DETERMINANTS OF CAPITAL ADEQUACY RATIO: AN EMPIRICAL STUDY ON EGYPTIAN BANKS

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Abstract

Capital adequacy rules are safety valve for regulators and banks’ clients/shareholders to reduce expected risks faced by commercial banks especially for cross border transactions as these rules are applied compulsory by all banks internationally. Applying these rules will achieve rational management and governance. This paper examines explanatory victors that influence capital adequacy ratio (CAR) in the Egyptian commercial banks. The study covers 36 banks during the period from 2003-2013. We examined the relationship between CAR as dependent variable and the following independent variables: earning assets ratio, profitability, and liquidity, Loan loss provision as measure of credit risk, net interest margin growth, size, loans assets ratio and deposits assets ratio. Furthermore, we investigate determinants of CAR before and after the 2007-2008 international financial crises. Results vary according to the period understudy. For the whole period 2003 to 2013 results show that liquidity, size and management quality are the most significant variables. Before the period 2008 results show that asset quality, size and profitability are the most significant variables. After the period 2009 results show that asset quality, size, liquidity, management quality and credit risk are the most significant variable that explain the variance of Egyptian banks’ CAR.

Keywords: Capital Adequacy Ratio (CAR), Commercial Banks, Risk Based Capital, Basel (I) & (II), Egypt, Financial Crisis

How to cite this paper: Hafez, H.M., Osama A. El-Ansary, O.A. (2015). Determinants of capital adequacy ratio: an empirical study on Egyptian banks. Corporate Ownership & Control, 13(1-10), 1166-1176. https://doi.org/10.22495/cocv13i1c10p4