Market competition in the Ethiopia commercial banking industry: an application of the traditional Structure-Conduct-Performance (SCP)
Dr. P Viswanadham, Daniel Assefa Mekonnen
The paper aim is to find the competition level based on the relationship between market structure and performance of the Ethiopian banking sector using financial data from commercial banks in Ethiopia. To investigate the impact of market structure on return, the author used structure-conduct – performance (SCP) and efficiency profitability (E-P) hypothesis. To measure the two hypothesis concentration taken to represent market structure and a market share variable to capture the effect of Market conduct on bank performance, and the two accounting measures return on Assets and return on Equity uses to represent banks performance. We have also used control variables to capture market specific characteristics such as bank size, market size, and risk to owners, liquidity measure, market risk, and market growth. We have taken a sample of 16 commercial banks incorporated in Ethiopia to examine the above hypotheses, using panel data for a period of 7 years from year 2010 - 2016. Regression analysis result indicated that banks profitability negligibly affected by concentration of the banking sector in Ethiopia. In light of these results, we conclude that there is no relationship between profitability and concentration. On the other hand the results of market share (MS) which is used for efficient structure hypothesis explain a positive relationship with profitability at 10% significant level only when ROE is used that indicate, there is a positive relationship between competition and profitability in the Ethiopian commercial banks. Consequently, the research suggests the need for improvement in bank capitalization, bank size, service product innovation and effective liquidity management for the Ethiopian banking industry. The commercial bank of Ethiopia is still enjoying the state of monopoly. The market trend shows that this state will continue for a longer period unless the private commercial banks developed new competitions strategies.