African Bank Research Articles

The influence of social media service quality on client loyalty in the South African banking industry

Orientation: The impact and growth rates of Facebook and other forms of social media have made it imperative for all businesses to ensure they have social media strategies in place.Research purpose: The purpose of this study was to measure the influence of social media service quality on client loyalty in the South African banking industry.Motivation for the study: There are limited studies conducted in developing countries such as South Africa that focused specifically on the social media service quality and client loyalty in the banking industry.Research design, approach and method: The study used a quantitative approach and a descriptive research design to test the proposed hypotheses. An online survey on Facebook was used to collect the data from a sample of 377 respondents who had interacted with the five major banks in South Africa on the said platform. A snowball sampling technique was used to identify the appropriate respondents. The data was analysed with Structural Equation Modelling (SEM) to assess the model fit.Main findings: Findings of the research study proved that the social media system’s availability, fulfilment and privacy have a significant influence on the overall service quality of social media, which leads to client loyalty in the South African banking industry.Practical/managerial implications: The study recommended that managers and marketers should constantly evaluate, monitor and improve the overall service quality of social media offered to their clients, as it leads to a corresponding increase in client loyalty in the South African banking industry.Contribution/value-add: The study provided empirical evidence, which contributed to the body of business and marketing knowledge in a South African banking context.

Externally constrained growth: Testing the applicability of Thirlwall’s law in South Africa

ABSTRACTThis study tests whether the performance of South Africa’s trade balance, that is, the country’s export and import performance, can effectively explain the economy’s growth rate. Formally, the study tests the applicability of Thirlwall’s law to the South African economy. The law states that the estimated growth rate of an economy is proportional to the growth rate of exports divided by the income elasticity of imports. The South African Reserve Bank (SARB) quarterly data from 1960 to 2009 for exports, imports, the exchange rate, export prices, import prices, and the economic growth rate is used for regression. The study runs an autoregressive distributed lag (ARDL) model in the presence of structural breaks and after adjusting for structural breaks and finds that growth in the South African economy can be shown to be trade balance constrained. This finding has policy implications with regard to trade promotion and strategies and strategies to enhance growth performance by increasing the overall competitiveness of the South African economy.

The impact of corporate entrepreneurship on service innovation: A case of a South African banking institution

Background: Financial services companies pride themselves on delivering quality services to customers. To sustain their revenue streams in tough macroeconomic times and rapid technological growth, they are challenged to continuously innovate their services. Aim: The purpose of this study was to determine the dimensions of corporate entrepreneurship (management support, work discretion, rewards and reinforcement, organisational boundaries and time availability) that predict service innovation in the financial services companies. Setting: Business managers and analysts in a South African bank. Methods: A case study approach was used to gather responses from business managers and analysts in one of the leading South African banks. The quantitative data were collected through an online survey utilising scales for corporate entrepreneurship and service innovation. Factor analysis and multiple linear regression were inferential statistical techniques used to analyse the data. Results: The findings of the study illustrate that some dimensions of corporate entrepreneurship predicted service innovation. Rewards and recognition, management support and time availability significantly ( p < 0.05) predicted service innovation. Work discretion and organisational boundaries were not significant predictors of service innovation. This may suggest that financial institutions limit employees’ freedom to make decisions, use standardised procedures that may reduce employees’ creativity to innovate and discourage employees from making mistakes. Conclusion: The insights gained from this study are useful to companies that are looking for methods to revive or improve commercial services offered to customers and build competitive advantage through corporate entrepreneurship.

A motivation for banks in emerging economies to adapt agency ratings when assessing corporate credit

Background: This article considers whether South African banks should utilise the credit ratings provided by US-based credit rating agencies when assessing the creditworthiness of corporate borrowers.Aim: A review is conducted of the relevant literature and specifically the methodologies used by the credit rating agencies for ranking corporates in emerging markets.Setting: The three largest international credit rating agencies are Fitch Ratings, Moody’s Investor Services, and Standard and Poor’s. These agencies’ credit ratings cover the global spectrum of corporate, sovereign, financial and other public entities and the securities and obligations they issue. The analytical frameworks used to produce these ratings are referred to as credit rating methodologies.Method: A review of Moody’s ratings for South African corporate entities was undertaken to examine claims of a sovereign ceiling influencing the external ratings obtained by these institutions in emerging markets.Results: Only 14 of the 200 global South African ratings pierced the sovereign ceiling.Conclusion: The study concludes that the use of unmodified external ratings by banks to assess a corporate borrower should be discouraged. High-level suggestions are provided on how the methodologies and data used by the external agencies may rather be used to arrive at more suitable internal ratings.

Bank Income Smoothing, Institutions and Corruption

This study investigates bank income smoothing, focusing on the effect of corruption on the extent of income smoothing by African banks. I find that banks use loan loss provisions to smooth positive (non-negative) earnings particularly in the post-2008 crisis period and this behaviour is reduced by strong investor protection. Also, I find that banks in highly corrupt environments smooth their positive (non-negative) earnings as opposed to smoothing the entire profit distribution. Finally, cross-country variation in bank income smoothing is observed. The findings have implications.

Bank technical, allocative and cost efficiencies in Africa: The influence of intellectual capital

This paper examines the effects of intellectual capital (IC) on technical, allocative and cost efficiencies for a panel of 339 commercial banks operating in 31 African countries over the 2005–2015 period. Our findings, which are based on Tobit and one-step system GMM regressions, provide evidence that IC exerts positive effects on bank technical, allocative and cost efficiencies. This finding, when significant, remains the same with the sample divided into various regional panels – East Africa, North Africa, Southern Africa, and West Africa. However, when our measure of IC is divided into its three components, namely human capital, physical capital and structural capital, only human capital is positively related to all the three efficiency measures across the panels. Our results suggest the need for African banks to place emphasis on human capital development.

A weighted director network analysis of the big four banks on the Johannesburg Stock Exchange

Background: Company director networks have been studied for many countries, including South Africa, from the perspective of network theory. However, most studies of company director networks focus on the overall structure of the network, that is, by conducting a macro-level analysis. Aim: In this study, we conducted a node-level analysis to investigate whether the four major South African banks, namely, Barclays Africa Group Ltd (now ABSA Group Limited), Nedbank Group Ltd, Standard Bank Group Ltd and FirstRand Ltd, occupy central roles in the company director network on the Johannesburg Stock Exchange (JSE). Setting: Social networks provide a vital source of information and are therefore an important field of study in business. Methods: We use degree-, betweenness- and closeness centrality, as well as strength, and a force-directed layout to investigate whether these four banks occupy key positions in the company director network on the JSE. Results: We show that these four banks occupy central roles on the JSE. The direct connections of these companies are also identified, and findings are compared to some overseas studies. Conclusion: This study concludes that the said four major banks occupy key positions on the JSE.

Bank income smoothing, institutions and corruption

This study investigates bank income smoothing, focusing on the effect of corruption on income smoothing by African banks. I find that banks use loan loss provisions to smooth positive (non-negative) earnings particularly in the post-2008 crisis period and this behaviour is reduced by strong investor protection. Also, I find that banks in highly corrupt environments smooth their positive (non-negative) earnings as opposed to smoothing the entire profit distribution. Finally, cross-country variation in bank income smoothing is observed. The findings have implications.

Bank stability in South Africa: what matters?

The study examined the determinants of bank stability within the South African banking sector. By controlling for individual bank characteristics and market characteristics, the study determined possible determinants of solvency, a proxy for bank stability, measured by z-score within the South African financial sector. The South African financial sector is highly concentrated but with a significantly large number of banks, the greater portion being foreign owned banks. The business models of some of the financial intermediaries differ from the big four and therefore the influence of the type of business model is of great interest in this study, as it highlights a unique feature of the South African financial sector. The study’s investigation used panel data estimation techniques and found that among the specific bank characteristics, lending activity and capitalization do significantly affect solvency of banks and at sector level concentration was significant. The crisis dummy also revealed that the presence of a financial crisis heightened insolvency. The results have implications for financial institutions and therefore are of interest to regulators, bank management and researchers. Policy prescription in the form of Prompt Corrective Action framework is made to ensure proactive reaction to trends likely to cause instability.

For banks, fair value adjustments do influence dividend policy

5Most researchers who investigate the interplay between fair value accounting (FVA) and the financial crisis look at the time period during the crisis. This paper investigates a potential role for FVA prior to the crisis: If FVA led to increased accounting profits with the recognition of transitory gains through profit and loss during the boom, and if those increased profits provided the rationale for increased dividends, then bank capital became riskier prior to the crisis, and this would have made the system more prone to failure. A study by Goncharov and Van Triest (2011) found no empirical support for an increase in dividends in response to unrealised positive fair value adjustments to income. In contrast, when the setting is limited to only South African banks, this paper finds that South African banks did pay dividends from unrealised transitory gains. This finding is based on a combination of three strands of evidence: a panel regression of the annual dividends declared by the large South African universal banks that showed that those banks probably ignored the unrealised nature of FVA profits when dividends were determined; monthly data from the total South African bank system in a co-integrated regression that showed that unrealised fair value profits from the banking book raised the average level of bank profits materially; and simple descriptive statistics on distributions that showed that South African banks distributed a greater proportion of profits during the critical period of 2004 to 2008 when unrealised fair value profits from the banking book raised the level of bank profits. The finding that South African banks did pay dividends from unrealised transitory gains was also confirmed by bank representatives and the post-financial crisis disclosure of one of the South African banks.

Size, efficiency, market power, and economies of scale in the African banking sector

There is a growing body of evidence that interest rate spreads in Africa are higher for big banks compared to small banks. One concern is that big banks might be using their market power to charge higher lending rates as they become larger, more efficient, and unchallenged. In contrast, several studies found that when bank size increases beyond certain thresholds, diseconomies of scale are introduced that lead to inefficiency. In that case, we also would expect to see widened interest margins. This study examines the connection between bank size and efficiency to understand whether that relationship is influenced by exploitation of market power or economies of scale. Using a panel of 162 African banks for 2001–2011, we analyzed the empirical data using instrumental variables and fixed effects regressions, with overlapping and non-overlapping thresholds for bank size. We found two key results. First, bank size increases bank interest rate margins with an inverted U-shaped nexus. Second, market power and economies of scale do not increase or decrease the interest rate margins significantly. The main policy implication is that interest rate margins cannot be elucidated by either market power or economies of scale. Other implications are discussed.

Political Dimension in Pan-African Cross-border Banking: An Inhibitor or Catalyst?

The emergence and the dominance of African banks in Africa have been touted as one of the popular mechanisms for financial development leading to a concept termed as Pan-African cross-border banking. African Banks have become dominant in the African market as opposed to European colonial banks substantially increasing their geographic footprints on the continent. African banks have become economically significant beyond their home countries and of systematic importance in a number of jurisdictions. This systematically examined the influence of the political environment on Pan-African cross-border banking using Kenya Commercial bank as a case study.Interpretive research paradigm guided the study seeking using qualitative data by interviewing employees, managers, and policymakers from the three subsidiaries of Kenya Commercial Bank; Uganda, Rwanda, and Burundi. This was further supported by secondary data collected from journal articles and reports from the Kenya Commercial Bank.The study established that political environment plays an important role in influencing Pan-African cross-border banking either through catalysing or inhibiting. Despite effort integration by African Union, regional unions like East African Community there still areas for improvement. In order to enhance Pan-African cross-border banking, there has to be systematically management of political environment which was distorted by history, ideologies, different political systems, different regulatory frameworks between the subsidiaries and home countries. This will further enhance the significance of Pan-African banks African cross-border banks enhancing economic development within Africa.

The Nexus between Macro-Prudential Banking Regulation, Interest Rate Spread and Monetary Policy in South Africa

This study is an empirical attempt to investigate the nexus between macro-prudential banking regulation, interest rate spread and monetary policy in South Africa. The effectiveness of monetary policy and alarmingly wide interest rate spread has been a contentious issue in the corridors of central banks across the globe in this lifetime. This has been largely because monetary policy alone proved to be less efficient in mitigating the effects of systemic risk, particularly during the 2007 financial crisis, necessitating the need for macro-prudential banking regulation. Time series dataset spanning from 1994Q1 to 2016Q4 is employed to carry out this study using the restricted Vector Autoregressive (VAR) model, that is, the Vector Error Correctional Model (VECM). The results show that there is no long-run causality running from trade openness, real exchange rate financial depth interest rate spread and credit growth to the repo rate in South Africa. A short run causality running from credit growth to the repo rate exists from the estimated model. In addition, the empirical results exhibited evidence that interest rate spread has a dampening effect on monetary policy but in the long-run this effect seems reversible in South Africa. Therefore, in order to ensure financial stability, care has to be taken by the South African Reserve Bank and government in choosing the best tool-kit of macro-prudential banking regulation as it can be used to disguise the symptoms of a lax monetary policy framework.

Modelling systemic risk in the South African banking sector using CoVaR

ABSTRACTIn this paper, we model systemic risk by making use of the conditional quantile regression to identify the most systemically important and vulnerable banks in South Africa (SA). We measure the marginal contributions of each bank to systemic risk by computing the difference between system risk of individual banks when they are in a normal state and when they are in distress. Using daily stock market prices of six SA commercial banks1 from June 2007 to April 2016; Our results show a considerable increase in the market risk of all the six banks during the 2008 global financial crisis with African Bank being the riskiest bank in the country. Our systemic risk ranking shows that First Rand Bank was the largest contributor to systemic risk followed by Standard Bank, Barclays Africa, Nedbank, Capitec and lastly African Bank. These results suggest that the largest banks pose a bigger threat to the banking system than the smaller banks. These findings clearly indicate that different banks pose different threats to the banking system and the economy at large. Hence, specific actions that go beyond limiting idiosyncratic risk are needed if stability is to be attained through macro prudential regulation.

Service quality and attitudinal loyalty: the mediating effect of delight on retail banking relationships

This study explores the mediating effect of customer delight on the relationship between service quality and attitudinal loyalty in the South African retail banking context. Using a quantitative research design, a sample of 400 retail banking customers were collected. Structural equation modelling and specifically the partial least squared (PLS) method were applied on the data. The results confirm that customer delight plays a partial mediating role on the relationship between service quality and attitudinal loyalty. This suggests that banks need to proactively pursue strategies that delight their customers, rather than merely satisfying them. This, however, is a major challenge for banks given the constant need to over-deliver on promises made to customers. In a competitive South African retail banking market driven by sales volumes and the growth in market share, this challenge is amplified further.

Market Power and Cost Efficiency in the African Banking Industry

Purpose - In this study, we test the so-called ‘Quiet Life Hypothesis’ (QLH) which postulates that banks with market power are less efficient. Design/methodology/approach - We employ instrumental variable Ordinary Least Squares, Fixed Effects, Tobit and Logistic regressions. The empirical evidence is based on a panel of 162 banks consisting of 42 African countries for the period 2001-2011. There is a two-step analytical procedure. First, we estimate Lerner indices and cost efficiency scores. Then, we regress cost efficiency scores on Lerner indices contingent on bank characteristics, market features and the unobserved heterogeneity. Findings - The empirical evidence does not support the QLH because market power is positively associated with cost efficiency. Originality/value - Owing to data availability constraints, this is one of the few studies to test the QLH in African banking.

Bank loan loss provisions, risk-taking and bank intangibles

This article investigates the relationship between discretionary loan loss provisions and bank intangibles among African banks. Prior studies have focused on how intangible assets affect firms’ profitability and valuation decisions with almost no focus on the role of loan loss provisions. We investigate whether banks increase (decrease) loan loss provisions in response to risks associated with investment in intangible assets. We find that discretionary loan loss provisions are inversely associated with bank intangible assets and change in intangible assets, but the inverse association is weakened in environments with strong investor protection. We observe that income smoothing is reduced among banks that have large intangible asset investment. Moreover, income smoothing is pronounced among banks that have few intangible asset investments but this behaviour is reduced for banks in environments with strong minority shareholders right protection.

Bank loan loss provisions, risk-taking and bank intangibles

This article investigates the relationship between discretionary loan loss provisions and bank intangibles among African banks. Prior studies have focused on how intangible assets affect firms’ profitability and valuation decisions with almost no focus on the role of loan loss provisions. We investigate whether banks increase (decrease) loan loss provisions in response to risks associated with investment in intangible assets. We find that discretionary loan loss provisions are inversely associated with bank intangible assets and change in intangible assets, but the inverse association is weakened in environments with strong investor protection. We observe that income smoothing is reduced among banks that have large intangible asset investment. Moreover, income smoothing is pronounced among banks that have few intangible asset investments but this behaviour is reduced for banks in environments with strong minority shareholders right protection.

Analysis of Factors Influencing Bank Profitability: Evidence from the West African Economic and Monetary Union Banking Sector

Analysis of Factors Influencing Bank Profitability: Evidence from the West African Economic and Monetary Union Banking Sector

Common External Tariffs and Trade Efficiency: Lessons for Cross-listed Firms in the East African Community

The East African Community’s trading bloc has attracted a lot of investment from the member countries yet it has not lived to its expectations. Some of the region’s members have fallen out in the past and even re-considered their membership in EAC. Among other areas of focus on the region’s integration is the implementation of common external tariffs and protection of the region’s members in regional and global market spheres. However, trade efficiency still lags behind in the region compared to global benchmarks. There exists flimsy evidence in literature on whether the implementation of common external tariffs revitalizes trade efficiency in the region. This paper, therefore, propounds the relationship between the implementation of common external tariffs and cross-border trade efficiency within the EAC considering experiences from other regional blocs and the implications for cross-listed Kenyan firms. The paper analyzes secondary data for Kenyan imports and exports from World Integrated Trade Solution (WITS) and the Observatory of Economic Complexity (OEC) as well as Economic review reports from the World Bank, the African Development Bank (AfDB) and EAC. The analysis covering the financial years: 1995 to 2017 shows a number of factors, other than tariffs, that drive trade and trade efficiency. The study also reveals non-tariff barriers, inward-looking trade policies, protectionist policies, redundant trading rules across border, increasing cost of trading among other shortcomings to regional trade that arise from implementation of common external tariffs. Statistical evidence also indicate that trade efficiency is independent of the implementation of common external tariffs. In addition, empirical evidence shows prolonged trade deficit not only in the developed countries, but in the developing world as well. The study concludes that tariffs are good for trade regulation to the detriment cross-border trading even beyond the regional bloc. However, besides macroeconomic correlates, factors other than common external tariffs influence regional and cross-border trade efficiency. This calls for comprehensive in-region trade policy review, revitalization and commitment by the member states even as individual trading entities pursue advanced competitiveness in the regional and global markets.