Role Of Macroeconomic Variables On Bank Performance 1

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Role Of Macroeconomic Variables On Bank Performance: Evidence From Sub-Saharan

Africa Chapter Four

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Role Of Macroeconomic Variables On Bank Performance 2

Role Of Macroeconomic Variables On Bank Performance: Evidence From Sub-Saharan

Africa Chapter Four

1.1 Background

Banks play an essential role in the expansion and development process of a country's

economy. They also act as financial intermediaries as well as primary sources of financing

for organizations and businesses. Financial institutions also ensure efficient allocation of

resources in that they mobilize finances for several productive operations. In operation, they

transfer money from those with surplus finances to those in need of productive operations,

fuel investments, and enhance economic growth and development. There is usually a drop in

economic growth and development when financial institutions fail in their financial

intermediation function. The importance of banks is increasingly fundamental in evolving

countries because commercial markets are generally fragile and undeveloped, and financial

institutions are primarily the leading source of funding for the bulk of the organizations and

are commonly the significant economic savings bank.

However, it is essential to note that banks' performance is contingent on various

aspects. In specific terms, how efficiently a banking system runs can be influenced by

internal and external aspects. The internal factors primarily entail the increased competition

among financial institutions, while external aspects entail the financial and macroeconomic

situations surrounding a nation (Osamwonyi and Michael 2014). Generally, how well banks

can compete is increasingly driven by their potential to innovate. Thus, we anticipate the

attractiveness of each bank to differ according to the features and benefits they hold. On the

contrary, all banks face similar financial and macroeconomic conditions. On the one hand,

favorable macroeconomic situations will stimulate the growth of the banking sector. On the

other hand, adverse financial and macroeconomic aspects might spell doom for banking

performance. In simple terms, an unstable and uncertain macroeconomic climate can

Role Of Macroeconomic Variables On Bank Performance 3

influence financial institutions' credit and market risk, leading to a dismal banking

performance. Additionally, spillovers consequences from financial catastrophe in, most

significantly, the developed financial markets in other nations of the world can also limit the

local performance of banks. Sundararajan et al. (2002) stated that the 2008 economic

deterioration that led to banks fiascos started in the United States and then increasingly

spread across the globe.

Banks must get scrutinized for their financial performance frequently. Over time there

has been sufficient improvement in the supervisory system of the banking industry in terms

of recovery, management efficiency, quality of assets, quality of earnings, and liquidity (Al-

Tamimi and Hussein 2010). The policy developers and researchers increasingly recommend

supervision of banks by applying capital adequacy, quality of assets, management quality,

returns, liquidity, and sensitivity (CAMELS) rating criterion in assessing and examining

financial institutions' performance and financial soundness. 

For purposes of this research, Countries being considered in Sub-Saharan Africa are Ghana,

Nigeria, South Africa, Botwana Ethiopia and Kenya.

1.2 Problem Statement

The banking sector's profitability is inevitable to support economic operations.

Economic development is influenced by intermediation in the financial industry and its

efficiency. In fact, an efficient and well running banking structure is crucial in resisting

adverse shocks and financial distress, especially in the scenario of commodity dependent

markets. For long-term survival, a bank needs to identify issues increasing or reducing its

returns, thus enhancing its long-run survival and increasing initiatives by improving

performance by managing the controlling determinants. The worldwide financial difficulty

that started in 2007 also led to distress in several banks in Africa. Despite a challenging

macroeconomic situation in African countries, the banking industries have remained resilient.
Role Of Macroeconomic Variables On Bank Performance 4

The Agency theory by Jensen & Meckling (1976) argues that organization managers ought to

position their companies by sufficiently adapting to the changing macroeconomic conditions,

thereby protecting the stakeholders’ interests.

Osamwoji and Chijuka (2014) examined how macroeconomic factors impact

commercial banks’ profitability. The research found a significant positive correlation

between the return on equity (ROE) and gross domestic product (GDP), a significant negative

correlation involving inflation level. San and Heng (2013) highlighted that macroeconomic

factor such as gross domestic product and inflation had no impact on profitability. Bank

specific factors, however, influence bank performance. Kanwal and Nadeem (2013) found

out that macroeconomic aspects have a week impact on commercial institutions earnings. In

their research, Gerlach, Peng and Shu (2005) found that macroeconomic variables influenced

business cycles and fluctuations and influences banks profitability in a significant manner.

Consequently, the regulatory bodies had to bail some of the banks in these African

countries. The recapitalization policy of the countries' central banks primarily stretched the

financial ability of banks. They were, therefore, successful in financing big projects in

various industries. However, the reduction in international prices of commodities makes

African banks vulnerable to the vagaries of international markets. It is anticipated that a

reduction in prices of significant goods produced by the selected African countries presents

increased risks to banks with an attendant effect on bank performance. In Africa, most

countries' broader economic situation is characterized by reducing gross domestic product

growth rates, falling prices, increasing inflation, uncoordinated fiscal and monetary policies,

increasing interest rates, inadequate money supply, and uncertain exchange rates. All these

are aspects external to the bank's performance. It means that they have limited or no control

over them with an attendant effect on banks' performance. A crucial question is whether

macroeconomic variables influence bank performance in Sub-Saharan Africa. Though a

Role Of Macroeconomic Variables On Bank Performance 5

casual observation can answer this query, that is not sufficient to establish that

macroeconomic variables impact banking sector performance in these countries, hence, this

research.

1.3 Research objectives

1.3.1 General objective

The study's broad objective is to define the consequence of macroeconomic

conditions on the bank performance of registered banks in Sub-Saharan Africa, specifically in

Ghana, Nigeria, South Africa, Botswana Ethiopia and Kenya

1.3.2 Specific objectives

The specific objectives of the research are:

i. To determine the effect of the gross domestic product on bank performance of listed

banks in Sub-Saharan Africa.

ii. To establish the impact of inflation on bank performance of listed banks in Sub-

Saharan Africa. To evaluate the influence of exchange rate on bank performance of

listed banks in Sub Saharan Africa.

iii. To determine the impact of money supply on bank performance of listed banks in

Sub-Saharan Africa.

iv. To examine the influence of actual interest rates on bank performance of listed banks

in Sub-Saharan Africa.

1.4 Research Questions

1.4.1 General question

What is the role of macroeconomic variables on the bank performance of listed banks

in Sub-Saharan Africa.

1.4.2 Specific questions

Role Of Macroeconomic Variables On Bank Performance 6

i. What is the effect of the gross domestic product on bank performance of listed banks

in Sub-Saharan Africa?

ii. What is the impact of inflation on the bank performance of listed banks in Sub-

Saharan Africa?

iii. What is the effect of the exchange rate on the bank performance of listed banks in

Sub-Saharan Africa?

iv. What is the impact of money supply on bank performance of listed banks in Sub-

Saharan Africa? What is the influence of real interest rates on the bank performance

of listed banks in Sub-Saharan Africa?

1.5 Significance of the study

The purpose of this research will be to establish the role of macroeconomic variables

on bank performance in Sub-Saharan Africa. It is justified that there are very few studies on

the role of macroeconomic variables on the performance of listed banks in Africa. Available

research is based on a panel information set that offers a general analysis rather than focusing

on a specific country and bank. Further, different researches lack consensus on the role of

macroeconomic conditions on bank performance. For example, a study argued that

macroeconomic factors insignificantly impact bank profitability, and another found mixed

outcomes regarding macroeconomic aspects. For these reasons, it is hard to conclude whether

or not macroeconomics conditions impact the performance of listed banks. This research will

be of value to several players in the banking industry and beyond. Other researchers and

academicians will find the research insightful and use the research findings as reference.

Scholars might get the impetus to enrich this study, say in a different context or sector, or

eliminate the limitations this research may encounter.

Role Of Macroeconomic Variables On Bank Performance 7

The conclusions and recommendations from the research will be essential and

relevant to financial institutions decision-makers. The findings will help them consider bank-

specific aspects that positively or negatively influence profitability and performance.

The research will contribute to the narrow literature on Sub-Saharan banking

performance in various ways. First, this will be one of the very scanty researches

investigating listed banks performance in the Sub-Saharan region. Second, the research will

account for recent economic and financial distress. Finally, the research will conduct two

kinds of robustness tests to ensure that the estimated coefficients will sufficiently represent

bank performance, thereby enhancing confidence in subsequent recommendations.

Potential investors and lenders in the banking sector in the Sub-Saharan region will

find this research useful in their investment decisions. They will be able to appraise their

investment goals and portfolios effectively, and so go ahead to make relevant decisions.

Therefore, this research intends to bridge the generalization gap by determining the

role of macroeconomic variables on the performance of listed banks in Sub-Saharan Africa.

1.6 Limitations of the study, delimitation, and scope

The research will mainly depend on secondary information available on the countries'

central bank and stock exchange. This means that the accuracy of research findings depends

on the available data. The data will be cross-checked on individual listed banks' websites to

ensure reliability and validity of data. The research will be based on annual information for a

four-year research period from 2017 to 2020. This is the latest period and the availability of

recent and applicable data to the present economic condition. However, a more extended

research period would capture periods of different economic significances such as booms and

recessions and give a broader time focus hence a greater dimension of the problem.

1.7 Methodology
Role Of Macroeconomic Variables On Bank Performance 8

In this research, statistical and econometric models will be estimated to evaluate the

role of macroeconomic conditions on the performance of listed banks in Sub-Saharan Africa

where a single listed bank will be chosen from each country through purposive sampling. The

research will be based on annual information for a four-year research period from 2017 to

2020.This will verify the connections between these countries' banks' performance and

changes in the economy and the magnitude of the banks' responses to these changes. The

model for this research will assume an existing correlation between macroeconomic factors

that impact banks' performance aspects. Given the macroeconomic status of gross domestic

product, other variables will be brought in. in that case, the study will employ a descriptive

and correlation study design. Time series empirical data will be used to establish the

correlation among various macroeconomic factors to determine whether either positive or

negative correlation coefficients and listed banks' performance exist as measured by return on

assets (ROA), return on equity (ROE) and TOBIN’S Q which is an indicator variable that

measures the performance of an organization from an investment perspective.  

1.8 Literature review

Siregar, Mualana, and Hasanah (2015) analyzed the impact of macroeconomic

conditions such as inflation, production index, exchange rate, crude oil price, Jakarta stock

index, and Indonesia Bank rate on the performance of state-owned financial institutions. The

research used Vector Error Correction Model with empirical findings showing that the Bank

of Indonesia's shock rate offered the most significant reaction of most of the bank

performance indicators. Simiyu (2015) examined the effect of macroeconomic conditions on

Kenya's listed commercial banks' profitability. In the research, panel information and fixed

impact analysis were used with empirical results indicating that exchange rates, gross

domestic output, and interest levels do not sufficiently affect bank performance. In contrast,

Sheefeeni (2015) reported that macroeconomic factors significantly impacted bank

Role Of Macroeconomic Variables On Bank Performance 9

performance in Namibia. Abusomwa (2018) researched macroeconomic variables and bank

performance, where the Generalized Method of Moments technique was used based on

information from 120 bank branches and 2400 bank clients in Nigeria. Empirical findings

showed that macroeconomic performance positively affected Nigerian banks' performance.  

1.9 Organization of the study

The study will be organized into five chapters: Chapter one will include the study

background, research problem, research objectives and questions, study significance, study

limitation and delimitation. Chapter two will document the theoretical background, the

empirical literature on macroeconomic factors and bank performance, literature summary,

research gaps, and the conceptual framework. Chapter three will include the research

methodology, design, empirical model, sample population, sampling technique, data

collection instruments, data analysis and presentation. Chapter four will entail the results and

analysis, while chapter five will include the research summary and recommendations.

CHAPTER TWO

Introduction

This chapter will review significant theories and literature by various researchers

concerning macro-economic variables and bank performance. The chapter will also include a

conceptual literature review, empirical literature review, conceptual framework, and a

summary of the research gaps that the current study seeks to contribute towards filling.

Several studies have tried developing theoretical and empirical works to understand the role

of macroeconomic variables on bank performance intensively.

Conceptual Literature Review

Macroeconomic Factors

The name macro originates from the Greek phrase, which means "large", while

economics is the branch that deals with productivity, system, and the decision making of an
Role Of Macroeconomic Variables On Bank Performance 10

economy (Sullivan and Sheffrin, 2003). According to Davis and Powell (2012), the macro

setting focuses on factors surrounding a firm and can impact the way it runs. The macro-

environment is the conditions and aspects external to a company outside the individual

business element, but they all function within it. The external business surrounding entails the

totality of aspects outside a company but are considered by the organization when making

decisions. However, these aspects depend significantly on the environment's difficulty and

dynamism. The peripheral business setting is categorized as stable when there are no constant

changes. Researches indicate that variations in financial assets value react to macroeconomic

features such as interest amount, inflation exchange level, gross domestic product (GDP),

unemployment degree and money supply, among others (Fosu et al., 2014). The present

research will scrutinize the role of the macroeconomic elements discussed below on bank

productivity.

Gross Domestic Product

This is the overall market value of commodities and services manufactured by a

nation's economy throughout a particular interval. It comprises all absolute commodities and

services created by economic players in that nation irrespective of proprietorship and are not

put on for sale in any other arrangement. Mwangi (2013) stated that GDP is the most

constantly used macroeconomic indicator in measuring a country's total economic activity; its

growth rate shows the condition of the commercial series. Hence, it has been used across the

globe as the primary output and economic activity measure.

Inflation

Inflation is another critical macroeconomic factor that affects organizations operations

and decision making especially financial institutions. Inflation is well-defined as the

persistent rise in the overall level of prices of commodities in a country (Jhingan, 2002).

According to Ackers (2002), the inflation level measures the fluctuations in the regular value
Role Of Macroeconomic Variables On Bank Performance 11

level based on the consumer price index (CPI). There are several ways of measuring the

inflation rate; however, GDP Deflator or CPI indicator are the two universally applied

methods. The GDP Deflator is a comprehensive inflation index in the economy, while the

consumer price index (CPI) measures fluctuation in the amount of a wide range of customer

commodities. The CPI measures typical retail values paid by clients. A tremendous or rising

CPI shows the presence of inflation; advanced prices tend to lower the general consumer

expenditure, which results in a reduction in GDP while the level of inflation is not negative,

speedily growing inflation rates show the probability of deprived macroeconomic health. For

example, Alimi (2014) research showed a negative impact of inflation on economic growth;

proxied as a wide meaning of money as GDP ratio; virtual money as a GDP share; and credit

to private industry as part of GDP.

Exchange Rate

The Business Dictionary defines it as the price for which a nation's currency can be

swapped for another nation's exchange. According to Harvey (2012), the exchange proportion

is the worth of two bills comparative to each other. Exchange rates can be permanent or

fluctuating. A country's central bank determines the fixed rate, while the fluctuating exchange

rate is determined by demand and supply market movements (The Economic Times, 2017).

Research by Barnor (2014) reported a substantial impact of foreign exchange level on the

stock market earnings of Ghanaian registered companies.

Money Supply

This is the aggregate stock of currency being exchanged in an economy (The

Economic Times, 2017). The money in circulation entails the money, printed notes, quantity

in credit accounts, and other liquid assets. Money supply valuation and examination assist

economists and policy creators to make the policy or change the current policies of growing

or reducing the economic money supply. The valuation is essential as it ultimately impacts
Role Of Macroeconomic Variables On Bank Performance 12

the business cycle and thereby influences the economy. Each republic's central bank is in

charge of publishing the money supply information based on the fiscal aggregates they set.

However, banks' deposit obligations are well-defined in all aspects, which are constricted

money (M10, broad money supply (M2), and stretched extensive money (M3).

Interest Rate

It is the cost incurred by a debtor for the usage of borrowed currency from a

moneylender or the amount payable on a rented asset. Ngugi (2001) defined interest amount

as the cost of money that mirrors market data concerning the predictable fluctuation in buying

power of money or impending price increases. According to economists, the interest rate is

capital distribution value over time; monetarist applies a rate of interest as a fundamental

means to get more savings since a rise in interest rates attracts reserves while discouraging

borrowing (Murungi, 2014). The interest levels are essential since they regulate the

movement of money in a country. Increased interest levels help reduce inflation and impair

the economy, while low-interest rates boost economic growth due to increased borrowing but

could result in high inflation levels. Additionally, Barnor (2014) reported a substantial

adverse impact of interest percentage on stock market earnings of registered companies in

Ghana. In a study by Mnang'at et al. (2016), the results established a momentous correlation

amid interest rate and productivity of small and medium businesses in Kenya.

Theoretical Literature Review

System Theory

According to Nwachukwu (2006), a system is a group of interconnected and

codependent fragments that yields a cohesive component. According to Kuhn (1974), a

system is any design whose aspects are connected substantially in justifying consideration.

Kuhn (1974) stretched the theory to factor in the point that the system's data enables the

understanding of another section. The system can either be regulated or unregulated. A

Role Of Macroeconomic Variables On Bank Performance 13

regulated system senses data (detector), applies regulation in decision making on what is felt

and trigger some exchange or information transmission amid the system. The result

(communication and operation) objective among systems is to attain balance (Kuhn, 1974).

This is the case since a system can both be a closed system where case connections happen

merely between features in the system and not externally, or an open structure where

connections happen inside and outside the system.

According to Laszlo and Krippner (1998), the system model assures a robust

conceptual analysis for grasping the correlation of people and connected cognitive systems

and procedures certain to them in both the environment and society. It entails a universal and

integrative analysis of scenarios and proceedings. The term expresses a compound of

interconnected aspects and the relationship among them that identifies the margin-maintained

process. In general, the system theory sees the whole set as a compound of co-existing,

related and dependent variables. This perspective is not to restrain the importance of research

items, subsystems or structures inside the broader setting as done in specialization but to put

all disciplines in the right outlook.

Efficient Market Hypothesis

The theory was proposed by Fama (1980) where he argued that investors' objective to

maximize their returns would make increased profits returns impossible. Fama (1980)

differentiated three sorts of EMH (weak, semi-strong and strong form) and assumed that key

players in an economy possess essential information relating to macroeconomic variables

variations affecting stock prices. Furthermore, Fama (1980) explained that the importance of

stock prices fluctuation is caused by macroeconomic factors such as money in circulation

(money supply), inflation level fluctuations, and changes in the exchange rate. Therefore,

EMH theory helps extrapolate that macroeconomic variations ultimately impact stock prices,
Role Of Macroeconomic Variables On Bank Performance 14

which in turn distresses the financial performance of listed firms, as in this research, listed

banks in Sub-Saharan Africa.

Modern Portfolio Theory (MPT)

Harry Markowitz (1952) postulated this theory in his "Portfolio Selection" journal. In

the 1970s, Black and Scholes developed the theory and offered commercial banks a way to

diversify their portfolios (loans and investments). The MPT theory postulates how risk-averse

investors could create portfolios to capitalize on expected market returns based on a

particular standard of market-wide uncertainty (Markowitz, 1952). Chimkono (2016) agree

that modern portfolio theory is a relevant theory in financial institutions performance studies

since an attractive portfolio derives from assets quality. Additionally, the possibility of

getting maximum returns depends on the practical classes of assets and liabilities classified

by management and banks' unit cost paid in the creation of each asset factor.

The MPT defines risk as the improbability of returns and applies a standard statistical

approach (variance and standard deviation) in measuring the correlation between risk and

return (Markowitz, 1952). The theory argues that an investor may create portfolios to

improve expected returns with a defined market-wide uncertainty level and denotes that risk

is intrinsic aspects of superior return (Markowitz, 1950). In that case, it is possible to create

an efficient frontier of ideal portfolios, contributing the highest probable returns at a given

risk rate. The theory does not support investing in a single stock; instead, the theory supports

diversification. The analysis will adopt a multiple linear regression framework to study the

role of macroeconomic elements on performance of registered financial institutions in sub-

Saharan Africa. The MPT underline the dependent variable: Financial performance, in a

sense, that if banks investors develop ideal portfolios and diversify their assets, they will

maximize returns, hence financial performance.

Empirical Literature Review

Role Of Macroeconomic Variables On Bank Performance 15

The study will be carried out in five countries in the sub-Saharan region to examine

macroeconomic variables' role on listed banks' financial performance.

Guruswamy and Hedo (2014) examined the influence of macroeconomic aspects on

Ethiopian commercial financial institutions performance using balanced panel information

between 2002 and 2013. The finding showed that exchange proportion and GDP have a

constructive and substantial effect on banks' productivity, while exterior public debt had a

negative and weighty effect on bank profitability. However, there was no significant

correlation between interest ratio, export level, import, level of inflation and money stock

with banks' profitability in Ethiopia.

Kakwa (2014) analyzed primary determinants of the performance of Ghanaian banks.

Examining elements such as money supply, size of the firm and inflation, the firm's size was

the predictable variable while bank performance was the criterion variable. The results

showed that inflation had an immaterial but positive influence on performance. Kiganda

(2014) similarly conducted a similar study on macroeconomic factors and the performance of

Kenyan commercial, financial institutions. Equity bank was the study element. Annual

records were used in the research, which covered the time between 2008 and 2012. The

researcher applied a multiple regression model where the findings showed that inflation has

an insignificant positive effect on banks' profitability, Equity Bank Limited.

Gado (2015) analyzed the weight of macroeconomic elements on performance in

Nigeria. The model included 20 highest capitalized firms that employed ordinary least

squares and association. The finding displayed that jointly the macroeconomic aspects have a

substantial and positive effect on profitability. Government spending and inflation yield a

positive effect, whereas exchange and interest level yield a negative influence. Yakubu

(2016) carried a similar study by examining bank-specific and external variables on the

Ghanaian commercial banks' profitability. The data collected from yearly financial statements
Role Of Macroeconomic Variables On Bank Performance 16

of five commercial institutions from 2010 to 2015 was analyzed using the ordinary least

square regression. The empirical findings showed that bank capitalization, liquidity, assets

sufficiency, management of assets, expense control and interest rate correlate with viability.

GDP growth and inflation level have an adverse correlation with profitability. However, the

only size of the bank, liquidity and expense management had a major positive influence on

the viability of commercial banks.

Saona (2016) studied the profitability determinants of Latin American banks using

seven nations between 1995 and 2012. The study found significant correlations linking bank

profitability, namely, a negative U-shape connection between bank capital proportion and

performance, a positive correlation between asset divergence, market concentration and bank

performance. Islam and Nishiyama (2016) conducted the same research using South Asian

nations. The research examined the institution-specific, sector-specific and precise external

factors of 259 banks in South Asian nations between 1997 and 2012. The study concluded

that financial liquidity, managerial success, and inflation positively impact the banks'

profitability while the cost of capital, funding gap, interest rate term structure, and economic

expansion negatively influence profitability.

Combey and Togbenou (2017) conducted research investigating short term and long

term connection amid three significant macroeconomic variables; GDP, actual exchange rate

and level of inflation and banking industry viability in Togo from 2006 to 2015. The return

on assets and return on equity were used in measuring the banking sector productivity. The

study also used the Pool Mean Group predictor. The findings show that banks' yield on assets

and yield on equity have no relationship with macroeconomic variables in the short term.

However, banks' return on assets is determined significantly by bank capital to asset

proportion and bank volume, while the return on equity of banks is influenced negatively by

the same ratio. Nevertheless, in the long term, real gross domestic product growth and real
Role Of Macroeconomic Variables On Bank Performance 17

practical exchange rate impact adversely and significantly bank assets return, while inflation

has zero impact. Regarding banks return on equity, in the long term, findings show that the

actual GDP development, actual exchange rate, and inflation negatively influence the ROE of

the banks'.

Owolabi (2017) analyzed the correlation between commercial traits and profitability

in Nigeria. The commercial factors included government spending, inflation level, interest

proportion and exchange ratio. The study sample encompassed 31 production companies

registered at the Nigeria Securities Exchange, and the review covered the period between

2010 and 2014. The outcomes indicate no significant influence of government spending,

inflation, interest rate and exchange ratio on earning per share and ROA. However, the

interest level significantly affected return on equity (ROE), while government spending,

commodity price increase, amount of interest, and exchange rate significantly impacted

Tobin's Q.

Conceptual Framework

Adom and Emad (2018) define the conceptual framework as a succinct display of

variables under analysis supplemented with a picture-graphical image of independent and

dependent variables under inquiry. It is a pictorial illustration showing the association

between dependent and independent factors, and it is the researcher's interpretation of how

the research will be done (Adom and Emad, 2018). Variables measure factors that assume

different figures among objects and are primarily dependent and independent elements. The

following is the conceptual framework that will guide this research.

Role Of Macroeconomic Variables On Bank Performance 18

Independent Variables-Macroeconomic Variables Dependent

variable
Gross domestic product
 GDP Per Capita

Inflation Rate
 Annual ordinary inflation rate

 Consumer Price Index

Bank Performance
Exchange Rate
 ROA
 USD/
 ROE

 TOBIN’S Q

Money Supply
 Broad Money Supply M2

Interest rate
 Annual Real Interest rates
(Central Bank Rate)

Summary of Gaps

After examining the literature reviews on macroeconomic variables role on bank

profitability, it is evident that different studies have been conducted studying different

macroeconomic factors concerning the performance of various sectors. The macroeconomic

factors include interest rate, exchange rate, inflation, GDP, and money supply, among many
Role Of Macroeconomic Variables On Bank Performance 19

others. The findings for these studies have been distinct. The empirical findings display that

the correlation among macroeconomic factors and performance can either be statistically

positive, adversely significant or none whatsoever. For instance, the results of the research

conducted by Combey and Togbenou (2017) showed that returns on both assets and equity

have no connection with GDP, real interest rate, exchange rate and inflation in the short run.

Nevertheless, research conducted by Islam and Nashiyama (2016) examining bank-specific

and macroeconomic specific determinants found that inflation, financial liquidity, and

managerial aspects positively affected profitability, while interest rate and economic growth

negatively affected bank profitability. In that case, it is evident that the research on the role of

macroeconomic factors on bank profitability in the sub-Saharan region is scanty, and most

studies on this topic give conflicting results. Therefore, this research seeks to contribute to the

discussion by reducing the indecisive rift on the role of macroeconomic variables on bank

profitability in sub-Saharan regions and make recommendations on appropriate policies that

will help improve performance.

CHAPTER THREE

This chapter highlights comprehensive information on the study design, population

and sample size, sampling procedure, information collection and instruments, variables

description and measurement, model specification, data analysis and ethical considerations.

Research Design

According to Cooper and Schindler (2014), a research design covers a background

from which target population, sample size and research approaches are chosen. The general

approach and structure help the researcher solve the research hypotheses; it is seen as the

study's blueprint (Akhtar, 2016). In this case, the research will adopt a descriptive research

design. The approach will enable the application of descriptive statistics and the multiple

linear regression framework developments, which will be used to conduct the research.
Role Of Macroeconomic Variables On Bank Performance 20

Target Population

Umair (2018) defines population as the whole group of attention that the researcher

desires to analyze. It refers to explicitly defined aspects, service, individuals, objects or

households under research (Umair, 2018). The study's target population will comprise five

(6) listed banks from sub-Saharan Africa, Nigeria, Botswana, Ethiopia, Ghana, South Africa,

and Kenya for four years between 2017 and 2020.

Sample Size and Sampling Technique

The study will focus on listed banks, each from Nigeria, Botswana, Ethiopia, Ghana, South

Africa and Kenya. The research will employ a non-probability sampling variant, namely, the

purposive sampling method.

List of Banks to Be Used in the Present Research.

Country Name of the bank

Nigeria First Bank of Nigeria

Ghana GCB Bank limited
Ethiopia Dashen Bank Limited
Kenya Equity Bank Limited
South Africa Standard Bank Group Limited
Botswana Standard Chartered Bank

Limited

Data

The research will employ secondary information. They are explained as information

formerly acquired for purposes other than the current research. The research will utilize

yearly financial statements of these banks, such as the declaration of financial position,

income statement of the designated banks for 2017-2020. Secondary information for

economic variables will be sourced from each country's statistical bulletin.

Role Of Macroeconomic Variables On Bank Performance 21

Variable Description and Measurement

Independent variables

Yearly GDP Growth

It is a measure of the number of financial operations in a financial year. It is also the value-

added and duties by all citizens in the country minus endowment not contained within the

charge of commodities (Word development indicators, 2012). For this research, the GDP

indicator for the period 2017-2020 will be GDP Per Capita and will be measured in

percentage form.

Interest rate

The actual rate of interest is determined after inflation adjustment. According to Obillo

(2014), when interest rates rise or reduce, it affects bank performance through fluctuation in

revenue. The Treasury bill (T-bill) central bank rate for each country will be applied in this

research, and it will be measured in percentages form.

Inflation

The Consumer Price Index (CPI) will apply in measuring the yearly inflation proportion.

Inflation impacts both returns and costs. It also influences essential variables such as labour

cost and price of assets. It will be measured in ratio form.

Exchange rate

According to World Development Indicators (2012), the exchange level or the rate proposed

in the legitimately formal exchange market is set by the national administration. Therefore,

the regular yearly U.S. dollar to the respective currencies of each country will be applied in

this research in percentage form.

Money supply

This is the amount of money is circulating in any given economy. The study will use the

broad money supply (M2), measured by growth in money supply in percentages.

Role Of Macroeconomic Variables On Bank Performance 22

Model Specification

The research will apply a multiple linear regression model in analyzing the role of

macroeconomic elements on the performance of listed financial institutions in the sub-

Saharan region. The dependent variable is bank performance, while macroeconomic factors

(GDP, inflation, interest rate, money supply and exchange rate) are the independent variables.

The analytical framework to be applied in analyzing this relationship will be:

Y= α+β1Z1+β2Z2+β3Z3+β4Z4+ β4Z4 + ε

In this case:

Y= Performance of listed banks indicated by ROE, ROA and TOBIN'S Q

α- is the regression equation intercept

βi = Is the Beta Coefficient of variable i (the slope of regression)

Z1 = Gross domestic product measured by GDP Per Capita

Z2 = Inflation rate measured by CPI natural logarithm annually

Z3 = Exchange rate measured by exchange rate natural logarithm between USD and currency

of respective countries annually

Z4 = Money Supply measured by broad money supply change

Z5 = Interest rate measured by annual central bank lending rate

ε = Error term

Data analysis

The collected data will be examined for completeness and later coded and tabulated. It

will be evaluated by applying descriptive statistics, correlation and regression exploration.

The research will use the Statistical Package for Social Sciences for data analysis. The study

will entail the computation of different correlation coefficients in the regression model to

determine the correlation amid macroeconomic variables and bank performance in the sub-

Saharan region.
Role Of Macroeconomic Variables On Bank Performance 23

Ethical considerations

Research ethics are defined as basics and standards that should be followed before,

during and after a study (Mugenda & Mugenda, 2013). The researcher will ensure that data

extracted from different sources will not be used for any other purpose besides this research.

CHAPTER FOUR: RESULTS AND DISCUSSIONS

1.0 Introduction

The importance of this chapter cannot be underscored. The primary goal of any

research is to present comprehensive answers- that are backed by empirical evidence- to

the research questions. Therefore, this section will present findings from the secondary

data that was used as the core source of information for this paper. With the preliminary

analyses of the data in place, the information will be used to present detailed discussions

regarding the different objectives of this research paper.

1.1 Preliminary Analyses of Data

This study will focus mostly on the secondary data collected from previous

research and financial statements from the banks under study. Geographically, the study

will use banks that are located within Sub-Saharan Africa. These banks include Nigeria

First Bank of Nigeria, Ghana GCB Bank limited, Ethiopia, Dashen Bank Limited, Kenya

Equity Bank Limited, South Africa Standard Bank Group Limited, and the Botswana

Standard Chartered Bank Limited. With these banks in place, the research will use their

annual financial statements like the income statements and the financial statements

between 2017 and 2020. In line with the research objectives, the study will focus on

macroeconomic variables like the gross domestic product, inflation, the exchange rate,

money supply, and interest rates.

Table 4.1 The Correlation Matrix on how macroeconomic factors affect banking
Role Of Macroeconomic Variables On Bank Performance 24

Money supply 1
Interest Rates .322** 1
Exchange .547** .325** 1
rates
GDP .528** .445** .418** 1
Inflation .583** .445** .448** .750** 1
Table 4.2 : Regression analysis
Model R R square Adjusted Std. Change Statistics
R Square F Change Dfl
R square Error of
Change
the
estimate
1 . 844a .715 .614 .524 .715 154.289 3

1.2 The effect of the gross domestic product on bank performance of listed banks in

Sub-Saharan Africa.

The Gross Domestic Product is a vital macroeconomic measure that evaluates the

performance of the banking sector in developing economies that have been covered in this

research paper. In its basic form, the GDP encompasses the aggregated market value of the

services and products transacted within the national borders of a given country. The banking

sectors in countries like Kenya form cover one of the biggest shares of the country's GDP- it

being a growing economy. According to Mwangi (2013), the performance of the GDP is

directly proportional to the performance of the banking sector. Therefore, it can be

inferentially assumed that while the performance of the banks is a factor of the GDP, the

GDP can also be used as a chief indicator of how the sector is performing.
Role Of Macroeconomic Variables On Bank Performance 25

1.3 The impact of inflation on bank performance of listed banks in Sub-Saharan Africa.

Inflation also has a direct impact on the performance of banks in the Sub-Sharan

region. According to Jhignan (2002), inflation is a macroeconomic effect characterized by the

overall hike in the prices of commodities, services, and financial instruments. Ideally,

inflation encompasses the fluctuations around the traditional values pegged to the consumer

price index (CPI). Ergo, the inflation within a given defined economic system can be

measured effectively through the GDP deflator- defined by the overall inflation index - or the

CPI indicator characterized by the fluctuation around various market commodities. In their

operation capacity, banks like Equity Bank that operates in Kenya and Rwanda, offer services

that can be quantified economically through the CPI variables. In Kenya, for instance,

financial statements for Equity bank in the financial periods between 2017 and 2020 have

shown direct proportionality to the country's annual CPI. Any robust rise in the CPI is a likely

pointer to the possibility of an inflated economy. An increase in the CPI is inversely

proportional to the behaviours of the GDP.

Role Of Macroeconomic Variables On Bank Performance 26

1.4 The influence of exchange rate on bank performance of listed banks in Sub Saharan

Africa.

Contextually, Harvey (2012) defines the exchange rate as the proportion between the

values of two different approved currencies. The respective Central Banks in Kenya (Kenya

Equity Bank Limited), South Africa (South Africa Standard Bank Group Limited), and

Botswana (Botswana Standard Chartered Bank Limited) usually determine a fixed

exchange rate. While the rate is usually fixed, the fluctuations are attributed to the

market forces of demand and supply, which is in tandem with the propositions by The

Economic Times (2017). For instance, in the case of the Ethiopian Dashen Bank Limited,

the net stock market earnings in the last quarter of the 2018 financial year showed a
Role Of Macroeconomic Variables On Bank Performance 27

noticeable impact on the stock market earnings by the fluctuations in the foreign

exchange rate.

1.5 The impact of money supply on bank performance of listed banks in Sub-Saharan

Africa.

The Economic Times (2017) defines the money supply as a macroeconomic aggregate

that covers the stock of legal tender transacted within an economy. To understand the money

supply better, one has to factor in the value of the printed bills, the value of the credit
Role Of Macroeconomic Variables On Bank Performance 28

accounts, and the liquid assets. As a macroeconomic variable, the money supply is essential

in informing the decisions by financial institutions in tandem with the policy changes effected

by the Central Banks. In Ethiopia, for instance, the Ethiopian Central Bank uses the defined

fiscal aggregates to public the money supply information. With such information in place,

banks' overall deposit capacities are typically informed by the M1, M2, and M3 (constricted

money, broad money supply, and extensive money, respectively). As such, it is inferentially

clear that the amount of money supply reported by the different Central Banks will define the

performance and decisions made by banks in their different capacities within the

macroeconomy.
Role Of Macroeconomic Variables On Bank Performance 29

1.6 The influence of actual interest rates on bank performance of listed banks in Sub-

Saharan Africa.

According to Ngugi (2001), interest is the extra amount that a given lenders levies on

the borrower as compensation or profit on top of the principal. From a deeper

macroeconomic perspective, the interest reflects the monetary cost pegged to the potential

market information relating to fluctuations in the buying power of money and the predicted

inflation or recession. According to Murungi (2014), the interest rates, on the other hand,

encompasses the distribution of capital over a given period. Any increase in interest rate

results in discouraged borrowing while the decrease in interest rate yields an increased

demand for capital. With a high-interest rate, the banks increase their reserves since more

people prefer saving to borrowing. Ergo, the regulation and the fluctuation of the interest

rates influence the movement of money within a given economy. As a remedial measure, the

Kenyan Central Bank in 2017 adjusted the interest rate to cushion the country from the

inflation effects typical of any election year in the country. Ergo, people tend to save more,

hence the increased reserve values reported by Equity Bank Limited during that period.

1.7 Chapter Summary

Role Of Macroeconomic Variables On Bank Performance 30

This chapter has presented sufficient evidence on how macroeconomic factors

affect the performance of banks within Sub-Saharan Africa. Ideally, different

macroeconomic factors tend to affect the performance of banks differently. Interest rates,

for instance, dictate the reserve levels held by banks or the amount that is issued out

through loans. When a given bank needs to offset its surplus reserves, it will

significantly lower the interests to attract more borrowers. On the other hand, inflation

increases the supply of money in the economy, something that will affect the operations

as well as the decisions made by bankers. The exchange rate also dictates the profits or

losses that the banks make. Ideally, the fluctuations in the exchange rate are key in the

computation of whether the banks can make profits while dealing with the different

currencies.
Role Of Macroeconomic Variables On Bank Performance 31

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