Institutional quality, macroeconomic uncertainty and efficiency of financial institutions in Sub-Saharan Africa
| DOI | https://doi.org/10.1108/JFRC-01-2022-0003 |
| Published date | 02 August 2022 |
| Date | 02 August 2022 |
| Pages | 200-219 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation |
| Author | Rexford Abaidoo,Elvis Kwame Agyapong |
Institutional quality,
macroeconomic uncertainty and
efficiency of financial institutions
in Sub-Saharan Africa
Rexford Abaidoo
Business Management and Accounting, University of Maryland Eastern Shore,
Princess Anne, Maryland, USA, and
Elvis Kwame Agyapong
Ghana Institute of Management and Public Administration GIMPA Green Hill,
Achimota, Accra, Ghana
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 relevantsources 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 macroeconomicuncertainty 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 subregionfrom 2002 to 2019. Empirical estimates verifying hypothesizedrelationships were
carriedout using the continuousupdating estimator (CUE) by Hansen et 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 enhanceefficiency 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 corruptioncontrol, government effectiveness, regulatory quality and ruleof law have on
operationalefficiency 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 analy sis
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 indexconstructed specifically for this study using principal component analysis approach.
Keywords Financial institution efficiency, Institutional quality, Regulatory environment,
Macroeconomic uncertainty
Paper type Research paper
JEL classification –C23, C26, G2, G21, G28
JFRC
31,2
200
Received10 January 2022
Revised6 May 2022
28June 2022
Accepted11 July 2022
Journalof Financial Regulation
andCompliance
Vol.31 No. 2, 2023
pp. 200-219
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-01-2022-0003
The current issue and full text archive of this journal is available on Emerald Insight at:
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1. Introduction
Operations of financial institutions offer one of the crucial productivity and growth support
systems in an economy. As one of its core mandates, financial institutions function as the
medium through which vital financial resources (the lifeblood of productive sectors of the
economy) are channeled to key sectors of an economy to ensu re sustained growth and
development. Operations of financial institutions and how their activities ultimately influence
productive sectors of an economy and overall growth and development, have over the years
attracted significant empirical inquiries in the related literature (Wu et al., 2010;Liang and
Reichert, 2012;Bulgari, 2019;Haini, 2020;Gambetta et al.,2021). The role of financial
institutions in the economic growth process has over the years, also given rise to reviews and
empirical studies focusing on conditions or factors influencing efficiency of their operations.
Financial institution efficiency as a result, continues to be examined, and defined using various
measures and indexes by leading studies in the finance and economic literature. The
importance of operations of financial institutions such as banks in an economy calls for the
need to ensure efficiency, which is crucial in sustaining effective means of channeling idle
financial resources to the various productive sectors of an economy to stimulate growth.
Efficiency profile of financial institutions, the focus of this study, is thus, paramount for both
institutional managers and corporate strategist as well as policymakers; due to their role as the
main economic arteries responsible for routing vital capital resources crucial for economic
growth and development. Importance of financial institutions as growth-enabling agent in an
economy is often appreciated during periods of adverse operational shocks. Such shocks often
adversely influence efficiency among financial institutions, and constrain productivity with
negative impact on growth trajectory in an economy. For instance, adverse macroeconomic
conditions or shocks have been found to be inimical to operational efficiency among financial
institutions leading to anemic productivity and sub-par gross domestic product (GDP) growth
(Farzam et al., 2013;Caglayan and Xu, 2019;Saif-Alyousfi, 2020;Baum et al.,2021;Jaara, 2021).
The literature, thus, attest to the importance of efficiency of financial institutions in the
economic growth and development discourse among economies.
Unlike most of the studies noted above however, the present study is not designed to
examine or further review the financial institution–economic performance nexus. This study
rather pursues a different approach on the dynamics of financial institutions. Approach
pursued in this empirical inquiry examines how governance and political environment within
which financial institutions operate influence efficiency of financial institutions among
emerging economies in Sub-Sahara. In order words, this study specifically examines the extent
to which quality of political institutional systems, governance and macroeconomic uncertainty
explainvariabilityinefficiency among financial institutions operating in the subregion. Our
research approach duly recognizes the cardinal role other conditions and variables such as
prevailing macroeconomic environment and industry specific factors play in influencing
efficiency or otherwise among financial institutions (these are duly controlled for). However,
this study is modeled on the presumption that the form of governance, quality of regulations
and institutions tasked to support private sector entities such as financial institutions may have
significant influence on efficiency among such institutions in an economy all things being
equal. We hypothesize this relationship following the work of Rajan and Zingales (2001),where
the structural composition of an economy, such as the cultural, political and legal systems, were
found to affect the pace of development of financial institutions. Beck et al. (2001) argue that
dynamics of financial sector performance and financial institutions development for that
matter can be explained by legal theories of financial development. According to Beck et al.
(2001),financial sector dynamics are influenced by the power of the government (governance),
the political and legal systems. Thus, to some degree, variability in perfor mance of financial
Efficiency of
financial
institutions
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