Bank Efficiency and The Bank Lending Channel: New Evidence

Abstract

We test the bank lending channel of monetary policy in Africa and examine the role of bank cost efficiency in this relationship. We use the stochastic metafrontier approach to estimate cost efficiency scores of 447 commercial banks in Africa. The A fixed effect (FE) estimator is used as the baseline estimation method. The 2SLS Instrumental Variables (IV) and two-step system GMM approaches are used as main estimation techniques to control for endogeneity. The results consistently show the existence of the bank lending channel in Africa: thus, bank credit responds to changes in monetary policy rate. Again, we find strong evidence to show that higher cost efficiency leads to higher loan growth. The results further show that Cost-efficient banks are less responsive to monetary policy shocks. The evidence suggests that bank cost efficiency weakens the bank lending channel. This implies that the effect of monetary policy on bank lending depends not only on bank size, capitalization and liquidity as espoused in literature but also on bank efficiency. The results are robust in formal sample-splitting. policy implications are discussed.