The influence of prudential regulatory requirements on the financial stability of Tanzanian commercial banks

Lusekelo Kasongwa

doi:10.51867/scimundi.6.1.9

Authors

Lusekelo Kasongwa
lkasongwa@mzumbe.ac.tz
Mzumbe University, Tanzania https://orcid.org/0000-0003-4122-3270

Keywords:

Asset Quality Requirements, Capital Adequacy, Financial Stability, Liquidity, Tanzania

Abstract

This study examines the influence of prudential regulatory requirements on the financial stability of listed commercial banks in Tanzania. The study was guided by the financial intermediation theory, emphasizing the role played by financial institutions in reducing transaction costs as well as managing risks and improving the efficiency of operations. Using panel data analysis, the study focuses on three key regulatory measures, capital adequacy, liquidity, and asset quality requirements, while also considering bank-specific characteristics such as size and age. Using quarterly panel data for seven listed commercial banks for nine years, the study employs generalized least squares (GLS) to estimate the relationship between prudential indicators and financial stability. The results reveal that both capital adequacy and liquidity requirements have significant negative effects on financial stability, suggesting that in a developing financial system like Tanzania’s, these rules may impose costs that erode profitability and reduce resilience. Asset quality requirements show a positive but statistically insignificant effect, indicating weak enforcement or delayed impact on stability. The study reveals that larger and older banks exhibit greater stability, underscoring the significance of scale and experience in fostering resilience. These findings underscore the need for context-specific prudential frameworks that balance regulatory safeguards with the realities of local banking markets, ensuring that compliance enhances rather than undermines stability. The study provides important policy insights for regulators and bank managers seeking to strengthen the Tanzanian financial system in line with both domestic needs and international standards. Specifically, there is a need for Tanzania’s prudential regulation to be more context-specific and proportionate by adopting flexible, countercyclical capital and liquidity frameworks and strengthening enforcement of asset quality and risk management so that oversight enhances long-term financial stability without undermining efficiency and growth.

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