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Does bank concentration stem from financial inclusion in Africa?

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 Applied Economics

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Does bank concentration stem from financial

inclusion in Africa?

Désiré Avom, Chrysost Bangake & Hermann Ndoya

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bank concentration stem from financial inclusion in Africa?, Applied Economics, DOI:
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APPLIED ECONOMICS
https://doi.org/10.1080/00036846.2021.2006134

Does bank concentration stem from financial inclusion in Africa?

Désiré Avoma, Chrysost Bangakeb and Hermann Ndoyac
a
Lille Economie Management (LEM) UMR 9221, University of Artois, Arras, France; bCentre d’Etudes et de Recherche en Economie et Gestion
(CEREG), University of Yaounde II-Soa, Yaoundé, Cameroon; cLaboratoire de Recherche en Economie Fondamentale et Appliquée (LAREFA),
University of Dschang, Cameroon, Dschang

ABSTRACT KEYWORDS
This paper provides original econometric evidence on whether banking concentration stems from Financial Inclusion; Bank
financial inclusion in African countries. In applying a system generalized methods of moments Concentration; Nonlinear
(SGMM) and the panel threshold regression method to a sample of 30 African countries for 2004– Relationship; Threshold
2017, we find two main results. First, bank concentration negatively and significantly affects Regression
financial inclusion in Africa. Second, as far as the nonlinear relationship is concerned, we find JEL
two extreme regimes with a smooth shift characterizing the bank concentration–financial inclusion G21; K20; O16
nexus, with respect to conditional variables; bank concentration effects are negative and signifi­
cant under the first regime and positive and significant under the second. Furthermore, our
findings show that the nonlinear relationship between bank concentration and financial inclusion
depends on the levels of financial freedom, mobile phones penetration, protection of property
rights, control of corruption and regulatory quality. The results are robust to alternative measures
of banking market structure, such as Lerner index and Boone indicator and to the panel smooth
transition regression (PSTR).

I. Introduction
Africa is the world’s second fastest-growing region,
experiencing an average annual GDP growth of
4.6% from 2000 to 2016. For the current five-year
period to 2022, Africa’s real GDP is projected to
grow 3.9% annually (IMF 2021). However, as
Africa’s growth rates continue to be sustained,
and the region increasingly is sought after by for­
eign investors, the World Bank (2013) notes that
poverty and inequality remain at an ‘unacceptable’
level and that progress made in reducing them
remains slow. Growth must be inclusive, and one
of the components of inclusive development is
financial inclusion, in which Africa still lags far
behind the rest of the world (Triki and Faye
2013). Although this is often confusing, financial
inclusion is not the same as financial depth.
Financial depth might be high and financial inclu­
sion be low if large amount of credits are assigned
to few household. Furthermore, it is possible to
have financial development without financial
inclusion since the former refers to the aggregate
level of credit or deposit money bank. Thus,
financial inclusion measures the ability of the
financial system to provide the financial services
to the poorest by alleviating their vulnerability
(Eggoh and Bangaké 2021).
From this perspective, financial inclusion has
become a subject of considerable interest among
policy makers, researchers, and other stakeholders.
This heightened interest reflects a better under­
standing of the importance of financial inclusion
to economic and social development. This trend
indicates a growing recognition that access to
financial services has a critical role in reducing
extreme poverty, boosting shared prosperity, and
supporting inclusive and sustainable development.
However, the achievement of financial inclusion
first requires the establishment of a well-developed
financial system (Beck and Cull 2014). Among a
diverse group of financial service providers, com­
mercial banks certainly provide the most basic
financial services across developing economies
(Sarma and Pais 2011). Elsewhere, most developing
countries have concentrated banking markets,

CONTACT Chrysost Bangake chrysost.bangake@univ-artois.fr Centre d’Etudes et de Recherche en Economie et Gestion (CEREG), University of Yaounde
II-Soa institution
© 2021 Informa UK Limited, trading as Taylor & Francis Group
2 D. AVOM ET AL.
which has given rise to the natural question as to
ask whether banking concentration harms financial
inclusion in these countries, as advocated by
Chauvet and Jacolin (2017). Our study is part of
this tradition insofar as it analyses the impact of
banking concentration on financial inclusion in
African countries.
Existing theories provide ambiguous predictions
regarding the impact of banking concentration on
financial inclusion. The conventional market
power hypothesis argues that concentration in the
banking system reduces financial inclusion. In con­
trast, the information hypothesis argues that in the
presence of information asymmetries, bank con­
centration can increase access to credit.
Empirically, previous works that exploring the
effects of banking concentration on financial inclu­
sion finds mixed results. For example, Pham,
Nguyen, and Nguyen (2019), Lu, Wu, and Liu
(2020), and Wang, Han, and Huang (2020) show
that higher concentration is associated with greater
credit availability, whereas Chauvet and Jacolin
(2017) find the reverse.
These conflicting results show that this relation­
ship is likely nonlinear, where the effect of banking
concentration on financial inclusion may vary by
stage and level of economic development. Indeed,
countries with the same level of banking concen­
tration may record different levels of financial
inclusion. The existence of such a nonlinear pattern
has been confirmed by other authors, such as Owen
and Pereira (2018), who found that greater banking
industry concentration is associated with more
access to deposit accounts and loans, provided
that the market power of banks is limited.
Our main contribution to the existing literature
is threefold. The first novelty of the paper is that we
construct a multidimensional financial inclusion
index to circumvent the criticisms often leveled at
individual measures. The weights assigned to the
three dimensions (usage, penetration and availabil­
ity) are determined endogenously by using a two-
stage principal component analysis (PCA). As a
second novelty, we explore whether there a thresh­
old of bank concentration in the financial inclu­
sion-bank concentration relationship exists.
1
In addition, we explore other channels through which bank concentration may affect financial inclusion (financial freedom, bank stability, corruption, and
property rights). We test these transmission channels.
Previous studies pay less attention to this aspect.
This relationship may be contingent on bank con­
centration, where the variable promotes financial
inclusion below or above a given threshold.1 This
conjecture requires the use of a more flexible mod­
eling strategy that can accommodate various bank
concentration-financial inclusion interactions. To
this end, we applied the dynamic panel threshold
model to analyze the nonlinear relationship
between bank concentration and financial inclu­
sion. As a third novelty, for robustness checks, we
rely on the panel smooth transition regression
(PSTR) model proposed by González, Teräsvirta,
and Van Dijk (2005), which authorized a smooth
transition for a weak number of thresholds over a
continuum of regimes. The PSTR model allows
individuals to move between groups over time
depending on changes in threshold variables.
Most of the empirical literature indirectly assumes
a constant impact of banking concentration along
the entire span and homogeneity among sample
countries. In this regard, such studies identify exo­
geneous or endogenous break thresholds using a
rolling Chow test. This test imposes discontinuity
in the relationship between banking concentration
and financial inclusion. This is not the case for our
PSTR model, which captures, on a continuous
basis, the effect of bank concentration on financial
inclusion. To the best of our knowledge, this model
has not been applied before on the considered
topic, although it seems to be highly relevant.
The rest of this article is organized as follows.
Section II presents a summary of the main studies
on bank concentration and financial inclusion.
Section III lays out the empirical strategy adopted.
Section IV describes the data and variables used,
and the results are discussed in Section V. Finally,
Section VI highlights the main conclusions drawn
and policy implications for African countries.
II. Related literature
Existing theories provide ambiguous predictions
regarding the impact of banking concentration on
financial inclusion. Two opposing theoretical
approaches are proposed. The first hypothesis,

related to the conventional structure-conduct-per­
formance (SCP) hypothesis, suggests that banking
concentration increases the cost of finance and
lowers the efficiency of banking institutions
(Vatiero 2010; Berger et al. 2004). Therefore, in a
concentrated banking market, banks negatively use
their market power by taking excessive risks to
increase their profits. The second theory based on
the information hypothesis argues that in the pre­
sence of information asymmetries between banks
and their borrowers, the former has incentives to
invest in monitoring and private information
acquisition. Then, in concentrated markets, banks
with more market power have more incentives to
invest in information acquisition and to build long-
term relationships with borrowers. Indeed, such
banks can better internalize the costs of these activ­
ities and then face lower risks of borrowers leaving
for another bank (Petersen and Rajan 1995).
While SCP and information hypotheses are
based on conflicting points of view, a potential
reconciliation could arise from several mechan­
isms. Contestable market theory developed by
Baumol, Panzar, and Willig (1983) shows that a
concentrated market can remain efficient and per­
formant, if competition exists between actors of
this market (Vives 2011). Furthermore, a strong
legal and institutional framework, and fewer
restrictions on banking activities can mitigate the
monopolistic market power of banks and improve
financial inclusion (Fernandez de Guevara,
Maudos, and Perez 2005; Gonzalez 2009).
Previous empirical studies on the effects of bank
concentration on financial inclusion, provide
mixed results. Earlier studies find that bank con­
centration promotes financial inclusion (Petersen
and Rajan 1995), while others conclude that bank
concentration is negatively related to financial
inclusion (Beck, Demirgüç-Kunt, and Maksimovic
2004). This first stream of literature mainly uses
cross-sectional, panel and probit models. For
example, Shi and Mao (2014) use data from 71
developing countries for 2004–2013, and a probit
model to assess the impact of bank concentration
on firms’ access to finance. The authors find that
firms face fewer financing constraints when the
banking market is more concentrated. Chauvet
and Jacolin (2017) assess the relationships between
APPLIED ECONOMICS 3
bank concentration, financial inclusion, and firm
performance. Applying a fixed effect model to a
sample of 79 developing countries over the period
2006–2014, the authors find that less concentration
and more competition in the banking market posi­
tively impact financial inclusion and firm perfor­
mance. Bank concentration therefore has a
negative effect on financial inclusion. However,
this result can be mitigated if certain aspects,
related to the legal and institutional framework
and economic development are taken into account.
As far as Africa is concerned, there is a few
studies that tackle the impact of bank concentra­
tion on financial inclusion. For example, as a sup­
port of the market power theory, Bara, Mugano,
and Le Roux (2017) have studied the relationship
between Bank concentration, country income and
financial development in SADC countries for
1985–2014. They have applied a fixed and random
effect model and found that bank concentration
constrains development of the financial sectors in
all SADC countries. Mengistu and Saiz (2018) have
analyzed how competition and financial soundness
affect financial inclusion in Sub-Saharan Africa, by
using structural and non-structural measures of
competition over 2011 and 2014 period. They
applied a probit model regression and found that
more competition tends to increase the probability
of access to financial products. Ajide (2019),
employed the autoregressive distributed lag
(ARDL) bound test approach to reappraise the
relationship between remittances, bank concentra­
tion and credit availability in Nigeria for the period
1986–2015. The author found that bank concentra­
tion constrains the development of financial sector
in Nigeria. Finally, Moyo and Sibindi (2020) used
probit model to assess bank concentration and
credit access nexus on a sample of 14 Sub-
Saharan African countries. They found a negative
and significant effect of bank concentration on
access to credit.
Conversely, work by Ayalew and Xianzhi (2019)
on a sample of 27 African countries suggests that
bank competition worsens credit/financing con­
straints. Finally, Chinoda and Mashamba (2021)
have examined the relationship between financial
inclusion, bank competition and economic growth
for a sample of 20 African countries over the period
4 D. AVOM ET AL.
2004–2018. They found that in the long-run bank
competition reduces financial inclusion, which is in
line with the information hypothesis. However, in
the short run the effect is significantly positive,
consistent with the market power hypothesis.
However, the cross-sectional methodology has
many drawbacks. Quah (1993) formally shows a
lack of balanced paths across a country, which
violates the hypothesis of averaging and pooling
cross-country. Evans (1995) also identifies the het­
erogeneity of slope coefficients across countries as
the main limitation of cross-sectional analysis.
Furthermore, the methodology used by most pre­
vious studies does not fully account for endogene­
ity. Correcting for the endogeneity of bank
concentration remains the primary challenge for
researchers focused on the effects of bank concen­
tration on financial inclusion. A failure to correct
for reverse causality and other sources of endo­
geneity in bank concentration may lead to mislead­
ing conclusions regarding the causal relationship
between the two variables.
To address endogeneity issues, Pham, Nguyen,
and Nguyen (2019) applied a system GMM method
to a sample of 93 countries for 2000–2014 to deter­
mine whether competition and bank concentration
promote financial inclusion. The authors find a
positive effect of bank concentration on financial
inclusion.
As one limitation of the previous studies, they do
not take into account the potential nonlinearity of
this relationship. It has been advanced that the
relationship between bank concentration and
financial inclusion, far from being linear, may be
influenced by bank concentration or other vari­
ables such as financial freedom, regulatory quality,
corruption, and property rights. In other words,
the marginal effect of financial inclusion may be
stronger in some countries than others. Indeed, in
investigating the nonlinearity between bank con­
centration and financial inclusion, Owen and
Pereira (2018) put forward the existence of thresh­
olds above and below which the effects of bank
concentration on financial inclusion differ. More
precisely, the authors use a system Generalized
Methods of Moments (SGMM) model to control
for endogeneity and find a positive impact of bank
concentration on financial inclusion. When the
interaction is considered, the relationship becomes
negative. This finding suggests that there is a
threshold that countries must reach that, eventually
renders the effects of bank concentration minimal.
In summary, although the nonlinearity of the
relationship between bank concentration and
financial inclusion seems to be widely accepted,
controversy remains on the sensitivity of this rela­
tionship due to the frequency of data, the consid­
ered framework, and the methodology used. Past
attempts made to take these nonlinearities into
account have either exogenously determined the
threshold level or involved improper treatment of
the endogenous threshold. To address this pro­
blem, in addition to the dynamic panel threshold
regression, we use the PSTR model to investigate
the nonlinearity of the relationship between bank
concentration and financial inclusion in African
countries.
III. Empirical strategy
Our strategy relies on three methods. The Principal
Component Analysis (PCA), the dynamic panel
model regression, and the Panel Smooth Transition
Regression (PSTR). The PCA helps us to build an
aggregate index of financial inclusion. The dynamic
panel model regression allows us to estimate the
linear and nonlinear relationships between bank
concentration and financial inclusion, while the
PSTR estimator highlights the different transitions
of bank concentration and the financial inclusion
nexus with respect to threshold variables.
Index of financial inclusion
In computing our index of financial inclusion, we
combine the approaches of Sarma and Pais (2011)
and Camara and Tuesta (2014). We closely follow the
approach developed by Nagar and Basu (2002) who
used PCA to weight socioeconomic indicators from
the latent variable. This methodology has recently
been used by Nguyen (2020) and Avom, Bangaké,
and Ndoya (2021). The main advantage of this
method is that it considers all information contained
in each variable used in the construction of the index.
Following OECD (2008), we start by normalizing
all indicators, using Min-Max method to reduce the
influence of outliers. Therefore, any indicator xtqc of
country c at the date t is transformed in:

t
xqc minc ðxtqc Þ
Itqc ¼ (1)
maxc ðxtqc Þ minc ðxtqc Þ
t t
where minc ðxqc Þ and maxc ðxqc Þ respectively indi­
cate minimum and maximum values of xtqc between
countries c at the date t. Then, the normalized
indicators Itqc have a value between 0 and 1, where
0 indicates the lowest score and 1 the highest.
The first step involves applying PCA to estimate
each of the three dimensions (penetration, avail­
ability, and
P usage) and is P
given by:
Di ¼ dj; k ¼ 1λdj dki
d
dj ¼ 1λdj (2)
where Dk ¼ Xλj . λj represents the variance of the
kth principal components (weights), X the indica­
tors and Di the index of dimensions. Weights are
assigned to each indicator included in the con­
struction of the dimension indices according to
their respective contributions.
The second stage involves conducting a PCA
again to compute the overall financial inclusion
index by applying a similar procedure to that
used in the first stage, as follow:
X X
FIIi ¼ Dj; k ¼ 1λj Dki Dj ¼ 1λj (2)
where FIIi is the financial inclusion index of
country i. The FII obtained is multiplied by 100
and lies between 0 and 100, with a value close of 0
reflecting a low level of financial inclusion and a
value close of 100 reflecting a high level of financial
inclusion.
System generalized method of moments (SGMM)
To properly test the hypothesis that bank concen­
tration can stem from financial inclusion, we use
SGMM as developed by Arellano and Bover (1995),
and Blundell and Bond (1998), to estimate our
model. The baseline regression of our GMM spe­
cification is as follows..
FIIit ¼ β0 þ β1 FIIi;t þ β2 Concit þ β3 Xit þ λi þ μt
1
þ εit
(3)
where FII represents the financial inclusion
index, X represents a vector of control vari­
ables, λ i is an unobserved country-specific
APPLIED ECONOMICS 5
effect, μt is a time-specific effect and εit is the
error term. Our main interest variable is Conc,
which measures bank concentration and is cap­
tured by the assets held by three or five large
banks.
The GMM estimator is useful for several rea­
sons. First, the estimator has been widely used to
address the endogeneity problem that appears in
panel data estimation (Arellano and Bover 1995;
Blundell and Bond 1998). Second, the GMM esti­
mator also considers the biases that appear due to
country-specific effects. Third, GMM also avoids
simultaneity or reverse causality problems. Two
versions of the GMM technique have been devel­
oped: ‘difference GMM’ and ‘system GMM’. For
the difference GMM estimator, the lagged levels of
the endogenous variables are used as instruments
(for exogenous variables, their first differences
serve as their own instruments). The system
GMM estimator simultaneously employs the equa­
tion in differences and the equation in levels by
using lagged levels of the variables as instruments
in the differenced equation and lagged differences
of the variables as instruments in the level equa­
tion. Given sample bias concerns associated with
the difference GMM estimator, Bond, Hoeffler, and
Temple (2001) noted that the system GMM esti­
mator can dramatically improve efficiency and
avoid the weak instrument problem of the first-
difference GMM estimator. The consistency of the
GMM estimator depends on two factors: the valid­
ity of the assumption that the error term does not
exhibit serial correlation (AR (2)) and the validity
of the instruments used (Hansen test).
Dynamic panel threshold model
To test for the existence of threshold level of bank
concentration in the bank concentration-financial
inclusion nexus, we apply the dynamic panel thresh­
old model of Seo and Shin (2016). This method
extends the original model by Hansen (1999) and
Caner and Hansen (2004) to allow for endogenous
regressors in a panel framework and is practicable by
the work of Seo, Kim, and Kim (2019). Built on the
principles of GMM, the method addresses the inher­
ent endogeneity and simultaneity which cannot be
6 D. AVOM ET AL.

ruled out in the nexus between bank concentration The measure also allows us to address problems of
and financial inclusion. At the same time, the financial inclusion measurement often discussed in
method further reports the threshold level between the literature. Then, we compare the effects of bank
bank concentration and financial inclusion. concentration on financial inclusion to each of the
The model takes the following form: three dimensions mentioned above. The index of
financial inclusion and the dimensions range from
FIIit ¼ μi þ β1 Concit δ1 Iðqit � γÞ 0 to 100; with a value of close to 0 indicating the
þ β2 Concit Iðqit > γÞ þ φXit þ εit (4) worst performance and a value close of 100 indicat­
where qit is the threshold variable, γis the thresh­ ing the best performance. The main exogenous
old level, and the error term isεit . I (·) is an indi­ variable is bank concentration (C3/C5) as, mea­
cator function taking a value of 1 if the argument in sured by the total assets held by the three or five
the indicator function holds, and 0 otherwise. The largest banks in a country. Following empirical
threshold variable, qit divides the sample into works on the determinants of financial inclusion,
regimes with different regression slope parameters we use a set of control variables, to assess the
β1 andβ2 . We use bank concentration, financial strength of an independent link between bank con­
freedom, protection of property rights, mobile centration and financial inclusion. We use GDP per
phones penetration, control of corruption and reg­ capita (GDPPC) and domestic credit to the private
ulatory quality as the threshold variable. Xit is a sector to appraise financial development (Findev);
vector of explanatory variables which may include Allen et al. (2014), Evans (2015) and Li and Wong
lagged dependent variable. (2018) have shown that economic and financial
To allow for differences in the regime intercept, development are lever of financial inclusion. We
we follow Osei and Kim (2020) and include a also control for human capital, measured by mean
threshold interceptδ. Including regime intercept years of schooling. As mentioned by Guerineau
helps minimize any potential bias in the threshold and Jacolin (2014), education is a key driver of
and the marginal effect estimates.2 financial inclusion. Following Pham, Nguyen, and
Nguyen (2019), we also control for bank ineffi­
ciency and systemic stability. We use bank over­
IV. Data and variable description head costs to total assets to proxy bank inefficiency
The present study covers the period of 2004 to 2017 (Inefficiency), while systemic stability is proxied by
and focuses on data for a sample of 30 African non-performing loan (NPL).
countries,3 on the basis of the quality and availabil­ To analyze the nonlinear relationship and to
ity of data. Data are taken from different sources: check for the main channels through which bank
the World Development Indicators (WDI), Global concentration affects financial inclusion, we use
Financial Development Database (GFDD) and bank concentration, financial freedom, property
Worldwide Governance Indicators (WGI) from rights protection, mobile phone penetration, con­
the World Bank, and IMF’s Financial Access trol of corruption and regulatory quality as thresh­
Survey (FAS). old variables. Table 1 provides the descriptive
Our endogenous variable is the financial inclu­ statistics and it shows that from 2004–2017, the
sion index (FII) as measured by a composite index average level of financial inclusion in our sample
based on three dimensions (penetration,4 is 16.29%, with average value of 15.99, 18.30 and
availability5 and usage6). Using an aggregated mea­ 18.92% found for penetration, availability and
sure of financial inclusion allows us to take into usage, respectively. The level of financial inclusion
account the maximum amount of information is relatively low, with limited penetration of finan­
related to access to and use of financial services. cial products and services. However, the average
2
Further details of the method can be found in Seo and Shin (2016) and Seo, Kim, and Kim (2019).
3
Algeria, Botswana, Burundi, Cameroon, Central Africa Republic, Chad, Congo, Egypt, Equatorial Guinea, Eswatini, Gabon, Ghana, Guinea, Kenya, Madagascar,
Malawi, Mauritius, Morocco, Mozambique, Namibia, Niger, Nigeria, Rwanda, Senegal, Seychelles, South Africa, Tanzania, Tunisia, Uganda, Zambia.
4
Penetration refers to the percentage of the adult population with financial accounts to total population and life and nonlife insurance policies per 1000 adults.
5
Availability includes the number of commercial bank branches and of ATMs per 1000 km2 and per 100,000 adults.
6
Usage is measured as the share of the adult population who borrowed and saved from a financial institution.
 APPLIED ECONOMICS 7

Table 1. Descriptive statistics.

Variable Unit Obs Mean Std. Dev. Min Max
FII Index 420 16.289 16.581 0.789 75.998
Penetration Index 420 10.805 15.986 0.5 84.327
Availability Index 420 17.731 18.303 2.334 78.891
Usage Index 420 20.258 18.923 0.368 0.869
C3 Percentage 392 73.359 21.143 32.062 100
C5 Percentage 336 84.897 16.311 48.653 100
Boone Index 406 −0.075 0.198 −2.540 0.321
Lerner Index 308 0.285 0.136 −0.282 0.648
NPL Ratio 406 9.301 8.307 −26.035 41.508
Inefficiency Ratio 420 5.797 6.695 −3.44 90.339
Findev Percentage 420 27.019 29.722 2.097 160.125
GDPPC USD 420 3297.772 3865.53 213.405 20333.94
Human capital No of years 420 5.457 2.147 1.3 10.1
Financial freedom Index 420 45 12.130 20 70
Property rights Index 420 38.160 14.586 10 75
Control of corruption Index 420 −0.527 0.620 −1.825 1.159
Regulatory quality Index 420 −0.479 0.543 −1.480 1.127
Mobile phones Percentage 420 60.428 42.050 1.263 91.496
Source: Author’s calculations.

level of bank concentration is 73.35% for the three

largest banks and 84.90% for the five largest banks. Table 2. Direct effect of bank concentration on financial inclu­
Thus, bank concentration is high in our sample sion and sensitivity analysis (C3 indicator).
(1) (2) (3) (4)
and, higher than the global average. FII Penetration Availability Usage
C3 −0.041*** −0.027** −0.032** −0.053***
(0.014) (0.013) (0.015) (0.018)
V. Results and discussion NPL −0.047** −0.050* −0.039 0.021
(0.023) (0.029) (0.061) (0.047)
Inefficiency 0.131* 0.043 0.129 0.053
Results of the linear nexus between bank (0.070) (0.070) (0.146) (0.288)
concentration and financial inclusion Findev 0.031 −0.003 0.024** 0.050*
(0.019) (0.011) (0.011) (0.027)
As an initial exercise, we analyze the direct impact of GDPPC 0.001*** 0.001** 0.001*** 0.001***
(0.000) (0.000) (0.000) (0.000)
bank concentration on financial inclusion. To test Hum Cap −0.221 −0.269 −0.563 −0.497*
(0.175) (0.227) (0.472) (0.257)
the sensitivity of the results, we compare the effect of L.FII 0.908***
bank concentration (C3 and C5) to the different (0.039)
L.Penetration 0.949***
dimensions of the financial inclusion index. (0.043)
Although this linear specification is not our pre­ L.Availability 0.976***
(0.054)
ferred model for this work, it allows us to appraise L.Usage 0.923***
the standalone effect of bank concentration and the (0.058)
Constant 3.582 3.049 4.287 5.265***
other control variables on financial inclusion. The (2.169) (1.807) (3.431) (1.894)
results obtained from the first set of regressions of Observations 351 351 352 351
Countries 27 27 27 27
SGMM method are reported in Tables 2 and 3, Instruments 25 25 24 24
AR (1) 0.000 0.012 0.003 0.002
respectively for C3 and C5 indicators. AR (2) 0.904 0.681 0.610 0.218
To lessen concerns about endogeneity, we lagged Hansen 0.891 0.632 0.680 0.867
all regressors one period. In all regressions shown in Note: The sample period runs from 2004 to 2017. Robust standard errors are
shown in parentheses. (***, **, and *) indicate statistical significance and
Tables 2 and 3, we control for non-performing loans, the rejection of the null hypothesis at 1%, 5% and 10% level, respectively.
bank inefficiency, financial development, GDP per C3 indicates bank concentration for the three largest banks, FII is the
financial inclusion index and L denotes to lag variables.
capita, and human capital. The regressions satisfy all
of the specification tests (AR (1), AR (2) and Hansen
test). There is no evidence of a second-order serial Across all estimations, we find that bank con­
correlation, but there is evidence of a first-order serial centration is negatively and significantly related to
correlation. Moreover, the regressions pass the financial inclusion regardless of the measure of
Hansen test and confirm the validity of the bank concentration used. This finding supports
instruments. the view that bank concentration stems from
8 D. AVOM ET AL.

Table 3. Direct effect of bank concentration on financial inclu­ Let us consider a general finding relating to the
sion and sensitivity analysis (C5 indicator). other control variables. The positive coefficients of
(1) (2) (3) (4)
FII Penetration Availability Usage GDP per capita and financial development are sig­
C5 −0.056** −0.028** −0.063*** −0.087*** nificant determinants of financial inclusion. As
(0.021) (0.011) (0.022) (0.030) shown by Adeola and Evans (2017) and Li and
NPL −0.063* −0.086 −0.094** 0.002
(0.035) (0.063) (0.040) (0.095) Wong (2018), finance is easier to access in high-
Inefficiency 0.063 −0.042 0.495*** 0.415*
(0.131) (0.141) (0.170) (0.235)
income and developed financial system countries.
Findev 0.101* 0.024* 0.079** 0.081* However, the previous linear specification
(0.056) (0.012) (0.034) (0.042)
GDPPC 0.000** 0.001* 0.000* 0.000** assumes the homogeneity of the nexus between
(0.000) (0.000) (0.000) (0.000) bank concentration and financial inclusion; this
Hum Cap −0.207 −0.383* 0.019 −0.411
(0.230) (0.196) (0.247) (0.345) can be misleading. Indeed, countries that have the
L.FII 0.851*** same level of bank concentration record different
(0.080)
L.Penetration 0.892*** levels of financial inclusion. These divergences can
(0.055) lead to a nonlinear relationship between the two
L.Availability 0.907***
(0.050) variables.
L.Usage 0.944***
(0.053)
Constant 5.512** 4.617** 2.788 5.840
(2.081) (1.723) (1.678) (3.933) Results of the nonlinear nexus between bank
Observations 276 276 276 276
Countries 23 23 23 23 concentration and financial inclusion
Instruments 20 20 19 20
AR (1) 0.005 0.048 0.002 0.004 In this section, we explore whether there is a non­
AR (2) 0.843 0.880 0.287 0.152
Hansen 0.629 0.732 0.705 0.690
linear nexus between bank concentration and
Note: The sample period runs from 2004 to 2017. Robust standard errors are financial inclusion. We first test the threshold effect
shown in parentheses. (***, **, and *) indicate statistical significance and by using bank concentration as the threshold vari­
the rejection of the null hypothesis at 1%, 5% and 10% level, respectively.
C5 indicates bank concentration for the five largest banks, FII is the able (model (1)) and we further run the threshold
financial inclusion index and L denotes to lag variables. regression by using other thresholds variables such
as financial freedom, protection of property rights,
financial inclusion in developing countries, parti­ mobile phone penetration, control of corruption
cularly in African countries. This finding corrobo­ and regulatory quality. In this regard, we develop
rates the results of Beck, Demirgüç-Kunt, and a nonlinear specification, using dynamic panel
Maksimovic (2004), Love and Martínez pería threshold regression.
(2015) and Chauvet and Jacolin (2017), who find We first run a dynamic threshold model, and we
a negative impact of bank concentration on finan­ test for the existence of a threshold level of bank
cial inclusion. With regard to different dimensions concentration in the bank concentration-financial
of financial inclusion, we find similar results as for inclusion relationship. The results of our dynamic
the financial inclusion index: a negative and sig­ panel threshold model are presented in Tables 4
nificant effect of bank concentration on each and 5. The first column of Tables 4 and 5 shows the
dimension. results with bank concentration as threshold vari­
These findings support the theoretical view of able. They imply that there is a threshold relation­
the market power hypothesis, which predicts a ship in the nexus level of bank concentration for
negative effect of bank concentration on access to achieving financial inclusion in Africa.
finance. Countries with concentrated banking sec­ Furthermore, the threshold relationship is vali­
tors exhibit low financial product and service pene­ dated by the linearity test. The test is based on the
tration and availability, especially in poor countries bootstrap algorithm robust to the nonparametric
with less developed financial systems. Moreover, iid under the null hypothesis of no threshold. The
banks in such countries take advantage of their results of the linearity test confirm that the models
reduced values on the market and their market are not linear because the indicators are significant
power to increase the cost of credit, which ulti­ at 1%. The point estimate of the threshold values is
mately negatively affects financial inclusion. 59.63 and 76.94, respectively for C3 and C5 which
 APPLIED ECONOMICS 9

Table 4. Dynamic panel threshold estimation of the effect of bank concentration on financial inclusion (C3 indicator).
(1) (2) (3) (4) (5) (6)
VARIABLES C3 Financial freedom Property rights Mobile phones Control of corruption Regulatory quality
First regime (C3) −0.485*** −0.107* −0.202* −0.191*** −0.580*** −0.408**
(0.175) (0.051) (0.109) (0.072) (0.200) (0.189)
Second regime (C3) 0.517*** 0.345*** 0.297** 0.303** 0.533** 0.364**
(0.189) (0.106) (0.126) (0.118) (0.225) (0.152)
NPL 0.189 0.440* 0.138 1.557*** −0.932 −0.279*
(0.340) (0.256) (0.406) (0.397) (0.743) (0.163)
Inefficiency −0.296 2.373*** −1.149 −0.247 0.593 0.136
(0.578) (0.792) (0.786) (1.050) (0.948) (0.413)
Findev −0.175** 0.033 −0.257* 0.144** 0.249** 0.270**
(0.078) (0.038) (0.139) (0.073) (0.105) (0.129)
GDPPC −0.001 0.004*** 0.002 −0.003* −0.005 −0.001
(0.002) (0.001) (0.004) (0.002) (0.003) (0.001)
Hum Cap 3.316* −2.128** −4.381 3.129 6.821* −2.544
(1.741) (1.061) (4.348) (2.482) (4.056) (3.546)
L.FII 0.542** 1.123*** 0.829** 0.400* 0.939*** 0.324***
(0.216) (0.183) (0.407) (0.229) (0.299) (0.090)
Constant −42.977*** −27.835*** 0.842 −39.211* −47.093* −15.801
(10.287) (8.954) (28.526) (20.063) (27.640) (22.680)
Threshold 59.632*** 50*** 44.141*** 83.746*** 0.512*** 0.343***
CI [56.81–64.46] [49.35–50.65] [37.88–50.40] [79.87–87.52] [0.46–0.57] [0.33–0.35]
No. Countries 27 27 27 27 27 27
No. Instruments 19 23 13 18 19 19
Linearity test (prob.) 0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000***
Note: The sample period runs from 2004 to 2017. Robust standard errors are shown in parentheses. (***, **, and *) indicates statistical significance and the
rejection of the null hypothesis at 1%, 5% and 10% level, respectively. C3 indicate bank concentration for the three largest banks, FII is the financial inclusion
index and L denotes to lag variables. CI indicates the confidence intervals at 95%.

Table 5. Dynamic panel threshold estimation of the effect of bank concentration on financial inclusion (C5 indicator).
(1) (2) (3) (4) (5) (6)
Threshold variables C5 Financial freedom Property rights Mobile phones Control of corruption Regulatory quality
First regime (C5) −0.784** −1.076*** −0.233* −0.689*** −0.603*** −1.067**
(0.352) (0.311) (0.139) (0.242) (0.215) (0.485)
Second regime (C5) 1.344*** 0.752* 0.702* 0.715* 0.884** 1.249**
(0.404) (0.447) (0.369) (0.565) (0.409) (0.595)
NPL −3.175* 1.363 −2.789** −0.493 −3.037 −0.906
(1.840) (1.015) (1.139) (1.821) (2.119) (0.703)
Inefficiency 0.224 −0.377 1.315* 1.181 1.924 −2.116**
(0.618) (0.536) (0.755) (1.338) (1.644) (0.996)
Findev −0.029 0.016 −0.292** −0.184* −0.133 −0.138
(0.207) (0.123) (0.146) (0.101) (0.106) (0.296)
GDPPC 0.012* −0.000 0.001 −0.010*** −0.006 −0.006
(0.007) (0.004) (0.004) (0.003) (0.006) (0.005)
Hum Cap −2.158 1.197 −3.389 9.156** −1.618 −4.084
(5.087) (4.776) (5.895) (4.434) (3.700) (10.473)
L.FII 2.671*** 1.047*** 0.754 0.642 1.315* 0.791
(0.798) (0.398) (0.595) (1.392) (0.703) (0.940)
Constant −73.591* −65.766 −53.531 −85.606 −66.822 −37.056
(38.347) (51.969) (33.963) (69.981) (42.776) (66.092)
Threshold 76.937*** 40*** 49.630*** 86.465 0.600*** 0.268***
CI [74.52–79.35] [38.46–41.54] [49.51–49.75] [80.12–87.35] [0.39–0.81] [0.21–0.32]
No. Countries 23 23 23 23 23 23
No. Instruments 21 20 13 15 19 21
Linearity test (prob.) 0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000***
Note: The sample period runs from 2004 to 2017. Robust standard errors are shown in parentheses. (***, **, and *) indicate statistical significance and the
rejection of the null hypothesis at 1%, 5% and 10% level, respectively. C5 indicates bank concentration for the five largest banks, FII is the financial inclusion
index and L denotes to lag variables. CI indicates the confidence intervals at 95%.

are equivalent to 59.63% and 76.94% of the assets
held by the three and five largest banks respectively.
With respect to the regime-dependent marginal
effects, bank concentration appears to have a sig­
nificantly negative effect on financial inclusion at
1% and 5% level, respectively for C3 and C5 if bank
concentration is less than the threshold. Above the
threshold, however, the effect of bank concentra­
tion is positive and significant at 1% level for the
both indicators. This second wave of results is
consistent with the information efficiency hypoth­
esis, which predicts a positive effect of bank con­
centration on financial inclusion, and opposes the
market power hypothesis.
10 D. AVOM ET AL.
In the other models, i.e. when using the other
threshold variables, the linearity tests are signifi­
cant at 1% and confirm the nonlinear relationship
between bank concentration and financial inclu­
sion, whatever the threshold variable used.
For example, using financial freedom as the
threshold variable, the study finds a threshold
level of 50% and 40% respectively for C3 and C5.
The results imply that under these thresholds, bank
concentration decreases financial inclusion in
African countries and beyond these thresholds the
relationship between bank concentration and
financial inclusion become positive. Thus, fewer
constraints on banking activities lead to a positive
effect of bank concentration on financial inclusion
(Fernandez de Guevara, Maudos, and Perez 2005;
Gonzalez 2009).
Moreover, regarding the estimation results of
mobile phone as threshold variable, the point esti­
mate of the threshold values is 83.75% and 86.47%,
respectively for C3 and C5. The results imply that
bank concentration negatively affects financial
inclusion in countries with low mobile phones
penetration (threshold of mobile phones lower
than 83.75 and 86.47), and the effect of bank con­
centration on financial inclusion become positive
when the penetration of mobile phones is high
(threshold of mobile phones greater than 83.75
and 86.47). Mobile phone penetration can there­
fore be an alternative for individuals to access
financial services when the banking market is
concentrated.
Turning to the regulatory quality as threshold
variable, the results show that the threshold level of
regulatory quality is 0.34 and 0.27 for C3 and C5,
respectively. This finding corroborates the views of
Claessens and Laeven (2005), Delis (2012),
Anginer, Demirguc-Kunt, and Zhu (2014) and
Owen and Pereira (2018), who showed that the
negative effect of bank concentration on financial
inclusion can be mitigated by a strong regulatory
quality framework.
Robustness checks
In this section, we perform two main robustness
analyses. The first is to use alternative indicators to
measure the structure of the banking market, given
the criticisms generally leveled to the concentration
ratios used above. The second robustness analysis
consists of using an alternative estimation strategy
to assess the nonlinearity between bank concentra­
tion and financial inclusion.
Our baseline analysis adopted the concentra­
tion ratios (C3/C5) to measure bank concentra­
tion. There are more involved measures which
are commonly used to assess the degree of
effective banking concentration (Carbó et al.
2009; Claessens 2009). We then use two
involved indicators to ascertain the robustness
of our findings. The first indicator is the Lerner
index, which is defined as the difference
between output prices and marginal costs (rela­
tive to prices) and is equal to the inverse of the
elasticity of demand for the case of a perfect
monopoly and equal to zero for a perfect com­
petitive market. Therefore, higher values of the
Lerner Index indicate high bank concentration
and less competition (Clerides, Delis, and
Kokas 2015). The second indicator is the
Boone Indicator (Boone 2008), which reflects
the effect of efficiency on profits, calculated as
the elasticity of profits to marginal costs. The
indicator mainly measures that more efficient
banks achieve higher profits. Therefore, the
more negative the Boone indicator, the lower
level of banking concentration and the more
positive the Boone indicator, the higher level
of bank concentration.
As in the previous analysis we first perform a
linear regression, assessing the direct effect of
Lerner and Boone indicators on financial inclusion,
using SGMM. We also analyze the sensitivity of the
results by estimating the effect of both Lerner index
and Boone indicator on the different dimensions of
financial inclusion (penetration, availability and
usage).
The results are reported in Tables 6 and 7 for
Lerner index, respectively. In all regressions shown
in Tables 6 and 7, we also control for non-perform­
ing loans, bank inefficiency, financial development,
GDP per capita, and human capital. The regres­
sions satisfy all of the specification tests (AR (1),
AR (2) and Hansen test). There is no evidence of a
second-order serial correlation, but there is evi­
dence of a first-order serial correlation. Moreover,
the regressions pass the Hansen test and confirm
the validity of the instruments.
 APPLIED ECONOMICS 11

Table 6. Robustness checks on the direct effect of bank con­ Table 7. Robustness checks on the direct effect of bank con­
centration on financial inclusion, by using Lerner index. centration on financial inclusion, by using Boone indicator.
(1) (2) (3) (4) (1) (2) (3) (4)
FII Penetration Availability Usage VARIABLES FII Penetration Availability Usage
Lerner −4.443*** −2.540* −4.975** −3.870** Boone −1.493*** −1.472*** −1.360** −3.289***
(1.423) (1.460) (2.237) (1.653) (0.508) (0.492) (0.658) (0.825)
NPL −0.462* −0.208 0.069 −0.479 NPL −0.121** −0.332* 0.069** 0.055
(0.255) (0.156) (0.229) (0.428) (0.051) (0.172) (0.026) (0.097)
Inefficiency −0.125** −0.107* −0.220*** 0.022 Inefficiency −0.089** −0.155*** −0.067** −0.118**
(0.056) (0.054) (0.074) (0.177) (0.035) (0.046) (0.029) (0.051)
Findev 0.105*** −0.003 0.065** 0.132*** Findev −0.008 −0.011 0.016 −0.019
(0.037) (0.026) (0.027) (0.036) (0.023) (0.038) (0.019) (0.027)
GDPPC 0.001 0.001* 0.001* 0.000 GDPPC 0.000*** 0.001** 0.000** 0.000*
(0.001) (0.001) (0.001) (0.000) (0.000) (0.000) (0.000) (0.000)
Hum Cap 0.197 −0.187 −0.543 0.318 Hum Cap −0.290 −0.418 −0.333 −0.457
(0.402) (0.477) (0.715) (0.388) (0.190) (0.453) (0.375) (0.444)
L.FII 0.732*** L.FII 0.964***
(0.050) (0.033)
L.Penetration 0.840*** L.Penetration 0.959***
(0.069) (0.040)
L.Availability 0.774*** L.Availability 0.996***
(0.079) (0.038)
L.Usage 0.801*** L.Usage 1.058***
(0.098) (0.031)
Constant 4.454 3.745* 5.669* 2.695 Constant 3.338*** 5.351* 1.381 2.575
(3.428) (2.116) (3.189) (2.086) (1.151) (3.049) (1.302) (1.636)
Observations 273 252 252 273 Observations 308 364 364 364
Countries 21 21 21 21 Countries 28 28 28 28
Instruments 17 17 17 17 Instruments 25 25 25 25
AR (1) 0.026 0.013 0.014 0.005 AR (1) 0.000 0.016 0.005 0.003
AR (2) 0.549 0.726 0.513 0.384 AR (2) 0.902 0.552 0.578 0.294
Hansen 0.802 0.821 0.485 0.771 Hansen 0.464 0.343 0.756 0.492
Note: The sample period runs from 2004 to 2017. Robust standard errors are Note: The sample period runs from 2004 to 2017. Robust standard errors are
shown in parentheses. (***, **, and *) indicate statistical significance and shown in parentheses. (***, **, and *) indicate statistical significance and
the rejection of the null hypothesis at 1%, 5% and 10% level, respectively. the rejection of the null hypothesis at 1%, 5% and 10% level, respectively.
FII is the financial inclusion index and L denotes to lagged variables. FII is the financial inclusion index and L denotes to lag variables.

Table 8. Robustness checks on the dynamic panel threshold regression of the effect of bank concentration on financial inclusion, by
using Lerner index.
(1) (2) (3) (4) (5) (6)
Threshold variable Lerner Financial freedom Property rights Mobile phones Control of corruption Regulatory quality
First regime (Lerner) −2.521 −1.496* −4.750** −5.507** −5.103** −5.466*
(23.164) (16.648) (23.921) (30.557) (51.209) (31.976)
Second regime (Lerner) 3.681* 1.084 3.899** 4.966* 3.204** 3.052
(20.417) (16.062) (18.224) (43.900) (50.155) (24.467)
NPL −0.427* −0.812 0.485 0.278 −0.042 1.057
(0.253) (1.270) (1.062) (1.033) (1.221) (0.818)
Inefficiency −1.196 −1.645 −0.145 −0.887 −4.208 −0.617
(1.151) (2.700) (1.138) (3.434) (4.011) (2.083)
Findev 0.075 0.002 −0.333 −0.401 0.534 −0.244
(0.204) (0.057) (0.415) (0.486) (0.774) (0.183)
GDPPC −0.000 −0.005 0.011 −0.005 0.018 0.017
(0.005) (0.007) (0.013) (0.005) (0.030) (0.012)
Hum Cap −4.241 15.457* −2.361 5.888 −18.814 −3.039
(3.762) (9.071) (9.699) (6.839) (35.701) (6.753)
L.FII 8.412 −68.705 4.585 −24.344 137.663 −32.481
(19.808) (43.370) (51.901) (37.843) (203.608) (24.987)
Constant 0.958* 0.553 1.238 0.699 4.436 0.437
(0.511) (0.893) (1.261) (0.721) (5.553) (1.682)
Threshold 0.211*** 60.000*** 39.495*** 61.283*** 0.379*** 0.466***
CI [0.17–0.26] [59.56–60.44] [36.99–42.03] [44.32–78.29] [0.35–0.41] [0.44–0.49]
No. Countries 21 21 21 21 21 21
No. Instruments 20 18 19 13 18 14
Linearity test (prob.) 0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000***
Note: The sample period runs from 2004 to 2017. Robust standard errors are shown in parentheses. (***, **, and *) indicate statistical significance and the
rejection of the null hypothesis at 1%, 5% and 10% level, respectively. FII is the financial inclusion index and L denotes to lag variables. CI indicates the
confidence intervals at 95%.
12 D. AVOM ET AL.

Overall, the results show a negative and signifi­
cant effect of both Lerner index and Boone indica­
tor on financial inclusion. These results confirm
those obtained with concentration ratio measures
(C3 and C5) and corroborate the market power
hypothesis, which states that bank concentration
stems from financial inclusion. Moreover, with
regard to different dimensions of financial inclu­
sion, we find similar results as for the financial
inclusion index: a negative and significant effect
of bank concentration on each dimension. Our
results using alternative measures remain robust.
Further, as in baseline analysis, we run a non­
linear regression with the Lerner index and the
Boone indicator, using the dynamic panel thresh­
old regression method. We first investigated a
threshold effect of the Lerner index and the
Boone indicator in the nexus with financial inclu­
sion, and we further analyze other threshold
variables.
The results of the dynamic panel threshold
model are reported in Tables 8 and 9, respectively
for Lerner index and Boone indicator. The first
model of each specification assesses the threshold
effect. In sum, the results in Tables 8 and 9 also
confirm the robustness of our baseline findings, a
nonlinear relationship between both Lerner index
and Boone indicator, and financial inclusion.
Specifically, for Lerner index for example, the
results in Table 8 show that the threshold relation­
ship is validated by the linearity test. The results of
the linearity test confirm that the models are not
linear because the indicators are significant at 1%.
The point estimate of the threshold values is 0.21.
With respect to the regime-dependent marginal
effects, Lerner index appears to have a negative
but insignificant effect on financial inclusion
below the threshold and a positive and significant
effect on financial inclusion at 10% level beyond the
threshold. In the same vein for Boone indicator, the
results of the linearity test are also significant at 1%
level, confirming that the models are not linear.
The estimated threshold of the Boone indicator is
−0.36. Therefore, under the first regime, the Boone
indicator is negative and significant at 10% level
and the effect become positive and significant at 5%
level under the second regime.
Let us consider a general comment relating to
the other threshold variables. All the other thresh­
old variables confirm a nonlinear relationship and
threshold effect in the nexus between both Lerner
index and Boone indicator on financial inclusion.
The results show a negative effect of Lerner index
and Boone indicator under the first regime (below

Table 9. Robustness checks on the dynamic panel threshold regression of the effect of bank concentration on financial inclusion, by
using Boone indicator.
(1) (2) (3) (4) (5) (6)
Threshold variables Boone Financial freedom Property rights Mobile phones Control of corruption Regulatory quality
First regime (Boone) −3.941* −1.680* −2.788* −4.113** −2.514* −4.702***
(2.644) (0.969) (1.175) (1.164) (0.886) (2.373)
Second regime (Boone) 2.283* 17.071** 1.575*** 3.691** 2.484 4.324***
(1.794) (8.608) (0.699) (0.603) (21.373) (2.392)
NPL 0.001 −0.025 0.763** 1.260** 0.458 −0.459*
(0.108) (0.165) (0.351) (0.541) (0.332) (0.278)
Inefficiency 0.362 0.492 −0.583 2.015 0.750 0.045
(0.767) (0.585) (0.515) (1.953) (0.846) (0.628)
Findev −0.070** 0.017 −0.113 −2.301*** 0.285 0.234
(0.033) (0.046) (0.111) (0.721) (0.263) (0.302)
GDPPC −0.002*** 0.001 0.002* 0.003 −0.002 0.004
(0.000) (0.002) (0.001) (0.010) (0.003) (0.003)
Hum Cap 3.820** −1.379 −5.375** −0.786 11.348** −6.586**
(1.933) (1.994) (2.240) (4.312) (5.655) (3.119)
L.FII 0.884*** 1.053*** 0.940*** 5.940** 1.679*** 1.085**
(0.160) (0.094) (0.209) (2.635) (0.643) (0.474)
Constant −18.155* 3.533 4.537 −22.179 −23.571 30.534**
(10.047) (6.987) (12.990) (22.207) (19.179) (12.343)
Threshold −0.36*** 50*** 45.152*** 27.095*** 0.491*** 0.228***
CI [−0.06–0.012] [46.30–53.57] [44.46–54.84] [22.13–32.06] [0.46–0.50] [0.22–0.23]
No. Countries 28 28 28 28 28 28
No. Instruments 21 24 13 13 18 16
Linearity test (prob.) 0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000***
Note: The sample period runs from 2004 to 2017. Robust standard errors are shown in parentheses. (***, **, and *) indicate statistical significance and the
rejection of the null hypothesis at 1%, 5% and 10% level, respectively. FII is the financial inclusion index and L denotes to lag variables. CI indicates the
confidence intervals at 95%.

the indicated threshold) and a positive a significant
effect under the second regime (above the indicated
threshold), whatever the threshold variable used.
Our findings of the dynamic panel threshold
regression, using alternative measures of bank con­
centration remain robust.
As mentioned above our second robustness
check addressed the concern with alternative strat­
egy to assess the nonlinear relationship between
bank concentration and financial inclusion. We
therefore check for the robustness of this nonli­
nearity by using a PSTR estimator, proposed by
González, Teräsvirta, and Van Dijk (2005). The
main advantage of the PSTR model is that it allows
the bank concentration–financial inclusion coeffi­
cients to vary with respect to time and country.
Hence, the coefficients can take different values,
depending on the value of another observable vari­
able, which in our case is bank concentration, bank
stability, financial freedom or the control of cor­
ruption. The PSTR model allows individuals to
move between groups and over time depending
on changes in the threshold variables. The PSTR
model also provides a parametric approach to
cross-country heterogeneity, and to the time
instability of the bank concentration–financial
inclusion coefficient, smoothing the alterations of
these coefficients with respect to the threshold
variables.
The simplest case of a PSTR with two extreme
regimes and a single transition function is written
as follows:
FIIit ¼ μi þ β0 Conci;t þ β1 Conci;t 1 Γðqit ; γ; cÞ
1
þ δ0 0 Xit þ εit
(5)
for i = 1, . . . , N and t = 1, . . . , T, where N and T
denote the cross-sectional and time dimensions
of the panel, respectively. FII is the financial
inclusion index, Conc the bank concentration and
Xit is a vector of control variables. µi represents
individual fixed-effects, and εit is the error term.
Transition function Γ is continuous and depends
on threshold variable qit and on c, which is location
the parameter. Last, parameter γ determines the
slope of the transition function. Based on Granger
APPLIED ECONOMICS 13
and Terasvirta et al. (1993) and González,
Teräsvirta, and Van Dijk (2005), we consider the
following logistic transition function:
Γðqit ; γ; cÞ ¼ ½1 þ expð γðqit cÞÞ� 1 ; γ�0
(6)
For a high value of γ, the transition becomes
rougher, and transition function Γ(qit ; γ; c) tends
toward indicator function Γ(qit ; c). Hence, when γ
tends to infinity, the PSTR model
reduces to Hansen’s (Hansen 1999) two-regime
panel threshold regression (PTR) model. In the
opposite case, when γ is close to 0, transition func­
tion Γ(qit ; γ; c) is constant, and the PSTR estima­
tion becomes a panel with fixed-effects. Last, low
and high values of qit correspond to the two
extremes. For instance, if transition variable qit is
different from the bank concentration variable, the
sensitivity of financial inclusion to the bank con­
centration level for the ith country at time t is
defined as follows:
@FIIit
#it ¼ ¼ β0 þ β1 Γðqit ; γ; cÞ (7)
@Concit
where β0 and β0 + β1 are the regression coeffi­
cients and Γ(qit; γ; c) is the transition function. #it is
defined as a weighted average of parameters β0 and
β1 located at two extreme regimes of the PSTR
model. β0 indicates the first regime (i.e. when the
transition function tends toward 0) and β0 + β1
indicates the second regime (i.e. when the transi­
tion function tends toward 1).
For estimating a PSTR model, González,
Teräsvirta, and Van Dijk (2005) propose the fol­
lowing procedure: (a) test the linearity against the
PSTR model, and (b) determine the number r of
transition functions. The test of linearity using the
PSTR model applies the following:
H0 : γ ¼ 0orH0 : β2 ¼ 0. However, under the
null hypothesis, the test is nonstandard in both
cases, and the PSTR model contains unidentified
nuisance parameters. A possible solution is to
replace transition function Γ(qit; γ; c) with its
first-order Taylor expression around γ = 0 and to
test an equivalent hypothesis in an auxiliary regres­
sion. We then obtain the following..
14 D. AVOM ET AL.

FIIit ¼ αi þ θ0 Concit þ θ1 Conct � qit þ δ0 Xit þ ε�it
(8)
Because θi parameters are proportional to the
slope parameter of transition function γ, testing
the linearity of the bank concentration-financial
inclusion model against PSTR involves testing the
following: .
Let SSR0 be the panel sum of squared residuals
under H0, and let SSR1 be the PSTR model with
m regimes. The corresponding F-statistic is then
defined as follows:
LMF ðSSR0 SSR1 Þ=mk
,F ðmk; TN
SSR0 ðTN N mkÞ
where T, N and K denote the number of years,
the number of countries and the number of exo­
genous variables, respectively.
The results of the PSTR estimation are reported
in Tables 10 and 11 and they confirm the results
previously obtained when estimating the panel
threshold regression, i.e. a nonlinear relationship
between bank concentration and financial inclu­
sion. Hence, bank concentration exhibits two
extreme regimes with a smooth shift characterizing
the bank concentration-financial inclusion nexus,
where the bank concentration effect is negative and
significant under the first regime and positive and
significant under the second. The estimated
thresholds of bank concentration are 55.01% and
73%, for C3 and C5, respectively. Indeed, under the
first regime (below the threshold), all else being
equal, bank concentration stems from financial
inclusion, and the effect becomes positive under
the second regime (above the threshold).
In the same vein, as in previous results, the non­
linear relationship is confirmed when using the
other threshold variable. Turning to financial free­
dom as threshold variable for example, the PSTR
results exhibit two regimes, where the bank con­
centration effect is negative and significant under
the first regime and positive and significant under
N mkÞ the second one. The estimated thresholds for finan­
cial freedom are 50.95% and 56.09% for C3 and C5,
(9) respectively.
Overall, these nonlinear results confirm previous
findings obtained with the dynamic threshold
regression. For all specifications, the value of the
slope parameter is low, characterizing a smooth
change of the transition function.
Finally, as for dynamic panel regression, we also
perform a PSTR regression with the Lerner index
and the Boone indicator. The results are reported
in Tables 12 and 13 for the Lerner index and the
Boone indicator, respectively and remain robust
whatever the model or the specification. The
PSTR results exhibit two extreme regimes with a
smooth shift characterizing the Lerner index-finan­
cial inclusion nexus, and the Boone indicator-

Table 10. PSTR estimation of the effect of bank concentration on financial inclusion (C3 indicator).
(1) (2) (3) (4) (5) (6)
Threshold variables C3 Financial freedom Property rights Mobile phones Control of corruption Regulatory quality
First regime (C3) −0.274** −0.095*** −0.068** −0.069*** −0.233* −0.376***
(0.133) (0.028) (0.027) (0.020) (0.156) (0.170)
Second regime (C3) 0.709** 0.062*** 0.041 0.160*** 0.606*** 0.920*
(0.276) (0.023) (0.035) (0.027) (0.194) (0.639)
NPL 0.156** −0.081 −0.066 −0.302* −0.283** −0.196***
(0.043) (0.078) (0.062) (0.170) (0.115) (0.043)
Inefficiency −0.365 −0.523** −0.034 0.742*** 0.928*** −0.413
(0.321) (0.246) (0.313) (0.281) (0.482) (0.176)
Findev −0.168*** 0.114*** 0.098*** 0.027** 1.757 0.452***
(0.050) (0.034) (0.037) (0.013) (1.304) (0.043)
GDPPC 0.375 −0.002*** 0.001 −0.001* 0.001 0.083
(0.687) (0.000) (0.001) (0.000) (0.000) (0.031)
Hum Cap 0.658 0.426 −0.604 −0.802** 3.446*** 0.890***
(0.592) (0.277) (0.574) (0.373) (0.968) (0.456)
Threshold 55.01 50.95 32.11 97.43 0.42 0.62
γ 1.080 2.675 20.681 5.313 10.760 3.266
LMF 5.687 3.467 4.152 5.697 3.803 3.355
(0.000) (0.002) (0.000) (0.000) (0.001) (0.000)
r 1 1 1 1 1 1
Note: The sample period runs from 2004 to 2017. Robust standard errors are shown in parentheses. (***, **, and *) indicate statistical significance and the
rejection of the null hypothesis at 1%, 5% and 10% level, respectively. C3 indicates bank concentration for the three largest banks, FII is the financial inclusion
index and r indicates the number of transition function.
 APPLIED ECONOMICS 15

Table 11. PSTR estimation of the effect of bank concentration on financial inclusion (C5 indicator).
(1) (2) (3) (4) (5) (6)

Threshold variable C5 Financial freedomProperty rightsMobile phonesControl of corruption Regulatory quality

First regime (C5) −0.149** −0.042 −0.063*** −0.426* −0.426** −0.036*
(0.063) (0.030) (0.024) (0.228) (0.240) (0.021)
Second regime (C5) 0.232*** 0.078*** 0.244*** 0.838*** 0.069* 0.095**
(0.068) (0.022) (0.178) (0.220) (0.041) (0.043)
NPL −0.178* −0.022** −0.877* −0.620*** −0.690** 0.114
(0.110) (0.095) (0.619) (0.210) (0.279) (0.121)
Inefficiency 0.724 −1.024*** 0.476*** −0.043** −0.301 −1.482**
(0.443) (0.232) (0.149) (0.079) (0.446) (0.645)
Findev −0.433 0.151*** −0.131 1.157** −0.136*** 0.096**
(0.049) (0.047) (0.207) (0.491) (0.051) (0.044)
GDPPC −0.004*** −0.005*** −0.006*** −0.001* 0.001 −0.007***
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Hum Cap 0.948* 1.348*** 0.486*** −0.161*** 0.522 1.801***
(0.537) (0.400) (0.285) (0.473) (0.679) (0.266)
Threshold 73 56.09 54.59 93.22 0.71 0.53
γ 0.184 0.280 2.122 0.394 260.83 144.01
LMF 3.343 3.483 11.354 3.560 2.085 6.580
(0.000) (0.002) (0.000) (0.000) (0.001) (0.000)
r 1 1 1 1 1 1
Note: The sample period runs from 2004 to 2017. Robust standard errors are shown in parentheses. (***, **, and *) indicate statistical significance and the
rejection of the null hypothesis at 1%, 5% and 10% level, respectively. C5 indicates bank concentration for the five largest banks, FII is the financial inclusion
index r indicates the number of transition function.

financial inclusion nexus. The effects of both
Lerner index and Boone indicator on financial
inclusion are negative and significant under the
first regime and positive and significant under the
second one.
The estimated threshold of Lerner index and
Boone indicator, given by the PSTR regression are
respectively 0.46 and −0.27. Concerning the other
threshold variables, the results are qualitatively the
same.
VI. Conclusion and policy implications
The aim of this study is to provide new evidence of
the nonlinearity of the bank concentration-finan­
cial inclusion nexus. Applying the SGMM and the
dynamic panel threshold regression method to a
sample of 30 African countries for 2004–2017, we
show strong evidence that bank concentration may
stem from financial inclusion. More precisely, our
findings exhibit a U-shaped relationship between
bank concentration and financial inclusion, where
the bank concentration effect is first negative and
then positive. However, five channels through
which bank concentration may have an indirect
ect on financial inclusion have been identified:
financial freedom, mobile phone penetration, pro­
tection of property rights, control of corruption
and regulatory quality. Concerning, the bank
financial freedom channel, there is a threshold
beyond which bank stability has a positive e ect
on financial inclusion. The threshold level is 50%
for C3 indicator and 40% for C5 indicator. The
direct effect is negative whereas the indirect effect
is negative. These results suggest that reducing
banking constraints led banks to be more efficient
and thus promotes financial inclusion.
Turning to the control of corruption channel,
the value of the threshold is 0.51 for C3 and 0.60 for
the C5 indicator. Once this threshold has been
reached, the negative ect of bank concentration
on financial inclusion tends to change and gradu­
ally becomes positive. This result implies that the
negative effect of bank concentration on financial
inclusion is mitigated when corruption is con­
trolled in the financial sector.
Furthermore, we run two main robustness
checks on our results. First, we use alternative
measures of banking market, capturing the con­
testability of banking sector and the market
power of banks. We therefore use Lerner index
and Boone indicator and replicate our regres­
sions. The results remain robust. Second, we use
an alternative estimation strategy to our
dynamic panel regression to assess the nonli­
nearity of bank concentration on financial inclu­
sion. The results found are qualitatively identical
to those previously obtained.
16 D. AVOM ET AL.

Table 12. Robustness checks on the PSTR regression of the effect of bank concentration on financial inclusion, by using Lerner
indicator.
(1) (2) (3) (4) (5) (6)
Threshold variable Lerner Financial freedom Property rights Mobile phones Control of corruption Regulatory quality
First regime (Lerner) −0.167** −0.108* −0.119* −2.586** −0.054* −0.158*
(0.090) (0.077) (0.038) (1.942) (0.185) (0.145)
Second regime (Lerner) 0.789** 0.430** 0.127* 1.101*** 0.277*** 0.204***
(0.342) (0.219) (0.358) (0.293) (0.064) (0.077)
NPL 0.120** −0.112 −0.032 −0.306*** 0.057 −0.911***
(0.052) (0.072) (0.069) 0.196) (0.267) (0.306)
Inefficiency −0.152*** −0.524** −0.319** 1.265*** −0.518 0.363
(0.021) (0.246) (0.205) (0.058) (0.421) (0.039)
Findev 0.083*** 0.046 0.112 0.116*** −0.293 0.012
(0.021) (0.033) (0.031) (0.023) (0.050) (0.016)
GDPPC −0.003*** 0.009 0.001** 0.001 0.001** −0.013**
(0.000) (0.001) (0.000) (0.000) (0.000) (0.001)
Hum Cap 1.508*** 0.943 −0.350 −1.074** −0.509 1.188***
(0.430) (0.247) (0.474) (0.434) (0.301) (0.163)
Threshold 0.46 50.13 35.29 74.41 0.71 0.70
γ 101.23 3.377 1.033 0.101 155.72 70.32
LMF 1.589 2.301 1.371 5.540 3.242 3.490
(0.010) (0.000) (0.41) (0.000) (0.058) (0.004)
r 1 1 1 1 1 1
Note: The sample period runs from 2004 to 2017. Robust standard errors are shown in parentheses. (***, **, and *) indicate statistical significance and the
rejection of the null hypothesis at 1%, 5% and 10% level, respectively. FII is the financial inclusion index and r indicates the number of transition function.

Table 13. Robustness checks on the PSTR regression of the effect of bank concentration on financial inclusion, by using Lerner
indicator.
(1) (2) (3) (4) (5) (6)
Threshold variable Boone Financial freedom Property rights Mobile phones Control of corruption Regulatory quality
First regime (Boone) −0.146** −0.646 −1.251** −2.702** −1.164* −2.326*
(0.060) (0.640) (0.569) (1.191) (0.888) (1.112)
Second regime (Boone) 0.292** 0.701*** 0.127 3.003* 4.238** 1.545*
(0.055) (0.233) (4.706) (2.808) (2.464) (0.976)
NPL 0.395 −0.063* −0.014 −0.189* −0.730*** −0.652**
(0.546) (0.037) (0.059) (0.067) (0.255) (0.261)
Inefficiency −0.732 0.263* −0.310 0.589* −0.049 −0.481
(0.107) (0.151) (0.294) (0.179) (0.046) (0.707)
Findev −0.201 0.011 0.126*** 0.116* −0.083** −0.091
(0.137) (0.037) (0.033) (0.031) (0.040) (0.084)
GDPPC 0.004** −0.001** 0.011* 0.001 −0.001** −0.006**
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Hum Cap 0.208 0.090 −0.360 −0.177 0.342*** 0.528***
(0.147) (0.275) (0.648) (0.276) (0.101) (0.134)
Threshold −0.27 45.63 35.58 60.90 0.71 0.76
γ 7.209 8.303 1.139 0.066 37.174 4.481
LMF 4.748 7.580 5.351 5.690 2.042 3.372
(0.043) (0.000) (0.001) (0.000) (0.046) (0.000)
r 1 1 1 1 1 1
Note: The sample period runs from 2004 to 2017. Robust standard errors are shown in parentheses. (***, **, and *) indicate statistical significance and the
rejection of the null hypothesis at 1%, 5% and 10% level, respectively. FII is the financial inclusion index and r indicates the number of transition function.

This study implies taking into account the References

relaxation of regulations in the banking sector, in
particular the opening of the banking market, to
facilitate competition in the market and promote a
greater supply and distribution of financial pro­
ducts and services.
Disclosure statement
No potential conflict of interest was reportedby the authors.
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