FINANCIAL SOUNDNESS AND BANK PROFITABILITY IN SUB-SAHARAN AFRICA: A COMPARATIVE ANALYSIS OF THE SADC AND ECOWAS ECONOMIES

Abstract

The SSA regional financial system has undergone a significant transformation, shifting banks from fragmented to integrated, technologically advanced banking. However, banks still face structural challenges, such as underdeveloped bond markets, high transaction costs, and volatile macroeconomic cycles. This study examines how financial soundness indicators affect the profitability of commercial banks, comparatively across the SADC and ECOWAS blocs in Sub-Saharan Africa. A macro-panel CAMEL rating dataset covering 15 countries over 16 years (2009-2024) is used for the analysis, employing the System Generalized Method of Moments (GMM). The results indicate a persistent, path-dependent pattern in bank earnings across both sub-regions. A key regulatory concern emerges, as Capital Adequacy has a significant negative impact on banks’ returns in SADC [Asset returns (ROA) – (β= -0.214, p < 0.05) and equity returns (ROE) – (β= -0.568, p < 0.01), yet it is not statistically significant for equity returns in ECOWAS (β-0.312 (p<0.10), suggesting that West African banks often treat capital requirements as passive compliance. Asset Quality deterioration severely reduces banks’ returns in both regions, especially in ECOWAS. Management Inefficiency uniformly lowers earnings, while Liquidity shows a trade-off: it positively affects ROA (β = 0.131, p < 0.05) and ROE (β = 0.462, p < 0.05) but negatively affects EPS (β = -0.218, p < 0.1) in SADC, but is insignificant across ECOWAS. Real GDP growth and Economic Freedom positively influence banks’ profitability across SADC and ECOWAS. This study concludes with specific regional recommendations for risk-based capital regulations, stock market integration, and digitized cross-border systems.