Competition and Efficiency in the Banking Sector in South Africa

Abstract

We analyse the evolution of competition and efficiency of the banking sector in South Africa using firm-level data for the period 1999-2008. We adopt a three-step estimation approach. First, we measure efficiency using the data envelopment analysis (DEA) methodology. Second, we use the Panzar-Rosse approach to derive the H-statistic for competitive conditions in banking. In the third stage, we take into account the role of managerial ability in competition by re-estimating the Panzar-Rosse model, with the DEA efficiency scores as an explanatory variable. Overall, the results show that although average efficiency was trending upwards over the period, the number of efficient banks was falling. Also, it is found that for the period 1999-2008, the structure of the South African banking industry was characterized by monopolistic competition. This result may reflect domination by five large banks, which together account for over 85 per cent of total banking assets.

Structure and profitability in the banking sector

“…Despite these important policy changes, there is a dearth of empirical evidence in the conduct and performance of banks in South Africa. Known empirical studies include Simatele (2015), Simbanegavi et al (2015), Mlambo and Ncube (2011) and Okeahalam (2001). Mlambo and Ncube (2011) also incorporate efficiency in their analysis.…”

Measuring the Impact of the Global Financial Crisis on Efficiency and Productivity of the Banking System in South Africa

“…As such many studies conducted in South Africa [Okeahalam (2001), Greenberg & Simbanegavi (2009), Mlambo & Ncube (2011),] have taken a keen interest on investigating the nexus between competition and bank performance.…”

Competitive Condition of Sub-Saharan Africa Commercial Banks

“…An extensive body of theoretical and empirical studies has reported the significant role of bank competition in ensuring access to finance (Clarke et al, 2006;Lin et al, 2010;Love and Per´ıa, 2014;Mudd, 2013;Rice and Strahan, 2010;Tan, 2013), efficiency (Mlambo and Ncube, 2011;Ningaye et al, 2014;Pasiouras et al, 2009;PruteanuPodpiera et al, 2008) and stability Fu et al, 2014;Schaeck and Cih´ak, 2014;Ariss, 2010) in any economy. According to Casu et al (2015), competition is good for many reasons; it is an essential force in any economy, it encourages firms to be more efficient and provide better allocation of resources.…”