Abstract

The examination of determinants of banks’ profitability has attracted great attention in the developed and developing economies, particularly in the area of business and corporate finance literature. This is because, profitability is an issue of great concern to shareholders and other corporate stakeholders. The need to improve banking institutions in Nigeria became imperative for better profitability of the banking industry in the region. This paper examined the effect of capital adequacy, credit risk and operating efficiency on the performance of commercial banks in Nigeria. The study used secondary panel data sourced from the CBN and Annual Bank Reports. The data analysis technique employed is panel random effect regression method. The capital adequacy variables of the study show that capital adequacy have significant positive effect on the bank’s financial performance. However, credit risk, and operating efficiency have negative and statistically significant effect on the financial performance of the banks in Nigeria. It concludes that capital adequacy strongly and actively stimulates, improve and grow the financial performance of commercial banks and that sufficiency of capital and adequate management can translate to improved performance. Based on the findings, the study recommends for improvement in the management of bank assets and liabilities, especially on the quality of assets portfolio and deposit liabilities in order to improve on the achievement of corporate objectives, and for the corporate governance process to be enhanced by adopting international best practices. The regulatory framework should also be enhanced to be more dynamic and effective as this will impact positively on bank management and enhance financial performance of commercial banks in Nigeria.

Keywords: financial institution, capital adequacy, profitability, bank failure, credit risk, operational efficiency..

JEL Classification: G2, G21.

Cite as: Innocent, Id. Od., Ademola, Ol. G., Teryima, T. S. (2019). Effect of Capital Adequacy, Credit Risk and Operating Efficiency on the performance of Commercial Banks in Nigeria. Financial Markets, Institutions and Risks, 3(1), 92-114. http://doi.org/10.21272/fmir.3(1).92-114.2019.

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