Testing the Quiet Life Hypothesis in the African Banking Industry

Asongu, Simplice A.; Odhiambo, Nicholas M.

doi:10.1007/s10842-018-0278-3

“…Most of the significant control variables display the expected signs. This established finding is not consistent with Asongu and Odhiambo (2019) who have used the same dataset to assess whether market power increases the quantity of loans and reduces loan price. They have confirmed evidence of the QLH and further asserted that such "quiet life" is driven by the belowmedian Lerner index sub-sample.…”

Section: Resultscontrasting

confidence: 71%

Market power and cost efficiency in the African banking industry

Asongu

¹

,

Nting

²

,

Nnanna³

2020

JES

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PurposeIn this study, we test the so-called “Quiet Life Hypothesis” (QLH), which postulates that banks with market power are less efficient.Design/methodology/approachWe employ instrumental variable Ordinary Least Squares, Fixed Effects, Tobit and Logistic regressions. The empirical evidence is based on a panel of 162 banks consisting of 42 African countries for the period 2001–2011. There is a two-step analytical procedure. First, we estimate Lerner indices and cost efficiency scores. Then, we regress cost efficiency scores on Lerner indices contingent on bank characteristics, market features and the unobserved heterogeneity.FindingsThe empirical evidence does not support the QLH because market power is positively associated with cost efficiency.Originality/valueOwing to data availability constraints, this is one of the few studies to test the QLH in African banking.

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“…Second, while our findings regarding the Quiet Life Hypothesis were statistically insignificant, they confirmed the potential for applying the QLH in the African banking industry. This evidence broadly confirmed mainstream findings by Tu and Chen (2000) in Taiwan for 1986-1999, whose results were valid only before 1991; Koetter and Vins (2008) for Germany from 1996 to 2006, although the magnitude of the estimated effects of the QLH were small; Schaeck and Cihak (2008) for Europe and the USA from 1995 to 2005; Solis and Maudos (2008) regarding the loans market in Mexico for the years 1993-2005; Delis and Tsionas (2009) for Europe from 1996 to 2006, using a local maximum likelihood technique; Ariss (2010) in a sample of developing countries for cost efficiency; Coccorese and Pellecchia (2010) in Italy during 1992-2007, although the impact of market power on efficiency was not particularly remarkable in magnitude; and Asongu and Odhiambo (2018) in Africa.…”

Section: Further Discussion and Policy Implicationsmentioning

confidence: 99%

“…To model the cost, we use a translog function with three inputs and one output. This function, which was first proposed by Christensen et al (1971) and then extended to a multiproduct framework, has been employed frequently for the assessment of the QLH in the banking literature (Koetter and Vins 2008;Coccorese and Pellecchia 2010;Ariss 2010;Asongu and Odhiambo 2018). The cost function is as follows:…”

Section: Methodology and Datamentioning

confidence: 99%

“…This paper was motivated by two main considerations in scholarly and policy circles: (1) the ongoing debate about the relationship between bank size and the efficiency of financial intermediation, and (2) gaps in the existing literature regarding this subject. Questions about the role of bank size in improving efficiency in the banking sector are reflected in the work of various researchers, including Asongu et al (2016); Boateng et al (2018), and Asongu and Odhiambo (2018). Existing research maintains that some big banks might abuse their market power instead of leveraging economies of scale to increase their efficiency in financial intermediation.…”

Section: Introductionmentioning

confidence: 99%

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Size, efficiency, market power, and economies of scale in the African banking sector

Asongu

¹

,

Odhiambo

²

2019

Self Cite

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There is a growing body of evidence that interest rate spreads in Africa are higher for big banks compared to small banks. One concern is that big banks might be using their market power to charge higher lending rates as they become larger, more efficient, and unchallenged. In contrast, several studies found that when bank size increases beyond certain thresholds, diseconomies of scale are introduced that lead to inefficiency. In that case, we also would expect to see widened interest margins. This study examines the connection between bank size and efficiency to understand whether that relationship is influenced by exploitation of market power or economies of scale. Using a panel of 162 African banks for 2001-2011, we analyzed the empirical data using instrumental variables and fixed effects regressions, with overlapping and non-overlapping thresholds for bank size. We found two key results. First, bank size increases bank interest rate margins with an inverted U-shaped nexus. Second, market power and economies of scale do not increase or decrease the interest rate margins significantly. The main policy implication is that interest rate margins cannot be elucidated by either market power or economies of scale. Other implications are discussed.

show abstract

“…This paper was motivated by two main considerations in scholarly and policy circles: (1) the ongoing debate about the relationship between bank size and the efficiency of financial intermediation, and (2) gaps in the existing literature regarding this subject. Questions about the role of bank size in improving efficiency in the banking sector are reflected in the work of various researchers, including Asongu et al (2016); Boateng et al (2018), and Asongu and Odhiambo (2018). Existing research maintains that some big banks might abuse their market power instead of leveraging economies of scale to increase their efficiency in financial intermediation.…”

Section: Introductionmentioning

confidence: 99%

Size, Efficiency, Market Power, and Economies of Scale in the African Banking Sector

Asongu

¹

,

Odhiambo

²

2018

View full text Add to dashboard Cite

There is a growing body of evidence that interest rate spreads in Africa are higher for big banks compared to small banks. One concern is that big banks might be using their market power to charge higher lending rates as they become larger, more efficient, and unchallenged. In contrast, several studies found that when bank size increases beyond certain thresholds, diseconomies of scale are introduced that lead to inefficiency. In that case, we also would expect to see widened interest margins. This study examines the connection between bank size and efficiency to understand whether that relationship is influenced by exploitation of market power or economies of scale. Using a panel of 162 African banks for 2001-2011, we analyzed the empirical data using instrumental variables and fixed effects regressions, with overlapping and non-overlapping thresholds for bank size. We found two key results. First, bank size increases bank interest rate margins with an inverted U-shaped nexus. Second, market power and economies of scale do not increase or decrease the interest rate margins significantly. The main policy implication is that interest rate margins cannot be elucidated by either market power or economies of scale. Other implications are discussed.

show abstract

Testing the Quiet Life Hypothesis in the African Banking Industry

Cited by 25 publications

References 50 publications

Market power and cost efficiency in the African banking industry

Market power and cost efficiency in the African banking industry

Size, efficiency, market power, and economies of scale in the African banking sector

Size, Efficiency, Market Power, and Economies of Scale in the African Banking Sector

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