Financial integration, competition and bank efficiency: evidence from Africa’s sub-regional markets

Abstract

This paper examines the convergence properties as well as the causal nexus between bank competition and efficiency in five regional economic communities of Africa over the 2007–2014 period. We estimate bank market power, cost and profit efficiency using the stochastic frontier analysis approach and employ β and σ convergence tests to assess the relative speed of banking convergence in Africa and the five sub-regional markets over the 2007–2014 period using data from 405 banks from 47 African countries. We further examine the causal nexus between bank competition and efficiency in these markets using Granger-type causality tests. The results show a steady rise in bank competition and efficiency in Africa and the five sub-regional markets overtime. The gradual convergence of bank competition and efficiency in the selected markets also reflects the benefits of financial integration in emerging markets. The results also support the quiet life hypothesis in Africa, especially in the East African Community, and reject the quiet life hypothesis in the AMU and ECCAS banking markets. We further found evidence of the efficient structure hypothesis in Africa, especially in the Arab Maghreb Union and Southern African Development Community.