Influence of capital adequacy requirement reviews on commercial banks’ financial performance in Tanzania

Abstract

Tanzania has undergone various amendments in capital adequacy regulations and policies at various time periods, such as in 1998, 2008, and 2014. However, despite these reviews, some banks have shown good performance while others have collapsed and merged with other strong banks. This study, therefore, aimed at assessing the influence of reviews of capital adequacy requirements on the financial performance of commercial banks in Tanzania. To achieve the main objective, the study specifically intended to analyse the extent to which commercial banks in Tanzania complied with capital adequacy requirements amendments, and compare the effect of capital adequacy requirements reviews on the financial performance of commercial banks in Tanzania before and after regulatory reviews. Panel secondary data were collected for only 24 sampled commercial banks out of 36 targeted banks. Data obtained from the study were descriptively analysed and inferentially using a random effect regression model. Results from the field reveal that, after regulatory amendments on capital requirements in 2014, Tier I, Tier II, GDP, and SIZE were observed to have a higher significant influence on the financial performance (ROE and saving mobilisation) of selected banks in Tanzania as compared to the period before capital requirements reviews. The study concludes that high compliance with capital adequacy requirements helps banks to improve their financial performance. Therefore, the study recommends that banks should further diversify their income sources to ensure that they hold more capital adequacy.