The purpose of this study is to examine the impact of governance quality and regional integration on the stability of the African banking sector. This study further explores the impact of the interaction between the rule of law and voice and accountability on financial stability.
This paper uses the variance decomposition and Kalman smoother techniques in estimating the regional integration of the African banking sector. This study adopts the Kaufmann and Kraay (2020) governance indicators as measures of governance quality. This study also relies on the random effects panel regression model in establishing the effects.
This study provides evidence that regional integration produces an adverse impact, whereas governance quality impacts favorably on banking stability. The impact of voice and accountability on banking stability is driven by rule of law. There exists a non-linear relationship between governance quality and banking stability. There is a significant difference between the effect of governance quality and integration on the financial stability of low- and upper-middle-income economies.
Policies aiming to foster banking sector development should be implemented to promote the stability of the banking sector. Superficial policy adjustments are insufficient; structural reforms in governance, banking regulations and democratic institutions are imperative. A strong and transparent governance framework, coupled with responsible financial integration, will ensure resilient banking systems, reduced financial crises and sustained economic growth.
This study examines the impact of the interaction between voice and accountability and rule of law on financial stability.
