Purpose – The purpose of this paper is to investigate the determinants of banking stability in Africa. Design/methodology/approach – The authors present four measures of banking stability embedding banks’ loan loss coverage ratio, insolvency risk, asset quality ratio, and level of financial development, thereby allowing analysis of banking stability determinants from four complementary perspectives: protection for downside credit losses, distress arising from insolvency risk, non-performing loans, and financial development. The authors use the regression methodology to estimate the impact of financial structure, institutional, bank-level factors on bank stability. Findings – The findings indicate that banking efficiency, foreign bank presence, banking concentration, size of banking sector, government effectiveness, political stability, regulatory quality, investor protection, corruption control and unemployment levels are significant determinant of banking stability in Africa and the significance of each determinant depends on the banking stability proxy employed and depends on the period of analysis: pre-crisis, during-crisis or post-crisis. Practical implications – Banking supervisors in African countries should consider the role of financial structure and institutional quality for banking stability in the African region. Originality/value – This study is the first to examine banking stability determinants in Africa that takes into account institutional quality and financial structure.

Introduction

We investigate the determinants of banking stability in Africa. There is no agreed definition for “banking stability” (Segoviano and Goodhart, 2009), although some policymakers like to think of banking stability as the absence of banking crises. This lack of agreement has led each national bank supervisor to decide for themselves what banking stability is, and whether banking stability includes the stability of only traditional banks or the stability of non-bank financial institutions as well as shadow banks operating outside the formal financial sector. Whatever the definition of banking stability is, an issue that is not clearly understood in the literature is the factors that influence banking stability in emerging economies, while considering the role of financial structure and institutional quality. Frequent banking crises in African countries in the last few years have brought the fragility of African banking and finance into unprecedented focus. Often preceded, by a wave of commodity and oil import dependence by African countries coupled with exchange rate volatility, structural and institutional failures that weaken the efficacy of banks’ risk management tactics (Beck and Cull, 2013), it can hardly be said that banking crises were widely foreseen. Although African banks have risk models to predict instability trends, an understanding of specific stability determinants and the variables to include in bank risk models, is important for banks operating in unpredictable environments such as Africa. The literature has not examined banking stability determinants in Africa; therefore, this study is a comprehensive attempt to investigate the determinants of banking stability in Africa to understand why African banking systems are often unstable and susceptible to financial difficulties. In theory, bank regulators in developed economies rely mainly on capital adequacy for stability (Caprio and Honohan, 1999), and some experts believe that capital resources are insufficient to achieve banking stability in developing economies due to structural weaknesses (Brunnermeier et al., 2009; Barth et al., 2004; Caprio and Honohan, 1999). Demirgüç-Kunt and Detragiache (2002) point out that regulators place much emphasis on micro-and macro-prudential regulations for banking stability but pay little attention to factors such as institutional and structural factors that influence bank stability, while Brunnermeier et al. (2009) also demonstrate that the 2008 global financial crisis and several national banking crises in countries around the world proved that crises are prone to occur in countries that have weak institutional controls and systemic dependence on banks in the financial system (Brunnermeier et al., 2009), and such interdependence can have serious consequences for banking stability. Considering these arguments, and the weak institutional environment in Africa, it is needful to identify the determinants of banking stability in Africa.