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APPENDIX TABLE I
Ephraim Chirwa is at the Department of Economics, Chancellor College, University of Malawi. We would like to thank Philippe Egoumé-Bossogo, Monica de Bolle, Kristina Kostial, Sérgio Leite, Johan Mathisen, Eric Parrado, Doris Ross, and Abdou Sam, for useful comments and suggestions. We are responsible for any remaining errors.
Levine (1997) provides a comprehensive review of the relationship between financial development and growth. See also Rousseau and Wachtel (1998), and Khan and Senhadji (2000) for more recent empirical evidence.
The issue of whether interest rate spreads are a good indicator for measuring banking efficiency has been debated in the literature. Sarr (2000) gives an overview of arguments why spreads are not necessarily a good measure for efficiency.
Some authors, while not in favor of high spreads, note the positive role of high interest spreads in developing countries. For instance, Barajas et al.(2000) remark that high spreads can be used by banks to strengthen and solidify the banking system by protecting against an inherently high risk, usually related to high monitoring costs in most developing countries. Hence a lowering of spreads could make the banking system more fragile.
Critics of the structure-conduct-performance hypothesis, particularly proponents of the efficient market hypothesis following Demsetz (1973) and Peltzman (1977) argue that market concentration is a result of bank’s superior efficiency that leads to larger market shares and profitability.
However, most of the extensive literature on credit rationing (see, for example, Baltensperger (1985) for a comprehensive survey) seems to indicate that banks generally prefer to curtail lending rather than raise interest rates.
After their abandonment in favor of treasury bills during most of the eighties, RBM bills were reintroduced in August 2000.
These include central bank discount facility, repos, market-determined exchange rate, introduction of foreign currency denominated accounts, introduction of auto teller machines (ATMs) and remunerated checking accounts.
Santomero (1984) provides an extensive survey of models of the banking firm. See Hannan(1991) for formalization of the relationship between market structure and bank loan rates, bank deposit rates and bank profits. For a more recent complete and detailed analysis of banking firm literature and models, see Freixas and Rochet (1997).
See surveys by Gilbert (1984), Smirlock (1985), Clark (1986), Evanoff and Fortier (1988) and more recent studies by Civelek and Al-Alami (1991), Agu (1992), Molyneux et al. (1994), Molyneux and Forbes (1995), Goldberg and Rai(1996), Maudos (1998) and Chirwa (2001) for the S-C-P or efficient market hypotheses.
The Herfindahl-Hirschman index is calculated as the sum of the squared market shares for firms competing in the same industry. The index has a value ranging between zero (zero percent) representing a perfectly competitive market and one (100 percent) representing a monopolist.
This is the case when the funds held in the LRR account earn no interest, or a lower interest rate than the opportunity cost of the funds.
Spreads and bank-specific characteristics are weighted averages with total assets as weights.
Using the AR1 (TSCS) command in TSP on the original data in each equation, we obtained the autocorrelation coefficient (Rho) that we used to transform the variables in the second stage. The first observation for each firm in the panel was lost as a result of this procedure.
The growth in the index of industrial production may be an imperfect measure of gross domestic product as it captures only developments in the manufacturing sector which is about 12 percent of gross domestic product. This may be the reason for its poor performance in the regression models. However, the index includes electricity production that may be highly correlated with developments in other sectors of the economy and it is the only indicator of output available as a monthly series that we could use to control for demand and supply conditions.
The cost of switching to new banks for existing customers that have long relationship with the incumbent banks may be high, particularly where new entrants are relatively small, with limited branch networks and are non-established international banks. Their long term survival is still under scrutiny by many bank customers, and it may take some time for the business stealing effects to manifest in the Malawian financial sector.