Financial integration and bank profitability in five regional economic communities in Africa

Abstract

Purpose

This paper examines the effect of both de jure and de facto measures of financial integration on bank profitability in five regional economic communities of Africa.

Design/methodology/approach

Using panel data from 405 banks operating in 47 African countries across five regional economic communities over 2007–2014, the study constructs a composite measure of bank profitability. The study then employs the dynamic two-step system GMM estimation technique to test the effect of both de jure and de facto measures of financial integration on bank profitability in Africa and across five sub-regional markets.

Findings

Overall, the results support a positive relationship between financial integration and overall bank profitability in Africa, except for the Arab Maghreb Union and Southern Africa Development Community.

Practical implications

The findings of this study suggest that increased financial integration in Africa directly improves bank’s overall profitability and the variations among the sub-regional markets inform tailored policy initiatives.

Originality/value

To the best of the authors' knowledge, this is the first study on Africa to employ a composite measure of bank profitability to assess its determinants. It is also the first to include both de facto and de jure financial integration measures in a single study. This is also the first largest comparative study on bank profitability in Africa.

Citation

Banyen, K. and Biekpe, N. (2021), "Financial integration and bank profitability in five regional economic communities in Africa", International Journal of Emerging Markets, Vol. 16 No. 3, pp. 468-491. https://doi.org/10.1108/IJOEM-08-2018-0435