To read this content please select one of the options below:

Freedom, competition and bank efficiency in Sub-Saharan Africa

Emmanuel Sarpong-Kumankoma (Department of Finance, University of Ghana Business School, Accra, Ghana)
Joshua Abor (Department of Finance, University of Ghana Business School, Accra, Ghana)
Anthony Q.Q. Aboagye (Department of Finance, University of Ghana Business School, Accra, Ghana)
Mohammed Amidu (Department of Accounting, University of Ghana Business School, Accra, Ghana)

International Journal of Law and Management

ISSN: 1754-243X

Article publication date: 13 November 2017

478

Abstract

Purpose

This study aims to consider the effect of financial (banking) freedom and competition on bank efficiency.

Design/methodology/approach

With data from 11 Sub-Saharan African countries over the period 2006-2012, the study estimates both competition (market power) and bank cost efficiency using the same stochastic frontier framework. Subsequently, Tobit models, including instrumental variable Tobit regression, are used to assess how financial freedom affects the relationship between competition and bank efficiency.

Findings

The results show that increase in market power (less competition) leads to greater bank cost efficiency, but the effect is weaker with higher levels of financial freedom. This is not consistent with the quiet life hypothesis.

Practical implications

Policymakers usually take the view that opening up banking markets to greater competition may lead to higher efficiency. However, the results have shown that allowing banks to maintain some level of market power may be necessary to ensure banking system efficiency.

Originality/value

This study deepens the understanding of the inconsistent relationship between competition and bank efficiency, by using the same framework to measure both competition and efficiency, and by providing new empirical evidence on how the level of financial freedom affects this relationship.

Keywords

Citation

Sarpong-Kumankoma, E., Abor, J., Aboagye, A.Q.Q. and Amidu, M. (2017), "Freedom, competition and bank efficiency in Sub-Saharan Africa", International Journal of Law and Management, Vol. 59 No. 6, pp. 1359-1380. https://doi.org/10.1108/IJLMA-11-2016-0142

Publisher

:

Emerald Publishing Limited

Copyright © 2017, Emerald Publishing Limited

Related articles