Academic journal article South Asian Journal of Management

The Dynamics of Concentration and Competition in the Banking Sector of Bangladesh: An Empirical Investigation [Dagger]

Academic journal article South Asian Journal of Management

The Dynamics of Concentration and Competition in the Banking Sector of Bangladesh: An Empirical Investigation [Dagger]

Article excerpt

Although the adoption of financial deregulation has led to substantial changes in the banking sector of Bangladesh, the analysis of concentration and competition still remains insignificant. At this backdrop, this research aims at assessing the market structure of the banking sector and its changes over the years. Different concentration ratios with the data of all banks from 1983 to 2011 and the Panzar-Rosse algorithm for measuring competition with the data of 39 banks from 2001 to 2011 are used in this study. The findings report a reduction in concentration, that is, an increase in competition in the banking sector of Bangladesh. Most importantly, banks are facing more competition in the credit market than in the deposit market. In addition, the level of competition is higher in interest based regular banking market than in fee based non-banking market.

Key Words: Bangladesh, Banking sector, Competition, Concentration, Market structure

(ProQuest: ... denotes formulae omitted.)

I. INTRODUCTION

An ideal structure is vital for the banking sector for accelerating both performance and stability (Berger, 1995), even though the banking literature proposes two distinct paradigms namely Structure Conduct Performance (SCP) and Efficient Structure (ES). The SCP paradigm supports the concentrated market structure for reducing the competitive behavior of banks (Bikker and Haaf, 2002b), and a number of studies have tried to highlight its positive contribution toward the banking sector. Hellmann et al. (1997) argue that concentration provides necessary incentives for maintaining the 'franchise value' of banks. Without such incentives banks may perform the loan screening and monitoring function reluctantly, which can lead to instability in the future (Casu et al., 2010). Beck et al.(2006) demonstrate that a market with a concentrated structure is less vulnerable to financing crisis. In contrast, Calem and Carlino (1991) favor the competitive market structure as it is less exposed to crisis, more competent, and equitable. Berger et al. (2004) state that restriction of competition in the banking sector either by discouraging foreign ownership or by encouraging state ownership generates negative impact on the efficiency. Furthermore, concentrated market can generate high revenues for banks but with low consumer benefits (Abbasoglu et al., 2007). On the other hand, according to the ES paradigm, banks showing better performance within the industry accumulate larger market share. This is possible due to the fact that banks with superior management or with superior technology for production can reduce costs to enhance profits (Berger, 1995). The fundamental difference between the two paradigms is that the former focuses on structure driven performance whereas the latter emphasizes on efficiency driven performance (Samad, 2008), and thus no consensus exists in the banking literature for an optimal market stru cture. Competition is good for improving performance in a static sense (Allen and Gale, 2004), but at the same time market power provides some benefits (Northcott, 2004). Nonetheless, an analysis of the market structure facilitates the adoption of important policies for the well-functioning of the banking sector of an economy (Bikker and Haaf, 2002b), since it gives important information about the extent of each of them in a particular period and the changes over time (Wong et al., 2008).

Starting from 1970s, the banking system in both developed and developing countries has observed a paradigm shift from financial regulation to financial deregulation. As a result, the focus of credit allocation has been placed to the hand of market mechanism from long-cherished state-directed policy. The government has started to encourage both domestic private and foreign ownership with a relatively relaxed branch expansion strategy in order to accelerate competitive atmosphere. The share of government ownership in the banking sector has also declined significantly during this period (Purwar, 2003), and the emergence of financial innovation and automation in the banking sector reduces the physical distance to a great extent, which stimulates the merger and acquisition to come to limelight more frequently than before. …

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