Banking in Africa

Abstract

This thesis explores varying themes in the context of banking in Africa. We evaluate business models of banks in South Africa, the impact of deposit insurance coverage on banking sector stability and the implications of geographical ring fencing for bank stability.

In chapter 3, we investigate the type, evolution, and impact on performance of bank business models in South Africa. We cluster banks into different business models based on the composition of their balance sheets. We identify business models oriented to wholesale and retail funding, as well as to universal, investment and interbank activities. We observe large differences in terms of business size, performance, and risk profiles across the business models. Tracking the evolution of business models over time, reveals that banks exhibit relatively stable business models, but where transition exists it is primarily driven by increased risk.

In chapter 4, we investigate the impact of deposit insurance coverage on banking sector stability. We construct an index to measure deposit insurance coverage in 45 African countries over the period 2004-2019. Using an instrumental variables approach, we find that high deposit insurance coverage increases instability in the banking sector. Furthermore, we find that external factors (the proportion of countries with deposit insurance, directives for deposit insurance adoption in Central and West Africa) increase the probability of deposit insurance adoption and coverage.

In chapter 5, we investigate the implications of geographic ring-fencing interventions for bank stability, focusing on a policy that prohibited parental support to foreign subsidiaries. Employing a difference-in-differences approach with 174 subsidiaries across 42 African host countries, we find an increase in overall bank default risk post-intervention. Alternative risk measures indicate heightened leverage, credit, and liquidity risk. Less stringent private and supervisory oversight in host countries exacerbates, while deposit insurance schemes mitigate the impact of geographical ring-fencing on risk.

Date of Award	4 Dec 2024
Original language	English
Awarding Institution	University of St Andrews
Supervisor	John Ogilvie Stephen Wilson (Supervisor), Anna Lucia Sobiech (Supervisor) & Linh Hoai Nguyen (Supervisor)