Economic performance in Africa: The role of fragile financial system

Abstract We relate risk in the African financial system to its long‐run economic performance under structural changes and cross‐sectional dependence. To achieve this objective, we generate risk indexes from several measures of financial soundness. We find a long‐run relationship between financial risk factors and economic performance indicators. Financial risk factors induce about 3% fall in RGDPP in the long‐run. This impact is huge in Kenya, Nigeria, Madagascar, Mauritius and Rwanda, whereas a reduction in employment is more prominent in Kenya, Madagascar and South Africa in this order. The capital risk index is more relevant in explaining economic performance in Africa.