This paper aims to examine the effects of financial freedom and competition on bank profitability.
The study uses system generalized method of moments and data from 139 banks across 11 Sub-Saharan African countries during the period 2006-2012.
The results of the study show that higher market power (less competition) is positively related to bank profitability, but operating efficiency is a more important determinant of profitability than market power. Also, both financial freedom and economic freedom show a positive impact on bank profits. The authors find evidence that banks with higher market power operating in countries with higher freedom for banking activities are more profitable than their counterparts in countries with greater restrictions on banking activities.
The results have shown that allowing banks greater freedom to operate would enhance their performance, without necessarily damaging the economy, as operating efficiency appears to be a more important reason for the observed profitability than market power.
This study provides insight on the ambiguous relationship between competition and bank profitability by considering the moderating effect of financial freedom which has not been taken into account in previous studies.
