Investigating The Effect Of Bank Competition On Financial Stability In Ten African Countries

Abstract

This paper explores the relationship between bank competition and financial sector stability using 2005–2010 data for ten African countries. The study utilises a Generalized Method of Moments approach to regress bank stability indices –Z-score, non-performing loans ratio and return on banks assets – on bank competition indices – Lerner-Index, Herfindahl-Hirschman Index total assets and Herfindahl-Hirschman Index total deposits. The findings show a robust positive relationship between market power and financial stability. This unequivocally suggests that there is a trade-off between bank competition and financial sector stability in these countries, as per the competition-fragility view.