The determinant of African banks’ capital structure: Basel III Accord or bank-specific factors?

Abstract

Orientation: The decision to have an optimum mix of capital structure is an issue of concern for financial service firms as much as other firms.Research purpose: The study investigated the impact of the Basel III regulatory requirements and other bank-specific factors on African banks’ capital structure and ascertained which of these factors ultimately determines the capital structure decision.Motivation for the study: There is limited evidence of study conducted on banks’ capital structure determinants within the Basel III Accord framework in Africa.Research approach/design and method: This study employed panel data drawn from 45 listed banks from 6 African nations. The panel data regression model was fitted with the system generalised moment methods estimator.Main findings: The findings revealed that within a similar economic condition in the sampled African nations, the Basel III minimum capital requirements, bank risk and size play the most important role in shaping the observed capital structure decisions of African banks.Practical/managerial implications: The regulators including central and reserve banks of the sampled African nation, and CEOs should keep their leverage ratio within the Basel III leverage ratio threshold to monitor and curb the build-up of excess leverage and also pay significant attention to the minimum capital requirements, bank risk and size in order to have an optimum capital mix.Contribution/value add: The Basel III Accord has significant importance in the financing decisions of African banks as much as the bank-specific factors.

An Empirical Analysis of the Dynamics Influencing Bank Capital Structure in Africa

“…This suggests that an increase in MCR and CBP is associated with a subsequent increase in bank leverage. This outcome is not surprising as it aligns with the findings of previous studies such as Obadire et al (2022b), Gavalas and Syriopoulos (2018), and Klefvenberg and Mannehed (2017). These studies have argued that, despite having various funding sources at their disposal, banks tend to rely significantly on debt capital to fulfill their investment and operational funding needs.…”

“…The comprehensive findings encompassing both TCTE and TDCE are detailed in Table 2. Notably, in the context of the TCTE measure of capital structure, there have been noteworthy augmentations compared to our prior study (as referenced in Obadire et al 2022b). In this iteration, the model has been enriched by the inclusion of six additional predictor variables.…”

“…The introduction of the Basel III leverage ratio also limits a bank's overall leverage by comparing its Tier 1 capital to its total exposure. This means banks now carefully manage their financing decisions to ensure compliance with the prescribed leverage limits (Obadire et al 2022b). As a result of this, the global Basel regulation plays a crucial role in the financing decisions of banks.…”

“…Previous studies have predominantly focused on data from developed nations, resulting in a significant knowledge gap in the literature concerning developing nations, particularly in Africa (Barclay and Smith 2020;Chiaramonte and Casu 2017;Fu et al 2014;Dietrich et al 2014). To address this gap, our previous study on African banks' capital determinants (Obadire et al 2022b) utilised the Basel III prescribed leverage ratio, known as the Tier 1 capital to total exposure, as a measure of banks' financing decisions.…”

Impact of Digital Finance on Stock Market Performance in Nigeria (2012m1-2021m12)

“…These diagnostic tests are basically serial correlation and normality tests. To test for serial correlation, the Correlogram-Q-statistic test of serial correlation was employed while the Histogram-Normality test (Jargue-Bera statistics) helps in diagnosing the normality of the model as used in studies such as those of Obadire et al (2022).…”