Abstract
The relationship between profit and bank market structure continues to raise questions amongst both policy makers and researchers. While some evidence supports a positive relationship between market structure, competition and profitability, other evidence seems to support the fact that profitability and related market share result from efficiency. Moreover, extant literature on South Africa is conflicting and seems to contradict anecdotal evidence. While some studies point to a competitive environment despite concentration, others suggest that concentration in the banking sector is harmful. Prosecution of banks for uncompetitive behavior also casts doubt on the conclusion that the South African banking sector is competitive. This paper examines the relationship between structure and conduct in the South African banking sector. Using the Berger (1995) discriminating tests, the effect of industry concentration, market share and efficiency on three measures of profitability is estimated on a panel of 11 South African banks for data between 1994 and 2016. The results show that concentration affects conduct. The profit-structure relationship is dominantly explained by the structure conduct hypothesis and partly by the efficient scale hypothesis. These results suggest that policy which discourages concentration and promotes competition in the banking sector is socially beneficial.
Highlights
Much literature has established a positive association between financial sector development and economic growth (King & Levine, 1993a, 1993b; Levine, 2005)
Banks producing output at levels that are closer to the minimum efficient scale or average cost achieve greater efficiency which leads to higher profits
The coefficient in use their market share as leverage to retain cus- the net interest margin (NIM) equation is negative suggesting that cost tomers by paying higher deposit rates, efficiency deteriorates as NIM increases
Summary
Much literature has established a positive association between financial sector development and economic growth (King & Levine, 1993a, 1993b; Levine, 2005). The financial sector in general enables economic growth, job creation and the building and expansion of vital infrastructure, banks remain at the heart of all developing and emerging country financial systems. Banks enable the functioning of the payment system, the transmission of monetary policy and are the primary entry point into the financial sector for the majority of small, medium and micro enterprises (SMMEs) and of middle and low income households. SMMEs and households are directly affected by the performance, conduct and other related behavior of banks. The literature indicates a strong empirical association between banking structure and economic growth (Levine et al, 2000). Understanding the structure and conduct of the banking sector should, be of interest to both academics and policy makers
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