Profitability Determinants of Commercial Banks: Empirical Evidence from Sub-Saharan Africa

Abstract

This study attempts to fill the research gap caused by a lack of empirical studies on the determinants of commercial banks’ profitability in sub-Saharan Africa. The purpose of the study was to provide comprehensive knowledge of commercial banks’ profitability and its determinants in sub-Saharan Africa, using only bank-specific factors. The study sourced panel data from the audited financial statements of the commercial banks through the Orbis database, which covered the period 2011 to 2018. In total, 400 commercial banks in 40 countries were involved in the eight-year study, thus generating 3,200 observations. The study employed return on average assets (ROAA) as a representation of bank profitability indicators. Bank-specific factors such as cost to income ratio (CTI), net interest margin (NIM), non-performing loan (NPL), and net income (NIC) represented the independent variables. Descriptive statistics, correlation matrix, the variance inflation factor and tolerance value were considered for the analysis. The study used multiple linear regressions to measure the impact in sub-Saharan Africa. The empirical findings revealed that net interest margin (NIM) and net income (NIC) had a significant positive impact on bank profitability, whereas the cost to income ratio and non-performing loan (NPL) had a significant negative impact on bank profitability. The study recommended that bank managers and policymakers should develop optimum credit risk and operational costs policies to reduce the cost to income ratio and non-performing loans to improve net income and net interest margin in the sub-region.