Examining Performance Determinants of Commercial Banks: Evidence from the Tanzanian Banking Sector
Keywords:
Commercial banks, bank size, return on assets, net interest margin, capital adequacy ratio
Abstract
While the current body of literature offers valuable insights into the factors influencing bank financial performance, there remains a significant paucity of empirical research focusing on least developed nations. In this paper, we present new evidence of the effect of bank size, capital adequacy ratio (CAR), and net interest margin (NIM) on commercial banks' performance (return on assets (ROA)) from the perspective of Tanzania – a least-developed country. We employed the Random Effect, and the Generalized Least Squares (GLS) regression models utilizing a panel dataset spanning the period 2000 to 2022 of ten (10) Tanzanian commercial banks to examine the specific effect of the foregoing variables on commercial banks’ profitability. These banks have a combined share of approximately 85 percent of the total assets (TZS 46 trillion) of the Tanzanian banking sector. We found that capital adequacy and bank size have positive significant effects on the financial performance of commercial banks in Tanzania. Whereas the random effect model shows a marginally significant positive effect on ROA, the GLS regression shows a significant negative effect, indicating that the effect of NIM could be either positive or negative depending on the context. Thus, we intimate that regulators prioritize measures aimed at promoting healthy levels of capital adequacy and encouraging the growth of larger banks while ensuring adequate oversight to mitigate potential risks associated with market dominance, and regulatory frameworks should be designed to foster competition and efficiency in the banking sector, facilitating a conducive environment for banks of all sizes to thrive.
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References
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24. Goddard, J., Molyneux, P., & S. Wilson, J. O. (2004). The Profitability of European Banks: A Cross-sectional and Dynamic Panel Analysis. The Manchester School, 72(3), 363-381.
25. González, L. O., Razia, A., Bua, M. V., & Sestayo, R. L. (2019). Market structure, performance, and efficiency: Evidence from the MENA Banking Sector. International Review of Economics & Finance. https:// doi.org/10.1016/j.iref.2019.05.013
26. Grubisic, Z., Kamenkovic, S., & Kalicanin, T. (2022). Market Power and Bank Profitability: Evidence from Montenegro and Serbia. Journal of Central Banking Theory and Practice, 11(1), 5–22. https://doi.org/10. 2478/jcbtp-2022-0001
27. Gržeta, I., Žiković, S., & Tomas Žiković, I. (2023). Size Matters: Analyzing Bank Profitability and Efficiency Under the Basel III Framework. Financial Innovation, 9(1), 43. https://doi.org/10.1186/s40854-022-00412-y
28. Hausman, J.A. (1978). Specification Tests in Econometrics, Econometrica, Econometric Society, 46(6), 1251-1271, https://doi.org/10.2307/1913827
29. Hewaidy, A. M., & Alyousef, H. Y. (2018). Bank-specific performance indicators, macroeconomic factors, and capital adequacy ratio of deposit money banks in Kuwait. Journal of Business and Management, 20(1), 1-16.
30. Isayas, Y. N. (2022). Determinants of Banks’ Profitability: Empirical evidence from Banks in Ethiopia. Cogent Economics & Finance, 10(1). https://doi.org/10.1080/ 23322039.2022.2031433
31. Kapaya, S. M. (2021). A review of the impact of reforms on financial viability and sustainability of Tanzania's rural microfinance institutions. African Economic Journal, 8(6), 47-61.
32. Khediri, K.B., & Khedhiri, H.B. (2009). Determinants of Islamic Bank Profitability in the MENA Region. International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, 2(3), 409-426. 10.1504/IJMEF.2009.029072
33. Khrawish, H. A. (2011). Determinants of Commercial Banks Performance: Evidence from Jordan. International Research Journal of Finance and Economics, 81, 148-159.
34. Lotto, J., & Papavassiliou, V. (2019). Evaluation of factors influencing bank operating efficiency in the Tanzanian banking sector. Cogent Economics & Finance, 7(1), 1664192. https://doi.org/10.1080/ 23322039.2019.1664192
35. Mirzaei, A., & Moore, T. (2014). What Are the Driving Forces of Bank Competition Across Different Income Groups of Countries? Journal of International Financial Markets, Institutions and Money, 32(C), 38-71.
36. Mkaro, G. H., Lau, L. S., & Choong, C. K. (2023). The Determinants of Banking Sector Performance in Tanzania: A Pre-Post Treasury Single Account Analysis. Cogent Economics & Finance, 11(2). https://doi.org/10.1080/23322039.2023.2282812
37. Mwangi, M. (2018). The Effect of Size on Financial Performance of Commercial Banks in Kenya. European Scientific Journal, ESJ, 14(7), 373. https://doi.org/10. 19044/esj.2018.v14n7p3733
38. Öhman, P., & Yazdanfar, D. (2018). Organizational-level profitability determinants in commercial banks: Swedish evidence. Journal of Economics and Statistics, 7(2), 113-130.
39. Olalekan, A., & Adeyinka, S. (2013). Capital Adequacy And Banks’ Profitability Of Deposit Taking: An Empirical From Nigeria. Far East Journal of Psychology and Business, 13(4), 32-41.
40. Ozili, P. K., & Ndah, H. (2021). Impact of Financial Development on Bank Profitability. Journal of Economic and Administrative Sciences. https://doi.org/10.1108/ jeas-07-2021-0140
41. Saona, P. H. (2011). Determinants of the Profitability of the US Banking Industry. International Journal of Business and Social Science, 2(22), 255 – 269
42. Sayilgan, G., & Yildirim, O. (2009). Determinants of Profitability in Turkish Banking Sector: 2002-2007. International Research Journal of Finance and Economics, 28, 207-214.
43. Teimet, R., Lishenga J., Iraya, M., & Duncan, E. (2019). The Effect of Bank Size on Profitability of Commercial Banks in Kenya. International Journal of Economics, Commerce and Management, United Kingdom, 202– 216.
2. Aladwan, M. (2015). The Impact of Bank Size on Profitability: An Empirical Study on Listed Jordanian Commercial Banks. European Scientific Journal, ESJ, 11(34),
3. Alexiou, C., & Sofoklis V. (2009). Determinants of Bank Profitability: Evidence from the Greek Banking Sector. Journal of Economic Annals, 54, 93– 118.
4. Allen, F., Carletti, E., & Marquez, R. (2011). Credit market Competition and Capital Regulation. Review of Financial Studies, 24(4), 983–1018. https://doi.org/10. 1093/rfs/hhp089
5. Angbazo, L. (1997). Commercial Bank Net Interest Margins, Default Risk, Interest-rate risk, and Off-balance Sheet Banking. Journal of Banking & Finance, 21(1), 55-87.
6. Asongu, S., & Odhiambo, N. (2019). Size, Efficiency, Market Power, and Economies of Scale in the African Banking Sector. Financial Innovation, 5(1). https://doi.org/10.1186/s40854-019-0120-x
7. Athanasoglou, P., Brissimis, S. N., & Delis, M. D. (2008). Bank-Specific, Industry-Specific, and Macroeconomic Determinants of Bank Profitability. Journal of International Financial Markets, Institutions and Money, 18(2), 121-136. https://doi.org/10.1016/j.intfin.2007.04.003
8. Avramidis, P., Cabolis, C., & Serfes, K. (2018). Bank Size and Market Value: The Role of Direct Monitoring and Delegation Costs. Journal of Banking and Finance, 93 (C), 127–138.
9. Bank of Tanzania, 2023, Annual Report, https://www.bot.go.tz/Publications/Regular/Annual%20Report/en/2023123114565911.pdf
10. Batten, J., & Vo, X. V. (2019). Determinants of Bank Profitability—Evidence from Vietnam. Emerging Markets Finance and Trade, 55(6), 1417–1428. https://doi.org/10.1080/1540496X.2018.1524326
11. Berger, A.N., & Bouwman, C.H.S. (2009) Bank Liquidity Creation. Review of Financial Studies, 22, 3779 3837. https://doi.org/10.1093/rfs/hhn104
12. Berger, A.N., & DeYoung, R. (1997). Problem Loans and Cost Efficiency in Commercial Banks. Journal of Banking & Finance, 21, 849-870 https://doi.org/10.1016/S0378-4266(97)00003-4
13. Bikker, J.A. & Metzemakers, P.A.J. (2005). Bank Provisioning Behavior and Procyclicality. Journal of International Financial Markets, Institutions and Money, Elsevier, 15(2), 141-157. https://doi.org/10.1016/j.intfin.2004.03.004.
14. Bourke, P. (1989). Concentration and Other Determinants of Bank Profitability in Europe, North America and Australia. Journal of Banking and Finance, 13, 65-79.
15. Delis, M.D., & Kouretas, G.P. (2011). Interest rates and Bank Risk-taking. Journal of Banking & Finance, 35, 840-855. https://doi.org/10.1016/j.jbankfin.2010.09.032
16. Demirguc-Kunt, A., & Huizinga, H. (1999). Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence, The World Bank Economic Review, 13(2), 379-40
17. Dietrich, A., & Wanzenried, G. (2014). The Determinants of Commercial Banking Profitability in Low-, Middle-, and High-income Countries. The Quarterly Review of Economics and Finance, 54(3), 337-354.
18. Dumitrescu, E.I., & Hurlin, C. (2012). Testing for Granger Non-Causality in Heterogeneous Panels. Economic Modelling, 29, 1450-1460. https://doi.org/10.1016/j.econmod.2012.02.014
19. Elsas, R., & Krahnen, J.P. (1998). Is Relationship Lending Special? Evidence from Credit-file Data in Germany, Journal of Banking & Finance, 22(10), 1283-1316, https://doi.org/10.1016/S0378-4266(98)00063-6.
20. Eisenbach, T., Lucca, D., & Townsend, R. (2016). The Economics of Bank Supervision. NBER Working Paper Series.
21. Ferrouhi, E. M. (2014). Bank Liquidity and Financial Performance: Evidence from Moroccan Banking Industry. Business: Theory and Practice, 15(4), 351.
22. Fidanoski, F., Choudhry, M., Davidović, M., & Sergi, B.S. (2018). What Does Affect Profitability of Banks in Croatia? Competitiveness Review, Vol. 28 No. 4, pp. 338-367. https://doi.org/10.1108/CR-09-2016-0058
23. Fotova, K., Kecek, D., & Lozić, J. (2023). Does Ownership Structure Affect Bank Performance in the COVID-19 Pandemic Period? Evidence from Croatia. Yugoslav Journal of Operations Research, 33(2), 277–292. https://doi.org/10.2298/YJOR220615018F
24. Goddard, J., Molyneux, P., & S. Wilson, J. O. (2004). The Profitability of European Banks: A Cross-sectional and Dynamic Panel Analysis. The Manchester School, 72(3), 363-381.
25. González, L. O., Razia, A., Bua, M. V., & Sestayo, R. L. (2019). Market structure, performance, and efficiency: Evidence from the MENA Banking Sector. International Review of Economics & Finance. https:// doi.org/10.1016/j.iref.2019.05.013
26. Grubisic, Z., Kamenkovic, S., & Kalicanin, T. (2022). Market Power and Bank Profitability: Evidence from Montenegro and Serbia. Journal of Central Banking Theory and Practice, 11(1), 5–22. https://doi.org/10. 2478/jcbtp-2022-0001
27. Gržeta, I., Žiković, S., & Tomas Žiković, I. (2023). Size Matters: Analyzing Bank Profitability and Efficiency Under the Basel III Framework. Financial Innovation, 9(1), 43. https://doi.org/10.1186/s40854-022-00412-y
28. Hausman, J.A. (1978). Specification Tests in Econometrics, Econometrica, Econometric Society, 46(6), 1251-1271, https://doi.org/10.2307/1913827
29. Hewaidy, A. M., & Alyousef, H. Y. (2018). Bank-specific performance indicators, macroeconomic factors, and capital adequacy ratio of deposit money banks in Kuwait. Journal of Business and Management, 20(1), 1-16.
30. Isayas, Y. N. (2022). Determinants of Banks’ Profitability: Empirical evidence from Banks in Ethiopia. Cogent Economics & Finance, 10(1). https://doi.org/10.1080/ 23322039.2022.2031433
31. Kapaya, S. M. (2021). A review of the impact of reforms on financial viability and sustainability of Tanzania's rural microfinance institutions. African Economic Journal, 8(6), 47-61.
32. Khediri, K.B., & Khedhiri, H.B. (2009). Determinants of Islamic Bank Profitability in the MENA Region. International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, 2(3), 409-426. 10.1504/IJMEF.2009.029072
33. Khrawish, H. A. (2011). Determinants of Commercial Banks Performance: Evidence from Jordan. International Research Journal of Finance and Economics, 81, 148-159.
34. Lotto, J., & Papavassiliou, V. (2019). Evaluation of factors influencing bank operating efficiency in the Tanzanian banking sector. Cogent Economics & Finance, 7(1), 1664192. https://doi.org/10.1080/ 23322039.2019.1664192
35. Mirzaei, A., & Moore, T. (2014). What Are the Driving Forces of Bank Competition Across Different Income Groups of Countries? Journal of International Financial Markets, Institutions and Money, 32(C), 38-71.
36. Mkaro, G. H., Lau, L. S., & Choong, C. K. (2023). The Determinants of Banking Sector Performance in Tanzania: A Pre-Post Treasury Single Account Analysis. Cogent Economics & Finance, 11(2). https://doi.org/10.1080/23322039.2023.2282812
37. Mwangi, M. (2018). The Effect of Size on Financial Performance of Commercial Banks in Kenya. European Scientific Journal, ESJ, 14(7), 373. https://doi.org/10. 19044/esj.2018.v14n7p3733
38. Öhman, P., & Yazdanfar, D. (2018). Organizational-level profitability determinants in commercial banks: Swedish evidence. Journal of Economics and Statistics, 7(2), 113-130.
39. Olalekan, A., & Adeyinka, S. (2013). Capital Adequacy And Banks’ Profitability Of Deposit Taking: An Empirical From Nigeria. Far East Journal of Psychology and Business, 13(4), 32-41.
40. Ozili, P. K., & Ndah, H. (2021). Impact of Financial Development on Bank Profitability. Journal of Economic and Administrative Sciences. https://doi.org/10.1108/ jeas-07-2021-0140
41. Saona, P. H. (2011). Determinants of the Profitability of the US Banking Industry. International Journal of Business and Social Science, 2(22), 255 – 269
42. Sayilgan, G., & Yildirim, O. (2009). Determinants of Profitability in Turkish Banking Sector: 2002-2007. International Research Journal of Finance and Economics, 28, 207-214.
43. Teimet, R., Lishenga J., Iraya, M., & Duncan, E. (2019). The Effect of Bank Size on Profitability of Commercial Banks in Kenya. International Journal of Economics, Commerce and Management, United Kingdom, 202– 216.
Published
2024-05-31
How to Cite
Mulbah, K. T., Kurbonov, S., & Nasriddinov, B. (2024). Examining Performance Determinants of Commercial Banks: Evidence from the Tanzanian Banking Sector. European Scientific Journal, ESJ, 20(13), 19. https://doi.org/10.19044/esj.2024.v20n13p19
Section
ESJ Social Sciences
Copyright (c) 2024 Kessellie Traore Mulbah, Sinbad Kurbonov, Bobur Nasriddinov
This work is licensed under a Creative Commons Attribution 4.0 International License.
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