1. IntroductionCapital is the term used in various fields such as accounting, finance, corporate law and economics. The term has significance in company law in Tanzania and all over the world. Capital in the modern company law constitutes share capital, loan capital and funds provided by members creditors or retention of profit and assets in which funds have been invested. All firms must, at varying times, obtain capital. To do so, a firm must either borrow the money (debt financing), sell a portion of the firm (equity financing), or both. How a firm raises capital depends a great deal on the size of the firm, its life cycle stage, and its growth prospects.[footnoteRef:1] Listed Public companies can raise capital through capital markets such as Dar es Salaam stock of Exchange (DSE) in Tanzania. [1: Ross et al (2002), Fundamentals of Corporate Finance, 6th Ed, McGraw-Hill, Pg. 553]

In this paper the discussion of capital will only base on share capital. According to the book by Goulding (1999), share capital can be defined as an amount which is stated in the companys memorandum and is the maximum sum which a company can raise by way of issuing shares.[footnoteRef:2] The maximum sum that a company can raise is referred to as nominal authorized or registered capital. As provided by section 64 of the Companies Act, companies limited by shares have power to alter the Authorized share capital in the capital clause of Memorandum of Association.[footnoteRef:3] The company is not abiding to issue all the authorized share capital. Only the share capital is treated as the legal capital of the company and subject to statutory regulations and restrictions.[footnoteRef:4] [2: Goulding, S. (1999). Company Law. 2nd Ed, Cavendish Publishing Ltd, London, Pg. 177] [3: The Companies Act no 12 of 2002.] [4: http://www.lawteacher.net/company-law/essays/the-concept-of-capital.php retrieved on 27/05/2014]

2. The concept of minimum capitalThe minimum capital is the concept that is wildly used in business and law. The concept has not been explained in the Companies Act No 12 of 2002 but the concept is applicable and used in various businesses in Tanzania. However the minimum capital concept has been explained in other regulations and acts which guide specific companies within an industry such as insurance industry. The term minimum capital can simply be defined as the share capital that must be deposited by shareholders before starting business operations.[footnoteRef:5] The capital clause in the memorandum of associations must state the minimum required share capital or above before registration and commencement of the business. This requirement is that companies must have an allotted or issued share capital of at least the authorized minimum to begin business or exercise any borrowing powers.[footnoteRef:6] The minimum capital regulations are applicable both in public and private companies in Tanzania that fall under the regulated businesses. The certificate of commencement of business activities for public companies and certificate of incorporation for private companies will only be issued once the Registrar of Companies is satisfied that the company has satisfied the formalities of the Companies Act and raised the required minimum capital for regulated businesses.[footnoteRef:7] [5: Saltane, V. and Serna, P. (2014). Why minimum capital concerns entrepreneurs? [Case study]. Doing business publication, Pg. 41] [6: Goulding, S. (1999). Company Law, 2nd Ed, Cavendish Publishing Ltd, London, Pg. 178.] [7: Bourne, N. (1998). Principles of Company Law. Cavendish Publishing Ltd, London, Pg. 52]

2.1. Maintenance of minimum capital requirementSection 64 of the Companies Act No 12 of 2002 provides that a company limited by shares may reduce its share capital on the passing of special resolution.[footnoteRef:8] The Act allows the deduction of capital both nominal or issued share capital. For those companies which are supposed to maintain a minimum capital are not allowed to reduce their nominal and paid up capital below the required minimum capital otherwise their license may be suspended or revoke. [8: The Companies Act No. 12 of 2002.]

2.2. Purposes of Minimum CapitalThe purpose of minimum capital depends on the industry for which the regulations are being set. But the generally the main purpose of setting minimum capital regulation as specified by Goulding (1999) is to protect and satisfying creditors.[footnoteRef:9] Thus enable creditors to fill secure of the default risks and also being satisfied to lend to the organization due to low risk of default. [9: Goulding, S. (1999), Company Law. 2nd Ed, Cavendish Publishing Ltd, London, Pg. 15.]

Despite that the article by Cotter (2011) specified another purpose as they are set to avoid systematic costs of default by reducing the probability of failure.[footnoteRef:10] This is done especially to risky industries such as banking and financial industry. [10: Cotter, J. (2011). Minimum Capital Requirement Calculations for UK Futures, Working Paper, University College Dublin, Pg. 3]

However research by Stel et al. (2007) demonstrated that the existence of required minimum capital hinders growth of businesses and business development.[footnoteRef:11] It acts as the barrier of entry for new business in the industry as not all people can have that amount of capital. [11: Stel, A.V, Storey, D.J and Thurik, A. (2007), The Effect of Business Regulations on Nascent and Young Business Entrepreneurship, Small Business Economics Vol 28 (issue 2-3), Pg. 171186.]

2.3. Minimum capital as outdated conceptThe minimum capital as noted earlier is established for the main reason of protecting creditors. It has been argued by Armour (2006), in his paper legal capital: an outdated concept?, that legal capital is no longer a means to safeguard the interest of creditors.[footnoteRef:12] Armour also suggested other ways of safeguard the interest of creditors such as contracts in form of loan covenants and insolvency provisions. [12: Armour, (2006). Legal Capital: an Outdated Concept?, Working paper, Centre for Business Research, University Of Cambridge. Pg. 6.]

2.4. Applicability of Minimum Capital in Laws and Regulation in Tanzania2.4.1. Banking BusinessAs provided by section 3 of the Banking and Financial Institutions Act No. 5 of 2006, Bank means an entity that is engaged in the banking business.[footnoteRef:13] Banking business is defined in section 3 of the Banking and Financial Institutions Act of 2006 as the business of receiving funds from the general public through the acceptance of deposits payable upon demand or after a fixed period or after notice, or any similar operation through the frequent sale or placement of bonds, certificates, notes or other securities, and to use such funds, in whole or in part, for loans or investments for the account of and at the risk of the person doing such business.[footnoteRef:14] They are financial intermediaries that connect borrowers and lenders. However banks are not the only financial institutions there are others that act as financial intermediaries which will not be part of banking business discussion example of other financial institution despite bank is micro finance companies. [13: The Banking and Financial Institutions Act No.5 of 2006.] [14: Ibid.]

The Banking business is well known of its risks which may results to the bank failure if not managed well. It is one of the risky industries in the world and may have a significant impact on the economies of the country.[footnoteRef:15] If not regulated they may lead to inflation and recession in the countrys economy. Therefore they are most heavily regulated in the economy. [15: Mishkin, F. (2004). The Economics of Money, Banking and Financial Markets, 7th Ed. Addison Wesley, Pg. 9-11]

In Tanzania banks are regulated by Bank of Tanzania (BOT) under the Banking and Financial Institutions Act No.5 of 2006. Under section 10(2) of the Banking and Financial Institutions Act, every bank and financial institution in Tanzania must abide with the licensing criteria for it to be licensed.[footnoteRef:16] However as provided under section 11(2) of the Banking and Financial Institutions Act, the Bank of Tanzania may suspend or revoke the license if it is found that the bank or financial institution failed to meet the minimum capital.[footnoteRef:17] Therefore minimum capital requirement is one of the very essential licensing criteria for banks or financial Institutions in Tanzania. [16: The Banking and Financial Institutions Act No.5 of 2006.] [17: Ibid.]

According to section 17(1) of the Banking and Financial Institutions Act of 2006, banks in Tanzania are required to have a minimum of core capital of not less than five billion shillings or higher amount that Bank of Tanzania may prescribe by order in the Gazette.[footnoteRef:18] This amount must be maintained at all times for the bank to continue its operations. The banking and financial institutions (licensing) regulations of 2008 under section 28(1), also specify that banks must comply with minimum capital to be licensed.[footnoteRef:19] [18: Ibid.] [19: The banking and financial institutions (licensing) regulations of 2008.]

2.4.1.1. Purposes of minimum capital for banksBecause of its popularity of the concept of minimum capital on banking business worldwide it has been one of the most researched business sector in the concept of minimum capital. The major reasons for bank capital regulations are specified in the article by Mbizi (2012) as follows; to maintain bank safety and soundness, to protect bank creditors and depositors in the event of a bank failure, create a disincentive to excessive risk taking by banks and provide a buffer against losses for banks.[footnoteRef:20] However the protection creditors and depositors is the most popular reason for setting minimum capital requirement for banks. [20: Mbizi (2012). An Analysis of the Impact of Minimum Capital Requirements on Commercial Bank Performance in Zimbabwe. International Journal of Independent Research and Studies, Vol 1, No.4 Pg. 131. ]

2.4.1.2. Impact of minimum capital for banks(Laurine and Roux, 2013) have shown that the minimum capital affects bank lending capabilities of banks.[footnoteRef:21] As banks have to set aside the minimum capital, this capital should not be given as loan. [21: Laurine, C. and Roux, P. (2013). The Impact of Minimum Capital Requirements on Zimbabwe Commercial Banks Lending. International Journal of Finance and Accounting 2013, 2(3), Pg. 137]

2.4.2. Insurance businessAs provided under Section 3 of Insurance Act, Insurance business is the business of assuming the obligation of an insurer in any class of insurance either specified in the act or not which is not declared to be exempt.[footnoteRef:22] Also under section 3 of the insurance Act the term insurer can be defined as a person carrying insurance business.[footnoteRef:23] It is one of the regulated business sectors in Tanzania. It is regulated under TIRA (Tanzania Insurance Regulatory Authority) under the Insurance Act No.10 of 2009 and other relevant regulations. [22: The Insurance Act No. 10 of 2009] [23: Ibid]

Under section 19(1) of Insurance Act specify that each registered insurer is required to maintain prescribed minimum paid up capital for the amount prescribed by Minister of finance upon recommendation of Commissioner and form in which paid-up share capital may be maintained by the insurer.[footnoteRef:24] Requirements for licensing insurance companies under insurance Act No. 10 of 2009 specify the minimum paid up share capital for general/life insurer, existing composite insurer and non-marine Insurer.[footnoteRef:25] For example in 2012 minimum share capital for general insurer was Tanzanian shillings 1.5 billion, existing composite insurer 2.0 billion and non-marine insurer 750 million. They specified the formula for determining the minimum share capital for the consecutive years after 2012. [24: Ibid] [25: Requirements for licensing insurance companies under insurance Act No. 10 of 2009]

3. ConclusionAlthough minimum capital is not specified in Companies Act No. 12 of 2002 but it has been specified in companies falling under the specific governing the companies within an industry. As different industries require different minimum capital. ReferencesStatues and RegulationsThe Banking and Financial Institutions (licensing) regulations of 2008.The Companies Act No. 12 of 2002.The Insurance Act No. 10 of 2009.The Requirements for licensing insurance companies under insurance Act No. 10 of 2009.Articles and BooksArmour, (2006). Legal Capital: an Outdated Concept?, Working paper, Centre for Business Research, University Of Cambridge.Bourne, N. (1998). Principles of Company Law. 3rd Ed, Cavendish Publishing Ltd, London.Goulding, S. (1999). Company Law, 2nd Ed, Cavendish Publishing Ltd, LondonLaurine, C. and Roux, P. (2013). The Impact of Minimum Capital Requirements on Zimbabwe Commercial Banks Lending. International Journal of Finance and Accounting 2013, Vol 2, No.3, Pg. 131-137.Mbizi, (2012). An Analysis of the Impact of Minimum Capital Requirements on Commercial Bank Performance in Zimbabwe. International Journal of Independent Research and Studies, Vol 1, No.4 Pg. 124- 134.Mishkin, F. (2004). The Economics of Money, Banking and Financial Markets, 7th Ed. Addison Wesley.Ross et al (2002), Fundamentals of Corporate Finance, 6th Ed, McGraw-Hill, Pg. 553Stel, A.V, Storey, D.J and Thurik, A. (2007), The Effect of Business Regulations on Nascent and Young Business Entrepreneurship, Small Business Economics Vol 28 (issue 2-3), Pg. 171186.Websiteshttp://www.lawteacher.net/company-law/essays/the-concept-of-capital.php accessed on 27/05/14

Table of Contents1.Introduction12.The concept of minimum capital12.1.Maintenance of minimum capital requirement22.2.Purposes of Minimum Capital22.3.Minimum capital as outdated concept32.4.Applicability of Minimum Capital in Laws and Regulation in Tanzania32.4.1.Banking Business32.4.1.1.Purposes of minimum capital for banks42.4.1.2.Impact of minimum capital for banks52.4.2.Insurance business53.Conclusion5References6

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