Challenges in the Era of Globalization - iaabd

Proceedings of the 12th Annual Conference © 2011 IAABD
reveals that the markets are in equilibrium 2 -hence in the long run, return on assets is correlated with input
prices. Again, the PR H-statistic (0.67) shows that banks in Africa as a whole operate in an environment
characterized by monopolistic competition. In table 2, the coefficients of input price of fund (PF) labour,
(PL) and Capital (PK) record positive and statistically significant results. This indicates that the input
prices positively influence total revenue of banks in Africa. Expectedly, the ratio of loan to total asset
enters the regression positively significant. It suggests that higher proportion of loans relative to asset of a
bank would be expected to generate higher revenue. Bank size does seem to impact negative influence on
bank revenue from this result unlike bank capitalization ratio. Above all, the monopolistic competitive
market structure suggests that there is an element of product differentiation among banks, some degree of
market power over pricing and low entry barriers. We then turn our focus to exploring the factors
accountable for the competitive bank behaviour in Africa.
Pool Sample Regression Results
Table 2 H-statistic of Banking System in Africa. Pooled sample Result
Ln(TRETA) Ln (ROA+1)
Variable Β t-statistic Β t-statistic
Ln(PF) 0.3362 15.48*** 0.0014 2.13*
Ln (PL) 0.2600 9.61*** 0.0026 3.04**
Ln(PK) 0.0741 5.13*** 0.0004 0.69
Ln (TA) -0.0129 -2.15* -0.0011 -5.28***
Ln (Equity/Ta) 0.0085 0.47 0.0014 2.04*
Ln (Loan/TA) 0.1243 4.37*** -0.0056 -4.57***
Constant -0.1511 -1.28 1.0398 315.46***
No. of Obs 1560 1507
H-statistic 0.67 0.0042
Note. *, ** and *** significant at 10%, 5% and 1% levels, respectively. Regressions were estimated using
heteroskedastic panels corrected standard errors
Factors Explaining Competitive Bank Behaviour
From table 3, the relationship between profitability measure, net interest margin, and competitive measure
is negative and statistically significant. This indicates that banks which are able to reap high profit do so
in an environment characterized by monopolistic competition. Alternatively, it shows that high bank
spreads are characteristic of concentrated banking markets.
2 Test of equilibrium provides p-values 0.0002 which is less than 1%.
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