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Appendix: Structure of the Banking System
The commercial banking industry in Kenya is the fourth largest in the region behind South Africa, Nigeria, and Mauritius. The banking sector includes 43 commercial banks, including 12 foreign banks. Cross-border linkages are an important feature; seven Kenyan banks have established 14 subsidiaries in neighboring countries.
The banking system in Tanzania has grown significantly since 2003, but remains relatively small and dominated by a top tier of larger domestic legacy and foreign banks. There are 33 commercial banks in Tanzania, including 16 foreign banks. Government ownership is limited to four smaller fully-owned banks and minority stakes in the three largest domestic banks. The top tier mainly caters to a small group of large corporate, which often represent up to 70 percent of banks’ loan portfolios.
The sector has expanded significantly since a moratorium on licensing new banks was lifted in 2005. Eight new banks have been licensed since 2005, bringing the total to 22 commercial banks, including 14 foreign banks, operating in Uganda. In addition, the total network of bank branches has more than tripled over that time to 390.
There are 12 commercial banks operating in Rwanda, including three foreign banks.
There are seven commercial banks and two financial establishments in Burundi with total assets representing 54 percent of GDP. Privately owned banks account for 73 percent of assets and 80 percent of deposits; the government remains the majority shareholder in two banks, and in two financial establishments specializing in housing and development
The authors are grateful for the valuable comments and suggestions provided by Peter Allum, Martine Guerguil, Masafumi Yabara, and the participants of the February 2011 Financial Sector Network Seminar in the African department of the IMF.
Burundi is not included in depth in the paper given the lack of available data in some areas.
Regarding indicators of market structure, there is the lack of clarity as to whether market structure determines bank behavior (structure-conduct-performance hypothesis); or is the result of bank behavior (efficient structure hypothesis). In the former, (i) Structure influences conduct (e.g., lower concentration leads to more competitive the behavior of firms); and (ii) Conduct influences performance (e.g., more competitive behavior leads to better bank performance). In the latter, structure is not (necessarily) exogenous since market structure itself is affected by firms’ conduct and hence by performance.
This is because a bank that raises its prices above marginal cost and begins to earn abnormal profits, will attract potential rivals into the market to take advantage of these profits. This process will continue until profits fall back to the competitive equilibrium. This implies that competitive outcomes are possible even in concentrated or highly profitable systems (Claessens 2009).
The empirical test for equilibrium is rejected for Rwanda.
Monopolistic competitions may also involve some tactical collusion between the dominant banks in the system that results in these banks having a similar output and pricing patterns, although this should not be confused with explicit and mostly illegal collusive agreements.
Launched in 2007, M-Pesa (Pesa is Swahili for money) is an innovative payment service that enable customers to transfer money quickly and cheaply within Kenya via mobile phone without the need to have a bank account.
Kenya, Tanzania, and Uganda agreed on establishing the East African Community in 1999 with an aim of deepening cooperation among member states, including establishment of a customs union, common market, monetary union and ultimately political federation of East African States (More precisely, they agreed on “re” establishing the East African Community, as the organization previously existed from 1967 to 1977 and collapsed due to intraregional discord). Burundi and Rwanda later joined the community in 2007.
Financial markets are integrated when the law of one price holds; that is, when securities with identical cash flows command the same price, firms or household should be able to access finance on the same terms within and across national boundaries