Economic freedom, competition and bank stability in Sub-Saharan Africa

Abstract

PurposeThis study aims to analyze the potential implications of economic freedom and competition for bank stability.Design/methodology/approachUsing system generalized method of moments and data from 139 banks across 11 Sub-Saharan African (SSA) countries during the period 2006–2012, this study considers whether the degree of economic freedom affects the relationship between competition and bank stability.FindingsThe results show evidence of the competition-fragility hypothesis in SSA banking, but suggests that beyond a setting threshold, increases in market power may also be damaging to bank stability. Financial freedom has a negative effect on bank stability, suggesting that banks operating in environments with greater financial freedom generally tend to be less stable or more risky. The authors also find evidence of a conditional effect of economic freedom on the competition–stability relationship, implying that bank failure is more likely to occur in countries with greater economic freedom, but with low competition in the banking sector.Practical implicationsThe results suggests to policy makers that a moderate level of competition and economic freedom may be the appropriate policy to ensure the stability of banks.Originality/valueThe study provides insight on the competition–bank stability relationship, by providing new empirical evidence on the effect of economic freedom, which has not been previously considered.

WITHDRAWN: Impacts of Bank Competition, Financial Stability, and Gender Gap on Access to Finance: Evidence From Sub-Saharan Africa

“…It is argued that a deep banking system can limit access to credit if it lacks competition, serves only incumbent rms and operates without regard to prudential regulations. While extant literature documents the implications of bank competition in promoting economic growth (Aluko and Ajayi 2018;Cherif et al 2020;Sarpong-Kumankoma et al 2020), adequate attention has not been paid on the implications of bank competition and nancial stability in rm's nancing constraint. Financial liberalizations in the 1990s, the boom in commodity prices, and economic growth have contributed signi cantly to the expanding banking sector in Sub-Saharan Africa (SSA) (Mlachila et al 2013;Otchere et al 2017).…”

Competitiveness in Banking Sector: A Systematic Literature Review

“…Foreign banks in less developed countries are usually more profitable than domestic banks (Chen & Hsu 2022). Also, banks with higher regulative freedom are more profitable than banks operating in more restrictive banking systems (Sarpong- Kumankoma et al 2018Kumankoma et al , 2020.…”

Competition–banking stability: the moderating role of government intervention quality in North African countries

“…Indeed, the first theoretical, as well as empirical literature wave, predicts a counterproductive effect of competition in terms of banking stability. A high level of competition increases liability risks by reducing banks’ ability to use their intermediation margin to absorb supply or demand shocks (Chang and Velasco, 2001), erodes banks’ market power and profits, and thus increases their risk appetite (Hellmann and Murdock, 2000; Matutes and Vives, 2000; Kabir and Worthington, 2017; Sarpong-Kumankoma et al ., 2020; Srivastava et al ., 2022). However, the second wave of literature argues that competition promotes banking stability by fostering innovation, and portfolio diversification and therefore improves the quality of financial products (Fiordelisi and Mare, 2014; Noman et al ., 2017; Rahman et al ., 2021).…”