Foreign bank inflows: Implications for bank stability in sub-Saharan Africa

Abstract

Foreign banks play progressively important roles in the banking sector in many developing countries. In sub-Saharan Africa (SSA), foreign ownership of banks is above 50% of the domestic banking sector and given the crucial role banks play in the domestic economy, the effect of their entry is questioned, especially in relation to domestic banking stability. We examine the impact of foreign bank inflows on the banking sector stability in SSA, using available data for the period 1995 to 2009. The study employed two econometric estimators: the multivariate logit and the two-step system generalised method of moment (GMM). The results from the two methods indicate that the presence of foreign banks in the domestic banking sector robustly reduces the probability of bank crisis. Finally, the study revealed that  improvement in political institutions also reduces the probability of bank crisis.

Keywords: ECOWAS; SADC; Financial development;  Multivariate logit; System-GMM.