Analysis of bank financial performance: The case of Pan-African Banks in the DRC

Abstract

This study aims to identify the factors explaining the financial performance of pan-African banks through accounting and economic analyses. African economic communities, particularly the WAEMU, SADC, EAC, and Central Africa are striving for sustainable development, which depends on the stability of their financial systems. Given that pan-African banks operate in a context marked by regional integration, financial globalization, and recurring crises, notably the subprime mortgage crisis (2007-2008). The strong interconnectedness with the international financial system exposes African banks to systemic risks, making financial stability not only necessary but imperative. In this context, bank profitability is a key lever for resilience, enabling the strengthening of equity capital, the absorption of shocks, and the ensuring the sustainability of credit institutions. Subject to international prudential standards (Basel I, II, and III), digital transformation, and competition from fintechs due to digital transformation, pan-African banks musts optimize their performance. The top four of the subgroups of pan-Africa banks (strata), operating in the DRC and drawn from the entire set of Congolese banks, constitute the sample for this study.

The better exploit  the richness of our data, combining temporal and cross-sectional dimensions, we used econometric approaches know as :Basic linear models, which, on the one hand, allow us to control for unobservable characteristics specific to each pan-African bank that do not vary over time (Fixed Effects, FE), and on the other hand, consider  that the differences in financial performance between banks are random and uncorrelated with explanatory variables (Random Effects, RE). The Hausman correction (or specification) method was used in choosing the fixed effects model and the random effects models, to verify whether the individual effects are correlated with the explanatory variables.

After data analysis, the Hausman specification test revealed that the fixed effects model is appropriate for the study data the fixed-effects model estimation indicates that the return on equity (ROE) ratio and the asset turnover ratio positively influence the financial performance (ROE) of pan-African banks in the RDC, while the capital adequacy ratio has no significant influence on their financial performance. Notwithstanding these two significant factors, it is important to demonstrate the influence of unobservable characteristics that contribute to the improved financial performance of pan-African banks. These characteristics do exist and are specific to each bank in the within this stratum. They can be identified by each bank’s governance model, its portfolio management model in terms of credit policies, its level of intervention in financial markets, its position in the interbank market, it its risk management practices, and so on.

Practical Implications: The research findings suggest that governments and authorities recommend that pan-African banks increase their regulatory capital to improve their solvency levels and improve their credit allocation to reduce Credit risk.

JEL Classification : G2 ; G21 ; G24 ; G28 ; G32 ; G38.

Paper type: Empirical Research.