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Unveiling the Energy Saving Role of Banking Performance in Sub-Sahara Africa

7 May 2018
Publication Type: Policy Brief, Working Paper
JEL Code: G20, Q4, Q40, Q43, Q48

Using a two-step system generalized method of moment (GMM) technique and a panel data for 43 sub-Sahara African countries from 1998 to 2012, this article examines the drivers of energy intensity. Specifically, the article tests two hypotheses: (1) improved banking performance does not foster energy efficiency improvements, and (2) institutional quality (democracy) does not compromise the energy-saving role of improved banking performance. The study uses a unique bank-based data by Andrianova et al. (2015) and different indicators of bank performance- return on asset, asset quality, bank capitalization, managerial inefficiency and financial stability. The paper also constructs a composite bank performance index from these indicators using the principal component analysis. The results reveal that, both in the short and long run, improved banking performance foster energy efficiency improvements in sub-Saharan Africa, but this is compromised by democracy (institutional quality). Thus, to achieve energy efficiency improvements, specific initiatives should be implemented to boost development of the banking sector while also ensuring that democratic governments in the sub-region wean themselves off things that impede the progress of the real sector. More ambitiously, creating a Green Bank may be necessary to stimulate energy efficiency investments in the sub-region.

Series title: Working paper 744
1 May 2018
Journal: Energy Economics 2018
2 August 2018
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