Abstract/Summary

African countries are pursuing financial reforms to address inhibitions to competition and efficiency of their banking sectors. This thesis focuses on Ghana which recently implemented deregulation reforms including the introduction of universal banking, the adoption of an open licensing policy to enhance contestability and competition, and the abolition of secondary reserves; and examines the impact of these reforms on banking competition and efficiency. The study uses a comprehensive and unique panel dataset of 25 banks for the period 2000-2014 which captures the pre- and post-reform periods. The study employs the persistence of profit and Boone indicator models of competition to analyse competitive conditions in the loans market. The empirical results suggest that competition initially increased following the reforms but subsequently declined as a result of macroeconomic weaknesses, in particular high interest rates, which was partly impacted by the indirect effects of the global financial crisis. The study also uses stochastic frontier analysis to examine the efficiency impacts of the reforms, as well as the role of bank ownership and size in influencing efficiency levels. Different deregulation reform indices are constructed using survey data and coding rules from two international databases on banking regulations and reforms, and captured as inefficiency covariates together with ownership and bank size in the one-step Battese-Coelli (1995) model. The findings point to an overall increase in cost efficiency following the reforms although there is non-uniformity in efficiency-impacts from the different policies. Foreign and regional banks are found to be marginally more efficient than private domestic and state-owned banks. Bank size was found to positively impact cost efficiency while the global financial crisis had an adverse impact on efficiency. The policy implications are that for African countries to benefit from financial deregulation reforms, there is the need for the reforms to be anchored on strong macroeconomic fundamentals, institutional initiatives which support these reforms, strong credit environments and appropriate sequencing of reforms.