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Fractionalization, polarization and banking stability in Africa

Published online by Cambridge University Press:  04 August 2021

Richard Adjei Dwumfour
Richard Adjei Dwumfour*
Affiliation:
Department of Finance, University of Ghana Business School, Ghana
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Abstract

I examine the impact of diversity (ethnic and religious fractionalization and polarization) on banking stability in Sub-Saharan Africa (SSA). Using data from 1996 to 2014, I employ the system Generalized Method of Moments (sys-GMM) approach to examine this relationship. I find that countries in SSA are more polarized religiously than they are ethnically. The region is, however, more ethnically fractionalized than they are religiously. Further, I conjecture that banks in more heterogeneous societies will experience poor asset quality and lower stability. I however postulate that banks offset the risks from diversity at certain levels of net interest margin (NIM). I provide empirical evidence to support these conjectures. I find varying threshold NIM values for each diversity indicator depending on the stability measure used. Opening up the banking system to foreign entry can help offset the negative impact of diversity on banking stability. Policy implications are discussed.

Keywords

Banking stabilityethnicityfractionalizationpolarizationreligion

JEL classification

G21: Banks • Depository Institutions • Micro Finance Institutions • Mortgages Z12: Religion O55: Africa
Type
Research Article
Information
Journal of Institutional Economics , Volume 18 , Issue 3 , June 2022 , pp. 379 - 397
Copyright
Copyright © The Author(s), 2021. Published by Cambridge University Press on behalf of Millennium Economics Ltd.

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