Macro-financial linkages and banking stability in sub-Saharan Africa

This thesis investigates three main questions in three distinct but related core empirical chapters. The issues addressed are: (i) in terms of macro financial linkages in the Sub Saharan African (SSA) context, is there a long run relationship between real economic growth and the select financial variables of credit to GDP, bank lending deposit spread and stock market prices (ii), what is the impact of the shock arising from Pan African Banks’ entry on domestic banking stability in SSA? (iii) what is the impact of the shock arising from the political business cycle (PBC) on banking stability in SSA? The thesis has five chapters. Chapter 1 is the general background to the research. Chapters 2, 3 and 4 are the empirical chapters. Chapter 5 is the conclusion.

Chapter 2 investigates the macro-financial linkages between the real and financial sectors in three frontier market economies in SSA, Kenya, Nigeria and South Africa. Specifically, it focuses on establishing whether there is a long-term relationship between real economic growth and select financial variables namely, the credit to the private sector to GDP ratio, and the bank lending deposit spread from the banking sector and stock market prices from the stock market in these economies. The results suggest the existence of a long run relationship between real economic growth and the select financial variables. The results also support the view that although both banks and stock markets may be able to promote economic growth, the impacts of the former are more powerful in these countries, as evidenced by the strong relationship between credit extension and real economic growth.

Chapter 3 uses standard panel data methods to examine the impact of Pan African Banking (PAB) on Banking System Stability in 22 SSA countries. PAB refers to the phenomenon of indigenous African banks that were once domestically based but now operate beyond their borders in other African countries. The study finds that foreign bank entry in the form of pan African banks (PABs) enhances banking system stability. Meanwhile, the presence of other foreign banks such as the traditional European banks does not significantly impact stability in SSA. The chapter also investigates the relationship between PAB and banking stability at SSA sub-regional level, distinguishing south eastern and west Africa SSA where the PABS are said to be systemically present. PABs subsidiaries/branches are defined as having systemic presence if their deposits are larger than 10% of the host country’s banking system deposits or if their assets are larger than 7% of host country GDP. The results indicate there is no significant difference in the impact of pan African banks on the banking system stability in these 2 sub regions of SSA, and PAB is found to enhance banking stability in both regions.

Chapter 4 uses System- GMM (SYS-GMM) estimation to model the political business cycle (PBC) in SSA. It investigates the outcomes for monetary, fiscal and importantly banking stability variables in election and post-election years in 22 SSA countries in the post democratization period of 2000 to 2015. Specifically, it investigates the existence of PBCs and analyses whether the PBCs increase the risks of monetary and banking instability in the panel sample of countries. Findings reveal that PBCs do exist in SSA, as found by Magloire (1997), Block (2002) and Christian and Olcer (2017). They also confirm that electoral cycles do increase macroeconomic instability risks specifically in monetary variables as found by Magloire (1997), in fiscal variables as found by Christian and Olcer (2017), and Block (2002). The chapter further importantly finds evidence that banking instability risks are also heightened by the electoral cycles.