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Exploring the Determinants of Capital Adequacy in Commercial Banks: A Study of Bangladesh's Banking Sector

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  • Md Shah Naoaj

Abstract

This study investigates the factors that influence the capital adequacy of commercial banks in Bangladesh using panel data from 28 banks over the period of 2013-2019. Three analytical methods, including the Fixed Effect model, Random Effect model, and Pooled Ordinary Least Square (POLS) method, are employed to analyze two versions of the capital adequacy ratio, namely the Capital Adequacy Ratio (CAR) and Tier 1 Capital Ratio. The study reveals that capital adequacy is significantly affected by several independent variables, with leverage and liquidity risk having a negative and positive relationship, respectively. Additionally, the study finds a positive correlation between real GDP and net profit and capital adequacy, while inflation has a negative correlation. For the Tier 1 Ratio, the study shows no significant relationship betweenleverage and liquidity risk, but a positive correlation with the number of employees, net profit, and real GDP, while a negative correlation with size and GDP deflator. Pooled OLS analysis reveals a negative correlation with leverage, size, and inflation for both CAR and Tier 1 Capital Ratio, and a positive correlation with liquidity risk, net profit, and real GDP. Based on the Hausman test, the Random Effect model is deemed moresuitable for this dataset. These findings have important implications for policymakers, investors, and bank managers in Bangladesh by providing insights into the factors that impact the capital ratios of commercial banks.

Suggested Citation

  • Md Shah Naoaj, 2023. "Exploring the Determinants of Capital Adequacy in Commercial Banks: A Study of Bangladesh's Banking Sector," Papers 2304.05935, arXiv.org.
    • Handle: RePEc:arx:papers:2304.05935
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    References listed on IDEAS

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    1. Md Shah Naoaj & Mir Md Moyazzem Hosen, 2023. "Does higher capital maintenance drive up banks cost of equity? Evidence from Bangladesh," Papers 2302.02762, arXiv.org.
    2. Ozili, Peterson K, 2015. "Determinants of Bank Profitability and Basel Capital Regulation: Empirical Evidence from Nigeria," MPRA Paper 61069, University Library of Munich, Germany.
    3. Reint Gropp & Florian Heider, 2010. "The Determinants of Bank Capital Structure," Review of Finance, European Finance Association, vol. 14(4), pages 587-622.
    4. Pham Thi Xuan Thoa & Nguyen Ngoc Anh & Nguyen Khac Minh, 2020. "The determinant of capital adequacy ratio: empirical evidence from Vietnamese banks (a panel data analysis)," Afro-Asian Journal of Finance and Accounting, Inderscience Enterprises Ltd, vol. 10(1), pages 60-70.
    5. Mr. Calixte Ahokpossi & Agnes Isnawangsih & Md. Shah Naoaj & Ting Yan, 2020. "The Impact of Monetary Policy Communication in an Emerging Economy: The Case of Indonesia," IMF Working Papers 2020/109, International Monetary Fund.
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    2. Karaś, Marta Anita & Boda, Michał, . "Stabilność i wyniki finansowe banków w krajach Europy graniczących z konfliktem militarnym w Ukrainie," Gospodarka Narodowa-The Polish Journal of Economics, Szkoła Główna Handlowa w Warszawie / SGH Warsaw School of Economics, vol. 2024(2).
    3. Geoffrey Ngetich Iletaach & Dr. Penina Langat & Dr. Gichuki Kingori, 2024. "Assessing the Impact of Asset Quality on Financial Performance: A Study of Kenyan Deposit Taking SACCOs," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 8(8), pages 2479-2492, August.
    4. Md Shah Naoaj, 2023. "Measuring Liquidity Risk and Its Determinants in Commercial Banks of Bangladesh: An Empirical Investigation," European Journal of Business and Management Research, European Open Science, vol. 8(2), pages 250-254, March.
    5. Md. Shah Naoaj & Mir Md. Moyazzem Hosen, 2023. "Assessing the Relationship between Enhanced Capital Requirements and Banks' Cost of Equity: Evidence from Publicly Listed Banks in Bangladesh," European Journal of Business and Management Research, European Open Science, vol. 8(2), pages 149-153, March.
    6. Apanisile Temitope Samuel, 2024. "The Effect of Quantitative Complexity Analysis on the Resilience of Nigerian Banks. Case Study: The Four Listed Nigerian Banks on the Premium Board of the Nigerian Exchange Group (NGX) for the Year 2019 -2022," International Journal of Research and Scientific Innovation, International Journal of Research and Scientific Innovation (IJRSI), vol. 11(7), pages 17-71, July.
    7. Marta Anita Karaś & Michał Boda, 2024. "Stabilność i wyniki finansowe banków w krajach Europy graniczących z konfliktem militarnym w Ukrainie," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 2, pages 64-111.

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