Bank Market Power and Monetary Policy Transmission in Africa in the Wake of Information Sharing Institutional Arrangements

Over the past three decades, most African countries have embraced financial liberalisation and relatively independent central banks’ policy framework to facilitate monetary policy transmission into price, interest rates and exchange rates stability. This study tests whether, in an expansionary monetary policy environment, banks with market power can reduce the impact of monetary policy transmission into lower interest rates, price stability and exchange rate stability, especially for emerging countries with opaque financial systems. Additionally, this paper suggests that because banks ration credit in opaque credit markets, the emergence of credit information sharing can mitigate banks’ credit risk when distributing credit, as they will no longer allocate credit solely through interest rates. However, the effect of bank market power on monetary policy transmission in the aftermath of private information sharing coverage varies across the African Union’s various economic communities. The analyses also considered Africa’s economic communities in investigating the nexus between market power and monetary policy transmission to assess the regional effects of the information sharing institutional arrangements. Regional economic communities can induce greater market power because of possible expansion of market share. The results of persistent first difference dynamic GMM show that banks with market power can augment the effort of central banks, which use monetary policy to induce price stability and real interest rates stability. The evidence also shows that the emergence of credit information sharing institutions complements the effect of banks with market power to channel monetary policy transmission into price stability and interest rates stability. Finally, the results indicate that the conduct of banks with market power has different impacts across the subregions. Thus, an aggregate approach in achieving monetary policy targets is not applicable.