CAMEL Indicators as Tools for Predicting Bank Financial Health Conditions in Nigeria

Abstract

The series of reform initiatives and consolidation strategies in the banking sector was created to improve the financial health of banks in Nigeria and strategically reposition the Nigerian economy. This paper used the CAMEL predictor model to examine the financial health of selected banks in Nigeria after adopting these reforms from 2012 to 2021.  Data for the study was collected from the audited annual reports of the eight banks. The study applied the discriminant (Z-score) technique and regression analysis to scrutinize the effect of Capital Adequacy, Assets Quality, Management Quality, Earnings Quality, And Liquidity Efficiency (CAMEL) variables on the bank's financial health conditions. The discriminant analysis revealed that 5 banks, i.e. (62.5%) of the banks investigated, may fall into distress status shortly if adequate measures are not applied.  In comparison, only 3 banks (37.5%) are financially sound. The study reveals that CAMEL indicators significantly predict bank financial health in Nigeria. However, whilst capital adequacy (CA) and liquidity sufficiency are insignificant predictors of a bank's financial health, assets quality, management quality, and earnings quality significantly predict the bank ‘s financial health in Nigeria.  The pivotal role of banks in Nigeria’s economy requires that the findings of this study should not be downplayed. Thus, bank managers should focus on managing their CAMEL indicators to avoid distress. Supervisory authorities should also intensify surveillance by conducting a CAMEL analysis of banks annually to reduce corporate failure incidences and positively reposition Nigeria's economy.