THE EFFECT OF CAPITAL ADEQUACY AND OPERATIONAL EFFICIENCY ON PROFITABILITY OF LISTED DEPOSIT MONEY BANKS IN NIGERIA

ABSTRACT

Abstract: This paper examines the effect of Capital Adequacy and Operational Efficiency on profitability of Deposit Money Banks (DMBs) in Nigeria for the period of 2008-2016 using panel data of 15 listed banks drawn from the Nigerian stock exchange. The independent variables were proxied by Capital Adequacy and Operational Efficiency while profitability was proxied by Return on Assets (ROA). The study adopts correlational research design to examine the effect of the bank specific factors on bank profitability. Panel data techniques were employed to examine the effect of capital adequacy and credit risk on profitability of the sampled DMBs. Although Hausman specification test suggested that random effect model is more appropriate, the study utilized Feasible Generalized Least Square (FGLS) to underpin the outcome of the Hausman specification. The capital adequacy has a positive and significant relationship with bank profitability while operational efficiency has a negative and significant relationship with bank profitability during the study period. It is therefore recommended among others that the Central Bank of Nigeria should enhance their surveillance, monitoring, control and supervision of DMBs so as to ensure that the banking firms appropriately comply with required minimum level of capital adequacy, which could in turn, improve their profitability.