INVESTIGATING THE EFFECTS OF FINANCIAL SOUNDNESS ON BANK PERFORMANCE UNDER VARYING DEGREES OF ECONOMIC FREEDOM IN SUB-SAHARAN AFRICA FOR ECONOMIC REFORMS, DIVERSIFICATION AND GROWTH

The economic environment is essential to the banking sector's growth because its established rules and regulations are fundamental to banking stability and profitability, driving economic transformation. This study assesses how the institutional environment (economic freedom) moderates the relationship between financial soundness indicators and banks' profitability measures in the sub-Saharan African economy. The study used the Generalised Method of Moments (GMM) to analyse country-level bank data from 2009 to 2024 for 31 sub-Saharan African countries. The results showed that economic freedom had positive and significant effects on bank profitability (β = 0.024, β = 0.031 for return on assets and earnings per share at p = 0.05, and β = 0.041 for return on Equity at p = 0.01). Moreover, economic freedom significantly improves the relationship between financial soundness indicators and bank profitability. Moderated capital adequacy improves earnings per share (β = 0.006, p < 0.01) more than other variables, while moderated management efficiency also improves return on Equity (β = 0.008, p < 0.01) more than other variables. Banks in institutionally friendly environments are more profitable than those in stringent, tightly regulated environments. Managers need to strategically position banks to capitalise on improvements in the business environment for profitability and growth. Policies need to provide a business-friendly environment that attracts more multinational banks into the economy. The study provides adequate literature and knowledge on the significance of the institutional environment in shaping business growth, offering policy and practical insights for the sub-Saharan African economy for economic reform policies, transformation, diversification, and growth. JEL Classification Codes: E58, G21, G28, M10.