Banking sector competitiveness

Champika Liyanagamage

doi:10.20525/ijrbs.v10i2.1062

Abstract

Despite core banking, banks also engage in off-balance-sheet (OBS) market activities. In many developed banking industries, OBS activities have grown to be significant during the last two decades. This paper provides rather scarce evidence on the competitiveness among banks for OBS activities and its impact on the degree of banking sector competition in Sri Lanka. Panzar-Ross H statistic approach employing in this study to estimate bank competition used a comprehensive set of bank-level data of the whole commercial banking sector in Sri Lanka covering the period 1996-2018. The first-round analysis of the study uncovers substantial differences among banks concerning the OBS activities. EGLS panel estimation procedure applied in this study provides evidence for a lower level of competitiveness among Sri Lankan banks for OBS activities. More interestingly, the findings further reveal that the degree of competitiveness for OBS activities has a significant positive impact on the overall competitiveness of the banking sector in Sri Lanka. These results suggest banking institutions re-visit their business models with greater emphasis on nonconventional banking activities in enhancing bank-level efficiency and hence positively contributing to the overall competitiveness of the banking sector.

Highlights

Banks were engaged in providing loans to investors and households and fund them by attracting deposits from savers.in recent years, various economic forces have encouraged banks to revisit the traditional role of bank financial intermediation
By applying Panzar-Rosse H statistics (1987) to test bank competitiveness, the present paper aims to analyze the degree of competition in the Sri Lankan banking sector and to explore the importance of off-balance sheet activities on such competitiveness during the period 1996-2018
Sri Lankan banks engage in off-balance sheet (OBS) market activities and reflect them in the non-interest income category

Summary

Introduction

Banks were engaged in providing loans to investors and households and fund them by attracting deposits from savers.in recent years, various economic forces have encouraged banks to revisit the traditional role of bank financial intermediation. Diminishing profitability of banks with traditional banking activities and understanding the importance of noninterest income to become more stable in the market have led banks to turn to new non-traditional financial activities (Kohler, 2013). This has been due to the open market and tough regulation from the central bank (Sun et al, 2017). These efforts include a variety of activities such as issuing various types of guarantees like letters of credit, making future commitments to lend, engaging in derivatives transactions, certain loan commitments, and revolving underwriting facilities which are generally not appearing on the balance sheet. Many empirical findings too have explored interactions between noninterest income and business performance (Trivedi, 2015; Senyo et al, 2015)

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Conclusion