Intricacies of financial liberalization, business models, and financial development on Bank stability in Africa

In the wake of the global financial crisis of 2007–2009, more stringent regulatory mechanisms such as increased capital adequacy ratios have gained prominence in an effort to create a stable banking sector. The relevance of capital regulation in ensuring the soundness and stability of the financial sector is overwhelmingly supported in the literature. Hitherto, little is documented on how capital requirement influences bank stability in Africa. This study, therefore, seeks to investigate the impact of regulatory capital requirement on bank stability in Sub-Saharan Africa over the period 2000-2017. Applying the generalized method of moments (GMM) technique, our results reveal a positive significant effect of capital requirement on bank stability. However, in the presence of institutional quality, capital adequacy has an inimical effect on stability. We conclude that stringent regulatory capital standards implementation is imperative for ensuring a sound and stable banking sector in Sub-Saharan Africa.

PurposeThis paper aims to examine the interaction effect of regulations (monetary and macro-prudential) in explaining the possible non-linear effect of bank risk exposures (credit risk and insolvency risk) on banking stability in Africa.Design/methodology/approachThe study uses a two-step system generalized method of moments (GMM) estimator for a data set of banks across 54 African countries over the period 2006–2020.FindingsThe authors find that the relationships between bank credit risk–bank stability and bank insolvency risk–bank stability are non-linear and characterized by the presence of optimal thresholds, which are 5.3456 for credit risk and 2.3643 for insolvency. Contrary to their positive effects below these optimal thresholds, credit risk and insolvency risk become negatively linked to bank stability in Africa. The authors find that macro-prudential action and monetary policy both have a positive and significant relationship with bank stability. The authors provide evidence to support that the marginal effect of excessive credit risk and insolvency risk on bank stability is reduced when interacted with monetary and macro-prudential regulations, and the impact is significant in strong institutional environment.Research limitations/implicationsFuture research should extend data to include developing and emerging economies in the world. Also, policymakers, researchers and practitioners should consider different regulatory and institutional frameworks in explaining the relationship between the thresholds of bank risk exposures and bank stability in the world.Practical implicationsRegulatory authorities should have to deeply reform their financial systems, develop risk-based regulatory framework and effective supervision mechanism relating to appropriate techniques that maintain an optimal and desired level of bank risks and risk-taking behaviours required to ensure a stable banking system.Originality/valueTo the best of the authors’ knowledge, this is the first study to examine how different regulatory frameworks shape the non-linear impact of bank risk exposures on bank stability in Africa.

I examine the impact of diversity (ethnic and religious fractionalization and polarization) on banking stability in Sub-Saharan Africa (SSA). Using data from 1996 to 2014, I employ the system Generalized Method of Moments (sys-GMM) approach to examine this relationship. I find that countries in SSA are more polarized religiously than they are ethnically. The region is, however, more ethnically fractionalized than they are religiously. Further, I conjecture that banks in more heterogeneous societies will experience poor asset quality and lower stability. I however postulate that banks offset the risks from diversity at certain levels of net interest margin (NIM). I provide empirical evidence to support these conjectures. I find varying threshold NIM values for each diversity indicator depending on the stability measure used. Opening up the banking system to foreign entry can help offset the negative impact of diversity on banking stability. Policy implications are discussed.

In this study, I examine the impact of diversity (ethnic & religious fractionalization and polarization) on banking stability in Sub-Saharan Africa (SSA). Using data from 1996 to 2014, I employ the system Generalized Method of Moments (sys-GMM) approach to examine this relationship. I find that countries in SSA are more polarized religiously than they are ethnically implying that, the continent is more likely to experience conflicts and other associated adverse effects of polarization through religion rather than ethnicity. The region is, however, more ethnically fractionalized than they are religiously. Further, I conjecture that banks in more heterogeneous societies will experience poor asset quality and lower stability. I however postulate that banks offset the risks from diversity at certain levels of net interest margin (NIM). I provide empirical evidence to support these conjectures. I find varying threshold NIM values for each diversity indicator depending on the stability measure used. I also find that opening up the banking system to foreign entry can help offset the negative impact of ethnic and religious fractionalization and polarization on banking stability. Policy implications are discussed.

This study examines how country-level corporate governance structures (CLCGS) affect the nexus between financial sector transparency regulations (FSTR) (led by the private and public sectors) and banking stability in Africa. Employing a Prais-Winsten panel data of about 77 banks across 30 African economies between 2006 and 2015, the results show that CLCGSs are crucial in shaping how FSTR led by the private and public sector affect banking stability in Africa. Specifically, we find positive and negative synergies between FSTR (led by the public and private sectors) and CLCGSs on banking stability, respectively. Additionally, the net effect results show that the negative effects of public and private sector-led FSTR on banking stability are suppressed when interacted with CLCGSs. Splitting our sample into economies with strong and weak CLCGSs, we report that FSTR led by the public sector fosters banking stability in economies with strong CLCGSs, while FSTR led by the private sector fosters banking stability in economies with weak CLCGSs in Africa. These findings provide clear indications that building and enhancing CLCGSs can help restrict the reduction effect of private and public sector-led FSTRs on banking stability in Africa.KeywordsCorporate governanceBanking stabilityRegulationsAfrica

PurposeThe purpose of this paper is to investigate the determinants of banking stability in Africa.Design/methodology/approachThe authors present four measures of banking stability embedding banks’ loan loss coverage ratio, insolvency risk, asset quality ratio, and level of financial development, thereby allowing analysis of banking stability determinants from four complementary perspectives: protection for downside credit losses, distress arising from insolvency risk, non-performing loans, and financial development. The authors use the regression methodology to estimate the impact of financial structure, institutional, bank-level factors on bank stability.FindingsThe findings indicate that banking efficiency, foreign bank presence, banking concentration, size of banking sector, government effectiveness, political stability, regulatory quality, investor protection, corruption control and unemployment levels are significant determinant of banking stability in Africa and the significance of each determinant depends on the banking stability proxy employed and depends on the period of analysis: pre-crisis, during-crisis or post-crisis.Practical implicationsBanking supervisors in African countries should consider the role of financial structure and institutional quality for banking stability in the African region.Originality/valueThis study is the first to examine banking stability determinants in Africa that takes into account institutional quality and financial structure.

PurposeThe purpose of this paper is to examine the effect of foreign bank assets (FBA) and (FBP) presence is examined on banking stability in the economies with strong and weak country-level corporate governance (CLCG) in Africa between 2006 and 2015.Design/methodology/approachUsing a Prais–Winsten panel data model of 86 banks in about 30 African economies, findings on how FBA and presence influence banking stability in strong and weak corporate governance economies under different regulatory regimes are reported for the first in Africa.FindingsThe findings show that foreign bank presence (FBP) and assets promote banking stability. However, the positive effect of FBA and presence is enhanced in economies with strong CLCG, whereas the positive effect of FBA and presence is weakened in economies with weak CLCG. After introducing different regulatory regimes, it is observed that the enhancing effect of FBP and assets on banking stability in the full sample and economies with strong and weak CLCG systems is deepened or improved under the loan loss provision regulation regime. However, under the private and public sector-led financial transparency regulations, the reducing effect of FBP and assets on banking stability in economies with weak corporate governance systems is further dampened.Practical implicationsThese findings show that the relationship between FBP and assets is deeply shaped by corporate governance systems and regulatory regimes in Africa. Hence, policymakers must build strong corporate governance and sound regulatory regimes to enhance how foreign bank operations promote banking stability.Originality/valueThis study presents first-time evidence on how FBA and presence influence banking stability under strong and weak governance systems while considering different regulatory regimes.

ABSTRACTDue to less settled securities exchanges, the main source of risk of the financial system in Africa is characterized by its most significant aspects being the banking sector in particular. Consequently, the overall stability of the financial system can be ensured by the stability of the banking sector. Furthermore, the greatest number of nations in Africa has historically been viewed as weak democracies. Thus, the purpose of this article is to examine the impact of democracy on banking stability in Africa. The approach includes data for 34 African countries from 2004 to 2019, and OLS and IV‐Tobit estimation techniques. Our diagnosis shows that democracy harms banking stability in Africa, with the results robust across different types of democracy, levels of political stability, proximity to the sea, and alternative indicators of banking stability. This affirms that democracy is not good for every sector's stability, especially for the banking sector. Policy implications are discussed.Related ArticlesAideyan, Osaore. 2016. “Political and Institutional Prerequisites for Monetary Union: Assessing Progress in the Economic Community of West African States (ECOWAS).” Politics & Policy 44(6): 1192–212. https://doi.org/10.1111/polp.12183.Asongu, Simplice A., Joseph Nnanna, and Vanessa S. Tchamyou. 2021. “Finance, Institutions, and Private Investment in Africa.” Politics & Policy 49(2): 309–51. https://doi.org/10.1111/polp.12395.Scarlato, Margherita, and Giorgio d'Agostino. 2019. “The Political Dimension of Cash Transfers in Latin America and Sub‐Saharan Africa: A Comparative Perspective.” Politics & Policy 47(6): 1125–55. https://doi.org/10.1111/polp.12332.

This study examines the effect of foreign bank assets and presence on banking stability in the economies with strong and weak country-level corporate governance in Africa between 2006 and 2015. Employing a Prais-Winsten panel data model on 86 banks in about 30 African economies, the findings on how foreign bank assets and presence influence banking stability in strong and weak corporate governance economies under different regulatory regimes are reported for the first time in Africa. The initial findings show that foreign bank presence and assets promote banking stability. However, the positive effect of foreign bank assets and presence is enhanced in economies with strong country-level corporate governance, while the positive effect of foreign bank assets and presence is weakened in economies with weak country-level corporate governance. After introducing different regulatory variables (regimes), it is observed that the enhancing effect of foreign bank presence and assets on banking stability in the full sample and economies with strong and weak country level corporate governance systems is deepened or improved under loan loss provision regulation regime. However, under the private and public sector-led financial transparency regulations, the reducing effect of foreign bank presence and assets on banking stability in economies with weak corporate governance systems is further dampened. These findings show that the relationship between foreign bank presence and assets is deeply shaped by corporate governance systems and regulatory regimes in Africa. Hence, policymakers must build strong corporate governance and sound regulatory regimes to enhance how foreign bank operations promote banking stability.

The impact of state ownership and business models on bank stability: Empirical evidence from the Eurasian Economic Union

This paper employs dynamic panel models to investigate the impact of country risk on the financial stability of banks in Africa. Using country risk and bank specific data for 10 African countries over the period of 2000 and 2021, the results reveal that African countries have a high country risk exposure. The country risk negatively and significantly affects African bank stability. The study findings suggest that compliance with at least Basel II capital requirements is needed to protect African banks from the negative effects of country risk on their stability in the short run. However, the adverse effects of prolonged country risk are mitigated by the compliance with higher Basel capital requirements in the long run. The results further show that an efficient legal and regulatory framework is essential to complement the capital buffer against country risk. Policies must be introduced to reduce country risk to enable African banks to adequately support the African economy in good and challenging times. Overall, country risk remains a threatening factor for bank stability, and consequently, banks need adequate capital to reduce the impact of country risk on bank stability in Africa.

This paper studies the nexus between market power and business models in the banking industry. Business models are represented by non-interest income and non-deposit short-term funding share. We also examine the impact of bank business models on banking stability and performance. Using a sample comprising six ASEAN country banking sectors from 2002 to 2015, we find that banks with a strong capital base but lower net interest margin perform better in translating their market power into generating non-traditional income as alternative sources of revenues. Our findings also show that the implementation of the Basel 2 Accord encourages banks to create non-interest income from trading and derivatives activities as well as from other non-interest income. We also document that banks with higher market power tend to increase non-deposit short-term funding in their financing mix. In the evaluation of banking stability, our results suggest that banks with greater non-traditional income are associated with less overall banking risk. Moreover, non-traditional incomes also contribute to better bank performance.

This paper studies the nexus between market power and business models in the banking industry. Business models are represented by non-interest income and non-deposit short-term funding share. We also examine the impact of bank business models on banking stability and performance. Using a sample comprising six ASEAN country banking sectors from 2002 to 2015, we find that banks with a strong capital base but lower net interest margin perform better in translating their market power into generating non-traditional income as alternative sources of revenues. Our findings also show that the implementation of the Basel 2 Accord encourages banks to create non-interest income from trading and derivatives activities as well as from other non-interest income. We also document that banks with higher market power tend to increase non-deposit short-term funding in their financing mix. In the evaluation of banking stability, our results suggest that banks with greater non-traditional income are associated with less overall banking risk. Moreover, non-traditional incomes also contribute to better bank performance.

Research on risk or sustainability in the banking system does play an important role in the banking industry, where competitiveness increases unceasingly. Simultaneously, the trend of diversifying banks’ business models is becoming more popular. Thus, this paper attempts to investigate the impact of business model diversification on bank risk and stability. The proxy of business models includes (1)Non-net interest income; (2) trading income. The paper applied Generalized Least Squares (GLS) to conduct empirical research on 18 joint-stock commercial banks listed on the Vietnam Stock Exchange from 2010 to 2019 (The GLS with panel data). The results indicated the negative impact of non-net-interest income on bank stability. Trading in foreign exchange, gold has no meaning for bank risk. The study offers some theoretical and practical implications for banks to control better risks based on new empirical findings. Especially, the diversification of business models is ineffective, and banks need more suitable solutions.

Research on banking sustainability plays an important role for banks in the growing financial market. As a result, banks must compete more, making the risk of weak banks increase. This study was conducted to evaluate the impact of business models on bank stability — analytical data on joint-stock commercial banks listed on the Vietnam stock exchange from 2012 to 2019. The panel data regression analysis model with a generalized method of moments (GMM) is used to analyze the results. The GMM results show that net interest income (NII) has a positive effect on bank stability. On the other hand, non-interest income (NNII and TRADE) has a negative impact on bank stability. This result indicates that business models are having a negative impact on bank stability. The study also points out several implications for improving the sustainability of banks.