Adequate Capital and Performance of Selected Microfinance Banks in Oyo State, Nigeria

  • Olaleye John Olatunde
  • Adigun Michael Oluremi
  • Odegbile N. Abiodun

Abstract

The sufficiency or adequacy of banks’ capital is determined by the capital adequacy ratio (CAR). Capital adequacy thus refers to the determination of banks existing capital structures, in terms of the ability to wield against potential widespread risk, crisis and distress. Banks’ capital adequacy influences banks’ performance, since the adequacy by implication determines the amount of funds available for banks’ business and other profitable initiatives, and the degree of absorption of risks. Hence the study examines the capital adequacy as a predictor of microfinance banks’ performance. The objective of this study is to assess the impact of adequate capital (paid up capital, share premium and statutory reserve) on microfinance banks' performance (adjusted capital, capital adequacy ratio and profit before tax) in Nigeria. The study made use of ex-facto research design with time series. A sample of twenty selected microfinance banks in Ibadan, Oyo state was selected. Data was collected through secondary source from published annual financial reports of year 2019, which was analyzed using the Ordinary Least Square (OLS) method with the help of E-views version 9. The study further deployed some descriptive and regression analyses to evaluate how the mean outcomes deviate from each other and establish the level of association between variables. Findings showed that paid-up capital and statutory reserve and general reserves have a positive and significant association with adjusted capital and profit before tax of MFBs in Nigeria. Findings of the study further revealed that share premium has negative and significant association with capital adequacy ratio of MFBs in Nigeria. In line with the findings of this study, it recommended that MFBs should establish capital adequacy measures that clearly outline management’s view of organization’s priorities on financial performance.Keywords: Capital Adequacy, Microfinance Banks, Performance, Reserve, Profit Before Tax
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