Market structure-performance hypothesis in Kenyan banking industry

Solomon W. Giorgis Sahile · Daniel Kipkirong Tarus · Thomas Kimeli Cheruiyot

35 citations0/0 files storedInternational Journal of Emerging Markets

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Banking stability, regulation, efficiency Efficiency Analysis Using DEA Banking Sector Performance and Management

Abstract

Purpose – The purpose of this paper is to test market structure-performance hypothesis in banking industry in Kenya. Specifically, the structure-conduct-performance (SCP) and market efficiency hypotheses were examined to determine how market concentration and efficiency affect bank performance in Kenya. Design/methodology/approach – The study used secondary data of 44 commercial banks operating from 2000 to 2009. Three proxies to measure bank performance were used while market concentration and market share were used as proxies for market structure. Market concentration was measured using two concentration measures; the concentration ratio of the four largest banks (CR4) and Herfindahl-Hirschman Index, while market share was used as a proxy for efficiency. The study made use of generalized least square regression method. Findings – The empirical results confirm that market efficiency hypothesis is a predictor of firm performance in the banking sector in Kenya and rejects the traditional SCP hypothesis. Thus, the results support the view that efficient banks maximize profitability. Practical implications – The study provides insights into the role of efficiency in enhancing profitability in commercial banks in Kenya. It has managerial implication that profitable banks ought to be efficient and dispels the notion of collusive behavior as a precursor for profitability. Originality/value – The paper fills an important gap in the extant literature by proving insights into what determines bank profitability in banking sector in Kenya. Although this area is rich in research, little work has been conducted in the developing economies and in particular no study in the knowledge has addressed this critical issue in Kenya.

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References

1957Barriers to New Competition 1956Barriers to New Competition 1973Industry Structure, Market Rivalry, and Public Policy 2006Bank-specific, industry-specific and macroeconomic determinants of bank profitability 2000A New Database on the Structure and Development of the Financial Sector 1999A New Database on Financial Development and Structure 1995The Profit-Structure Relationship in Banking--Tests of Market-Power and Efficient-Structure Hypotheses 2004Factors explaining the interest margin in the banking sectors of the European Union

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