Sustainable investment and cost efficiency of banks in sub-Saharan African countries, the role of bank stability

Abstract

Sustainable investment (ESG) factors are increasingly analyzed to identify the potential benefit o of banksbanks’ cost efficiency. The banking sector influences the whole economy through the credit channel and balances its stability. The interplay of these elements motivated the main objective of the study to examine the effect of a bank’s sustainable investment on the cost efficiency of banks and the role of banking sector stability in this relationship. Using panel data from 25 countries in sub sub-Saharan Africa over the period 2010 to 2017, the study used stochastic frontier analysis to estimate the cost efficiency scores, then the study used GMM to establish the effect sustainable investment has on cost efficiency and the influence of bank stability in this effect. The findings indicate indicated that the cost efficiency of banks in sub sub-Sahar an African countries is at least 70%. Environmental projects negatively impact cost efficiency in banks, while socially responsible banks have no impact. Governance factors improve efficiency in sub sub-Saharan African banks. Environmentally friendly banks are less risky and stable, enhancing efficiency. Socially responsible banks' cost efficiency is not influenced by bank stability, and governance factors positively impact cost efficiency but independent of bank stability. It was recommended that banks should improve their cost efficiency by identifying areas where they can reduce costs by up to 30%. Banks should invest more into social and governance projects and also in environment project projects as it enhances the stability of banks while improving their cost eff iciencyiciency.