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How Do Commercial and Non-commercial Banks Adjust Capitalization Ratio: Evidence from Tanzania

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  • Daud Mkali Fadhil,
  • Dr. Salvio Elias Macha,
  • Dr. Salama Yusuf Yusuf
Daud Mkali Fadhil
PhD Student at the Open University of Tanzania, Faculty of Business Management
Dr. Salvio Elias Macha
Senior Lecturer at the Open University of Tanzania, Faculty of Business Management, P.O. Box 23409, Dar es Salaam, Tanzania
Dr. Salama Yusuf Yusuf
Senior Lecturer at the Zanzibar University, Faculty of Business Administration, P.O. Box 2440, Zanzibar, Tanzania
Published in : International Journal of Scientific Research and Management (IJSRM) , Vol. 12 No. 03 (2024)

Published 2024-03-25

Keywords

  • Tanzania, Target bank capitalization ratio, Dynamic trade off theory, Too-big to fail hypothesis

Copyright (c) 2024 Daud Mkali Fadhil, Dr. Salvio Elias Macha, Dr. Salama Yusuf Yusuf

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

Abstract

This study examines the dynamic balanced panel data to explore the level of capitalization adjustment process for commercial and non-commercial banks in Tanzania for a period of 10 years from 2012 to 2021 in a two-step system GMM estimator. The findings of the research reveal that the cost of adjustment towards the required bank capitalization ratio is lower for commercial and non-commercial banks operating in Tanzania. The results are significant to the instantaneous adjustment process of a capitalization ratio measured in terms of the ratio of bank total equity to total assets. This finding is consistent with the dynamic trade-off theory of capitalization ratio using the coefficient value of the lagged response variable. The result reveals further that return on assets reduces the cost of the target bank capitalization ratio which means it eliminates the financial distress because return on assets is easier to be valued by investors. Therefore, it can be used as an indicator of the good performance of banks that can increase the easy availability of external capital from prospective and existing investors. The negative and significant sign of the bank size coefficient (-0.710) implies that the sample of banks in this study in terms of equity to assets ratio causes the capitalization ratio to deviate from the target level. This is consistent with the too-big to fail hypothesis. Abdulhamid et al. (2019) hold that an inverse association between bank size and capitalization ratio would happen because large banks have comparative advantages in non-traditional banking activities (interest) since they can operate with a fixed cost. The findings of this study have significant policy implications for economic and financial sector growth.

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