The Influence Of Market Power And Diversification On Performance

The purpose of the dissertation is to examine the impact of Market Power,Income Diversification,and Assets Diversification on the Efficiency and Profitability of the Commercial Banks in Ethiopia.The study also aimed at measuring and analyzing the efficiency and the Market power.&competitiveness of the commercial banks,A more comprehensive measure of the technical,pure technical&scale efficiencies under the various orientations including constant returns to scale&variable returns to scale have been performed.Additionally,the relative cost,revenue&profit efficiencies of the banks have also been estimated and analyzed.Similarly,the level of Market Power and Competitiveness of the banks has also been estimated and analyzed.The study used financial data(unbalanced panel)of the commercial banks extracted from the annual audited financial reports and from the international banking database(Or bis Data Base)covering the period from 2005 to 2016 to achieve the objectives of the study.For estimating the efficiency of the banks,the nonparametric Data Envelopment Analysis(DEA)approach was used,with the inputs and outputs of the banks selected following the intermediation approach.The study used both the structural and non-structural approaches of measuring Market Power and competitiveness.Both the income and asset diversification measures were used in the study.The Tobit Regression Model has been used in the examination of the influence of market power and diversification on the various components of the efficiency of the banks,and the multivariate panel data regression model with fixed effects estimator to examine the impact of the market power and diversification on the profitability of the commercial banks.The study shows the most efficient banks in terms of technical,cost,revenue and profit efficiency which are on the DEA frontier under both the input and output orientations.The study utilized both the concentration ratio and HHI index of structural competition measurement approaches to estimating the competitiveness taking the gross loans&advances,total deposits,total assets and total income of the commercial banks as indicators of market share(power).The study also used the most commonly technique,the Lerner index from the nonstructural approaches,due to its simplicity in computations&interpretations,the absence of stringent data requirement,and more importantly its ability for estimating the market power at bank-level.The results of all the techniques used in the estimation of market power and competitiveness have shown that there is a decreasing trend in the level of market power of the commercial banks in Ethiopia during the period from 2005 to 2016,indicating that competition among the commercial banks have been getting intensified though it is concluded that the market is highly concentrated when evaluated against the international standards.The research finding implies that there is a need for designing policy for encouraging the entrance of more participant commercial banks to the industry.The empirical result shows that the market power measured using the Lerner index has a statistically significant positive relationship with cost and profit efficiency scores,but has no influence on technical,pure technical,scale,allocative and revenue efficiency scores of the banks.It means that the result shows Market Power of the commercial banks has no influence on the technical efficiency but it positively affects the cost and profit efficiency of the banking sector.Triangulating the relationship between market power and the various efficiency components indicate that banks with high market power generate higher profits by minimizing costs rather than rather than charging higher prices for their services.It supports the Efficient Structure Theory rather than the Market Power Theory.This study is the first in examining the influence of market power(measured using the Lerner index)on the profitability of the Ethiopian Commercial banking sector using the Panel Data Fixed Effects Estimator.In the investigation of the effect of Market Power on profitability,we used the three commonly used measures of profitability of banks(Return on Assets,return on equity&Net interest margin)as the dependent variable.The Lerner index computed using the loan market and assets market have been taken as an indicator of Market Power and predictor variable.The empirical result shows that the Market Power has a significant positive impact on all the three measures of profitability.It means the research finding suggests that competition inverse of Lerner index)among the participants has a negative significant influence on the profitability of the commercial banks in Ethiopia.The finding also shows that the Income Diversification measured by the ratio of noninterest income to total income has a strong positive effect on both profitability and efficiency measures of performance.Whereas,the asset diversification measured by the ratio of noninterest-bearing assets to that of total assets is found to have a significant negative effect on both profitability and efficiency measures used.The finding also shows that the level of mix or diversity of Income Sources among interest and noninterest revenues has a negative effect on technical,cost&revenue efficiency scores,but has no statistically significant effect on profit efficiency,return on assets,and return on equity.On the other hand,in general,the diversity of assets among interest bearing and noninterest bearing has found to have no statistically significant impact on the overall performance of the banks.Moreover,the empirical result shows that size has a significant positive impact on all the three measures of profitability used in the study.The equity capital of the banks have a positive relationship with profitability measured using Return on Assets&Net Interest Margin,but negative on Return on Equity.Credit risk has a significant negative effect only on return on equity,whereas loan risk has positive on both Return on Assets&Return on Equity,but insignificant on Net Interest Margin.Income diversification of the banks affects return on assets positively,but negatively the net interest margin of the banks.