Comparative Analysis of Interest Rate Effects on Bank Performance in Emerging Market Versus African Economies

Given the dominance of banks as a source of external finance in Africa and the pervasiveness of interest rate risk in banking, we investigate the impact of interest rate shocks on the performance of banks, using panels of emerging market and African economies, for 2000-2014. We also specifically examine whether economic factors that drive interest rates have independent effects on banks’ profit and net-worth. We find that interest rate shocks have no effect on profits in Africa’s banks compared to positive effects on profits of emerging market banks, but some macroeconomic factors (inflation, money supply and uncertainty) that drive interest rate shocks have independent effects on African banks’ profits. Further, interest rate shocks affect banks’ net-worth positively in Africa but negatively in emerging markets. Such comparative positive effects flag Africa’s banks as bearing attractive investment opportunities because investors would prefer markets with better determination of shareholders’ wealth than not. These and other findings in the paper suggest that Africa’s banks should not only look to forecast and hedge interest rate risk, but they should also pay attention to factors that drive interest rate shocks as a pointer to possibly using macro policies for hedging banking risks at the macro-level, especially in environments where financial derivatives are not yet reasonably available.