Competition and Market Structure in the Zambian Banking Sector

04/03/2013
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Studies on banking competition in developing countries, and especially in Africa, are sparse. This 2013 study, published by the Chief Economist Complex of the African Development Bank, evaluates the degree of competition in the Zambian banking sector in the wake of dynamic market shifts induced by financial reforms, entry of new foreign banks and privatization of the state-owned bank. Competition is measured using the Panzar-Rosse H-statistic and the Lerner index from 1998-2011. To our knowledge, estimation of the time varying bank-specific Lerner index provides the first-ever documented empirical evidence on the evolution of competition in the Zambian industry.

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. The study also shows that 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.

Generally, the findings lend support to previous research suggesting that foreign bank penetration and privatization can heighten competitive pressures in the banking sector. Thus, the main policy lesson drawn from the analysis is 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.