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 Mzumbe University, Tanzania https://orcid.org/0000-0003-4122-3270

DOI:

https://doi.org/10.51867/scimundi.6.1.9

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.

Downloads

Download data is not yet available.

References

Abba, G. O., Okwa, E., Soje, B., & Aikpitanyi, L. N. (2018). Determinants of capital adequacy ratio of deposit money banks in Nigeria. Journal of Accounting & Marketing, 7(2), 1-7.

https://doi.org/10.4172/2168-9601.1000271 DOI: https://doi.org/10.4172/2168-9601.1000271

Abedin, M. T., & Hossain, M. S. (2025). Exploring risk resistant banking strategies: Implications for sustainable practices. Future Business Journal, 11(1), 22. https://doi.org/10.1186/s43093-025-00441-w DOI: https://doi.org/10.1186/s43093-025-00441-w

Agustiningsih, W. R., & Muazaroh, M. (2021). The effect of bank liquidity, asset quality, profitability and bank size on capital adequacy in state owned bank. In The 3rd International Conference on Business and Banking Innovations (pp. [pages]). Surabaya, March 6-7, 2021.

Ajagbe, S. T., & Usman, T. B. (2025). The impact of financial intermediation on economic growth in Nigeria. Journal of Economics and Finance Research (JEFR), 4(1), 1-10.

Ariff, M., & Shawtari, F. A. (2019). Efficiency, asset quality and stability of the banking sector in Malaysia. Malaysian Journal of Economic Studies, 56(1), 107-137.

https://doi.org/10.22452/MJES.vol56no1.6 DOI: https://doi.org/10.22452/MJES.vol56no1.6

Awdeh, A., Assaf, R., & Ghosn, F. (2023). The impact of financial development and stability on human development. Global Economy Journal, 23(01n04), 2450005.

https://doi.org/10.1142/S2194565924500052 DOI: https://doi.org/10.1142/S2194565924500052

Bateni, L., Vakilifard, H., & Asghari, F. (2014). The influential factors on capital adequacy ratio in Iranian banks. International Journal of Economics and Finance, 6(11), 108-116.

https://doi.org/10.5539/ijef.v6n11p108 DOI: https://doi.org/10.5539/ijef.v6n11p108

Ben Abdallah, M., & Bahloul, S. (2025). The influence of solvency and liquidity ratios on profitability of Tunisian banks: The moderating effect of asset quality. African Journal of Economic and Management Studies, 16(2), 255-270.

https://doi.org/10.1108/AJEMS-02-2024-0136 DOI: https://doi.org/10.1108/AJEMS-02-2024-0136

Birisi, H. B., Omagwa, J., & Musau, S. (2024). The link between capital adequacy and financial stability: Evidence from deposit taking savings and credit co-operative societies in Kenya. Journal of Finance and Accounting, 8(6), 1-15.

https://doi.org/10.53819/81018102t4268 DOI: https://doi.org/10.53819/81018102t4268

Chioma, A. V., Okoye, N. E., Chidume, A. J., & Nnenna, O. G. (2021). Assessing the effect of capital adequacy risk and liquidity risk management on firm value of deposit money banks in Nigeria. African Journal of Accounting and Financial Research, 4(1), 33-49.

Damayanti, C. A., & Purwanto, E. (2025). The influence of capital adequacy, asset quality and liquidity on the profitability of Bank Jateng. EKOMABIS: Jurnal Ekonomi Manajemen Bisnis, 6(01), 89-104.

Elviani, M., & Sumarna, A. D. (2024). The capital adequacy, asset quality, management quality, earning quality, and liquidity analysis in Indonesia banking sectors. Jurnal Akuntansi, 2303, 0356.

https://doi.org/10.33369/jakuntansi.14.1.60-76 DOI: https://doi.org/10.33369/jakuntansi.14.1.60-76

Fengju, X., & Wubishet, A. (2024). Analysis of the impacts of financial development on economic growth in East Africa: How do the institutional qualities matter? Economic Analysis and Policy, 82, 1177-1189. https://doi.org/10.1016/j.eap.2024.04.002 DOI: https://doi.org/10.1016/j.eap.2024.04.002

GR, S. (2025). An evaluation of the financial performance of Indian public sector banks with special reference to capital adequacy and asset quality. Asian Research Journal of Arts & Social Sciences, 23(1), 12-23. https://doi.org/10.9734/arjass/2025/v23i1629 DOI: https://doi.org/10.9734/arjass/2025/v23i1629

Gurley, J. G., & Shaw, E. S. (1960). Money in a theory of finance. Brookings Institution.

Haile, M. A., M K, J., & Mulugeta, W. (2024). Does regulatory convergence shape banking resilience in Africa?. Heliyon, 11(1), e41347. https://doi.org/10.1016/j.heliyon.2024.e41347 DOI: https://doi.org/10.1016/j.heliyon.2024.e41347

Kuria, J. K., Kiboi, A., & Macheru, J. (2024). Asset quality and financial stability: An empirical review of commercial banks in Kenya. Journal of Finance and Accounting, 8(3), 22-38.

https://doi.org/10.53819/81018102t7004 DOI: https://doi.org/10.53819/81018102t7004

Kusi, B. A., Forson, J. A., Adu-Darko, E., & Agbloyor, E. (2023). Global financial crisis, international capital requirement and bank financial stability: An international evidence. Journal of Financial Regulation and Compliance, 31(2), 237-258.

https://doi.org/10.1108/JFRC-04-2022-0057 DOI: https://doi.org/10.1108/JFRC-04-2022-0057

Mirichii, J. M. (2023). Capital adequacy, asset quality, management efficiency, earnings ability, liquidity and financial performance of deposit taking savings and credit cooperative societies in Kenya. Journal of Finance and Accounting, 7(11), 306-328. https://doi.org/10.53819/81018102t4243 DOI: https://doi.org/10.53819/81018102t4243

Oke, B., & Ikpesu, F. (2022). Capital adequacy, asset quality and banking sector performance in Nigeria. Acta Universitatis Danubius. OEconomica, 18(5), 56-57.

Olawale, A. (2024). Capital adequacy and financial stability: A study of Nigerian banks' resilience in a volatile economy. GSC Advanced Research and Reviews, 21(1), 001-012. https://doi.org/10.30574/gscarr.2024.21.1.0346 DOI: https://doi.org/10.30574/gscarr.2024.21.1.0346

Samad, R. R. M., & Geraldina, I. (2024). Analysis of asset quality and capital adequacy on bank profitability. In International Conference on Research and Development (ICORAD) (Vol. 3, No. 2, pp. 108-114).

Sang, N. M. (2021). Capital adequacy ratio and a bank's financial stability in Vietnam. Banks and Bank Systems, 16(4), 61-71. http://dx.doi.org/10.21511/bbs.16(4).2021.06

https://doi.org/10.21511/bbs.16(4).2021.06 DOI: https://doi.org/10.21511/bbs.16(4).2021.06

Snjawi, S. A. K., & Essa, S. K. (2021). The role of liquidity indicators to assess its risks and enhance capital adequacy in banking activity. Journal of Economics and Administrative Sciences, 27(130), 243-255. https://doi.org/10.33095/jeas.v27i130.2218 DOI: https://doi.org/10.33095/jeas.v27i130.2218

Wanjiru, B. N., Jagongo, A. O., & Ndede, F. W. (2024). Effect of capital adequacy on financial performance of commercial banks in Kenya. The Strategic Journal of Business & Change Management, 11(2), 327-349.

https://doi.org/10.61426/sjbcm.v11i2.2913 DOI: https://doi.org/10.61426/sjbcm.v11i2.2913

Waqas, H., & Bahrain, S. (2019). Risk management, capital adequacy and audit quality for financial stability: Assessment from commercial banks of Pakistan. Asian Economic and Financial Review, 9(6), 654-664.

https://doi.org/10.18488/journal.aefr.2019.96.654.664 DOI: https://doi.org/10.18488/journal.aefr.2019.96.654.664