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The Dynamics of Bank Concentration, Competition and Efficiency in the East African Community

Author

Listed:
  • Moses Nyangu

    (University of Stellenbosch Business School: Stellenbosch University
    Strathmore University Business School: Strathmore University)

  • Nyankomo Marwa

    (University of Stellenbosch Business School: Stellenbosch University)

  • Ashenafi Fanta

    (University of Stellenbosch Business School: Stellenbosch University)

  • Latacz-Lohmann Uwe

    (University of Kiel)

Abstract

The paper examines whether increased bank concentration and lack of competition lead to inefficiency within the East African Community (EAC) banking sector. Bank efficiency is decomposed into technical, pure technical, scale, cost, and profit efficiency unlike previous studies which have examined bank efficiency in a more generic manner. A two-step system generalized method of moments (GMM) and a sample of 149 banks with 1805 observations over the period 2001–2018 are employed. The findings reveal that the effect of bank concentration and competition is dependent on the type of efficiency. In particular, bank concentration has a positive significant effect on technical, pure technical, and profit efficiency. However, it has a negative significant effect on cost and scale efficiency. In addition, greater competition is found to foster technical, scale, cost, and profit inefficiency. These results are robust to alternative market power measures and an array of control variables. The paper reveals important policy implications to the regulators that a trade-off between bank concentration and competition through anticompetitive policies should be ensured in the banking sector as they play a significant role on bank efficiency.

Suggested Citation

  • Moses Nyangu & Nyankomo Marwa & Ashenafi Fanta & Latacz-Lohmann Uwe, 2022. "The Dynamics of Bank Concentration, Competition and Efficiency in the East African Community," Journal of Industry, Competition and Trade, Springer, vol. 22(1), pages 21-49, March.
    • Handle: RePEc:kap:jincot:v:22:y:2022:i:1:d:10.1007_s10842-022-00379-7
    DOI: 10.1007/s10842-022-00379-7
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