EFFECT OF TIER ONE CAPITAL COMPONENTS ON THE LOAN PORTFOLIO OF DEPOSIT MONEY BANKS IN NIGERIA

Abstract

The inadequacy of tier one capital components has been a recurring issue of concern in the Nigerian banking sector, potentially affecting the ability of deposit money banks to perform their traditional role of financial intermediation through loans and advances. Additionally, the impact of specific tier one capital components, such as paid-up share capital, and statutory reserve on the loan portfolio of deposit money banks in Nigeria remains unclear hence, the study examines the effect of tier one capital components on loan portfolio of deposit money banks in Nigeria from 2015 to 2024. The independent variables of the study and proxies for tier one capital components are paid-up share capital and statutory reserve, while loans and advances are the dependent variable. A total of 23 deposit money banks were listed on the Nigerian Stock Exchange during the period, out of which 6 banks were sampled for the study. Secondary data were collected from the audited annual financial statements of the selected banks and analyzed using panel data regression analysis. Findings suggest that Paid Up-Share Capital has a positive and significant effect on Loans and Advances. However, Statutory Reserve has a positive but non-significant effect on Loans and Advances. The study recommends that Nigerian Deposit Money Banks should be adequately capitalized at all times in accordance with the Central Bank of Nigeria's prudential guidelines to enable the banks to efficiently provide their traditional service of financial intermediation, while implementing a retention policy that will enable them to retain a sizable proportion of their earnings for future growth and expansion. The implication of the study is that strong bank capital components can enhance lending capacity, thereby contributing to industry development, economic growth, and financial stability