Hostname: page-component-cd9895bd7-fscjk Total loading time: 0 Render date: 2024-12-24T01:00:48.131Z Has data issue: false hasContentIssue false
  • English
  • Français

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
Get access Rights & Permissions [Opens in a new window]

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.

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Abrams, D., Hogg, M. A. and Marques, J. M. (2005), The Social Psychology of Inclusion and Exclusion, New York: Psychology Press.Google Scholar
Alesina, A. and Ferrara, E La (2005), ‘Ethnic Diversity and Economic Performance’, Journal of Economic Literature, 43(3): 762–800.CrossRefGoogle Scholar
Alesina, A. and La Ferrara, E. (2000), ‘Participation in Heterogeneous Communities’, The Quarterly Journal of Economics, 115(3): 847–904.CrossRefGoogle Scholar
Alesina, A. and Spolaore, E. (2003), The Size of Nations, Cambridge, MA: MIT Press.CrossRefGoogle Scholar
Alesina, A. F., Lotti, F. and Mistrulli, P. E. (2013), ‘Do women pay more for credit? Evidence from Italy’, Journal of the European Economic Association, 11(suppl_1): 45–66CrossRefGoogle Scholar
Alesina, A., Devleeschauwer, A., Easterly, W., Kurlat, S. and Wacziarg, R. (2003), ‘Fractionalization’, Journal of Economic growth, 8(2): 155–194.CrossRefGoogle Scholar
Antonakis, J., Bendahan, S., Jacquart, P. and Lalive, R. (2010), ‘On Making Causal Claims: A Review and Recommendations’, The Leadership Quarterly, 21(6): 1086–1120.CrossRefGoogle Scholar
Arellano, M. and Bond, S. (1991), ‘Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations’, Review of Economic Studies, 58(2): 277–297CrossRefGoogle Scholar
Arellano, M. and Bover, O. (1995), ‘Another Look at the Instrumental Variable Estimation of Error-Components Models’, Journal of Econometrics, 68(1): 29–51.CrossRefGoogle Scholar
Arrow, K. (1972), Some mathematical models of race discrimination in the labor market. Racial discrimination in economic life, 187–204, Lexington, Mass: Lexington Books.Google Scholar
Ashraf, B. N., Zheng, C. and Arshad, S. (2016), ‘Effects of National Culture on Bank Risk-Taking Behavior’, Research in International Business and Finance, 37 (May): 309–326.CrossRefGoogle Scholar
Barth, J. R., Caprio, G. and Levine, R. (2008), Rethinking Bank Regulation: Till Angels Govern. USA: Cambridge University Press.Google Scholar
Bayer, P., Ferreira, F. and Ross, S. L. (2018), ‘What Drives Racial and Ethnic Differences in High-Cost Mortgages? The Role of High-Risk Lenders’, The Review of Financial Studies, 31(1): 175–205.CrossRefGoogle Scholar
Beck, T, De Jonghe, O and Schepens, G (2013), ‘Bank competition and stability: Cross-country heterogeneity’, Journal of financial Intermediation, 22(2): 218–244CrossRefGoogle Scholar
Blanchflower, D. G., Levine, P. B. and Zimmerman, D. J. (2003), ‘Discrimination in the small-business credit market’, Review of Economics and Statistics, 85(4): 930–943CrossRefGoogle Scholar
Bluedorn, J. C. (2001), ‘Can Democracy Help? Growth and Ethnic Divisions’, Economics Letters, 70(1): 121–126.CrossRefGoogle Scholar
Blundell, R. and Bond, S. (1998), ‘Initial conditions and moment restrictions in dynamic panel data models’, Journal of econometrics, 87(1): 115–143CrossRefGoogle Scholar
Buhaug, H. (2006), ‘Relative Capability and Rebel Objective in Civil War’, Journal of Peace Research, 43(6): 691–708.CrossRefGoogle Scholar
Cameron, A. C. and Trivedi, P. K. (2010), Microeconometrics Using Stata (Vol. 2), College Station, TX: Stata Press.Google Scholar
Charles, K. K. and Hurst, E. (2002), ‘The transition to home ownership and the black-white wealth gap’, Review of Economics and Statistics, 84(2): 281–297CrossRefGoogle Scholar
Charles, K. K., Hurst, E. and Stephens, M. (2008), ‘Rates for vehicle loans: race and loan source’, American Economic Review, 98(2): 315–320CrossRefGoogle Scholar
Chui, A. C., Titman, S. and Wei, K. J. (2010), ‘Individualism and Momentum Around the World’, The Journal of Finance, 65(1): 361–392.CrossRefGoogle Scholar
Coffé, H. (2009), ‘Social Capital and Community Heterogeneity’, Social Indicators Research, 91(2): 155–170.CrossRefGoogle Scholar
Cohen-Cole, E. (2011), ‘Credit card redlining’, Review of Economics and Statistics, 93(2): 700–713CrossRefGoogle Scholar
Cooter, R. and Landa, J. T. (1984), ‘Personal Versus Impersonal Trade: The Size of Trading Groups and Contract Law’, International Review of Law and Economics, 4(1): 15–22.CrossRefGoogle Scholar
Deku, S. Y., Kara, A. and Molyneux, P. (2016), ‘Access to consumer credit in the UK’, The European Journal of Finance, 22(10): 941–964CrossRefGoogle Scholar
Dincer, O. C. and Wang, F. (2011), ‘Ethnic Diversity and Economic Growth in China’, Journal of Economic Policy Reform, 14(1): 1–10.CrossRefGoogle Scholar
Dwumfour, R. A. (2017), ‘Explaining Banking Stability in Sub-Saharan Africa’, Research in International Business and Finance, 41(October): 260–279.CrossRefGoogle Scholar
Dwumfour, R. A. and Ntow-Gyamfi, M. (2018), ‘Natural Resources, Financial Development and Institutional Quality in Africa: Is There a Resource Curse?’, Resources Policy, 59 (December): 411–426.CrossRefGoogle Scholar
Dwumfour, R. A., Agbloyor, E. K. and Abor, J. Y. (2017), ‘Correlates of Poverty in Africa: Exploring the Roles of Remittances, Financial Development, and Natural Resources’, International Journal of Social Economics, 44(12): 2033–2051.CrossRefGoogle Scholar
Easterly, W. (2001), ‘Can institutions resolve ethnic conflict’, Economic Development and Cultural Change, 49(4): 687–706CrossRefGoogle Scholar
Easterly, W. and Levine, R. (1997), ‘Africa's Growth Tragedy: Policies and Ethnic Divisions’, The Quarterly Journal of Economics, 112(4): 1203–1250.CrossRefGoogle Scholar
Emenalo, C. O., Gagliardi, F. and Hodgson, G. M. (2018), ‘Historical Institutional Determinants of Financial System Development in Africa’, Journal of Institutional Economics, 14(2): 345–372.CrossRefGoogle Scholar
Fahlenbrach, R., Prilmeier, R. and Stulz, R. M. (2012), ‘This Time is the Same: Using Bank Performance in 1998 to Explain Bank Performance During the Recent Financial Crisis’, The Journal of Finance, 67(6): 2139–2185.CrossRefGoogle Scholar
Glaeser, E. L. and Sacerdote, B. I. (2008), ‘Education and Religion’, Journal of Human Capital, 2(2): 188–215.CrossRefGoogle Scholar
Green, E. (2013), ‘Explaining African Ethnic Diversity’, International Political Science Review, 34(3): 235–253.CrossRefGoogle Scholar
Greene, W. H. (2018), Econometric Analysis (8th edn), London: Pearson.Google Scholar
Greif, A., Milgrom, P. and Weingast, B. R. (1994), ‘Coordination, Commitment, and Enforcement: The Case of the Merchant Guild’, Journal of Political Economy, 102(4): 745–776.CrossRefGoogle Scholar
Hanson, A., Hawley, Z., Martin, H. and Liu, B. (2016), ‘Discrimination in mortgage lending: Evidence from a correspondence experiment’, Journal of Urban Economics, 92(March): 48–65CrossRefGoogle Scholar
Holtz-Eakin, D., Newey, W. and Rosen, H. S. (1988), ‘Estimating Vector Autoregressions with Panel Data’, Econometrica: Journal of the Econometric Society, 56(6): 1371–1395.CrossRefGoogle Scholar
Kanagaretnam, K., Lim, C. Y. and Lobo, G. J. (2011), ‘Effects of National Culture on Earnings Quality of Banks’, Journal of International Business Studies, 42(6): 853–874.CrossRefGoogle Scholar
Kanagaretnam, K., Lim, C. Y. and Lobo, G. J. (2014), ‘Influence of National Culture on Accounting Conservatism and Risk-Taking in the Banking Industry’, The Accounting Review, 89(3): 1115–1149.CrossRefGoogle Scholar
Kasman, A. and Carvallo, O. (2014), ‘Financial Stability, Competition and Efficiency in Latin American and Caribbean Banking’, Journal of Applied Economics, 17(2): 301–324.CrossRefGoogle Scholar
Knack, S. and Keefer, P. (1997), ‘Does Social Capital Have an Economic Payoff? A Cross-Country Investigation’, The Quarterly Journal of Economics, 112(4): 1251–1288.CrossRefGoogle Scholar
Kodila-Tedika, O. and Agbor, J. A. (2014), ‘Religious Diversity and Economic Development in Sub-Saharan Africa: So far So Good’, Journal of African Development, 16(1): 99–117.CrossRefGoogle Scholar
Leeson, P. T. (2005), ‘Endogenizing fractionalization’, Journal of institutional economics, 1(1): 75–98CrossRefGoogle Scholar
Lewer, J. J. and Van den Berg, H. (2007), ‘Religion and International Trade: Does the Sharing of a Religious Culture Facilitate the Formation of Trade Networks?’, American Journal of Economics and Sociology, 66(4): 765–794.CrossRefGoogle Scholar
Mauro, P. (1995), ‘Corruption and Growth’, The Quarterly Journal of Economics, 110(3): 681–712.CrossRefGoogle Scholar
Medina, L. and Jonelis, M. A. W. (2017), The informal economy in Sub-Saharan Africa: Size and determinants. IMF Working Papers, 2017(156), Washington, D.C.: International Monetary Fund.Google Scholar
Montalvo, J. G. and Reynal-Querol, M. (2005), ‘Ethnic Diversity and Economic Development’, Journal of Development Economics, 76(2): 293–323.CrossRefGoogle Scholar
Montalvo, J. G. and Reynal-Querol, M. (2021), ‘Ethnic Diversity and Growth: Revisiting the Evidence’, The Review of Economics and Statistics, 103(3): 521–532.CrossRefGoogle Scholar
Ottaviano, G. I. and Peri, G. (2005), ‘Cities and Cultures’, Journal of Urban Economics, 58(2): 304–337.CrossRefGoogle Scholar
Ottaviano, G. I. and Peri, G. (2006), ‘The Economic Value of Cultural Diversity: Evidence From US Cities’, Journal of Economic Geography, 6(1): 9–44.CrossRefGoogle Scholar
Ozili, P. K. (2018), ‘Banking Stability Determinants in Africa’, International Journal of Managerial Finance, 14(4): 462–483.CrossRefGoogle Scholar
Pope, D. G. and Sydnor, J. R. (2011), ‘What's in a Picture? Evidence of Discrimination From Prosper. com’, Journal of Human Resources, 46(1): 53–92.CrossRefGoogle Scholar
Portes, A. (1998), ‘Social Capital: Its Origins and Applications in Modern Sociology’, Annual Review of Sociology, 24(1): 1–24.CrossRefGoogle Scholar
Roodman, D. (2009), ‘How To Do xtabond2: An Introduction to Difference and System GMM in Stata’, The Stata Journal, 9(1): 86–136.CrossRefGoogle Scholar
Ross, S. L., Turner, M. A., Godfrey, E. and Smith, R. R. (2008), ‘Mortgage lending in Chicago and Los Angeles: A paired testing study of the pre-application process’, Journal of Urban Economics, 63(3): 902–919CrossRefGoogle Scholar
Segoviano, M. A. and Goodhart, C. (2009). Banking Stability Measures. IMF Working Papers, 2009(004), International Monetary Fund, Washington, D.C.CrossRefGoogle Scholar
Shao, L., Kwok, C. C. and Guedhami, O. (2010), ‘National Culture and Dividend Policy’, Journal of International Business Studies, 41(8): 1391–1414.CrossRefGoogle Scholar
Shleifer, A. and Vishny, R. W. (1993), ‘Corruption’, The Quarterly Journal of Economics, 108(3): 599–617.CrossRefGoogle Scholar
Spolaore, E. (2006). National Borders and the Size of Nations. The Oxford Handbook of Political Economy. Oxford: Oxford University Press, pp. 778–798.Google Scholar
Tanzi, M. V. (1994). Corruption, Governmental Activities, and Markets. International Monetary Fund.Google Scholar
Tavares, J. and Wacziarg, R. (2001), ‘How Democracy Affects Growth’, European Economic Review, 45(8): 1341–1378.CrossRefGoogle Scholar
Williamson, O. E. (2000), ‘The New Institutional Economics: Taking Stock, Looking Ahead’, Journal of Economic Literature, 38(3): 595–613.CrossRefGoogle Scholar
Wintoki, M. B., Linck, J. S. and Netter, J. M. (2012), ‘Endogeneity and the Dynamics of Internal Corporate Governance’, Journal of Financial Economics, 105(3): 581–606.CrossRefGoogle Scholar
Wooldridge, J. M. (2002). Econometric Analysis of Cross Section and Panel Data. Cambridge, MA: MIT Press.Google Scholar
Zheng, X., El Ghoul, S., Guedhami, O. and Kwok, C. C. (2012), ‘National Culture and Corporate Debt Maturity’, Journal of Banking & Finance, 36(2): 468–488.CrossRefGoogle Scholar