Competition and Market Contestability in Ghanaian banking industry: A Panzar-Rosse Approach
Keywords:
Banking competition, Panzar-Rosse method, GhanaAbstract
The present study evaluates the market structure of Ghana’s banking industry and estimates the nature and degree of competition. This study uses non-structural methodology proposed by Panzar-Rosse Model known as “H-statistic” to empirically assess competitiveness in the Ghanaian banking market. The study uses 23 banks in Ghana from 2000 to 2019, compiled and reported by Ghana Association of Bankers (GAB). The study results show that banks in Ghana derive their revenue in conditions of monopolistic competition. Thus, Contestable markets theory and Chamberlainian competition theory are validated by the study results. Furthermore, the study results revealed that from 2000 to 2019, after various structural reforms including the implementation of the FINSAP, competition in the Ghanaian banking sector increased. Finally, when the dataset was decomposed into local and foreign banks, the results indicate that monopolistic competition market conditions are found for both local and foreign banks. Managerially, the presence of a monopolistic market condition adds to the call for managers of the banks to consider factor input prices in an attempt to generate more revenues. Second, to avoid negative consequences of competition, managers of these banks should not rely on a single income source but also indulge in non-intermediation activities. In terms of policy, pro-structural shift policies that have helped with the transition from a monopoly structure to a monopolistic competition free entry or contestable market structure should be rigorously pursued by the policymakers. Besides, policy directives that enhance greater consolidation in the banking sector should
be pursued rigorously. Finally, the results from this study could help policy-makers to fashion an appropriate optimal intervention and stability policies geared towards enhancing banking stability at different levels of bank competition.
References
Acheampong, G. & Dana, L.P. (2015). Liability of foreignness in fast-expanding markets: evidence from Ghana, Thunderbird International Business Review, 57 (5), 1–3.
Abdul Majid, M.Z. and Sufian, F. (2008). Market structure and competition in emerging market: evidence from Malaysian Islamic banking industry. Munich Personal RePEc Archive MPRA, No. 12126, 1-23.
Al-Muharrami, S., Matthews, K., Khabari, Y. (2006). Market structure and competitive conditions in the Arab GCC banking system, Journal of Banking and Finance 30, 3487–3501.
Bain, J. (1956). Barriers to New Competition, Harvard University Press, Cambridge, MA.
Bawumia M., Owusu-Danso T. & McIntyre A. (2008). IMF Survey Magazine: Countries & Regions, Ghana's Reforms Transform Its Financial Sector. Available at :http://www.imf.org/external/pubs/ft/survey/so/2008/car052208a.htm).
Baumol, W. J., Panzar, J. C. & Willig, R. D. (1982). Contestable Markets and the Theory of Industry. Structure, Harcourt Brace Javanovic, New York.
Beck, T., Demirguc-Kunt, A. & Maksimovic, V. (2004). Bank competition and access to finance: international evidence, Journal of Money, Credit, and Banking, 36 (3), 627-648.
Belaisch, A. (2003). Do Brazilian Banks Compete? IMF Working Paper 03/113 (Washington: International Monetary Fund).
Berger, A.N., Demirg€uç-Kunt, A., Levine, R. & Haubrich, J.G. (2004). Bank concentration and competition: an evolution in the making, Journal of Money, Credit and Banking, 36 (3), 433-451.
Biekpe, N. (2011). The competitiveness of Commercial Banks in Ghana. African Development Review, 23 (1), 75-87.
Bikker, J.A. & Haaf, K. (2002). Competition, concentration and their relationship: an empirical analysis of the banking industry, Journal of Banking & Finance, 26 (11), 2191-2214.
Bikker, J. A., Shaffer, S. & Spierdijk, L. (2009). The Panzar-Rosse Revenue Test : To Scale or Not to Scale ?. available at: http://ssrn.com/abstract=1458889.
Bikker, J.A. & Groeneveld, J.M. (2000). Competition and Concentration in the EU Banking Industry, De Nederlandsche Bank NV, 8.
Bonaccorsi di Patti, E. & Dell’Ariccia, G. (2004). Bank competition and firm creation, Journal of Money, Credit, and Banking, 36 (2), 225-251
Bikker, B., Spierdijk, L. & Finnie, P. (2006). Misspecification of the Panzar Rosse model: assessing competition in the banking industry, de Nederlansche Bank NV Working Paper No 114.
Bresnahan, T.F. (1982). The oligopoly solution concept is identified, Economics Letters, 10 (1-2), 87-92.
Casu, B. & Girardone, C. (2006). Bank competition, concentration and efficiency in the single European market, The Manchester School, 74 (4), 441-468.
Chamberlin, E. (1933). The Theory of Monopolistic Competition, Cambridge, MA, Harvard University Press.
Claessens, S., & Laevan, R. (2004). What drives bank competition? Some International Evidence. Journal of Money, Credit and Banking, 36(2), 563-584. http://dx.doi.org/10.1353/mcb.2004.0044.
Davies, G. & Davies, J. E. (1984). The revolution in monopoly theory. Lloyds Bank Review, 6(2), 38-52.
De Bandt, O. & Davis, E.P. (2000). Competition, contestability and market structure in European banking sectors on the eve of EMU, Journal of Banking and Finance, 24(1), 1045-1066.
Drummond, P., Maechler, A.M. & Marcelino, S. (2007). Italy: Assessing Competition and Efficiency in the Banking in the Banking System. IMF Working Paper WP/07/26
Dunlop, J. (1938). The movement of real and money wage rates. Economic Journal, 48(1) 413–434.
Flaminiet, V. McDonald, C. & Schumacher, L. (2009).The determinants of commercial bank profitability in sub-Saharan Africa. IMF Working Paper 09/15, International Monetary Fund, Washington.
Fu MX & Heffernan, S. (2009). The effects of reform on China’s bank structure and performance. Journal Bank Finance, 33(1):39–52.
Garrido, A. (2004). El grado de competencia en el sistema bancario español, Universitat de Barcelona Working Paper.
Gutiérrez de Rozas, L. (2007). Testing for competition in the Spanish banking industry: the PanzarRosse approach revisited, Banco de España Research Paper No. WP-0726.
Guzman, M.G. (2000). Bank Structure, Capital Accumulation, and Growth: A Simple Macroeconomic Model, Economic Theory 16 (2), 421–455.
Hauner, D. & Peiris, S. (2005). Bank Efficiency and Competition in Low-Income Countries: The Case of Uganda, IMFWorking Paper No. 05/240 (December).
Hondroyiannis G, Lolos S, Papapetrou E (1999). Assessing competitive conditions in Greek banking. Journal International Finance Market Institution Money 9, 377–391.
Jin, D., Liu, J., Liu, L. & Yin, D. (2014) Competition and profit hiding: evidence from banks in China. Managerial Finance, 40(10), 1040–1051. doi: 10.1108/MF-11-2013-0315.
Jiang, G., Wong, J., Tang, N., and Sze, A. (2004). Banking sector competition in Hong Kong – Measurement and evolution over time. Hong Kong Monetary Authority.
Jiménez, G., Lopez, J.A. & Saurina, J. (2013). How does competition affect bank risk-taking?, Journal of Financial Stability, 9 (2), 185-195.
Khattak, M. A. & Ali, M. (2021). ‘Are competition and performance friends or foes? Evidence from the Middle East banking sector’, International Journal of Islamic and Middle Eastern Finance and Management, 14(4), 671–691. doi: 10.1108/IMEFM-08-2019-0348.
Koetter, M., Kolari, J.W. & Spierdijk, L. (2012). Enjoying the quiet life under deregulation? Evidence from adjusted Lerner indices for US banks. Review of Economics and Statistics, 94 (2), 462-480.
Kotler, P. (1976). Marketing management: Analysis, planning, control Englewood Cliffs, NJ, Prentice-Hall.
Korsah, K. B., Nyarko, E. K., & Tagoe, N. A. (2001). Impact of Financial Sector Liberalization On Competition And Efficiency In The Ghanaian Banking Industry. IFLIP Research Paper.
Lau, L.J. (1982). On identifying the degree of competitiveness from industry price and output data, Economics Letters, 10 (1-2), 93-99.
Lee, C. & Hsieh, M. (2013). Beyond Bank Competition and Profitability : Can Moral Hazard Tell Us More?, Journal of Financial Services Research, 70(1), 87–109. doi: 10.1007/s10693-012-0151-1.
Lee, S. and Lee, J. (2005). Bank consolidation and bank competition: An empirical analysis of the Korean banking industry. Bank of Korea Economic Papers 8, 102-144.
Leon, F. (2015). Does bank competition alleviate credit constraints in developing countries?, Journal of Banking & Finance, 57, 130-142.
Levine, R. (1997). Financial development and economic growth: views and agenda. Journal of Economic Literature, 35, 688e726.
Lin, J. Y., & Nugent, J. (1995). Institutions and economic development. Handbook of Development Economics. 3, pp. 20
Lloyd-Williams, D.M., Molyneux, P. & Thornton, J. (1991). Market structure and performance in Spanish banking”. Journal of Banking & Finance, 18, 433-43.
Majid, A., M. Zulkhibri & S. Fadzlan (2007). Market Structure and Competition in Emerging Market: Evidence from Malaysian Islamic Banking Industry. MPRA Paper No. 12126, Munich Personal RePEc Archive.
Mason, E. S. (1939). Price and production policies of large scale enterprises, American Economic Review, 29(1), 61-74.
Maudos, J. & Solis, L. (2007). Deregulation, Liberalization and Consolidation of the Mexican Banking System: Effects on Competition, Working Paper WP EC 2007–13, Department of Economics, University of Valencia.
Maudos, J. & Perez, F. (2003). Competencia vs poder de mercado en la banca española, Moneday Crédito, 217, 139-166.
McKelvey, W. (1982). Organizational systematics: Taxonomy, evolution, classification. Los Angeles, University of California Press.
Mlambo, K. & Ncube, M. (2011). Competition and Efficiency in the Banking Sector in South Africa. African Development Review, 23(1), 4–15. https://doi.org/10.1111/j.1467-8268.2010.00268.x.
Molyneux, P., Lloyd-Williams, D. M. & Thornton, J. (1994). Competitive conditions in European banking. Journal of Banking and Finance, 18, 445-459. http://dx.doi.org/10.1016/0378-4266(94)90003-5
Nathan, A. & Neave, E.H. (1989). Competition and contestability in Canada’s financial system: empirical results, Canadian Journal of Economics, 22 (3),576-594.
Nelson, R. R. & Winter, S. G. (1982). An evolutionary theory of economic change. Cambridge, Harvard University Press.
Nelson, R. R. & Winter, S. G. (1974). Neoclassical vs. evolutionary theories of economic growth: Critique and prospectus, Economic Journal, 84(1), 886-905.
Panzar, J. C. & Willig, R. D. (1971). Free Entry and the Sustainability of Natural Monopoly, Bell Journal of Economics, 81(1), 78-98
Panzar, J. C. & Rosse, J. N. (1982). Structure, Conduct and Comparative Statistics. Economic Discussion Paper No. 248. Bell Laboratories.
Panzar, J. C. & Rosse, J. N. (1987). Testing for monopoly equilibrium”, Journal of Industrial Economics, 35(1),443-456.
Perera, S., Skully, M. & Wickramanayake, J. (2006). Competition and structure of South Asian banking: a revenue behaviour approach. Applied Financial Economics, 16 (11), 789-801.
Petersen, M.A. & R.G. Rajan. (1995). The Effect of Credit Market Competition on Lending Relationships. Quarterly Journal of Economics, 110 (2), 405–443.
Porter, M. E. (1980). Competitive strategy. New York: Free Press Porter, M. E. (1981). The contributions of industrial organization to strategic management”, Academy of Management Review, 6(1), 609-620.
Prasad, A. & Ghosh, S. (2007). Competition in Indian Banking: An Empirical Evaluation, South Asia Economic Journal, 8(1), 265.
Rajan, Raghuram G. & Luigi Zinagales, (1998). Financial Dependence and Growth. American Economic Review 88(3), 559-86.
Rakshit, B. & Bardhan, S. (2020). Bank competition in India: revisiting the application of Panzar–Rosse model, Managerial Finance, 46(11), pp. 1455–1477. doi: 10.1108/MF-09-2019-0457.
Repullo, R. (2004). Capital requirements, market power, and risk-taking in banking, Journal of Financial Intermediation, 13 (2), 156-182.
Rime, B. (1999). Mesure de degrede concurrence dans le systeme bancaire Suisse al’aide du modele de Panzar et Rosse, Revue Suisse d’Economie Politique et de Statistique, 135, 21-40.
Robinson, J. (1933). The economics of imperfect competition. London, MacMillan
Schaeck, K. & Cihak, M. (2014). Competition, efficiency, and stability, Financial Management, 10 (1), 215-241, available at: https://doi.org/https://doi.org/10.1111/fima.1201
Simpasa, A. M. 2013. “Competition and Market Structure in the Zambian Banking Sector.” Working Paper Series 168. Tunis, Tunisia: African Development Bank.
Schumpeter, J. A. (1950). Capitalism, socialism, and democracy, (3rd ed.). New York, NY.
Shaffer, S. (1982). A non-structural test for competition in financial markets. In Bank Structure and Competition, Conference Proceedings. Chicago: Federal Reserve Bank of Chicago, 225-43.
Smith, Robert, and David Tripe. 2001. Competition and Contestability in New Zealand Banking System. Paper presented at the 14th Australian Finance and Banking Conference, Sydney.
Smirlock, M. (1985). Evidence on the (Non) relationship between concentration and profitability in Banking, Journal of Money, Credit and Banking, 17 (2), 69-83.
Staikouras, C.K., Koutsomanoli and Fillipaki, A. (2006). Competition and concentration in the new European banking landscape, European Financial Management, 12 (3), 443-482.
Stevenson, H. (1976). Defining corporate strengths and weaknesses. Sloan Management Review, 17(3), 51-68.
Thompson, A. A. & Strickland, A. J. (1980). Strategy formulation and implementation. Dallas: Business Publications.
Todorov, A. B. (2016). Assessing Competition in the Bulgarian Insurance Industry : A Panzar Rosse Approach. International Journal of Economics and Financial Issues, 6(3), 872–879.
Turk-Ariss R. (2008). Competitive behaviour in Middle East and North Africa banking systems, The Quarterly Review of Economics and Finance, 49(1), 693–710
Wahid, M. A. (2017). Comparing the competition of Malaysia Islamic and conventional banks: Evidence surrounding the global financial crisis. Journal of Islamic Accounting and Business Research, 8(1), 23–40. doi: 10.1108/JIABR-06-2015-0022.
Weill, L. (2004). Measuring cost efficiency in European banking: a comparison of frontier techniques, Journal of Productivity Analysis, 21 (2), 133-152.
Williams, J. (2012). Efficiency and market power in Latin American banking. Journal of Financial Stability, 8 (4), 263-276.
Wong. J. (2006). Competition in Hong Kong’s Banking Sector: A Panzar- Rosse Assessment. HKMA Research Memorandums, Hong Kong Monetary Authority. Working Paper No. 0616.
World Bank (1995). Ghana: Growth, Private Sector, and Poverty Reduction, Report No. 14111-GH.
Yildirim, H. S. & Philippatos, G.C. (2007). Restructuring, consolidation, and competition in Latin American banking markets. Journal of Banking and Finance 31, 629-639.
Downloads
Published
How to Cite
Issue
Section
License
Papers accepted become the copyright of the journal, unless otherwise specifically agreed.
