Capital adequacy and financial stability: A study of Nigerian banks' resilience in a volatile economy
Department of Finance, University of Lagos, Lagos, Nigeria.
Review Article
GSC Advanced Research and Reviews, 2024, 21(01), 001–012.
Article DOI: 10.30574/gscarr.2024.21.1.0346
Publication history:
Received on 07 August 2024; revised on 20 September 2024; accepted on 23 September 2024
Abstract:
This study investigated the relationship between capital adequacy and financial stability in Nigerian banks within a volatile economic environment. The research stemmed from the challenges of inadequate bank deposits, largely due to Nigeria’s large unbanked population and limited access to formal financial services. This situation undermined banks' ability to accumulate capital and lend effectively, hampering economic growth. The study aimed to evaluate how capital adequacy ratio (CAR) influences the financial stability of banks, with a focus on the impact of monetary policy and capital regulation. Using an ex-post facto research design, secondary data from 2005 to 2020 were collected from NDIC reports, CBN bulletins, and financial journals. The Ordinary Least Squares (OLS) method was employed to analyze variables such as return on assets (ROA), return on equity (ROE), non-performing loans (NPL), firm size, CAR, and loans and advances (LA). Findings revealed that CAR and firm size positively influenced bank stability, while NPL and LA negatively impacted it. Monetary policy and capital regulation played significant roles in determining financial stability. The study concluded that improving capital adequacy and firm size enhances bank resilience, while tighter regulation of non-performing loans and effective monetary policies could mitigate financial instability. Recommendations include strengthening risk management frameworks, aligning with Basel III standards, and improving credit monitoring. This study contributes to existing knowledge by identifying new determinants affecting capital adequacy and financial stability, with suggestions for further research on regulatory reforms and their long-term effects on bank profitability.
Keywords:
Capital Adequacy; Financial Stability; Nigerian Banks' Resilience; Volatile Economy
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