Competitive Conditions in the Tanzanian Commercial Banking Industry

Abstract

Abstract: Since 1991, Tanzania has made important improvements in reforming its financial sector, dismantling the state-dominated banking sector and allowing foreign bank entry. Despite this, the banking industry is still concentrated with low accessibility to financial services. Large foreign banks dominate the financial landscape, preventing competitive dynamism to permeate the sector. This paper analyses the competitive nature of the Tanzanian banking industry from 2004 to 2008. Utilizing a rich bank level data set, we employ the Panzar–Rosse methodology to compute the competitive index, taking into account risk, efficiency, regulatory and macroeconomic factors. The results show that banks in Tanzania earned their income under conditions of oligopolistic conduct. Moreover, the competitive index derived from an interest revenue equation was not significantly different from that obtained using an aggregate revenue measure. This suggests that the degree of contestability from traditional intermediation activities approximates overall bank behaviour. The overall message is that greater market contestability can be achieved by adopting measures aimed at stimulating competitiveness in the banking sector, including consolidating gains on the macroeconomic front and allowing more foreign bank entry so as to increase the spread of banking services.

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