Financial integration and bank profitability in five regional economic communities in Africa

Purpose - This paper examines the effect of bothde jureandde factomeasures of financial integration on bank profitability in five regional economic communities of Africa. Design/methodology/approach - Using panel data from 405 banks operating in 47 African countries across five regional economic communities over 2007–2014, the study constructs a composite measure of bank profitability. The study then employs the dynamic two-step system GMM estimation technique to test the effect of bothde jureandde factomeasures of financial integration on bank profitability in Africa and across five sub-regional markets. Findings - Overall, the results support a positive relationship between financial integration and overall bank profitability in Africa, except for the Arab Maghreb Union and Southern Africa Development Community. Practical implications - The findings of this study suggest that increased financial integration in Africa directly improves bank’s overall profitability and the variations among the sub-regional markets inform tailored policy initiatives. Originality/value - To the best of the authors' knowledge, this is the first study on Africa to employ a composite measure of bank profitability to assess its determinants. It is also the first to include both de facto and de jure financial integration measures in a single study. This is also the first largest comparative study on bank profitability in Africa.