Financial Market Development and Bank Capitalization Ratio: Evidence from Developing Countries
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Date
2017
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Volume Title
Publisher
Sage Journals
Abstract
Financial sector liberalization in many African countries, set in a series of financial sector reforms,
aimed at developing the system. Theoretically, reforms that develop the banking sector are expected
to improve banks’ performance and reduce excessive bank-risk taking by enhancing bank capital ratio
in addition to maintain the stability in the system. Nonetheless, literature also shows that the health of
the financial system may be at risk following a liberalization process in the form of contagion effects of
financial markets integration. A recent example is the global 2007/2008 global financial crisis. Against
this background, this article examines the extent to which banking sector development in selected
African countries affect the commercial banks’ capitalization ratio. Employing a dynamic panel regression
technique for the examination while controlling for bank-specific and macroeconomic factors over
the period 2000–2014, this article finds that banking sector development in the selected countries
improves bank capital ratio consistent with the aims of banking sector reforms and the maintenance of
stable financial system.
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Keywords
Africa, bank capital ratio, liberalization, private credit, stock market capitalization