Quantifying the Link between Financial Development and Bank Profitability

Abstract

This study seeks to examine the impact of financial development on bank profitability in Sub-Saharan Africa (SSA). We also investigate how institutional quality, bank stability, financial openness, and competition affect profitability. The researchers employ data from 33 countries covering from 2000 to 2017. Using the generalized method of moments (GMM) technique, the findings show that financial development exerts a negative significant effect on banking sector profitability. This result holds regardless of the indicator of profitability. This indicates that financial development dampens profitability in SSA. The study also reveals that institutional quality and bank stability positively and significantly influence profitability. We further observe that the impact of financial openness and competition on profitability significantly differs depending on the measure of profitability. The study discusses key implications for policy.