Title:
DOES BANK COMPETITION AFFECT PROFITABILITY? THE CASE OF MULTINATIONAL BANKS IN SUB SAHARAN AFRICA

Authors:
Boaz Kibs Muhanguzi*,Uganda

Abstract:
Globalization and increased openness of modern economies presupposes that multinational enterprises, banks in particular, freely move to where they expect to reap high profits and so, increase competition. Unlike the most previous studies on the same subject matter, this specific study investigates the effect of bank competition on profitability particularly, in sub Saharan African region. to accomplish this, a panel bank sample (2007-2017) is investigated. Level of bank competitions measured using the Lerner index, a proxy for market power, while Return on Assets is used as a measure of bank profitability. Analyzing the effect of bank completion on profitability is done using a two-step system Generalized Method of Moments estimator. Other covariates (geographic diversification, country risk; debt and equity sources of financing, bank size, and economy size) are included in the regression model. Descriptive results indicate a low market power (Lerner index) implying presence of a high level of bank competition in the region. The regression output indicates a positive and significant effect of bank competition on profitability. Further, the results show a positive and significant effect of country risk, geographic diversication, sources of finance (debt and equity), and size of the economy significantly influencing bank profitability in a positive manner. Only bank size does not significantly affect profitability. This implies that competition amongst multinational banks in sub Saharan Africa yields more profits, even in economies where country risk is high. This suggests that profitability emanates from use of better efficient bank structures (management and technology) than charging high prices (monopoly)