ABSTRACT
That the Banking Industry in Nigeria has always been profitable has never been in doubt. Again, that the Nigeria banking industry has been a very competitive one is also not a matter for contention as the result of several researchers measuring the competition in the banking industry have sufficient empirical evidence to substantiate this theory,  however, what has recently become a contentious issue is to determine what really drives banking profitability in the face of this cut-throat  competition  in Nigeria.  Not even  the banking consolidation reforms introduced  in Nigeria by the erstwhile Governor  of  the Central Bank of Nigeria, Professor Charles C. Soludo, in 2005 which highlighted the unprecedented competition in the Nigerian banking industrycan be agreed to the major determinate of banking profitability in Nigeria. Generally,  the impact of competition  on  the profitability of commercial banks in Nigeria has been a subject of great scholarly inquiry and continues to occupy a large body of empirical research. Competition in the banking industry is necessary as it promotes economic growth by increasing firms’  access  to external financing,  lowering the costs of providing banking products and  services, managing and mitigating banking risks, mobilizing savings and investment opportunities and adopting efficiency strategies for improving profitability. Petersen and Ranjan (1995) show theoretically that Commercial banks that wield substantial market share are more profitable in developed economies as they can lend even to young firms  whose  credit  records  may be  opaque,  hence  leading  to  high  loan  volumes  and substantial  increase in both economic activities  and economic growth. However,  Cetorelli and Gamberra (2001) argue that, there is compelling evidence to suggest that the profitability of commercial banks in most developing economies (for which Nigeria is one) is a direct function of its banking efficiency and other ancillary variables and has no direct relationship with the market share of firms.Hence, the profitability of commercial banks in Nigeria can only be placed at the center of any developmental economic agenda, if it combines optimally the  determinates  of  banking  profitability  such  as  market  share,  efficiency  and concentration of commercial bank branches to respond to the dynamic changes in economic conditions, especially, those that affect delivery of financial services.  Our major objective in this research is therefore, to resolve the dilemma between the conflicting theories highlighted in the Structure  Conduct  Performance  Hypothesis  – SCP (which propagates  the ideals of significant market share) and the theories of Efficiency Structure Hypothesis -ESH, (which gives  credence  to  the  significance  of banking  efficiency)  in  assessing  the  impact  of competition on profitability of commercial banks in a developing country like Nigeria.
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Competition in the banking industry has been a subject of great scholarly inquiry and continues to occupy a large body of empirical research. That the Banking Industry in Nigeria has always been profitable since the early 1990s has never been in doubt. That the Nigeria banking industry has been a very competitive one is also not a matter for contention as the results of several researchers measuring the competition in the banking industry have sufficient empirical evidence to substantiate this theory, however, what has recently become a contentious issue is to determine what really drives banking profitability in the face of this cut-throat competition. Not even the banking reforms introduced in 2005 which triggered unprecedented competition in the banking industry in Nigeria can be agreed to the major determinate of banking profitability in Nigeria. The reforms generally entailed the upward review of the minimum capital requirement of banks from N2billion to N25billion (an increase of approximately, 1,150%), a decrease in the number of commercial banks operating in Nigeria from 120 in 1993 to about 24 commercial banks post consolidation in 2010 and a dilution in the ownership structure of most commercial banks as they subsequently became publicly quoted companies on the Nigerian Stock Exchange (NSE).
Generally, the impact of competition on the profitability of commercial banks in Nigeria has been a subject of great scholarly inquiry. Banking competition promotes economic growth by increasing firms’ access to external financing, lowering the costs of providing banking products and services, managing and mitigating banking risks, mobilizing savings and investment opportunities and adopting efficiency strategies for improving profitability. Petersen and Ranjan (1995) show theoretically that Commercial banks that wield substantial market share are more profitable in developing economies as they can lend even to young firms whose credit records may be opaque, hence leading to high loan volumes and substantial increase in both economic activities and economic growth.
However, Cetorelli and Gamberra (2001) argue that, there is compelling evidence to suggest that the profitability of commercial banks is a function of its banking efficiency and other ancillary variables and has no direct relationship with its market share. Hence, the profitability of commercial banks can only be placed at the center of any developmental economic agenda if it combines optimally the determinates of banking profitability such as market share, efficiency and concentration of branches of the commercial bank to respond to the dynamic changes in economic conditions, especially those that affect delivery of financial services. Our major objective in this research is therefore, to resolve the dilemma between the conflicting theories discussed in the Structure Conduct Performance Hypothesis – SCP (which propagates the ideals of significant market share) and the theories of Efficiency Structure Hypothesis -ESH, (which gives credence to the significance of banking efficiency) in assessing the impact of competition on profitability in a developing country like Nigeria.
From public policy perspective, competitiveness of the banking sector is agreed to represent a socially optimal target, since it reduces the cost of financial intermediation and improves delivery of high quality services thereby enhancing social welfare. Banking competition also promotes economic growth by increasing firms’ access to external financing (Beck, Demirgüç-Kunt and Maksimovic, 2004; Pagano, 1993). However, Petersen and Ranjan (1995) show theoretically that banks wielding substantial market share tend to lend to young firms whose credit records may even be opaque, hence leading to high loan volumes.
In practice, Cetorelli and Gamberra (2001) argue that, although,concentrated banking
systems offer growth opportunities for young firms, there is strong evidence of a general depressing effect on growth associated with banks’ exercise of market shareand this impacts all sectors and firms in the economy. Hence, competition in banking should be placed at the center of any public policy agenda since it has the mechanism to respond to the dynamic changes in economic conditions, especially those that affect delivery of financial services. Relevant literature on the measurement of competition in the banking industry may be divided into two broad mainstreams, the structural approach and the non-structural approach (Mugume, 2010). The structural approach to modeling competition is majorly made up of the structure- conduct-performance (SCP) paradigm and the efficiency structure hypothesis (ESH)
as well as a number of other formal approaches which all have their roots in industrial organization theories.
However, sufficient theoretical and empirical evidence abounds that confirm that both the SCP, ESH and the other market concentration indexes such as the Herfindahl- Hischman index alone cannot be used to measure industry wide banking competition because they have deficiencies that inhibit their effective use as a measure of banking competition.Mugume (2010) stated some of these deficiencies to include a country’s:
Macro-economic performance
Financial stability
Form and degree of taxation of financial intermediation products
Quality of information and judicial systems
Scale of banking operations
Risk preferences
The author opines that because of the highlighted deficiencies of the Herfindahl- Hischman index, the use of these concentration measures present a poor indicator for the degree of competition in the banking industry especially, for developing countries, such as Nigeria(Mugume, 2010). However, concentration ratios as measures of competition do not also provide adequate and conclusive explanations of actual bank profitability and may lead to wrong inferences on competitive conditions (Hausman and Sidak, 2007). Instead, Baumol (1982) opines thatbanking competition should be assessed based on banking market contestability arising from the presence or absence of entry barriers into the industry.Mwenda and Mutoti (2011) remedied this bias by measuring banking competition in the Zambian banking sector using the H statistic model developed by Panzar and Rosse(Simpasa, 2013). Although, there was a significant improvement over the results of Baumol (1982) using banking concentration ratios to measure the impact of competition, the authors did not condition the competitive index on changes in market conditions brought about by the entry of new foreign banks in the recent years and the privatization of the Zambian National Commercial Bank (ZNCB) that took place in 2007 (Simpasa, 2013).
Profitability of Nigerian commercial banks has generally been buoyant, driven by earnings on bank loans, commission n turnover, income from trading treasury securities,realized gains on foreign exchange transactions and fee income which have all contributed significantly to these commercial banks’ profits. Banks’ return on assets (ROA) and the net interest margin (NIM) are the major proxies used to gauge banking profitability and the intensity of competitive pressures on these commercial banks. Depending on the market shareof a bank in input and output markets respectively, it may be able toincrease output prices (lending rates) or decrease input prices (deposit rates) with a view to increasing its profitability. Bank management can selectthe combination of inputs (time deposits, fixed deposits, savings account deposits) and outputs (loans) at which profits can be maximized(DeBandt and Davis, 2000).
Inorder to avoid stating the obvious and to clarify our motives further, westart by asking why a bank would not be able to maximize her profits. Let us consider four issues related to profit maximization: (Berger, 1995).
(a) The role of diversification and risk preferences of the bank; (b) The problems between shareholders and bank management; (c) Imperfectcompetition and;
(d) Inefficient use of inputs and outputs.
A first consideration relating to bank profit maximization concerns theconcept of risk and its diversification. Shareholders will usually prefer to balance their appetite formaximizing expected profits and minimizing costs with the amount of riskthey are willing to take. Abstracting from speculative motives, shareholdersare generally assumed to be indifferent to the distribution of profits, receivinga return on their investment in the bank either through an increase in thebank’s share price or through dividends received. If all the banks operating in the economy share the samerisk- return preferences, or if the risk-return relationship can be described bysome relatively simple homothetic continuous function, then there is noserious problem with the fact that we may have to control fora bank’s risk preferences. Recent works by DeYoung (1998) have tried to incorporate risk intoa bank benchmarking exercise. Given that this type of work is still in its infancy in developing countries, such as Nigeria, we refrainedfrom including risk and risk preferences in this research work.
Instead, we adoptedother controlvariables such as bank regulation and bank reputation that aim to proxy for banks’ risk-return preferences.A second consideration relating to banks’ profit maximization, concernsincentive structures.Even risk-neutral shareholders who are well-diversifiedmay have problems translating their claims on bank profits into actions requiredto maximize revenue and minimize costs. In the absence of completeinformation, principal-agent theory states that shareholders are unable toadequately monitor bank management and that the resulting managerialdiscretion may induce sub-optimal behavior, i.e. profits are not maximizedand/or costs are not minimized(Berger and Humphrey, 1997). As long as shareholders cannot monitor andpenalize bank management, the latter may show expense-preference behavioror if the bank management is highly risk-averse, it can adopt any other strategy that tends to reduce the profitability of the bank(Hannan and Mavinga, 1980). Thismeans that the asymmetric information between principal and agent that wasonce used by Diamond (1984) to explain the profitability of banks from a reduction in audit costs for lenders to non-financial can also be used to explainwhy banks themselves may also suffer from moral hazards and other compensation incentiveproblems in their profitability drive (Diamond, 1984).
Firstly, very few studies haveattempted to test empirically the impact of principal- agent conflicts on theperformance of banks even in developed countries and specifically in European banks. (Molyneux and Forbes, 1995) Translations into empirical tests of theprincipal-agent conflicts described above where hidden actions by or hidden knowledge ofbank management which resulted in suboptimal profitability measures. Secondly, to theextent that the principal-agent relationship results in moral hazard conflicts,this will only create problems if the principal (i.e. the shareholders) cannotinsure himself against excessive risk-taking by the agenti.e. the bank management (Meyer and Mugume, 2004).Avast amount of literature exists on ways to minimize the negativeeffects of these principal-agent problems but have not been considered in this research work.
Thirdly, price and non-price competition, the substitutability of bank’s products and
the contestability of banking markets may also serve to ensure that a bank’s optimalprofitability is not achieved by putting competitive pressure on its management, providedthat the bank’s management compensation is not performance- based(DeBandt and Davis, 2000).
Whether compensation incentive problems areas important in determining why banks themselves may also suffer from moral hazardsas in developed banking economies as there are in developing economies is still questionable (Molyneux and Forbes, 1995). Although,these identified compensation incentive problems may lead to suboptimalperformances by banks, which is an anomaly to the cardinal objective in being in business, the extent to which these incentives problems affect a developing country such as the Nigeria bankingindustry is unclear. There are quite a few reasons to suspect that the incentive problemsthat can cause a bank to make lesser profits or experience above-minimumaverage costs are significantly different from bank to bank, or from country tocountry. This is because the thin line of separation between ownership and control is highly similar forcommercial banks across developed countries, especially in Europe (Goldberg and Rai, 1996).Therefore, even if compensation incentivesconstraints can help explain bank performance,empirical testing of these incentives to determine whether they can explain differences in bank performanceis difficult to achieve and their empirical results to date, have so far been in conclusive.Also, commercial banks’ profitability is usually related to changes in the environment and the behaviorof their competitors (Molyneux, Lloyd-Williams and Thorton, 1994; Goldberg and Rai, 1996; Levine, Laoyza and Beck, 2000).
Therefore, another consideration relating to banks’ profitmaximization relates to the market share of the individual commercial bank(Berger and Hannan, 1998). Economic theory also tells us that ina perfectly competitive situation, profit maximization is equivalent to costminimization. In practice however, we do not necessarily observe maximizationof profits and/or minimization of costs. Of course, exogenous factors such asregulation or (economic) shocks can cause suboptimal performances for commercial banks.To theextent that these exogenous factors do not have similar effects on both cost minimizationand profit maximization, they can drive a wedge between the two (Hannan and Mavinga, 1980).Imperfectmarket structures can cause a situation where commercial banks’ profits are maximized at an output levelwhere average costs are no longer minimized, thus leading to achieving sup- optimal profitability peaks by commercial banks (Vivex, 2001).This sub-optimal profitabilityachievement can thus be used to explainchanges in profitability levels over time for firms as well as for commercial banks.
A bank may also produce at lower costs and with a higher profit than otherbanks if it makes better use of its input resources and transforms them into outputs inthe cheapest possible way. In the long run, every bank has to produceefficiently in order to survive banking competition. This brings us to the next factor driving maximization of banking profits in Nigeria, which is banking efficiency.
The competitive indices for efficiency offer a practicalperspective on the
understanding of banking competition in Nigeria and its policy implications.The broad conclusion from several research analyses is that over a longer period of time, commercial banks efficiency will begin to decline, underpinningthe growing intensity of competition, particularly in post financial reform periods (Mugume, 2010).This suggests that thedegree of competition may be higher for commercial banks before banking reforms are introduced than after banking reforms are introduced in their economies. Also, that the degree of competition from other forms of financial intermediaries (capital markets, non-bank financial institutions, insurance companies) play a role in determining the degree of competition in banking system. It has also been shown, theoretically as well as empirically, that the degree of competition in the financial sector can matter in assessing economic development.
1.2 Statement of the Problem
In the face of slowing industry growth and so much competition, today’s commercial banks are under tremendous pressure to grow organically by gaining a proportionate portion of the market share. A financial system’s contribution to the economy depends on the quantity and quality of its services and the efficiency with which it provides them (Mugume, 2010). According to Mugume (2010), there are two plausible theories to determining the market shareof competing banks towards measuring their profitability and it is crucial to determine which of these two theories more accurately describes their behavior with increasing profits, since the economic policy implications derivable from either of these theories are radically diverse. The first theory postulates that an increase in banks’ profitability is directly related to the total efficiency improvement in its operations, termed the Efficiency Structure Hypothesis (ESH) theory.
The efficiency hypothesis further expatiates that an increase in the total revenueof banks’as a result of improved efficiency will certainly increase that banks’profitability.The other theory, the Structure Conduct Performance (SCP) Hypothesis explains that an increase in the profitability of commercial banks is caused by an increase in the market shareand that being in possession of a considerable share of the market, otherwise classified as possessing market power is attributable to the SCP Hypothesis (Smirlock, Gilligan and Marshall, 1984; Mugume, 2010).
Relevant literature also suggests that there exists a relationship between concentration and efficiency and between market share and profitability, as already highlighted above. These relationships have generated competing hypotheses. On the one hand, the traditional collusion theorists, also called the structure-conduct-performance – SCP hypothesis (Bain, 1951) postulates that banking concentration lowers the cost of collusion between firms and results in higher normal profits. On the other hand, the efficiency theorists, proponents of the efficiency structure hypothesis -ESH(Demsetz,
1973) postulated an alternative explanation for the existence of a positive correlation existing between banking efficiency and profitability, affirming that only the most efficient firms in any industry can attain greater profitability and consequently their marketshares can become more concentrated enhancing their profitability. He,(Demsetz, 1973) concludes that, in such circumstances, the observed positive relationship existing between concentration and profitability is spurious as it simply proxies competition for an already existing positive relationships between superior efficiency, market share and concentration.(Gibson and Tsakalotos, 1994).
This is the main problem that this research work helps to resolve – the dilemma
between the conflicting theories of structure-conduct performance hypothesis (SCP) and the efficiency structure hypothesis (ESH) as to which of these theories really drives profitability in Nigerian commercial banks. Is it the acquisition of a significant market share or the adoption of an efficient banking approach that explains the profitability of Nigerian commercial banks and other developing economies?
1.3 Objectives of the Study
The overall objective of this study is to empirically investigate the impact of competition on the profitability of commercial banks in Nigeria. To achieve this objective, the study strives to accomplish the following specific objectives:
1. Investigate the impact of market share on the profitability of commercial banks in Nigeria.
2. Find out the impact of banking efficiency on the profitability of commercial banks in Nigeria.
3. Investigate the impact of concentration on the profitability of commercial banks in Nigeria
1.4 Research Questions
This study strives to provide answers to the following research questions:
1. What is the impact of market share on the profitability of commercial banks in
Nigeria?
2. What is the impact of banking efficiency on the profitability of commercial banks in Nigeria?
3. What is the impact of banking concentration on the profitability of commercial banks in Nigeria?
1.5 Research Hypotheses
In order to achieve the above stated research objectives and also answer the research questions formulated above, the following research hypotheses have been tested:
1. Market share does not have a significant and positive impact on the profitability of commercial banks in Nigeria.
2. Banking efficiency does not have a significant and positive impact on the profitability of commercial banks in Nigeria
3. Banking concentration does not have a significant and positive impact on the profitability of commercial banks in Nigeria.
1.6 Scope of the Study
This study covers the period 2005 – 2013 and gathers data from about 13 out of the 24 existing commercial banks in the country. 2005 is chosen as the commencement year for the scope of this study because it was the first year in which financial statements of commercial banks were prepared after the banking consolidation reforms which were embarked upon by the erstwhile Governor of the Central Bank of Nigeria -CBN, Professor Charles Soludo in 2004. The consolidation reforms generally entailed the upward review of the minimum capital requirement of banks from N2billion to N25billion (an increase of approximately, 1,150%), adecrease in the number of commercial banks operating in Nigeria from 89 to 24 (post consolidation) and a dilution in the ownership structure of most of these banks as most commercial banks subsequently became publicly quoted companies on the Nigerian Stock Exchange. (Nannyanjo, 2012). The financial year ending December 31, 2013 fits our terminal date for the scope of this study because the data used in our analysis has already been published by as of April 31, 2014.The 2004 financial reforms were also expected to see to the emergence of a fewer number of commercial banks in Nigeria but with a significant capital base. Mergers, acquisitions and other forms of business combinations produced the resultant 24 commercial banks which triggered unprecedented competition among the banks and the ultimate emergence of the five big banks in Nigeria due to their huge capital base.
These banks are: First Bank of Nigeria –(FBN), Guaranty Trust Bank –(GTB), Zenith International Bank –(ZIB), United Bank of Africa–(UBA) and Access Bank – Access.Apart from these 5 big banks the other high efficiency emerging banks that will be sampled in this study are: Ecobank International–(ECOBANK), Skye Bank– (SKYE), First City Monument Bank–(FCMB), Union Bank of Nigeria–(UBN), Diamond Bank–(DIAMOND), Fidelity Bank –(FIDELITY), Stanbic IBTC Bank – (STANBIC) and Sterling Bank –(STERLING). These 13 banks are chosen out of the
24 banks in the industry because in a recent study carried out by the Research
Department of FBN in 2013 comparing the market shares of commercial banks in Nigeria for the financial year ending December 31, 2012 their combined value was: (Appendix 1)
Total Assets (TA) 86% of Industry value Total Deposits (TD) 86% of Industry value Net Revenue from Funds (NRFF) 91% of Industry value Operational Expenses (OPEX) 87% of Industry value Profit before Tax (PBT) 94% of Industry value
From the analysis above, it is obvious that the other 11 commercial banks that do not constitute a part of our sample merely control a minority value of the industry market share as highlighted below:
Total Assets (TA) 14% of Industry value Total Deposits (TD) 14% of Industry value Net Revenue from Funds (NRFF) 9% of Industry value Operational Expenses (OPEX) 13% of Industry value Profit before Tax (PBT) 6% of Industry value
Broadly speaking, our knowledge about bank behavior, bank pricing of their products and services in Nigeria is still very limited. There is a gap in empirical work on whether competition in the banking industry has really increased in this era of financial reforms in Nigeria (post banking consolidation reforms of 2004) or not. Although, there are good reasons to believe that changes in banking regulations may also affect the relationship between competition and profitability, it is not within the scope of this research work to consider the influence of banking regulations on the profitability of commercial banks in Nigeria.
1.7 Significance of the Study
While there has been a rapidly growing literature on banking profitability issues in developed countries, little attention has been paid to the profitability of commercial banks in developing countries, yet there is an increasing recognition that financial sector development is a top priority for sustained economic growth in developing countries like Nigeria. This research work aims to contribute to the existing literature by analyzing the impact of competition on the profitability of commercial banks in Nigeria during the recent post consolidation era of 2004generally and specifically to the following researchers and stakeholders:
a. Financial System Operators: The financial system of any economy is made of its financial markets (commercial banks) and other financial institutions (discount houses, insurance companies, bureau de change, stock broking firms, etc.) which are central to its economic development and growth. Obviously, the financial system tends to evolve around a strong banking system which can facilitate a more efficient allocation of financial resources. The importance of a strong and competitive banking sector in a country’s economic growth and development is already well established in several banking competition literature (Beck, Levine and Loayza, 2000). The efficiency theory highlighted in this research work if adopted and implemented by the financial system operators will help to grow the economy partly by widening access to external financing and channeling financial resources to the economic sectors that need them most. (Mugume, 2010). A well- developed financial system which results from a healthy competition in the banking industry can also help an economy cope better with exogenous shocks such as terms of trade volatility and move such nations away from natural resource-based development to other competitive and viable economic growth alternatives.
b. Bank Operators:It is necessary for every banking system to be competitive; this is to ensure that banks are effective forces for financial intermediation, channeling savings into investments that foster higher economic growth and other ancillary functions of a commercial bank in an economy. However, it is also necessary to monitor and control the impact of market share on the competitiveness of commercial banks which is a major independent variable in measuring the impact of competition on the profitability of commercial banks in Nigeria.
Bank Operators will therefore be more properly guided in adopting appropriate strategies towards increasing their share of the market with a view to increasing their profitability if they imbibe the recommendations in this research work.
c. Bank Regulators:A high degree of competition and efficiency in the banking system can contribute to greater financial stability, product innovation and access by households and firms to financial services which can in turn improve the prospects for economic growth. In this respect, there is a real concern that a monopolistic or oligopolistic, inefficient and fragile banking sector in Nigeria is a major hindrance to economic development. Identifying the kind of reforms and environments that may help to promote competition and efficiency in Nigeria’s banking system is therefore very important to the regulators of the industry as highlighted in this research work. In the light of most recent regulatory changes affecting the United States of America (USA) financial industry, the policy relevance for USA regulators is more current than ever. Such regulatory changes continue to have a significant impact on the market share of the banking industry and on bank’s competitive conduct. A deeper analysis of the economic role of bank competition which has been highlighted in this research work should thus contribute to our understanding of the responsibilities of bank regulators and the consequences of excessive regulatory actions and therefore, support more effective banking regulation. (Vittas, 1992)
d. Policy Makers:Financial markets and institutions are central to economic development and growth. Increasingly, scholars acknowledge that a supportive policy for financial sector development is a key component of national development policy. The responsibilities of these policy makers can be positively enhanced if they understand what really drives competition in the banking industry especially for developing countries like Nigeria, which this research work aims to espouse. A comparative analysis of the growth rates of different countries has produced convincing evidence that having a deeper financial system contributes to economic growth and that knowledge is not merely reflected in the wealth and prosperity of a nation (Honohan and Beck, 2007). Moreover, the development of the financial sector which can be driven by the competitive nature of the commercial banking industry is fundamental to the conduct of monetary policy. Countries with deep financial systems also seem to have a lower incidence of poverty than others with the same level of national income.
A detailed analysis of the economic role of bank competition which has been highlighted in this research work should also contribute to our understanding of the responsibilities of policy makers and the consequences of recommending stringent policies actions and therefore, support more effective policy making (Vittas, 1992). Policymakers will typically recommend measures aimed at fueling competition, promoting the liberalization of financial markets and removing barriers to entry (Vittas, 1992) as recommended in this research work.
e. Bank Customers: For starters, bank customers can now hold their own against the might of the banking industry. The democratization of information and communication has turned the average banking customer into an aware and confident individual who is not shy of voicing an opinion in public, this is one of the positives of commercial banks adopting competitive measures. This evolution has brought about greater diversity in consumer need, along with the expectation of fulfillment since banks profitability has been matched to total customer deposits and returned a positive correlation as highlighted in this research work. Hence, every customer demands that his bank pay close attention to his unique requirements and customize its products, services and experience to his liking. Under severe competitive threat, the banks have no choice but to comply, else it risks losing business to a rival that will.
Fortunately, the emergence of online technology, self-service mechanisms and social media has made it feasible for banks to gather customer information in granular detail and use that insight to restructure a defined basket of offerings into an almost unlimited set of personalized variants. It goes without saying that a flexible, agile and integrated core banking platform is absolutely necessary for realizing this goal. This is why bank customers should know the impact of competition on the profitability of their banks and hence their behaviors.Also, since customer expectations are not just confined to products, but extend to prices and delivery as well, which are important ingredients in their profitability assessment; there is a need to take appropriate action on that front. The pricing perspective implies that each competing bank must set fair and transparent prices and they can attract customers and boost their profitability with good deals. What’s more, the rising popularity of banking institutions to connect with their customers at many several touch points is only a testimony that the competitive battleground just got bigger!
f. Research Analysts:Commercial banking profitability studies highlighted in this research work apply the structure-conduct performance (SCP) hypothesis to the banking industry. According to the hypothesis, the degree of competition among firms in a banking market is influenced by the degree of concentration of their output (loans, assets and deposits) among a few relatively large banks, since a more highly concentrated market structure is assumed to be conducive for more effective collusion and hence enhanced profitability among the commercial banks (Smirlock, Gilligan and Marshall, 1984; Molyneux, Lloyd-Williams and Thornton, 1994; Mugume, 2010). However, a conflicting version of the Efficiency Structure Hypothesis (ESH) postulates that an increase in banks’ profitability is majorly attributable to the total efficiency improvement in its operations. In this research work, this hypothesis will be tested by estimating measures for bank performance (profitability) as a function of concentration and efficiency in the local market. If the market shareparadigm of the SCP reveals positive and more substantial empirical support, authorities will be advised to put more emphasis on promoting competition in the banking industry, regulating banking product prices in the industry and generally discouraging further mergers of banks.
However, if theESH theory which asserts that only efficient firms can attain an increase in market share and hence their profitability because of their superiority in producing and marketing products then authorities will be expected to put more emphasis on promoting competition in the banking industry and discouraging further banking consolidation reforms (Demsetz, 1973). Therefore, a resolution of these conflicting theories, as attempted in this research work is a veritable ground for further research analysis especially for developing countries in Africa.
1.8 Limitations of the Study
Conducting a research project of this nature may not be totally complete without stating some obvious limitations. The major limitation in this research is the use of secondary data which may inherently contain errors that can affect the validity of our own research findings, recommendations and suggestions. This limitation is highlighted here for obvious reasons.
This material content is developed to serve as a GUIDE for students to conduct academic research
IMPACT OF COMPETITION ON THE PROFITABILITY OF COMMERCIAL BANKS IN NIGERIA
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