Macro Specific Distress Factors and Financial Sustainability of Deposit Money Banks in Sub-Saharan Africa

Abstract

This study examines the effect of macro-specific distress factors on the financial sustainability of deposit money banks in Sub-Saharan Africa, using a balanced panel of 50 listed banks across 11 African Continental Free Trade Area (AfCFTA) countries over the period 1986–2020. Financial sustainability is proxy by the Financial Sustainability/Financial Stability Index (FSI) and Bank Soundness (BSO), while the explanatory variables include economic growth, inflation, trade deficit, lending interest rate, foreign exchange rate, and financial openness. Employing descriptive statistics, correlation analysis, panel unit root and cointegration tests, and a 3-Stage Least Squares (3SLS) estimation technique, the study finds strong evidence of a long-run relationship between macroeconomic distress variables and bank sustainability. The results reveal that lending interest rate and foreign exchange rate are the dominant macroeconomic drivers: lending interest rates exert a positive and significant influence on financial sustainability, while foreign exchange rates display mixed effects, improving the sustainability index but significantly weakening bank soundness, reflecting balance-sheet and currency-risk pressures. In contrast, economic growth, inflation, trade deficit, and financial openness do not exert statistically significant direct effects on sustainability outcomes. The study recommends prudent interest rate management, active mitigation of exchange-rate volatility, and strengthened macro prudential and supervisory frameworks to ensure that improvements in sustainability indicators do not mask underlying soundness risks. These findings contribute to the macro–financial stability literature by highlighting the asymmetric channels through which macroeconomic conditions shape bank sustainability in Sub-Saharan Africa.

Keywords: Financial sustainability, Bank soundness, Macroeconomic distress, Interest rate, Exchange rate, Sub-Saharan Africa.