Banks have high profits in Sub-Saharan Africa (SSA) in comparison to other regions. This paper wields a sample of 389 banks in 41 SSA countries to probe the determinants of bank profitability. It is found that apart from credit risk, higher returns on assets are linked with activity diversification, larger bank size, and private ownership. Bank returns are affected by macroeconomic variables, concluding that macroeconomic policies that promote low inflation and stable output growth do increase credit expansion. The results also show moderate persistence in profitability. Causation in the Granger sense from returns on assets to capital occurs with a considerable lag, implying that high returns are not suddenly retained in the form of equity increases. Therefore, the paper gives some help to a policy of imposing higher capital needs in the region in order to firm up the financial stability.
Commercial banks seem to be very profitable in Sub-Saharan Africa (SSA). Average returns on assets were about 2 percent in the last 10 years, significantly quite higher than bank returns in many other regions all around the world. This scenario holds true whether returns on assets are assessed by country, by individual banks (Figures 1–5) or by country income group. The net interest margins and an alternative measure of profitability give the same picture (Figures 6 and 7). Why are banks more profitable in Africa? Standard asset pricing models suggests that arbitrage should certify that riskier assets are remunerated with more returns.
[...] (2005) suggest a positive, albeit asymmetric, implication on bank profitability in the Greek banking industry, with the cyclical output being enough in the upper phase of the cycle only. The macroeconomic environment has limited implication only on net interest margins in SSA countries stated by Al- Haschimi (2007). This proof is consistent with the results of other country- specific studies (for instance Chirwa and Mlachila (2004) for Malawi, and Beck and Hesse (2006) for Uganda). As measured by the current period CPI growth rate we also account for macroeconomic risk by controlling for inflation, the price of fuel and the price of a commodity index that excludes fuel. [...]
[...] The study also shows that the profitability of Greek banks is designed by bank-particular components and macroeconomic rule variables which are not directly controlled of bank management. Industry structure does not appear to necessarily affect profitability. Recently, many studies have stressed towards the relation among macroeconomic variables and bank risk. Saunders and Allen (2004) study the literature on pro-cyclicality in operational, credit, and market risk exposures. These cyclical implications result from systematic risk emanating from common macroeconomic interdependencies or influences upon corporations as financial centers and institutions consolidate internationally. [...]
[...] “Determinants of Banking Profitability in the South Eastern European Region,” Bank of Greece Working Paper 06/47. Beck, T. and H. Hesse (2006). “Foreign Bank Entry, Market Structure and Bank Efficiency in Uganda,” World Bank Policy Research Working Paper 4027, October. Berger, A. (1995a). Profit-Structure Relationship in Banking: Test of Market-Power and Efficient-Structure Hypotheses,” Journal of Money, Credit and Banking 27, 404-431. Berger, A. (1995b). Relationship Between Capital and Earnings in Banking,” Journal of Money, Credit and Banking 27, 432-456. Berger, A., Hanweck, G. [...]
[...] Therefore re-estimating the model in a linear fashion through assuming random effects to study the implications of ownership and the quality of the regulatory environment on bank returns is made. More estimation is also performed to study the normal relation between profitability and capital. Table 5 shows the results from our fundamental designation The estimated model fits the panel data well, as shown by the Wald test statistic that has rejected the null hypothesis of joint insignificance of parameters. The Sargan test also grants proof that the underlying over identifying restrictions are valid and the Arellano-Bond test for serial correlation in the first-differenced residuals illustrates no proof of model misspecification. [...]
[...] High bank profitability might be reduced financial intermediation if the high returns suggest that interest rates on loans—for the same maturity—are higher than in other parts of the world. Yet, if high returns are the implication of market power, this would suggest some degree of inefficiency in the provision of financial services. Therefore unusually high returns should prompt as a robustness check; we rerun the regressions by using the Corruption Perception Index compiled by Transparency International, as a measure of the legal environment, with no improvements in statistical importance. [...]
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