Capital Adequacy Ratio and Microfinance Banks: A Study of Pakistan

Abstract

Critical requirement imposed by regulatory authorities on financial institutions and banks is sufficient and adequate capital. State Bank of Pakistan imposed capital adequacy ratio (associated risk to its assets) requirement on microfinance banks to ensure its stability. This study focuses on determinants that influence capital adequacy in Pakistani microfinance banks for the period 2011-2015. Analysis of observations considers 12 microfinance banks operating under State Bank of Pakistan. Five factors have been considered in current study that is Share of Deposit, Return on Equity, Portfolio Risk, GDP, and Total Assets. The results indicate that total assets to capital adequacy shows insignificant and negative relationship (r=-.008, sig=.953) while the other four factors indicate positive and significant relationship. The results of multiple regression indicate total assets ( =-0.823, t=-17.200, p=0.000) and growth rate ( =-0.766, t=-5.112, p=0.000) having negative and significant impact, however, share of deposit shows insignificant and negative impact on capital adequacy ( =-0.039, t=-2.446, p=0.01), while the other factors have positive and significant impact on capital adequacy ratio.