You are on page 1of 62




Banks play a distinct role in the economy unlike other

business enterprises, they are therefore subjected to extensive

regulations, including capital adequacy which is an important

element in today’s banking industry. As it has been known that

the primary function of every banks is financial intermediation

i.e. mobilization of fund from the surplus sector to the deficit

sector and this function can only be performed only if an only if

the bank level of capital adequacy is sound.

Capital adequacy is a controversy issue to banks in

Nigeria because there is no general acceptable level of capital

adequacy although there are some basis for measuring this one

of which was recommend by Basle Committee of Central Bank.

Although capital adequacy does not necessarily connote capital

base of the bank because a bank with more than the minimum

prescribe capital base of N25billion is said to be capital

adequate than a bank with just N25billion. Capital adequacy

relate to the size and composition capital although it beyond the

capital adequacy of a bank.

Capital adequacy deals with capital base of the banks,

the capital structure and capital composition of various banks in

the banking industry. In other words capital adequacy is the

sum total of capital base and other monies (including assets)

aside the capital base. Although the level of capital adequacy

determine the effectiveness and efficiency of their banking

operation and the capacity of a bank which will always have

impact on banks growth and survival because capital adequacy

enable banks to keep afloat and also maintain the going

concern status. The level of capital adequacy of a bank

determines the ability of a bank to perform his primary function

which is financial intermediation. The efficient functioning of a

bank require the public especially the depositors to have

confidence in their stability and ability to transact business and

able to absorb losses and in worst case to allow bank to wind

down its business without loss to the depositors, counterparties

and all these can only be done if the bank has adequate capital.

In the recent of crunch of global economy i.e. financial

melt down only bank with adequate capital will survive the

harshness not only survive but stay afloat and at the same time

still perform other forms of obligation.


Capital adequacy as a sin qua non for banks growth and

survival in Nigeria.

As at the end of June 2004 there were 89 banks

operating in the country comprising of various sizes and degree

of soundness and most of this bank are undercapitalized even

the so call largest bank in Nigeria have a capital base of

US$240 million compared to the smallest bank in Malaysia with

capital base of US$526million. These banks were in effective

because of their undercapitalized status which the public and

the foreign investor cannot boost of let alone having confident

in the bank which in turn impose a big problem on Nigeria

economy because it is the bank efficiency or performance that

determine the overall well being of the economy.

Capital adequacy of a bank is to serves as a means of

absorbing loss. As Philips (1997) has correctly observed “the

more capital a bank has, the more losses it can sustain without

going bankrupt, capital adequacy thus provides the measure for

the time a bank has to correct for lapse, internal weakness or

negative development. The larger the size of capital the longer

the time a bank has before losses completely eroded its


The implication of capital inadequacy is that bank will go

bankrupt and face all sort of risk. Moreover it will have

implication on cost of intermediation, spread between lending

rate and deposit rate, inability to finance other sector of the

economy which will eventually put undue pressure on banks to

engaged in sharp activities or practices as a means of survival

therefore capital adequacy serve as a mean to cushion or

absorb of all this risks and problem and ineffectiveness of bank

performance which will enable them to survive and grow and

also maintain their going concern status.


The main aim of this study is to determine if capital

adequacy is a prerequisite to growth and survival of banks in

Nigeria. The followings are the supporting objectives:

i. To examine if capital adequacy. is necessary for bank

growth and survival

ii. To investigate if banks will survive when they fail to review

their capital base, composition and structure from time to


iii. To know if bank with adequate capital is cause of failure

to those with inadequate capital to.

iv. Examine the role of capital adequacy in banks

management and performance.

v. If capital adequacies affect the operational activities of a



The following questions are to be answered in the course

of this study.

1. Does capital adequacy necessary before a bank can

grow and survive?

2. Will banks survive when they fail to review their capital

base, composition and structure from time to time?

3. Can bank with adequate capital cause those with

inadequate capital to fail?

4. What role does capital adequacy plays in banks

management and performance?

5. How capital adequacies affect the operational activities of

a bank?

6. Ratio of capital adequacy i.e. to what extent does capital

of banks cover their risk exposure.


H0: There is no relationship between capital adequacy,

growth and survival of banks in Nigeria.

H1: There is relationship between capital adequacy, growths

and survival of banks in Nigeria.


The significant of this study is to determine the necessity

of capital adequacy for survival and growth of banks in Nigeria.

Furthermore with the current situation in the economy and the

ever increasing in obligation of banks, bank will be able to know

how to protect themselves from any possible risk that might

arise as a result of capital and also to make their performance

more effective and also the regulatory authority will be able to

compare and contrast the performance of banks in Nigeria and

possibility outside Nigeria.

Banks in Nigeria will be able to know the essence of

having adequate capital because when new minimum capital

base was announced most banks especially the commercial

banks in Nigeria feel depressed because the essence of the

new capital base was not clear to them. Also banks with

inadequate capital will be able to know how to equip

themselves with more capital while managing the existing level

of capital to grow and survive.


Method is use for this study will be regression analysis.

The data which is available for this study is secondary data

which will be source from Central Bank of Nigeria (Journals and

Report) also from Nigeria stock exchange market.

This research work will also rely on information from the

internet as well as various published and unpublished papers in

the subject. Also relevant data will be source from past and

present relevant Journals.


Due to some constraint this research work will be carried

out based on available information and data. Also banks in

consideration will be limited to First Bank of Nigeria. Data to be

use may not be up to date due to inability to get current

information from the CBN and not all banks are willing to

expose or disclose their level of operational activities (Level of

capital). Times and cost will also be of a constraint to this work.

Also this study will cover from the year 2001 to 2010.


This study is of five chapters division, the chapter one is

the introduction to the study while chapter two embodies the

literature review and theoretical framework on the capital

adequacy and its effect on banks growth and survival in

Nigeria. Also, chapter three highlights the research

methodology, method of collections and the source of data


Chapter four analyze the interpretation of data obtained

and also test of the hypothesis and the implication of result.

Chapter five anchors the summary of the research work,

conclusion reached and recommendation are made also on

survival of banks in Nigeria.




The efficient function of banks require participant to have

confidence in each other’s stability and ability to transact

business. Capitals rules help foster this confidence because

they require each member of the financial community to have,

among other things adequate capital. This capital must be

sufficient to protect a financial organization's, depositions and

counterparties from the risk of the institutions on and off

balance sheet risks. Top of the risk are credit and market risk,

not surprisingly, banks are required to set aside capital to cover

these two main risks. Capital standards should be designed to

allow banks to absorb losses and in worst cases allow bank to

wind down its business without loss to customers,

counterparties and without disturbing the orderly functioning of

financial markets.

Capital adequacy is a measure of banks financial

strength, in particular its ability to cushion operational and

abnormal losses. Therefore at any given level of risk only banks

with adequate capital will survive and grow. However, to test if

capital adequacy determines how banks can easily absorb loss

this can be done by using “capital adequacy ratio” which has

been design by international standard to ensure banks can

absorb a reasonable level of losses before coming in solvent.

Therefore, a bank without adequate capital cannot survival let

alone grows and competes with home banks and banks



Adequate capital is seen as the quantum of funds, which

a bank should have or plan to maintain in order to conduct its

business in a prudent manner. Functionally, adequate capital is

regarded as the amount of capital that can effectively discharge

the primary capital function of preventing bank futures by

absorbing losses. As these losses were related to the risks

which banks undertake as a natural corollary of their efforts to

serve the legitimate credit needs of the community.

The central Bank of Nigeria, for instance, defines capital

adequacy as a situation where the adjusted capital sufficient to

absorb losses and fixed asset of the bank, leaving a

comfortable surplus for the current operation and future

expansion. Adjusted capital is made up of paid up ordinary

share capital statutory reserves, generals revenues, net

provisions for bad and doubtful accounts, including other losses

arising from fraud forgeries, theft etc, and loan capital that

satisfies certain conditions.

Samuel Famakinwa et al, (2004), adequate capital has

been argued to be the foundation of safe banking system. A

good capital base gives a bank a competitive edge and enables

it to provide better services and ultimately increase its earning.

Raising adequate capital may come through direct investments

and or mergers and acquisition.

Ebhodaghe J.U (1997), stated that, capital plays a

significant role in the banking sector of an economy. The need

for adequate capital for banks in a pressing problem not only in

Nigeria, but to a very large extent in many countries especially

in developing economics. The need no doubts, in as a result of

the relatively rapid growth in bank’s assets and liabilities due to

the deregulation of the nations financial system coupled with

the relatively between growth in many bank’s capital.

Igwe (1990), capital adequacy is he level of capital

necessary for a bank, as determine by the supervisory and

regulatory authorities to assure the bank’s financial health and


Onoh J.K. (2004). all things being equal, the capital

strength of a bank is a major indicator of the bank’s likely

performance in profitability, asset growth and liquidity among

others. Any bank that does not enjoy capital adequacy cannot

perform because it will be suffering from all constraints. Capital

adequacy share-up confidence in the bank. The level of

operation of bank will improve significantly once it enjoys capital

adequacy and therefore enhances the bank profit potentials.

Yomo Ajenifuja (2004), Banks are expected to maintain

adequate capital to meet their financial obligation, operate

profitability and contribute to promoting a sound financial

system. It is for these reasons that the central bank of Nigeria

prescribes minimum capital requirement. This minimum ratio

capital adequacy has been increased to one thousand, two

hundred and fifty (1,250%) in the share capital base from

N2billion to N25billion on 6th July, 2004.

Chijama Ogbu (2005), fundamentally, the role of capital is

to act as a buffer against future, unidentified, even relatively

remote losses that bank may incurred. It is necessary for a

bank to hold enough capital to cushion both depositors and

senior lenders against losses, while leaving the banks ability to

meet the needs of its customers. A strong banking sector with a

strong capital base is better able to supply credit to businesses

and find instrument opportunities that promise to encourage

growth, create employment and contribute to a stronger


Ologun S.O. (1994), noted that, the key element is the

only element common to all countries bank system. It is wholly

visible in the published accounts and it is the basis on which

most market judgements of capital adequacy are made and it

has a crucial leaving bearing on profit margins and banks ability

to compete. This emphasis on equity reflect the importance

which the committee attaches to security a progressive

enhancement to the quality, as well as the level of the total

capital resources maintained by major banks.

Ogunleye R.W. (1995), emphasis that, capital adequacy

plays a vital role in minimizing the cost of resolving bank failure.

That is, it provides protection to both depositors and other

creditors of banks in case of liquidation. It also takes care of all

information expenses incurred in setting up the bank as well as

the acquisition of fixed assets, and also allow a bank to gain

competitive entry by acquiring the necessary infrastructure to


Prof. Mike Obadan (2004), Believe capital adequacy

would not guarantee the soundness of banks unless

fundamental factors that cause all health and unsoundness in

banks are tackled.

Ola Vincent (2004), low capital base is the major draw

back to Nigeria banks participation globalization that is

sweeping the world economy. Revolving the capital of Nigeria

banks to any of the worlds major convertible currencies reveals

how shallow or inadequate the capital base of many banks are

to even participate in the global markets. He added that a bank

must be able to regulate itself, acquire the various tools and

techniques, which would enable it to benchmark against other

world players.

Adekanye emphasized further in (1993) the significance

level of earnings to growth in banks capital become dearer from

this requirement. Thus a bank that makes good profit will be

able to attract new capital from the market or existing

shareholders. On the other hand, low level of earning will make

it more difficult and expensive for the bank to raise new capital.

Rodingo (2002), defined capital adequacy as a measure

of banks capital. It is expressed as a percentage of a bank risk

weighted credit exposure. This ratio will thus be used to protect

depositors and promote the stability and efficiency of

commercial banks.

Hgun song Shin (2004), opined that capital adequacy

helps bank to survive even during substantial losses. It gives

time to re-established the business and avoid the poor

performance of banks given the minimum capital for banks has

been specify by the regulating authority.

Granluigi Femico (2004), in his own contribution defined

capital adequacy as a standard for minimum level of a banks

equity in relationship with its assets (related to different types of

activity) set by the central bank for banks.


Regulators try to ensure that banks and other financial

institution especially commercial banks have sufficient capital to

keep them out of difficulty. This not only protects depositors, but

also the wider economy because of the failure of a big bank has

extensive knock-on effects. The risks of knock-on effects that

have repercussion at the level of the entire financial sector are

called systematic risk. Capital adequacy requirements have

existed for a long time, but the two most important are those

specified by the Basle committee of the bank for international

settlement. Formulating relevant capital rules is the domain of

the Basle committee on bank supervision. Recognizing that its

seminal work, the 1988 capital accord, which set the minimum

8% capital standard for banks in the industrialized world is

outdated. Though the committee (Basle committee) has issued

a “consultative paper on a new capital adequacy framework”

(1999) for comment on all interested parties. The 1988 accord

covered primarily credit risk. “International convergence of

capital measurement and capital standards” 1988 sets out the

details of risk-based capital framework. The document outlines

how effect different Asset classes (both on and off balance

sheets) are weighted according to their riskness. There are five

weights -0%, 10%, 20%, 50% and 100%. The Basle committee

recognized that a bank’s capital ratio using the above risk

weightings, are not always a good indicator of its financial

condition. The 1988 weighting do not differentiate adequately

borrower’s differing default risks. The 1988 accord is know as

the Basle I “Accord” which defined capital adequacy as a single

number, it is ratio of bank capital to its asset. There are two

types of capital, tier one and tier two. The first is primarily share

capital, the second other types such as preference shares and

subordinated debt. The minimum capital adequacy requirement

was that tier one capital was at least 8% of assets.

The new framework which is also known as Basle 2 is

based on three “pillars” minimum capital requirement,

supervisory review process and market force or risk. The new

framework is designed to improve the way regulatory capital

reflect underlying risk. The first minimum capital requirement

which develops and expand on the standardized 1988 rules.

The risk-weighting system described above will be replaced by

a system that uses external credit rating. For some

sophisticated banks, the committee believes that an internal

rating based approach could from the basis for setting capital

charges, subject to supervisory approval and adherence to

quantitative and qualitative guideline.

The second pillar is the “supervisory review” of capital

adequacy which will seek to ensure that a bank’s position is

consistent with its overall risk profile and strategy and as such

will encourage early supervisory intervention. Supervisors and

the ability to require banks which shows a greater degree of risk

to hold capital in excess of 8% minimum. The third pillar which

is market force or discipline, will encourage high disclose

standards and enhance the role of market participants in

encouraging banks to hold adequate capital.


Capital adequacy can be use to access it impact on bank

survival and growth in Nigeria because it serves as a key

element for bank’s survival in long run. CAMELS is a framework

which is use to measure the performance of banks which in turn

have a great effect on their growth and survival. The element of

CAMELS which shows what capital adequacy really mean is

described as follows;

C – Capital Buoyancy – This deal with the reserve of a

bank at a particular point in time, when a bank has a huge

capital reserve it can be said that such bank is capital adequate

and this bank will be able to meet unexpected obligation and

also have the ability to cushion operational and abnormal


A – Asset Quality – Asset quality has direct impact on

bank financial performance,. The quality of assets particularly

loan asset and investment would depend largely on the risk

management system of bank. This can also be use to assess

how adequate a bank capital is and how quality the asset is

example of is loan assets which depends on the realizable

value of the collateral.

M – Management Quality – The performance of other

component of CAMELS depend on the vision, capability, agility,

professionalism, integrity and competence of banks

management. As sound management is crucial for the success

of any institution, management quality is generally accorded

greater weighting in the assessment of the overall CAMELS

composite rating. Banks with adequate capital will have access

to good management quality because they have the resources.

E – Earninry performance – How capital adequacy

affects the earning performance of bank is through confidence

of the public. The quality and trend of earnings of an institution

depend largely on how well the management manages the

asset and liabilities of the institution. Adequate capital enables

banks to earn reasonable profit to support asset growth, bold

up adequate reserve and enhance share holder’s value. Good

earning would inspire the confidence of depositors, investors,

creditors and the public at large.

L – Liquidity – Banks must always be liquid to meet

depositor’s and creditors’ demand to maintain public

confidence. This can be achieved with the help of adequate

capital. Although there is need to be an effective asset and

liability management system to minimized maturity mismatches

between assets and liabilities and to optimized returns. As

liquidity has inverse relationship with profitability.

S – Sensitivity To Market Risk – Capital adequacy will

also go along way in making banks sensitive to the market risk.

Capital adequacy enables them to cushion any loss or reduce

risk to the barest minimum level.


As opined by rebel A.C. and Jeffery G.

CAMELS is a good technique in measuring performance

of a bank which goes a long way to ensure survival and growth

of banks. CAMELS rating is always accurate if a bank has been

examined for more than two quarters in a year.


Capital adequacy ratios are measure of the amount of a

bank’s capital expressed as a percentage of its risk weighted

credit exposures. As international standard which recommends

minimum capital adequacy ratio has been developed to ensure

banks can absorb a reasonable level of losses before becoming

insolvent. Applying minimum capital adequacy ratio serves to

protect depositors and promote the stability and efficiency of

the financial system. Capital adequacy ratio area measure of

the amount of a bank’s capital in relation to the amount of its

credit exposures. They are usually measure as a percentage

e.g. a capital adequacy ratio eight percent means that a bank’s

capital and credit exposure are both defined and measured on

a specific manner.

The Basle committee (centred in the Bank for

international Settlements) which was originally established in

1974 is a committee that represents Central Banks and

financial supervisory authorities of the major industrialized

countries. The committee concerns itself with ensuring the

effectives supervision of banks on a global basis by settling and

promoting international standards.

The calculations of capital (for use in capital adequacy

ratio) require some adjustment to make to the amount of capital

shown on the balance sheet. Two types of capital called tier on

e capital and tier two capital. Tiers one capital which is

permanently and freely available to absorb losses without the

bank being obliged to cease trading. Tier one capital is

important because it safeguards both the survival of the bank

and the stability of the financial system. An example tier one

capital is the ordinary share capital of the bank. Tier two capital

which is generally absorbs losses only in the event of a winding

– up of a bank, and so provides a lower level of protection for

depositors and others creditors. It comes into play in absorbing

losses after tier one capital has been lost by the bank.

The Basle capital accord also defines a third type capital,

referred to as tier three capital, Tier three capital consist of

short term subordinated debt. It can be used to provide a buffer

against losses caused by market risk. If tier one and tier two

capitals are insufficient for this. Market risks of losses on

foreign exchange and interest rate contracts caused by

changes in foreign exchange and interest rates. The reserve

bank does not require capital to be held against market risk, so

does not have any requirements for than holding of tier three

capitals. The Basle capital accord is an international standard

for the calculation of capital adequacy ratios. The Accord

recommends minimum capital adequacy ratio that banks should

meet. This helps to promote stability and efficiency in the

financial system.



In order to ensure better assets and inability management

in the height of unprecedented bank crisis of the 1990’s Nigeria

quickly adopted the Basle New international capital standard

called international of capital measurements and capital

standard the Nigeria banking system was already knee deep in

crisis. Many banks, especially, the new generation banks of the

1990s and state government owned bank were tottering on the

brink of collapse, because of capital inadequacy, fraud and poor

bank management.

The Nigeria regulatory and supervisory authorities eager to

sanitize the banking system enhance its operations and operate

bank creditors and shareholders quickly adopted the new

international capital standards along the lines recommended by

the Basle Committee. A circular with the fitted “measurement of

capital adequacies along international standard” was issued on

March 29, 1990 by the banking supervision Department of the

CBN, Directing all licensed banks to start implementation

without delay the new capital standard. In doing so the risk

weights for assets of the on-balance sheet activities and those

of the off-balance sheet assets were applied accordingly. The

minimum capital to be set aside, for covering risk asset

generated by on-balance sheet and off-balance sheet

transaction or enjoyment, was initially fixed at 7.5% for Nigeria

banks in 1990 as prescribed by the Basle accord. The minimum

8% capital to be set aside was to be composed as follow; not

more than 5% of the capital should come from supplemental

capital, also in keeping with the Basle accord.

However, the Basle committee have review the minimum

capital adequacy ratio to 10% effective from January 1, 2004, in

addition all balance sheet engagements have been categorized

in line with the recommendation in the 1988 accord as against

the blanket application of 20% risk weighting to such item.



Capital adequacy is affected by some certain factors

which are risk. The risks are divided into two major part credit

risk or credit exposure and market risk. The credit risk is a risk

that the bank will no be able to recover the money it is owed.

The risks inherent in a credit exposure are affected by the

financial strength of the party owing money to the bank. Market

risk on the other hand is risk associated with movement in

economic and political climate Remi A. 2005. The role of capital

adequacy cannot be over emphasized because capital has

primary and secondary role in banking system has Reed (1964)

wrote in most business firms the primary function of capital is to

finance the purchase of buildings, machinery and equipment its

secondary function is to protect long and short-term creditors,

who make funds available to the business. In banking, however,

the function of capital is primarily to serve as a cushion or

insurance fund to absorb losses that may occur. As a source of

funds for the acquisition of physical assets, bank capital serves

a secondary function.

The following are roles capital adequacy provides to


i. Capital adequacy enable bank to acquire the physical, the

skill base and the institutional structure necessary to

perform the intermediation function and provide related

services and to compete in the market it chooses to enter.

ii. Adequate capital provides the bank with opportunities to

make acquisition in related areas to bring into the group

additional services to provide the customers base or

conversely more customers to offer the portfolio of

existing services.

iii. Capital adequacy helps to absorb abnormal losses in this

way capital and insurance function, because it insures

against unanticipated losses that cannot be absorbed by

current earnings.

iv. A more inclusive going concern role of capital adequacy

in banking is that of confidence booster. Adequate capital

provides customer, the public and the regulatory authority

with confidence in the contained financial viability of the

bank confidence to the depositors that his money is safe;

to the public that the bank will be or is in a position to give

genuine consideration to their credit and other banking

need in good and as in bad times and to the regulatory

authority that the bank is or will in continued existence.

v. For regulator capital adequacy is an instrument to

discipline bank management. Apart from the minimum

initial capital requirement, regulators impose standards on

the level and composition of capital and its relationship to

risk factor and one of the considerations for permitting


vi. Exploitation of area of research and development:-

Capital adequacy has also help banks to be able to

conduct research that could help in the development of

their bank and only a bank with a buoyant capital will be

able to conduct the research on what the teeming

population need which has a great effect on banks

development and also enable them to compete

favourably with banks abroad.

vii. Technology advancement:- This is another important

aspect in Nigeria banks today and technology is now

improving year-in year-out, banks are also striving to keep

this trend sit that they will not be sent off the market.

viii. Inter bank business – Most time participation in bank

business, in a situation where the blue chip companies

needs a huge sum as a loan and only a bank cannot

provide that, two or more banks will be required to come

together to provide such loan but only those who are

capital adequate will be willing to take up such task and

without business like this banks will be moving at a slow



Since capital adequacy serves as a measure to cushion

off abnormal losses and also determine the extent to which

bank can survive therefore bank need to ensure that their

earning capacity should increase in order to increase there

level of capital like wise the other remaining component of

CAMELS should be fulfill in order to maintain their stability so

as to continue to share and survive in any harsh economic

condition. Likewise banks should incorporate both on and off

balance sheet contracts on credit exposure and take right

action as to the result found after the measurement. Impliedly

the higher the capital adequacy ratios a bank has, the greater

the level of unexpected losses it can absorb before becoming

insolvent. Therefore, banks with higher CAR should be self

assure to survive while bank with lower CAR should strive hard

in order to survive and reduce both credit risk and market risk to

barest minimum level.


The banking operation began in Nigeria in 1892 under the

control of the expatriates and by 1945, some Nigerians and

Africans had established their own banks. The first era of

consolidation ever recorded in Nigeria banking industry was

between 1959-1969. This was occasioned by bank failures

during 1953- 1959 due mainly to liquidity of banks. Banks, then,

do not have enough liquid assets to meet customers demand.

There was no well-organized financial system with enough

financial instruments to invest in. Hence, banks merely invested

in real assets which could not be easily realized to cash without

loss of value in times of need. This prompted the Federal

Government then, backed by the World Bank Report to institute

the Loynes commission on September 1958. The outcome was

the promulgation of the ordinance of 1958, which established

the Central Bank of Nigeria (CBN). The year 1959 was

remarkable in the Nigeria Banking history not only because of

the establishment of Central Bank of Nigeria (CBN) but that the

Treasury Bill Ordinance was enacted which led to the issuance

of our first treasury bills in April, 1960.

The period (1959–1969) marked the establishment of

formal money, capital markets and portfolio management in

Nigeria. In addition, the company acts of 1968 were

established. This period could be said to be the genesis of

serious banking regulation in Nigeria. With the CBN in

operation, the minimum paid-up capital was set at N400,000

(USD$480,000) in 1958. By January 2001, banking sector was

fully deregulated with the adoption of universal banking system

in Nigeria which merged merchant bank operation to

commercial banks system preparatory towards consolidation

programme in 2004.

In the ’90s proliferation of banks, which also resulted in

the failure of many of them, led to another recapitalization

exercise that saw bank’s capital being increased to

N500million(USD$5.88) and subsequently

N2billion(US$0.0166billion) on 4th 2004 with the institution of a

13-point reform agenda aimed at addressing the fragile nature

of the banking system, stop the boom and burst cycle that

characterized the sector and evolve a banking system that not

only could serve the Nigeria economy, but also the regional

economy. The agenda by the monetary authorities is also

agenda to consolidate the Nigeria banks and make them

capable of playing in international financial system. However,

there appears to be deliverance between the state of the

banking industry in Nigeria vis-à-vis the vision of the

government and regulatory authorities for the industry. This, in

the main, was the reason for the policy of mandatory

consolidation, which was not open to dialogue and its

components also seemed cast in concrete.

In terms of number of banks and minimum paid-up-

capital, between 1952-1978, the banking sector recorded

fourty-five(45) banks with varying minimum paid-up capital for

merchant and commercial banks. The number of banks

increased to fifty-four(54) between 1979-1987. The number of

banks rose to one hundred and twelve(112) between 1988 to

1996 with substantial varying increase in the minimum capital.

The number of banks dropped to one hundred and ten(110)

with another increase in minimum paid-up capital and finally

dropped to twenty-five in 2006 with a big increase in minimum

paid-up capital from N2billion(USD$0.0166billion) in January

2004, to N25billion(USD$0.2billion) in July 2004.



The era of banking legislation commenced with the

Nigerian Banking Ordinance of 1952 and the opening of the

CBN in 1959. The establishment of CBN presented ground for

the adoption of monetary management, stricter legal framework

and regulation and improved institutional facilities for

supervision. One of the principal objectives of the CBN is to

promote monetary stability and soundness in the banking

sector. To achieve this, the CBN conducts regular supervision

and examination of banks as means of maintaining surveillance

on banking activities and operations. This is to ensure that

banks comply with the directives stipulated by the monetary


Supervision of banks in Nigeria is vested in the Central

Bank of Nigeria (CBN). The CBN Act No. 24 of 1991 and the

Bank and Other Financial Institutions Act (BOFIA) No. 25 of

1991 and subsequent amendments specify the regulatory and

supervisory powers of the CBN over banks and other financial

institutions. The NDIC complements the efforts of the CBN in

bank supervision and examination so as to ensure a safe and

sound banking system. The deposit insurance system was

established in Nigeria in 1988 as fallout of economic

deregulation (CBN/NDIC, 1995). Other reasons for

establishment of NDIC were: the country’s past bitter

experience of bank failures, the lessons of other countries’

experiences with deposit insurance schemes, banking

competition, the need for effective supervision/prudential

regulation and change in government bank support policy

(Alashi, 2002). The primary mission of NDIC is to ensure

stability and public confidence in the banking sector by

guaranteeing payments to depositors in the event of failure of

insured institutions as well as promoting safe and sound

banking practices through effective supervision. With the

introduction of NDIC, bank depositors are assured of cash

payments of up to a maximum of 50,000 Naira in case of any

bank failure.

The CBN/NDIC employs many tools (onsite and offsite

examination, statutory requirement on disclosure, prudential

guideline, etc.) in carrying out its supervisory role. Both onsite

and offsite supervisory functions are performed by both the

CBN and NDIC. To ensure that banks operations and activities

are reported as accurately as possible, the CBN directs that

every bank should appoint an auditor approved by the CBN.

In addition to the above, banks are also statutorily required to

disclose certain information. This is designed to ensure that

depositors, investors, regulators and the public have adequate

information as regard banks’ performance and financial

condition. Information disclosure by banks is guided by different

laws and regulations such as the BOFIA No.25 of 1991, NDIC

Act No.22 of 1988 and Companies and Allied Matters

Act(CAMA) No. 1 of 1990. All these acts are set out to ensure

that the nature of information disclosed by banks follows a

required standard. For instance, section 27(1) of the BOFIA

provides guidelines for the publication of annual accounts of




The methodology employed in gathering data for this

research work is stated here. i.e. the model building, model

estimation methods and Apriori expectation.


The data which is available for this study is secondary

data which was sourced from Central Bank of Nigeria (journals

and report) also from The Nigerian Stock Exchange Market.

This research work also relied on information from the internet

as well as various published and unpublished papers on the

subject. Also, relevant data was sourced from past and relevant



This research work measured the impact of capital

adequacy as a sin qua non for bank’s growth and survival in

Nigeria. Notable scholars and researchers have written

extensively on capital adequacy and bank growth.

The Model is specified thus:

Y = α0 + α1X1 + α2X2 + … + u


Y = dependent

α 0 = constant of the model

α1, α2, = Coefficient of the model

X1, X2, = Independent explanatory variables.

Ut = stochastic variable or error term.

That is;

MC= α0 + α1 NETAS + α2 EPS + α2 NP + μ


MC = Market Capitalization

NETAS = Net asset

EPS = Earnings per share.

NP = Net Profit


Here, the theoretical relationship between the dependent

variable and each independent variable is stated.



ðmc > 0


This states that a positive relationship should exist

between market capitalization and net asset.


ðmc >0


Higher MC means higher Earnings per share. This

suggests that there is a positive relationship between market

capitalization and Earnings Per Share.

The Ordinary Least Square method (OLS) will be used in

this study. This method comprises of the various test which

includes the following:

i. The T-test: This test is used to estimate the individual

significance of the variables used in the model. It helps

to see the individual effect of each of the variables on

the dependent variable that we are trying to explain.

ii. The F-test: Here we consider the effect of the overall

model i.e. the explanatory power of each of the models

in explaining the effect of the model on the topic of


iii. The R-Square: The R-Square explains the systematic

variations of the independent variable on the

dependent variable. It explains how the effect of

changes of all explanatory variables explains the

changes in the dependant variables. Here the residual

term is not taking into consideration in testing for these

effects so our result might overestimate the effect of

these changes.

iv. The Adjusted R-Square: The Adjusted R-Squared is

a method used in estimating the residual error which

was not considered in the R-Square. It helps reduce

the overestimation in changes of the explanatory

variable in explaining the dependent variables which

was not considered in the R-Square.


The following hypotheses will be tested:-

H0: There is no relationship between capital adequacy,

growth and survival of banks in Nigeria..

H1: There is relationship between capital adequacy, growth

and survival of banks in Nigeria.




This section handled the analytical aspect of this research

work. It seeks to analyze the result of the models specified in

chapter three with a view to empirically analyze the capital

adequacy for the growth and survival of banks in Nigeria. Data

used were presented together with the estimated results for the

models. Again, the results obtained were discussed in details.


The data used for the estimation of this research work

were stated in the table 4.1 below.

Table 4.1 data presentation


2001 296.00 10217.00 13555.30
2002 307.00 11887.00 14071.20
2003 346.00 15265.00 28145.00
2004 312.00 18170.00 57648.20
2005 235.00 19406.00 59404.10
2006 434.00 27006.00 113882.5
2007 399.00 41605.00 223772.5

2008 225.00 48726.00 254683.1
2009 294.00 64277.00 468588.4
2010 175.00 83381.00 1074884
Source: Statistical Bulletin (2010)

Where EPS = Earning per share

NETAS = Net Assets

MC = Market Capitalization


Dependent Co-efficients t-test Prob.

Variable MC
Constant 35409.451 0.168 0.871
NETAS 11.523 6.397 0.0000
EPS -649.194 -1.140 0.292
R 0.947
R2 0.897
R2 Adjusted 0.867
F-ratio 30.359
Sig. 0.000
Source: Computer Analysis (2010)


The model earlier formulated in chapter three of this

research work was estimated thus:

MC = 35409.451 + 11.523NETAS – 649.194EPS + U1

(0.168) (6.397) (-1.104)


The statistical analysis presented in Table 4.2 above

could be interpreted into a layman’s language following the

earlier stated statistical tools in a chronological manner.

 R-square (R2)

This explains the degree of relationship between the dependent

and the independent variables. The value of 0.947 in Table 2

above shows that about 95% of variations in the dependent

variable (Market Capitalization) are accounted for by all the

independent variables. It followed therefore that about 5% of

the variations are accounted for by variables outside this model.

 Adjusted R-squared (R2 Adjusted)

This measures what the normal R-squared measures but it

gives considerations to degree of freedoms in order to

appropriately measure the proportion of the variation in the

dependent variable that are attributable to variations of the

independent variables. The value of 0.897 in Table 4.2 above

showed that the actual variation in the dependent variable

attributed to all the independent variables is almost 90% and

10% are outside the model.

 F-statistic (f-test)

This tests for overall significance of the model, i.e. the

goodness of the model. A model is said to be significant if its f-

calculated or f-ratio is greater than the tabulated f-values, at a

given level of significance. For this model, the value of 30.359

is significant at 1%, 5% and 10% levels of significance because

it exceeded these values at these levels.


According to the empirical finding, this research work

shows that there is a strong positive relationship between

capital adequacy (Bank capital) and survival of banks in

Nigeria. The result also shows that there is a positive

relationship between Earning per share and Market

Capitalization (Bank Capital).

However, the positive relationship between Bank capital

and EPS explained that bank capital enhances the growth of

EPS of a bank. While the Net Asset is not affected by the bank

capital. The constant explained that despite the fair that all

variables used for this research work, if other variables are

added to those variables, it will show a positive relationship of


In conclusion, the empirical finding shows among others the

level of relationship (positive relationship) between bank capital

and survival of banks. Positive relationship between Earning

per share and Market Capitalization (Bank Capital).

However, the positive relationship between Bank capital

and EPS explained that bank capital enhances the growth of

EPS of a bank. While the Net Asset is not affected by the bank

capital. The constant explained that despite the fair that all

variables used for this research work, if other variables are

added to those variables, it will show a positive relationship of


In conclusion, the empirical finding shows among others

the level of relationship (positive relationship) between bank

capital and survival of banks.




A good attempt is made to study and evaluate the impact

and relationship between capital adequacy and survival of

banks in Nigeria. And a positive result was shown from the

regression analysis. Analysis was made on data from First

Bank of Nigeria (FBN) using Ordinary Least Square (OLS)

method due to its reliability and a strong relationship is shown

between capital adequacy and performance and survival of

banks in Nigeria which means a slight change in level of bank

capital will automatically affect the level of their performance.

Since it has been established that the performance of

banks is subjected to adequate capital therefore no bank can

profitably operate with inadequate capital base. The primary

function of banks capital is to provide a cushion against losses,

to survive during economic crisis. Capital protects depositor

and other bank’s creditors in the event of failure. So therefore

banks and regulatory authority must ensure they review the

capital base of bank from time to time also banks must also

comply with Balse Committee guideline.


This study employs a framework that, although exploit

has a considerable appeal in terms of modeling the external

effect of capital adequacy and its overall impact on growth and

survival of banks. Besides being more informatively than some

familiar conventional speculatory, the descriptive analytical

regression method was employed.

The main result, derivable from the applicability of the

statistical tool is that, it is difficult not to conclude that capital

adequacy; a measure of the solvency of a bank, has a positive

effect on banks survival and growth and the conclusion appears

to in a vast majority of setting and statement evaluated and


Despite the limitation the result still shows that there is

strong positive relationship capital adequacy and banks growth

and survival which means capital adequacy have effect on

banks performance.

The Basle accord also shows how capital adequacy affect

bank performance which the committee of Basle accord state

that the higher the capital adequacy ratio the greater the

survival of banks which implies that bank with less capital

adequacy ratio may be threaten to survive.

Finally banks growth and survival is a function of capital

adequacy. The results show that the ratio of capital adequacy to

other performance indicator has been rising. It is considered

that socio-political economic as well as managerial factor which

are closely related to the stage of development in line with

internal insurrection are the major factor responsible for the

observed patterns of banks performance over the years.


The following practical suggestion comes out from the

finding of this study. The option revolves around practical

recommendation on how to ensure improvement in bank

survival and growth (bank performance) and eventually to put

stop to the problem that might be encountered in the

management of capital.

First step should be taken toward increasing the

composition of adequate capital to enhance the performance of

the banks because in other to ensure economic stability

adequate capital must be ensured since it will boost the

confidence of both domestic and international community which

will attract investors.

Secondly, a study carried out by the Central Bank of

Nigeria that a greater percentage of banks get into distress

traps as a result of management. Therefore it is suggested that

bank should ensure that they have sound management team

worth highly integrity and banks must also ensure that they

monitor the activities of their management and report

accordingly to any foul suspected by any of their team as


However the objective of a bank as in profitability and

liquidity. Good policy should be put in place and it should be

review from time to time to ensure that the two objective does

not clash which will also help in enhancing adequate capital

that will improve the performance of the bank.

Banks are also recommended to comply with the Basle

Committee policy because it helps to absorb necessary risk

which may affect the performance or survival of banks and also

increase their level of security (going concern).

Lastly, if the appropriate follow up is conscientiously and

pragmatically given to therefore stated recommendation, the

exacters of the relationship between capital adequacy and the

banking performance will be defined better without any counter

cyclical effect.


Adekanye (2004): Bank Capital Nigeria Deposit Insurance

Corporation, NDIC Quarterly, June.

Agene C. E. (2006): The Principle of Modern Banking, Gene

Publications Limited, Abuja.

Bank for Int. Settlements (BIS) 1988: Basle Committee

Reporting on Banking Regulation and Supervisory


Berger, Allen N, Kathleen The Limitations of Market Value

Accounting Kuester Kind & a small alternative” – Journal

Central Bank of Nigeria “Measurement of Capital

Adequacy along International D. Standard”. Lagos March

29, 2003

Cole Rebel A., Barbara G. Cornyn & Jeffreg “Firms; A New

Monitoring System for banking Institution” Fed. Reserve

Bulletin January 1-15

Cooke P. (2003) Int. Convergence of Capital Adequacy

Measurement and Standard” In the future of Financial

Systems and Services. Essay in Honour of Jack Revel

(Edward P. M. Gardened) St. Martins Press, 310-335

Craine, R. (1995) Fairly Priced Deposit Insurance and Bank

Charter Policy “Journal of Finance, Vol. 50, No. 5, 1735 –


Dewatripont M. and (1993): The prudential Regulation of

Banks J. Tirole Cambridge, MA, MIT Press.

Diamond, D. W. and P. H. Dybvig (1986) Banking Theory,

Deposit Insurance Bank Regulation” Journal of and

Business 59, 53-68.

Federal Government of Nigeria (1991): Decree No. 25

Gennotta G. and Dpyle 1991 “Banks and other Financial

Decree 1991”. Federal Govt. Press, Lagos. Capital

Control and Bank Risk Journal of Banking and Finance

15 805-824

Hall, M. J. B. (2004): The Basle Committee Proposal for a New

Capital Adequacy Assessment at Framework. A critique

“Monoe, Loughborough University.

Hendricks, D. and the Hirtle (2005): “Bank Capital

Requirement for Market Risk Internal Models Approach”.

Federal Reserve – Bank of New York Economic Policy

Review (4) 1-12

ISDA (2000): A New Capital Adequacy Framework: Comments

on a Consultative Paper issued by the Basel Committee

on Banking Supervision in June 1999. International

Swaps and Derivatives Association.

James M. O’Brien (2007): Realistic of Banking and Finance 15

September 753-83

Kackson P. C. Furfine D., Jones W. Perraudim L. & Tedecki

and M. Yoneyama (1999): Capital Requirement and

Bank Behaviour & The Impact of Basel Accord Basel

committee on Banking supervision Working, Paper No. 1

Kahane, Y. (2001): “Capital Ade. & the Regulate of Fin.

Intermediaries” Journal of Banking and Finance 1, 207 –


Kareken, J. H. Deposit Insurance & Bank Regulation: A

Equilibrium Exposition” Journal of Business 51, 413-438

Keeley M. C. and Frlong (1990): A Re examination of the

Mean Variance F. T. Analysis of Bank Capital Regulation

Journal of Banking and Finance 14, 69 – 84.

KIM D. and A. M. Santomero (1988): “Risk in Banking and

Capital Regulation” Journal of Finance 43, 1219 – 1233

Marcus A. J. (1984) “Deregulation & Bank Financial policy”

Journal of Banking and Finance 8, 577–565.

Marshall D. and Venkataraman (1991): Bank Capital

standards for Market Risk. A – S Welfare Analysis”

European Finance Review 2, 125 – 157

Milne A. and A. E. (1998): Bank Capital & Risk Taking” Mineo

Whalley Bank of England.