Competition and bank risk-taking in Sub-Saharan Africa countries

The last 3 decades have witnessed a growing trend of financial sector liberalization in countries in Sub-Saharan Africa, along with increased competition in the banking sector. Accordingly, this paper investigates the effect of competition on banks’ risk-taking in the Sub-Saharan Africa region. The topic is considered to be of significant importance due to the recent banking crisis in the region. The study tests the hypothesis that intense competition in the banking sector positively impacts the risk-taking behaviour of banks in the countries. Using a sample of 220 banks in 16 Sub-Saharan Africa countries from 2007 to 2018, the paper sheds insight on the impact of competition, measured by Lerner index and H-statistics on bank risk-taking, measured by Z-score, non-performing loans, loan-loss provision, and capital adequacy ratio. Results estimated through the two-step system generalized method of moments (GMM) and two-stage least-squares (2SLS) techniques indicate that intense competition measured by Lerner index exacerbates bank risk-taking in the region as measured by Z-score, non-performing loans, loan-loss provision, and capital adequacy ratio. Furthermore, the study finds an increase in competition measured by H-statistics is associated with an increase in risk-taking measured by Z-score, non-performing loans, and loan-loss provision. The results of the study suggest that H-statistics has no significant influence on the capital adequacy ratio of the banks. Bank-specific and macroeconomic variables appear to have influence on bank risk-taking in the region. The results are robust to controlling for alternative measures, governance mechanisms, and endogeneities. Overall, the results of the study show that intense competition in the regions’ banking system increases the risky behaviour of banks, confirming the competition-fragility view. The findings of the study have key policy implications for regulators, policymakers, and banking practitioners in the Sub-Saharan Africa countries.