Efforts by African banks to reduce risk through diversification are being undermined by corruption, a joint KNUST study has found.

The study was published in the journal Research in International Business and Finance.

Researchers analysed 714 banks across 51 African countries and found that corruption significantly increases bank risk while undermining strategies meant to improve financial stability.

Banks often diversify their income sources, moving beyond traditional lending into fees and other services, to reduce risk, the researchers said. However, the study shows that in countries with high corruption, this approach becomes far less effective.

“Corruption weakens oversight and transparency, allowing banks to take on riskier activities,” the study found. In such environments, diversification can even expose banks to greater instability instead of protecting them.

The research, which used data from 2011 to 2019, shows that the negative effects of corruption are widespread, affecting both large and small banks across the continent.

The study concludes that reducing corruption is essential if banks are to benefit from diversification strategies. Without stronger regulation and institutional controls, efforts to make banks more stable may not achieve their intended results.

The researchers recommend improving transparency and believe tackling corruption could help strengthen Africa’s banking systems and reduce financial risk.

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Corruption increases bank risk and weakens diversification benefits, research finds

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