One of the biggest achievement in the Financial Sector in the Nigerian economy has been the upward review of the capital base of banks. This has resulted in bigger, stronger and more resilient financial institutions. Capital Adequacy can be percentage ratio of a financial institution's primary capital to its assets (loans and investments), used as a measure of its financial strength and stability. According to Nwokoji (2013) the average Capital Adequacy Ratio (CAR) of the banks in the industry was consistently above the stipulated minimum of 10.0 per cent in the first half of 2012. The industry average CAR stood at 17.7 per cent, compared with 17.9 and 5.0 per cent at end-December 2011 and the corresponding period of 2011, respectively. With the exception of one bank, all the banks met the regulatory minimum CAR of 10.0 per cent with the highest and lowest at 34.1 and a negative 7.8 per cent, respectively.
This paper sets out to examine the effect of capital adequacy on profitability of deposit- taking banks in Nigeria. It
seeks to assess the effect of capital adequacy of both foreign and domestic banks in Nigeria and their profitability.
The paper present primary data collected by questionnaires involving a sample of 518 distributed to staff of banks
with a response rate of 76%. Also published financial statement of banks were used from 2006 – 2010. The findings for the primary data analysis revealed a non-significant relationship but the secondary data analysis
showed a positive and significant relationship between capital adequacy and profitability of bank. This implies
that for deposit- taking banks in Nigeria, capital adequacy plays a key role in the determination of profitability. It
was discovered that capitalization and profitability are indicators of bank risk management efficiency and cushion
against losses not covered by current earnings.