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The effect of economic growth on banking system performance: An interregional and comparative study of Sub-Saharan Africa and developed economies

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  • Obiora, Sandra Chukwudumebi
  • Zeng, Yong
  • Li, Qiang
  • Liu, Hao
  • Adjei, Peter Darko
  • Csordas, Tamas

Abstract

As an important part of the financial sector, banking systems play a critical role in economic development as well as in improving the quality of life of the people of sub-Saharan Africa (SSA). However, little evidence exists in the literature about the performance of the banking systems in SSA compared with developed economies. This paper investigates the effects of economic development on banking performance across 23 SSA countries and 14 developed countries between 1981 and 2018. Using estimation models such as feasible general least squares, fixed-effects estimation with Driscoll-Kraay standard errors, and system and difference generalized method of moments, our findings show that in SSA as a whole, economic development has a positive impact on commercial bank lending, raises lending rates, increases the amount of domestic credit to the private sector (DCPS), and reduces the number of nonperforming loans (NPLs). In developed countries, economic development has a positive impact on lending rates, DCPS, and the number of NPLs. However, although economic development in developed economies has mostly positive effects on banking performance, SSA countries have more performance issues in banking as a whole and in regional pockets. A careful reassessment of SSA’s interregional banking system is therefore highly recommended. An increase in the number of NPLs in East and Southern Africa, a decline in deposit rates offered in Southern, West, and Central Africa, and increasing real interest rates in SSA despite economic growth are some of the concerns that require careful reassessment and policy adjustments.

Suggested Citation

  • Obiora, Sandra Chukwudumebi & Zeng, Yong & Li, Qiang & Liu, Hao & Adjei, Peter Darko & Csordas, Tamas, 2022. "The effect of economic growth on banking system performance: An interregional and comparative study of Sub-Saharan Africa and developed economies," Economic Systems, Elsevier, vol. 46(1).
    • Handle: RePEc:eee:ecosys:v:46:y:2022:i:1:s0939362522000012
    DOI: 10.1016/j.ecosys.2022.100939
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    2. Shreya Pal, 2023. "Does Remittance and Human Capital Formation Affect Financial Development? A Comparative Analysis Between India and China," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 30(2), pages 387-426, June.

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    More about this item

    Keywords

    Banking system performance; Economic development; Sub-Saharan Africa; Developed economies;
    All these keywords.

    JEL classification:

    • A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative
    • P52 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Studies of Particular Economies

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