Comparative Analysis of Liquidity and Capital of Commercial Banks in Tanzania

Abstract

This study compares the liquidity and capital of commercial banks in Tanzania. Specifically, the study examines the liquidity and capital adjustment of small, medium and large banks. The study used quarterly data of 28 commercial banks from 2010 to 2019 and applied descriptive and correlation analysis. Results revealed a negative correlation between adjustment in capital and liquid assets to customer deposits ratio. Furthermore, a significant correlation between capital adjustment and liquidity in small and large banks was also observed. The liquidity and capital adjustment between the current and previous periods do not significantly differ among small, medium, and large banks. However, a significant adjustment from regulatory minimum is observed across banks’ group mean. The negative correlation between adjustment in capital and the ratio of liquid assets to customer deposits indicates that banks of higher capital have low liquidity. When capital is adjusted upward, small banks reduce liquidity while large banks increase liquidity. However, when liquidity is adjusted upward, small banks reduce capital while large banks increase capital. When capital requirements increase, the ratio of liquid assets to total assets is reduced for all banks since banks are inclined to increase capital. The results imply heterogeneity of banks’ liquidity and capital. Therefore, the regulator should consider heterogeneity among banks to allow effective regulatory and supervisory mechanisms across bank categories. Moreover, bank managers should effectively manage both capital and liquidity to remain legitimate and survive