Determinants of capital adequacy ratio in Kuwaiti banks

Abstract

The aim of this study is to identify the effects of seven internal factors of five conventional Kuwaiti banks on capital adequacy ratio (CAR). The five factors are: Loans to Assets, Loans to Deposits, Non-Performing Loans to Total Loans, Return on Assets, Return on Equity, Dividend Payout and Total Liability to Total Assets. The study covers the period from 2005 to 2013. The study shows that under fixed effect model, variables DIVIEDEND, LAR, LDR, NPLLR, and ROE do not have any impact on capital adequacy ratio. However, SIZE has a significant and negative relationship with capital adequacy ratio. Also, ROA shows a significant and negative relationship with capital adequacy ratio. Under random effect model, results indicate that CAR is adversely affected by bank’s SIZE (total liability to assets), and ROA has a significant and negative relationship with capital adequacy ratio, However, Loan to Deposit Ratio (LDR) showed a significant and positive relationship with capital adequacy ratio. On the other hand, dividend payout, loans to assets, Non-Performing Loans to Total Loans and Return on equity do not have significant effect on CAR under random effect model.