Bank competition and access to finance by firms in the common monetary area of Southern Africa

Abstract

This study determines the effect of bank competition on firms' access to finance in the Common Monetary Area of Southern Africa (CMA). The study uses a combination of firm, bank, and country-level data from various sources for the period 2014 to 2020. We use four different measures of access to finance, one subjective and three objective. Furthermore, we employ two non-structural measures of competition (the Lerner index and Boone indicator) and one structural measure (the Herfindahl-Hirschman index). Probit, ordered probit, and probit with sample selection estimations are utilized to obtain results. According to results, more bank competition in CMA enhances firms’ access to finance. Our findings directly suggest that promoting bank competition can enhance firms' access to finance. Relevant authorities in the CMA should develop and implement policies that stimulate bank competition in order to promote firms' access to finance. Furthermore, the most important firm-specific factors that explain firms’ access to finance appear to be the size of a firm, whether it is foreign-owned, audited, and privately held or not. On the other hand, the level of income, inflation rate, financial development, and institutional development are all important in explaining cross-country variation in firms’ access to finance.