Capital Adequacy: A Case Study

Capital adequacy is calculated by using total equity to total assets. It indicates the amount of total assets which is being financed by shareholders. Besides, it expresses the safety and soundness of banks to fight against the insolvency of bank as well as avoid from bankruptcy. Higher capital ratio shows that the bank is able to survive by gaining higher profit and preventing from unpredicted losses. Furthermore, capital adequacy also helps in protecting the regulators as well as securing the stability and productivity of a financial system.

Rahman, Hamid and Khan (2015) seek to identify the bank specific determinants and macroeconomic factors that affect bank profitability by using 25 conventional banks in Bangladesh during 2006 to 2013.

This is because banks with higher equity capital, total assets, loans and deposits as well as stock market capitalization are more likely to have benefits in translating those elements into greater profitability. Constantly, Aymen (2013) and Lee (2015) found that capital adequacy and return on equity have positive relationship since the growth of capital increases the ability of bank to deal with potential shocks and have greater financial strength. Berger (1995) indicates that bank profitability is positive related capital adequacy. He points out that cost of funds in banks can be minimized if there is greater capital ratio. Higher capital ratio also decrease the price of funds and the quantity of fund required, finally it enhance the net interest income as well as

It measures the ability of a bank to meet its obligations and how liquid a bank is. In other words, bank liquidity refers to the ability to fund increases in assets and meet obligations as they fall due (Lartey, Antwi, and Boadi, 2013). This ratio cannot be either too high or too low. If it is too high, there is higher possibility that the banks may not have enough liquidity to cover its debts. If it is too low, the banks might not gain as much profit as they could be. According to Jeevarajasingam (2014), maintains both liquidity and profitability decision is significant managerial decision, as it influences the shareholder return, risk, and customer satisfaction. There are many indicators of liquidity. For example, Lartey, Antwi, and Boadi (2013) used Temporary Investment Ratio (TIR) as a measurement of liquidity in their study to discover the relationship between the liquidity and the profitability of banks listed on the Ghana Stock Exchange. The ratio is calculated as Cash and Cash Equivalents / Total Assets. Alshatti (2015) used investment ratio, quick ratio, capital ratio, net credit facilities/ total assets and liquid assets ratio as the proxies for liquidity in