Effects of Basel III higher capital requirements via bank lending rates in Africa: A preliminary assessment

This paper focuses on the possible impact of the Basel III higher tier 1 capital (common equity) requirements on bank lending rates in four African countries (Egypt, Kenya, Nigeria and South Africa). In the methodology, an accounting model is employed to estimate the increase in the bank lending rates that is necessary to keep the bank return on equity (ROE) unchanged under the heightened regulatory capital framework. According to the estimates, the impact of the higher equity capital requirement on bank lending rates in Egypt, Kenya, Nigeria and South Africa would be 47.43, 32.41, 18.36 and 12.59 basis points increase (respectively) for every one percentage-point increase in the equity-capital ratio. Apart from increasing the bank lending rates, other alternatives that can be explored to keep the bank ROE unchanged are also provided in this paper.