Financial freedom, market power and bank margins in sub-Saharan Africa

Abstract

PurposeThis paper examines the effect of financial (banking) freedom and market power on bank net interest margins (NIM).Design/methodology/approachThe study uses data from 11 sub-Saharan African countries over the period, 2006-2012, and the system generalized method of moments to assess how financial freedom affects the relationship between market power and bank NIM.FindingsThe authors find that both financial freedom and market power have positive relationships with bank NIM. However, there is some indication that the impact of market power on bank margins is sensitive to the level of financial freedom prevailing in an economy. It appears that as competition intensifies, margins of banks in freer countries are likely to reduce faster than those in areas with more restrictions.Practical implicationsCompetition policies could be guided by the insight on how financial freedom moderates the effect of market power on bank margins.Originality/valueThis study provides new empirical evidence on how the level of financial freedom affects bank margins and the market power-bank margins relationship.