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86 Pages·2007·0.45 MB·English

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PPEERRFFOORRMMAANNCCEE OOFF BBAANNKKIINNGG FIRMS:
A Case of PPrriivvaattee CCoommmmeerrcciiaall BBaannkkiinngg SSeeccttoorr iinn EEtthhiiooppiiaa

Prepared by:
Abdulwali Mohammed

AAddvviissoorr:: Dr. P. Laxmikantham

A research thesis SSSuuubbbmmmiiitttttteeeddd tttooo ttthhheee DDDeeepppaaarrrtttmmmeeennnttt ooofff AAAccccccooouuunnntttiiinnnggg aaannnddd
Finance, for thee ppaarrttiiaall ffuullffiillllmmeenntt ooff tthhee ddeeggrreeee ooff MMaasstteerr ooff SScience in
Accounting and Finance

June, 2018
AAddddiiss AAbbaabbaa,, EEtthhiiooppiiaa
DECLARATION
I, Abdulwali MohammedKedu, hereby declare that this thesis entitled “MARKET STRUCTURE
AND ITS IMPACT ON PROFITABILITY PERFORMANCE OF BANKING FIRMS: A CASE
OF PRIVATE COMMERCIAL BANKING INDUSTRY IN ETHIOPIA” submitted by me for
the award of the degree of Master of Science in Accounting and Finance of Addis Ababa
University, is outcome of my own effort and that all sources of materials used for the study have
been properly acknowledged. I have produced it independently except for the guidance and
suggestion of the thesis Advisor.
This study is original work and it has not been presented for the award of any other Degree,
Diploma, Fellowship or other similar titles of any other university or institution.

Place:Addis Ababa Signature:
Date: June, 2018 G.C. Abdulwali Mohammed Kedu
CERTIFICATION
This is to certify that the thesis prepared by Abdulwali Mohammed entitled “MARKET
STRUCTURE AND ITS IMPACT ON PROFITABILITY PERFORMANCE OF BANKING
FIRMS” and submitted in partial fulfillment of the requirements for the degree of Master of
Science in Accounting and Finance complies with the regulations of the University and meets the
accepted standards with respect to originality and quality.

Advisor Dr. P. Laxmikantham

Approved by the Board of Examiners

Examiner (1) ___________________ Signature __________________ Date ___________

Examiner (2) _____________________Signature __________________ Date ___________

Department of Accounting & Finance
College of Business & Economics
Addis Ababa University
Addis Ababa, Ethiopia
ACKNOWLEDGEMENTS
First of all, I thank the almighty Allah for being my strength through all journey of my life. I
would like to express my sincere recognition to my adviser, Dr. P. Laxmikantham for his
attentive follow up and patience forwarding valuable comments and suggestions till the
completion of this thesis work.My deepest gratitude goes to all my colleagues who were around
assisting me during my thesis work.

i
ABSTRACT

This paper has investigated the impact of market structure onprofitability performance of
Ethiopian private commercial banking firms. The impact of market structure on profitability
performance of banks was studied based on the traditional structure-performance hypothesis
(SCP) and the efficient-structure hypothesis that explains a positive correlation between
profitability and market structure. A panel data of selected eightprivate commercial banks
financial statement is used covering the period between 2008/9 up to 2016/17 G.C. The study
employed an Ordinary Least Square regression analysis to test the impact of market structure
variables (concentrations, market share)and bank specific variables (efficiency, banks size, bank
risk, loan portfolio, Age) on profitability performance of banks. The regression test results
confirm the significance of concentration and market share to profitability performance of banks.
Efficiency, bank size, bank risk, and loan portfoliowere among the factors to alter the
profitability performance of banks, whereas Age is found to be the only variable which has
negative and insignificant impact on bank profitability.The study findingconfirms that traditional
structure conduct performance argument did held in the commercial banking industry in Ethiopia
for the period 2008/9-2016/17 G.C.

Since market structure have a significant impact on banks profitability, the management body of
banks should have to pay greater attention to expand their market share and they must improve
their efficiency.

Key words: market structure, market concentration, market share, bank specific, Efficiency

ii
LIST OF FIGURES

Description Page
Figure 2.1: Schematic Diagram showing the relationship between variables .........................19
Figure 4.1:Bera-Jarque test of Normality ................................................................................33

iii
LIST OF TABLES

Table Description Page
Table 3.1List of all commercial banks in Ethiopia ..................................................................21
Table 3.2List of sample private commercial banks..................................................................22
Table 4.1 Summary of descriptive statistics analysis ...............................................................27
Table 4.2Correlational matrix of dependent and independent variables ..................................29
Table 4.3White test of Heteroskedasticity ...............................................................................31
Table 4.4Breusch-Godfrey test for the absence of serial autocorrelation ................................31
Table 4.5Correlation matrix of independent variables .............................................................32
Table 4.6 Ramsey test of model specification..........................................................................34
Table 4.7 Hausman test for model selection ............................................................................35
Table 4.8 Regression resultof ROA and explanatory variables ...............................................36
Table 4.9 The impact of Concentration on profitability ..........................................................38
Table 4.10 The impact of Market share on profitability ..........................................................38
Table 4.11The impact of Efficiencyon profitability .................................................................39
Table 4.12The impact of Bank Sizeon profitability .................................................................40
Table 4.13The impact of Bank riskon profitability ..................................................................41
Table 4.14The impact of Loan portfolio on profitability .........................................................41
Table 4.15The impact of Bank Ageon profitability .................................................................42

iv
ABBREVIATIONS AND ACRONYMS

BS Bank Size
BR Bank Risk
CONC Concentration
CB Commercial Bank
ESH Efficiency Structure Hypothesis
EFF Efficiency
HHI Herfindahl-Hirschman index
MS Market share
NIBT Net Income Before
ROA Return on Assets
RMP Relative Market Power
RMH Relative Market Hypothesis
SCP Structural Conduct performance
TA Total Assets
TC Total Capital

v
CHAPTER ONE
INTRODUCTION

This chapter of the study begins with the theoretical ground of the study. The details of statements of the
problem that the researcher was tried to identify are presented clearly. The intended objectives of the
study are also part of this chapter. Significance and scope are also parts included in the chapter.

1.1 Background of the Study
The nature ofimpact of a market structure in which banks operate and the profitability
performance of banks has been examined in a considerable number of empirical studies.
Following the traditional collusion hypothesis, which is first introduced by Bain (1951) many
theoretical and empirical works have been undertaken and tried to affirm how structure of a
market affects performance especially in the banking sector.

The traditional market structure paradigm asserts that a concentrated market with lower
competitive pressure is more likely to create collusion among participants in the market and
results superior profit. Alternative to the traditional market structure hypothesis, relative market
power (RMP) hypothesis is given which support thatfirms with relatively bigger market shares
and differentiated product lines have a superior market power and use it to set market prices and,
thereby, earn an above average profit. Therefore, market share and firm’s performance might
have a positive relationship. This hypothesis examines how individual firms use their market
power through their pricing policy to earn super profit.

The structure of a market and the degree of competition are closely related. Literature based on
structural approaches has investigated how the market concentration weakens the market
competition by fostering collusive behavior among firms Lalith Seelanatha(2010). The structural
approach assesses bank competition by examining measures of market structure such as
concentration ratios. The theoretical justification for using concentration as a measure of
competition comes from the so called Structure-Conduct-Performance paradigm, which
postulates that efficient and larger firms (higher concentration) are more likely to engage in anti-
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competitive behavior. Thus, the market structure (industry characteristics) could tell the
competitive behavior of firms in a given industry.

The traditional collusion hypothesis has later encountered a competing hypothesis from Demsetz
(1973) with a view that market concentration is a result of firms’ superior efficiency (firm
specific factors) that leads to larger market share and profitability. According to the proponents
of efficiency hypotheses, a market may exhibit concentration towards some efficient firms. The
cost advantage arising from efficiency of some firms which give rise to concentration may be
reflected in better products which satisfy demand at lower cost.

Certainly, the issue of structure-profit relationship has its own policy implications. This is mainly
because definitive support for the structural-conduct-performance (SCP) paradigm implies that
an active policy aimed at limiting number of firms which increases concentration is an
appropriate one. On the other hand policy makers may favor a more competitive environment so
as to enhance productivity and efficiency among firms in an industry.

Financial reform measures in the banking and other sectors are recent phenomena in most
developing countries including Ethiopia. After 1991, the new government of Ethiopia faced with
the twin tasks of reconstructing the economy, and embarking on the transition to a market
economy, and this has brought a new era in the financial sector of the country as liberalization
and privatization policy and different reform measures are introduced. According to
AlemayehuGedas, (2006) “Such measures have made a profound change on the number as well
as market share of private banking and a significant change in the functioning of the financial
sector”. Thus the resulting effect of structural changes and the structure-profit relationship in the
commercial banking industry of Ethiopia was the utmost target of this study.
1.2 Statement of the problem
Banks are among the key financial institutions playing a vital role in economic development and
growth. The long run survival of banks and their performance has been a concern for policy
makers, regulators and investors as well. Evidence from many researches in banking and finance
has indicated that banking performance is related to internal and external factors. An important
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