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The Determinants of Commercial Bank Profitability in Sub-Saharan Africa

  • Valentina Flamini
  • Liliana Schumacher
  • Calvin A. McDonald
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    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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    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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    1. 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.
    2. 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.
    3. Allen Berger, 1994. "The Relationship Between Capital and Earnings in Banking," Center for Financial Institutions Working Papers 94-17, Wharton School Center for Financial Institutions, University of Pennsylvania.
    4. Gaston Gelos, 2006. "Banking Spreads in Latin America," IMF Working Papers 06/44, International Monetary Fund.
    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. David B. Humphrey, 1990. "Why do estimates of bank scale economies differ?," Economic Review, Federal Reserve Bank of Richmond, issue Sep, pages 38-50.
    8. 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.
    9. 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.
    10. 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.
    11. 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.).
    12. 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.
    13. Panayiotis P. Athanasoglou & Matthaios D. Delis & Christos K. Staikouras, 2006. "Determinants of Bank Profitability in the South Eastern European Region," Working Papers 47, Bank of Greece.
    14. 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.
    15. 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.
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