Bank Efficiency and Financial Sector Development in Sub-Saharan Africa: Issues and Future Challenges

Hiroyuki Kiyota

This paper analyses the efficiency and profitability of commercial banks in 29 sub-Saharan African countries, for the period starting 2000 and ending 2007. It examines whether the African banking sector may be exposed to contagion effects of the global financial crisis. It also investigates the banking system in Africa as well as the efficiency of banks. The study employs parametric methods, stochastic frontier approach to measure banks’ cost and profit efficiency. It further analyses the efficiency and profitability of commercial banks by group (such as emerging markets (South Africa), frontier markets, and financially developing markets) as well as by case (i.e. domestic bank, sub-Saharan Africa (SSA) foreign bank, or non-SSA foreign bank). Furthermore, using regression analysis, the paper discusses the correlation of technical efficiency scores with the financial indicators, such as asset quality, capital ratios, operational and liquidity ratios, and zscores. The paper concludes with a brief assessment of the effects of the crisis by pointing out the issues concerning Africa's banking system. It also suggests policy implications.