Bank Market Power, Financial Innovation And Economic Growth In Africa

ABSTRACT

This thesis has four empirical papers. The first paper examines the determinants of bank market power in Africa. The second paper contains analyses of how financial development and financial innovation lead to economic growth convergence between African countries and the world’s technological leader. The second paper also analyzes whether financial innovation lead to economic growth in six sub-regions in Africa. The third paper examines whether bank market with power promote financial innovation that in turn leads economic growth in Africa. The last examines the nexus between bank market power and economic growth using country-level data. The paper also explores how institutional quality factors influence the mechanisms through which banks with market power influence economic growth. Finally, the last paper analyzes how the level of bank market power interact with sub-regional integration to induce economic growth across six sub-regions in Africa. The period of the study spans from 2002 to 2015 and the study includes 44 African countries. The study employs the first difference GMM model to achieve the above objectives. However, in order to analyze finance-growth convergence, the study employs the robust least squares estimation procedure on an averaged cross-sectional data. The results show that bank concentration, bank efficiency, and foreign ownership have negative influence on the level of bank market power. On the other hand, the level of bank stability induces bank market power positively. Moreover, the interaction between: bank concentration and efficiency; bank concentration and access to credits; bank stability and access to credit and foreign bank ownership and access to credits have strong positive effects on the level of bank market power. The vi results also show that financial development lead to economic growth convergence provided other policy measures are present. Similarly, the study found that the level of financial innovation does not lead to economic growth for the overall sample and the sample below the median level of financial innovation. Finally, the study reports that bank with market power employ screening processes that induce economic growth in Africa. However, the adoption of ATMs by the banks does not induce economic growth which indicates that in the absence of ATMs banks with market power can still channel funds into productive sectors to induce growth. The study therefore provides information on how the banking system development can induce financial innovation toward economic growth in Africa. The results also show that the level of bank market power in Africa induces economic growth. In addition, institutional quality improvement induces positive economic growth and improves the degree at which bank market power affect 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, banks with market power induce economic growth but the less competitive nature in the banking environment of the other sub-regions does not induce economic growth.