Challenges in the Era of Globalization - iaabd

Proceedings of the 12th Annual Conference © 2011 IAABD
This paper also controls for the countries’ general economic development, macroeconomic stability, and
institutional framework as these are likely to affect banking system performance. Boyd et al. (2001) find
evidence supporting the adverse impact of inflation on bank lending activities. Inflation and GDP growth
are included in the regression to account for differences in macroeconomic environments. Inflation is the
rate of inflation based on the Consumers Price Index (CPI). GDP growth measures business cycle
fluctuation. Cross-country studies on monetary policy choices are limited. This is because various
countries use different policy measures. The study employs the respective countries’ short-term interest
rate as a measure of monetary policy stance. Short-term interest rates appear to be a good indicator as
figure 2 shows a strong negative correlation between our short-term interest rates and the share of deposit
in total short-term financing of banks. An increase in short-term interest rates leads to a corresponding
decrease in the share of deposits in short-term finance. This result is also consistent with the argument
that banks rely more on uninsured debt Banking activities can also be affected by the freedom with which
they operate. The banking freedom index provides the overall measures of the openness of the banking
sector and the extent to which banks are free to operate their businesses (The Heritage Foundation 2010).
The study uses the banking freedom index from the Economic Freedom Indicators of the Heritage
Foundation. It is scaled from 0 to 100 with higher values indicating greater freedom.
Bank level data is taken from the Bankscope database maintained by Fitch/IBCA/Bureau Van Dijk. Series
are yearly, covering a sample of 264 banks across 24 Sub-Saharan African countries during the eight year
period, 2000–2007. The study employs unconsolidated balance sheet data whenever possible even though
in some cases the paper makes use of consolidated statement because of data availability. The analysis is
conducted on the individual banks and the sample includes all commercial banks, cooperative banks,
development banks, savings banks, real estate and mortgage banks for which annual data is available for
some period, or the years, during the period 2000-2007. Macro data are obtained from the World
Development Indicator of the World Bank and International Financial Statistics database of the
International Monetary Fund and the respective central banks.
Figure 2: Bank’s short-term finance mix and short-term interest rates
Deposits/Short-term
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
2000 2001 2002 2003 2004 2005 2006 2007
Source: WDI, Bankscope and author’s calculations
4. Empirical Results
Years
Finance mix Short-term interest rate
Descriptive statistics
Table 1 provides descriptive statistics of both bank spreads and its determinants for 264 banks across 24
SSA countries averaged over 2000-2007. The banking spread in SSA countries has been increasing
during the period. It increased by 99% in 2000 (a rate 3.85) to 7.68 in 2004 and then fell marginally in
2007 to 4.51. At the same period, the competitive structure, proxied by Lerner index increase by 145.6%,
95.8% and 86.83% respectively to conventional, funding-adjusted and efficiency-adjusted Lerner indices.
It has to be emphasized here that, the Lerner indices have not followed a uniform pattern. The result
clearly shows that the Lerner indices increased from (10.4, 27 and 29.2) in 2000 to (25.5, 53.7 and 55.6)
in 2003; the highest during the sampled period, and fell thereafter to (24.8, 42.2 and 43.2) in 2007. Thus
60
50
40
30
20
10
0
Short-term interest rates
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