Institutional quality, macroeconomic uncertainty and efficiency of financial institutions in Sub-Saharan Africa

Rexford Abaidoo and Elvis Kwame Agyapong

Journal of Financial Regulation and Compliance, 2022, vol. 31, issue 2, 200-219

Abstract: Purpose - This paper evaluates how institutions of governance and macroeconomic uncertainty influence efficiency of financial institutions in the subregion of Sub-Saharan Africa (SSA). Data for the empirical inquiry were compiled from relevant sources for 33 countries in the subregion from 2002 to 2019. Empirical estimates verifying hypothesized relationships were carried out using the continuous updating estimator (CUE) by Hansenet al.(1996). Design/methodology/approach - The purpose of this paper is to evaluates how institutions of governance and macroeconomic uncertainty influence efficiency of financial institutions in the subregion of Sub-Saharan Africa (SSA). Data for the empirical inquiry were compiled from relevant sources for 33 countries in the subregion from 2002 to 2019. Empirical estimates verifying hypothesized relationships were carried out using the continuous updating estimator (CUE) by Hansenet al.(1996). Findings - The results suggest that institutional quality has significant positive effect on financial institution efficiency, supporting the view that improved and supportive structures of governance tend to promote operational efficiency among financial institutions among economies in SSA. In addition, improvement in individual governance indicators such as corruption control, government effectiveness, regulatory quality and rule of law was also found to support or enhance efficiency of financial institutions among economies in the subregion. Macroeconomic uncertainty on the other hand is found to impede efficiency of financial institutions; the same condition (macroeconomic uncertainty) is further found to negate any positive impact corruption control, government effectiveness, regulatory quality and rule of law have on operational efficiency among financial institutions in the subregion. Originality/value - Unlike most of related studies, this study adopts a different approach on the dynamics of financial institutions. Approach pursued in this empirical inquiry examines how the regulatory environment within which financial institutions operate, the form of governance and the quality of government institutions influence efficiency of financial institutions among emerging economies in Sub-Sahara. Empirical analysis conducted examines effects of variables that are unique to this study; these variables are either constructed or econometrically derived specifically for various interactions verified in the study. For instance, institutional quality variable is an index constructed specifically for this study using principal component analysis approach.

Keywords: Financial institution efficiency; Institutional quality; Regulatory environment; Macroeconomic uncertainty; C23; C26; G2; G21; G28 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfrcpp:jfrc-01-2022-0003

DOI: 10.1108/JFRC-01-2022-0003

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