Técnicas e instrumentos de evaluación y diagnostico

Does competition in banking increase access of firms and individuals to finance, and what are the channels through which this can be achieved? Similar to the competition-stability and competition-efficiency debates discussed earlier, the impact of competition on access to finance is also a much debated subject in the literature. Here too we find two distinct viewpoints: the market power hypothesis and the information hypothesis. The market power hypothesis predicts a positive relationship between competition and access, and states that increased competition in banking leads to a reduction in the cost of finance and thereby increases credit availability and access by firms and individuals. The information hypothesis sees a negative relationship between competition and access as it contends that due to the presence of information asymmetries in banking, competition can reduce access to finance as increased competition makes it more difficult for banks to internalize the returns from investing in relationship banking (Love and Peria, 2012).

The market power hypothesis therefore sees the impact of competition on accessibility as a demand-driven phenomenon where cost of credit by firms is the main constraint to access. Thus, since an uncompetitive banking system is characterized by banks with significant market power who charge higher prices on loans, increasing competition will not only lead to lower prices through enhanced efficiency but also result in enhancing access to credit (Claessens, 2009). However, it can be argued that this would be the case if the cost of finance were the only or major constraint to access in the demand and supply of loanable funds. This seems to be the case in most African countries where cost of credit and interest rates spreads are very high, although there are other challenges such as lack of credit history, improper financial record keeping by firms, and low financial literacy on the part of individuals.

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The information hypothesis theory, on the other hand, sees access to credit as a supply-side phenomenon which hinges on banks’ long-term relationship-building incentives. In particular, banks with greater market power are deemed to have more of an incentive to establish long- term relationships with new firms and extend financing to such firms due to the benefits of long-term relationship banking. In that case, financial access is seen to increase with market power. Similar to the underlying rationale for the competition-inefficiency hypothesis discussed earlier, the perceived short-term relationships in a highly competitive environment is seen to constrain credit extension by banks. Petersen and Rajan (1995) argue that lenders are more likely to increase financing to firms in a more concentrated banking environment because it is easier to deepen relationship banking in such markets.

The empirical work related to the competition-access issue has also yielded mixed results. Fischer (2000) and Petersen and Rajan (1995) find that market concentration leads to more information acquisition and greater credit availability in the study of manufacturing firms in Germany and SMEs in the US respectively. Beck et al. (2004) in a cross-country study instead find that market power is associated with less access, especially for developing countries. As noted by Love and Peria (2012), the mixed results in empirical studies is partly attributed to the different measures of competition used, while differences in the nature of the countries and their levels of financial and institutional development seem to impact on the outcomes of these studies (Beck, Demirgüç-Kunt, and Pería, 2011).

A closely related issue in the competition-access debate has to do with credit access and quality of loan portfolio. It is argued that increased competition leads to more access not only on account of lower cost but due to weaker credit lending standards, as was observed in the US sub-prime mortgage market which triggered the global financial crisis. On the other hand, while concentration may reduce the total amount of loanable funds, it may also increase incentives to effectively screen borrowers, thereby enhancing the quality of the loan portfolio.

In Ghana, like other African countries, access to credit is constrained by high interest rates, a symptom of lack of competition in the banking sector, but also due to high interest rates on government securities from increased borrowing from the banking sector by government, and lack of credit reference infrastructure. Although the use of credit reference services is in its infancy stage, it is expected to yield significant benefits in the medium term. It is therefore anticipated that with improvement in the credit environment, fiscal discipline and strong macroeconomic, competition in the banking industry should impact positively in increasing access.

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To sum up, the literature suggests that banking competition especially in the context of African countries is expected to have a positive impact on banking efficiency and increase financial access. This could arise either directly from competition pressures which induces or encourages efficiency in the production and allocation of financial services or from technology enhancements and innovations that are usually associated with the entry of foreign banks with such superior technology. While its impact on stability remains debatable, strong regulatory and supervisory framework can be adopted to minimize any potential instability that can be triggered by increased competition. We now turn our attention to examine policies that enhance competition in banking.