Bank profitability and economic growth in the emerging markets: The mediating role of stability

Abstract

Bank profitability is of significant importance to economic growth since it determines banks’ resilience and their ability to provide credit (Raddatz et al., 2020). However, high bank profitability (margins) as in the Sub-Saharan Africa (SSA) region can hurt economic growth through inefficient financial intermediation (Rahman et al., 2023). It is, therefore, imperative to examine the interplay between bank profitability and economic growth in SSA. This study investigates the contribution of banks’ performance to economic growth in SSA by examining the impact of bank profitability on growth, as well as the mediating role of stability in this interplay. A panel dataset for 26 SSA economies that spans from 2000 to 2020 was collected and analyzed. System generalized method of moments (GMM) and structural equation model (SEM) were used for the analysis. Surprisingly, the study finds that bank profitability does not affect economic growth in SSA economies. This evidence is attributed to inefficient intermediation in the form of high bank margins and low lending volumes. However, a positive contribution of bank profitability to growth was noted in low-income economies, supporting the notion that banks dominate in economies with underdeveloped financial markets. The study also finds evidence of partial mediation of stability on the bank profitability-growth nexus in SSA.