INFLATION AND FINANCIAL SECTOR STABILITY IN SUB-SAHARAN AFRICA STATES

Abstract

In SSA, persistent inflation remains a macroeconomic challenge capable of weakening banking resilience and undermining sustainable financial intermediation. This study examines the effect of inflation on financial sector stability in selected Sub-Saharan African (SSA) countries over the period 2008–2024. The study therefore aims to assess whether inflation significantly influences financial sector stability, while controlling for key macroeconomic conditions. The analysis is anchored on Financial Stability Theory and Financial Repression Theory, which explain how inflation distorts interest rate signals, weakens balance sheets, discourages savings, and heightens systemic fragility in bank-dominated economies. Methodologically, the study employs a quantitative panel design using secondary data sourced from the World Development Indicators (WDI). Financial stability is proxied by the bank capital-to-assets ratio (BCAR), while inflation (CPI), GDP per capita, interest rate spread, and exchange rate serve as explanatory variables. A Fixed Effects regression model is adopted, supported by the Hausman specification test. Findings reveal that inflation has a negative and statistically significant effect on BCAR, indicating that rising inflation reduces bank capitalization and weakens stability. Interest rate spread is positive and significant, while GDP per capita and exchange rate are insignificant. The study recommends credible inflation management, stronger fiscal–monetary coordination, enhanced prudential supervision, and financial market deepening to strengthen stability.