Abstract
This paper assesses the level of competition in Zimbabwe’s banking sector using the Panzar-Rosse H-statistic. The H-Statistic has been assessed, using the total revenues regression equation, and applying the panel least square regression model with fixed effects. The H-statistics is estimated at 0.56, which result is confirmed, using bank random effects and the General methods of moments. The H-statics obtained from the two methods are 0.54 and 0.51 for the random effect and generalised methods of moments, respectively. The results confirm the presence of monopolistic competition. On an annual basis, the results show that the Zimbabwean banking sector is evolving towards perfect competition. There is need for the government to desist from tampering with market forces as this reduces the amount of competition. This study is important, as there are limited studies on the competition of the banking sector in dollarized economies. Dollarized economies are peculiar in that their characteristics differ from non-dollarized economies.
Highlights
A competitive banking system is a pre-requisite for effective intermediation between savers and investors
The results showed that there was an increase in competition in Ghana’s banking system as a result of the economic reforms and the banking sector was oligopolistic in nature, which explained the profitability of the sector
The results show that the banking sector in Zimbabwe operates under monopolistic competition consistent with the results from other studies that used the same method
Summary
A competitive banking system is a pre-requisite for effective intermediation between savers and investors. A competitive banking sector can bring about superior innovation, which enhances the variety and quality of financial products. This reduces the price of banking products improving the society’s standard of living (Carbo et al 2009). Banking competition helps foster higher economic growth (Buchs & Mathiesen 2005) It enhances efficiency as it compels managers to cut down on costs in order to remain profitable (Claessens & Laeven 2004). Banking competition enables banks to satisfy the needs of the public at a reduced social cost It enhances the efficiency of the production and quality of financial products. It enhances the efficiency of the production and quality of financial products. Claessens and Laeven (2004) argued that a reduction in the level of competition in the banking sector increases the cost of providing financial services which impedes economic growth
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