Market Power of Ethiopian Banks: Evidence and Explanations
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Date
2012-06
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Abstract
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' increases. In the specific
case of the banking sector, the analysis of the social inefficiency associated with market power
is even mare important if we take into account the importance of the financial intermediation
function in economic growth.
The Ethiopian banking sector is analyzed for evidence of market power by computing the Lerner
Index of banks using annual data from 2002 to 2011. Using a model of oligapolistic 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 for as the study is concerned, the National bank of Ethiopia does not enjoy the luxury of
implementing available policy instruments to minimize the impact of market power on social
welfare and economic grawth because the main explanatory variables are bank specific.
Instead, it should endeavour to create an enabling environment for contestability in the sector,
for example continuing with the open policy of domestic equity participation by adopting
friendly and rational regulations. In addition, foreign banks should also be allowed to operate as
such entry will intensify competition and propagate efficiency gains across the banking market
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Keywords
Competition, Monopoly Power, Social Inefficiency