Banking reforms, efficiency and competition: new empirical evidence from a panel vector autoregressive analysis of Ghanaian banks

This paper examines the causal nexus between bank efficiency and market power using data from 21 banks in Ghana over the period 2008–2019. Bank cost-efficiency was estimated using the nonparametric data envelope analysis (DEA) estimator whilst bank market power (a proxy for bank competition) was measured by the Herfindahl–Hirschman Index of the industry’s lending. The causal nexus between bank efficiency and market power in Ghana was further examined using the most recent Panel Vector Autoregressive (PVAR) model developed by Abrigo & Love (2016). The results show a significant improvement in bank cost-efficiency and bank market power in the Ghanaian banking industry over time. This reflects the benefits of the ongoing banking reforms in Ghana. Also, the results suggest that bank cost-efficiency positively Granger-causes bank market power which supports the efficient structure hypothesis (ESH). However, the reverse causality running from bank market power to bank cost-efficiency is positively significant, and, therefore, does not support the quiet life hypothesis (QLH). The significant improvement in bank cost-efficiency provides an incentive for the ongoing reforms across the sector. Similarly, the evidence of the significant impact of bank market power on bank cost-efficiency in Ghana suggests that tailor-made initiatives and policies need to be adopted depending on the market share (MS) or concentration ratio (CR) of each of the disaggregated banking subgroups rather than the wholesale initiatives across the entire sector.