Dissertation Submitted in Partial Fulfilment of the Requirement for Doctor of Philosophy Degree in Accounting and Finance: Specialization in Finance
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Date
2026-01-01
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AAU
Abstract
The financial system is essential for a healthy economy, transferring funds from surplus to deficit units. Banks, as the backbone, play a crucial role in this process, influencing economic growth and development. Proper financial regulations and oversight are necessary for an efficient and stable banking sector. However, research on the effect of financial regulation on banks' performance and stability, and comparisons across countries, are limited. Therefore, the objective of the study is to assess the effect of bank regulations on bank operational efficiency and financial stability, and to compare Ethiopian foreign bank entry regulations with those of other SSA countries. To conduct the analysis, the researcher uses panel data from 2000–2021 to better understand the policy effects. This study utilizes aggregate bank efficiency and stability data from the World Bank. Country-based banking aggregate Z–score and Cost-Income-Ratio are used to measure financial
stability and efficiency of the banking sector, respectively. Variables such as
foreign bank entry restrictions, banking activity restrictions, and strict capital
regulation are selected to measure bank regulation across SSA. The data sources include the National Bank of Ethiopia, Global Financial Development Database, Bank Regulation and Supervision Survey, World Development Indicators Database, and Worldwide Governance Indicators database. A Random Effect Instrumental Variable (REIV) approach is used to analyze the relationship between foreign bank entry restrictions and bank efficiency; the Taylor-Hausman model assesses the effect of foreign bank entry restriction on bank stability; and Generalized Method of Moments (GMM) is applied to examine the relationship between banking activity restrictions, stringent capital regulation, and both bank efficiency and stability. The empirical findings of the paper are used by policymakers, regulators, and bank management. Specifically, the results help policymakers and regulators understand the effects and consequences of existing regulations on bank efficiency and stability, and provide insights into the outcomes
of strict regulation. The Ethiopian banking industry has been unique in the sense that government owned banks dominate, the market is closed to foreign banks and there are strict regulations. This offers a good opportunity to perform a comparative analysis, contribute to the literature, and make policy recommendations. The findings show that restrictions on foreign bank entry have a significant negative effect on bank operational efficiency but a positive effect on bank stability; bank operational efficiency is negatively affected by restricted banking activities and stringent capital regulation; and bank stability is positively affected by restricted banking activities and negatively affected by strict capital regulation. The first policy recommendation is to liberalize foreign bank entry cautiously, relaxing
banking activities and capital regulation. The public interest argument is also a very important tool. Swift liberalization in an imperfect market structure,
underdeveloped financial system, and inadequate supervision can all lead to
inefficiency and instability. Keywords: bank; regulation; entry restriction; activity restriction; capital regulation; efficiency; stability