The Nexus Between Bank Competition and Dynamic Cost Productivity – The Ghanaian Experience

Abstract

This study investigates the relationship between competition and cost productivity in the Ghanaian banking sector, with the aim of understanding how competitive dynamics influence bank efficiency and performance. The study is structured around five key objectives: estimating the level of competition among banks, evaluate cost efficiency and cost productivity changes, decompose cost productivity into its underlying drivers, address potential linear programming infeasibilities in productivity estimation, and explored the bi-directional nexus between competition and cost productivity. Using a combination of econometric analysis and Data Envelopment Analysis (DEA), the study examines data from Ghanaian banks over a specific period. The findings reveal significant variability in competition levels, with some banks displaying substantial market power while others operate in highly competitive environments. On average, the banking sector remains moderately competitive, with concentration (HHI) stable between 0.20–0.30 and pricing power (Lerner Index) averaging 0.30–0.40. The study also finds considerable differences in efficiency levels, with larger banks benefiting more from scale efficiencies and technological advancements. Most banks operate close to the efficiency frontier, with technical efficiency around 0.96–1.02, though scale efficiency varies more widely (0.93 1.05). However, some banks face challenges due to inefficiencies in resource utilization. The regression analysis demonstrates a positive but modest correlation between competition, as measured by the Lerner Index, and cost productivity, suggesting that banks with greater market power tend to be more efficient. However, this relationship is complex and influenced by other factors such as technological adoption, management practices, and regulatory frameworks. The study concludes that while competition plays a significant role in shaping bank efficiency, it is not he sole determinant. Strategic investments in technology, process optimization, and risk management are critical for enhancing productivity in the banking sector. The study offers several recommendations for both practitioners and policymakers, including the need to foster a balanced competitive environment, encourage technological adoption, and enhance regulatory oversight.