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How does the expansion of regional cross-border banks affect bank competition in Africa?

01.06.2015Florian Léon

African banking sectors have witnessed significant changes in their structure over the past several decades with the penetration of regional cross-border banks. We have investigated whether these changes have led to more competition in the banking industry.

The entry of foreign banks increases the number of players and therefore, is likely to increase competition in the banking sector. Moreover, cross-border banks have a comparative advantage when entering new markets in terms of better access to capital, risk diversification, scale economies, skill and management expertise. In particular, foreign banks that originated from Africa have an additional competitive advantage in dealing with countries sharing similar institutional, cultural and economic characteristics. These banks could thus adopt more aggressive strategies to gain market shares.

Several factors, however, may limit the ability of African cross-border banks to increase competition in host markets. The effect of foreign banks entry on competition is conditional to market strategies and the degree of engagement of the regional banks in host countries. For instance, the entry of new banks can exert no effect on competition if these banks follow their clients abroad or focus on a fringe demand that is not financed by domestic banks. Thus, a foreign bank might become a dominant player and reduce contestability. In addition, the multi-market contact theory documents that firms interacting in several markets have more incentives to collude. Therefore the fact that cross-border banks interact in different national markets may reduce their willingness to compete.

To investigate how the expansion of regional banks in Africa has affected banking sector competition, we compared the evolution of competition and the market share of African cross-border banks over the period 2002-2009 in a sample of seven West African countries (Benin, Burkina-Faso, Côte d'Ivoire, Mali, Niger, Senegal, Togo). We used 3 different measures of competition: the Lerner index, the Panzar-Rosse H-statistic and the Boone indicator. Countries under consideration in this study, which are all members of the West African Economic and Monetary Union (WAEMU), have a major advantage for our purpose. Since the mid-2000s, the WAEMU banking landscape has changed dramatically with the arrival and expansion of new banks from Africa. African cross-border banks began their expansion in the WAEMU ten years ago, whereas this change has occurred very recently elsewhere in the continent.

The findings of this study reveal that the penetration of regional banks goes hand-in-hand with more competition among banks. The results show that the degree of competition has increased since the mid-2000s.

Put differently, the expansion of regional banks seems to spur competition in Africa. These preliminary results should be confirmed by a more rigorous test including more African countries. In addition, further research should analyse the consequences of the development of cross-border banks on banking efficiency, stability and inclusion in Africa.

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This blogpost is based on the paper "Has competition in African banking sectors improved? Evidence from West Africa", prepared by Florian Léon from the University d'Auvergne - CERDI.

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