Market structure-performance hypothesis in Kenyan banking industry

Solomon W. Giorgis Sahile (Specialized Financial & Promotional Institution (SFPI), Addis Ababa, Ethiopia)
Daniel Kipkirong Tarus (Department of Finance and Accounting, Moi University, Eldoret, Kenya)
Thomas Kimeli Cheruiyot (School of Business & Economics, Moi Universty, Eldoret, Kenya)

International Journal of Emerging Markets

ISSN: 1746-8809

Publication date: 21 September 2015

Abstract

Purpose

The purpose of this paper is to test market structure-performance hypothesis in banking industry in Kenya. Specifically, the structure-conduct-performance (SCP) and market efficiency hypotheses were examined to determine how market concentration and efficiency affect bank performance in Kenya.

Design/methodology/approach

The study used secondary data of 44 commercial banks operating from 2000 to 2009. Three proxies to measure bank performance were used while market concentration and market share were used as proxies for market structure. Market concentration was measured using two concentration measures; the concentration ratio of the four largest banks (CR4) and Herfindahl-Hirschman Index, while market share was used as a proxy for efficiency. The study made use of generalized least square regression method.

Findings

The empirical results confirm that market efficiency hypothesis is a predictor of firm performance in the banking sector in Kenya and rejects the traditional SCP hypothesis. Thus, the results support the view that efficient banks maximize profitability.

Practical implications

The study provides insights into the role of efficiency in enhancing profitability in commercial banks in Kenya. It has managerial implication that profitable banks ought to be efficient and dispels the notion of collusive behavior as a precursor for profitability.

Originality/value

The paper fills an important gap in the extant literature by proving insights into what determines bank profitability in banking sector in Kenya. Although this area is rich in research, little work has been conducted in the developing economies and in particular no study in the knowledge has addressed this critical issue in Kenya.

Keywords

Citation

Giorgis Sahile, S., Tarus, D. and Cheruiyot, T. (2015), "Market structure-performance hypothesis in Kenyan banking industry", International Journal of Emerging Markets, Vol. 10 No. 4, pp. 697-710. https://doi.org/10.1108/IJoEM-12-2012-0178

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Publisher

:

Emerald Group Publishing Limited

Copyright © 2015, Emerald Group Publishing Limited

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