Banking Concentration, Financial Inclusion and Economic Growth in South Africa

Abstract

The finance-growth nexus has been widely researched, and there is robust theoretical and empirical evidence that financial development promotes economic growth. However, in recent years there has been an ongoing debate on whether the market structure of the banking industry affects economic growth and financial inclusion. The financial industry in South Africa is well developed with sound policies and financial institutions. The banking industry in South Africa is dominated by four large banks. This study uses the Structural Bayesian Vector Autoregressive model to investigate the relationship between bank concentration, financial inclusion and economic growth in South Africa between 1995-2022. The study finds that banking industry concentration in South Africa promotes economic growth. Moreover, concentration in the banking industry promotes banking sector efficiency in the short run as banks are able to conduct thorough screening of clients. However concentration in the banking industry impedes financial inclusion in the short run, but the effect dies out in the long run.