The Dark Side of Democracy: New Empirical Evidence of Its Effect on Banking Stability

ABSTRACT Due to less settled securities exchanges, the main source of risk of the financial system in Africa is characterized by its most significant aspects being the banking sector in particular. Consequently, the overall stability of the financial system can be ensured by the stability of the banking sector. Furthermore, the greatest number of nations in Africa has historically been viewed as weak democracies. Thus, the purpose of this article is to examine the impact of democracy on banking stability in Africa. The approach includes data for 34 African countries from 2004 to 2019, and OLS and IV‐Tobit estimation techniques. Our diagnosis shows that democracy harms banking stability in Africa, with the results robust across different types of democracy, levels of political stability, proximity to the sea, and alternative indicators of banking stability. This affirms that democracy is not good for every sector's stability, especially for the banking sector. Policy implications are discussed. Related Articles Aideyan, Osaore. 2016. “Political and Institutional Prerequisites for Monetary Union: Assessing Progress in the Economic Community of West African States (ECOWAS).” Politics & Policy 44(6): 1192–212. https://doi.org/10.1111/polp.12183 . Asongu, Simplice A., Joseph Nnanna, and Vanessa S. Tchamyou. 2021. “Finance, Institutions, and Private Investment in Africa.” Politics & Policy 49(2): 309–51. https://doi.org/10.1111/polp.12395 . Scarlato, Margherita, and Giorgio d'Agostino. 2019. “The Political Dimension of Cash Transfers in Latin America and Sub‐Saharan Africa: A Comparative Perspective.” Politics & Policy 47(6): 1125–55. https://doi.org/10.1111/polp.12332 .