Recapitalization and Competition of Commercial Banks: Evidence from Selected Sub-Saharan African Countries

In the past two decades, central banks in sub-Saharan African countries have witnessed a trend of the recapitalization policy, and many more are bracing up to undertake the same reform. Theoretically, increased capital should improve capacity to invest, take risks and manage loans, as well as minimize the probability of failure as the banks become a€˜too big to fall'. As important as this subject is, the empirical evidence, especially for countries in sub-Saharan Africa (SSA), is sparse and inconclusive. It is on this premise that this study investigated the effect of recapitalization on bank competition in six selected countries in the region. The study used bank-level and macroeconomic indicators between 2000 and 2015 with the aid of the Panzara-Rosse model to examine the level of competition before and after bank recapitalization. The results show that bank competition is higher for the period after recapitalization than the period before recapitalization. The study, therefore, recommends that bank recapitalization could be necessary, especially for countries with low minimum paid-up capital. Recapitalization will act as a built-in stabilizer and shock absorber, which will make banks self-reliant on government funds and higher capacity to invest. However, bank recapitalization should be treated with caution to avoid the band-wagon effect but should reflect a country's economy of scale and calculated appropriate statistics that improves bank capacity