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Journal of Money, Investment and Banking - Issue 24 (2012) 62 Every business exerts considerable influence on its environment, customers, the governmentand the general public and this is derived from its financial resources and profitability which is afunction of availability of funds to prosecute identified investment. Bank capital has always been a central and vexing issue in the context of financial health andsafety of a bank. It can in fact be said that the ultimate strength of a bank lies in its capital funds givenits significance as a tool for meeting liabilities in a financial crisis and as a cushion for insulating abank from the vagaries of the market adversity. For a bank to enjoy depositors’ confidence, it musthave a strong capital base as evidence of its strength and a tool for operating profitably so thatshareholders’ funds can increase through accretion to statutory and general reserves. Every businessexerts considerable influence on its environment, customers, the government and the general publicand this is derived from its financial resources and profitability which is a function of availability offunds to prosecute identified investment. In past years, the world has witnessed ‘the crack’ and in some cases, total collapse of majorfinancial institutions, which before then, had made and declared significant and sometimes enviablereturns. Following these collapse, there was a need to review the contradiction that played out in someof these cases, between declaration of significant returns and sudden death. This informs the evaluationof banks’ performance from a risk adjusted bases. Banks are among the most leveraged businesses withsubstantial proportion of their assets in loan and advances exposing them to considerable risk. There isalso an established fact of risk – return relationship whereby the higher the risk taken the higher thereturn expected. In essence, banks by the nature of their operations may make substantial profit fromloans and advances but without commensurate level of capital to cushion unanticipated losses may fail.1.1. Statement of the ProblemAdjustment in bank capital sizes has constituted a significant policy focus of regulatory reforms in thelast sixty years of the Nigerian banking system-operations. The watershed for regulatory adjustmentand re-engineering of Nigerian bank capital and adequacy compliance commenced with the PartonCommission of Enquiry 1951 which culminated in the enactment of the first Nigerian banking law(The 1952 Banking Ordinance). This and subsequent regulatory framework, both local andinternational including the Central Bank of Nigeria Act 1959; the Banking Decree 1969, the CentralBank of Nigeria Decree (24) 1991; Banks and other Financial institution Decree (25) 1991; Basle1 and2 as well as Bank Consolidation policy of 2004 emphasized the need for capital adequacy and upwardadjustment in Nigerian banks statutory capital. For instance; Nigerian bank regulatory authoritiesseemed to have incorporated upward adjustments on statutory capital as a major policy focus since1988 without corresponding linearity between the increases and bank distress management. Table 1.0below presents relationship between bank capital adjustments and distress management.Table 1: Recapitalization of the Nigerian Banking System and incidence of Distress 1988-2008 Numbers of Operating Number of Distressed Distressed Banks as % Minimum Regulatory Years deposit Banks Deposit Banks Total Deposit Banks Capital 1988 64 7 10.9 N10m. 1990 107 9 8.4 N10m. 1992 120 16 12.6 N50m. 1995 115 58 52.2 N50m. 1997 115 60 61. N500m. 1998 89 12 24.7 N500m. 1999 90 10 11.1 N500m. 2001 90 - - N1b. 2003 87 3 3.7 N2b. 2004 89 4 - N25b. 2005 25 13 14.6 N25b. 2008 24 7 - N25b.Source: NDIC Annual Report – Various Publications 1988-2008.
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63 Journal of Money, Investment and Banking - Issue 24 (2012) Emphasis on continuous increases in regulatory capital as antidotes for ensuring stability andsolvency within the Nigerian banking system seemed to have overlooked balanced interaction betweenpersonnel management, policy suitability and environmental stability; hence continuous incidence ofbank distress (Soyibo and Odusola (2003) Ayida (2004), Adedipe 2005, and Onaolapo 2007. Capitaladequacy management among its other significances is designed to provide cushion for absorbingoperational losses; afford some measures of shareholders confidence and reveals the bank’s ability tofinance its capital project as well as ensure some level of protection for depositors’ funds; Greuningand Bratanovic (2003). Based on these justifications, Nigerian bank regulatory authorities mostespecially the Central Bank of Nigeria (CBN) have within the last 22years instituted various reformsthat culminated in over 1000% increases in deposit bank statutory capital. In spite of the noticeablechanges in regulatory capital, incidence of distress has remain a permanent phenomenon of the sectorleading to the recent establishment of Asset Management Company of Nigeria (AMCON)and the takeover of the boards of management of seven problem banks within the last three years 2009 – 2011. Given the spate of capital adequacy measures put in place to stabilize the financial health of theNigerian banking sector vis-à-vis the incidence of sectoral distress, this paper examine the followingresearch questions/objectives:- (i) Does Capital Adequacy management influence Nigerian deposit bank Returns on Asset (ROA)?. (ii) To what extent does compliance with Capital Adequacy conditionality influence operational efficiency among selected Nigerian deposit banks? (iii) What impacts does capital adequacy compliance has on bank profitability and Returns on Capital Employed (ROCE)?. Establishing the functional role of capital vis-à-vis profitability, level of performance andpublic confidence in banks emphasize the need for a capital adequacy as a means for sustaining soundfinancial system. Generally both the regulatory authority and bankers to some extent agree on thesignificance of some level of capitalization for normal operation. The bone of contention lies on how todetermine what proportion is adequate and the causality between the level of capital and bankperformance. This study therefore examines issues relating to the specific roles of capital adequacy and itsimpact on bank profitability.2. Literature Review and Theoretical Framework2.1. Capital and Capital AdequacyThe significance of start-up and operating capital to any business cannot be over emphasized andaccording to the submission of many financial theorists, the term capital is capable of being a source ofconfusion because of the variety of meanings which can be assigned to it, Ebhodage (1991), Greuningand Poratanovic (2003), and Satchindananda (2006). To the economist, capital refers to “real” capitalwhich is the stock of goods accumulated through production while in business and finances, it is seenas “financial capital” which in itself could sometimes mean both tangible and intangible capital; Klise(1972). On the other hand, Arogundade (1999) defines capital as the owner’s stake in business andtherefore a commitment to its success. Opinion however, differs among experts in banking and financeas to what constitutes capital adequacy; for instance Nwankwo (1991) submits that the question of howmuch capital a bank needs to ensure the stakeholders confidence and sustain healthy operations isdetermined by the supervisory and regulatory authorities. Umoh (1991) noted that adequate capitalization is an important variable in business and it ismore so in the business of using other people’s monies such as banking. It is further stated that insuredbanks must have enough capital to provide a cushion for absorbing possible losses or provide, fundsfor its internal needs and for expansion, as well as ensure security for depositors and the depositorinsurance system. Regulators and bankers have also not reached agreement as to what level of
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Journal of Money, Investment and Banking - Issue 24 (2012) 64capitalization is adequate; for instance while regulators concern themselves primarily with the safety ofbanks, the viability of invested funds, and stability of financial markets, sbankers generally prefer tooperate with less capital, as the smaller its equity base the greater the financial leverage. Rose (1999)buttressed Koch’s stand by stating that even a bank with a low return on assets can achieve a relativelyhigh return on equity through heavy use of debt (leverage) and minimal use of owner’s capital. Kidwell et al (2000), on the issue of capital adequacy observed banks and regulators differbecause they have different objectives. The primary goal of bank management is long term profitmaximization achievable through high leverage while bank regulators are more interested in the risk ofbank failures in general. Hence, bank regulators desire higher capital standards that promote banksafety.2.2. Function of CapitalThe primary function of capital is to finance the purchase of building, machinery and equipment whileits secondary function is to protect long and short tem creditors who make funds available to thebusiness. However, in banking, the function of capital is primarily to serve as a cushion on loanedfunds to absorb losses that may occur. It also serves the function for the acquisition of physical assets;Rosse (1964) , Crosses and Hamsel (1980) and the Economist (1999) . Bank capital affords the “engine and bumper” that keeps the bank, going as well as absorbingnasty shocks and the more capital a bank has, the better it is able to sustain losses without running intoinsolvency. For instance a bank statutory capital primarily serves as a indicator of bank growth, ensurefunds for the organization’s growth and afford the development of new service, programs andfacilities; and a ‘tether ‘ for regulatory agencies to limit how much risk exposure banks can accept. Itthus protect the government deposit insurance system from serious losses. In spite of the controversyover the roles of capital between bankers and regulators coupled with the fact that its function willlargely determine the quantity or amount of capital considered adequate for banking business, thereseems to be similarity between the parties’ stands on the various purposes of capital. This has led to theclassification of the roles of capital in banking into primary and secondary; the former functionaffording banks operational latitudes while the latter bring about efficiency. Other review of bankingliteratures has shown that regulators place high premium on the primary functions while bankersemphasized secondary roles. Nwankwo (1991) stated that the indispensability of capital in banking lies on its functionalsignificance at the various stages in a bank’s life cycle; for instance at the commencement it satisfiesthe statutory minimum requirement as well as compensate for lack of profit that is generally thecharacteristic of business at the early years of operation. As a bank matures, additional capital wouldbe needed to cushion expansion and absorb operational losses and where the third stage ischaracterized with either illiquidity or bankruptcy many banks survive these hazards through theapplication of capital as a tool for protecting depositors and other creditors.2.3. Components of Bank CapitalAccounting theory defines capital, simultaneously as a net worth which equals the cumulative value ofliability and represents ownership interests in a firm. In banking, the regulators concept of bank capitaldiffers substantially from accounting capital. Specifically, regulators exercise some level of depthwhen measuring capital adequacy and they refer to “capital” as those funds contributed by the banksowners consisting principally of stock, surplus (reserves) for contingencies and retained earnings. Abalance sheet classification of a bank capital will generally include ordinary share capital or equity,reserves (statutory reserves, general reserves and retained earnings), and preference shares. LoanCapital may be referred to as long term capital while reserves may also include share premium andrevaluation reserves; Rose (1999) and Arogundade (1999). Since the universal adoption of the 1988Basle Accord by many banks; operational capital has been re-defined to consist of core capital
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65 Journal of Money, Investment and Banking - Issue 24 (2012)(primary or tier 1 capital) and supplemental capital (secondary or tier 2 capital). Thus Components ofthe two tiers of a bank capital will include Equity capital i.e Common stock + perpetual preferredstock + Surplus fund + Bonus issue reserve + Minority equity interest in subsidiary companies; whileCore capital refers to Equity Capital – goodwill (other intangible assets). Another class of capitalcommonly referred to as Supplemental capital relates to Provision for loan loss + preferential shares+ Convertible securities (hybrid capital instruments) + Revaluation reserves.2.4. Capital Adequacy Measurement and ProfitabilityCrosse and Hamsel (1980) stated that the adequacy of capital is a dynamic concept and it is influencedby the prevailing and expected economic conditions of the entire economy. Ebhodaghe (1991) definescapital adequacy as a situation where the adjusted capital is sufficient to absorb all losses and coverfixed assets of the bank leaving a comfortable surplus for the current operation and futureexpansion.Functionally, adequate capital is regarded as the amount of capital that can effectivelydischarge the primary function of preventing bank failures by absorbing losses. On the other handmeasurement of capital for adequacy purposes is determined by several factors (both internal andexternal) influencing the level of risk occasioned by operation. Furthermore the level of capitalperceived to be adequate at one time may need to be adjusted over time as the risk characteristics thecompetitive environment, markets and economic conditions in which the bank operates change. TheBasel Accord (1988) as international standard of capital adequacy recognizes the ratio of capital fundsto deposit and has informed the adoption of a rule of thumb that a bank should have capital funds equalto at least 10% of its deposit liabilities. The minimum risk-based standard for capital adequacy was setby Basel Accord, 1 at 8% of risk-weighted assets of which the core capital element should be at least4%. Oftentimes a bank statutory capital is considered as adequate if it is enough to cover the bank’soperational expenses, satisfy customers’ withdrawal needs and protect depositors against total orpartial loss of deposits in the event of liquidation or losses sustained by the bank; Onuh (2002) Crosseand Hamsel (1980) The nexus between capitalization and profitability is particularly pronounced given thesignificance of business profit as a tool for risk mitigation, business survival and a sign of successfulproduct development. Figure 2.1: Inter-relationship Between Capitalization and Bank performance Metrics Profitability Risk Minimization Capitalization Business Survival Product Devt.Source: Authors design At the centre of every capitalization attempt made by a bank is the need to ensure a balancebetween sustainable product developments, profitability and risk mitigation. For instance, a soundbanking system is built on profitability and adequacy of capital.. Profitability is a revealing indicator ofthe efficiency of a bank competitiveness in the markets and the quality of its managements. Both thelevel of capitalization and profitability are used as indicators of bank risk management efficiency andthe extent of ‘cushion’ available in case the ‘unexpected’ arises. Profitability in form of retainedearnings is typically one of the likely sources of capital generation.
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Journal of Money, Investment and Banking - Issue 24 (2012) 66 Crosse and Hamsel (1980) stated that capital has to do with the bank’s ability to generateincome. and a means for expanding its operations, deliver quality service and hence remaincompetitive. This, no doubt, is critical to income generation as growth of balance sheet is not possiblewithout adequate capital; Greeuning and Bratanovic (1993) Rosse and Hamsel (1980). Capital adequacy is also an important indicators of the strength of a bank. The bestmanagement cannot turn around an ailing financial institution if it does not have an adequate capital. Inessence a direct implication of capital adequacy requirement is that it limits the risk profile ofinvestment of a bank and therefore affects its capacity to achieve a target level of profitability. Theessence capital adequacy lies on the needs to manage or re-structure the balance sheet given the linearrelationship between bank profitability; core capital ratio and the risk-based capital ratio. Increase incapital ceteris paribus is expected to enhance earnings by reducing the expected cost of financialdistress including bankruptcy; Oluyemi (1996) Nanon (1999) and Mathura (2009). Alexandre andFabiano (2004) also emphasised on the importance of inflation in the analysis of profitability andcapital adequacy. It was noted that the validity of any analysis of profitability and capital adequacy lieson the significance of profitability as an appropriate measure of income and the essence of capital sizeas an indicators of monetary concept of capital maintenance in terms of general purchasing power bebased on restated historical cost.3. Research MethodologyThe study employed secondary data that were obtained from publications of the Central Bank ofNigeria, (CBN), the National Bureau of Statistics, (NBS), The Nigerian Deposit Insurance Corporationand other relevant publications. Information used cover a period of ten years. The OLS estimation isobtained from SPSS 17.0 adopted for the purpose of the analysis. The stationary of the time series istested using the Augmented Dickey Fuller (ADF) Unit Root Test (as obtained from EViews7) for thevariables adopted in the study. In addition, the Pair wise Granger Causality Test (GCT), is further usedfor co-integration test between the variables. The hypothesis for study states that Capital Adequacydoes not affect the profitability of any of the sampled Nigerian deposit money bank.Models 1 –7 presented below are used to relate the study variables: CAR = β 0 + β 1 RA + µ 1 (1) CAR = β 0 + β 1 EFR + µ 2 (2) CAR = βo + β1PBT + µ3 (3) CAR = β0 + β1 ROCE + µ4 (4) CAR = ΒO + Β1INFR + µ5 (5) CAR = β0 + β1RA + β2ROCE + µ6 (6) CAR = β 0 + β 1 RA + β 2 EFR + β3PBT + β4ROCE + β5INFR + µ7 (7) Where βo --- βn are coefficients of the expletory variables N; the error terms and CAR = Capital Adequacy Ratio RA = Return on Assets EFR = Efficiency Ratio PBT = Percentage Growth of Profit before Tax ROCE = Return on Capital Employed INFR = Inflation Rate
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67 Journal of Money, Investment and Banking - Issue 24 (2012)3.1. Analysis of Data and Presentation of ResultTable 1: Capital Adequacy and banks Returns on Assets. (ROA) Dependent variable: CAR Unstandardized Coefficient Variable Standardized Coefficient t – Statistic B Std. Error Constant 19.725 8.847 2.230 RA -0.035 -0.274 2.801 -0.098 R- squared 0.001 Adjusted R- squared -0.124 D-W statistic 2.403 F – ratio 0.010Source: SPSS Output Generated based on data analysed From table 1 above, the marginal contribution of the independent variable – Return on Assetsof banks to the dependent variable Capital Adequacy Ratio is negative and the degree of fitness is justtoo insignificant from the above result. However, the standard error of the independent variable is lowthereby producing a very low statistical noise in the estimates. The DW is above 2 and this signifies thepresence of a negative serial correlation between the dependent and independent variables. The result for Model 2 is not far away from that of Model 1. The R2 is insignificant and thecoefficient of EFR is ridiculously low. The standard error is less than 0.2. It shows therefore thatEfficiency Ratio unilaterally may not create any alarm on the Capital Adequacy Ratio of Banks.Table 2: General Adequacy and Bank Operational Efficiency Dependent variable: CAR Unstandardized Coefficient Variable Standardized Coefficient t – Statistic B Std. Error Constant 17.761 10.767 1.650 EFR 0.039 0.019 0.173 0.109 R- squared (R2) 0.001 Adjusted R squared -0.123 D-W statistic 2.437 F – ratio 0.12Source: SPSS Output Generated based on data analysedTable 3: Capital Adequacy Ratio and Bank Profitability Dependent variable: CAR Unstandardized Coefficient Variable Standardized Coefficient t – Statistic B Std. Error Constant 17.760 2.771 6.409 PBT 0.336 0.028 0.028 1.010 R- squared(R2) 0.113 Adjusted R squared 0.002 D-W statistic 2.575 F – ratio 1.020Source: SPSS Output Generated based on data analysed From table 3 above, there is a positive relationship between Capital Adequacy Ratio andPercentage growth of Profit before Tax (PBT). Just like the two results above, the degree of fitness isvery poor. By virtue of this result, variations in PBT will result in an infinitesimal change on CAR. TheDW result for the relationship shows a negative serial correlation. The standard error is also low andthis depicts a poor statistical reliability of the coefficient estimates.
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Journal of Money, Investment and Banking - Issue 24 (2012) 68 The result for Model 4 (Table 4) below is worst than the three above. The R2 is zero and a poornegative relationship. The Standard Error is also very low and the DW is a situation of negative serialcorrelation.Table 4: Capital Adequacy Ratio and Bank Returns on Capital Employed Dependent variable: CAR Unstandardized Coefficient Variable Standardized Coefficient t – Statistic B Std. Error Constant 19.095 6.470 2.951 ROCE -0.012 -0.007 0.212 -0.033 R- squared 0.000 Adjusted R- squared -0.125 D-W statistic 2.426 F – ratio 0.001Source: SPSS Output Generated based on data analysedTable 5: inflationary effect on Bank Capital Adequacy Ratio Dependent variable: CAR Unstandardized Coefficient Variable Standardized Coefficient t – Statistic B Std. Error Constant 25.013 7.041 3.552 INFR -0.313 -0.520 0.558 -0.931 R- squared 0.098 Adjusted R- squared -0.015 D-W statistic 2.435 F – ratio 0.867Source: SPSS Output Generated based on data analysed Models 5 (Table 5) and 6 (Table 6) results are not far away from those of Models 1 to 4. Theindependent variables show a very minute fraction of variance in the dependent variable. StandardErrors are just too low and the DW results give a negative serial correlation.Table 6: Bank Capital Adequacy and Returns on Investment. Dependent variable: CAR Unstandardized Coefficient Variable Standardized Coefficient t – Statistic B Std. Error Constant 19.725 9.456 2.086 RA -0.051 -0.407 4.177 -0.098 ROCE 0.024 0.015 0.316 0.046 R- squared 0.001 Adjusted R- squared -0.284 D-W statistic 2.396 F – ratio 0.005Source: SPSS Output Generated based on data analysed The result of Model 7 below (Table 7) gives R2 of 27.1%, indicating that 27.1% variation in thedependent variable will be explained by the independent variables. However, the Adjusted R-squaredis -0.64 and this is because all variables in the independent variables had earlier shown poor fittings inthe previous models. By implication, 64% variation in the dependent variable will be negativelyexplained by all the independent variables. The D-W statistic is 2.48 (which lie between 2 and 4) andthis indicates a degree of negative autocorrelation. The marginal contributions of the variousindependent variables to the dependent variable (assuming all other variables are constant) are strong
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69 Journal of Money, Investment and Banking - Issue 24 (2012)except for INFR which is 0.164. RA has -0.997, a negative but strong relationship. EFR is also goodwith -0.52. However, PBT and ROCE have 0.949 and 0.968 respectively. These show strong positiverelationships with the dependent variable. The value of the F-ratio (0.297) is low and this is not close to1. A resultant effect of this is to accept the null hypothesis. The values of t-statistic calculated are lowerthan the tabulated value t-statistic at 95% significant level which also signifies the acceptance of thenull hypothesis.Table 7: Bank Capital Adequacy, Profitability and Inflation Dependent variable: CAR Unstandardized Coefficient Variable Standardized Coefficient t – Statistic B Std. Error Constant 35.507 26.392 1.345 RA -0.997 -7.903 9.464 -0.835 EFR -0.520 -0.256 0.334 -0.766 PBT 0.949 0.079 0.089 0.887 ROCE 0.968 0.580 0.666 0.872 INFR 0.164 0.272 1.405 0.194 R- squared 0.271 Adjusted R-squared -0.640 D-W statistic 2.481 F – ratio 0.297Source: SPSS Output Generated based on data analysed Table 8 below gives the ADF Statistic values (tα) and associated one-sided probabilities (ρ–values). It also reports the critical values of the 5% level. Following the rule, we do not reject the nullhypothesis if tα value is greater than the critical values. Also, a ρ–value that is lower than the 5% (0.05)significant level is taken as evidence to reject the null hypothesis of a zero coefficient. The ADFStatistic values for all the regressors are greater than their corresponding 5% critical values at the leveland the first difference, hence the need to accept the null hypothesis that is Capital Adequacy will notaffect the profitability of any bank. Under the assumption that the errors are normally distributed or that the estimated coefficientsare asymptotically normally distributed, the ρ–values of the t-statistic need to be examined in drawingour conclusion. The ρ–values for all the independent variables and first difference are greater than 0.05thus, signifying evidence to accept the null hypothesis.Table 8: Augmented Dickey Fuller (ADF) Test Statistics LEVEL FIRST DIFFERENCE SECOND DIFFERENCE 5% 5% 5% VARIABLES t- t- t- Prob* Critical Prob* Critical Prob* Critical Statistic Statistic Statistic Level Level Level CAR -4.89 0.026 -4.25 -4.50 0.048 -4.45 -15.46 0.0002 -4.77 RA -2.95 0.211 -4.25 -2.56 0.305 -4.25 -7.79 0.0067 -4.77 EFR -3.41 0.116 -4.11 -3.66 0.111 -4.45 -4.54 0.0621 -4.77 PBT -2.79 0.238 -4.11 -3.92 0.083 -4.45 -2.36 0.3667 -4.77 ROCE -3.08 0.178 -4.25 -2.40 0.355 -4.25 -6.73 0.0122 -4.77 INFR -2.39 0.363 -4.11 -2.71 0.269 -4.45 -4.67 0.0414 -4.45Prob* - Mackinnon (1996) one–sided p-valuesSource: SPSS Output Generated based on data analysed The ADF Unit Root test result in table 9 below is used to test the stationary of the time series.All the variables are non-stationary at level for the intercept. At the first difference, all except RA arenon-stationary at the intercept. These imply that the variance in CAR increases with time andapproaches infinity but with trend at level, RA and INFR are stationary. However, INFR became non-
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Journal of Money, Investment and Banking - Issue 24 (2012) 70stationary at the second difference with trend, but RA was stationary at first difference and seconddifference with trend. From the result of the Unit Root test, it shows that all the independent variablesare non-stationary at one point or the other (either at the Level, First Difference or Second Difference).This shows that the variance of all these variables increases with time and approaches infinity. COEFFICIENT AT COEFFICIENT AT COEFFICIENT AT SECOND LEVEL FIRST DIFFERENCE ORDER OF VARIABLES DIFFERENCE INTEGRATION INTERCE INTERCE INTERCE TREND TREND TREND PT PT PT CAR 12.42 1.28 -7.19 1.271 15.315 -2.001 I(1) RA 6.28 -0.21 -0.082 0.049 -5.147 0.811 I(1) EFR 99.16 -2..69 -38.178 5.133 35.465 -4.769 I(1) PBT -45.34 18.89 -281.33 57.45 7.61 9.101 I(1) ROCE 79.28 -6.64 -4.135 0.391 -42.823 6.688 I(1) INFR 12.96 -0.46 9.96 -1.839 -14.72 2.276 I(1)Source: SPSS Output Generated based on data analysedTable 10: GRANGER TEST 2LAG Pairwise Granger Causality Tests Date: 07/22/11 Sample: 1999-2008 Lagos: 2 Null Hypothesis: Obs F-Statisc Prob. RA does not Granger Cause CAR 8 1.07708 0.4441 `CAR does not Granger Cause RA 1.69369 0.3219 EFR does not Granger Cause CAR 8 0.03821 0.9630 CAR does not Granger Cause EFR 4.58528 0.1224 PBT does not Granger Cause CAR 8 0.79057 0.5299 CAR does not Granger Cause PBT 8 0.23745 0.8022 ROCE does not Granger Cause CAR 8 2.52058 0.2279 CAR does not Granger Cause ROCE 8 11.8678 0.0376 INFR does not Granger Cause CAR 8 0.65328 0.5814 CAR does not Granger Cause INFR The results of the Granger causality test show the statistics for the joint significance of each ofthe lagged endogenous variables in the models above. The probability (ρ–values) of the F-statistic forthe joint significance between CAR and AR; CAR and EFR; CAR and PBT; CAR and INFR; and,CAR and ROCE are greater than the significance level of 0.05, therefore we accept the null hypothesis.The results of most of the F-statistic are very high and by virtue of this, most of the endogenousvariables can be treated as exogenous variables.5. Conclusion and RecommendationThe results of the various tests carried out under this study accept the Null Hypothesis which states that - Capital Adequacy will not affect the profitability of any bank. Itimplies that the various efforts by the monetary authority to review often times the capital base of thebanking sector is not borne out of the aim to improve the profitability of the banks but mainly tomaintain stability in the banking industry. This will be noticed from the various actions of the CentralBank of Nigeria (CBN) in the recent time which come heavily on ailing banks in terms of restructuringmanagements, outright revocation of licences and nationalization of some of the banks. Also to beobserved from these actions was the quest to protect depositors and not investors or owners of thesebanks. It should be noted from some of the reviewed literatures that strong capital base strengthened
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71 Journal of Money, Investment and Banking - Issue 24 (2012)the ability of banks to sail through the storm of the challenges in the course of their trading activitiesand also to withstand the competitive environment. The statutory capital requirement may not haveanything to do with bank performance most especially if the ‘adequate capital’ is not properlymanaged. This does not mean however that strong capital base or weak capital base will not haveanything to do with the performance of banks, but rather the influence is likely to be subjected to somany factors among which are operational management, adequate corporate governance, economic andpolitical environment, global financial situation, quality of staff and the likes. The incidence of non-significance between capital Adequacy Ration (CAR), and selected bankprofitability and performance informed recommendations that Nigeria financial regulators need tofocus attention on intrinsic elements of bank operational activates in particular regulatory frameworkthat review personal and asset management qualities, corporate governance and strategic focus ofNigeria commercial banks will go a long way in ensuring stable financial environment for depositmoney banks and kindred financial institutions within the system.References[1] Adebayo, E. O (2010): “Capital Adequacy: Instrument for Sustainable Growth and Development in the Nigerian Banking Sector”; Journal of Management Skills and Techniques, Vol. 1, No. 1, November, Pp 35 - 48[2] Adedipe A (2005) Building and Sustaining Corporate performance and Growth in the Nigerian Capital Market Nigerian Stock Market Annual (2005)[3] Adekanye, F. (1983): Element of Banking, F and A Publisher, Lagos, 3rd Edition[4] Ajayi, S. I and Ojo, O. O (1981): Money and Banking: Analysis and Policy in Nigerian Context; George Allen and Urwin Publishers Ltd., London[5] Alexandre, A. N and Fabiano, G. (2004): “The End of Monetary Restatement and its Impact on Profitability and in the Capital Adequacy of Banks in Brazil”; www.institutoassaf.com.br[6] Apilado, V. and Gies T. (1976): Capital Adequacy and Commercial Bank Failure in Bank Capital; Published by Van Nostrand Reinhold Company, New York[7] Arogundade, A.O (1999): “Capital Adequacy and Capacity Issues”; Focus on Nigeria, July- Dec[8] Ayida A. A. (2004) Corporate Governance in Nigerian Banks journal of Nigerian Institute of Management (chartered) Vol. 40 No 2,3, & 8 April 2004.[9] Bank for International Settlements (1988): “The Basel Agreement”; June[10] Basel Committee on Banking Supervision (2005): The Application of Basel II to Trading Activities and the Treatment of Double Default Effects; Bank for International Settlements Press & Communications, Switzerland, July[11] Central Bank of Nigeria (1998 - 2009): Banking Supervision Annual Reports[12] Central Bank of Nigeria (2005 - 2009): Annual Report and Statement of Account[13] Crosse, H.D and Hamsel, G.H (1980): Management Policies for Commercial Banks; Bankers Publishing Company, Boston[14] Greuning, H.V and Bratanovic S. (1999): Analysing Banking Risk; Maxwell Publishing House[15] Jerry L. J (1995): Regulation and the Future of Banking; Economic Commentary, Federal Reserve Bank of Cleveland, August[16] Kidwell, D. S et al (2000): Financial Institutions, Markets and Money; The Dryden Press, Harcourt College Publishers[17] Klise, E. S (1972): Money and Banking; South Western Publishing Co. Cincinnati, Ohio, Fifth Edition[18] Manuake, T. (2006): “The New Face of Banking”; TELL Magazine, Lagos, January 2
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Journal of Money, Investment and Banking - Issue 24 (2012) 72[19] Mathuva, D. M (2009): “Capital Adequacy, Cost - Income Ratio and the Performance of Commercial Banks: The Kenyan Scenario” The International Journal of Applied Economics and Finance, 3(2): 35 - 47[20] Nanon, S. (1999): “Capital Adequacy and Capital Issues in Nigeria”; CBN Journal of Finance, Vol.3 No.2[21] Nwankwo, G.O (1991): Bank Management, Principles and Practice; Malthouse Press Ltd, Lagos[22] Ogunleye, R.W (1995): “Monetary Policy Influence on Banks’ Profitability –Evidence from Single Equation Approach”; NDIC Quarterly, Vol.5 No.4 December[23] Oluyemi, S.A (1996): “The Implications for Banks’ Profitability on Implementing the Risk- Based Capital Requirements”; NDIC Quarterly, Vol. 6 Nos.1 & 2, March/June[24] Onaolapo A. R. (2007) An Evaluation of the Effects of Recapitalization on the Financial Health of Nigerian Commercial Bank. A op. Cit Ph.D Thesis submitted to the school of Post Graduate Studies Ladoke Akintola University of Technology (LAUTECH) OGBOMOS for the Award of PhiL Degree in the Dept. Mgs. 2007[25] Onyiwa, B. C (2002): “Capital Adequacy in Banks”; The Nigerian Accountant, April/June[26] Onoh, J.K (2002): Dynamics of Money, Banking and Finance in Nigeria – An Emerging Market; Astra Meridian Publishers, Lagos[27] Rose, P. S (1999): Commercial Bank Management; Irwin McGraw-Hill, 4th Edition[28] Soyibo A. and Odusola A. F. (2003) Financial Sector Soundness: Conceptual Issues Conference Procedures; Enhancing Financial Sector Soundness in Nigeria Central Bank of Nigeria Second Monetary Policy Conference Abuja.[29] Smikey, J.F. (1999): Bank Financial Management; Oxford Press Ltd.[30] Wolkwowith, B. (1976): Measuring Bank Soundness in Bank Capital; Van Nostrand Reinhold Company, New York
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