A Panel Data Analysis into the Impact of Regulations and Supervision on the African Banking Profitability and Risk Profile

Abstract

This paper investigated the effect of banking regulations and supervision on the profitability and risk profile of banks in selected African countries over the period 2009 to 2019. The study focused on 33 banks operating across 9 African countries, namely South Africa, Uganda, Kenya, Tunisia, Egypt, Namibia, Zambia, Nigeria and Ghana, as representative of the continent. It includes data from some of the major economies in the continent such as South Africa, Nigeria and Egypt to ensure that regulatory and supervisory developments in the continent are analysed appropriately. The analyses of the various interrelations were done using dynamic panel data modelling, Cointegration, and error correlation modelling approaches using Eviews statistical software. The study uses an unbalanced panel of commercial banks in the selected countries to estimate the model with both the return on equity and the return on assets as proxies for profitability. Overall, evidence shows that a well-regulated, stable and supervised banking sector is critical in the sustainable economic growth of the prospective economies. The findings of the study, however, provide an interesting outcome, in contrast to other studies, highlighting that the coefficient of the capital adequacy ratio is negative and statistically not significant to the profitability. This reflects the weak financial conditions in most African countries. The negative and statistically insignificant capital adequacy ratio could also be a reflection of the unacceptable risk profile of banks in the continent. Besides the literature reflecting that adjustment in the inflation rate improves banks’ profitability, this study contrasts with this view, a further reflection of the uniqueness of the banks operating environment in the continent. This output cautions banks in Africa on the profile of risks that they should take as this could impact negatively on their profitability during periods of increasing inflation. This again offers important policy implications for regulators of banks and policymakers in Africa regarding the regulations and supervisory frameworks that relate to on boarding of clients and management of the loan portfolios.