The Effects of the Interactions Between Agro-Production, Economic, and Financial Development on Bank Sustainability

Abstract

The Sub-Saharan African region encounters a deficiency in agricultural financing, which can be attributed to its constraints in accessing international investments in general and the low engagement of bank risk-taking in particular. This situation leads to underproduction, which exacerbates poverty and malnutrition in the region. Thus, this study investigates the impact of the interaction effects between agricultural production, economic development (ED), and financial development (FD via FDI and DC) on bank stability ratios across 40 countries, encompassing 350 operational banks, during the period covering 2010 to 2019. The research employs the Generalized Method of Moments (GMM) technique and verifies its consistency with Two-Stage Least Squares (2SLS) and the Z-Score Approach. The results highlight two findings: first, the interaction effects between economic development, agricultural production, and financial development factors have significantly greater impacts on bank sustainability than their individual effects without interactions. Secondly, these interaction effects sustain significantly bank stability in two ways: on the one hand, they increase bank returns (through both ROE and ROA), while on the other hand, they reduce bank riskiness (via negative effects on NPL and positive effects on LLR). The study concludes that those interaction effects significantly sustain the stability of the African banking system. The SS African states (via their central banks) should promote farming finance services and enforce a minimum ratio of farming loans for each commercial bank’s credit portfolio as a solution to the investment deficiency in the sector. Hence, this can solve food production level issues, ensure food security, and effectively sustain both the banking system and real economic development.