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Empirical Study of Determinants of Management Behaviour in African Commercial Banks

Table of Contents

  • Introduction
  • Africa: Economic Background Information
    • Overview of Banking in Sub-Saharan Africa
  • Efficiency and Management Behaviour
  • Literature Overview
    • Methodology
    • Date Sources
    • Conclusion
    • Appendices
    • References

Introduction

This paper seeks to determine management behaviour in African commercial banks between 1995 and 2010. Management behaviour is one crucial factor goes a long way in determining bank’s performance. Hence using dynamic panels and Granger causality techniques, the study will explore four different types of management behaviour as identified by Berger and DeYoung (1997) namely: bad management, bad luck, skimping and moral hazard.

Each type will be pinpointed through an examination of the inter-temporal ordering of the relationships between loan loss provision (asset quality), efficiency, and capitalisation. It is envisaged that the findings there-of will provide necessary ingredients for policy prescription and implementation towards enhancement of performance in banks operating on the African continent. Further, the study will add to the body of literature as it focuses on African managers that operate subject to unique economic conditions of low GDP per capital growth, high inflation rates, and low levels of information sharing, rule of law, government effectiveness and corruption, in contrast to other economies that other studies have focused on (See Berger and DeYoung (1997), Williams (2004) and Fordelisi et al (2011)).

The remainder of this paper is organised as follows: Section 2.0 covers brief introduction to African economy, section 2.1 overviews the African banking sector, section 2.2 covers the theoretical aspect of the study 3.0 covers literature review, section 4.0 covers methodology, section 5.0 will provide data sources and finally, section 6.0 concludes.

Empirical Study of Determinants of Management Behaviour in African Commercial Banks

Africa: Economic Background Information

Most countries in Africa were colonised by western countries and majority obtained independence in the early 1960s. Over the years, economic performance has been slow as countries develop new economic policies. According to statistics of the IMF (2010) on Sub Saharan Africa (SSA), real GDP per capita growth for 1995-2009 was on average higher, at 2.3% as compared to -0.2% registered over 1980-1994. Foreign direct investment in the region has also boomed to 4.5%  in 1995-2009 as compared to 1.0% of GDP recorded in 1996-2008. Africa has maintained trade relations amongst its member countries as divided into regional and resource groups (see Table 1 and 2 in the Appendix). However, trade partnerships with the rest of the world currently tilt more towards China and other developing countries in Asia. For instance, 3.4% trade relations with China was recorded in 2000 and increased to 13.6% in 2009.

The economic performance of Africa in the aftermath of 2007-2009 financial crisis was resilient, owing to the sound economic policies in most of the countries in the region, (IMF, 2010). Notwithstanding, the impact of the crisis as evidenced in the macro-economic indicators of deteriorating levels of unemployment and fiscal balances, economic growth is forecasted at 6% in 2012.

Overview of Banking in Sub Saharan Africa (SSA)

Many financial systems in African countries are bank dominated, usually accounting for over 50% of the financial sectors assets. One distinctive feature of African Banking systems is high concentration (Domansti 2005(BIS); with over 50% domination by few foreign owned banks, although the distribution varies across countries (Table 3).  According to IMF (2010), performance of the financial sector as measured by domestic credit to private sector, particularly in the SSA was 20.8% of GDP in 1995-2009, a decrease from 41.2% registered in 1980-1994. Overall, the performance of banks has improved although they vulnerabilities to macroeconomic variables remain. Many banking sectors are well capitalised, liquid, and profitable although the prevalence of non-performing loans remain high (Tables 4-6). African banks have loan portfolios that are concentrated in a few sectors which thrive on donor aid, exports earnings, resulting into high exposure to credit risk in cases of exogenous shocks (inflation) to the economy. Further, weaknesses in the legal and judiciary frameworks (rule of law, government effectiveness, bureaucracy, corruption) for enforcing creditor rights, deficiencies in the infrastructures for assessing borrower credit worthiness (credit ratings) and shortcomings in banks risk management capabilities further worsen the credit risk exposure. The probability of these risks has been increased by the global financial crisis, (Quintyn and Verdier, 2010).  Countries like Botswana, Lesotho, Zambia and Chad with more foreign bank ownership remain more exposed to credit risks through contagion effects, (Aryeetey and Ackah, 2011).

According to Murinde (2012), regulation to ensure capital adequacy and reasonable risk taking in African banks has evolved in three overlapping phases. The first was the pre-1960s colonial phase where bank business was controlled from abroad; Second, the post-independence 1960s-1970s where local governments intervened to address market failure by launching state development banks to direct credit to local entrepreneurs; and third, the Basel regime which includes transition from Basel I to Basel II and now to Basel III. Cornford (2008) indicates sporadic implementation of Basel II. Although most African countries complied with Basel I and II but post-crisis, countries are said to be at crossroads as going back to Basel II is not an option and the theme for Basel III appears to carter more for concerns of developing economies.

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