ABSTRACT
This study examines the relationship between financial system development and performance of banking sector in the Sub-Saharan Africa for the period 1993 to 2019. A total sample of six (6) countries in the SSA (Nigeria, Ghana, Kenya, Mauritius, South Africa and Botswana) were selected for the study based on the availability of data for all variables selected for estimation within the same time period. The Fully Modified Least Squares (FMOLS) method was employed in the estimation of two (ROE and ROA) models specified in the study. The results obtained from the empirical analysis based on the ROE model revealed that, stock market capitalization (MCAP), stock market turnover (STO) and broad money supply (M2) have significant positive impact on the performance of banking sector in the Sub-Saharan African Countries. However, stock market total value traded (STV) and ratio of credit to private sector (CPS) have significant negative relationship with banking sector performance. The coefficients of interest rate spread (IRS) and consumer price index, a proxy for inflation rate (INFR) have insignificant impact on banking sector performance in the SSA countries. On the other hand, the results obtained based on ROA model indicates that credit to private sector (CPS) has negative significant effect on banking sector performance in the Sub-Saharan African Countries. Consumer price index, a proxy for inflation rate (INFR) has significant positive impact on the performance of banking sector in the Sub-Saharan African Countries. However, the coefficient of interest rate spread (IRS) has negative but insignificant impact on the performance of banking sector. Furthermore, stock market capitalization (MCAP), stock market turnover (STO), broad money supply (M2) and stock market total value traded (STV) have positive but insignificant impact on the performance of banking sector in the Sub-Saharan African Countries. Thus, the findings show that financial system development variables have significant effect on ROE as a measure ofbanking sector performance in Sub-Saharan African Countries while they have no such level of significance on ROA as a measure of performance. This is an indication that return on equity (ROE) is a better measure of banking sector performance than return on assets (ROA).
Furthermore, the financial system development variables of stock market capitalization, stock market turnover, money supply, stock market value traded and credit to private sector are the major drivers of banking sector performance in Sub-Saharan African Countries. However, private sector credit has a negative influence. Therefore, the study recommends among others that, to effectively overcome the negative impact of credit to private sector on banking sector performance, banks should ensure that due diligence and proper follow up should be observed by respective banks’ management in the SSA in order to ensure appropriate utilization of loans on the right assets yielding investments so that private sector credit will have positive impact on the performance of the banking sector. Also, since adequate liquidity allows investors to alter their portfolios quickly and cheaply, thereby making investment less risky and facilitates longer term and more profitable investments, market regulators across the SSA countries should be more proactive by formulating appropriate policies that will attract more investors into the SSAmarkets. This can be achieved by ensuring transparency regarding market information, reduce bid-ask prices and consistently checkmate market malfeasances. These measures will in no doubt ensure steady development of the financial system and the overall performance of the banking
sector in SSA.
