Structure and profitability in the banking sector

Abstract

The relationship between profit and bank market structure continues to raise questions amongst both policy makers and researchers. While some evidence supports a positive relationship between market structure, competition and profitability, other evidence seems to support the fact that profitability and related market share result from efficiency. Moreover, extant literature on South Africa is conflicting and seems to contradict anecdotal evidence. While some studies point to a competitive environment despite concentration, others suggest that concentration in the banking sector is harmful. Prosecution of banks for uncompetitive behavior also casts doubt on the conclusion that the South African banking sector is competitive. This paper examines the relationship between structure and conduct in the South African banking sector. Using the Berger (1995) discriminating tests, the effect of industry concentration, market share and efficiency on three measures of profitability is estimated on a panel of 11 South African banks for data between 1994 and 2016. The results show that concentration affects conduct. The profit-structure relationship is dominantly explained by the structure conduct hypothesis and partly by the efficient scale hypothesis. These results suggest that policy which discourages concentration and promotes competition in the banking sector is socially beneficial.

Canadian Banking Industry Profitability: Exploring the Relevance of Two Competing Hypotheses

“…The finding that the negative effect is statistically significant in Regression 1 (Table 2) shows that increasing loan to deposit ratio could inhibit profitability. This observation substantiates Garza-Garcia ( 2012), but it contradicts Simatele, Mishi, and Ngonyama (2018) finding that indicate statistically significant positive influence on profitability. High LOTD reduces liquidity and creates the need for banks to raise funds at higher costs (Gropp, Sorensen, & Lichtenberger, 2007), leading to profitability decline.…”

“…In addition, there are studies such as Bhatti and Hussain (2010) and Al-Muharrami and Matthews (2009) that show support for SCP, demonstrating that concentration in the industry creates the environment where banks collude to increase profitability. Furthermore, single country studies (e.g., Simatele, Mishi, & Ngonyama, 2018;Alhassan, Tetteh, & Brobbey, 2016;Doyran, 2012;Ye, Xu, & Fang, 2012;Tregenna, 2009;Lu, Fung, & Jiang, 2007) differ in findings, which could be due to differences in methodology, country characteristics and economic conditions, regulation, and the period of study. Notably, studies that examined the industry in the same country have produced conflicting findings.…”

“…In some studies (e.g., Bucevska & Misheva, 2017;Tregenna, 2009), the evidence reflects full support for the MPH or the ESH. Nonetheless, studies such as Simatele, Mishi, and Ngonyama (2018), Sharma, Gounder, and Xiang (2013), Kapopoulos and Siokis (2005), and Berger (1995) show concurrent presence of MPH and ESH components. These inconsistencies in findings suggest the need for an empirical study with more insight.…”

Industry structure, macroeconomic fundamentals and return on equity

“…Alabede (2012) investigated the determinants of Nigerian banks’ performance and the intervening effects of global financial condition where bank concentration was found to be a significant determinant of performance. Similarly, Simatele et al ’s (2018) study proved that the profit–structure relationship in South African banking sector is dominantly explained by the SCP hypothesis.…”

Competition reduces profitability: the case of the Indian life microinsurance industry

“…Several studies focused on the banking industry support the SCP hypothesis that anti-competitive behaviour is associated with better performance (Bajtelsmit and Bouzouita 1998;Sathye 2005;Samad 2008;Pilloff and Rhoades 2002;Mohammed et al 2015;Jibao et al 2010;Simatele et al 2018;Tan 2016;Goddard et al 2009;Jeon and Miller 2005). Other empirical analyses of the property and liability insurance industry in the U.S. (Chidambaran et al 1997), the life insurance sector in Ghana (Alhassan et al 2015) and the non-life insurance industry in Eastern European countries (Njegomir and Stojic 2010) support the SCP hypothesis.…”