Bank Profitability and Capital Regulation: Evidence from Listed and non-Listed Banks in Africa

ABSTRACT

This study investigates the determinants of African bank profitability while controlling for bank capital regulation. Using static and dynamic panel estimation techniques, the findings indicate that bank size, total regulatory capital, and loan loss provisions are significant determinants of the return on assets of listed banks compared to non-listed banks. Also, regulatory capital has a more significant (and positive) impact on the return on assets of listed banks than non-listed banks particularly when listed banks have sufficient regulatory capital ratio. We also find that higher regulatory thresholds have a negative impact on the return on asset of non-listed banks.

KEYWORDS:

• Bank profitability
• Africa
• listed banks
• panel regression
• capital regulation
• GMM dynamic panel

Notes

1. Security market regulators in African countries that have stock exchanges require listed firms to provide additional disclosure requirements, and enforcement mechanisms are put in place to ensure compliance. This is the case in countries like Kenya, South Africa, Mauritius, etc. While the quantity and quality of disclosures for listed firms will differ across African countries due to differences in enforcement quality, stock market development and information needs of financial statement users in several countries in the African region, various securities regulators in the African region ensure that some minimum level of disclosures for listed firms is maintained, enforced and scrutinised for compliance even though enforcement issues abound in the region.

2. African banks during the global financial crisis were less integrated with the global financial system; thus, there is little reason to believe that the balance sheet of African banks was significantly affected by the 2007 to 2008 global financial crisis (Ozili, forthcoming 2017).

3. Tier 1 capital includes shareholders’ equity capital and retained earnings while Tier 2 capital includes revaluation reserves, hybrid capital instruments, subordinated term debt, general loan loss reserves and undisclosed reserves.

4. However, we observe that some African countries do not have data for this ratio. At country-level, ‘bank regulatory capital to risk-weighted assets’ reflects the average regulatory capital to risk-weighted assets for banks in a country in a given period, and also takes into account differences in national accounting, taxation, capital regulation and supervisory regimes in each African country that are not comparable across African countries. Data for ‘bank regulatory capital to risk-weighted assets’ for each country is obtained from ‘Global Financial Development indicators’ available from the World Bank database. See Table A1.

5. GMM instruments are only applied to the lagged dependent variable (ROA_i,t-1) rather than using all available instruments. Following a cautionary note from Roodman (2009) about weak instrumentation often associated with first difference GMM, we restrict the GMM instruments and apply the instruments only to the lagged dependent variable (ROA_i,t-1).

6. We run correlation analysis and confirm that multicollinearity is not issue in the study. See Appendix for correlation table.

Additional information

Funding

This work was supported by the Not Applicable: [Grant Number Nor Applicable].