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Published in: Economic Change and Restructuring 4/2020

01-01-2020

Financial integration, competition and bank efficiency: evidence from Africa’s sub-regional markets

Authors: Kannyiri Banyen, Nicholas Biekpe

Published in: Economic Change and Restructuring | Issue 4/2020

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Abstract

This paper examines the convergence properties as well as the causal nexus between bank competition and efficiency in five regional economic communities of Africa over the 2007–2014 period. We estimate bank market power, cost and profit efficiency using the stochastic frontier analysis approach and employ β and σ convergence tests to assess the relative speed of banking convergence in Africa and the five sub-regional markets over the 2007–2014 period using data from 405 banks from 47 African countries. We further examine the causal nexus between bank competition and efficiency in these markets using Granger-type causality tests. The results show a steady rise in bank competition and efficiency in Africa and the five sub-regional markets overtime. The gradual convergence of bank competition and efficiency in the selected markets also reflects the benefits of financial integration in emerging markets. The results also support the quiet life hypothesis in Africa, especially in the East African Community, and reject the quiet life hypothesis in the AMU and ECCAS banking markets. We further found evidence of the efficient structure hypothesis in Africa, especially in the Arab Maghreb Union and Southern African Development Community.

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Appendix
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Footnotes
1
These include the Arab Maghreb Union (AMU), East African Community (EAC), Economic Community of Central African States (ECCAS), Economic Community of West Africa States (ECOWAS) and Southern African Development Community (SADC).
 
2
Léon (2015) opine that lower spreads in a competitive market forces banks to increase the scope and scale of their activities, to seek out new clients and to adopt innovative technologies for faster and quality service delivery, raising their operational cost, especially in the short-run. Besides, revenue losses from new untested clienteles and products all increase bank operational cost.
 
3
Largely single country studies doted across the continent.
 
4
See also: Fernandez de Guevara et al. (2007) and Weill (2009) which all studied banking convergence to assess the leveling effect of financial integration in various banking sectors.
 
5
This financial intermediation approach is a widely used parametric method in the banking efficiency literature as it more accurately accounts for estimation errors and statistical noise by separating the random error from the inefficiency term (Aigner et al. 1977; Andries and Capraru 2014; Sarpong-Kumankoma et al. 2017).
 
6
Inefficiency is therefore measured as the percentage reduction in inputs or expansion in outputs that will set the bank on the production possibility frontier.
 
7
The inefficiency effect \({u}_{i,t}\) is specified alongside the cost/profit estimation to account for bank industry and country specific variables affecting bank inefficiency. Specifically, we estimate the following model of Andries and Capraru (2014): \(u_{i,t} = \delta_{0} + \delta_{1} {\text{GDPPC}}_{j,t} + \delta_{2} {\text{INF}}_{j,t} + \delta_{3} {\text{FSD}}_{j,t} + \delta_{4} {\text{CR5R}}_{j,t} + \delta_{5} {\text{EQ}}_{i,t} + \varepsilon_{i,t}\). To account for the effect of GPD per capita (GDPPC), inflation rate (INF), domestic credit to domestic to private sector by banks (FSD), bank market concentration (CR5R) and bank capitalization (EQ).
 
8
Such as bank competition and efficiency in the case of Casu and Girardone (2009, 2010).
 
9
Like time series VAR models, we tested the unit root properties of the variables and they were stationarity in levels for all samples, allowing us to conduct the Granger-causality test using the variables in levels. Besides, Sims (1980) argue that differencing data with small T and large N distorts crucial details about the co-movements among variables.
 
10
The optimal lag is chosen where the MBIC, MAIC and MQIC are smallest and Hansen J p value is above 0.1 (Andrews and Lu 2001; Abrigo and Love 2016).
 
11
Table 1 shows these banking markets are invariably the least competitive in the continent. This could mean that sign (±) of the effect of bank competition on cost efficiency depends on the level of competition in the region under study.
 
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Metadata
Title
Financial integration, competition and bank efficiency: evidence from Africa’s sub-regional markets
Authors
Kannyiri Banyen
Nicholas Biekpe
Publication date
01-01-2020
Publisher
Springer US
Published in
Economic Change and Restructuring / Issue 4/2020
Print ISSN: 1573-9414
Electronic ISSN: 1574-0277
DOI
https://doi.org/10.1007/s10644-019-09262-8

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