The Effect of Capital Adequacy on Credit Risk Management among Commercial Banks in Nigeria; Within the Basel Capital Adequacy Framework

Abstract

This study analyses the effects of capital adequacy measures on credit risk management practices in Nigeria. The study applies the quasi experimental research design. The secondary time series data were obtained from annual report of the fifteen (15) quoted commercial banks in Nigeria as compiled in the Nigeria Stock Exchange Fact book for the period 1989 to 2015. The dependent variable; credit risk was modelled with the five (5) variants of capital adequacy measures as prescribed in Basel III provisions as our dependent variables. The independent variables were categorized under Tier I, Tier II, capital to total assets, capital conservation Buffer (CCB), Minimum Total capital Ratio (MTC) and counter cyclical capital Buffer (CCyB). The multivariate regression technique was specified and results obtained based on E-views version 9.0. The unit root result shows that the variables were stationary at levels in all except MTC which was stationary at first difference. The conintegration result shows existence of a long run equilibrium relationship between credit risk and capital adequacy. The VAR result shows that changes in credit risk were statistically and significantly influenced by capital adequacy measures. The bi-variate causality test unveils that credit risk granger-causes Tier I, capital to total risk assets, hence there exist a bidirectional link between credit risk and capital adequacy (CCB) though credit risk granger-cause more. The Impulse Response Function result shows that credit risk responded normally and negatively to the selected capital adequacy measures except for MTC ratio. The variance decomposition result unveils that credit risk accounted for own shocks up to 79.30%, this points to the critical nature of credit risk to bank survival and growth. This study concludes that transition from Basel II to Basel III will further mitigate risk management under Basel III capital framework and will also avert systemic failure in banks in Nigeria. It is recommended that risk management should be a matter of policy focus and priority among regulators and operators of bank in Nigeria.