Department of Banking and Finance
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Item Economic freedom, competition and bank stability in Sub Saharan Africa(International Journal of Productivity and Performance Management, 2020) Sarpong-Kumankoma, E.; Abor, J.Y.; Aboagye, A.Q.Q.; Amidu, M.Purpose – This study aims to analyze the potential implications of economic freedom and competition for bank stability. Design/methodology/approach – Using system generalized method of moments and data from 139 banks across 11 Sub-Saharan African (SSA) countries during the period 2006–2012, this study considers whether the degree of economic freedom affects the relationship between competition and bank stability. Findings – The results show evidence of the competition-fragility hypothesis in SSA banking but suggest that beyond a setting threshold, market power increases may also damage bank stability. Financial freedom hurts bank stability, implying that banks operating in environments with greater financial freedom generally tend to be less stable or more risky. The authors also find evidence of a conditional effect of economic freedom on the competition–stability relationship, implying that bank failure is more likely to occur in countries with greater economic freedom but low competition in the banking sector. Practical implications – The results suggest to policymakers that a moderate level of competition and economic freedom may be the appropriate policy to ensure the stability of banks. Originality/value – The study provides insight into the competition–bank stability relationship, by providing new empirical evidence on the effect of economic freedom, which has not been previously considered.Item Prospects and Feasibility of Diaspora Bond: The Case of Ghana(International Journal of Financial Research, 2019) Mensah, L.This study sought to establish the rationale, feasibility, conditions, determinants, and hindrances of a successful issuance of a diaspora bond by Ghana as a sovereign economic entity. The study also sought to assess the willingness of the Ghanaian diaspora to patronize a diaspora bond. A total of 12 financial institutions within Accra and 113 Ghanaians living in the diaspora were contacted using the purposive sampling method. The study finds that Ghana has patriotic citizens in the diaspora who are ready to patronize its diaspora bonds. It was also found that prospective investors of Ghana‟s diaspora bond find GDP growth and political stability as the most favorable indicators in pulling investors. The study concludes that though internal weaknesses and external threats exist, Ghana stands a good chance for a successful diaspora bond issue with an anticipated high patronage by Ghanaians in the diaspora.Item Drivers of income inequality in Africa: Does institutional quality matter?(African Development Review, 2020) Kunawotor, M.E.; Bokpin, G.A.; Barnor, C.This paper examines the role institutional quality plays among the empirical drivers of income inequality in Africa. Using a dynamic two‐step difference GMM with robust standard errors over the period 1990–2017, we find no statistically significant effect of institutions in general, on income inequality. However, we find that institutional quality indicators such as control of corruption and the strict enforcement of the rule of law significantly reduce income inequality. We also find no statistically significant effects of the other institutional quality indicators such as government effectiveness, voice and accountability, regulatory quality, and political stability on income inequality in our sample. We suggest that more premium be placed on corruption control and the stringent adherence to the rule of law in ensuring equitable distribution of income in Africa. Furthermore, we re‐echo suggestions that promote institutional development in Africa as institutions in general remain very weak.Item Experiences of COVID-19 in Africa(Nature Human Behaviour, 2021) Asuming, P.O.Timely information for understanding the socioeconomic impact of COVID-19 in low-income countries is very limited. A recent paper by Josephson, Kilic, and Michler reveals large and disproportionate socioeconomic impacts of the pandemic and provides useful insights to inform an appropriate policy response.Item Fiscal & Monetary Policies, Climate Change And Income Inequality In Africa(University Of Ghana, 2022-12) Kunawotor, M.E.This study is an essay on fiscal policy, monetary policy, climate change and income inequality in Africa. The study covers 52 African countries over the period 1990 – 2017. The aim of the first empirical paper is to investigate the effects of temperature change and extreme weather events on fiscal balance in Africa and their implications for fiscal policy formulation. It also investigates the extent to which institutions and adaptive capacity moderate the impacts of extreme weather events and temperature change on fiscal balance. This paper uses the System Generalized Method of Moments, Fixed Effects and Random Effects estimation strategies. The results show that temperature change anomaly which implies a warmer climate in a meteorological year worsens fiscal balance in Africa. The findings also reveal that weather-related events may have a significant negative impact on fiscal balance, if the damage caused is large and consequential. Furthermore, African countries that have relatively strong institutions and adaptive capacities tend to moderate the impact of temperature change anomaly and extreme weather events on fiscal balance. The policy implications of this paper is that the frequent incidence of climatic disruptions and extreme weather events which are considered external shocks, may make the fiscal consolidation efforts and debt sustainability measures of some African governments a little more difficult. The second empirical paper examines the direct effect of extreme weather events on headline inflation and food price inflation. It further investigates if agricultural production empirically serves as a conduit through which extreme weather events impact inflation. This paper uses a two-step system Generalized Method of Moments estimation technique with robust standard errors and Panel VECM and finds that weather-related events may need to occur on a large scale or be extreme to cause a significant price hike in Africa. There is also a bi-directional causality between inflation and extreme weather events in the long run. It also finds that the incidence of droughts and floods leads to a rise in food price inflation. Furthermore, the results reveal that agricultural production serves as a perfect mediator through which extreme weather events affect headline inflation. The policy implication of this paper is that monetary policy authorities may need to consider the implications of supply shocks caused by extreme weather events on general price levels. Also, anchoring inflation expectations should be a drive of policy makers as both headline inflation and food inflation appear quite persistent in Africa. The third empirical paper investigates the effects of weather events and the various types, on income inequality in Africa. It also investigates the impacts that institutions and adaptive capacity play in moderating the impact of weather events on income inequality. Furthermore, it investigates if agricultural productivity mediates the impacts that weather events has on income inequality. The findings using the difference Generalized Method of Moments estimator reveal a non-monotonic U-shape relationship between weather events and income inequality. The result using a simultaneous quantile regression approach shows that weather events increase income inequality at the 10th, 25th, 50th and 75th percent quantiles. In terms of the weather events types, the paper also finds a non-monotonic U-shape relationship between flood and income inequality. Furthermore, institutions tend to moderate the impacts weather events has on income inequality. The results however, shows that there is no statistically significant mediating role of agricultural productivity on the weather events and income inequality nexus. Again, the result appears statistically insignificant on the moderating role adaptive capacity plays in the weather – income inequality nexus. The policy implication is that income inequality concerns should not be ignored in the global climate change discussions. Also, African countries need to strengthen their institutions and adaptive capacities as they remain very weak in the continent. The fourth and final empirical paper examines the distributional effects of both fiscal and monetary policies in Africa. This paper deploys the two-step dynamic system GMM, the simultaneous quantile regression technique and Panel VAR and also uses variants of fiscal and monetary indicators including fiscal redistribution. The results show that fiscal redistribution has been quite effective in Africa as reflected in the role played by income taxes and transfers in reducing Gini coefficients albeit to a relatively little extent. The result shows that direct tax is progressive and a potent tool in redistributing income in favour of the have-nots while indirect tax unsurprisingly is regressive and income un-equalizing. Similarly, the paper finds property taxes to have income un-equalizing effects in Africa. The results of the expenditure indicators reveal that government spending on basic and primary education narrows net income inequality while government spending on secondary and tertiary education rather widens net income inequality. Also, the result show that contractionary monetary policy has unintended distributional effects in Africa. The policy implication of this paper is that African governments need to broaden their tax net, increase the share of direct tax including property tax in the tax net and spend more on basic education to improve income distribution in Africa.Item Renewable Energy Diffusion In Ghana: Investment Decision Making Strategies Under Uncertainty(University Of Ghana, 2021-09) Ofori, C.G.Climate change and energy sustainability concerns have spurred renewed interest in the transitioning from fossil fuels to cleaner sources of energy generation, of which renewable energy generation plays an important role. However, the conversation surrounding renewable energy integration goes beyond environmental considerations to include other factors, such as ensuring profitability and increased investment. Renewable energy integration requires substantial buy-in from governments, investors, and businesses, particularly Small and Medium Scale Enterprises. However, securing the buy-in from these stakeholders, especially investors and businesses, requires that a business case be made for them in an environment riddled with uncertainties. Also, creating value within the uncertain environment requires investment decisions regarding the context-specific issues that could aid or offset profitability and the potential for renewable energy integration. This thesis seeks to provide decision-making strategies for large-scale and small-scale renewable energy investments in uncertain environments. Three independent studies are carried out with specific objectives that seek to achieve the overall aim of the study. The first study analyses the value of delaying utility-scale renewable energy investments. The second study analyses the costsaving potential for SMEs to switch to renewable energy technologies. Lastly, the third study presents a cost minimisation model for renewable energy investments while providing approaches towards financing same. Using real options models and linear programming models, the study outlines several findings that have implications for research, policy and investment decisions. The studies have varying implications for businesses in providing investment strategies for utility-scale and small-scale renewable energy investment. It also contributes largely to the pool of literature on renewable energy and investments using rigorous methodological approaches that consider inherent uncertainties in the business environment. First, there is value in delaying utility-scale renewable energy investments until the uncertainties are relaxed. However, delaying investments have opportunity costs and must be matched with the gains in delays to create an optimal investment timing point that maximises the option value for investors. Other factors that affect the option value for renewable energy investments include the volatility resulting from the upside potential of the investments. Also, governments are required to create an environment that increases the demand for renewable energy technologies. Second, SMEs obtain significant value when they replace, either wholly or partially, conventional energy supply sources with renewable energy technologies. This replacement allows for renewable energy technologies to be counted as part of the primary energy sources for the SME. However, SMEs do not obtain significant investment value when renewable energy technologies are used only for backup energy supply. SMEs are also required to consider the capacity factor of renewable energy technologies, tariffs for conventional power supply, system reliability of conventional systems and the investment costs for renewable energy generation as essential factors for renewable energy investments. Third, SMEs can finance their capacity expansion and renewable energy integration plans through debt financing amortised using savings they obtain when they use renewable energy technologies. However, considering the investment options, the study results show that in situations where savings from conventional tariffs are not enough to meet required loan repayments, delayed investments could yield substantial value for SMEs. The results further show that investment pooling can prove helpful to SMEs as unionised groups can drive trust from financial institutions. This approach is beneficial for SMEs that work within an industrial enclave.Item Environmental Risk And Foreign Direct Investment: The Role Of Financial Sector Development And Tax Policies(University Of Ghana, 2022-07) Yiadom, E.B.Responding to climate change is at the forefront of policy and research at this crucial moment of the earth’s history. A two-pronged approach has emerged: mitigation and adaptation. This study relates to both the climate mitigation and adaptation strategies to resolving climate change. Specifically, the thesis contributes to the literature by (i) examining the moderating role of financial sector development on the effect of foreign direct investment (FDI) on environmental risk, (ii) decomposing financial sector development into its subcomponents: access, depth and efficiency, and examining the extent to which they aid or prevent foreign direct investment from harming the environment, (iii) exploring whether countries with ‘weak’ or better still low tax rate attract ‘dirty’ FDI to deteriorate their environment, (iv) investigating the impact of carbon tax adoption on foreign direct investment. The study employs standard approaches namely the generalized method of moments (GMM), dynamic panel threshold models, fixed effects, random effects, sample splitting, and partial effects computations to examine the linkages. The results from the various estimation strategies show that, the unmitigated effect of FDI on environmental risk is detrimental. However, FDI conditioned on the local financial sector development minimizes environmental risk. This means that countries that have a well-developed financial sector is able to channel FDI into green projects that improve the quality of the environment. Further, the dynamic panel threshold model reveals that financial development increases environmental risk at low regimes of the threshold but high regimes of financial development have the ability to reduce it. This means that the level of financial sector development matters in accounting for its impact on environmental risk. Therefore, assuming a linear relationship between the two variables could be problematic. This brings clarity to the literature on why some studies report positive effect of financial development on environmental risk and others show negative effect. We further decomposed financial development into its subcomponents to help examine their behaviours and recommend specific policy directions. The findings reveal that financial deepening and efficiency reduce environmental risk and can overturn the negative impact of FDI on the environment. However, financial access worsens environmental risk especially at lower levels and cannot make the FDI – environment nexus any better. But then again, high levels of financial access has the ability to reduce environmental risk. Also, after splitting the dataset into high and low financially developed economies, we report that FDI is more environmentally depressive among low financially developed economies. Third, on the effect of tax policies on the FDI-environmental risk nexus, the study finds support that the tax channel is the main medium through which FDI worsens environmental risk. By discomposing tax policy into low and high regimes, the study reports that countries that deliberately reform tax policy to bait FDI have higher environmental risk. Therefore, using tax policy to lure FDI amount to short-changing capital risk for environmental risk. Finally, We set up the Dynamic Stochastic General Equilibrium (DSGE) model to estimate the effect of carbon tax adoption on FDI. The findings from this exercise show that the direct effect of the carbon tax on FDI is repressive. However, if the revenue from the carbon tax is recycled into the economy, the carbon tax will have a significant positive effect on FDI. Hence, the study corroborates the double dividend theory. The findings further suggest that a carbon tax of around US$8.5/ton is reasonable to enhance inward FDI but a carbon tax either above US$25/ton or below US$3/ton will be detrimental to the African region. Also, the entrenched negative relationship between FDI and taxes is worsened if the additional carbon tax is levied among high tax regime countries than their counterparts. The findings of this thesis churn out several contributions to knowledge and literature. The African context in the environmental economics and carbon tax policies are marginalized in the existing literature. This study opens up the frontiers to the discussions on the implications of carbon tax introduction on the free movement of international capital. As a forerunner on the subject of carbon tax’s effect on FDI in both Africa and the globe, this study offers reasons why many countries have not implemented a carbon tax despite the numerous benefits associated with it. This study also leads the way in advancing that the finance and the tax channels are the yet-to-be explored factors that account for the impact of FDI on the environment. The existing literature associates the negative effect of FDI on the environment with institutional quality. However, institutional quality is broad and encompasses almost everything in the administration of a country. This leaves policymakers helpless as the specific aspect of institutions that can mitigate the harmful environmental effects of FDI. This thesis brings finality to this policy debacle and recommends that retooling tax policies and enhancing financial deepening and efficiency could improve the effect of FDI on the environment. Keywords: environmental risk, foreign direct investment, financial sector development, carbon tax, tax policies, and generalized method of moment.Item Cross-Border Banking And Depositor Market Discipline In Africa(2019-07) Mutala, H.Y.A.This thesis focuses on the effect of cross-border banks on bank risk and market discipline in the presence of explicit deposit insurance and depositor market discipline incentives using a dataset that covers many countries in Africa. Based on different estimation techniques, this thesis provides the following robust results. First, cross-border banks have better: asset quality, liquidity, and diversification mean scores than their domestic counterparts. Simultaneously, cross-border banks also experience higher overhead expenses, higher volatility in earnings, lower capital levels, higher market risk, and lower stability than domestic banks. These findings lend credence to both the diversification hypothesis and market risk hypothesis. Second, cross-border banks operating in countries with explicit deposit insurance arrangements have higher loan loss provision (lower asset quality), a higher standard deviation of return on assets (higher variation in earnings), higher market risk (lower Sharpe ratio), and lower stability (lower Z-score). This study, therefore, reveals a benign form of regulatory arbitrage hypothesis within cross-border banks in Africa. Third, depositor market discipline via the priced based mechanism and the quantity-based mechanism exist in Africa. This evidence supports a complete test for depositor market discipline. This finding is based on robust evidence from the capital adequacy ratio and the ratio of corporate loans to total loans of cross-border banks. Fourth, the study finds that the capital level of cross-border banks serves as an incentive for depositors to monitor the risk of cross-border bank Fifth, the study finds that when depositors monitor and discipline banks for excessive risk-taking, it is strong enough to influence banks to reduce their risk-taking levels among Good Banks. This last evidence supports a true form of test for depositor market discipline in Africa. This study makes the following contributions to the literature: First, to gain new insights into the effect cross-border banking has on bank risk, it makes use of unexamined samples. The evidence the study provides on depositor market discipline within the cross-border banking context is also new in the literature. Lastly, the finding that the capital level of cross-border banks serves as an incentive for depositors to monitor cross-border bank risk, is also new in the literature. This study has revealed the important role depositors can play in the monitoring and policing of cross-border bank risk. The Basel Committee on Banking Supervision and bank regulators should, therefore, take note and put in place structures that will enable depositors to have access to cross-border bank information such as capital level and corporate loan concentration level constantly.Item Cross-Border Banking and Depositor Market Discipline in Africa(University Of Ghana, 2019-07) Mutala, H.Y.A.This thesis focuses on the effect of cross-border banks on bank risk and market discipline in the presence of explicit deposit insurance and depositor market discipline incentives using a dataset that covers many countries in Africa. Based on different estimation techniques, this thesis provides the following robust results. First, cross-border banks have better: asset quality, liquidity, and diversification mean scores than their domestic counterparts. Simultaneously, cross-border banks also experience higher overhead expenses, higher volatility in earnings, lower capital levels, higher market risk, and lower stability than domestic banks. These findings lend credence to both the diversification hypothesis and market risk hypothesis. Second, cross-border banks operating in countries with explicit deposit insurance arrangements have higher loan loss provision (lower asset quality), a higher standard deviation of return on assets (higher variation in earnings), higher market risk (lower Sharpe ratio), and lower stability (lower Z-score). This study, therefore, reveals a benign form of regulatory arbitrage hypothesis within cross-border banks in Africa. Third, depositor market discipline via the priced based mechanism and the quantity-based mechanism exist in Africa. This evidence supports a complete test for depositor market discipline. This finding is based on robust evidence from the capital adequacy ratio and the ratio of corporate loans to total loans of cross-border banks. Fourth, the study finds that the capital level of cross-border banks serves as an incentive for depositors to monitor the risk of cross-border banks. Fifth, the study finds that when depositors monitor and discipline banks for excessive risk-taking, it is strong enough to influence banks to reduce their risk-taking levels among Good Banks. This last evidence supports a true form of test for depositor market discipline in Africa. This study makes the following contributions to the literature: First, to gain new insights into the effect cross-border banking has on bank risk, it makes use of unexamined samples. The evidence the study provides on depositor market discipline within the cross-border banking context is also new in the literature. Lastly, the finding that the capital level of cross-border banks serves as an incentive for depositors to monitor cross-border bank risk, is also new in the literature. This study has revealed the important role depositors can play in the monitoring and policing of cross-border bank risk. The Basel Committee on Banking Supervision and bank regulators should, therefore, take note and put in place structures that will enable depositors to have access to cross-border bank information such as capital level and corporate loan concentration level constantly.Item Bank Governance, Disclosure and Stability: Evidence from Africa(University of Ghana, 2020-10) Boateng, S.S.The Stability of the financial system specifically, the banking sector is of a primary concern for economic management. The features of the financial sector are such that an entity’s failure could easily spill over to endanger the health of an entire economy. This explains the contagion effect of the sector. The weakness in the operations of the banking sector if not checked and controlled, can undermine the effective process of financial intermediation. The destructive macroeconomic externalities as a result of bank fragility underscores the need for financial sector, operating to maximize stakeholders’ interest and not solely for the shareholders. The corporate governance framework of this sector is unique from the non-financial sector hence, making it imperative to examine its uniqueness for banks stability. Further, corporate transparency through information disclosure is deemed relevant for market efficiency yet the banking sector regardless of the high supervision is classified opaque. The financial sector thrives on market trust and confidence since the business of banking is highly risky. Among the factors to influence trust and confidence of the market is the bank’s governance structures and information disclosure policies. This study investigates the effect of bank governance and financial disclosure on stability, and employs bank-level data from 29 African countries over the period 2006-2012. The motivations for the study are; 1- The ramifications of global financial crisis (banking crisis), particular on African economies spurs the debate on bank stability; 2- The aftermath investigations of the banking crisis revealed weak corporate governance and poor disclosure policies yet existing literature offer inconclusive results whereas literature on Africa is dearth hence the study bridges the gap; 3- the study draws attention to the stakeholder theory in bank governance given that the dominated agency theory appears deficient in addressing the governance challenges in the banking sector; and 4– to contribute to knowledge in the area of the bank governance, information disclosure, and stability. To appreciate the Africa financial sector dynamics and to advance knowledge, the study splits the sample into Non-Islamic and Islamic populated and developed and less developed credit market economies. The rationale is to enable comprehensive understanding of bank stability in Africa and its sub-divisions. The objectives for this study are; 1- to empirically examine the effect of internal governance structures on bank stability; 2- to examine the nexus on disclosure- stability; 3 – to investigate the relation between internal governance structures and financial disclosure; and 4- to examine the interactive effect of bank governance and disclosure on stability. This study employs the panel data framework which entails both cross-sectional and time series data to ensure that both time and entity observations are captured. The use of this method certifies reliability in results. For the purpose of the study, annual data is obtained from Bank Scope and World Development Indicators (WDI) databases. Specifically, corporate governance variables as well as bank-specific variables were captured based on data from Bank Scope, whiles data on macroeconomic conditions were obtained from WDI. The study period captures the unique events in the Africa economies. For instance, the shrink in GDP growths from average of 5% in 2007 to 2.8% in 2009, Nigeria banking crisis in 2009, credit contractions witnessed in the 2008-2009, the external shocks from the global financial crisis and also accounts for the effects of the second-generation reforms required for the institutional and structural defects. The empirical results show significant association between internal governance structures and bank stability. The study found a significant positive relation between CEO duality and bank stability as well as board size and bank stability. On the other hand, a significant negative association was established between non-executive board and bank stability as well as board gender and bank stability. The results show that the effect of internal governance structures on stability is not straight forward and had contextual influence. Also, the study found positive and significant relation for bank size, capital and stability. Further, findings show positive support for financial disclosure on bank stability given non-Islamic populated economy and that of developed credit market economies. The results suggest that the effect of financial disclosure on bank stability varies across the different forms of economies employed, making the effect of information disclosure on stability strongly contextual. The third empirical work found non-executive board, female board membership and audit independence supporting financial disclosure significantly. The fourth empirics found a complementary effect between bank governance and disclosure on stability. Whiles, other variables such as management quality, profitability, diversity, sale growth, inflation had adverse effect on bank stability. From the findings, we recommend that, policies be contextualized in line with bank governance and disclosure in relation to stability as the Africa settings is heterogeneous in nature. We further recommend that, in line with the complimentary effect between governance and disclosure, the market can leverage on both internal bank governance structures together with greater disclosure for transparency to promote market discipline and stability. We strongly advocate for punitive sanctions for banks’ board members for going against their fiduciary duties since their performance has influence on bank stability. We also propose strengthen of female board membership to boast their influence on corporate boards. Finally, we recommend that to strengthen bank stability, we need to augment the capital base and increase the size of the banks.
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