The Impact of Minimum Regulatory Capital Requirements on the Performance of Banks: The Case of Ethiopian Private Commercial Banks

Abstract

This study examines the impact of minimum capital requirements on the performance of private commercial banks in Ethiopia over the period 2000–2020. Using a fixed-effects panel data model, the results indicate that the implementation of higher minimum capital requirements has had a positive and statistically significant effect on bank performance. The analysis also explores the impact of various internal, industry-level, and macroeconomic factors on bank profitability. The findings show that earning quality, management efficiency, and bank size have a significant positive effect on profitability at the 5% level. This suggests that banks can improve their performance by strategies aimed at diversifying revenue streams, optimising operating costs, and achieving economies of scale. Additionally, the study finds that real GDP growth has a positive and significant impact on bank profitability at the 10% level. However, factors such as liquidity, market concentration, inflation, and real per capita income were not found to have a statistically significant effect on bank performance. The study recommends that the central bank consider a more differentiated approach to setting capital requirements, taking into account the unique risk profiles, business models, and systemic importance of individual banks. This could help ensure that capital regulations are tailored to the specific characteristics of the banking sector, thereby promoting financial stability and supporting the performance of the banking industry. Additionally, the current policy of encouraging mergers and acquisitions may need re-evaluation to balance concentration and competition in the banking sector.

Keywords: Minimum Capital Requirement, Bank, Performance, Ethiopia

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