CAPITAL ADEQUACY AND BANK PERFORMANCE IN NIGERIA
ABSTRACT
    The study examined capital adequacy and bank performance in the Nigerian banking industry. It sought to answer the following research questions: what is the relationship between capital adequacy ratios and return on asset? What is the relationship between Capital adequacy ratios and return on equity?
    Research data consisted of the relevant  items in the financial statements of the banks, such as capital adequacy ratios computed from the value of regulatory capital to the risk weighted assets, financial ratios (ROA and ROE), which were sourced from the annual reports of banks for the period of study. The scope of the study consisted of nine banks out of the twenty two banks currently operating in Nigeria. They are Union Bank, Zennith Bank, First Bank, Eco Bank, First City Monument Bank, United Bank for Africa, Guaranty Trust Bank, Diamond Bank and Stanbic IBTC Bank for the period of 2001-2010, which covers the pre and post capitalization period. Research data were analyzed using the simple linear regression model to determine line of best fit between predictive and response variables. The econometric package that was employed for the data analysis was the statistical package for social sciences (SPSS).
    The research findings showed that there exist a significant positive relationship between capital adequacy ratios and return on asset. There also exist a positive relationship between capital adequacy ratios and return of equity, but the relationship is not significant. It is therefore recommended that the regulatory authorities should strictly penalize all banks in Nigeria that fail to satisfy the minimum capital adequacy ratio (which is 10%). Also, that the regulatory authorities should concentrate on the investment portfolios of banks so as to ensure that the capital at their disposal is used to pursue business opportunities more effectively.        
  TABLE OF CONTENTS     
CHAPTER ONE: INTRODUCTION
1.1    Background of the Study     -    -    -    -    -    -    
1.2    Statement of the problem    -    -    -    -    -    -    
1.3    Research Questions    -    -    -    -    -    -    -    
1.4    Objectives of the study     -    -    -    -    -    -    
1.5    Research Hypothesis    -    -    -    -    -    -    -    
1.6    Scope of the study     -    -    -    -    -    -    -    
1.7    Significance of the study     -    -    -    -    -    -    
1.8    Limitation of the study     -    -    -    -    -    -    
CHAPTER TWO: LITERATURE REVIEW
2.1    Introduction    -    -    -    -    -    -    -    -    
2.2    Evolution of the Nigeria Banking Sector     -    -    -    -    
2.3    Constraints to Banking Sector Reforms in Nigeria    -    -    
2.3.1    Corruption and failure of regulatory Authorities    -    -    
2.3.2    Mistrust for the Motive of the Regulatory Authorities    -    
2.4    Bank for International Settlements    -    -    -    -    -    
2.4.1    Role  of the Bank for International Settlements    -    -    -    
2.4.2    Basel Capital Accord     -    -    -    -    -    -    -    
2.4.3    Basel Accord (1&II)    -    -    -    -    -    -    -    
2.5.    Perspective on Bank Capital Adequacy     -    -    -    -    
2.5.1    Empirical studies on Bank Capital Adequacy     -    -    -    
2.5.2    Determinants of Bank Capital Adequacy in the sub-sector of the     Nigerian Economy.     -    -    -    -    -    -    -    
2.6    Capital inadequacy and the Nigerian Banks     -    -    -    
2.6.1    Weak Risk management and inadequacy of Capital    -    -    
2.6.2    Banks with Capital adequacy problems     -    -    -    -    
2.6.3    Reasons for Concern over Capital adequacy in Nigerian Banks     
2.6.4    Regulatory and Legal Framework on Capital Adequacy    -    
CHAPTER THREE: RESEARCH METHODOLOGY
3.1    Introduction -    -    -    -    -    -    -    -    -    
3.2    Research Design    -    -    -    -    -    -    -    -    
3.3    Population of the Study    -    -    -    -    -    -    
3.4    Sampling Technique     -    -    -    -    -    -    -    
3.5    Sources of Data     -    -    -    -    -    -    -    -        
3.6    Theoretical Framework -    -    -    -    -    -    -    
3.7    The Research Model    -    -    -    -    -    -    -    
3.8    Method of Data Analysis     -    -    -    -    -    -    
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA  
4.1    Preamble    -    -    -    -    -    -    -    -    -    
4.2    Presentation of data     -    -    -    -    -    -    -    
4.3    Test of Hypothesis    -    -    -    -    -    -    -    
CHAPTER FIVE: SUMMARY, DISCUSSION OF FINDINGS,                     CONCLUSION AND RECOMMENDATIONS
5.1    Summary of Findings     -    -    --    -    -    -    -    
5.2    Discussion of findings    -    -    -    -    -    -    -    
5.3    Conclusion    -    -    -    -    -    -    -    -    -    
5.4    Recommendation    -    -    -    --    -    -    -    
    Appendix     -    -    -    -    -    -    -    -    -    
Bibliography -    -    -    -    -    -    -    -    -    
 CHAPTER ONE
INTRODUCTION
1.1    BACKGROUND OF THE STUDY
Banks, by their nature undertake intermediation functions. They accept deposits through the creation of priced liabilities from surplus units of the economy, and in turn create priced assets (banking credit facilities for deficit or needy units of the economy), in the process, they are exposed to various risks, the most common of such risks being the probability that a credit will go bad and its repayment delayed or lost entirely (Owumi, 1997). Such loss may relate to either the principal, interest, part thereof or even both. Changes in banking and financial market regulations have increased the complexity of banking risk; furthermore, the position of banks in modern economies has made the management of banking risk ever more important to financial stability and economic growth.
Banking business in the world is characterized by five major functions amongst others-risk management, operations management, financial advisory services, investment management and financial management.
Owing to the multiplicity of these functions which they perform, coupled with their role of financial intermediation on a short term basis, every society has keen interest in the health and well-being of the banking sector.
Capital is the cornerstone of a bank’s financial strength. It supports banks operations by providing a buffer to absorb unanticipated losses from its activities and, in the event of problems, enables the bank to continue operating in a sound and viable manner, while addressing or resolving the problems. The maintenance of adequate capital reserves by a bank can engender confidence in the financial soundness and stability of the bank by providing continued assurance that it will honour its obligation to depositors and creditors.  A reliable measure of the capital strength of a bank is the capital adequacy ratio, which is the ratio of a bank’s regulatory capital to its risk-weighted assets (Morgan, 2008). Prudential guidelines on capital adequacy set out three main elements that determine a bank’s capital adequacy.
1.    They are credit risk associated with exposure
2.    Market risk arising from banking activities, and
3.    The form and quality of capital held to support these     exposures.
    Traditional approaches to bank regulation emphasize the view that capital adequacy is crucial to the long-term financing and solvency of banks, especially in preventing bankruptcies and their associated negative externalities on the financial system. In general, capital adequacy act, as a buffer against liquidity crisis and hence failure.
1.2    STATEMENT OF THE RESEARCH PROBLEM   
    Many countries especially less developed countries and most sub-Saharan African countries have experienced banking problems requiring major reforms to address weak banking supervision, and inadequate capitalization.
    In Nigeria there has always been the argument of whether the Nigerian banking industry is “under –branched” or “under-banked” – (Bello, 2005).  The indiscriminate issuing of banking licenses in the 1990’s saw the proliferation of two-branch banks.
1.3    RESEARCH QUESTIONS
1)    Is there any relationship between capital adequacy ratios and return on asset (ROA)?
2)    Is there any relationship between capital adequacy ratios and return on equity (ROE)?

1.4    OBJECTIVES OF THE STUDY
    The overall objective of the study is to ascertain whether capital adequacy affects bank performance in Nigeria. The specific objectives are to determine:
(i)    The relationship between capital adequacy ratios and return on asset (ROA).
(ii)    The relationship between capital adequacy ratios and return on equity (ROE).

 
1.5    RESEARCH HYPOTHESIS
Ho1:    There is no significant relationship between capital adequacy ratios and return asset (ROA).
Ho2:    There is no significant relationship between capital adequacy ratios, and return equity (ROE).

1.6    SCOPE OF THE STUDY
     This study is concerned with capital adequacy and bank performance in Nigeria. The scope of the study will therefore consist of nine out of the twenty two banks currently operating in Nigeria for the period of 2001-2010. Since all banks in Nigeria operate under the same environment and governed by the same regulatory authorities, focus would be on the annual report of the banks headquarters for the necessary analysis.  
1.7    SIGNIFICANCE OF THE STUDY
    Results of this study will be of immense importance to policy makers in the central Bank of Nigeria (CBN), strategic managers in the banking industry, depositors, researchers and the academic, as well as students of Banking and Finance and Allied disciplines in the management sciences.
Policy Makers in Central Bank of Nigeria: Results of this study will serve to give a clear cut indication of the relationship between capital adequacy and corporate performance in Nigeria. Such result will provide a useful guide to policy guidelines for bank regulation in Nigeria and thus enhance their stability and competitiveness.
Strategic Managers in the banking industry:  These category of people will also find the result of this study useful as it will serve to alert them with the need to maintain adequate capital adequacy ratio, or otherwise. Such acquaintance will influence, their strategic planning and thus have significant implications for their strategic options, especially financials strategies.
Depositors: They will find the result of this study very useful as it will serve to influence the decision to withdrawal their deposit if their banks are perceived to be under capitalized or to consolidate their deposits if the reverse is the case. Alternatively, if it is found that capital adequacy has no implication for corporate performance, then they will base their decision on other factors beside capital adequacy.
Researchers and the academia: Results of this study will form the basis for further studies as other researchers may wish to replicate the study using the same methodology and the same population, or same methodology and different population, or even different methodology and different population. Using same methodology and same population may be aimed at testing the validity of the results, of this study.
Students of Banking and Finance and allied disciplines in the Management Science:  Lastly, students of Banking and Finance as well as allied disciplines in the management sciences will find the result of this study useful as such as result will constitute relevant data on research topics, methodology and empirical results.  

1.8    LIMITATIONS TO THE STUDY
    As earlier mentioned, capital adequacy ratio is the ratio of banks capital adequacy to its risk weighted Assets. The values of this asset tends to fluctuate over time, owing to the time value of money which is eroded by inflation, while the regulatory capital depreciates in value due to inflation. The inability of the capital adequacy ratio to fully inability of the capital adequacy ratio to fully reflect the true picture, owing to fluctuations in the value of the naira occasioned by inflation, is a limitation to the result of this study.
    Secondly, most organizations, including banks, have a penchant for doctoring their balance sheets to make them look more attractive than they actually are. Any such distortions of facts in the balance sheet with respect to corporate assets and/or distortions in the profit and loss account will constitute serious limitations to the result of this study.