Banking Sector Efficiency in Sub-Saharan Africa

Abstract

This paper examines the determinants of net interest margins (NIMs) in four regional blocks in Sub-Saharan Africa (SSA). Using bank-level data, we find that countries with a high level of operating costs, a low level of non-interest income, a high ratio of equity to total assets and high treasury-bill interest rates have higher NIMs. Moreover, high operating costs are associated with low measures of institutional quality and a small size of bank operations. We find support for the view that market structure is also partly responsible for high NIMs in SSA, although quantitatively this effect is somewhat less important. High operating costs, high treasury-bill rates and a high ratio of equity to total assets and, indirectly, institutional factors, such as the rule of law, are the most important factors in accounting for high interest margins in the East African Community, relative to other regions.