International Journal of Economics and Finance; Vol. 7, No. 10; 2015 ISSN 1916-971X E-ISSN 1916-9728 Published by Canadian Center of Science and Education 151 Competitiveness and Determinants of Bank Profitability in Sub-Saharan Africa Isaiah Oino 1 1 School of Business and Law, University of East London, UK Correspondence: Isaiah Oino, School of Business and Law, University of East London, UK. E-mail: i.oino@uel.ac.uk Received: July 16, 2015 Accepted: September 6, 2015 Online Published: September 25, 2015 doi:10.5539/ijef.v7n10p151 URL: http://dx.doi.org/10.5539/ijef.v7n10p151 Abstract We analyse how competitive the banks in sub-Saharan Africa are and what determines their profitability. We use a panel data of 97 sub-Saharan African banks for the period from 2000 to 2012. Using recursive regression, there is no strong evidence to suggest a structural break. The findings indicate that on average banks have a 40% return on equity. The fixed effects indicate that both internal and external factors are influential in determining the profitability of the banks. Specifically, the cost–income ratio and capital ratio negatively and significantly influence profitability. Measuring revenue diversification with the Herfindahl –Hirschman index (HHI), the results indicate that the more diversified the bank is, the more profitable it is. On the other hand, we find that the coefficient of cyclical output almost doubles when the output exceeds its trend value. In contrast, when the output is below its trend, the coefficient of cyclical output is insignificant. Keywords: sub-sahara, banks, efficiency, profitability 1. Introduction The economic growth of a region or country has been attributed to the financial development in terms of the stock market, bond market and derivative market. This is because institutions like banks assess the creditworthiness of the borrower and the viability of the investment to ensure efficient allocation of resources. Moreover, in order for promising projects to be exploited, banks and securities markets mobilize households to save in order to lend and monitor the investments and the performance of the managers. Africa is one of the continents that is endowed with vast resources and yet lags behind on economic fronts. This is despite the fact that banks in Africa are the most profitable financial institutions in the world but have a modest global rating (Valentina et al., 2009). The profitability could be attributed to the standard asset pricing model, which implies that risk assets are remunerated with higher returns. Therefore, the profitability of the bank should indicate specific risks as well as risks associated with the macroeconomic environment. As a result of the 2007 global financial crisis, financial institutions have undergone tremendous reforms. However, such reforms, which among others encompass minimum regulatory capital requirements, bonus payments and identification of risks, are in tandem with the legal framework. Other recent reforms that have enhanced financial liberalization include interest rate controls, particularly in Kenya, Tanzania and Ghana. The financial liberation has led to the growth of banks across Africa, predominately for private banks and the entry of foreign banks. Attempts have been made to enhance financial stability, for instance recapitalization, which resulted in a reduction in the number of banks (Note 1). A basic comparison of data between developing and developed countries shows that financial systems in developing economies tend to be less efficient. For instance, the average depth of financial institutions (measured as private credit to gross domestic product (GDP)) and markets (measured as stock market capitalization plus outstanding domestic private debt securities to GDP) in developed economies is more than twice that in developing economies. However, in terms of the stability of financial institutions (measured by the Z-score), on average, the banking systems in developing economies are less volatile than those in developed economies (World Bank Financial Database, 2013). The levels of stability of financial markets (measured as the asset price volatility) are similar, on average, for developed and developing economies. Therefore, the objective of this research is not only to examine how competitive the banks in sub-Saharan Africa (SSA) are but also assess the internal and external factors that influence profitability. The remainder of this paper is organized as follows. Section two briefly discusses the theoretical and empirical