Abstract
This thesis aimed to see the determinant factors for capital adequacy using seven (7) selected banks operating in Ethiopia from 2007 to 2019. The research conducted different estimation to see the relationship between the dependent variable, Capital Adequacy Ratio (CAR) and independent Variables which include Bank size (SIZE), DAR (Deposit to Asset Ratio), Loan to Asset Ratio (LAR), Loan to Deposit (LTD), Return on Asset (ROA), Return on Equity (ROE), Loan Loss Provision (LPR), and macroeconomic variables (gross domestic product and inflation). The variables SIZE, DAR, LAR and ROE affect CAR negatively whereas ROA and LPR affects positively. Hence, it is recommended that to be sure that banks have adequate adequacy reserve, commercial banks and National Bank of Ethiopia should give attention to the risk associated with banks size, caring of banks loan and deposit, initiating to increase their return on their asset and to manage their equity return. Keywords: capital, adequacy and commercial banks, Ethiopia. DOI: 10.7176/RJFA/11-21-05 Publication date: November 30 th 2020
Highlights
Capital adequacy as a concept has been in existence prior to the era of capital regulation in the banking industry and there exist several literatures on the determination of capital adequacy ratio (CAR) as well as its determinants
The concept appeared in the middle of the 1970’s because of the expansion of lending activities in banks without any parallel increase in its capital, since capital ratio was measured by total capital divided by total assets (AlSabbagh, 2004)
The committee publish Basle Capital Accord, it decide to define minimum capital adequacy ratio in the amount of 8% of risk weighted assets is standardize international banks (Nuviyanti and Anggono, 2014).Using minimum capital adequacy ratios causes promotion instability and inefficiency of the financial system by decreasing the likelihood of insolvency in banks
Summary
Capital adequacy as a concept has been in existence prior to the era of capital regulation in the banking industry and there exist several literatures on the determination of capital adequacy ratio (CAR) as well as its determinants. There are inconsistent results in literature regarding the effect of some variables on CAR, for example,Yonas (2015), Ali et al (2006) and Khanal et al (2003) found a negative relationship between ROE and CAR while Khrawish (2011) and Molyneux and Thornton (1992) found a positive relationship between ROE and CAR.In light of the above facts and the research gaps, the aim of this study is to examine bank specific and macroeconomic determinants of Capital Adequacy commercial banks in Ethiopia. To this end, this study tried to provide real information about the determinant factors affecting CAR of commercial banks. To examine the effects macro-economic factors on capital adequacy of commercial banks in Ethiopia
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