Competition and Stability in African Banking

This paper investigates the implications of market power on issues of bank efficiency and stability in African developing countries. Using data from 229 banks in 7 African economies over the period 2009-2016, we calculate market power, bank efficiency and stability estimates at the bank level. We employed different specifications of the conventional Lerner indicator to measure the degree of market power and the Z-index to account for bank stability. Bank efficiency scores were estimated with the stochastic frontier analysis. Our results show that a higher degree of market power results in profit efficiency gains and enhanced bank stability, despite significant cost efficiency losses. Further, as banks gain market power, they also benefit from greater firm stability and reduced risk potential. This result supports the traditional view that increased competition may undermine bank stability. Our results also seem to suggest that efficiency Granger-causes market power indicating, that changes in profit efficiency precede changes in market power. Banks that are able to operate more profit efficiently will gain greater market power in comparison with their peers. Overall, our findings seem to suggest that higher degrees of market power bring about greater profit rates and enhanced bank stability.