Market Power of Ethiopian Banks: Evidence and Explanations

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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.


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)


Competition, monopoly power, social inefficiency, Lerner Index