Competition and bank efficiency in emerging markets: empirical evidence from Ghana

The purpose of this paper is to examine the relationship between competition and efficiency in the Ghanaian banking industry.

Data on 26 banks from 2004 to 2011 is used to estimate technical and cost-efficiency scores by the data envelopment analysis while the Boone indicator is employed to proxy for competition. Controlling for bank size, lending, income diversification, tangibility, leverage and profitability, ordinary least squares, instrumental variables and fixed effects estimations are used to estimate the panel regression model. The authors also apply the growth convergence theory to examine the existence of efficiency convergence.

The results points to improvements in cost efficiency (CE) and competition within the banking industry. From the empirical estimations, the findings suggest that competition exerts a positive influence on CE. The authors also find evidence of convergence in both technical and CE.

The study recommends that efforts at improving competitiveness of the banking industry will translate into lower interest rate spread through improved CE. This will ultimately improve access to bank credit and impact positively on economic growth. Future studies could also examine productivity changes and scale economies in the banking industry.

To the authors best knowledge, this is the first study to apply the Boone (2001) indicator in assessing the competitiveness of the Ghanaian banking industry. This is also the first study to examine efficiency convergence within the banking industry in Ghana.