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Unveiling the energy saving role of banking performance in Sub-Sahara Africa

Amuakwa-Mensah, F, Klege, R.A, Adom, P.K., Hagan, E, Amoah, A
Most countries in Sub-Sahara Africa are on the path of becoming emerging economies with huge economic prospects and investment opportunities. Notwithstanding, energy insecurity and fragmented banking sector are the predominant features in the region. Thus, energy intensity is high in the region and the banking sector is under developed; this is an indication that more energy is required to produce a unit of output in the sub-region. Given the close link between energy consumption and climate change (Amuakwa-Mensah and Adom 2017; Ali et al., 2016; Shabaz et al., 2015), the current energy use pattern in Sub-Sahara Africa has important implications on the region's environment. Since the adverse effects of climate change have no geographic boundaries, the international community should be concerned about the energy use patterns in sub-Saharan Africa. Our study provides an important insight into global discussions on energy efficiency, climate change and political institutions.

What do we already know?
Energy consumption and financial development nexus have produced two opposing views in the literature. First it is asserted that the development of the financial sector leads to scale effects in an economy via the effects of reduced cost of borrowing. Therefore, with an expansion in economic activities, more energy is needed to run these activities leading to higher energy consumption. On the other hand, financial development is shown to have technical effects in an economy; this facilitates technological investment and diffusion, and, in the end, improve the efficient use of energy. Despite the indirect acknowledgement of how financial development could potentially promote inefficiency, there are no explicit empirical test of this assertion, at least from African Perspective. This policy brief provides answers to this.
 
Research Approach
We adopted a unique banking data set by Andrianova et al. (2015) for our study. Also, a two-step system generalised method of moment (GMM) technique is adopted and a panel data for 43 Sub-Sahara African countries from 1998 to 2012 is used to explore the energy saving role of the banking sector. Variables included in our study includes return on asset, asset quality, bank capitalization and managerial efficiency as indicators of bank performance, the Z-score is used to measure the fragility of the financial system.
 
Other important controls considered in the analysis include crude oil prices, GDP per capita, FDI, trade openness, industry value added, urbanization and institutional quality.
 
Further we applied the Principal Component Analysis to derive a composite index for banking performance, which is used to check for robustness.
 
Key Findings
The findings reveal that, both in the short and long run, improved banking performance which was measured by different indicators foster energy efficiency improvements in sub-Saharan Africa but this is compromised by democracy (institutional quality). Thus, from energy security perspective, creating the enabling environment and removing market barriers for banking operation to thrive should be given more attention. For example, programs such as tax rebates and energy subsidy for the sector could be a step in the right direction. More ambitiously, creating a regional green bank in the sub-region may stimulate energy efficiency investments and hence promote energy efficiency in the sub-region. Also, Banks in sub-Saharan African countries are underdeveloped, and countries either do not have functioning credit reference bureau system or for those who have, it is not fully utilized. Creating a national/regional credit reference bureau system would enable banks to assess the creditworthiness of clients before issuing a loan; this will help reduce the possibility of bad debts. From the forgone, the close connection between banking operation and the energy sector suggests that, government policies should be integrated in nature. While all the above may be necessary to ensure energy efficiency improvements in the sub-region, the political environment also matters. A democratic environment characterized by the existence of pressure interest groups can compromise the energy-saving role of improved banking performance. Thus, for the general good, democratic governance in the sub-region should find ways to wean themselves of things that affect the progress of the real sector. The task of promoting energy efficiency, however, is multifaceted. As revealed in our study, openness policy and economic growth are necessary, as well as the conscientious attempt to strengthen environmental policies to prevent the pollution-haven hypothesis and remove fuel subsidies for the non-banking sector. Given the high poverty incidence in the sub-region, the removal of subsidies may compromise welfare in the short-run. However, in the long-run, this will be reversed since the growth benefits associated with energy efficiency improvements can be redistributed back to the poor in the form of improved social intervention programs in education, housing, and health.
 
References
  • Ali, H.S., Law, S.H., Zannah, T.I., 2016. Dynamic impact of urbanization, economic growth, energy consumption, and trade openness on CO 2 emissions in Nigeria. Environ. Sci. Pollut. Res. 1–9. doi:10.1007/s11356-016-6437-3.
  • Amuakwa-Mensah, F., Adom, P.K., 2017. Quality of institution and the FEG (forest, energy intensity, and globalization) -environment relationships in sub-Saharan Africa. Environ. Sci. Pollut. Res. 24, 17455–17473. doi:10.1007/s11356-017-9300-2
  • Andrianova, S., Baltagi, B., Beck, T., Demetriades, P., Fielding, D., Hall, S., Koch, S., Lensink, R., Rewilak, J., Rousseau, P., 2015. A new international database on financial fragility (Discussion Paper No. 15/18). Department of Economics, University of Leicester, Leicester, UK.
  • Shahbaz, M., Solarin, S.A., Sbia, R., Bibi, S., 2015. Does energy intensity contribute to CO2 emissions? A trivariate analysis in selected African countries. Ecol. Indic. 50, 215–224. doi:10.1016/j.ecolind.2014.11.007

Taxpayers’ behavioural responses to Voluntary Disclosure Programmes: evidence from South Africa

South Africa, like any other country, strives towards greater tax revenue mobilisation. One possible explanation to low revenue levels is non-compliance by taxpayers. Given its implications for the provision of public goods and services, the government has instituted various enforcement measures, including (among others) reprieves (amnesties and voluntary disclosure programmes) to delinquents who voluntarily disclose their previously unreported income.

Order flow and rand/dollar exchange rate dynamics

This paper uses the microstructure approach for the South African foreign exchange market to determine the impact of order flow on the rand/US dollar exchange rate over the short and long term. A hybrid model which combines microeconomic and macroeconomic fundamental determinants of the exchange
rate has been adopted. The analysis uses monthly series from January 2004 to December 2016. We find that order flow explains movements in the exchange rate, both in the short and in the long term. The speed of adjustment from short-term deviations is relatively slow.

Foreign Direct Investment, Sectoral Effects and Economic Growth in Africa

Earlier studies on the impact of foreign direct investment (FDI) on economic growth have not been instructive largely on their failure to examine the sectoral transmission channels through which FDI affects overall growth. We re–examine the impact of FDI on economic growth in Africa relying on panel data from 38 African countries over the period 1960–2014. Results from the system generalised method of moments (GMM) reveal that, while FDI positively and unconditionally spurs economic growth, its growth–enhancing effect is imaginary when the conditional sectoral effects are introduced.

Skill Shortages as a Barrier to Women’s Start Ups: A Model with Evidence from Eswatini

The shortages of entrepreneurial skills, both perceived and actual, have lowered the rate of opportunity-driven women’s entrepreneurship. This paper contributes to the literature on entrepreneurship, gender and development with a theoretical and empirical analysis linking gender differences in entrepreneurial outcomes to skills and business training. The role of skills, including self-confidence, and training for the entrepreneurial performance is tested on a survey of urban entrepreneurs in Swaziland.

Latest Workshops

Skills Development

Monday, July 3, 2017 to Friday, July 7, 2017

Call for Application for Skills Development Training in Econometrics

The ERSA is pleased to invite applications for the Skill Development Training Programme in basic Econometrics for academics and postgraduate students (masters and PhD) with limited training in Econometrics and quantitative methods. The skills development initiative is in line with ERSA’s objective to deepen economic research capacity and to train young economists in Southern Africa.

7th Annual Meeting of the African Economic History Network: Innovation and the African Past

Wednesday, October 25, 2017 to Friday, October 27, 2017

The African Economic History Network, in association with the Laboratory for the Economics Africa's Past at Stellenbosch University, Harvard Univeristy's Center for African Studies and Economic Research Southern Africa announces a Call for Papers.

Lecture Series in Economic Theory: "Asymmetric Information in Markets and Organizations"

Monday, March 14, 2016 to Tuesday, March 15, 2016
In part 1 of this lecture, we are going to introduce the basic set-up of credence goods markets and discuss how markets should be designed to provide the right incentives for experts and their customers. The theoretical analysis will be complemented by the discussion of evidence of expert behaviour and market outcomes from empirical as well experimental studies. 
 
In part 2 of the lecture, the emphasis will be on information disclosure by interested parties and evidence provision by intermediaries.