Competition and Efficiency in the Banking Sector in South Africa

Abstract

Abstract: We analyse the evolution of competition and efficiency of the banking sector in South Africa using firm-level data for the period 1999–2008. We adopt a three-step estimation approach. First, we measure efficiency using the data envelopment analysis (DEA) methodology. Second, we use the Panzar–Rosse approach to derive the H-statistic for competitive conditions in banking. In the third stage, we take into account the role of managerial ability in competition by re-estimating the Panzar–Rosse model, with the DEA efficiency scores as an explanatory variable. Overall, the results show that although average efficiency was trending upwards over the period, the number of efficient banks was falling. Also, it is found that for the period 1999–2008, the structure of the South African banking industry was characterized by monopolistic competition. This result may reflect domination by five large banks, which together account for over 85 per cent of total banking assets.