Challenges in the Era of Globalization - iaabd

Table 3 Determinants of Competitive Bank Behaviour
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Variable
Coeff Robust Std Error t-statistic P-values
Net Interest Margin -0.36620 0.06250 -5.85*** 0.0000
CR3 -0.11130 0.01802 -6.18*** 0.0000
Cost-income ratio -0.00001 0.00105 -0.10 0.9900
Activity Restrictions -0.33740 0.00191 -176.51*** 0.0000
Fraction of Entry Denied -0.17360 0.01340 -12.96*** 0.0000
Foreign Ownership 0.03910 0.01164 3.36*** 0.0000
Log(GDPpc) -0.11540 0.00166 -69.68*** 0.0000
Intercept 2.39660 0.02065 116*** 0.0000
No. Obs 850
R-sq 0.996
Dependent Variable is the PR H-statistic computed for each country. OLS robust standard error to correct
for heteroskedasticity employed on a panel of 15 countries over the period 1999-2008 with 850
observations. ***, significant at 1%.
Consistent with Bikker and Haaf (2002), we report negative and significant relationship between
concentration and bank competitive measure. This indicates that the level of competition reduces as the
banking system becomes more concentrated. Thus, it is likely that monopolistically competitive banking
environment in Africa is likely to confer more market power on banks. We must add that, one must be
cautious in explaining this causal relationship (Beck et al., 2003). With regards to the variables
representing contestable markets, the coefficient of the activity restriction variable is negative and
statistically significant at 1%. By predictions of the contestability theory, this shows that more restrictions
imposed on cross-sector activities of banks in the financial industry will enhance anti-competitive
behaviour of the existing banks leading to a lower degree of competitive bank behaviour (Claessens and
Laeven, 2004; Bikker et al., 2007 and Turk-Ariss, 2009). Similarly, foreign ownership indicates positive
and statistically significant relationship with bank competitive measure. By implication, the presence of
foreign banks actually explains variations in the level of competition in the banking sector among
countries in Africa (Bikker and Haaf, 2002 and Claessens and Laeven, 2004). Furthermore, the
percentage of fraction of entry denied shows a statistically negative and significant relationship with
competitive measure. This supports the fact that countries where there are higher restrictions on and high
denial of applications to entry into the bank sector, existing banks are protected against competition.
Thus, the more applications being denied, the less competitive the banking sector becomes. Competitive
banking behaviour could be influenced by the response of banks to business cycle dynamics. The
expected direction of this response could be positive or negative. The logarithm of GDP per capita reports
statistically significant and negative coefficient.
Conclusion
This paper investigates competitive banking behaviour in Africa using a sample of 26 countries over the
period 1999-2008. It further examines the factors that account for the competitive bank behaviour using
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