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Journal of Banking Regulation (2023) 24:1-14
https://doi.org/10.1057/s41261-021-00181-1
ORIGINAL ARTICLE
Basel IV capital requirements and the performance of commercial
banks in Africa
Damilola Oyetade - Adefemi A. Obalade - Paul-Francois Muzindutsi'
Accepted: 17 October 2021 / Published online: 30 October 2021
©The Author(s), under exclusive licence to Springer Nature Limited 2021
Abstract
Capital adequacy is considered an essential determinant banks' performance. Banks in Africa have revenue growth oppor-
tunities, but fragility and vulnerability to bank failures arising from capital inadequacy and non-performing loans affect
their performances. The Basel Committee aims to introduce higher capital requirements is to strengthen the resilience of the
banking system; however, the implementation of higher Basel capital requirements may affect the performance of banks. This
study examines the potential impact of Basel IV capital requirements (CAR) on the performance of commercial banks from
selected African countries. To achieve the set objective, the study simulated Basel IV CAR to create sample representative
bank balance sheets using historical data from 2000 to 2018 because Basel IV CAR has not commenced. The study devel-
oped a sample-representative of Basel IV CAR and employed static and dynamic panel regression analyses as the estimation
techniques. The results suggest that Basel IV CAR portends short-term negative impacts on bank performance while the
long-term impact on bank performance is favorable.
Keywords Basel capital requirements - Performance - Banks - Africa
JEL Classification G21 - G28 - G17
Introduction
The performance of banks is a crucial element to the sur-
vival of banks. At the same time, capital regulations are
important factors that could be beneficial or detrimental to
banks' performance [1]. Due to the nature of banks' busi-
ness, banks are exposed to many potential risks of opera-
tional losses; deposits withdrawal without notice, the state
of the economy like recession, COVID-19 pandemic global
crises and other factors that create uncertainty in borrowers'
loan repayments [2, 3]. These risks affect the performance,
banks' survival, and the banking sector's stability; and their
negative effects can spill over to the economy [4]. To man-
age these effects, regulatory authorities play an important
role in establishing adequate regulations that include capital
requirements (hereafter CAR) to address the banks' risks [5].
Paul-Francois Muzindutsi
MuzindutsiP @ukzn.ac.za
School of Accounting, Economics and Finance, University
of KwaZulu-Natal, University Road Westville, Bag X 5400,
Durban 4000, South Africa
Nevertheless, the regulatory authorities' decisions to stabi-
lise of the banking sector [6], which includes higher CAR,
affect the performance of banks [7].
Banks in Africa generate high income, but capital inad-
equacies, high levels of non-performing loans, poor asset
quality, operational inefficiencies, and macroeconomic
factors erode the earnings of these banks that could oth-
erwise be averted by implementing higher Basel levels [8,
9]. Empirical studies identify that banks in Africa are ade-
quately capitalized above the minimum Basel CAR of 8 per-
cent. The average bank capital ratio in Africa is 12 percent
[10, 11]. This could suggest that African banks do not need
to comply with Basel III or even Basel IV like banks in the
developed countries that fell into a financial crisis with low
capital levels. The challenge of the African banks' average
capital ratios are; first, the quality and the composition of
the high capital ratio declared.
Secondly, some of the banks may not apply the Basel
requirements, such as calculating the risk-weighted assets
in arriving at their reported capital ratio. As a result, many
African banks have capital buffers either above their risk
exposures or below their risk exposures. Hence, the growth
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