Bank Competition in Africa:
Do Institutional Quality and
Cross-border Banking
Matter?
Mohammed Amidu
Research Paper 458
Bringing Rigour and Evidence to Economic Policy Making in Africa
Bank Competition in Africa:
Do Institutional Quality and
Cross-border Banking Matter?
By
Mohammed Amidu
University of Ghana
AERC Research Paper 458
African Economic Research Consortium, Nairobi
August 2021
This research study was supported by a grant from the African Economic Research
Consortium. The findings, opinions and recommendations are those of the author,
however, and do not necessarily reflect the views of the Consortium, its individual
members or the AERC Secretariat.
Published by: The African Economic Research Consortium
P.O. Box 62882 - City Square
Nairobi 00200, Kenya
ISBN
9789966-61-156-7
© 2021, African Economic Research Consortium.
Contents
1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Evolution of Banking in Africa and literature review. . . . . . . . . . . . . . . . . . . . 4
3. Data and methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4. Empirical results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
5. Conclusion and policy implications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
List of tables
Table 1: Estimates of bank competition using Boone method . . . . . . . . . . . .18
Table 2: Average bank competition in Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Table 3: Pair-wise correlation coefficient between selected variables . . . . .22
Table 4: Determinants of bank competition with institutional quality . . . . .24
Table 5: Determinants of bank competition with
cross-border banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Table 6: Determinants of bank competition using
Boone indicator and Lerner index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Table 7: The sensitivity of competition to cross-border
banking and institutional quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
Table 8: Determinants of bank competition:
Controlling for banking freedom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
Table 9: Determinants of bank competition: Controlling
for capital stringent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
Table 10: Determinants of bank competition:
Controlling for risk expropriation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Table 11: Determinants of bank competition:
Controlling regulatory variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
Table A1: Sample coverage and average of country level variables . . . . . . .46
Table A2: Bank-specific variables: Averages for the period 2002-2009 . . . . .47
Table A3: Summary of variables definition and sources. . . . . . . . . . . . . . . . . .48
List of figures
Figure 1: Ownership structure of banks in Africa . . . . . . . . . . . . . . . . . . . . . . . . . 5
Figure A1: Trend in bank competition for regions of Africa over time . . . . . .17
Figure A1: Trend in bank competition for regions of Africa over time . . . . . .49
List of abbreviations and acronyms
BMCE
CBB
Banque Marocaine du Commerce Extérieur
Cross-border Banking
CPI
Consumer Price Index
EAC
East African Community
ECOWAS
GDP
ICRG
IQ
Economic Community of West African States
Gross Domestic Product
International Country Risk Guide
Institutional Quality
NEIO
SCP
SADC
UBA
New Empirical Industrial Organization
Structure Conduct Performance
Southern African Development Community
United Bank for Africa
Abstract
This study analyses the implications of cross-border banking (CBB) and institutional
quality (IQ) for bank competition in Africa. We apply a two-step estimation procedure
using bank-level panel data for 29 African countries. In step one, the Boone indicator
and the Lerner index are used to gauge bank competition in a given country in Africa.
In the second step, we analyse the sources of bank competition, placing emphasis
on the impact of CBB and IQ. The results suggest that competition increased in the
period2002-2005,before decreasing somewhat between 2006 and 2007 and increasing
again there
competition in African countries with stronger governance structures and instituti