Capital Adequacy,Deposits And Lending Behavior Of Banking Systems

Bank capital adequacy is crucial as it is linked to the general well being of the national economy.It is indicated that banking systems failures have the potential to stagnate growth of an economy of a country and numerous economies including economies in Africa have not been insulated against the catastrophic effects of the fragile systems of the banking systems.The primary objective of this study to understand how banks’ capital adequacy influence decisions regarding the deposit and lending of banking systems within the context of Africa in a country-level study.In this regard,the effect of capital requirement was examined using regression model where change in bank deposits and change in loans were used as dependent variables.Additionally,the Pearson correlation test was employed to determine the direction of effect and strength of effect with a panel of 25 African countries from 2000 to 2017.In analysing Bank behavior,the study adopted two dependent variables,in one part is change in deposit(ΔDeposit)and in another part is change in loans(ΔLoans).Both of these variables are examined with same independent variables.For the purposes of estimation,the study used Multivariate analysis.Rationale for choosing Multivariate analysis is to eliminate possibility of multiple univariate tests applied on the variablesAnalysis of the effect of various independent variables including interest rate,financial stability,capital adequacy ratio,etc on banks’ deposit and lending behaviour represented by bank deposit and bank loans were carried out in six analyses.These include both deposit and bank loan models involving low G.D.P countries,high G.D.P countries,and all the countries.From the analysis,it was revealed that C.A.R has positive relationship with bank deposit under both low and high G.D.P countries.This finding suggests that bank deposits in these countries are one of the main sources of funding for the banks.On the other hand however,the study revealed that C.A.R has positive effect on bank loans,which is also used as one of the measures of banks’ deposit and lending.For policy makers to adequately capture the behaviour of banks with respect to C.A.R without compromising on either loans or deposit,strategic and measured decisions should be taken regarding C.A.R.Most importantly,given the varied results of capital requirements under the various settings of;Low G.D.P and high G.D.P,considerations ought to be made of the size of the economy when setting appropriate capital requirement level.