Exploring the Conduct of Ethiopian Banks: The Structure- Conduct-Performance Approach

Tesfaye Boru Lelissa

doi:10.7176/ejbm/11-1-09

Abstract

The study uses the views from both bank mangers and regulatory staff to investigate the behavior of banks operating in a concentrated market. As identified in the literature, such variables as bank conduct, has been a neglected topic in the traditional SCP hypothesis. This is due to the claim that bank conduct is a derivative of the industry structure on the one hand and the difficult to quantitatively test the behavior of banks in the system as the proxy variables are not quantitative by nature or else data is not available as they are not represented in the financial records of banks. The study however finds that bank conduct is not necessarily a derivate of the industry structure. Such findings from the qualitative approach witnessed a different behavior of banks than the one suggested in the SCP hypotheses. For instance, given high market concentration, banks in Ethiopia are behaving differently in price competition which remains a less essential parameter to change performances. Service difference has been an important reaction taken by the banks. Banks have been promoting themselves through a mix of approaches and attempted to increase their market share via increasing branch networks. In addition, besides market structure, regulation has been the most important variable affecting banks performance via encouraging homogenous service offerings, similar bank growth strategies and controlling their asset quality positions. Unlike what is claimed in the SCP hypothesis, the qualitative study shows that organic growth, not merger and acquisition, is considered as a dominant strategy that ensure growth in the banking system. Bank risk taking behavior also appears in contrast to the hypotheses as banks behavior towards risk is guided by the development status in the financial market as well as the competition level in alternative markets like foreign banking. The quiet life test result is also unlike the one suggested by the SCP hypotheses as banks are found to be conscious in their expense management decision. The qualitative study also explored additional variables determining bank conduct such as employee retention, top management reputation and quality of relationship with shareholders. DOI : 10.7176/EJBM/11-1-09

Highlights

The empirical studies employing the SCP model, which are highly dominated by quantitative approach often fail to allow for banks' market conduct explicitly (Bikker and Haaf, 2002(a))
The study uses the views from both bank mangers and regulators to investigate the behavior of banks operating in a concentrated market
As identified in the literature, such variables as bank conduct, has been a neglected topic in the traditional SCP hypothesis. This is due to the claim that bank conduct is a derivative of the industry structure on the one hand and the difficult to quantitatively test the behavior of banks in the system as the proxy variables are not quantitative by nature or else data is not available as they are not represented in the financial records of banks

Summary

Introduction

The empirical studies employing the SCP model, which are highly dominated by quantitative approach often fail to allow for banks' market conduct explicitly (Bikker and Haaf, 2002(a)). Firms and managers choose ‘a quiet life’ which result in a negative correlation between market power and managerial efficiency Even if such behavior can be statistically inferred from the SCP model, the qualitative approach provides an in depth look on some of the behaviors of managers in concentrated (or otherwise) banking market. Whenever there appears an attempt to include measures of conduct on the quantitative model, only few variables (e.g. advertising expense or selling expense etc.) which can provide a partial look on bank conduct are utilized This is mainly related to the qualitative nature of some of the variables that may explain bank conduct and is due to lack of public information even in some of the quantifiable conduct parameters. The researcher argues that since lack of information on variables related to conduct to a certain extent limits the generalization of the quantitative studies, a qualitative approach to explore the behavior of banks need be used

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Results

Conclusion