CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Deposit money banks (DMBs) are the main holders of a country's financial assets and the core of its payments and credit system. Because of this position, the failure of a bank can spread quickly through the financial system, and the stability and performance of banks are therefore matters of public concern (Soomiyol et al., 2023). Banks are regulated for this reason. Prudential regulation covers many areas, including capital adequacy, asset quality, earnings, liquidity, exposure to foreign exchange risk and leverage, and its aim is to protect depositors and keep the system sound (Soomiyol et al., 2023).

Regulation has been a defining feature of the Nigerian banking industry. In 2004 and 2005, the Central Bank of Nigeria (CBN) raised the minimum capital requirement for banks from N2 billion to N25 billion, which led to a wave of mergers and acquisitions (Mondaq, 2026). Internationally, the 2007–2008 financial crisis exposed weaknesses in earlier standards, and the Basel Committee on Banking Supervision responded with Basel III, which strengthened the quality and level of bank capital, introduced a leverage ratio and added global liquidity standards (Basel Committee on Banking Supervision, 2011). Nigerian banks have operated under these evolving standards.

The most recent and far-reaching step is the CBN's Banking Sector Recapitalisation Programme, announced in March 2024. It gave banks 24 months, to 31 March 2026, to raise their minimum capital. International commercial banks had to move from N50 billion to N500 billion, national commercial banks from N25 billion to N200 billion and regional commercial banks from N10 billion to N50 billion. National merchant banks were required to hold N50 billion, and national and regional non-interest banks N20 billion and N10 billion respectively. The minimum capital adequacy ratio remained 10% for national and regional banks and 15% for banks with international authorisation (Mondaq, 2026). The CBN reported that 33 banks had met the revised requirements at the deadline (Mondaq, 2026).

Regulation protects the system, but it also affects the banks it governs. Higher capital and liquidity requirements raise the cost of funding and reduce the share of assets that can be invested in loans and other higher-yielding uses, which can lower profitability even as they increase resilience. Empirical studies of Nigerian banks reflect this tension. Soomiyol et al. (2023) found that capital adequacy regulation had a negative but insignificant effect on return on assets (ROA) and a positive and significant effect on return on equity (ROE), while liquidity regulation and credit risk regulation were both negatively related to performance. Ohonba and Aigienohuwa (2024), studying ten banks over 2012 to 2022, found that the non-performing loan ratio had a significant negative effect on ROA while the capital adequacy ratio had no significant effect. In a study of 11 listed banks that used data from 2018 to 2024, Abubakar et al. (2026) found that Basel III liquidity requirements reduced profitability and that capital adequacy and leverage requirements had no significant effect, and they interpreted this as a trade-off between short-term profitability and prudential discipline.

These mixed results suggest that the effect of regulation depends on the type of regulation, the performance measure used and the period examined. This study examines the impact of regulation on the financial performance of selected deposit money banks in Nigeria.

1.2 Statement of the Problem

Nigerian banks operate under a demanding and frequently changing regulatory regime, culminating in the largest recapitalisation exercise in two decades. Regulators expect these rules to produce stronger and more stable banks, but banks bear the cost of compliance, and it is not clear how far regulation helps or hinders their financial performance. Existing evidence is inconclusive. Some studies report that capital regulation improves returns to shareholders (Soomiyol et al., 2023), others find no significant effect on asset returns (Ohonba & Aigienohuwa, 2024; Abubakar et al., 2026), and liquidity regulation is repeatedly linked with lower profitability (Soomiyol et al., 2023; Abubakar et al., 2026). Most studies also examine a single regulatory indicator, and few of those reviewed here consider several together or cover the period of the 2024 recapitalisation programme. This study therefore examines the impact of regulation on the financial performance of selected deposit money banks in Nigeria, to help regulators and bank managers understand how regulatory requirements relate to profitability.

1.3 Objectives of the Study

The main objective is to examine the impact of regulation on the financial performance of selected deposit money banks in Nigeria. The specific objectives are to:

1. Determine the effect of capital adequacy regulation on the financial performance of selected deposit money banks in Nigeria.
2. Assess the effect of liquidity regulation on their financial performance.
3. Examine the effect of credit risk regulation on their financial performance.
4. Evaluate the effect of the minimum capital requirement on their financial performance.

Financial performance is measured by return on assets (ROA) and return on equity (ROE).

1.4 Research Questions

1. To what extent does capital adequacy regulation affect the financial performance of selected deposit money banks in Nigeria?
2. How does liquidity regulation affect their financial performance?
3. What is the effect of credit risk regulation on their financial performance?
4. How does the minimum capital requirement affect their financial performance?

1.5 Research Hypotheses

The following hypotheses are stated in null form:

H01: Capital adequacy regulation has no significant effect on the financial performance of selected deposit money banks in Nigeria.

H02: Liquidity regulation has no significant effect on the financial performance of selected deposit money banks in Nigeria.

H03: Credit risk regulation has no significant effect on the financial performance of selected deposit money banks in Nigeria.

H04: The minimum capital requirement has no significant effect on the financial performance of selected deposit money banks in Nigeria.

1.6 Significance of the Study

The study will be useful to regulators such as the Central Bank of Nigeria and the Nigeria Deposit Insurance Corporation, who must design rules that protect depositors without unduly weakening bank earnings. It will help bank management to understand how capital, liquidity and credit risk requirements affect profitability and to plan compliance accordingly. It will give investors and analysts a better basis for judging how regulatory change may affect returns, and it will add to the literature on banking regulation and performance in Nigeria, where findings remain mixed.

1.7 Scope of the Study

The study covers selected deposit money banks in Nigeria. It examines four aspects of regulation, namely capital adequacy, liquidity, credit risk and the minimum capital requirement, and assesses financial performance through ROA and ROE. It uses secondary data from the banks' audited annual reports and the publications of the Central Bank of Nigeria. Because the sample consists of selected banks, the findings may not apply equally to every bank in the industry.

1.8 Definition of Terms

Regulation: The rules and supervisory requirements set by the Central Bank of Nigeria and other authorities to govern the conduct, capital, liquidity and risk management of banks.

Deposit money bank (DMB): A bank licensed to accept deposits from the public and to provide credit and other financial services.

Capital adequacy ratio (CAR): The ratio of a bank's regulatory capital to its risk-weighted assets, which measures its ability to absorb losses.

Liquidity regulation: Requirements that oblige banks to hold enough liquid assets to meet their short-term obligations.

Non-performing loan (NPL) ratio: The share of a bank's loans that are in default or close to default, used as a measure of credit risk.

Financial performance: The extent to which a bank earns profit from its assets and equity, measured here by return on assets (ROA) and return on equity (ROE).

References

Abubakar, A., Abdullahi, A., Suleiman, H., & Abdullahi, M. (2026). Basel III regulatory reforms and bank financial performance: Evidence from Nigerian deposit money banks. FUDMA Journal of Accounting and Finance Research, 4(2), 92–105. https://doi.org/10.33003/fujafr-2026.v4i2.369.92-105

Basel Committee on Banking Supervision. (2011). Basel III: A global regulatory framework for more resilient banks and banking systems (rev.). Bank for International Settlements. https://www.bis.org/publ/bcbs189.htm

Mondaq. (2026). Status update on CBN's banking sector recapitalization. https://www.mondaq.com/nigeria/financial-services/1770020/status-update-on-cbns-banking-sector-recapitalization

Ohonba, N., & Aigienohuwa, O. (2024). Credit management and financial performance of deposit money banks in Nigeria. Journal of the Management Sciences, 60(4), 209–223. https://journals.unizik.edu.ng/jfms/article/view/3650

Soomiyol, M., Bwuese, B., & Yua, H. (2023). Effect of prudential guidelines on the financial performance of deposit money banks in Nigeria. Journal of Global Accounting, 9(4), 118–146.