Market Power of Ethiopian Banks: Evidence and Explanations
No Thumbnail Available
Date
2012-06
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
A.A.U
Abstract
Market Power of Ethiopion Banks: Evidence and Explanations
Hailemichael Nekotibeb
Addis Ababa University, 2012
The measurement of the degree of competition in any economic sector is of great relevance in
that the level of social welfare decreases as the market power of firms' increoses. In the specific
cose of the banking sector, the analysis of the social inefficiency associated with market power
is even more impartant if we take into account the importance of the financial intermediation
function in economic growth.
The Ethiopian banking sector is analyzed for evidence af market pawer by computing the Lerner
Index of bonks using annual dota from 2002 to 2011. Using 0 model of oligopolistic conduct,
we show that Ethiopian banks exercised market power in setting prices. The examination of the
determinants of market power identifies the positive roles of operating efficiency and size.
However, the results also indicate that inflation, elasticity of demand to loans and excessive size
had a weakening effect on exercise of bank's market power.
As far as the study is concerned, the National bank of Ethiopia does not enjoy the luxury of
implementing available policy instruments ta minimize the impact of market power on social
welfare and economic growth because the main explanatory variables are bank specific.
Instead, it should endeavour to create an enabling environment for contestability in the sector,
far example cantinuing with the open policy of domestic equity participation by adopting
friendly and rotional regulations. In addition, foreign banks should also be alia wed to ope rote as
such entry will intensify campetition and propagate efficiency gains across the banking market.
Description
A Project Paper Submitted to the Department of Economics
Presented in Partial Fulfillment of the Requirements for the Degree of
Master of Arts in Economics (Competition Policy and Regulatory
Economics)
Keywords
Competition, monopoly power, social inefficiency, Lerner Index