Information for banking efficiency in Africa: evidence from income levels and legal origins.

AuthorAsongu, Simplice A.
  1. Introduction

    There are three main motivations for a study on the relevance of mobile phone penetration in mitigating the asymmetry of information for financial allocation efficiency in the African continent (1). They are: (i) the scope for information and communication technology development; (ii) a strategic need for internal sources of investment to complement external capital flows and (iii) sparse financial allocation efficiency due to asymmetry of information (2) between lenders and borrowers in the banking sector on the one hand and on the other, substantially documented concerns about excess liquidity in African financial institutions. The motivations are engaged here in chronological order.

    First, on the scope for mobile phone penetration on the African continent, Murphy and Carmody (2015) and Asongu (2017) have recently shown that compared with markets in developed and Asian countries; there is much room left in the African market for the development of mobile phones. According to the narrative, whereas high-end markets are reaching saturation, low-end markets in Africa are offering comparatively substantial investment opportunities.

    Second, the literature on African business is consistent with the imperative to improve domestic financial development (Tchamyou, 2019; Taiwo, 2021), especially after failed attempts by privatisation policies to attract foreign capital (Fasakin, 2021). The need for domestic sources of investment aligns with the post-2015 inclusive and sustainable development agenda in the sense that external sources of finance like loans (Asongu et al, 2015) and foreign direct investment (Asongu and Tchamyou, 2015) are associated with exclusive human development and inequality respectively, in Africa.

    Third, there is a recent stream of African finance literature documenting that financial allocation inefficiency in the continent is substantially traceable to information asymmetry between lenders and borrowers (see Triki and Gajigo, 2014; Lussuamo and Serrasqueiro, 2020). Furthermore, the introduction of information sharing mechanism (ISM) has built on the idea that financial allocation inefficiency in the continent can be explained by information asymmetry, notably in terms of concerns about: affordability, physical access and bank lending eligibility (Moyo and Sibindi, 2022; Machokoto, 2021). Hence, in addition to mediating between borrowers and lenders, ISM also enhances market competition, reduces constraints in credit availability and boosts efficiency in the allocation of capital (Jappelli and Pagano, 2002). Unfortunately, despite the theoretical advantages of ISM, African financial institutions are still being confronted with stark concerns of surplus liquidity (Saxegaard, 2006; Fouda, 2009; Asongu, 2014a, p.70) and ISM unfavourable affecting financial development (Asongu et al, 2016). The unexpected negative impact substantiates the narrative that the effect of ISM on lending is difficult to establish: "On the whole, all three models agree on the prediction that information sharing (in one form or another) reduces default rates, whereas the prediction concerning its effect on lending is less clear-cut" (Jappelli and Pagano, 2002, p. 2020).

    In response to the evidence of allocation inefficiency, the literature has failed to emphasise the importance of financial sector efficiency from the perspective of the fundamental goal of financial intermediation, which is to transform deposits or liquid liabilities into credit for economic operators (Kablan, 2010; Kiyato, 2009; Al-Obaidan, 2008; Ataullah et al, 2004). In accordance with Asongu and Tchamyou (2014), the main financial efficiency measurements in African literature have focused on Data Envelopment Analysis (DEA) for technical efficiency (Kablan, 2009); cost efficiency (Chen, 2009; Mensah et al,, 2012) and profit efficiency (Hauner and Peiris, 2005).

    Noticeably, in the light of the objectives for the current study, the literature on the nexus between financial development and information asymmetry leaves space for improvement in four main dimensions; namely, the imperative to: (i) focus on regions where concerns about financial access are comparatively more severe; (ii) investigate the impact on financial access by appreciating financial development in the light of the fundamental role of banks in transforming deposits into credit; (iii) examine the underlying complementarity throughout the conditional distributions of financial allocation efficiency and (v) put emphasis on fundamental features such as income levels and legal origins in order to improve space for policy implications. The highlighted gaps are substantiated in the discourse which follows.

    First, this study concentrates on Africa because, despite the publicized issues of excess liquidity in the continent's banking sector, minimal literature on information sharing has been devoted to addressing this issue. To our knowledge, the continent has not received the scholarly attention it deserves regarding the underlying anxiety. This substantially contrasts with the evidence that it is a continent where financial access concerns are most severe (Asongu et al., 2016). We substantiate this by articulating the neglect of allocation efficiency and limited focus on Africa in the information sharing (hereafter IS) literature.

    Second, 'financial development'- and IS-specific studies have failed to recognise financial efficiency from the perspective of banks' ability to transform mobilised liquidities into credit for economic operators. Both African-specific and general IS literature have not conceived financial development within the framework of allocation efficiency. Whereas the IS literature has already been discussed in the preceding paragraph, two mainstream indicators have been used in the African financial development literature, notably, the: (i) employment of DEA to examine the efficiency of decision-making units (3) and (ii) assessment of cost and profit-linked efficiencies (4) as well as economic efficiency in terms of scale and technical efficiencies (5). Contrary to the mainstream literature, we use an indicator of financial development efficiency that is in accordance with the policy syndrome of surplus liquidity. The motivation for employing this indicator is that information sharing within the banking sector is necessary to improve banking allocation efficiency. Therefore, the financial measurement employed is the ratio of bank credit to bank deposits because ISM reduces informational rents and boosts competition in the banking sector which result in allocation efficiency and higher levels of financial lending (Pagano and Jappelli, 1993, p. 2019).

    Third, on the imperative of accounting for existing levels of financial development, the study argues that blanket financial allocation efficiency policies may not be effective unless they are contingent on initial levels of financial development and tailored differently across countries with low and high initial levels of financial access. The intuition for this estimation approach is that certain levels of financial development may be required to achieve positive allocation efficiency externalities from ISM. Hence, all the conditional distributions are considered with particular emphasis on countries with low, medium and high levels of financial access. The employment of quantile regressions is distinct from recent studies which have been based on mean values of the dependent variables, namely: Triki and Gajigo (2014) and Tchamyou and Asongu (2017a) who have respectively employed the Generalised Method of Moments (GMM) and Probit models.

    Fourth, the inclusion of legal origins and income levels enables the study to provide more room for policy implications between the nexus between information sharing by means of mobile phones. Moreover, banking allocation efficiency can also be contingent on the wealth of nations as well as their legal traditions from colonial legacies. Such fundamentals have been documented in the comparative development literature to elicit cross-country differences in economic development (Beck et al, 2003; La Porta et al, 2008; Mlachila et al, 2017). The comparative importance of income levels and legal origins is put in more perspective in what follows.

    In terms of income levels, relative to low-income countries, countries with higher income are more linked with institutions that provide more access to how people can realise the maximum of their potential, especially in terms of, inter alia, financial access and equitable distribution of the fruits of economic prosperity (Asongu and Nting, 2021). According to the extant studies, higher income levels avail more market opportunities which include opportunities for financial access (Blanco and Ram, 2019) which are connected to a higher degree by which banks transform mobilized deposits into credit opportunities for households and economic operators.

    With respect to legal origins, the comparative relevance of French civil law versus English common law is consistent with the extant authoritative literature on comparative economic development (La Porta et al., 1998, 1999), which has been confirmed within the remit of Africa (Asongu, 2012a, 2012b; Agbor, 2015). In the light of the attendant literature, compared to English common law countries, French civil law countries are less effective in terms of openness and adjusting to challenges in the economic environment, such as the ability to leverage information technologies for better financial access opportunities, not least, because compared to English common law countries in Africa, most French civil law countries have monetary systems that are not completely independent on the one hand and on the other, have preferred financial stability and monetary dependence to monetary experience. By putting emphasis on financial stability, instead of allocating credit to economic operators, economic...

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