Bank competition and economic growth

Abstract

Purpose The degree and impact of competitiveness in the banking sector is of great importance as this has great impact on the financial system and the wider economy. A question of interest here is, does competition in the commercial banking sector boost or hamper economic growth. The purpose of this paper is to test the hypothesis that competitiveness in commercial banking is linked to economic growth. Design/methodology/approach The authors use the Boone (2008) indicator to estimate competitiveness of banking markets in ten frontier countries in Africa from 2005 to 2012. This model measures banking competitiveness by assessing the relationship between relative marginal costs and relative market share. Through a panel data model, the authors examine the effect banking sector competitiveness has on economic growth. Findings The results of Boone (2008) indicator suggest that, to a greater extent, banks in the countries studied have a competitive banking sector. The results of the panel data estimation support the hypothesis that banking sector competition impacts positively on economic growth. Practical implications The paper recommends for more policy geared towards enhancing bank competition. This is because competitive banking system will allocate resources more efficiently to improve economic growth. Originality/value To the best of the authors’ knowledge, this is the first study to test the link between bank competition and economic growth in a cross-section of Frontier African countries.