How does the central bank recapitalization policy affect competition in commercial banks of Sub-Saharan Africa?

Abstract

In the last two decades, central banks in Sub-Saharan African (SSA) countries have witnessed a trend of the recapitalization policy for commercial banks, and many more are bracing up to undertake the same reform. This has raised debates on whether and how it affects the competitiveness of commercial banks. Nevertheless, empirical evidence remains sparse and inclusive, especially for SSA countries. It is on this premise that this study, therefore, investigates competition in commercial banks before and after recapitalization for six selected SSA countries. The study employs the Panzar-Rosse model to analyze bank-level and macroeconomic indicators between 2000 and 2015. The results show that the H-statistic increased from –0.15, –0.28 and -0.82 before capitalization to 0.94, 0.97 and 0.7 after recapitalization for the first, second and third estimations respectively. This showed that bank competition is higher for the period after recapitalization than the period before recapitalization. The study, therefore, concludes that bank recapitalization could be necessary, especially for countries with low minimum paid-up capital. It is to the extent that banks can now be self-reliant with a higher capacity to invest, as this will significantly improve competition in commercial banks’ services. AcknowledgmentThis research study was supported by a grant from the African Economic Research Consortium, Nairobi Kenya. The findings, opinions and recommendations are those of the authors and do not necessarily reflect the views of the Consortium, its members or the AERC Secretariat.