Competitiveness and efficiency of commercial banks and economic growth in the frontier economies of Africa
Various studies have examined the relationship between competition and efficiency in the banking sector, and others have looked at how this relates to broader economic growth. Goldsmith (1969) and King and Levine (1993), among others, consequently found that financial reform in the banking sector has led to improved efficiency and competition and, as a result, led to economic growth. Financial reform in Africa came about as a result of financial liberalization that took place during the late 1980’s. This reform process was structured to increase competition and efficiency of the financial sector. This has motivated academic inquiry into the assessment and measurement of bank efficiency, bank competition and the impact on economic growth. The literature available indicates a myriad of factors that impact upon bank efficiency and bank competition. A determinant that is scarcely addressed in the literature on Africa however is the quality of institutions. Against this background, this thesis presents a collection of empirical papers on competition, efficiency and economic growth of the banking sector in Africa. Explicitly, annual firm level data on banks from 10 frontier African countries is employed to study different economic theories using various panel data econometric methodologies. The findings reveal that the banking industry in Frontier Africa is characterised by monopolistic competition. In addition, our results may suggest that bank competition could be beneficial for economic growth. As bank competition increases via the efficiency channel, this would ultimately increase economic growth. Furthermore, we also analyse the relationship between bank competition and efficiency. We observe a positive relationship between bank competition and both profit and cost efficiency, as a consequence these findings reject the Quiet Life Hypothesis. We also observe low levels of bank efficiency and competition across the sample. However, the study finds that diversification into non-interest generating activities enables Frontier African banks increase their earnings potential. The study also looks at the quality of institutions and the impact on bank competition. Our results indicate in general, we find that regulatory quality has a positive effect on the degree of competition in the banking sector. The findings recommend that to improve economic growth, policy makers should aim at improving competitive and efficiency conditions in the banking sector because a competitive banking system will allocate resources more efficiently and spur economic growth is as a result. The focus of this policy should therefore be on competition policies, comprehensive financial liberalisation policies, macroeconomic policies and regulatory and supervisory policies.
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