Does banking consolidation improve bank stability? Evidence from Sub-Saharan Africa

Abstract

Purpose

This study aims to investigate the influence of banking consolidations on bank stability in Sub-Saharan African (SSA) countries for the period 2003–2019, following a series of bank mergers and acquisitions (M&As) in the region and whether regulation-induced bank M&As affect banking sector stability.

Design/methodology/approach

The fixed effect panel regression model is used to understand the influence of regulation-induced and voluntary bank mergers and acquisitions on banking stability in SSA. The study also controlled for bank-specific factors, market concentration and macroeconomic variables that affect banking stability. The study used three measures of bank stability: the Z-score, risk-adjusted return on assets and risk-adjusted bank capital.

Findings

The study results reveal that voluntary bank M&As, market concentration, net interest margin, bank capital, bank deposits and income diversification influence banking sector stability positively. However, the findings show that regulation-induced bank mergers and acquisitions impact banking stability negatively. Where bank M&As were a result of banking regulatory reforms, called regulation-induced mergers and acquisitions (RIM&As), banking stability suffered, but voluntary bank M&As improved banking stability. Again, the study supports the concentration–stability argument rather than the competition–stability hypothesis. Therefore, more concentrated banking markets in SSA countries have more stable banks and fewer risks of system-wide bank failures. Other factors influencing banking stability in SSA are return on equity, bank efficiency (cost-to-income), bank size and deposits-to-assets ratio. However, their relationship is negative with the stability of the banking sector.

Practical implications

The findings imply that the regulatory authorities should encourage voluntary bank M&As and not regulation-induced bank M&As to improve the stability of the banking systems in SSA.

Originality/value

The study provides new evidence on the effects of regulation-induced bank M&As on the stability of banks.

Citation

Ayagre, P., Sarpong-Kumankoma, E., Aboagye, A.Q.Q. and Asuming, P.O. (2024), "Does banking consolidation improve bank stability? Evidence from Sub-Saharan Africa", Journal of Financial Regulation and Compliance, Vol. 32 No. 5, pp. 572-589. https://doi.org/10.1108/JFRC-03-2024-0039