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The Determinants of Commercial Bank Profitability in Sub-Saharan Africa

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Author Info

  • Valentina Flamini
  • Liliana Schumacher
  • Calvin A. McDonald
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    Abstract

    Bank profits are high in Sub-Saharan Africa (SSA) compared to other regions. This paper uses a sample of 389 banks in 41 SSA countries to study the determinants of bank profitability. We find that apart from credit risk, higher returns on assets are associated with larger bank size, activity diversification, and private ownership. Bank returns are affected by macroeconomic variables, suggesting that macroeconomic policies that promote low inflation and stable output growth does boost credit expansion. The results also indicate 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 immediately retained in the form of equity increases. Thus, the paper gives some support to a policy of imposing higher capital requirements in the region in order to strengthen financial stability.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/15.

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    Length: 32
    Date of creation: 01 Jan 2009
    Date of revision:
    Handle: RePEc:imf:imfwpa:09/15

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    Related research

    Keywords: Banks; Credit risk; Commercial banks; Profits; Financial stability; Economic models; bank profitability; banking; return on assets; bank profits; causation; autocorrelation; correlation; time series; bank risk; banking sector; statistics; bank entry; bank spreads; bank performance; bank interest; descriptive statistics; equation; bank-specific risk; equations; bank activity; regression equation; probability; dummy variable; bank interest margins; bank of greece; financial statistics; bank interest rate; banking industry; statistical significance; bank size; survey; linear model; dummy variables; granger causality; income statement; estimation period; bank exposure; banks balance sheet; return on equity; predictions; banking system; explanatory power; statistic; banking sectors; logarithm; bank management; algebra; bank credit; bank group; correlations; bank lending; bank assets; measure of profitability; bank solvency; bank policy;

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    References

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    1. Brock, Philip L. & Rojas Suarez, Liliana, 2000. "Understanding the behavior of bank spreads in Latin America," Journal of Development Economics, Elsevier, vol. 63(1), pages 113-134, October.
    2. R. Gaston Gelos, 2009. "Banking Spreads In Latin America," Economic Inquiry, Western Economic Association International, vol. 47(4), pages 796-814, October.
    3. Ephraim W. Chirwa & Montfort Mlachila, 2004. "Financial Reforms and Interest Rate Spreads in the Commercial Banking System in Malawi," IMF Staff Papers, Palgrave Macmillan, vol. 51(1), pages 5.
    4. David B. Humphrey, 1990. "Why do estimates of bank scale economies differ?," Economic Review, Federal Reserve Bank of Richmond, issue Sep, pages 38-50.
    5. Jacob A. Bikker & Haixia Hu, 2002. "Cyclical patterns in profits, provisioning and lending of banks and procyclicality of the new Basel capital requirements," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 55(221), pages 143-175.
    6. Linda Allen & Anthony Saunders, 2004. "Incorporating Systemic Influences Into Risk Measurements: A Survey of the Literature," Journal of Financial Services Research, Springer, vol. 26(2), pages 161-191, October.
    7. Athanasoglou, Panayiotis & Delis, Manthos & Staikouras, Christos, 2006. "Determinants Of Bank Profitability In The South Eastern European Region," MPRA Paper 10274, University Library of Munich, Germany.
    8. Allen N. Berger, 1994. "The relationship between capital and earnings in banking," Finance and Economics Discussion Series 94-2, Board of Governors of the Federal Reserve System (U.S.).
    9. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
    10. Boyd, John H. & Runkle, David E., 1993. "Size and performance of banking firms : Testing the predictions of theory," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 47-67, February.
    11. Goddard, John & Molyneux, Phil & Wilson, John O S, 2004. "Dynamics of Growth and Profitability in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 1069-90, December.
    12. Allen N. Berger & Gerald A. Hanweck & David B. Humphrey, 1986. "Competitive viability in banking: scale, scope, and product mix economies," Research Papers in Banking and Financial Economics 82, Board of Governors of the Federal Reserve System (U.S.).
    13. Jeffrey A. Clark, 1988. "Economies of scale and scope at depository financial institutions: a review of the literature," Economic Review, Federal Reserve Bank of Kansas City, issue Sep, pages 16-33.
    14. Bourke, Philip, 1989. "Concentration and other determinants of bank profitability in Europe, North America and Australia," Journal of Banking & Finance, Elsevier, vol. 13(1), pages 65-79, March.
    15. Heggestad, Arnold A, 1977. "Market Structure, Risk and Profitability in Commercial Banking," Journal of Finance, American Finance Association, vol. 32(4), pages 1207-16, September.
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    Cited by:
    1. Vincent Okoth Ongore & Gemechu Berhanu Kusa, 2013. "Determinants of Financial Performance of Commercial Banks in Kenya," International Journal of Economics and Financial Issues, Econjournals, vol. 3(1), pages 237-252.
    2. Awojobi, Omotola & Amel, Roya & Norouzi, Safoura, 2011. "Analysing Risk Management in Banks: Evidence of Bank Efficiency and Macroeconomic Impact," MPRA Paper 33590, University Library of Munich, Germany, revised 17 Jul 2011.
    3. Goddard, John & Liu, Hong & Molyneux, Philip & Wilson, John O.S., 2011. "The persistence of bank profit," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 2881-2890, November.
    4. Marcelin, Isaac & Mathur, Ike, 2014. "Financial development, institutions and banks," International Review of Financial Analysis, Elsevier, vol. 31(C), pages 25-33.
    5. Songül KAKÝLLÝ ACARAVCI & Ahmet Ertugrul ÇALIM, 2013. "Turkish Banking Sector’s Profitability Factors," International Journal of Economics and Financial Issues, Econjournals, vol. 3(1), pages 27-41.

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