An empirical investigation of market structure, determinants of profitability, competitiveness and productivity in MENA economies banking sector
Student thesis: Doctoral Thesis
The purpose of this thesis has been to investigate the market structure, profitability, competitiveness and productivity of commercial banks operating in the MENA economies for the period 1999-2012. The study first measures whether the banking industry in MENA economies has been concentrated or not, and aims to investigate the relationship between market structure and banks’ profitability; then examines whether a bank’s performance can be better explained by the Structure-Conduct-Performance (SCP) hypothesis, that claims that a highly concentrated market leads to collusive behaviour among larger banks, resulting in superior performance hypothesis or by the efficient hypothesis (EH) that claims that the positive association of market share of a bank and higher performance is caused by the bank’s superior efficiency. Empirically, I apply the Panzar-Rosse model to investigate which can be beneficial to policy makers, by illustrating how to shape policies which positively affect the market competition and safeguard stability of the financial sector. Finally, the study assesses changes in banking productivity by employing Data Envelopment Analysis (DEA), and the findings will be able to show bank managers, market participants and policy makers the sources of productivity of commercial banks and to assist them for optimum resource allocation strategies. This study examines markets that were found to have different degree of market concentration, and assesses the relevance of SCP and EH paradigm. The results of panel analysis and GMM estimators, provide evidence that the SCP hypothesis is not rejected, emphasising that increased market power yields monopoly profits. The fact that the impact of market concentration is positive in MENA economies is vital evidence, at least to a certain extent. On the other hand, Market share (MS) is found in most regressions using fixed effects to be positive and highly significantly different from zero, whilst market concentration is equal to zero, supporting the argument that if a bank enjoys a higher degree of efficiency in respect to good management and technology than its competitors, it can easily gain a larger market share by lowering its prices and earning economic profits However, also the thesis finds a positive and significant relationship between net interest margins, profitability and capital adequacy, suggesting that commercial banks in the MENA economies still need to be highly capitalised so as to be viable and to operate profitably. Spending on technology and fixed assets is found to contribute in making banks more profitable, but banks’ size not, indicating that policymakers, regulators and managers of banks in the MENA region should encourage mergers that lead to significant investments, instead of simply increasing the size of the new scheme. Poor cost management is one of the largest contributors to poor performance for commercial banks in the examined period. Overall, the thesis finds evidence of structural reforms and uncovers measures that have led to the improvement of regulation, and the implementation of frameworks which should continue to improve competitiveness within MENA banking sectors. In addition, future policy on the banking sector should take account of differences in the factors that affect bank productivity in these countries which are distinctively different.
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