CAMEL RATING MODEL: AN EFFECTIVE PARAMETER FOR PREDICTING BANK DISTRESS IN NIGERIA
Abstract
The paper tested the efficacy of the use of the CAMEL Rating Model to predict bank distress in Nigeria during the period 2009-2018. Data for the study were collated from published annual reports and accounts of a sample of 10 deposit money banks. The study employed the techniques of Multiple Discriminant (MDA) and Multiple Regression Analyses on the data. The MDA results revealed that 5 out of the 10 sampled banks obtained Z-score values within the region of distress. Using the CAMEL Rating Model, banks were categorized as distressed and non-distressed banks. The result further revealed that all distressed banks fell under the marginal category, indicating symptoms of financial deterioration in their asset quality ratios. Again, the CAMEL Rating values were regressed against the Z-score values to provide further impetus to distress prediction. The regressed estimates showed the quality of assets, efficiency of management and the state of liquidity impact significantly on bank distress. On the other hand, capital adequacy and earning strength had an insignificant effect on bank distress. Therefore, CAMEL variables were effective in predicting bank distress in Nigeria in the period of study. Based on these results, it was recommended, among other things that the Central Bank of Nigeria should ensure strict compliance with prudential guidelines by banks in granting loans and advances to customers to enhance liquidity strength, asset quality, earning strength and management efficiency among deposit money banks, hence a sound and safe banking industry in Nigeria.