Factors Influencing Financial Stability In Sub-Saharan Africa

This study sought to explore potential influencers of financial stability in Sub-Saharan Africa for the period 2000-2017.To achieve this objective,unbalanced panel dataset of 38 countries was used and its choice was dictated by availability of data.In order to account for endogeneity issues that are likely to arise in banking industry,the Generalized Method of Moments estimator was employed to empirically test the formulated hypotheses.The analysis focused on banking sector of financial system because SSA economies are bank-based at large and most of them do not have capital markets.The main measures of stability in this study are bank z-score,bank regulatory capital,and the ratio of non-performing loan over total loans.Based on the existing literature,a couple of independent variables potentially influencing the stability of financial system were categorized into banking efficiency,banking competition,banking concentration,access to financial services,financial deepening,and governance of public sector.The regression analysis was carried out along with financial freedom,recent global financial crisis,and macroeconomic business cycle as control variable.The main findings of the study have shown that banks' profitability is substantially associated with the overall financial stability and reduces the portfolio risk.Inefficiency in management of cost was found to lead to the stability and reduce the level of banks' risk taking.It was suggested from this observation that regulators use prohibitive measures such as imposing banks to hold more equity capital in order to curb risk taking,hence maintain the stability.Although the involvement of banks in non-traditional activities appeared to boost capital holding,it was found to lead to high risk taking and decline the overall stability.The results of empirical analysis further indicated that there exists optimal level of banking concentration for the health of financial system as demonstrated by inverted U-shaped association between assets concentration in largest three banks over total assets of commercial banks and banks z-score.This threshold effect was also robust to alternative measure of concentration.With regard to the degree of competition,it was empirically shown that higher market power improves the overall stability,supporting competition-fragility hypothesis.It was found that deep financial systems are prone to risk of default.This can be true in that financial deepening allows credit booms which may be associated with moral hazard and informational asymmetry.While the effect of access to financial services using the constructed index was found to be insignificant on overall risk and capital requirement,its association with loan portfolio risk was positive and statistically significant.It means that the banks' effort to reach out more users increases the exposure to risk because of lax credit standard.However using the constituents of the index for access to financial services,there is evidence that proximity with customers leads to the stability and increases the level of loan portfolio risk.It was revealed from the constructed index for public sector governance that good quality of public institutions promotes the overall stability even if it incentivizes risk taking.The reported results are robust to altered sample and alternative measures for studied factors.Besides,they are robust to alternative method of estimation.This study contributes to the literature by using recent data to identify the factors associated with financial stability in SSA.Unlike the earlier studies on stability that focused on firm-level data,the present study emphasized on country level data in order to capture the whole system.It moreover goes beyond banking industry specific features and acknowledges the substantial impact of public institutions on the health of financial system.