Determinants of Capital Adequacy Ratio in Banking Sector of Pakistan
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Date
2014-04-28
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Publisher
UMT,Lahore
Abstract
Purpose - This study strives to explore the relationship of capital adequacy ratio with the
determinants of capital adequacy ratio of the banking sector of Pakistan to found out that
which of the determinants has the greater impact on capital adequacy ratio.
Design/methodology/approach – The panel data of 26 banks for the years 2008-12 was
taken regarding various banking and financial variables i.e. capital adequacy ratio, ROE,
liquidity, bank efficiency, size of bank, bank‟s capital to asset ratio, Tier-1 capital ratio,
financing to deposit ratio and share of deposits in non-equity liabilities. An econometric
data analysis technique was applied for the results.
Findings – The study shows that the shares of deposits in non-equities liabilities and
capital to asset ratio are the two main independent variables that have the significant
impact on the capital adequacy ratios of the banking sector of Pakistan. Whereas return
on equity, liquidity, bank efficiency, Tier-1 capital ratio and financing to deposit ratio
have no significant impact on capital adequacy ratio of the banking sector of Pakistan.
Managerial Implications - The study will assist policy makers and decision making
authorities of domestic and international banks to have a better look at efficient ways of
taking capital structure decisions, analyzing cost of capital and maintaining capital
adequacy ratios up to optimum levels.
Originality/Value – This study strived to find out the major determinants of capital
adequacy ratio in banking sector of Pakistan by having two new variables in the study
that have never been used before. Also the rationales that provide, immunity to banks in
Pakistan, have been discussed for the first time in detail.