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Abstract: This study evaluates the degree of competition in the Zambian banking sector in the wake of dynamic market shifts induced by entry of new foreign banks and privatisation of the state-owned bank. Using an unbalanced panel of bank level data complemented with market factors from 1998 to 2011, we measure using the Panzar-Rosse H-statistic and the time varying Lerner index, two non-structural measures mostly applied in the banking industry, see for instance. These indices are estimated across two periods with a view to assess whether or not increased foreign bank presence observed since 2008 and privatisation of the state owned bank in 2007 have had a discenible impact on competition in the Zambian banking setcor. We classify these periods as pre-entry/pre-privatisation and post-entry/post privatisation, respectively. Ther results are then compared.
Zambia initiated far reaching financial sector reforms in 1992. The reforms brought great anticipation that competition in the banking system would be enhanced, thus leading to improved provision of financial services after many years of financial repression. However, expectations have been broadly at variance with practical observations. The banking system is concentrated and segmented with four largest banks controlling a third of the industry assets and about three quarters of the loans market. Intermediation margins are also wide, even by regional standards, despite marked improvements in macroeconomic conditions. Between 1998 and 2011, the average net interest margin was about 6% while the equivalent measure for return on assets stood at more than 4%. High profits and wide spreads are reminiscent of the high level of concentration in the sector. Nonetheless, commercial banks in Zambia have continued to show resilience after the banking crisis of the mid-1990s which saw closure of more than 6 banks. Currently, a majority of banks hold capital balances above the regulatory threshold, depicting the strength and stability of the Zambian banking sector. Thus, the failure of financial liberalisation to generate a 'critical level' of competitive pressure stems largely from the inherent nature of the Zambia banking system, with incumbent large foreign banks firmly entrenched in all segments of the market. However, concentration ratios distort the picture of competition because they do not offer adequate and conclusive explanations of actual bank behaviour. In view of this, appropriate measures are required to accurately assess banks’ exercise of market power and competitive conduct.
Empirical results from the H-statistic show that Zambian banks earned their revenue under conditions of monopolistic competition. This finding is consistent with the estimate of the Lerner index which suggests that the degree of competitiveness may not be as low as previously understood, especially among foreign banks. Encouragingly, domestic banks also experienced intensification of competitive pressures over the sample period.
Risk taking, revenue diversity and regulatory intensity are all important determinants of market power. Tight monetary policy is also found to strengthen the banks’ exercise of market power. Macroeconomic instability, denoted by inflaiton, limits banks’ competitive conduct while a large capital buffer is mainly aimed at maintaining banks’ solvency but it imposes a limit on competitive behaviour. The results also show that more geographically diversified banks have a higher propensity to raise revenue than those with a smaller branch network, and therefore useful in stimulating competition. Benchmarking Zambia against regional peers, the results show that Zambia ranked above countries of the EAC, except Kenya, which exhibited the highest degree of contestability in the region. Generally, the findings lend support to previous research suggesting that foreign bank penetration and privatisation can heighten competitive pressures in the banking sector. Thus, for policy purposes, the analysis shows that competitive conditions could be further enhanced by easing regulatory impediments and in the long-run, allowing more foreign bank participation could spur competitive conduct in the industry.
Abstract: The objective of this study is to assess whether the formation of the Southern African Development Community (SADC) in 1992 has led to (i) convergence in real income or “catch- up” growth across the countries within the region or higher growth in the region as compared to advanced economies over the past two decades; and (ii) convergence in indicators of macroeconomic stability and/or the harmonization of macroeconomic policies within the region.
The paper investigates convergence in real per capita GDP and macroeconomic policy and stability indicators within the SADC, using primarily the concepts of beta and sigma convergence and common stochastic trends. Empirical tests for the period 1992-2009 showed no evidence of absolute beta and sigma convergence in real per capita GDP among the SADC economies. Although, absence of convergence does not necessarily imply lack of economic growth, further empirical assessment of possible conditional beta convergence did not reveal any tendency of convergence to own steady states. On an individual level, however, ADF unit root test indicated that Botswana and South Africa’s real per capita GDP converged to a common stochastic trend while the rest were characterized by a boundless drift.
With regard to the SADC macroeconomic convergence goals set for 2012, the findings indicate that most of the economies of the member states have shown a tendency of macroeconomic divergence in 2009 in monetary policy, fiscal policy, and foreign exchange reserve ratios. Since member countries are at varied levels of economic development, the goals themselves must be conditional on the level of convergence in economic structure and hence macroeconomic convergence may not be attainable. Furthermore, achieving the targets may be neither necessary nor sufficient to achieve good macroeconomic outcomes. We made further attempt to identify possible club convergence within SADC free trade area using Common Monetary Area criterion, including South Africa, Lesotho, Namibia and Swaziland. The result indicates that the real per capita GDP level of the CMA economies did not converge to the South African real GDP per capita level during the 18 years under consideration. The crucial implications of the above results are that the establishment of regional trading block did not enhance economic performance in the poorer member states in SADC during the 18 years under consideration. Poor member states failed to catch up with the more developed countries within the region. The same countries that were richer 18 years ago are richer today and the poorer countries remained largely poorer. This is not to suggest that regional trade agreements and economic blocks do not promote economic performance and help poor countries to catch up. It is rather the way member countries implement the regional integration agreements that matter most. Duplication of membership among the several Regional Economic Communities, low savings and investment, shortages of high level skills, high level of unemployment, inadequate and substandard infrastructure, and insignificant production and manufacturing capability all contributed to slow economic growth and lack of convergence in real per capita GDP. Regional economies need to urgently address these challenges in order to achieve deeper economic integration and catch up with the more developed economies in the sub region and the rest of the world. Macroeconomic policy strategies should also be designed conditional on the actual degree of convergence in the economic structure.
Displaying results 1 to 9 out of 9