Increased foreign bank presence, privatisation and competition in the Zambian banking sector

Purpose – This study aims to evaluate the degree of competition in the Zambian banking sector in the wake of dynamic market shifts induced by entry of new foreign banks and privatisation of the state‐owned bank. Design/methodology/approach – Competition is measured using the Panzar‐Rosse H ‐statistic and the Lerner index from 1998‐2011. Findings – Results from the H ‐statistic show that Zambian banks earned their revenue under conditions of monopolistic competition. This finding is consistent with the estimate of the Lerner index which suggests that the degree of competitiveness may not be as low as previously understood. Risk taking, revenue diversity and regulatory intensity are all important determinants of market power. Tight monetary policy is also found to strengthen the banks' exercise of market power by expanding their holdings of Treasury securities. Generally, the findings lend support to previous research suggesting that foreign bank penetration and privatisation can heighten competitive pressures in the banking sector. Research limitations/implications – Due to data unavailability prior to 1998, the study does not establish whether or not the level of competition has changed since 1992 when financial sector reforms were initiated. Practical implications – The main policy lesson drawn from the analysis is that competitive conditions could be further enhanced by easing regulatory impediments and, in the long run, allowing more foreign bank participation could spur competitive conduct in the industry. Originality/value – To the author's knowledge, estimates of the time varying bank‐specific Lerner index provide initial empirical evidence on competitive conduct of Zambian banks and how it has evolved over time.