DETERMINANTS OF CAPITAL ADEQUACY OF ETHIOPIA COMMERCIAL BANKS

Abstract

The main objective of the study is to investigate empirically the determinants of CAR in Ethiopian commercial banks. The study period covered the year 2004-2013 on which eight banks are selected based on availability of ten years data. The study use secondary data which is gathered from annual reports of the banks under study. Panel data regression is used in this study and analyzes relationships between bank specific variables: SIZE (Bank Size), DEP (Deposit ratio), LNTA (Loan to Total Asset), LIQ (Liquidity Position), ROA (Return on Asset), ROE (Return on Equity), NIM (Net interest margin) and LEV (Leverage) and the dependent variable which is CAR. In order to select the best model that fit for the study Hausman specification test has been made. And based on the result on which the probability is less than 5%, fixed effect model is selected as the best model for the study. The result of the fixed effect model for the study reveals that ROA, DEP and SIZE have a positive effect on capital adequacy and ROE and NIM have a negative effect on capital adequacy but LIQ, LNTA and LEV have no a significant effect on capital adequacy.