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Article
Publication date: 8 May 2017

Roland Mwesigwa Banya and Nicholas Biekpe

The degree and impact of competitiveness in the banking sector is of great importance as this has great impact on the financial system and the wider economy. A question of…

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Abstract

Purpose

The degree and impact of competitiveness in the banking sector is of great importance as this has great impact on the financial system and the wider economy. A question of interest here is, does competition in the commercial banking sector boost or hamper economic growth. The purpose of this paper is to test the hypothesis that competitiveness in commercial banking is linked to economic growth.

Design/methodology/approach

The authors use the Boone (2008) indicator to estimate competitiveness of banking markets in ten frontier countries in Africa from 2005 to 2012. This model measures banking competitiveness by assessing the relationship between relative marginal costs and relative market share. Through a panel data model, the authors examine the effect banking sector competitiveness has on economic growth.

Findings

The results of Boone (2008) indicator suggest that, to a greater extent, banks in the countries studied have a competitive banking sector. The results of the panel data estimation support the hypothesis that banking sector competition impacts positively on economic growth.

Practical implications

The paper recommends for more policy geared towards enhancing bank competition. This is because competitive banking system will allocate resources more efficiently to improve economic growth.

Originality/value

To the best of the authors’ knowledge, this is the first study to test the link between bank competition and economic growth in a cross-section of Frontier African countries.

Details

Journal of Economic Studies, vol. 44 no. 2
Type: Research Article
ISSN: 0144-3585

Keywords

Article
Publication date: 15 August 2022

Habib Hussain Khan

The purpose of this study is to explore the possible impact of banking market structure on the idiosyncratic risk of financially dependent firms in China.

Abstract

Purpose

The purpose of this study is to explore the possible impact of banking market structure on the idiosyncratic risk of financially dependent firms in China.

Design/methodology/approach

The study analyzes firm-level data for China from 1999 to 2018 using a two-step dynamic panel system generalized method of moments (GMM).

Findings

The findings imply that bank competition lowers corporate risk, particularly among firms that are highly dependent on external funding for their financing needs. The findings are consistent with alternative indicators of competition, corporate risk, and financial dependence. The analysis of the transmission mechanism – the channel through which competition affects corporate risk – reveals that bank competition reduces corporate risk by curtailing financing constraints faced by firms.

Research limitations/implications

The competition-enhancing policy should consider the optimum level of bank competition for financial and economic stability. Further research is necessary to define the “desirable” or “optimum” level of bank competition.

Practical implications

In China, where the banking sector is still highly concentrated, the findings of this study call for policies aimed at encouraging healthy competition among banks. Nevertheless, such a policy must also consider the extent of bank competition that is optimal for the economy, particularly for financial and economic stability.

Originality/value

The paper provides the first evidence of the possible linkage between bank competition and corporate risk in China.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 1 March 2021

Walid Abdmoulah

This study aims to shed new light on the nexus between market competition and financial development (FD), using the new FD index developed by the IMF, covering financial…

Abstract

Purpose

This study aims to shed new light on the nexus between market competition and financial development (FD), using the new FD index developed by the IMF, covering financial institutions and markets access, depth and efficiency.

Design/methodology/approach

The author uses panel data from 140 countries over 2000–2014 period and a dynamic generalized method of moments (GMM) model, along with a sensitivity analysis over 2008 financial crisis.

Findings

Strong evidence of the positive impact of market competition, as measured by Boone index, on financial institutions and markets development is found, whereas banks concentration has a damaging effect on FD. Commonly used Lerner index is found to be irrelevant. Interestingly, none of the competition indexes in this study affects financial institutions returns, which hold even over 2008 financial crisis, likely at the expense of depth and access in developing countries. Institutions, as proxied by control of corruption, have broader positive impact on FD, particularly on financial markets. These findings have important implications for developing countries keen to foster the development of their financial system.

Practical implications

Policymakers should take into consideration that FI are unlikely to undertake deep improvements in terms of credit allocation depth and inclusion on a volunteer basis, unless constrained by regulations. When promoting bank competition, it is recommended to diversify methods targeting market competition, notably by promoting financial business diversification and intermediary efficiency, and tackling collusion arrangements or interest groups influence. Second, it is important to support households and small and medium enterprises’ access to finance. Third, it is highly recommended to promote good institutions given their overall beneficial role in promoting the financial system as a whole, notably financial markets.

Originality/value

To the best of the author’s knowledge, this study is the first to fully use the new IMF Financial Development index. It covers financial institutions and markets access, depth and efficiency, whereas most of previous findings focus on access to credit or cost of credit. Besides, the study uses a larger panel data from 140 countries over 2000–2014 period and a dynamic GMM estimator, along with a sensitivity analysis over (2007–2009) crisis. By exploring the impact of three different competition indicators, namely, Boone, Lerner and banks concentration indexes, the study responds to the concerns regarding the limitations of each of them.

Details

Journal of Financial Economic Policy, vol. 13 no. 5
Type: Research Article
ISSN: 1757-6385

Keywords

Article
Publication date: 16 May 2016

Mariarosaria Agostino and Francesco Trivieri

The purpose of this paper is to investigate the relationship between bank market power and firm creation, which represents a debated issue in the economic literature…

Abstract

Purpose

The purpose of this paper is to investigate the relationship between bank market power and firm creation, which represents a debated issue in the economic literature, still lacking empirical evidence.

Design/methodology/approach

The analysis is carried out by taking an international perspective, using different measures of banking competition, and controlling for a large set of determinants suggested by the variegate literature on firms’ birth drivers.

Findings

The main finding suggests that credit market competition may benefit firms’ creation, as the relationship between the latter and bank market power – when statistically significant – appears to be negative. In addition, the detrimental impact of market power appears greater (in absolute terms) when departing from higher levels of banking competition.

Research limitations/implications

The empirical evidence seems supporting the competitive position in the debate on the role of banking competition. Furthermore, the authors reckon that the findings reinforce the belief of a crucial role played by the availability of funds for nascent firms, with evident implications for the policy strategies more appropriate to foster entrepreneurship. The “fashion” followed by several countries of lowering administrative entry barriers (van Stel et al., 2007) needs to be reappraised, pondering also means to enrich resources availability.

Originality/value

To the best of the knowledge, the paper is the first one addressing the issue of the role of bank market structure on firms’ creation in a multi-country setting.

Details

Journal of Small Business and Enterprise Development, vol. 23 no. 2
Type: Research Article
ISSN: 1462-6004

Keywords

Article
Publication date: 20 June 2022

Bhavya Srivastava, Shveta Singh and Sonali Jain

Amidst the backdrop of a wide array of structural developments that have revolutionized the competitive landscape of Indian commercial banking, this paper aims to…

Abstract

Purpose

Amidst the backdrop of a wide array of structural developments that have revolutionized the competitive landscape of Indian commercial banking, this paper aims to empirically examine the role of two external monitoring mechanisms – competition and concentration on financial stability and further highlights the significance of bank-level heterogeneity in the nexus.

Design/methodology/approach

The study uses the Lerner index, defined through a translog specification, as a measure of market power. A system generalized method of moments technique accounts for the dynamic associations among the competition-concentration-stability nexus. The study further examines the moderating effect of ownership, size and capitalization on the nexus. The study also uses the Boone indicator and comments on the competition-bank stability relationship after controlling for bank governance.

Findings

The findings indicate that banks are less stable in a more competitive and higher concentrated environment. Exploring bank-level heterogeneity, first, the authors report that as competition increases, state-owned banks have greater incentives to undertake risky activities than private and foreign banks, which point to implicit sovereign guarantees that characterize the former. Second, the authors document an adverse influence of competition on the soundness of larger banks consistent with the “too-big-to-fail” assertion. Third, results corroborate the disciplinary role of regulatory capital and lend support to stricter capital norms under Basel III in a more competitive environment.

Originality/value

This paper is perhaps the first to capture competition and concentration in a single model; to reconcile conflicting evidence on competition-risk nexus; to shed light on the joint effect of competition and Basel accords for Indian banks.

Details

Competitiveness Review: An International Business Journal , vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1059-5422

Keywords

Article
Publication date: 13 May 2022

Małgorzata Anna Olszak and Iwona Kowalska

Despite the extensive debate on the impact of bank competition on risk-taking, there is no evidence of its role in procyclicality of loan-loss provisions (LLPs). The…

Abstract

Purpose

Despite the extensive debate on the impact of bank competition on risk-taking, there is no evidence of its role in procyclicality of loan-loss provisions (LLPs). The purpose of this study is to find out what is the role of competition in the procyclicality of LLPs.

Design/methodology/approach

Using over 70,000 bank-level observations in 103 countries in 2004–2015 and the LLPs model, this study interacts competition with business cycle to check what is the effect of competition on procyclicality of LLPs.

Findings

This study finds that intense competition is associated with more procyclicality of LLPs. Increased procyclicality of LLPs in a more competitive environment is binding for high-income countries. The opposite effect is shown for low-income countries.

Research limitations/implications

Future research can be extended by testing the role of additional factors – such as regulations, supervision or institutional protection of shareholders' rights, in the association between procyclicality and competition.

Practical implications

The main message of this paper is that the competitive environment changes the procyclicality of LLPs. The results are important from the point of view of the COVID-19 pandemic because government interventions during lockdowns will affect competition in the banking industry and in other industries of the economy.

Originality/value

This paper contributes to the extant research in three dimensions. First, it shows that competition is an important factor behind procyclicality of LLPs. Second, it adds to the research on the links between competition and financial stability. Third, it shows that the link between competition and procyclicality of LLPs depends on the economic development of the country in which the banks are located.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 5 June 2017

Yong Tan and John Anchor

The purpose of this paper is to investigate the impact of competition on credit risk, liquidity risk, capital risk and insolvency risk in the Chinese banking industry…

Abstract

Purpose

The purpose of this paper is to investigate the impact of competition on credit risk, liquidity risk, capital risk and insolvency risk in the Chinese banking industry during the period 2003-2013.

Design/methodology/approach

This study uses a generalized method of moments system estimator to examine the impact of competition on risk. In particular, translog specifications are used to measure the competition and insolvency risk.

Findings

The results show that greater competition within each bank ownership type (state-owned commercial banks, joint-stock commercial banks and city commercial banks) leads to higher credit risk, higher liquidity risk, higher capital risk, but lower insolvency risk.

Originality/value

This paper is the first piece of research testing the impact of competition on different types of risk in banking industry and it further contributes to the empirical literature by using a more accurate competition indicator (efficiency-adjusted Lerner index) and a more precise insolvency risk indicator (stability inefficiency).

Details

International Journal of Managerial Finance, vol. 13 no. 3
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 13 April 2020

Mallika Saha and Kumar Debasis Dutta

Since the strike of the 2007-2008 global financial crises, financial stability has been discussed with immense interest in academic and policy circles. Following this…

Abstract

Purpose

Since the strike of the 2007-2008 global financial crises, financial stability has been discussed with immense interest in academic and policy circles. Following this essence, this paper aims to investigate the nexus of financial inclusion, competition concentration and financial stability.

Design/methodology/approach

To analyze this relationship, this study uses different inclusion indices constructed by principle component analysis, Boon indicator, different concentration measures and Z-score, for a sample of 92 countries and subsamples based on income and economic grouping of those countries as well as for pre- and post-crisis episodes over the period of 2004-2014. This study also investigates the variation in inclusion–stability relationships in the presence of competition and concentration. This study uses two-step system-generalized method of moments (GMM) and two-stage least square to address the endogeneity.

Findings

The study finds that competition contributes to stability; however, there is evidence of fragility in the presence of concentration in the banking industry. Moreover, this study finds a U-shaped inclusion–stability relationship. The overall results of this study support the competition–stability view and a trade-off between inclusion and stability, which are consistent and robust to alternative econometric tests.

Research limitations/implications

Financial inclusion should be endorsed with caution in low-income, middle-income and emerging countries, and prudent policies should be taken to govern the market concentration to maintain financial stability.

Originality/value

To the best of the authors’ knowledge, this paper is the first to explain the impact of financial inclusion on financial stability in the presence of market heterogeneity.

Details

Competitiveness Review: An International Business Journal , vol. 31 no. 4
Type: Research Article
ISSN: 1059-5422

Keywords

Article
Publication date: 12 April 2022

Paolo Coccorese and Biswa Swarup Misra

This paper investigates the relationship between market power and efficiency for Indian banks in order to test the validity of the quiet life hypothesis (QLH) during 2005–2019.

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Abstract

Purpose

This paper investigates the relationship between market power and efficiency for Indian banks in order to test the validity of the quiet life hypothesis (QLH) during 2005–2019.

Design/methodology/approach

First, the bank-level DEA efficiency scores and three measures of the Lerner index: traditional, efficiency-adjusted, stochastic are estimated. Then, efficiency scores are regressed on Lerner indices plus a set of banking and economic control variables.

Findings

Robust evidence against the QLH is obtained. Moreover, the conventional Lerner index suggests that market power of Indian banks, as well as of the different bank groups, increased during the study period, due to a greater reduction in costs compared to that of the price of banking services. The efficiency scores also declined for the banking system as a whole, and for all bank groups except new private banks.

Originality/value

This is the first study testing the QLH for the different categories of Indian banks and also provides robust inferences by using both stochastic and non-stochastic measures of market power.

Details

Managerial Finance, vol. 48 no. 6
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 11 June 2018

Md Aslam Mia

The purpose of this paper is to measure and track the evolution of market concentration and competition in the microfinance industry in Bangladesh by employing both the…

Abstract

Purpose

The purpose of this paper is to measure and track the evolution of market concentration and competition in the microfinance industry in Bangladesh by employing both the structural and non-structural measurement techniques.

Design/methodology/approach

By using a unique panel data set generated from the microcredit regulatory authority (MRA) annual reports, the sample includes 169 microfinance institutions (MFIs) and covers the period 2009-2014. The authors employed the Herfindahl-Hirschman index (HHI) and concentration ratio (CR) (largest 3, 8 and 20 MFIs) as structural measurement techniques and the Lerner index as a non-structural measurement technique. In addition, four different market indicators are used as representatives of deposit and credit markets to better explain the evolution of market concentration.

Findings

The results of HHI indicate that the sector is moderately concentrated and currently transitioning to an unconcentrated market. However, based on CR, the industry is still dominated by a few large MFIs. The Lerner index (non-structural approach) also confirmed that the level of competition is relatively high and likely to follow an inverted U-shape during the study period.

Practical implications

The findings of this study will enhance our understanding of the market structure in the Bangladesh’s microfinance industry so as to inform important policy prescriptions. The results also provide impetus to the relatively young MRA to nurture competition in the market; simultaneously, the findings prompt management of the MFIs to cope with a competitive market environment.

Originality/value

This study is one of the first of its kind that includes a large data sample of microfinance market for a single country by employing both structural and non-structural measurement approaches.

Details

International Journal of Social Economics, vol. 45 no. 6
Type: Research Article
ISSN: 0306-8293

Keywords

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