Unveiling the macrolevel implications of competition in the commercial banking sector: empirical insights from the BRICS region

Purpose The purpose of this study is to assess the macroeconomic consequences of banking sector competition for the Brazil, Russia, India, China and South Africa (BRICS) region, organized into two main areas of focus: economic growth and financial inclusion spanning the period 2005–2020. Design/methodology/approach While the annual growth rate of real per capita GDP is used to quantify economic growth, the financial inclusion index is constructed by applying the normalized inverse of the Euclidean distance to two fundamental aspects of an inclusive financial system: availability, and utilization of financial services. The study uses a pooled mean group autoregressive distributed lag approach, a methodology that has not been previously used to analyze both the competition-economic growth and competition-financial inclusion relationships. Findings Findings suggest that a rise in competition within the BRICS banking sector results in a decline in long-term economic growth. Greater competition induces greater risk-taking among banks via the franchise-value effect, resulting in inefficient capital allocation. Further, in line with the argument that banks have lesser incentives to perform comprehensive applicant evaluations in a highly competitive market, findings suggest that increasing competition leads to a decline in financial inclusion over the long term. Nevertheless, the impact of competition on economic growth and financial inclusion in the short term is insignificant. Originality/value Given the significant impact that banks had on the real macroeconomy during the global financial crises, the paper is one of the first to investigate whether banking sector competition hinders or promotes economic growth and financial inclusion both in the short- and long term.