Foreign bank entry and bank competition in Africa: an inverted u-shaped relation

This paper rigorously investigates the relationship between foreign bank entry and bank competition in Africa. It uses newly databases of bank competition measured by the Boone indicator and foreign bank entry. Our final sample covers 34 African countries over the period 1997–2009. To take into account potential endogeneity between our measures of bank competition and foreign bank entry we employ the GMM system dynamic-panel data estimation. The GMM results show that there is an inverted U-shaped relationship between foreign bank entry and bank competition. Our result remains robust to the introduction of financial depth measured by: private credit, liquid liabilities, bank assets and deposit money; bank efficiency: overhead costs, bank cost to income ratio, and the net interest margin; and bank stability measured by: bank capital, the Z-score and deposit insurance; bank concentration, defined as the share of assets of the three largest banks, the logarithm of per-worker GDP, the inflation rate, corruption, geography and religion as controls. Our findings have important implications for both policymakers and regulators who work on issues related to African economies. Since the majority of foreign banks in Africa are originated from developed countries, our result suggests to governments to encourage and diversify foreign bank presence in the continent. Specifically, they should encourage foreign banks entry from developing and emerging economies. This will increase competition in the banking sector for those countries and will boost economic growth by lowering the cost of credit.