Finance and Development in Africa: Volume 12 Part B

This volume contains papers that address the role of banks, the stock market, foreign direct investment and financial management in the development process in African countries.

Purpose – The purpose of this paper is to examine the relationship between banking sector efficiency and economic growth in Africa.

Methodology/approach – The paper used the stochastic frontier approach stating the banking sector cost function as a Fourier flexible to estimate bank efficiency. We then used the Arellano–Bond GMM estimator to investigate the relationship between banking sector efficiency and economic growth. Annual data for banking sector financial statements were used in estimating efficiency scores.

Findings – The study found banking sector efficiency in the sample to be 69%. We also found a positive relationship between banking sector efficiency and economic growth, confirming the critical role banks play in the economy.

Practical implications – Banking sector efficiency score of 69% implies banks in Africa could save up to 31% of their total cost if they were to operate efficiently. Policy direction should therefore focus on policies and incentives that will improve the efficiency of the banking sector and hence economic growth. The study brings to the fore the importance of the qualitative aspect of the banking sector in allocating financial resources in the real economy. Focus in the real economy should not be only on the size of the banking system but also on the quality with which resources are allocated.

Originality/value of paper – This study is among the first dedicated solely to African countries. It does set the pace for future research in the area and also confirms in Africa the Schumpeterian hypothesis that the banking sector is key in allocating resources in the real economy.

Purpose – This paper investigates competitive bank behaviour in Africa for the period 1999–2008 and further examines the impact of institutional quality and political atmosphere on competitive bank behaviour.

Design/methodology/approach – This study used panel data methodology based on the Panzar–Rosse (1987) design.

Findings – The findings of the study indicates that the nature of banking system in Africa can best be described as monopolistically competitive. Also, our findings endorse the importance of institutional quality and political stability in fostering competitive banking sector. In particular, the rule of law shows positive and significant relationship with competitive bank behaviour. Additionally, the quality of regulations suggests positive association with bank competitive behaviour. With respect to political environment, stable political atmosphere is conducive for promoting competitive banking sector. Improved regulatory quality coupled with reduced level of perception about corruption fosters competitive bank behaviour.

Originality/value – This paper provides useful information relevant to policy makers in the banking sector about the nature of bank competitive behaviour in Africa and the drivers behind the competitive behaviour.

Purpose – This paper examines the interaction of efficiency and bank risk taking in the Ghanaian banking industry.

Design/methodology/approach – We relate risk taking to price competitiveness, foreign ownership and cost efficiency and other control variables. Cost-inefficiency scores from a stochastic frontier model are used, and a Lerner price index is employed to proxy for market power.

Findings – Our results suggest that market power affects risk taking when conditioned on foreign ownership, but foreign bank risk-taking behaviour is not statistically different from local banks. Cost inefficiency diminishes bank soundness. We also find that industry concentration discourages greater risk taking.

Originality/value – Our study extends the views on risk taking and competition among banks in Ghana, which throws more light from an emerging economy perspective.

Purpose – The chapter seeks to examine the changing nature of competition during and immediately after the consolidation within the context of Nigerian banking sector reform.

Design/methodology/approach – The chapter deploys the Herfindahl–Hirschman Index, interest rate spread and conducted interviews with senior bank managers to test the hypothesis that there was no change in competition.

Findings – The results obtained support the CBN's expectation of sustained competition and higher efficiency levels, resulting in a minimal reduction of interest rate spread.

Originality/value – This is the first study that examines the changing nature of competition resulting from the 2004–2006 Nigerian banking consolidation.

Purpose – The chapter tests the effects of capitalisation on market structure within the context of Nigerian banking sector reform.

Design/methodology/approach – The chapter is based on data collected through secondary sources, mainly from financial statements of banks audited by the CBN. The time period under review is 2001–2009, encompasses the 18 months transitional window and a trajectory of 3 years before the consolidation announcement. Quantitative methods were used to analyse available data.

Findings – The result confirms that banking consolidation led to an increase in the size of the top end of Nigerian banks.

Originality/value – This is the first study that tests the effects of capitalisation on market structure of the Nigerian banking sector.

Purpose – The purpose of this chapter is to examine whether or not the Capital Asset Pricing Model (CAPM) reasonably describes the return generating process on the Ghanaian Stock Exchange using monthly return data of 19 individual companies listed on the Exchange during the period January 2000 to December 2009.

Methodology/approach – We follow a methodology similar to Jensen (1968) time series approach. Parameters are estimated using OLS. This study is designed to measure beta risk across different times by following the time series approach. The betas of the individual securities are estimated using time series data of the excess return version of the CAPM.

Findings – Our test results show that although market beta contributes to the variation in equity returns in Ghana, its contribution is not as significant as predicted by the CAPM, and in some cases very weak. Our results also reject the strictest form of the Sharpe–Lintner CAPM, but we found positive linear relationship between equity risk premium and market beta. Instead, our evidence uphold the Jensen (1968) and Jensen, Black, and Scholes (1972) versions of the CAPM.

Research limitations/implications – This study is limited to the single-factor CAPM. Future studies will extend the test to include both size and BE/ME fundamentals and factors relating to P/E ratio, momentum and liquidity.

Practical implications – Our results will make corporate managers to be cautious when using CAPM as a basis to determine cost of equity for investment appraisal purposes, and fund managers when evaluating asset and portfolio performance.

Originality/value – The CAPM is applied to individual securities instead of portfolios, since the model was developed using information on a single security.

Purpose – The major question posed in this paper is whether public finance management (PFM) reforms undertaken by development partners (DPs) and the Ministry of Health (MOH) in Ghana were to find solutions to the many PFM challenges or it was merely a façade to pursue latent political interest?

Methodology – Study information was gathered via a desk review of major PFM policy documents, procedures, manuals, guidelines, and findings of commissioned studies covering the period under review. Information generated from the desk review was triangulated via extensive interviews with a sample of policy makers from MOH and DPs.

Findings – The findings suggest that MOH and DPs pursued reforms mostly to address the PFM challenges in the sector. Additionally, the study finds questionable the attitude and posture of the two actors and calls for further investigations to unearth what the said attitude and posture may imply in terms of intentions.

Originality/value – The findings raises fundamental question regarding public sector – DPs collaborations in executing reforms. This could open up new frontiers for further research to better understand DPs/public sector collaboration in the implementation of reforms.

Limitations – The sample used for this study may constrain generalization to other jurisdiction. This limitation does not in any case invalidate the conclusions arrived at.

Purpose – The purpose of this study is to examine the impact of foreign direct investment (FDI) on the performance of manufacturing firms in Nigeria.

Methodology – Annual data of aggregate foreign direct investment, manufacturing foreign direct investment, manufacturing index, manufacturing capacity utilization, manufacturing value added, and manufacturing turnovers were used. In the analysis, we tested for stationarity using augmented Dickey–Fuller test, and the test for long-run relationship was conducted using Johansen cointegration test. Vector error correction model was used for causality test.

Findings – The data satisfied the stationarity test and that there is a long-run relationship between FDI and the performance of manufacturing firms in Nigeria. The study also found that causality runs from FDI to the performance of manufacturing firms.

Practical implications – Since there is a long-run relationship among the variables, policies to attract FDI into the manufacturing sector should have a long range view and should be sustainable. The policy direction should focus on improving productivity and innovative capabilities of the manufacturing sectors and strengthening the supporting industries and institutions. Specifically, policies like provision of tax relief to manufacturers on importation of new technology and expatriate that will bring about efficiency and effectiveness in productions.

Originality/Value of paper – This is one of the few attempts at studying the impact of FDI on manufacturing firms. The study draws attention of policy makers in Nigeria to the fact that diversification of the economy can be achieved through a viable manufacturing sector.