Economic freedom, corruption and bank stability: evidence from sub-Saharan Africa

Abstract

PurposeThis study aims to examine the impact of economic freedom and corruption on bank stability in sub-Saharan Africa (SSA).Design/methodology/approachThis study uses 38 countries in SSA from 2008 to 2019 using system GMM technique.FindingsThe authors found that greater economic freedom increases economic efficiency through improving bank stability. Besides this, the authors also find that banks in environments with greater business freedom, financial freedom, trade freedom and investment freedom are less prone to solvency. The results also show that corruption improves bank stability, suggesting evidence of the “grease the wheels” hypothesis.Practical implicationsThe results suggest to policymakers that a high economic freedom may be an appropriate policy toward enhancing bank stability. Besides this, the results also suggest to policymakers to prioritize addressing the core issues that encourage corruption to extort bribes.Originality/valueThis study provides insightful discussion on whether economic freedom and its subcomponents and corruption have an effect on bank stability in SSA.