Impact of Basel III on Namibian Banks' Profitability

This dissertation assesses the impact of Basel III implementation on the profitability of Namibian banks. It aims to identify the drivers of cost in the implementation of Basel III that will impact on the profitability of banks. The study will focus on the four Domestic Systemic Important Banks in Namibia.

SALFORD BUSINESS SCHOOL

An assessment of the impact of Basel III
implementation on the profitability of Namibian
banks.
A Plaatje
Student ID: @00534648
A dissertation is submitted in partial fulfilment of the requirements of the University of
Salford for the degree of MSc International Banking and Finance
July 2019
Contents
1. Introduction.................................................................................................................1
1.1 Rationale for Research.........................................................................................2
1.2 Aims and objectives.............................................................................................2
2. Literature Review........................................................................................................3
2.1 Basel Accord........................................................................................................3
2.2 The Impact of Basel III.........................................................................................4

3. Research Design and Methodology............................................................................6
3.1 Methodology.........................................................................................................7
3.2 Data collection......................................................................................................7
4. References..................................................................................................................7
1. Introduction

History has shown that periods of great distress are followed by periods of regulatory
interventions to prevent or minimize the impact of future distress. The banking
industry is an important element of the financial system in many countries. The
global financial crisis in 2009 saw the banking industry negatively impacted. In
response, the Basel Committee on Banking Supervision (BCBS) decided to
strengthen regulation by the introduction of the new capital and liquidity
requirements (BCBS 2014; BCBS 2013; BCBS 2010). This set of reforms is known
as Basel III, and supplements Basel II which came into effect in 2008.
Namibia is not one of the national members of the BCBS. However, Namibia issued
the Determination on the Measurement and Calculation of Capital Charges for Credit
Risk, Operational Risk, Operational Risk and Market Risk for Domestic Systemically
Important Banks (BID-5A), which became effective 1 September 2018. Basel III
Capital Framework (BID-5A) was issued in July 2018 and will be phased in over a
five year period until 2022. In terms of the principles of proportionality, the capital
framework is only applicable to Domestic Systemic Important Banks in Namibia,
namely the big 4 banks (Nedbank Namibia, Standard Bank Namibia, FNB and Bank
Windhoek). Namibia has started with the development of the Basel III Liquidity
Framework, but no consultation with the industry has been done. Another factor is
also the requirement from the South African Reserve Bank (SARB), where the
subsidiaries of South African Banks are also required to report on Basel III to the
parent company. The study will, therefore, focus on the four DSIB’s, which accounts
for 93 per cent of the assets in the Namibian Banking Industry as of 31 May 2019.

1.1 Rationale for Research
The study of the impact of Basel III on the financial performance of banks is considered
an essential issue in the field of finance and investment, especially from a Namibian
perspective. In Namibia, the banking sector raised concerns regarding the cost of
regulatory projects on the profitability of banks. This study seeks to understand the
financial consequences that Basel III regulatory reforms may have on the profitability of
the Namibian banking industry. The study will further aim to identify the drivers of cost in
the implementation of Basel III that will impact on the profitability of banks. The cost of
implementation of the banks is of concern due to the compulsory nature of compliance.
It is also of interest given the current economic downturn experienced in Namibia, which
already puts pressure on the financial performance of banks. Various studies have
focused on the impact of regulatory reform on the performance of banking institutions,
however these have been limited to other countries such as India (Gupta & Bhat, 2014);
Europe (Sbarcea, 2015), Omani (Bilal & Salim, 2016) and Mauritius (Ramlall &
Mamode, 2017). The researcher identified a gap, as no study has been done to assess
the impact on the profitability of the Namibian banking sector because of Basel III
implementation.
1.2 Aims and objectives
The research question will ascertain if the implementation of Basel III
will negatively impact on the profitability of the Namibian banks. The
objectives is to (1) determine the perceived impact on the income of
the commercial banks and the key drivers that may increase the cost

of banks; (2) determine the overall impact on profitability of banks;
and (3) examine the variation in the industry’s perception on the
effects of profitability in relation to the regulator’s understanding.
The benefit from this study will be to the Namibian banking sector at
large but also the regulatory authority, the Bank of Namibia, as it aids
the understanding of the financial impact that may emanate from the
implementation of Basel III on the Namibian banking sector, especially
policymakers. The research will also provide investors with sufficient
information to make informed investment decisions and formulate
investment strategies to obtain optimal gains. It will also demonstrate
whether regulators and banks view the financial implications of Basel
III in the same manner.
2. Literature Review
The literature reviewed in this chapter relates to the impact of Basel III
implementation in various jurisdictions. The research reviewed also detailed the
changes between Basel II and Basel III and further focus on the potential implications
and challenges that banks may experience or changes necessitated to comply with
regulatory reforms within the Basel Accords.
2.1 Basel Accord

Banks are at the core of the credit intermediation process between savers and
investors, and a reliable and robust banking system is thus the foundation for
sustainable economic growth (BCBS, 2010). To address market failures that were
revealed during the crisis, the Committee introduced various fundamental reforms which
build on the three pillars of the Basel III framework. Basel III enhances the quality and
quantity of regulatory capital, which is expected to strengthen the bank’s capacity to
absorb risk and reduce the risk of bank failures (Ramlall and Mamode 2016). The
Committee has further strengthened its liquidity framework to enhance short-term
resilience of a bank’s liquidity risk profile by ensuring that it has sufficient high quality
liquid assets to survive a stress period of one month. In addition, the enhanced liquidity
framework was also to promote resilience over a longer time horizon by creating
additional incentives for banks to opt for stable sources of funding. The higher capital
and liquidity requirements are designed to enhance financial stability, nonetheless there
will be cost implications as equity is more expensive form of funding than debt, and
liquid assets yield a lower return (BCBS, 2010).
The benefit of the Basel Accords either fully or in country specific manner is
supported by literature. Countries such as Namibia are afforded greater flexibility in the
implementation of their standards.
2.2 The Impact of Basel III

A study conducted on the impact of bank capital regulation on operating
efficiency on banks in Tanzania concluded that there is a positive relationship between
capital ratio and capability of banks (Josephat, 2018). The study suggested that higher
capital requirements result in higher operational efficiency of banks. The author
suggests that the change in capital requirements influence the decision to enhance
operational efficiency with a specific focus on strong corporate governance, risk
assessment methods, credit underwriting standards, competency of staff, improved the
internal control environment. The study did not focus on the cost of implementation to
bring about the operational efficiencies in terms of staff training, enhanced risk
assessment methods or tools and changes in corporate governance.
Similarly, Pessarossi & Weill, (2013) argued that an increase in the capital ratio
of banks has a positive effect on cost efficiency of banks. It further argues that the
benefit is dependend on the size of the bank, of which depends to an extent on the
bank’s ownership type.
In his paper on the effects of Basel III on capital adequacy requirements, Kombo
(2014), using the Kenyan example, argued that capital adequacy requirements are
important in commercial banks, as it leads to financial stability in Kenya and improves
credit risk management techniques. The researcher highlighted an important element
that the implementation affected the balance sheet structure of the Kenyan banking
sector. Despite the latter, the study did not extend to highlight how the change in the
balance sheet structure will impact on the profitability of banks.
A few academics like Pinheiro, Savoia, & Securato, (2015),Ramlal & Mamode
(2016) and Bilal & Salim, (2016) and acknowledged the impact that Basel III could have

on the profitability of banks. Ramlall & Mamode (2016) using the case of Mauritius
concluded that banks will have to restructure their balance sheet by incorporating highly
liquid assets to meet Basel III requirements (Pasiouras, Tanna and Zopounidis 2009).
The study also cautioned that the increased capital and liquidity requirements will
increase the costs of funding, which inturn will impact the profit margins and ultimately
put pressure on banks operating capacity. The researchers also suggest that in order
for banks to sustain RoE (return on equity), the cost may be passed to customers in the
form of lower deposit rate and higher cost of credit.
Pinheiro, Savoia, & Securato, (2015) assessed the potential effects from the
change in Basel III capital requirements in Brazil. The results indicated that 23 out of the
58 banks analyzed, will not comply with the Basel III capital requirements. The study
indicated that in total, an increase in the regulatory capital of about R$ 85 billion was
required to ensure compliance, in 2012 (Salloy et al 2012). The study further projected
that 39 banks may experience difficulty in raising capital from the market due to lower
returns than the cost of equity.
Similarly the research conducted by Bilal & Salim, (2016), using a correlation
analyses model, also found that Basel III impact had a positive impact on financial
performance in Oman, however the impact was found to be not statically significant.
The variables used to measure financial performance of banks was in termsof return on

assets (ROA), ROE, efficiency ratio (EFR), net interest margin (NIM) and debt to equity
ratio.
The above literature portray different pictures regarding the impact of Basel II
implementation on financial performance, some writers found a positive relationship,
while others such as Pinheiro, Savoia, & Securato, (2015),Ramlal & Mamode (2016)
and Bilal & Salim, (2016) found a negative relationship. Although Basel III will bring
several benefits Pessarossi & Weill, (2013), it is important to fully understand the cost
implications and the impact on profitability of banks for the policy makers to make
informed decisions and for the commercial banks to address the potential impact.
3. Research Design and Methodology
This chapter discusses the research methodology employed, the participants
and the data gathering. The research methodology and data collection methods are
deemed adequate to address the research questions. Similar studies that have been
conducted applied a descriptive survey design as the principal research instrument,
like Kombo (2014) and (Ramlall & Mamode, 2016)
3.1 Methodology
The researcher will use primary and secondary data sources for this research.
Basel III Capital requirements came into effect in 2019 in Namibia and will be phased in
over five years. Moreover, the liquidity requirements are yet to be announced and also
likely to be phased in (Ojo 2014). There is thus no quantitative data available to assess

the full impact, quantitatively. The researcher has, therefore opted for a qualitative
analysis through an opinion survey to obtain the views of the banks and regulator.
3.2 Data collection
A questionnaire will be the principal research instrument for this study. The
questionnaire will be sent to the 4 DSIBs for completion, while the questionnaire for the
regulator will administered through personal interviews with the Basel III Project
Manager and Project Leader (Wang 2014). For the banking industry, the questionnaire
will be sent to Head of Risk, Head of Compliance and Chief Financial Officers to obtain
a holistic view. Further, each bank is required to publish financial statements by law, of
which the annual reports may provide qualitative data on the impact of regulatory
changes.
The researcher will present these findings as generalized as opposed to banking
institution specific. This is due to the confidentiality of the information.
Reference
BCBS. 2010. Basel III: A global regulatory framework for more resiliant banks and
banking systems. Switzerland: Bank for International Settlements.
Bilal, Z. O., and Salim, B. F. 2016. Does Basil III Implementation Impact on Financial
Performance? Evidence from Omani's commercial banks . International Journal of
Economics and Financial Issues, 963-970.

Josephat, L. 2018. The Empirical Analysis of the Impact of Bank Bapital Regulations on
Operating Efficiency. International Journal of Financial Studies.
Pessarossi, P., and Weill, L. 2013. Do capital requirements affect bank efficiency?
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