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Abstract This article examines the effect of institutional quality on social cost of intermediation in high and low developed financial markets across 29 African countries between 2006 and 2013. Employing bootstrap‐quantile and two‐step system generalized methods of moments models with bank level data of about 330 banks, the results provide interesting and new insights. The results show that improvement in institutional quality in high or low developed financial markets translates into reduced social cost of intermediation to the society. However, it is evident from the results that improvement in institutional quality is more robust, persistent and weightier in reducing the social cost of intermediation in low developed financial markets which are often characterized with weak regulatory regimes and enforcement. Hence, improvement in institutional quality shores up regulatory supervision, monitoring and enforcement which translates into heavier dampening of social cost of financial intermediation in less developed financial markets. Moreover, bank size, credit shocks, return on equity and liquidity are key drives of social cost of intermediation both in low and high developed financial markets. These findings have policy implications and recommendations for policymakers and regulators of financial institutions. Policymakers and regulators, especially those in less developed financial markets, must endeavour to create, implement and advance mechanisms and enabling environment that enhances the quality of institutions since improved institutional quality reduces social cost of intermediation to the benefit of society.
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