Abstract
A key research question that remains largely unanswered especially in the African context is whether the macroeconomic environment and the level of financial development of a country determine the effectiveness of financial reforms. This has important policy implications. We choose Ghana as a case study and carry out an in-depth analysis of its comprehensive set of financial reforms, implemented in the 2000s, which we look at individually. We estimate a stochastic cost frontier to look at efficiency. This is then followed by two different models of competition on the loans market, the main target of the reforms. We find that only the removal of entry restrictions is significant at improving banks efficiency and that private and global foreign, but not regional banks, benefit from it. The results show, however, no improvements in competition, and reveal instead that macroeconomic and institutional weaknesses continue to exert a negative counterbalancing effect. Reforms need to be anchored on stronger macroeconomic fundamentals, institutional initiatives and generally stronger credit environments for their full potential to be revealed in the context of developing financial markets.
Highlights
Banking in Africa has been undergoing gradual but notable changes since the turn of the 1990s, following the widespread introduction of financial reforms aimed at improving competition and efficiency
This paper examines the impact of deregulation reforms on the efficiency and competitiveness of banks in Ghana using a panel dataset of 25 banks for the period 2000–2014 which captures the pre- and post-reform periods
First of all we find that efficiency improved over time and in particular following the introduction of deregulation
Summary
Banking in Africa has been undergoing gradual but notable changes since the turn of the 1990s, following the widespread introduction of financial reforms aimed at improving competition and efficiency. The relaxation of entry restrictions (ENTRYR) instead contributes significantly to reducing cost inefficiency This improvement could be a result of increased competitive pressures on the market, and/or of positive technological spillovers if the new banks have better technologies than the incumbents. The general trend of efficiency over time is positive, growing quite steadily from an average of 88% before the reforms to one of 93% afterwards with levels as high as 95.4% just before the financial crisis Overall this part of the analysis shows that deregulation brought some beneficial effects in terms of efficiency improvements but that not all deregulatory policies contributed if at all, to it. Using the estimated stochastic cost frontier results, we calculate the observation-specific marginal cost of loans, which is used to derive both the LOC variable of the POP model and the explanatory variable for the Boone model
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