The Effects of Capital Adequacy Requirements on Banks’ Market Share in Tanzania

Abstract

This study investigated how, in the course of implementing the capital adequacy requirements, particularly the Capital Adequacy Ratio (CAR), might have effects on banks’ market share in Tanzania. Specifically, the study investigated the significance and relationship between changes in the CAR to the banking sector’s profitability in general and individual bank profitability in particular. The Herfindahl Hirschman Index (HHI) is an independent variable used to measure banks’ market share. We obtained a sample of twenty-one banks from the population of sixty-three banks in the Tanzanian banking industry as at December 2016. Main source of secondary data was the Banking Supervision Information System (BSIS) covering the period of fifteen years, from 2002 to 2016. The study used the Pooled Effects Model (Pooled OLS Regression model) and the Fixed Effects Model to analyse the impacts of capital adequacy requirements on banks’ market share. Further, the Seemingly Unrelated Regressions (SUREG) were also performed and discussed in order to address problems relating to individual heterogeneity, which were omitted in the model applied. The results revealed that although in general terms capital adequacy requirements have been proved not to influence banks’ market share, the individual bank analyses have proved statistically that they do. It is recommended therefore that in addition to the overall capital adequacy requirements prescribed by the BOT in place, banks should be encouraged to develop their internal capital adequacy requirements by developing the Internal Capital Adequacy Assessment Process (ICAAP) as required by Basel II. These are the banks' privately-optimal capital levels whose determination takes into account circumstances and peculiarity of a particular bank including its risk profile. Through this way banks will be able to know at what capital levels their performance might be impacted negatively or positively and thus make informed decisions in as far as banks’ capital management is concerned.

Keywords: Capital adequacy, Risk Management and Market Share.