Drivers of financial stability gap: evidence from sub-Saharan Africa

Abstract

Purpose As an effort to support the quest for a stable financial sector, this study aims to determine the factors that contribute to the financial stability gap in sub-Saharan Africa (SSA). Design/methodology/approach The estimation techniques used include the fixed and random effect, system general methods of moments and dominance analysis. The data used is annual data for 33 SSA countries, covering the period 2007 to 2018. Findings Key findings from the analyses indicate that nonperforming loans increase gaps in financial stability while regulatory quality, control of corruption, political stability and appreciation of the local currency reduce the financial stability gap in SSA. Research limitations/implications The absence of a specific metric for measuring the financial stability gap appears to be the limitation of this study. Its existence could improve the discussion and also make replicability easier. However, this study relies on a measure introduced by Kulu et al. (2022b), which is also acceptable and quite popular in the literature. Originality/value To the best of the authors’ knowledge, this study is the first in the finance literature to estimate the determinants of the financial stability gap in SSA.