Economic freedom, competition and bank stability in Sub-Saharan Africa

Purpose – This study aims to analyze the potential implications of economic freedom and competition for bank stability. Design/methodology/approach – Using system generalized method of moments and data from 139 banks across 11 Sub-Saharan African (SSA) countries during the period 2006–2012, this study considers whether the degree of economic freedom affects the relationship between competition and bank stability. Findings – The results show evidence of the competition-fragility hypothesis in SSA banking, but suggests that beyond a setting threshold, increases in market power may also be damaging to bank stability. Financial freedom has a negative effect on bank stability, suggesting that banks operating in environments with greater financial freedom generally tend to be less stable or more risky. The authors also find evidence of a conditional effect of economic freedom on the competition–stability relationship, implying that bank failure is more likely to occur in countries with greater economic freedom, but with low competition in the banking sector. Practical implications – The results suggests to policy makers that a moderate level of competition and economic freedom may be the appropriate policy to ensure the stability of banks. Originality/value – The study provides insight on the competition–bank stability relationship, by providing new empirical evidence on the effect of economic freedom, which has not been previously considered.