Market Power and Bank Lending in Africa: The Role of Regulatory Policy

Abstract

The paper investigates how regulatory policy modulates the complex relationship between market power and bank lending. The empirical evidence is based on the seemingly unrelated panel regressions by employing a dataset of 52 African countries for the period, 2006–2018. The study finds a U-shaped relationship between market power and bank lending. The study shows that the estimated thresholds fall within the range of -4.38 to 9.67 of market power. It observes that the thresholds of market power in countries with stringent regulatory policies have relatively greater than countries operating in low regulatory policy regimes. The study shows a negative and direct effect of market power on lending. In the light of interactions, the conditional effects are estimated to provide meaningful interpretations. This is relevant to policymakers because our established conditional effects imply that regulatory policy is a sufficient complementary condition for reducing the negative effect of market power on bank lending.