An analysis of the moderating role of Internet penetration in the banking competition-banks’ profitability nexus: case of the CEMAC banking sector

Abstract

This study investigates the role of Internet penetration in moderating the effect of banking competition on banks’ profitability in the CEMAC zone from 2010 to 2020. The Hirschman Herfindahl Index (HHI) is employed as a proxy for banking competition both in the loan and the deposit market. The findings are obtained by employing the instrumental Two-Stage Least Square (2SLS) and Lewbel’s strategies. Three main findings have been established. First, the direct effect results provide strong evidence to support the positive competition–profitability relationship in both the loan and deposit markets, except for the net interest margins. Second, the indirect effect findings indicate a negative moderating role of Internet penetration on the banking competition–profitability nexus. Third, the net effect findings reveal that though, with the interaction of internet penetration, the direct enhancing effect of competition on profitability still outweighs the negative challenges to the banking sector instilled by the high internet penetration rate. The findings conform to the modern competition–efficiency paradigm and contradict the competition–fragility paradigm. Banks in the CEMAC zone should be efficient in their regulatory compliance, ameliorate customer service, and create direct mobile marketing to be able to cope in a competitive global market with the role of financial intermediation vividly becoming less imperative.