An Evaluation of the Nexus Between Banking Competition and Efficiency in Zimbabwe

Abstract

This study investigates the relationship between cost and revenue efficiency, and competition in the banking system in Zimbabwe. Competition was approximated using the Lerner Index, and efficiency, using the data envelopment analysis. The Granger causality method was applied to determine the causal relationship between efficiency and competition. The study established that the banks operated under monopolistic competition during the period 2009-2014. The data envelopment analysis found that banks in Zimbabwe operate outside their revenue and cost efficiency potential, experiencing inefficiency levels of around 30 per cent. The Granger causality test suggests that revenue and cost efficiency positively Granger causes market power. This means that an increase in cost and revenue efficiency leads to a decline in competition, which implies that bank regulators face a tradeoff and should moderate their application of procompetitive policies. The results further suggest that competition positively impacts cost efficiency supporting the institution of procompetitive policies so as to stimulate cost efficiency.