The term competition describes an activity where the objective is to gain something or to defeat somebody for winning something. This is done to establish a sense of superiority over other entities known as rivals in the particular field. It is the basic condition required to provide goods and services at optimum prices and this is required to be present in any industry so as to maintain a happy customer base. Since competition is the hallmark of a typically capitalistic economy, competition helps to ensure a particular degree of liberalization in the industries where it exists. Here price mechanism operates which enables the existence of a healthy competition and therefore a better competitive environment.
In the banking sector, competition works differently in comparison to the rest of the industries dealing with the production and sale of normal goods and services. This is different particularly in the banking sector as the functions of a bank in the financial sector is different. Over the years, the main responsibility if a bank has been to create money and provide loans traditionally in the exchange of some kind of a security. The functioning of banks, their nature and objectives makes them different and thus makes the legislative bodies more prone to supervising and posing regulations on their functions.
In particular, the vulnerability lies more in the instability of the market and the prevalent economic conditions because the functions performed by the banks are specific and towards the welfare of not only its customers but also the entire economy as a whole. Since the emergence of globalization and liberalization drive in the 1970s there has been a significant increase in both the performing arena of banks as well as in their competitive drive. This paper discusses mainly the significant works done previously on the competition in the banking sector.
Banking Industry: Competition and Efficiency
The banking sector faces competition, which is different in comparison to the other industries because of the functions performed by the banks in the economy’s financial system. The banking system faces the influence of marketing failures because of which cost reduction and efficiency increases are not completely suitable as primary modes of competition. There has been increase in the competition in the banking sector in various parts of the world, which has mainly resulted from the deregulation, and liberalization of the developed countries of the world.
The excessive pressure from the existence of market competition led to the expansion of banks in new market territories. Across various parts of the world, there has been a significant increase in the existence of many technologically advanced firms in this sector and these advanced companies have constantly challenged the presence and involvement of the traditional methods that have been used as means in the banking sector. This has resulted in an excess amount of competitive pressure on the existing banks in the economy.
As per the research conducted by Vyas & Raitani (2014), on the case of the competition in the Indian banking industry, an increasing trend in competition, which has been noticed in the period between 1996 to 2004 (Coccorese, 2013). After this period, a fall in the banking sector’s competitiveness was witnessed. Using the Granger Causality test, it has been seen that the competition in the banking industry generally had a positive impact on the efficiency of the banks in the Indian economy.
This information has been very important for policy makers as it is a symbol of the efficiency of the globalization and liberalization policies and this positive impact is expected to have a positive impact on the economic growth of the country. Therefore, by keeping this in mind, the policymakers can devise plans on improving and raising competitiveness in the banking sector in the Indian market, which would result in an increase in the banking sector’s efficiency in India.
According to a study conducted on the inter-relationship between the soundness of the Jamaican banks and the competiveness of Jamaican banking sector, during the period between March 2000 and June 2008 useful findings were revealed (Bailey-Tapper, 2009). The research also took up on the inefficiencies that the banks, which were operating in Jamaica, faced and it was found that in the case of merchant banks and other building societies, high competition was supplemented by the plagues of high risk of insolvencies and low degree of capitalisation, which gained high prevalence in these sectors.
On considering commercial banks in Jamaica, a greater competitive spirit had led to a reduction in the risk of insolvency along with that there was an important concern for the regulators of the banking industry pertaining to the commercial banks and various other building societies. Moreover, there was a U shaped relationship between the growth of loans and the ratio of bad and non-performing loans (Lawrence, et al., 2016). This could be considered as a proxy for judging the quality of loans. Based on the hypothesis, that at low rates of loan growth the finding was that the growth in the loan usually had a negative effect on the number of bad loans.
However, at a higher rate of growth in loans the amount of negative or bad loans increases with the growth rate of loans. This result is at par with the regulatory perception that the banks characterized with higher growth rate of loans need additional attention and observation.
In Pakistan, the banking industry has made significant progress in the past couple of years and has made ample progress in distributing the banking network and the regulators across the nation and the progress has been continuous with the intention of connecting the whole nation into a healthy network chain of banking (Khan & Riazuddin, 2009). Various reforms have been witnessed such as acquisitions and mergers of various kinds and consolidation reforms.
In a research to analyse the relationship between the efficiency and competition in the banking sector of Pakistan the results revealed that the trend has been declining in nature in the purview of concentration since 2000. It reflected a fall to 1000 in the absolute level of the Herfindahl-Hirschman Index since 2004 (Mirza, Bergland, & Khatoon, 2016). This fall occurred in all the three major banking structure indicators, which was indicating that in the competitive market structure, Pakistan’s banking sector fell. After using the PR model, it was further revealed that in Pakistan, the banking sector was bearing features of a monopolistic competitive system.
The banking sector in Zambia, which is a developing country, has witnessed as sleuth of changes leading to a massive impact on the competition level and a similar scenario has been seen in many other countries of Africa (Mooka, et. al, 2014). The banking sector has also seen dynamic changes caused by the entry of foreign banks along with the privatization of the state owned banks and it was seen that most of the banks operating in Zambia had earned their incomes from the monopolistic competition.
The increase in the competitiveness in the banking sector of the country can be contributed to a few major role-playing market factors like big risk taking abilities, intensity of the regulations and diversity of the revenue in the banking sector (Asongu, 2017). Taking an aggregate view it could be seen that by lessening the impediments to the success of the banking sector and its competitiveness, and these impediments are the rules and regulations, competitive conditions can be further enhanced in Zambia.
Stability and Competitiveness: Asia Pacific
The competition in the banking sector has become very significant in the scenario concerning financial stability. The recent financial instability, the global financial crisis of 2008, has shaken the economy, as many banks and other organisations have been unable to get out of the impact of the collapse due to the home mortgage market of the US (Luo, & Jackson, 2015). Even the European banks were affected along with countries like Estonia, Latvia, Lithunia, Hungary to mention a few (Haron, et al., 2017). Data from 14 Asia Pacific countries for the period between 2003 – 2009 was analysed with the purpose of gauging the impact of the competition in the banking sector and that of regulations on the vulnerability of various individual banks.
This measured the probability of bankruptcy and the z-scores of different banks (Fu, et al., 2015). The results showed that lager amounts of concentration would lead to financial vulnerability. Along with it, it has been seen that reduced pricing power also raised the bank risks keeping various macroeconomic, banking and institutional factors under control (Soedarmono & Tarazi, 2017). Additionally, tight capital regulations and institutional growth would lead to coping up with the desired financial stability but it also showed that property rights and deposit insurance are responsible factors behind bank vulnerability.
Capital Requirements and Bank Competition
On examining the banking sector in Kenya in the purview of minimum capital prerequisites and its impact on competition, it has been seen that efficiency in regulations is important for sustained bank competitiveness and the impact of capital is non-linear (Mwega, 2016). In addition, increased benefits of capital on banking competitiveness were derived on initiation of consolidation with bank structure playing a vital role on performance. (Mokaya & Kipyegon, 2014)
Researches regarding a multi-product approach towards banking where the banks that were providing classical products along with banking products had significant power in comparison to the ones providing only classical products and that market power was under mined in the absence of multi-product information. (Argote, et al., 2016) Therefore, it is necessary to produce both financial and non-financial products. The Ethiopian banking industry has been highly profitable, centralized and competitive and any change in their performance has serious implications on the economy’s financial fabric and competitiveness.
The Commercial Bank of Ethiopia holds a quasi-monopoly influence and the banking sector in the country is quite not penetrable as the entry is complex characterized by several legal, technical and economic market barriers. (Barbosa, de Paula Rocha, & Salazar, 2015) competition in terms of price in the Ethiopian banking industry is weak and this is supported by an econometric analysis which shows the presence of monopolistic competition in terms of prices among the banks. Therefore, the Ethiopian banks challenge each other in terms of effectiveness, technological advancements and superior services attained through the development of promotional exercises, branch networks and prices. (Rossi & Beccalli, 2017).
According to a research by Kasman and Kasman, (2015) there had been a spurt in the competitiveness of the Turkish banking industry, between the period of 2002 - 12. It used the Boone indicator and the Kerner index, as they were efficient in estimating the competitive index of the banking sector. This research used the z-scores, non-performing loans as proxy variables and the results revealed that competition, and non-performing loan ratio has a negative relation but completion and z-scores have a positive relation. (Özer & Gürel, 2017).
The results also reflected that larger concentrations have a positive impact on the non-performing loans and a negative impact on the z-score. Therefore, higher competition in the banking industry would result in higher instability, which can adversely affect the banking structure because high competition would maker banks take more risks leading to more instability because of the risks that had been undertaken.
Training and development are indispensable tools for ensuring the overall success, enhancement and performance of an organization and its employees and this is not different for banks. The Nigerian banking industry was analysed on the grounds of effectiveness of training and development of the employees’ on their performance and also on the organization’s competitiveness (Samuel, 2015). This is because training is very important for the survival of an employee in any organization and to ensure the effective performance of a business organization along with its competitiveness among its rivals in the market.
The results show that individuals must take advantage of every opportunity that falls their way in forms of skill development or professional opportunities and they must be very active Gabriel, Gabriel, & Nwaeke, 2015). Therefore, the management of different banks must provide sessions for effective training of employees as a part of their strategy so that the employees can learn the skills and improve their overall performance. The banking companies should hold on to every opportunity to develop training and development sessions that might be able to ensure success in their banking policies because the policies will be properly implemented by the employees who have received training and thus the status quo will be maintained. This will help in maintaining and reviving the competitive edge that is a very important requirement for banking companies in the present competitive market.
Boone Indicator and its Application
The Boone indicator is one of the non-structural measures for capturing competition in a dynamic market. This came into being with the Austrian market’s measurement of competition in a dynamic manner. Studies reflect that even if with decrease in competition, the Lerner index falls, the reallocation effect affects the increase decrease or remain stable from efficient to inefficient firms. Firms that are more competitive are assumed to be punished more harshly in terms of loss in profit.
Boone is of the view that reallocation increases monotonically with the degree of competition that is the relationship between cost and profit is monotonic which is an advantage and so it is a robust measure. Boone’s approach is more advantageous in developing countries but this approach disregards other aspects. According to this approach, efficiency should be observable and one dimensional. Boone’s indicator grasps dynamic changes but may fail to identify the degree of competition in the short-run.
Bank risks and competition:
Risk and competitiveness in the banking sector have a strong relationship and the financial position of the bank has a very crucial role to play. Increases in the value of the franchise of the different banks shareholders as well as the management largely reduce their exposure to risk as a reaction to safeguard its franchise value (Sung & Park, 2016). The market power of a bank is assumed to be reflected upon by the fundamental foundation value of the franchise and this is what ultimately leads to a reduction in the amount of competition in the market. (Bessis, 2015). Thus, there exists a close and interlinking relationship between the risk taking capability of a bank and the relationship between risk and competition prevailing in the market.
To sum up, in the case of the competitive nature of the banking industry many observations were seen. These included the thorough investigation of the state or degree of competition in the banking sector in various countries like Jamaica, India, Pakistan, Turkey, Ethiopia, Kenya, Nigeria, Zambia and Asia Pacific. Variety of researches were taken up which lead to various results. A few indicated that proper training and skill development of the bank employees had significant influence on the competitiveness.
Some attributed to the type of products produced and sold while many were of the opinion that the positive impact of economic policies of globalization and liberalization on competitiveness both in the scope of a developed as well as in the case of a developing nation. Besides these there has been a significant degree of influence on competitiveness of the banking sector by various factors such as capital requirement, bank risks and financial stability where each of these factors had a major role to play in the act of influencing the nature of competitiveness of the banking sector in various countries around the world. Nonetheless, there are many avenues that still need to be considered as they have a significant impact with the competitiveness of the banking industry.
These would require future research on this topic and a thorough analysis of the fundamental effects of having a relationship between the decision of a bank to provide goods apart from its traditional goods and the market power of the bank. Additionally, it is very essential to properly consider the impact of the introduction of the different technological innovations in the competitive nature of the banking industry.
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