FINANCIAL PERFORMANCE OF BANKS IN SELECTED AFRICAN COUNTRIES: DOES INSTITUTIONAL QUALITY MATTER?

Abstract

The importance of the banking sector to any nation's development cannot be overemphasized due to its ability to provide the loanable funds required for investment and capital formation. However, the decline in the financial performance of banks in Africa coupled with weak institutions prevalent in most countries in Africa have limited the banks' capacity to effectively stimulate economic prosperity. Hence, this study examined the effect of institutional quality on the financial performance of banks in selected African countries. The study population consisted of the 1017 banks operating in Africa from 2010 to 2020. Yamane formula and random cluster sampling was employed to select the top 200 banks in terms of assets, profits and size in Africa as at 2020. The study employed secondary data obtained from the Bank Focus database and the World Development Indicator. System Generalized Method of Moment was employed as the estimation technique. Findings revealed that institutional quality positively and significantly affects bank financial performance in selected African countries. Consequently, this study concluded that institutional quality is an important driver of bank financial performance. Thus, this study recommended that the selected countries' governments promote policies that would strengthen their nation's institutions because of their ability to further improve banks' financial performance.