The dynamic effect of risk management on financial profitability of banks in Africa: An analytical panel quantile regression method

• Author: Emmanuel Kwaku Manu,Isaac Okyere Paintsil,Wen Xuezhou,Isaac Newton Akowuah,Samuel Gyedu
• Published date: 01 October 2020
• DOI: http://doi.org/10.1002/jcaf.22469
• Date: 01 October 2020

BLIND PEER REVIEW

The dynamic effect of risk management on financial

profitability of banks in Africa: An analytical

panel quantile regression method

Emmanuel Kwaku Manu

1

| Wen Xuezhou

2

| Isaac Okyere Paintsil

1

|

Samuel Gyedu

1

| Isaac Newton Akowuah

1

1

School of Management, Jiangsu

University, Zhenjiang, China

2

School of Finance and economics,

Jiangsu University, Zhenjiang, China

Correspondence

Emmanuel Kwaku Manu, School of

Management, Jiangsu University,

Zhenjiang, China.

Email: emak82589@gmail.com

Wen Xuezhou, School of Business,

Jiangnan University, Wuxi 214122, China.

Email: wen_xuezhou@163.com

Funding information

Research Project of The Social Science

Foundation of Jiangsu Province, Grant/

Award Number: 18GLB012; Universities

of Jiangsu Province, Grant/Award

Number: 2018SJZDA006

Abstract

The main goal of the study is to investigate the integration of financial indica-

tors (bank credit, capital asset, non-performing loans, and liquidity) in the

banking sector can bring macroeconomic benefits to the economies of Africa.

This article highlights the performance of framework employed by Brzoza-

Brzezina and Makarski in a small open economic system with two types of

financial frictions. The dataset comprises 13 banks in Africa for the period

2000–2016. We estimated our model by way of the usage of system GMM

approach and panel quantile regression technique in which the data was

grouped into Northern and Southern Africa. We explore the result of credit

apportionment of Banks in the crisis period for African countries. We confirm

that both groups of variables have significant influence on credit risk.

Although we provide evidence that the marginal effect is stronger for bank

credit and non-performing loans than bank liquidity indicating that in North-

ern Africa countries financial profitability will increase more as a result of

increasing bank credit and non-performing loans than bank liquidity.

KEYWORDS

Bank credit, credit risk management, financial profitability, panel quantile regression,

system GMM

JEL CLASSIFICATION

C58; G20; G28; G29

1|INTRODUCTION

All assumptions, particularly the hypothesis of financial

investment, certainly reveal that there is some connec-

tion among liquidity and credit risk. A developing assort-

ment of writing, particularly after subprime monetary

emergency, underlines the positive connection between

these two dangers (Allen & Carletti, 2008; Cornetta,

McNuttb, Strahanc, & Tehraniand, 2011; Gefang, Koop, &

Potter, 2011; Imbierowicz & Rauch, 2014). Imbierowicz

and Rauch (2014) look at the relationship between liquid-

ity and credit risk in US banks for the time of 1998–2010.

They locate a powerless and positive interrelationship of

liquidity and credit risk utilizing bank explicit measures.

Cornetta et al. (2011) contend that financial emergency

dwindled liquidity from the market. They separate banks

into two classifications: (a) banks, having stores and

value capital money as center wellspring of subsidizing,

Received: 12 March 2020 Revised: 20 July 2020 Accepted: 24 July 2020

DOI: 10.1002/jcaf.22469

J Corp Acct Fin. 2020;31:99–120. wileyonlinelibrary.com/journal/jcaf © 2020 Wiley Periodicals LLC 99

keep on loaning more when contrasted with different

banks and (b) banks, having more illiquid resource,

lessen loaning to expand their liquidity. In conclusion,

banks, in dealing with their liquidity hazard, drive them

to diminish credit supply which brings about diminishing

the credit chance. This likewise shows co-positive devel-

opment of the two dangers.

There are a few examinations breaking down the

effect of liquidity risk on bank security (Almarzoqi,

Naceur, & Scopelliti, 2015; Beck, DemirgüçKunt, &

Merrouche, 2013; Čihák & Hesse, 2010; Cornetta

et al., 2011; Wagner, 2007). Wagner (2007) contends that

liquidity hazard has negative effect on bank steadiness.

Higher fluid resources, at first, improve the security of

the bank and make emergency less exorbitant. Subse-

quently, the bank begins facing challenge to build pro-

ductivity, which off-sets the underlying positive effect

and increment bank unsteadiness. Cornetta et al. (2011)

find that banks, with high illiquid resources, increment

their liquidity and abatement loaning during budgetary

emergency. Almarzoqi et al. (2015) report comparative

finding while Čihák and Hesse (2010) find no connection

between liquidity hazard and solidness for bigger IBs

however huge negative relationship is watched for little

banks.

The worldwide financial emergency has put center

around the difficulty of the universal transmission of

financial stuns through global banks. The essential

inquiry following the emergency was as per the follow-

ing: will the outside banks diminish credit supply in their

host nations in view of the issues in the nations of origin

and their asset reports? Various exact papers confirm the

effect of the macroeconomics in the nation of origin and

parent bank qualities on the credit supply of nations

(Allen, Jackowicz, & Kowalewski, 2013; Arakelyan, 2018;

Cetorelli & Goldberg, 2012; de Haas & Horen, 2013; de

Haas, Korniyenko, Pivovarsky, & Loukoianova, 2012; de

Haas et al., 2014; de Haas, Korniyenko, Pivovarsky, &

Tsankova, 2014; Ongena, Peydro, & van Horen, 2013;

Popov & Udell, 2012; Temesvary & Banai, 2017). Profit-

ability and liquidity from parent bank specifics and GDP

development from home macroeconomics were identified

as the primary determinants of credit supply in have

nations.

The capability of the market for financial branches

for use in administration stays hidden. Constrained risk

the managers leaves financial grounds, firms, and fami-

lies more presented to stuns than they could be and is

apparently a key factor in financial emergencies. Why

the increases from utilizing exchanged protections for

risk the board are abused to such a restricted degree stays

a focal open inquiry. To address this inquiry, we study

the determinants of hazard the board in the

quantitatively biggest market for such instruments the

loan fee subsidiaries advertise in which the principal

members are financial organizations. We center on the

financial mediator area for a few reasons. To start with,

despite a lot of discussion about bank chance administra-

tion and its disappointment during the financial emer-

gency, even the essential examples of hazard the

executives in financial foundations are not known and its

fundamental determinants are not surely known. Second,

financial organizations assume a key job in the full-scale

economy and for the transmission of fiscal arrangement.

Understanding their introduction to loan costs stuns and

the degree to which they do or do not support these expo-

sures is consequently basic for money related and full-

scale prudential arrangement. Third, financial delegates

are the biggest clients of subsidiaries, estimated as far as

gross notional exposures, and loan cost subordinates

include the heft of such exposures.

Simultaneously, banks’non-performing loans (NPLs), in

many nations expanded significantly, and specialists began

to research the determinants of NPLs. The consequences of

observational examinations confirm the presence of three

gatherings of determinants of credit hazard: bank-specific,

bank industry-specific and macroeconomic (Agoraki,

Delis, & Pasiouras, 2011; Bock & Demyanets, 2012;

Jakubík & Reininger, 2013; Skarica, 2014; Tanaskovi

c&

Jandri

c, 2015). Regardless of the developing writing on the

job of remote banks in the credit supply in many nations

and determinants of NPLs, inquire about that considers the

credit danger of outside banks has been uncommon

(Geršl, 2007; Haselmann & Wachtel, 2007; Havrylchyk &

Jurzyk, 2011). Their general decision is that outside banks

have lower NPL levels. To experimentally explore our explo-

ration question, we developed an informational index that

covers a board of 13 nations and their parent banks in

Africa. Past research in many nations has considered three

gatherings of credit chance factors: bank-specific, macroeco-

nomic determinants, and bank industry-specific determi-

nants. We assessed our model by utilizing board PVAR and

board quantile technique where the informational collection

was group into Northern Africa and Southern Africa.

Our paper adds to the existing literature in some

stages.

First, we exalted the literature regarding credit risk in

African countries. To the best of our knowledge, this is

first research that considered new groups of variables for

country-owned banks in Africa: parent bank specifics

and the macroeconomics of the parent bank. However,

several previous studies tried to investigate the role of for-

eign bank ownership (Agoraki et al., 2011; Cerutti, Ilyina,

Makarova, & Schmieder, 2010; Drakos, Kouretas, &

Tsoumas, 2016; Maechler, Mitra, & Worrell, 2007; Män-

nasoo & Mayes, 2009; Uiboupin, 2005) by including the

100 MANU ET AL.