Bank Profitability Determinants in Africa: A Review of Literature

1. Background

The objective of this paper is to provide a concise overview of the advances in the African bank profitability determinants literature, to understand the state of research in the field and offer directions for future research. During the review, the study focused mostly on the post-2010 literature, and illuminate the issues that are particularly significant in the literature.

Bank profitability is crucial for the continuity of banking business. Bank profitability is of interest to external parties such as regulators, shareholders, tax authorities, accounting standard setters, financial economists, banking academics, the public and investor analysts. There is so much attention on bank profitability for many reasons. The most important reason is because, when banks declare a profit, some of the profit is allocated as (i) provisions for loan loss (ii) regulatory reserves, (iii) dividend to shareholders, (iv) tax payments, (v) bonuses to employees, (vi) corporate social responsibility expenses, and (vii) some profit is reinvested into the banking business. These allocation expectations, which are either statutory or discretionary, both justify the attention given to the profitability of banks from internal and external parties. Take the case of a bank regulator, for example. Bank regulators want banks to be profitable at all times. Regulators would be worried if all or most regulated banks report significant losses in the same year because it can tarnish the reputation of the regulator. Bank regulators can grant regulatory forbearance to banks that have financial difficulties in the short term, to avoid transmitting distress in the inter-bank market. Of course, there may be concern that bank managers could take advantage of their important status in the financial system to report false profit or inflated profit in order to meet their profit projections and to entice investors, and this is a highly debated issue in the earnings management literature (see, for example, Cao (2022), Ozili (2022), and Ertan (2022)).

Bank profitability is also very important for the proper functioning of firms in the real sector of the economy. Profitable banks can perform their financial intermediation function effectively by allocating credit to economic agents who undertake production and investment activities that contribute to higher economic output. Given the importance of bank profitability for economic growth, economists and researchers are interested in bank profitability determinants. Many studies provide extensive insight into the determinants of bank profitability in developed countries, but such insights are limited for developing countries particularly African countries. Knowledge about bank profitability determinants in African countries is limited in the literature.

Majority of the profitability studies have focused on bank profitability determinants while only few studies focus on the antecedents and consequence of bank profitability. Some studies explore bank profitability during booms and recessions (Dietrich and Wanzenried, 2011; Albertazzi and Gambacorta, 2009); how profit persistence contribute to bank stability (Ali and Puah, 2019; Le, 2020; Ozili 2021a); the role of earning management in profit persistence (Ozili, 2018; Ozili and Outa, 2017); how regulation affects bank profitability (Ozili, 2015; Latridis and Persakis, 2012); impact of competition on bank profit (Yuanita, 2019); how corporate governance affects bank profit (Peni and Vähämaa, 2012; Aebi, Sabato and Schmid, 2012); as well as bank profitability impacts across other regions (Pasiouras and Kosmidou, 2007; Ozili and Uadiale, 2017, etc.). Despite the extensive research on bank profitability determinants, there are few studies from emerging countries, particularly African countries. This review study summarizes the mainstream bank profitability literature, and thereafter, focus the discussion on African bank profitability determinants. In Africa, banks are important because most African countries have a bank-based financial system. Yet, there is little research on African bank profitability determinants, compared to the similar research conducted in other regions.