What Determines Capital Adequacy in the Banking System of Kingdom of Saudi Arabia? A Panel Data Analysis on Tadawul Banks

Abstract

The aim of this paper is to present an empirical evidence to explain some bank internal factors that influence the capital adequacy ratio (CAR) of listed banks in the Kingdom of Saudi Arabia (KSA). We used the data covering from 2008 to 2012 for the Saudi Arabian Banks that are listed in Saudi Arabian Stock Market, Tadawul. By using a panel data and modelling through fixed effect, robust estimation and generalized least square (GLS) and feasible GLS we found that except non-performing loans, other variables have significant effect on CAR. Depending on the model type the results vary. Fixed effect, robust estimation and least squared dummy regression (LSDR) results shows that loans to assets ratio has negatively significant while leverage and the size of the banks have positively significant in determining CAR. In GLS estimation we found that in addition to earlier model results, loan to deposit ratio has negatively significant and the return on assets has positively significant on CAR. Our analysis also shows that there are significant bank specific effects in panel data structure while no time effect is found.

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