Asset Quality, Capital Adequacy and Financial Performance of Deposit Money Banks in Nigeria
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Date
2023-12
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Lead City University
Abstract
The performance of a banking institution is largely driven by its ability to increase its customers’ patronage, retain them and manage its assets and liabilities to enhance optimal returns.This can be done through banks maintaining adequate capital and quality assets for better performance. In Nigeria, in spite of the fact that banks are highly regulated since 1988, many banks have failed due to insufficiency of capital and mismanagement of funds. Assets quality of deposit money banks and capital adequacy over time has been compromised. Increase in the level of gross non-performing loans pause a great risk to banks, the financial sector and the economy at large. Equally, failure to manage down non-performing loans over a long period gradually affects financial performance of deposit money banks. Non- performing loan profile in the DMBs in Nigeria is rising, and has been identified as a
disturbing trend.It thus imperative to ascertain the effect of capital adequacy in the financial performance of Deposit Money Banks (DMBs) in Nigeria. This study employed ordinary least square regression analysis with emphasis on pooled effect, fixed effect and random effect model. The findings of this research revealed that non-performing loans has a negative non significant effect on financial performance of DMBs in Nigeria having a coefficient = - 0.022478 and P value of 0.5462. Loan loss provisions has a negative significant effect on financial performance of DMBs in Nigeria having a coefficient = -0.002954 and P value ofn 0.0054. Risk weighted assets has a positive significant effect on financial performance of DMBs in Nigeria having a coefficient = 0.067768 and P value of 0.0034. Liquidity ratiohaving a coefficient = 0.000435 P value of 0.0034 has a positive significant effect on financial performance of DMBs in Nigeria. Moderating variable bank size (BS) has a negative non-significant effect on the effect of non-performing loans, loan loss provisions, risk weighted assets and liquidity ratio on the financial performance of deposit money banks in Nigeria. The study concluded that asset quality and capital adequacy are key factors affecting the financial performance of the Nigeria Deposit money banks and are essential in measuring
financial performance of financial institutions while size has no effect on financial performance of the Nigeria Deposit money banks. The study, therefore, recommended that banks should put in place rigorous credit risk management policies in order to stem the increase in NPLs associated with increased lending. The CBN should ensure compliance by adequately monitoring compliance to policy on loan loss limits in relation to provisions. Central Bank of Nigeria should effectively regulate the capital and the resources owned by the Deposit Money Banks (DMBs) in Nigeria by ensuring that a certain level of capital is kept with the Central Bank for financial soundness and stability. Bank officials should be trained in the areas of liquidity management and liquidity changing conditions should not be handled with levity. The banks should reduce their non-performing loans by appropriate credit policies
and procedures and should consider other quantitative and qualitative approaches of profit improvement than bank size. 5
Keywords: Assets Quality, Capital Adequacy, Bank size, Financial Performance, Return on Assets
Word Count: 502
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Keywords
Assets Quality, Capital Adequacy, Bank size, Financial Performance, Return on Assets
Citation
Kate Turabian