Analysis of capital adequacy in commercial banks: a case study of Guaranty Trust Bank Uganda Limited

Abstract

This study analyzed capital adequacy in Guaranty Trust Bank (GTBank) Uganda, which transitioned to a credit institution by the end of the 2023/2024 financial year. It focused on three objectives: (1) evaluating GTBank’s capital adequacy ratio before and after the transition, (2) assessing the effectiveness of its capital management practices in complying with evolving regulations, and (3) examining challenges and opportunities in maintaining capital adequacy during the transition.

A mixed-methods approach was used, combining quantitative and qualitative data. The sample size consisted of 40 purposively selected respondents, including GTBank management, regulators, and department heads. Data were collected through questionnaires and interviews, with quantitative data analyzed using SPSS and qualitative data interpreted through narrative techniques. The study ensured validity via peer review and reliability through methodological triangulation. Findings revealed that GTBank’s capital adequacy ratio improved significantly post-transition, driven by enhanced capital management strategies and stronger regulatory compliance. However, challenges such as macroeconomic fluctuations, rising compliance costs, liquidity constraints, and increased regulatory burdens hindered the bank's ability to maintain capital adequacy while pursuing growth. The study also identified opportunities for improved risk mitigation and access to capital markets, although GTBank's conservative approach may limit growth potential. Key recommendations include improving GTBank’s capital management, enhancing collaboration with the Bank of Uganda, engaging investors on capital adequacy issues, and conducting future research on comparative capital adequacy practices. The study emphasizes the importance of effective capital management and regulatory adherence in ensuring the financial stability of banks like GTBank. A mixed-methods approach was adopted, involving quantitative and qualitative approach, employing a descriptive research design to delve into the multifaceted dimensions of capital adequacy in commercial banks. The study employed a sample size of 40 respondents purposively selected, including executive and senior management team, financial controllers, regulators from Bank of Uganda, branch heads, members from the audit, risk, compliance and credit departments of GTBank. Data collection methods included closed-ended questionnaires and semi-structured interviews. Quantitative data were analyzed using SPSS (v20-64bit), applying descriptive statistics to assess the capital adequacy ratio and compliance management practices. Qualitative data were analyzed using Polkinghorne’s (1995) two-tier approach, incorporating narrative analysis and analysis of narrative techniques, to interpret interview responses and complement the quantitative findings. The validity of the findings was ensured through peer review, while reliability was achieved via methodological triangulation. The study findings indicate that GTBank's CAR showed a significant improvement post-transition, reflecting enhanced capital management strategies and stronger alignment with regulatory requirements. Stakeholders reported greater confidence in the bank's financial health due to these advancements. Despite these improvements, the transition presented significant challenges including, macroeconomic fluctuations and rising compliance costs, liquidity constraints and increased regulatory burdens which strained the bank's ability to maintain adequate capital levels while pursuing growth opportunities. Additionally, the research highlighted that GTBank's conservative approach to capital management, while ensuring regulatory compliance, may limit aggressive growth strategies. Opportunities identified during the transition include enhanced risk mitigation strategies and the potential for better access to capital markets. Recommendations highlight the need for GTBank management to improve capital management and risk assessment, while the Bank of Uganda should provide clear guidelines and foster collaboration. Investors should engage with management on capital adequacy, and researchers should conduct longitudinal studies and comparative analyses. The banking sector should advocate for standardization, innovate, and monitor economic conditions for effective capital management. The research recommends future research should compare capital adequacy practices across banks, conduct longitudinal studies on GTBank's capital trends, explore stakeholder views, assess macroeconomic and regulatory impacts, and examine the role of technology in enhancing capital management. Conclusively, this research underscores the critical importance of effective capital management and regulatory adherence in sustaining financial stability for commercial banks like GTBank. The insights gained provide valuable recommendations for refining capital adequacy practices, ensuring that GTBank not only meets current regulatory standards but also capitalizes on growth opportunities in a competitive banking environment.