Competitiveness and Determinants of Bank Profitability in Sub-Saharan Africa

We analyse how competitive the banks in sub-Saharan Africa are and what determines their profitability. We use a panel data of 97 sub-Saharan African banks for the period from 2000 to 2012. Using recursive regression, there is no strong evidence to suggest a structural break. The findings indicate that on average banks have a 40% return on equity. The fixed effects indicate that both internal and external factors are influential in determining the profitability of the banks. Specifically, the cost–income ratio and capital ratio negatively and significantly influence profitability. Measuring revenue diversification with the Herfindahl–Hirschman index (HHI), the results indicate that the more diversified the bank is, the more profitable it is. On the other hand, we find that the coefficient of cyclical output almost doubles when the output exceeds its trend value. In contrast, when the output is below its trend, the coefficient of cyclical output is insignificant.