Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/204978
Authors: 
Asongu, Simplice
Odhiambo, Nicholas M.
Year of Publication: 
2018
Series/Report no.: 
AGDI Working Paper No. WP/18/056
Publisher: 
African Governance and Development Institute (AGDI), Yaoundé
Abstract: 
There is a growing body of evidence that interest rate spreads in Africa are higher for big ba nks 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 contra st, 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 dat a 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.
Subjects: 
Sub-Saharan Africa
banks
lending rates
efficiency
Quiet Life Hypothesis
competition
JEL: 
E42
E52
E58
G21
G28
Document Type: 
Working Paper

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