CAMELs and Banks Performance Evaluation: The Way Forward
21 Pages Posted: 14 Jul 2008
Date Written: June 24, 2008
Despite the continuous use of financial ratios analysis on banks performance evaluation by banks' regulators, opposition to it skill thrive with opponents coming up with new tools capable of flagging the over-all performance ( efficiency) of a bank. This research paper was carried out; to find the adequacy of CAMEL in capturing the overall performance of a bank; to find the relative weights of importance in all the factors in CAMEL; and lastly to inform on the best ratios to always adopt by banks regulators in evaluating banks' efficiency. The data for the research work is secondary and was collected from the annual reports of eleven commercial banks in Nigeria over a period of nine years (1997 - 2005). The purposive sampling technique was used. The presentation of data was in tables and analyzed via the Efficiency Measurement System (EMS) 1.30 software of Holger School and independent T-test equation. The findings revealed the inability of each factor in CAMEL to capture the wholistic performance of a bank. Also revealed, was the relative weight of importance of the factors in CAMEL which resulted to a call for a change in the acronym of CAMEL to CLEAM. In addition, the best ratios in each of the factors in CAMEL were identified. For example, the best ratio for Capital Adequacy was found to be the ratio of total shareholders' fund to total risk weighted assets. The paper concluded that no one factor in CAMEL suffices to depict the overall performance of a bank. Among other recommendations, banks' regulators are called upon to revert to the best identified ratios in CAMEL when evaluating banks performance.
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