Banking Efficiency in a Small Insular Economy: the impact of banking liberalization in Cape Verde.

Abstract

The efficiency of the banking sector is one of the main concerns of regulators, especially in less developed countries. In this paper we study banking efficiency in the small and insular economy (SIE) of Cape Verde (CV). Based on the experience of this country, it is tested the extent to which the banking sector in SIEs is faced with specific restrictions to its efficiency. Another interesting aspect of the CV’s case is that it allows assessing the impact of bank liberalization on efficiency. We conclude that the main constraints to profit efficiency are the weak competition, and that trade openness has a negative impact on cost efficiency, but a positive effect on profit efficiency. The small internal market also limits the acquisition of scale economies. Banking market liberalization increased cost and profit efficiency mainly through the entrance of foreign banks in the domestic market.

JEL Classification System: G21 e G29