Capital Adequacy in Banks: Reflections on Selected Banks in Tanzania

  • OR Mutaitina

Abstract

In principle, bank capital serves two functions. First, it represents the value of shareholder's equity, and secondly, it is the value of the buffer stock available to absorb unexpected losses. Because of this second function, it is argued that a bank's capital must be adequate. Adequate capital is the foundation of any banking system. It offers protection to depositors, creditors, deposit insurance funds, central banks and ultimately the government. Due to the protection it provides against unexpected losses, the maintenance of adequate capital is undoubtedly the main source of public confidence in individual banks and the entire banking system. This paper is of the opinion that, regardless the legally established minimum standards, the amount of capital appropriate for an individual bank is a function of its likelihood to incur unexpected losses,. Banks with greater risks are exposed to greater degree of unexpected losses and should therefore hold adequate amount of capital.

African Journal of Finance and Management Vol.7(1) 1998: 13-21
Published
2004-11-25
Section
Articles

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eISSN: 0856-6372