ABSTRACT

This study assesses the determinants of banking system efficiency in sub-Saharan Africa (SSA) and asks what, besides the degree of efficiency, explains the low level of financial development in the region. It uses stochastic frontier analysis to measure efficiency and a generalized method of moments system to explain financial development. SSA banks are found to be generally cost-efficient, with some differences across sub-regions. Among the determinants of efficiency, Return On Equity and non performing loans seem to have a negative impact, highlighting the problem of moral hazard faced by banks and the weakness of the judicial and legal environment in enforcing credit contracts. Financial development in SSA could be improved by better macroeconomic stabilization policy and a more competitive banking sector.