| Title : | Industrial concentration and bank performance in Nepal | | Material Type: | printed text | | Authors: | Sushila Nepal, Author | | Publication Date: | 2017 | | Pagination: | 110p. | | Size: | GRP/Thesis | | Accompanying material: | 9/B | | Languages : | English | | Descriptors: | Industrial concentration
Industries
| | Class number: | 338.8 | | Abstract: | Market concentration is one of the most important determinants of competitiveness and debate about the structure of the banking industry is increasing day by day. The world has seen a rapid consolidation of banks during the past several decades, which has caused a decrease in the number of banks and an increase in banks’ average size (Evrensel, 2001). As a result, many banks have grown too big and that the banking system has become too concentrated. At the same time, several recent studies show that banking consolidation and changes in the structure of the banking industry significantly affect not only the performance of individual banks but also the stability of the entire banking system (Berger et al., 2009). Due to this, the recent financial literature has become very concerned with discussing the effects of concentration on banking performance. In investigating the relationship between the concentration and competition in banking sector there are two competing approaches: the structure-conduct performance (SCP) hypothesis and the efficient-structure (EFS) hypothesis are developed.
SCP hypothesis postulates that the higher market concentration leads to higher market power and, hence, to the higher normal profit generated by the bank (Bain, 1951). Banks with higher market power in a high concentrated market are more able to set the lower price of deposits and the higher price of credit (Park and Weber, 2006). On the other hand, efficient structure hypothesis developed by Demsetz (1973) and Peltzman (1977) challenged the line of reasoning of the traditional SCP and offer a competing explanation of the relation between market structure and performance. The hypothesis claims that if banks achieve a higher degree of efficiency, its profit maximizing behaviour will allow it to gain market share by reducing prices (Molyneux and Forbes, 1992). Market structure is therefore shaped endogenously by banks' performance, thus, concentration is a result of the superior efficiency of lending banks (Vesala, 1995).
Lloyd-Williams et al. (1994) reported a positive relation between the concentration and the return on assets. Al-Obaidan (2008) found positive and statistically significant influence of concentration on ROE indicator. Nabieu (2013) found that market concentration and market share significantly determines profitability in Ghana, signifying the strong acceptance of the SCP hypothesis. Park and Weber (2006)observed that bank efficiency has a significant effect on bank profitability and support the efficient structure hypothesis. In Nepalese context few studies have been conducted to test two competing hypotheses namely traditional structure conduct performance (SCP) and efficient structure performance (EFS) hypothesis such as Pradhan and Shrestha (2015), Gajurel and Pradhan (2011), and Gajurel (2010). Still there different views on SCP and EFS hypothesis, Nepalese studies have shown no support to the efficient structure hypothesis. This study is accompanied in the context of Nepalese commercial banks to see whether the result support the previous studies.
The major objective of this study is to test the structure conduct performance (SCP) hypothesis and efficient structure (EFS) hypothesis in Nepalese commercial banking sector. The study is based on the secondary data of 17 Nepalese commercial banks for the period of 2008 to 2015 with a total of 136 observations. Data and information have been collected from the World Economic Outlook of International Monetary Fund, annual reports of selected commercial banks and Banking and Financial Statistics published by Nepal Rastra Bank. This study has employed descriptive research design and causal comparative research design to deal with issues associated with the impact of market share, concentration, and efficiency on profitability of selected commercial banks. The relationship between dependent and independent variables are analyzed in single step and multi-step regression analysis. Return on assets, net interest marginand return on equity are the dependent variables, whereas market share, Concentration ratio, Herfindahl - Hirschman index, efficiency, firm size, age of the firm and inflation are independent variables.
The result shows that average return on asset is highest for LUMB (2.93 percent) and lowest for MBL (0.65 percent). The average return on equity is higher for LUMB (31.09 percent) and lowest for MBL (7.69 percent). The average market share is highest for NABIL (6.70 percent) and lowest for LUMB (1.15 percent). The Herfindahl - Hirschman index is highest for the year 2010 of 18.33 percent and lowestfor the year 2008 of 6.82 percent. Theconcentration ratio shows that it is highest for the year 2008 of 48 percent and lowest for the year 2012 of 30 percent. The average efficiency is highest forLUMB 0.99) andlowest is for NSBI (0.72). NIBL has highest average firm size (Rs. 71.09 Billion) and LUMB has lowest of (Rs. 12.69 Billion). The average age is highest for NABIL (28.50 years) and lowest for PCB, SUBL and NMB (4.5 years).The inflation shows that it is highest for the year 2009 of 12.6 percent.
The descriptive statistics for selected commercial bank shows that mean return on assets, net interest margin, return on equity, Market share,Herfindahl - Hirschman index, concentration ratio, firm size, age of the firm and inflation are 1.73 percent,19.14 percent, 3.39 percent, 3.35 percent, 4.88 percent, 37.5 percent, 0.91, Rs. 36.28 Billion, 14.67 years and 9.13 percent respectively.
The study of selected commercial bank shows that market share, concentration, efficiency, firm size and age of the firm are positivity correlated to bank performance where as inflation is negatively correlated.
The regression analysis reveals that market share and concentration have positive and significant impact on performance of Nepalese commercial banks measured in term of ROA, NIM and ROE. This indicates that increase in these variables leads to increase in profitability of Nepalese commercial banks. Similarly, beta coefficient is positive for efficiency. However, coefficients are not significant. This indicates that efficiency of Nepalese commmercial banks has no impact on the performance. Overall, the result shows that the efficiency structure hypothesis is not accepted rather the significant beta coefficient of concentration and positive coefficients of market share shows that SCP hypothesis is explaining the profitability of Nepalese commercial banks.
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Industrial concentration and bank performance in Nepal [printed text] / Sushila Nepal, Author . - 2017 . - 110p. ; GRP/Thesis + 9/B. Languages : English | Descriptors: | Industrial concentration
Industries
| | Class number: | 338.8 | | Abstract: | Market concentration is one of the most important determinants of competitiveness and debate about the structure of the banking industry is increasing day by day. The world has seen a rapid consolidation of banks during the past several decades, which has caused a decrease in the number of banks and an increase in banks’ average size (Evrensel, 2001). As a result, many banks have grown too big and that the banking system has become too concentrated. At the same time, several recent studies show that banking consolidation and changes in the structure of the banking industry significantly affect not only the performance of individual banks but also the stability of the entire banking system (Berger et al., 2009). Due to this, the recent financial literature has become very concerned with discussing the effects of concentration on banking performance. In investigating the relationship between the concentration and competition in banking sector there are two competing approaches: the structure-conduct performance (SCP) hypothesis and the efficient-structure (EFS) hypothesis are developed.
SCP hypothesis postulates that the higher market concentration leads to higher market power and, hence, to the higher normal profit generated by the bank (Bain, 1951). Banks with higher market power in a high concentrated market are more able to set the lower price of deposits and the higher price of credit (Park and Weber, 2006). On the other hand, efficient structure hypothesis developed by Demsetz (1973) and Peltzman (1977) challenged the line of reasoning of the traditional SCP and offer a competing explanation of the relation between market structure and performance. The hypothesis claims that if banks achieve a higher degree of efficiency, its profit maximizing behaviour will allow it to gain market share by reducing prices (Molyneux and Forbes, 1992). Market structure is therefore shaped endogenously by banks' performance, thus, concentration is a result of the superior efficiency of lending banks (Vesala, 1995).
Lloyd-Williams et al. (1994) reported a positive relation between the concentration and the return on assets. Al-Obaidan (2008) found positive and statistically significant influence of concentration on ROE indicator. Nabieu (2013) found that market concentration and market share significantly determines profitability in Ghana, signifying the strong acceptance of the SCP hypothesis. Park and Weber (2006)observed that bank efficiency has a significant effect on bank profitability and support the efficient structure hypothesis. In Nepalese context few studies have been conducted to test two competing hypotheses namely traditional structure conduct performance (SCP) and efficient structure performance (EFS) hypothesis such as Pradhan and Shrestha (2015), Gajurel and Pradhan (2011), and Gajurel (2010). Still there different views on SCP and EFS hypothesis, Nepalese studies have shown no support to the efficient structure hypothesis. This study is accompanied in the context of Nepalese commercial banks to see whether the result support the previous studies.
The major objective of this study is to test the structure conduct performance (SCP) hypothesis and efficient structure (EFS) hypothesis in Nepalese commercial banking sector. The study is based on the secondary data of 17 Nepalese commercial banks for the period of 2008 to 2015 with a total of 136 observations. Data and information have been collected from the World Economic Outlook of International Monetary Fund, annual reports of selected commercial banks and Banking and Financial Statistics published by Nepal Rastra Bank. This study has employed descriptive research design and causal comparative research design to deal with issues associated with the impact of market share, concentration, and efficiency on profitability of selected commercial banks. The relationship between dependent and independent variables are analyzed in single step and multi-step regression analysis. Return on assets, net interest marginand return on equity are the dependent variables, whereas market share, Concentration ratio, Herfindahl - Hirschman index, efficiency, firm size, age of the firm and inflation are independent variables.
The result shows that average return on asset is highest for LUMB (2.93 percent) and lowest for MBL (0.65 percent). The average return on equity is higher for LUMB (31.09 percent) and lowest for MBL (7.69 percent). The average market share is highest for NABIL (6.70 percent) and lowest for LUMB (1.15 percent). The Herfindahl - Hirschman index is highest for the year 2010 of 18.33 percent and lowestfor the year 2008 of 6.82 percent. Theconcentration ratio shows that it is highest for the year 2008 of 48 percent and lowest for the year 2012 of 30 percent. The average efficiency is highest forLUMB 0.99) andlowest is for NSBI (0.72). NIBL has highest average firm size (Rs. 71.09 Billion) and LUMB has lowest of (Rs. 12.69 Billion). The average age is highest for NABIL (28.50 years) and lowest for PCB, SUBL and NMB (4.5 years).The inflation shows that it is highest for the year 2009 of 12.6 percent.
The descriptive statistics for selected commercial bank shows that mean return on assets, net interest margin, return on equity, Market share,Herfindahl - Hirschman index, concentration ratio, firm size, age of the firm and inflation are 1.73 percent,19.14 percent, 3.39 percent, 3.35 percent, 4.88 percent, 37.5 percent, 0.91, Rs. 36.28 Billion, 14.67 years and 9.13 percent respectively.
The study of selected commercial bank shows that market share, concentration, efficiency, firm size and age of the firm are positivity correlated to bank performance where as inflation is negatively correlated.
The regression analysis reveals that market share and concentration have positive and significant impact on performance of Nepalese commercial banks measured in term of ROA, NIM and ROE. This indicates that increase in these variables leads to increase in profitability of Nepalese commercial banks. Similarly, beta coefficient is positive for efficiency. However, coefficients are not significant. This indicates that efficiency of Nepalese commmercial banks has no impact on the performance. Overall, the result shows that the efficiency structure hypothesis is not accepted rather the significant beta coefficient of concentration and positive coefficients of market share shows that SCP hypothesis is explaining the profitability of Nepalese commercial banks.
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