Bank-Specific Determinants of Profitability of Commercial Banks in Africa: Evidence from Panel Data (2013–2023)
Keywords:
Commercial banks, Financial performance, Profitability, Return on Assets, Return on EquityAbstract
This study investigates the impact of bank-specific factors on the profitability of commercial banks in Africa. While prior research has largely focused on developed and emerging economies outside Africa, limited continent-wide evidence exists on the internal drivers of profitability among African banks. The study employs unbalanced panel data comprising 70 commercial banks drawn from 10 African countries between 2013 and 2023. Profitability was measured using Return on Assets (ROA), Return on Equity (ROE), and Net Interest Margin (NIM). The independent variables considered include capital adequacy, asset quality, operational efficiency, and liquidity. Both fixed- and random-effects panel models were estimated, with the Hausman test guiding model specification. Robustness was checked using alternative proxies and regional sub-group analysis. Results indicate that capital adequacy and operational efficiency exert a positive and statistically significant influence on bank profitability. Asset quality and deposit ratio (as a proxy for funding mix) show negative but insignificant relationships. Liquidity presents mixed evidence, positively related to ROA and ROE but negatively linked to NIM, implying profitability trade-offs in highly liquid banks. The findings underscore the importance of internal management decisions in driving profitability. In particular, bank managers should prioritize cost efficiency through digitalization, resource optimization, and prudent expense management. Regulators must balance capital requirements to safeguard stability without constraining lending. By jointly analyzing three measures of profitability across multiple African regions, this study provides comprehensive empirical evidence on internal performance drivers in African banking. It extends both the Resource-Based View and Efficiency Structure Hypothesis in the African context, offering insights for scholars, policymakers, and practitioners.
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