Measuring Competition in the Banking Sector of Pakistan: An Application of Boone Indicator

Abstract

The banking sector of Pakistan has witnessed a notable transformation in its structure and business activities following the implementation of financial sector reforms since the early 1990s. Specifically, the reforms helped transform a repressed financial sector into a market oriented and sound financial sector, predominantly owned and managed by the private sector. How these developments have impacted competition among the banks is still an open question.This study attempts to answer this question with the application of a recent approach to measure competition: Boone indicator of competitiveness. This measure postulates that inefficient firms (banks) in a competitive environment are punished harshly, and there is an output reallocation from inefficient to efficient firms/banks. We have estimated elasticity of market share to marginal costs for 24 banks in Pakistan, using a balanced panel of bank level (annual) data for the year 1996 to 2015. Marginal costs are obtained indirectly by first estimating a translog cost function using earning assets as an output, and cost of financial capital, physical capital and labor as inputs. The estimated Boone Indicator value of negative 0.31 is significant and suggests that inefficient banks have been losing their market share to efficient banks over the estimation period: a reflection of underlying competitive environment. Increasing value of Boone indicator (in absolute terms) over the period of study suggests that competition among the banks in Pakistan has increased over time.

Competitive strategies-performance nexus and the mediating role of enterprise risk management practices: a multi-group analysis for fully fledged Islamic banks and conventional banks with Islamic window in Pakistan

“…This paper intends to contribute to the growing Islamic banking literature in the following ways. First, a recent study by the State Bank of Pakistan estimates the degree of competition in Pakistani banks; however, the relationship between competition and performance of Islamic banks remains unexplored (Khan and Hanif, 2017). In this regard, our study is the first to the best of the authors’ knowledge in the Pakistani context that considers the unique competition-performance nexus between FFIBs and Islamic window banks.…”