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Banking sector competition and intermediation efficiency in Kenya

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  • Samuel Kiemo
  • Anne Kamau

Abstract

This paper seeks to evaluate efficiency and competition dynamics of the banking sector in Kenya for the period 2001–2017 using bank‐level data for 37 commercial banks. We apply non‐parametric data envelopment analysis to analyze measures of various aspects of efficiency in the banking sector. We also adopt Panzar–Rosse, H‐statistics to assess the level of competition in the banking sector. To examine the effect of efficiency on competition, panel estimators are applied. The study findings indicate that efficiency was on an upward trend and averaged 69%. The banking sector is characterized by monopolistic competition as shown by an H‐statistic of .59. Managerial ability measured by data envelopment analysis efficiency score was found to be an important factor in promoting competition for the Kenyan banking sector. The study shows that there is room for Kenyan banks to improve their efficiency by optimizing the scale of operations and continuing to adopt technology. This paper recommends policy makers to continue adopting policies that promote greater banking sector efficiency and competition.

Suggested Citation

  • Samuel Kiemo & Anne Kamau, 2021. "Banking sector competition and intermediation efficiency in Kenya," African Development Review, African Development Bank, vol. 33(4), pages 648-661, December.
    • Handle: RePEc:bla:afrdev:v:33:y:2021:i:4:p:648-661
    DOI: 10.1111/1467-8268.12609
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    References listed on IDEAS

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    1. Samuel Kiemo (PhD) & Cyrus Mugo, 2021. "Banking Sector Consolidation and Stability in Kenya," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 11(3), pages 1-6.
    2. Jan Boone, 2008. "A New Way to Measure Competition," Economic Journal, Royal Economic Society, vol. 118(531), pages 1245-1261, August.
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    7. Jan Boone, 2008. "A New Way to Measure Competition," Economic Journal, Royal Economic Society, vol. 118(531), pages 1245-1261, August.
    8. Joseph C. Paradi & H. David Sherman & Fai Keung Tam, 2018. "Data Envelopment Analysis in the Financial Services Industry," International Series in Operations Research and Management Science, Springer, number 978-3-319-69725-3, July-Dece.
    9. Samuel Mwangi Kiemo & Tobias O. Olweny & Willy M. Muturi & Lucy W. Mwangi, 2019. "Bank-Specific Determinants of Commercial Banks Financial Stability in Kenya," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 9(1), pages 1-5.
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    Cited by:

    1. Talam, Camilla & Kiemo, Samuel, 2024. "Interest rate risk in Kenya: The banking sector stability and fiscal risks nexus," KBA Centre for Research on Financial Markets and Policy Working Paper Series 80, Kenya Bankers Association (KBA).

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