By Philip Ayagre Atimbire(Dr)
In recent years, several countries in Sub-Saharan Africa (SSA) have undergone significant banking consolidations, largely driven by regulatory reforms, such as increasing minimum capital requirements for banks.
While regulatory authorities have claimed that these mergers and acquisitions (M&As) would stabilize the banking sector, new research suggests that the impact of consolidation on bank stability is far more complex, particularly when M&As are regulation-induced.
A study conducted on the banking sectors of eight SSA countries from 2003 to 2019 provides new insights into the relationship between banking consolidations and bank stability. The research explores the effects of both voluntary and regulation-induced M&As on bank stability, using three key measures: the Z-score, risk-adjusted return on assets, and risk-adjusted bank capital. It also considers a range of factors, including market concentration, bank-specific characteristics, and macroeconomic variables.
The findings reveal a clear distinction between the two types of mergers. Voluntary M&As, where banks choose to merge for strategic reasons, such as; raising capital, improving product offerings, and achieving better economies of scale, are shown to enhance banking stability.
These voluntary consolidations allow banks to diversify income sources, increase capital, and better withstand financial shocks. On the other hand, regulation-induced M&As, triggered by government-imposed capital requirements or other regulatory pressures, negatively affect bank stability. These forced consolidations often result in banks that are less prepared for long-term sustainability, as they are primarily focused on meeting regulatory thresholds rather than strengthening their business models.
The study also stable. In SSA, countries with fewer but larger banks experienced lower risks of insolvency and systemic found strong support for the concentration-stability hypothesis, which suggests that more concentrated banking markets, those dominated by fewer, larger banks, tend to be more crises, supporting the idea that concentration in the banking sector enhances stability. This contrasts with the competition-stability hypothesis, which posits that increased competition in the banking sector leads to greater stability.
Furthermore, several bank-specific factors were found to influence stability. Banks with higher capital levels, more diverse income sources, and greater deposit bases were generally more stable. However, other factors, such as a higher return on equity (ROE), and poorer bank efficiency (as measured by cost-to-income ratios), were negatively associated with stability. High ROE, for instance, was linked to higher risk-taking, which could undermine financial resilience.
The study’s findings underscore the importance of policy decisions in shaping the future of banking in SSA. Regulatory authorities are encouraged to promote voluntary mergers as a means of strengthening the banking sector rather than enforcing regulation-induced mergers, which may inadvertently harm stability. To foster a more stable financial environment, regulators should focus on policies that allow banks to grow organically and competitively, thereby ensuring their resilience in the face of economic challenges.
In conclusion, while banking consolidations in SSA have been seen as a remedy for the region’s historical banking crises, the study reveals that the type of consolidation, voluntary or forced, has a significant impact on stability.
Voluntary mergers foster long-term growth and resilience, while regulation-induced mergers often undermine stability. As SSA continues to navigate its banking sector reforms, policymakers must prioritize strategies that promote voluntary mergers and healthy competition, ultimately leading to a more secure and stable banking environment.
This write up is an excerpt from an article published in the Journal of financial regulation and compliance in 2024 and is a lecturer at the Central Business School, Central University