State history, governance and financial institutions' efficiency: Evidence from African countries

Abstract This study investigates how statehood experience influences financial institutions' efficiency through the quality of governance. To this effect, the study employs a Tobit instrumental variables technique with data from 22 African countries for the period 2002–2018. The state antiquity index, recently provided by Ang and Fredriksson (2018), is used to capture statehood experience whereas rule of law, voice and accountability, regulatory quality, political stability and absence of violence, government effectiveness, and control of corruption are the indicators of the governance quality. Our results show that statehood experience, directly and indirectly, influences financial institutions' efficiency. The nature of the direct effect is negative, while that of the indirect effect depends on the governance indicator considered. Indeed, the negative effect of statehood experience is moderated by the strict application of the rule of law and amplified by control of corruption, political stability and absence of violence, and excessive regulation. Thus, to reduce the negative effect of statehood experience on the efficiency of financial institutions, older African states should: i) promote strict enforcement of the rule of law and alternation of power, and ii) relax regulation and government intervention.