THE EFFECT OF CAPITAL ADEQUACY ON THE PERFORMANCES OF BANKS IN THE FACE OF GLOBAL FINANCIAL CRISES

1.1 Introduction

The global financial crisis has generally influence the financial position and performance of the global banking industry. Bank performance is the importance of banks, is more pronounced in developing countries because financial markets are usually under developed and banks are considered the merely major source of finance for the majority of firms and are usually the main depository of economic savings (Arun & Turner, 2004). The poor performance of the banking sector has been attributed to several problems; such as inadequate capital, high non-performing assets and so on, which had gone ahead to frequent distress in the banking sector and collapse of some banks (Agbada & Osuji, (2013).

As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitations of the Study and Definition of technical terms.

1.2 Background of Study

Bank occupies an important position in every economy and as such its contributions to the growth and development of any economy need not to be over emphasized. To this extent, the soundness and safety of financial institutions has become a thing of great concern to the government, the regulatory authorities, the investors, the creditors and the entire public. One of the achievements in the financial sector in the Nigerian economy has been the upward review of the capital base of banks (Okoye, Amahalu, Obi, & Nweze, 2016). It supports bank operations by providing a buffer to absorb unanticipated losses from its activities and in the event of problems, enabling the bank to continue to operate in a sound and viable manner while the problems are addressed or resolved (Aruwa & Mohammed, 2011).

According to Osubor (2003) Bank capital consist of paid up capital, statutory reserves, share premium reserve and other undisclosed reserves. It is worthy to note that the strength of any Bank is determined by the nature and capital resources available to a bank. Capital adequacy is one of the major factors to be considered when the soundness, safety and performance of a particular bank is being assessed. It must have an adequate capital. Capital adequacy according to BOFIA (Bank and other financial institution act (1991) is defined as quantum of find which a bank should have a plan to maintain in other to conduct it’s business in a prudent manner. It can equally be defined as the amount of capital that can effectively discharged the primary capital functions of preventing banks failure by absorbing losses which could not be absorbed by the normal earnings. Capital adequacy enable bank to attract funds and to offer varieties banking services to customers.

Bank performance is the importance of banks, is more pronounced in developing countries because financial markets are usually under developed and banks are considered the merely major source of finance for the majority of firms and are usually the main depository of economic savings (Arun & Turner, 2004). There is an urgent need to keep the performance of bank under close watch and supervision at all times. Due to banks’ significant influence on the economy, immense stress has been given on the regulation and supervision of the banking sector (Barth, Caprio & Levine, 2006). The poor performance of the banking sector has been attributed to several problems; such as inadequate capital, high non-performing assets and so on, which had gone ahead to frequent distress in the banking sector and collapse of some banks (Agbada & Osuji, (2013).The global financial crisis has generally influence the financial position and performance of the global banking industry.

Banks capital plays a very important role in maintaining safety and solidarity of banks and the security of banking systems in general as it represents the buffer gate that prevents any unexpected loss that banks might face, which might reach depositors funds, given that banks operate in a highly uncertain environment that might lead to their exposure to various risks, and losses, that might result from risks facing banks.

Therefore, in Nigeria where the research was carried out, the activities that was conducted is to know the Effect of Capital Adequacy on the Performances of Banks in the Face of Global Financial Crises.

1.3 Statement of Problems

The problems associated with capital inadequacy of banks in the face of global financial crises have caused a lot of harms and impediments to the economic growth and development in the country.

Capital inadequacy of banks have been identified as major reason for bank failure in Nigeria and also seen as a factor militating against industrial development in Nigeria since banks are unable to finance agriculture and other major sectors of the economy.

Capital inadequacy of banks cause actual shortage of investment funds in the economy as it limits the lonable fund. Which bank can grant to a particular borrower or to a group of related borrowers.

Capital inadequacy has made it so difficult for many banks to settle their financial obligation as when due and unable to attract fund from the customers as the customers or depositor must have lost confidence on the banks.

Capital inadequacy has equally limited commercial banks in Nigeria from acquiring or adopting the new modern techniques in banking to keep pace with the trend of globalization and as well hindered them from carryout banking across the border. It is therefore, in the light of my concern over the safety and soundness of our financial system, the economy and the entire banking public that this research topic is being selected.

1.4 Aim and Objectives of Study

The aim of the study is to scrutinize the Effect of Capital Adequacy on the Performances of Banks in the Face of Global Financial Crises. In achieving this aim, the following specific objectives were laid out as follows:

1. To investigate on the role bank adequate capital plays in the industrial growth and economy development in Nigeria in the face of global financial crises.
2. To determine the effect of capital adequacy on bank performance and on the depositors.
3. To determine the level of safety and soundness of a bank through base.
4. To enumerate factors that are affecting of bank capital and possible solutions to them.
5. To appraise and evaluate the development and growth, of bank using capital adequacy as a yardstick.

1.5 Research Questions

The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:

• Adequate capital is operationally imperative in banking?
• Does adequate capital of a bank determine it’s performance and ability to meet it’s financial obligation as at when due?
• Adequate capital leads to confidence over mobilization of deposits?
• Adequate capital increases the bank ability to compete effectively in the market place?
• Adequate capital does not determine the amount of loan given to a borrower or group of related borrower in the face of global financial crises?

1.6 Research Hypothesis

In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.

Hypothesis One

• H0: Adequate capital does not determine the level of confidence customers have on bank in face of global financial crises
• H1: Adequate capital determines the level of confidence customers have on bank in face of global financial crises

Hypothesis Two

• H0: Adequate capital does not increase the investment portfolio of bank as to enable bank to diversify it’s investment to ensure maximum returns
• H2: Adequate capital increases the investment portfolio of bank as to enable bank to diversify it’s investment to ensure maximum returns

1.7 Significance of Study

This research work will widen my knowledge as a student banker and enable me and the reader of this work to understand the fundamental roles which adequate capital can play in the banking industry and in the economy as a who my fellow student banker are equally going to benefits from this research work as it will advance their knowledge and equipped them with right information and skills which are obtained in the modern day banking creditors, investors and the entire bank customers will also benefits immensely from this research work as they will be provided with right and desirable information techniques and tools of measuring the position of their various banks.

This study will be of immense benefit to other researchers who intend to know more on this study and can also be used by non-researchers to build more on their research work. This study contributes to knowledge and could serve as a guide for other study.

1.8 Scope of Study

The study focuses on the Effect of Capital Adequacy on the Performances of Banks in the Face of Global Financial Crises in Nigeria.

1.9 Limitations of the Study

During the course of this study, many things militated against its completion, some of which are:

1. Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
2. Research material: availability of research material is a major setback to the scope of the study.
3. Frequent power failure: This made the researcher append more money on fuel to ensure sustainable power.
4. Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

1.10 Definition of Terms

Capital: This means shareholders fund i.e those funds attributed to the proprietors published in the balance sheet.

Banks: A bank is a corporation or body person who accepts money on current and savings accounts pays such money on demands and carries out some other financial function for their customers.

Profitability: This refers to the capital employed in the bank. It is the reward for risk excess income over and above the expenses incurred in earning income.

Liquidity: This refers to the ability of a bank to raise certain amount of fund at a certain cost within a certain period of time as to be able to settle it’s financial obligation as they fall due.

Bank Capital Adequacy: This as used in this research work refers to the amount of capital a bank should maintain in order to conduct it’s operations in a prudent manner.

Solvency: This refers to the ability of bank capital to absorb possible losses and make bank continue in operations.

Bofia: This means banks and other financial institutions act. This is an act that guides the activities of all licensed banks in Nigeria.