The Effect of Capital Adequacy on Profitability -Panel data Evidence from North Africa and Middle East Commercial Banks (2014-2020)

Abstract

The objective of this study is to scrutinize and measure the impact of the capital adequacy ratio as required by the Basel Committee on a  set of bank’s profitability that operating in the Middle East countries and North Africa, during the period (2014-2020). Thus, we estimate  banks' profitability using return on equity (ROE) as the dependent variable, while using the capital adequacy ratio set by the Basel  Committee as the independent variable. Hence, to attain the aim of this study, we depend on panel data models. The study came to a  conclusion, that the capital adequacy ratio has a significant negative impact on return on equity. So, the increase in the capital adequacy  standard observed among the banks in the sample drove to a decrease in the banks' ROE. furthermore, this is by virtue of the procedures  used to raise capital, which also require internal or external financing, which in turn causes the latter to distribute profits and  add them to capital over a longer period of time, which cause a decrease in the return on equity ratio.