Determinants of Capital Adequacy Ratio in the Banking Sector: Evidence from the Arab Region

The capital adequacy ratio is one of the most important indicators used to assess the ability of the banking sector to absorb shocks. Therefore, central banks have paid attention to the importance of monitoring this ratio on an ongoing basis, given the vital role of the banking sector in supporting the economy. In this paper, we investigate the banking and economic factors that could affect the capital adequacy ratio in the Arab banking sector, by using dynamic panel data model for a panel of 35 banks spread across seven Arab countries during the period 2015 to 2020. The results show that there is a positive and significant relationship between credit risk (ratio of non-performing loans to total loans) and the size of the bank on the one hand, and capital adequacy ratio on the other hand. There is also a negative significant relationship between bank profitability (return on assets) and capital adequacy ratio, while there is no significant relationship between dynamic provisions and capital adequacy ratio. Finally, regarding the role of economic variables, the study shows that the real GDP growth rate has a significant positive impact on the capital adequacy ratio in the Arab region.