Affiliation between Capital Adequacy and Performance of Banks in Bangladesh

Abstract

Purpose: The aim of the research is to explore the affiliation between banks performance and capital adequacy in Bangladesh. Methodology: A total of 20 listed conventional banks are selected as a sample covering a period of 11 years from 2010-2020. The analysis of the study is conducted with help of correlation and multivariate fixed effect regression analysis to examine how the capital adequacy ratio (CAR), the credit deposit ratio (CDR), and the cost-income ratio (CIR) influence the performance of banks. Findings: With the use of correlation and regression analysis, the researchers have come to the conclusion that the capital adequacy ratio (CAR) has a negative association with return on assets (ROA) and the cost-income ratio (CIR) has a negative relationship with return on assets (ROA), while the credit deposit ratio (CDR) has no relationship with return on assets (ROA). On the other hand, the capital adequacy ratio (CAR) and cost-income ratio (CIR) have a negative association with return on equity (ROE), but the credit deposit ratio (CDR) has a positive relationship with return on equity (ROE). The study concluded that capital adequacy and return on assets (ROA), as well as capital adequacy and return on equity (ROE), have a significant association. Thus, capital adequacy and banks' performance are significantly related. Practical Implications: The performance and credit deposit ratio is positively related. An increase in credit deposit ratio will increase the profitability. The cost income ratio is negatively related with profitability. Banks should maintain cost income ratio low as possible. The capital adequacy ratio is negatively related with profitability. An increase in capital adequacy ratio will reduce the profitability. Originality: This is an original research of researchers. The researchers attempt to examine the data using a large sample and sophisticated statistical tools to conduct the research. Research Limitations: The research is based on only the secondary data.