Effect of Competition on Efficiency of Banking Industry in Ethiopia
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Date
2022-06
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Addis Ababa University
Abstract
This study was conducted with an objective of identifying effect of competition on efficiency of commercial banks in Ethiopia. Based on this aim this study has assessed competition in banking industry in Ethiopia, cost efficiency of the banks, and the effect of competition on the cost efficiency of the banks. The study has included 17 commercial banks in Ethiopia; 16 private banks and 1 public bank, Commercial Bank of Ethiopia (CBE). The study was conducted by using financial report of the banks from 2001 to 2020 and the data was collected from National Bank of Ethiopia (NBE). Since majority of the banks were established during the period under study, the study has used unbalanced panel data and the data analysis was conducted by using 250 observations. Competition in the banking industry was estimated by using Lerner Index and cost efficiency of the banks was estimated by using Stochastic Frontier Approach (SFA). Then the effect of competition on the cost efficiency was estimated by using Random Effect Model following Hausman procedure. Based on the data analysis, Lerner Index for the study period was 0.601 of
banking industry in Ethiopia that suggests existence of monopolistic competition in the banking industry. On the other hand, the banks have cost efficiency closer to 1 suggesting that commercial banks in Ethiopia are efficiently handling their cost. The result of empirical estimations showed that there is there is negative and significant effect of competition on efficiency of commercial banks in Ethiopia. This indicated that banks with larger monopoly power have lower cost efficiency in banking industry in Ethiopia. This study implies that commercial banks in Ethiopia with large market power has lower cost efficiency.
Key Words: Banking Industry in Ethiopia, Competition, Cost Efficiency, Monopoly,
Lerner Index, SFA