The Impact of Industry Concentration on Performance of the Ethiopian Banking Industry
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Date
2025-02-17
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A.A.U
Abstract
This study examines the impact of industry concentration on the performance of the Ethiopian
banking industry. The primary research question revolves around the impact of market
concentration and relative market share versus bank efficiency in determining profitability and
operational outcomes. Key performance metrics, including Return on Assets (ROA) and Net
Interest Margin (NIM), were analyzed through a system Generalized Method of Moments
(GMM) regression approach using Stata software Version 15. Additionally, MaxDEA Software
was employed to compute efficiency scores, particularly technical, scale, and management
efficiency, for each bank. The findings reveal that market concentration, represented by the
Herfindahl-Hirschman Index (HHI), has a positive and significant effect on both ROA and NIM.
This suggests that more concentrated markets enable higher profitability and wider interest
margins, which supports elements of the Structure-Conduct-Performance (SCP) hypothesis.
However, the negative and significant relationship between market share and bank performance
calls into question the validity of the Market Power Hypothesis (MPH), implying that while
larger banks enjoy some collusive advantages, individual market share does not necessarily
translate into higher performance. From an efficiency standpoint, the results indicate that
neither technical efficiency nor scale efficiency has a statistically significant impact on
profitability, which challenges the Efficiency Structure Hypothesis (ESH). Interestingly,
management efficiency demonstrates a positive and significant influence on both ROA and NIM,
underscoring the importance of sound management practices in the banking sector. This
research contributes to the ongoing debate about the drivers of bank performance in emerging
markets, offering evidence that market concentration and managerial efficiency play crucial
roles in shaping outcomes, while technical and scale efficiency are less decisive. The study
emphasizes the need for enhanced competition and improved managerial practices within the
Ethiopian banking industry to foster sustainable growth and profitability.
Key words: Structure, conduct, performance, bank, efficiency, concentration, DEA