Macroeconomic Determinants of Commercial Bank Profitability in Africa: GDP, Inflation, and Interest Rate Dynamics

Abstract

This study investigates how macroeconomic factors, GDP growth, inflation, and interest rate dynamics influence the profitability of commercial banks in Africa. By incorporating a multi-country dataset, the paper offers continent-wide evidence that extends beyond country-specific or regional case studies. Panel data from 70 commercial banks across 10 African countries for the period 2013–2023 were analysed using fixed- and random-effects regression models. Profitability was measured using return on assets (ROA), return on equity (ROE), and net interest margin (NIM). Explanatory variables included GDP growth, inflation rate, and lending interest rates. Hausman tests guided model selection, while robustness checks included sub-regional regressions and alternative profitability measures. GDP growth significantly and positively affects profitability, particularly ROA and ROE, reflecting stronger loan demand during economic expansion. Inflation exerts a negative effect especially, on NIM suggesting that unanticipated price shocks raise costs and credit risk. Lending interest rate volatility consistently reduces bank profitability, highlighting risks associated with unstable credit conditions. Sub-regional results show that West African banks benefit more from GDP growth, while Southern African banks are more vulnerable to inflationary pressures. Sustained macroeconomic stability is critical to banking sector performance. Bank executives should adopt hedging and interest rate risk management strategies, while regulators must coordinate monetary and financial stability policies to avoid excessive volatility. This paper contributes by providing continent-wide empirical evidence on the simultaneous role of GDP growth, inflation, and interest rates in shaping bank profitability in Africa. By integrating sub-regional dynamics, the study highlights heterogeneity in macroeconomic effects across African markets, enriching both theoretical and policy debates.