Bank Competition, Concentration and Economic Growth: A Panel Analysis of Selected Banks in the Nigeria Banking Industry.
- March 7, 2022
- Posted by: rsispostadmin
- Categories: Banking and Finance, IJRSI
International Journal of Research and Scientific Innovation (IJRSI) | Volume IX, Issue II, February 2022 | ISSN 2321–2705
By
Okowa, Ezaal, Vincent, Moses Owede
University of Port Harcourt, Nigeria.
Abstract
The role of financial development in the growth and development of developing economies have constituted a popular discourse among development and financial economist. Two key issues of interest in the discussion of financial are competition and concentration in the banking industry as key predictors of growth in every economy. This study therefore investigated the effect of concentration and competition in the Nigerian banking industry on economic growth with focus on the big-8 banks in Nigeria. Moreover, the implementation of the consolidation policy of the Central Bank of Nigeria in the year 2005 informed the choice of period (i.e., 2005-2019) selected for this study. While a positive concentration-growth nexus was found in the study, the study could not establish a positive competition-growth nexus in the Nigerian economy for the period under review. The increase in capital base as required by the consolidation policy has accounted for the level of concentration in the banking industry; and this has made it easier for banks to contribute significantly to the growth of the economy. Imperfect competition in the banking industry on the other hand has led to higher costs of loans that detain firms from new investments, thus slowing down the firms’ expansions and productivity growth.
Keywords: Competition, Concentration, Big-8, Growth
1 Introduction
Increases in average income, as well as a reduction in income inequality, have been linked to greater financial development in recent decades. The literature on financial development and growth has recognized that the development of the financial sector is important at both the microeconomic and macroeconomic levels (King & Levine, 1993; Creel, Hubert & Labondance, 2015). Since the financial crisis, there has been an increase in the scrutiny of banking regulations around the world, which has heightened policy debates about the impact of concentration and competition on real sector outcomes in the banking industry (Beck, Levine & Loayza, 2014). According to this framework, researchers and policymakers have been particularly interested in the potential impact of financial market structure on access to finance, which could result in increased investment and aggregate output. According to organization theory, a competitive financial sector is required in order to maximize social welfare while also achieving the highest possible level of productivity. As a result, bank competition promotes economic development by lowering the cost of financing and by providing financial services to other industries that are required for their manufacturing processes. This point has also been made in more recent literature, which supports the claim (Amidu & Wilson, 2014; Rakshit & Bardhan, 2019). As a result of these theories, it is argued that competition in the banking sector promotes economic growth by increasing capital accumulation in a given economy. In contrast, the theories of competition fragility raise concerns about the economic role of increased bank competition, as it increases instability by eroding quasi-monopoly rent and discouraging banks from properly screening their borrowers. Increased bank competition is therefore detrimental to the economy (Jemeneze, Lopez & Saurina, 2007; Allen & Gale, 2004). As a result, a volatile financial sector has a negative impact on long-term economic growth and development (Owusu & Odhiambo, 2014). Banks play a critical role in the functioning of an economy, making the topic of banking sector competition particularly important. Bank competition is important because, according to some empirical studies, there is a strong relationship between the market structure of the banking industry and the rate of growth in the economy (Jayaratne & Strahan, 1996; Beck, Levine & Loayza, 2000).
