Determinants of bank capital adequacy: Empirical insights from Arab countries

Abstract

Capital adequacy plays an important role in the banking system through absorbing potential losses and financial shocks. This study aims to examine the determinants of bank capital adequacy in Arab countries (Bahrain, Egypt, Jordan, Kuwait, Lebanon, Oman, Palestine, Qatar, Saudi Arabia, and UAE). The study uses macroeconomic factors such as economic growth and interest, while bank-specific factors include nonperforming loans, profitability, and bank size. This study employed Fully Modified Ordinary Least Square (FMOLS) to examine the panel data from 2017 to 2023. The results showed that annual interest and non-performing loans negatively affect bank capital adequacy, while profitability and bank size positively impact capital adequacy (CAR). In contrast, economic growth has no significant effect on CAR. In addition, as can be seen from pairwise Granger causality, this study provided ample evidence for two ways of causality between the variables of credit risk and CAR, and between profitability and CAR. The results found that Arab banking sectors are compliant with the minimum capital requirements released by Basel Accord III. The findings suggest that bank managers are encouraged to be more selective in credit facilities and consider interest changes while formulating their capital regulations to absorb any potential risk in the banking system.