Academic journal article Asian Social Science

Market Concentration, Market Share, and Profitability (Study at Indonesian Commercial Banking in the Period of 2001-2012)

Academic journal article Asian Social Science

Market Concentration, Market Share, and Profitability (Study at Indonesian Commercial Banking in the Period of 2001-2012)

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. Introduction

In general, the condition of Indonesian banking during 2001-2012 showed a good achievement. The market dynamic is marked by the reduction of the number of banks which operated in Indonesia, from 145 banks (in 2001) to 120 banks (in 2012). However, the number of bank offices is increasing from 6.765 bank offices (in 2001) to 16.625 bank offices (in 2012).

The total assets, deposits, and credits of Indonesian banking shows the significant improvement. Even though Indonesian banking still can't distribute credits optimally (credits is still lower than deposits), but LDR tended to rise from 40% (2001) to 84% (2012). The increment of LDR means the banking achievement in mobilizing society's funds is increasing. This achievement in performing intermediation function in this economics system occurs because of the good assets liability management. This fact can be seen from the development of LAR (loan to assets ratio) is performing faster than DAR (deposits to assets ratio). The operational efficiency has also increased, it can be seen from the decreasing of CIR and the increasing of ROA.

This phenomenon shows the relationship between market structure, conduct, and performance. The relationship between market structure and performance has been widely studied by several researches, the most used variables are concentration ratio and individual market share as the proxy of market structure variables. In Germany, Yu and Neus (2005) used CR (concentration ratio) as the proxy of market structure to determine its influence on profitability. The research found that market concentration has a significant negative relationship with profitability. However, in 2007, Wong, Fong, and Wong found the different result in their research which stated concentration ratio is positively insignificant with profitability. Meanwhile, Jian and Jing (2008) found a significant positive effect of individual market share on profitability in their joint-stock Chinese commercial banking.

This gap of research occurs because of the differences of sampling and dependent or independent variables in their researchs. Therefore, this study hopefully will deliver a better result to find out the effect of market structure on performance in Indonesian banking industry.

2. Research Model and Hypothesis

In accordance to research objective, the inferencial analysis using two channels, which are deposits market channel and credits market channel. The influence of concentration ratio and market share from those chanels will be seen explicitly, this thing will be the novelty of the research because the previous researchs only used one channel. The banking characteristics is included as control variable because every individual bank has its own characteristic uniqueness.

2.1 Econometrics Model Equation of Deposits Market Channel

...

2.2 Econometrics Model Equation of Credits Market Channel

...

2.3 Hypothesis

Theoritically, the relationship between profitability with market share and market concentration has described in Structure-Conduct-Performance theory from Harvard Business School version, it is stated that structure, conduct, and performance are linieary related. In this study, performance is proxied by ROA, conduct is represented by market share, and structure is represented by market concentration. In banking industri, there are two market channels; deposits market channels and credit market channels. The two markets has a big role in banking profitability because a high deposits will makethe ability to distribute credits higher, therefore the net interest margin will also increase. The research of Smirlock (2010) showed that market concentration has no influence on ROA, meanwhile market share influences ROA in USA banking. This means USA banking refused the SCP hypothesis because the banking has operated efficiently. Meanwhile Batthi the research of Batthi (2010) showed that market concentration influences ROA, while the market share has no influence on ROA in Pakistani banking. …

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