Determinants of Commercial Bank performance in Sub-Saharan Africa

Abstract

The central theme of this research was to investigate the determinants of commercial bank performance in Sub-Saharan Africa (SSA). Specifically the focus was on profitability and total factor productivity growth as key measures of bank performance. The analysis used an unbalanced panel of 216 commercial banks drawn from42 countries in SSA for the period 1999 to 2006.

Using the cost efficiency model, bank profitability was estimated using panel random effects method in static framework. The explanatory variables are growth in bank assets, growth in bank deposits, capital adequacy, operational efficiency (inefficiency), liquidity ratio as well as the macroeconomic variables of growth in GDP and inflation. The findings clearly show that both bank-specific as well as macroeconomic factors explained the variation in commercial bank profitability over the study period.

In estimating bank total factor productivity growth, the gross accounting procedure, through Estimation was also by the panel random effects method, in static framework. In this specification, new variables were introduced as explanatory. These are growth in other bank earning assets, asset quality, profitability and real exchange growth and maintaining some few variables used in bank profitability measurement. Results also show that both bank-specific as well as macroeconomic factors had an influence on bank total factor productivity growth over the study period.

These findings demonstrate the importance of both bank level as well as macroeconomic factors in explaining commercial bank performance in Sub-Saharan Africa. The policy implications drawn from this thesis are that if banks are to attain performance improvements, both bank level as well as macroeconomic factors are important.