The Effect of Bank Market Power on Economic Growth in Africa: The Role of Institution

Abstract

We provide empirical investigations into the nexus between bank market power economic growth using nationalized bank data from 44 African countries from 2002 to 2015. The paper also explores how institutional quality factors influence the mechanisms through which banks with market power influence economic growth. Finally, the paper analyzed how the level of bank market power interact with sub-regional integration to induce economic growth across six sub-regions in Africa. We employed the first differences GMM model to achieve the above objectives. The results show that less competitive banking systems in Africa induce economic growth. In addition, institutional quality improvement induces positive economic growth and improves the degree at which bank market power affects economic growth. The influence of institutional quality on economic growth however vary depending on specific institutional factors even when we differentiated the effect of the level of bank market power. In West Africa, the competitive nature of the banking environment induces economic growth but the less competitive nature in the banking environment of the other sub-regions discourages economic growth. The results call for policy directions that improve economic and political institutions as well as the competitiveness of sub-regional banking environment.