CREDIT RISK INDICATORS AND CAPITAL ADEQUACY RATIO: EVIDENCE FROM SELECTED LISTED COMMERCIAL BANKS IN AFRICA

Abstract

This study examines the effect of credit risk indicators on the Capital Adequacy Ratio (CAR) of selected listed Commercial Banks in Africa. Capital adequacy remains a critical measure of banking sector resilience because it reflects banks' ability to absorb unexpected losses and maintain financial stability. Despite growing regulatory emphasis on capital strength, banks across Africa continue to face challenges associated with credit concentration, deteriorating asset quality and borrower repayment risk. Using quarterly panel data from eight listed African commercial banks, namely Standard Bank Group, National Bank of Egypt, FirstRand Group, Absa Group, Access Bank Plc, Zenith Bank Plc, Ecobank Transnational Incorporated and United Bank for Africa Plc, covering the period 2019Q1 to 2025Q2, this study investigates the impact of Credit Concentration Ratio (CCR), Non-Performing Loans (NPLs) and Debt Service Coverage Ratio (DSCR) on Capital Adequacy Ratio. The study employs descriptive statistics, panel unit root tests, Kao cointegration tests, Hausman specification tests and Fixed Effects panel regression techniques. The findings reveal that Credit Concentration Ratio exerts a statistically significant negative effect on Capital Adequacy Ratio, indicating that excessive portfolio concentration weakens banks' capital positions. Debt Service Coverage Ratio exhibits a weak negative relationship with capital adequacy, while Non-Performing Loans show no statistically significant effect. The study concludes that concentration risk remains the major credit-risk factor influencing capital adequacy among African commercial banks. The study recommends stronger portfolio diversification strategies, enhanced concentration-risk monitoring frameworks and proactive capital management policies to strengthen banking sector resilience across Africa.