The determinants of commercial bank profitability in Sub-Saharan Africa

Type :

Term papers

Pages :

15 pages

Format :

.doc

Published date :

09/14/2009

Category :

Economics & finance

Sub category :

Finance

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Summary :

Abstract
Introduction
1. Risk as a good explanation for high returns
2. Factors having an impact on bank returns
3. High bank returns as a negative attribute for financial intermediation in SSA countries
Determinants of bank profitability
1. Credit risk and operating inefficiencies
2. Macroeconomic and regulatory conditions
3. Bank interest margins in Latin America
4. The model of Ho and Saunders: A study
5. The profitability behavior of the south eastern European banking industry
Data and methodology
1. Bank-particular determinants
2. Measuring credit risks
3. Capital must as a significant variable
4. Market power as a main factor of generating profits
5. Macroeconomic factors
Empirical results
1. Two-step General Method of Moments (GMM) approach
2. The importance and magnitude of the coefficient on the lagged ROA
3. The lag coefficient on the one-year lagged ROA
4. Results from the regression
5. The positive and important coefficient of the size variable
6. Market concentration
Concluding remarks and implications for policy makers
References

Abstract

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.