Challenges in the Era of Globalization - iaabd

Abstract
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Do Sub-Saharan African Banks with Market Power Profit from Monetary Policy?
Mohammed Amidu amidu@ug.edu.gh
University of Ghana Business School, Legon, Ghana. Email:
Banking spread in Sub-Saharan Africa (SSA) is high by international standards and this phenomenon has been
suggested to be one of the factors hindering the region economic growth. This paper assesses the competitive
environments of SSA banks with the aim of testing whether banks with market power profit from monetary policy.
Employing various specifications of the Lerner index as the measure of degree of market power, the results suggest
that the high net-interest margins among SSA banks can be attributed to high level of market power and the cost of
labor. The results also show that spreads of banks with market power is significantly more sensitive to the monetary
policy changes. The overall findings point to the fact that banks in Africa profit from monetary policy shocks.
Introduction
Financial systems in Africa are predominately bank-based and the level of financial intermediation in
Sub-Saharan Africa (SSA) is relatively low as evidenced by low levels of credit to the private sector.
Studies have shown that a lack of or low financial intermediation is not only an important barrier to
growth; it is seen as a causal factor in explaining economic performance. Levine (2004) has provided
empirical evidence of a causal relationship between the level of financial intermediation and the degree of
economic growth. The effectiveness of the banking system in channeling funds from surplus economic
units to deficit units is measured by examining the spread between lending and deposit units as well as
assessing the level of competition and operational efficiency of the banking sector (Yildrim and
Philippatos 2007). The poor performance of SSA banks in the supply of loans to private sector appears
related to the prevalence of high lending costs in Africa. Figure 1 shows that SSA banks’ interest spreads
are among the highest in the world.
Figure 1: Interest rates spread across countries based on regional groupings
Bank spread
25
20
15
10
5
0
1998 1999 2000 2001 2002 2003 2004 2005
Years
East Asia & Pacific Europe & Central Asia Euro area
Latin America & Caribbean Middle East & North Africa South Asia
Sub-Saharan Africa
Source: World Development indicators (September 2009) and author’s calculations
This paper investigates whether SSA banks with market power profit from monetary policy tightening,
having access to cheap local sources of funding that enable them to maintain high interest margins. In
addition, the paper attempts to address the following issues: whether the prevalence of high spread in
Africa is due to the imperfect market conditions (Carbo Valverde and Rodriguez Fernandez 2007); the
regulatory large reserve requirements (Gelos 2006); the imposition of mandatory credit (Souza-Sobrinho
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