Effects of Financial Sector Development on Bank Capitalization Ratio in Tanzania.

Fadhil, Daud Mkali (2024) Effects of Financial Sector Development on Bank Capitalization Ratio in Tanzania. Doctoral thesis, The Open University of Tanzania.

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Abstract

Financial sector development in many countries is a series of reforms aimed at improving the sector. Theoretically, reforms that aim to develop the banking sector and stock market are expected to strengthen banks‘ stability and lower bank-risk of default through enhancing bank capitalization ratio. This thesis aimed to assess whether financial sector development plays any role in influencing bank capitalization ratio in Tanzania. The study collected secondary data from published balance sheets and income statements of 28 banks selected country-level data was collected from the DSE and World Bank database for ten years period from 2012 to 2021. The study employed a dynamic panel dataset and the Generalized Method of Moments (GMM) technique to estimate the regression model while considering bank-specific characteristics and macroeconomic conditions. Before estimating the regression model, the data was analysed using both descriptive and inferential statistics. It was found that financial sector development proxies such as banking sector development and stock market development in Tanzania improve bank capitalization ratio consistent with the aims of maintaining stability of banking sector. This is as a result of the increasing credit facility to private businesses that enable banks to increase interest income which improve bank capitalization ratio. In addition, this might be associated with the improvement of bank supervision. The thesis further found that the banks in Tanzania incurred low costs and possess high pace of adjustment to target capitalization ratio because the majority of banks are not listed. Hence, they depend on equity capital from founders or private investors which have lower floatation costs as compared to public stock market. Keywords: Tanzania, Bank capitalization ratio, Generalized Method of Moments (GMM), Banking sector development, Stock market development

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