Does Bank Competition Affect Profitability? The Case of Multinational Banks in Sub Saharan Africa

Abstract

Globalization and increased openness of modern economies presupposes that multinational enterpreises, banks in particular, freely move to where they expect to reap high profits. Unlike previous studies on bank competition and profitability in sub Saharan Africa, this specific study investigates how multinational bank competion has affected their profitability. Using a two-step system GMM on the sampled best performing multinational banks’ panel dataset (2007-2017) to regress ROA as a measure of bank performance; conventional, and adjusted-Lerner indices for bank competition; alongside six other control variables (geographic diversification, country risk; debt and equity sources of financing, bank size and economy size), results indicate a low market power (Lerner index) due to high level of bank competition. This implies that high profitability is explained by the efficient-structure of multinational banks in the region than market power. Further, the results find country risk, geographic diversication, sources of finance (debt and equity), and size of the economy significantly influencing bank profitability in a positive manner. Only bank size does not significantly affect profitability. The results suggest that competition amongst multinational banks in sub Saharan Africa yields more profits, even in economies where country risk is high due to better efficient structures of the banks. Thus, multinational banks should go ahead and spread to newer economies in the region, as benefits from their efficient structures are still high.