Briefing Paper

Bank Competition in Africa: Do Institutional Quality and Cross-border Banking Matter?

This study analyses the implications of cross-border banking (CBB) and institutional quality (IQ) for bank competition in Africa. We apply a two-step estimation procedure using bank-level panel data for 29 African countries. In step one, the Boone indicator and the Lerner index are used to gauge bank competition in a given country in Africa. In the second step, we analyse the sources of bank competition, placing emphasis on the impact of CBB and IQ. The results suggest that competition increased in the period 2002-2005, before decreasing somewhat between 2006 and 2007 and increasing again thereafter. The results also show that cross-border banking enhances bank competition in African countries with stronger governance structures and institutional quality. Our results are robust to an array of controls, including an alternative methodology, variable specifications, and the regulatory environments that banks operate in. Also available in French: La Concurrence Bancaire en Afrique: La Qualité des Institutions et les Opérations Bancaires Transfrontalières ont-elles de l’Importance?