Econometric Analysis of the Determinants of Bank Profitability in Three Major African Countries: Kenya, Nigeria, and South Africa

Abstract

In light of the importance of bank profitability for provision of financial services and for financial stability, this study examines its determinants in three major Sub-Sharan African countries, namely Kenya, Nigeria and South Africa. Our panel econometric approach using bank-level fixed effects seeks to identify the bank-specific, banking-market and macroeconomic determinants of bank profitability in 240 banks across the three countries over 1990-2019. Across a range of estimates, we find that bank liquidity and the non-interest income to total income ratio had a significant positive effect on profitability while credit risk and the cost-to-income ratio had a significant negative effect. In most models, real GDP growth affected bank profitability positively. Small banks and large banks differ in terms of their determinants of profitability. There are important implications for both bank management and regulators, which in turn may affect both financial stability and scope for economic development.