Impact of Capital Adequacy on Asset Quality of Deposit Money Banks in Nigeria

Abstract

This paper sets out to examine the effect of capital adequacy on asset quality of deposit money banks in Nigeria. The paper employs a sample of Nigerian banks that made the Forbes West Africa list of 2012. Also, published financial statement of banks were used from the period 2008-2010. The findings from the regression analysis showed a positive and significant relationship between capital adequacy and asset quality of banks. This implies that for deposit money banks in Nigeria, capital adequacy plays a key role in the determination of asset quality. The study recommends that optimal capital ratios be maintained by banks in view of its influence on asset quality. It is also recommended that the Central Bank and other monitoring bodies should foster their strength in supervision as the two categories have been viewed to be very crucial and do increase the stability of the banking system.