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Competition and bank profitability

Author

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  • Nuraini Yuanita

    (Indonesia Financial Services Authority)

Abstract

By issuing Indonesian Banking Architecture in 2004, the central bank of Indonesia has encouraged banking sector to consolidate. The aim of merger among others is to increase bank economies of scale. This study tries to look at the impact of merger bank on the bank performance by implementing structure conduct and performance hypothesis. Merger bank affects market structure. According to structure conduct and performance hypothesis, market structure affects bank behavior as well as bank performance. The result of this study suggests that an increase in market concentration causes a decrease in price. It shows that merger increase economies of scale so that bank can offer lower price. A decrease in price brings down bank profitability. Concentration ratio also can be used as competition measurement. It is known as a structural measure of competition. Using the structural measure, a lower competition that is shown by higher concentration ratio is associated with lower profitability. This research also analyses the relationship between competition and bank profitability using Lerner index as a non-structural measure of competition. The non-structural measure of competition shows that lower competition is associated with higher profitability. Hence, the structural measure of competition creates different result from the non-structural measure of competition.

Suggested Citation

  • Nuraini Yuanita, 2019. "Competition and bank profitability," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 8(1), pages 1-15, December.
    • Handle: RePEc:spr:jecstr:v:8:y:2019:i:1:d:10.1186_s40008-019-0164-0
    DOI: 10.1186/s40008-019-0164-0
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    References listed on IDEAS

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    Cited by:

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    2. Dao, Kieu Oanh & Kieu, Le & Tu, Pham Thuy & Nguyen, V.C., 2020. "Factors Affecting the Competitive Capacity of Commercial Banks: A Critical Analysis in an Emerging Economy," OSF Preprints 8mz2y, Center for Open Science.
    3. Wang, Chao & Li, Mengyu & Liu, Xiaoxing, 2024. "Does credit carbon exposure affect banks' profits and risks? Evidence from China," Applied Energy, Elsevier, vol. 370(C).
    4. Le Kieu Oanh Dao & Thuy Tu Pham & Van Chien Nguyen, 2020. "Factors Affecting the Competitive Capacity of Commercial Banks: A Critical Analysis in an Emerging Economy," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 11(4), pages 241-254, July.
    5. Jan Janku & Ondrej Badura, 2021. "Non-linear Effects of Market Concentration on the Underwriting Profitability of the Non-life Insurance Sector in Europe," Working Papers 2021/9, Czech National Bank.
    6. Goodhope Hance Mkaro & Lin Sea Lau & Chee Keong Choong, 2023. "The determinants of banking sector performance in Tanzania: A pre-post Treasury Single Account analysis," Cogent Economics & Finance, Taylor & Francis Journals, vol. 11(2), pages 2282812-228, October.
    7. Faten Zoghlami & Yassine Bouchemia, 2021. "Competition in the banking industry, is it beneficial? Evidence from MENA region," Journal of Banking Regulation, Palgrave Macmillan, vol. 22(2), pages 169-179, June.
    8. Okotori, Tonprebofa & Ayunku, Peter, 2020. "Banking Reforms and Deposit Money Banks Profitability in Nigeria," MPRA Paper 102389, University Library of Munich, Germany.
    9. Saif Ullah & Atta Ullah & Mubasher Zaman, 2024. "Nexus of governance, macroeconomic conditions, and financial stability of banks: a comparison of developed and emerging countries," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 10(1), pages 1-38, December.
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    More about this item

    Keywords

    Competition; Banking profitability; Lerner index; Ownership dispersion;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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