Corporate Ownership & Control / Volume 13, Issue 1, 2015, Continued - 10

THE MARKET CONCENTRATION AND BANKING

INDUSTRY PERFORMANCE
Mohammed Salameh Anasweh*

Abstract

This study examines the structure-profit relationship in the Qatari banking industry. The study sample
consists of all the local banks operating in the market (13 banks) listed in Qatar Stock Exchange (QSE)
over the 2009-2014 period. The hypotheses related to the market power structure which includes the
traditional Structure-Conduct-Performance Hypothesis (SCP), and the traditional Efficiency
Hypothesis (EH). The empirical results generally support the (SCP) Hypothesis in Qatari banking
industry. Thus, the main implication of these results for the policymakers, of Qatari banking sector, is
to expand the ongoing deregulation efforts with the aim of reducing the industry concentration and
enhancing the market competitiveness.

Keywords: Market Structure, Performance of Banks, Qatari Banking Industry

*College of Business Administration, Mutah University, Jordan

1 Introduction industry has undergone substantial structural reforms

over the last two decades. There have been
All countries need efficient financial institutions to fundamental changes in the behavior of banks with
promote and support economic growth. Starting with more emphasis on profitability and comprehensive
King and Levine (1993), research on the link between asset management in recent period. It is particularly
finance and economic growth reveals that countries important for emerging countries to ensure that
with “better” financial systems tend to grow faster. banking system is stable and efficient. Such a banking
However, the existence of financial institutions per se development should lead to private and infrastructural
is not enough; the quality and efficiency of these projects being financed effectively and allocated
institutions are crucial for the transmission of funds in efficiently. As Albertazzi and Gambacorta (2009)
the economy. Financial institutions multiply and argue, because of phenomena such as globalization,
allocate society’s savings, and the efficiency with growing international financial markets, deregulation
which they intermediate capital has substantive and advances in technology, identifying the
repercussions on economic performance (Jayaratne determinants of bank performance is an important
and Strahan, 1996), (Demirgiic-Kunt and predictor of unstable economic conditions.
Maksimovic, 1998) , (Rajan and Zingales, 1998) and Athanasoglou et al (2008) also point out that a
(Levine et al, 2000). profitable banking system is likely to absorb negative
Wheelock and Wilson (1995), Studies on shocks, thus maintaining the stability of the financial
banking efficiency are relevant in constantly changing system. In this respect, it is important to investigate
economies such as the Mexican case. Countries that the effectiveness of emerging banks. How banks are
undergo significant transformations in their financial affected by increased competitive pressures, depends
institutions face different challenges from one year to partly on how efficiently they are run. Banks can
another, and only efficient institutions will be able to increase their profitability through either improvement
face them successfully. The study of banking of their cost efficiency or exerting their market power.
efficiency is important since efficiency measures are The latter approach to make profit can reduce total
indicators of success. Banks, as any other firm, face social welfare (Mirzaei et al, 2011).
numerous sources of competition from both other The market structure performances on the banks
banks and other firms inside and outside their are rare and typically insufficiently robust as they are
industry. An open and flexible banking environment based on a limited number of countries only.
not only provides more credit, but also better Traditionally, market structure indicators, such as the
allocation of credit, leading to the funding of more number of banks and banking concentration, have
positive net present value projects that contribute to been considered the major determinants of
economic growth (Diaz, 2011). competition in the banking sector. This study aims to
Financial intermediation is essential for investigate the market structure-profit relationship on
economic development. The international banking banks listed in (QSE). The specific objective of the

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study is to analyze this relationship in terms of market potential, since firms do not have access to credit,
share and banking concentration. Specifically the which leads to less growth, (Pagano, 1993 and
study will answer the following: Is there a statistically Guzman, 2000). According to conventional wisdom,
significant effect of the concentration or market share the increase of competition should warrant an
in the performance of banks listed in (QSE)?. Is there expectation for lower prices on bank services, and
effect of concentration and market share in the greater availability of credit, which would make it
performance? affordable for the small firms to borrow and invest
more. Many empirical studies support this view,
2 Literature review and developments of finding that higher concentration and more restrictions
hypotheses on competition lead to less new firm creation, and less
economic growth (Berger, Hasan and Klapper, 2004.
From the theoretical point of view, the effect of Cetorelli and Strahan, 2006). Allen and Gale (2000)
banking development on the volatility of output is find that an increase in bank market power leads to
ambiguous. Morgan et al (2004) suggest that higher loan rates charged to borrowers, while
improved access to banking finance allows firms to Claessens and Laeven (2005) using a cross-section
smooth out their idiosyncratic shocks. However, the estimation method for bank competition, find that
effect of banking development on volatility of banking competition is important for the growth of
economic growth can be affected by the stage of the industries dependent on external finance.
development of the country (Aghion et al, 2004), the The study of Hamdan et al,(2014), aimed to
type of shocks that the economy faces, such as investigate the relationship between banking market
monetary or real shocks (Bacchetta and Caminal, structure and profitability of banks of Bahrain and
2000), or whether the economy faces credit demand Kuwait , the study sample included local banks in the
versus credit supply shocks (Morgan et al, 2004), two countries, (23) bank during the period (2005-
(Hoxha, 2013). 2010). Results of the analysis in general have
As a step toward understanding the relationship confirmed support to the hypothesis structure-
between bank market structure and economic activity, behavior- performance hypothesis explained the
first investigate the relationship of concentration in relationship between market structure and profitability
state banking systems on the growth of manufacturing of Bahraini banks, while the results did not provide
industries in the first three decades of the twentieth support for the hypothesis structure - behavior -
century. As noted earlier, previous studies have used Performance in Kuwaiti banking market, and then
national bank concentration ratios to investigate the exclude the alliance between most banks hypothesis
effects of banking market structure on industrial concentrated, and the results do not support the
growth across countries. In this research focuses on hypothesis of conventional efficiency in the Kuwaiti
variation within a single country, the United States, banking market.In other study to Hamdan(2014),
which allows us to control better for differences in aimed to understand the restructuring of the banking
financial development. Studies that examine cross- sector in the United Arab Emirates and factors are
country variation, such as Rajan and Zingales (1988) instrumental in revenues, in terms of competition and
and Cetorelli and Gambera (2001), assume that monopoly and levels of efficiency, the study sample
financial development is uniform within a country and large proportion of UAE banks (96%) , during the
attempt to identify cross-country differences. period (2007- 2012) .The study found experimental
Following another studies, assumed that the level of evidence to support absence concentration hypothesis
financial development is uniform within the United banking in the UAE banking market. The study
States (although some of our fixed-effects suggests work in conditions of full competition, and
specifications allow for the possibility that financial other evidence supports excellence UAE banks
development varied across states). efficiently cost and efficiency standard profit, that
The importance of the financial intermediaries explain the returns of sectors. This confirms the
for growth has not been established until at least the absence of the banking monopoly conditions in the
last two decades. In fact, Schumpeter (1911) argued United Arab Emirates, while the banking sector
that financial intermediaries are essential for returns interpreted through the structure of efficiency
technological innovation and economic development; and not through force market. The recommendations
however, for most of the last century financial of this study was to prevent concentration and
development has been observed as being correlated monopoly by encouraging access to the market to
with economic growth. One of the first studies that encourage competition and to support the legislation
established causality between financial development that limit the emergence of any monopolistic practices
and growth is King and Levine (1993), which was policy, and in addition to maintaining the status of the
followed by Levine and Zervos (1998) which argued banking market balance.
that bank credit and growth are positively correlated. While in Brazil Resende (2005), investigated that
One view suggests that markets with concentrated and the structure–conduct–performance (SCP) relation-
less competitive banks are not growing at their best ships in the context of the Brazilian manufacturing

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industry in 1996. For that purpose, it considered a contribution to the market. The second part refers to
system with four equations pertaining concentration, (Conduct) the behavior of banks, which depend on
advertising, R&D and profitability that was estimated economic characteristics, management of bank costs,
with simultaneous equation models. In addition to the and the trade-off between risk and reward, size
usual explanatory variables proxying barriers to entry efficiency and efficiency of the debts and obligations.
and demand conditions, the article considered The third part refers to (Performance) the level that is
organizational practices and incentive schemes affected by each of the banking market structure and
variables. The evidence indicated an important role for efficiency of the administration; it must be compared
variables related to barriers to entry in affecting to the costs and profits of the bank (Al-Atyat, 2015).
market structure, an important and nonlinear effect of The banks concentration and other impediments to
concentration on advertising, a relevant impact of affect competition on the performance of banks in
firm-size on the propensity to exert R&D effort and inappropriate ways and generate social loss with poor
finally a significant positive impact of concentration banking services and pricing, this resulting to the
on profitability, and were similar to the previous practice of banks market strength arising from the
evidence for developed countries. Additionally, no increased concentration levels according SCP
important roles were detected for organizational hypothesis (Hamdan et al, 2014). The Traditional
practices and incentive schemes on the SCP Efficiency Hypothesis was presented by (Demsetz,
relationships. Lam at el, (2007) , mentioned Market 1973), which is assumed that differences in
concentration on the major container shipping routes organizations and dispersion within the market result
has the potential to reduce contestability, impede in inequality in market shares, so that higher levels of
effective competition and, as a consequence, inhibit efficiency associated with the largest market shares for
the positive relationship between trade and economic a limited number of banks which leads to high levels
growth. This development could also hamper the of performance and then a positive relationship
ability of economic regions to realize their respective between market share and profit (Hamdan et al, 2014).
competitive and comparative advantages. Within this This hypothesis suggests that the most efficient
context, the structure- conduct-performance (SCP) banks increase in size and market share and then
framework is used to analyze liner shipping dynamics increase their ability to achieve high profits through
in the transpacific, Europe–Far East and transatlantic market share concentration in a limited number of
trade routes. The analysis finds no conclusive banks (Al-Atyat and Hamdan, 2015).
evidence that either the increased concentration of slot Based on SCP and TE hypothesis; the main
capacity or the attempts by shipping lines to boost hypothesis of the study is:
potential slot capacity (mainly through collaborative “There is no statistically significant effect of the
arrangements) lead to improved financial market share and concentration of market on the
performance. To conclude that, despite high and performance of banks listed in Qatar Stock
increasing concentration among carriers on each of the Exchange”.
trade routes analyzed, these markets remain
contestable. 3 The methodology

2.1 SCP and TE hypothesis in Qatar 3.1 Study population, sample and
Market resources of data

Bain (1951), mentioned that there are many The study sample covered is the banks listed in QSE
concentrated markets because of low competition for which are 14 banks. The data was collected from the
reasons of alliance-type or monopolistic led to the Investors' Guide by QSE and banks annual reports
development of inappropriate prices for consumers based on the following conditions: 1) all data is
(for example, in the manufacture of high interest rates available, and 2) The bank did not merge with another
banks put on loans and lower interest rates on deposits bank or have been liquidated during the current study
compared with other competitive environment) this period. As a result, the final study sample became 13
contribute to achieving high profits, which is known banks starting from 2009 until 2014 signify 93% of
as bank concentration. According to this hypothesis, the inventive study population.
there are few monopolistic banks leads the rest of the
banks towards the development of higher prices and 3.2 Study model
lower costs, and then achieve the highest profit levels
at the expense of consumers (Al-Zubi, 2005). The study used the following model to examine and
The SCP is composed of three parts; the first part express about market structure and banks performance
is the (structure) which refers to the banking market with the addition of a set of control variables, so as to
structure characteristics in terms of the number of adjust the relationship between independent and
banks, the concentration ratio and the size of their dependent variables.

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n
 i ,t   0  1Conci ,t   2 MSi ,t    k Z itk   i ,t (1)
k 1

Where: π i,t : Performance of bank (i) in the year of (t).

β0 : Constant
β1,2,k : Slope or changes of markets structure.
MSi,t: Market shares of bank (i) in the year of (t).
Conci.t : Concentration of bank (i) in the year of (t).
zitk : Control Variables, include: Bank Size, Bank Age, Number of Branches
εi,t : Random error.

3.2.1 The sub-models performance of banks listed in QSE, according to

hypothesis of traditional efficiency; the following
The first sub-hypothesis is designed to test the model has been put to the second hypotheses:
relationship of market concentration of assets on
performance of banks listed in QSE, according to SCP n

hypothesis; the following model has been put to the  i ,t   0   1MSi ,t    k Z itk   i ,t (2)
k 1
first hypotheses:

n 3.3 Measurement of variables

 i ,t   0  1Conci ,t    k Z itk   i ,t (2)
k 1 The following Table 1 summarizes the measurement
of the dependent, independent and control variables.
The second sub-hypothesis is designed to test the
relationship of market share of deposits in

Table 1. Measurement of variables

Variables Label Definition and measurement

Dependent variable: Bank Performance. π Measured by the return on asset (ROA) and the
measurement of the effectiveness of
administration on using available resources and
the extent of their ability to achieve return from
various sources available.
Measuring Independents Variables:
Market share MS It reflects market share of each bank deposits
(Credit Facilities) and this indicator is used to
measure the traditional efficiency hypothesis
(Hamdan, 2014). Measured by the Credit
Facilities of bank to the total Credit Facilities
of banks through this equation:
Concentration Conc Measured by the total market share of assets of
each bank, according to the following equation
(Ahmadov,2012)
Measuring Control Variables:
Company size Size Nature logarithm of total assets.
Company age Age Time span of the company.
Number of Branches Branches Measured by number of branches that the bank
owned.

4 Testing of hypothesis 4.1 Validity of data

The current section contains three parts. The first part At the onset we have to examine validity of data for
will hold testing the validity of data utilized in the statistical analysis. For this purpose, we used normal
research. While the second part will include the distribution test, Multicollinearity test,
descriptive analysis followed by the third part which Autocorrelation test, and Homoskedasticity test.
will hold the empirical analysis. Validity of the study models representing correlation
between market Concentration and banking industry
performance was secured. Thus, we can say that the
study models in equations numbered (2 and 3) are

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accurate. All variables on the right side express non- and have the same probability random error εi,2; εi,3
random variables excluding the last one εi,2; εi,3 with a variance of σ2; σ3.
which is supposed to belong to natural distribution
with zero average and fixed variance is expressed in 4.2 Descriptive statistics
σ2; σ3. All these variables are independent ones. As
for variable (π) they are dependent in the two models Table 2 summarizes the descriptive statistics of banks
performance, market share and concentration.

Table 2. Descriptive analysis

Standard
Variables Label Years Minimum Maximum Mean
deviation
2009 -46.556 24.240 1.300 2.091
2010 -47.912 22.680 -4.693 2.100
Bank 2011 -23.391 22.920 2.704 1.235
PER
Performance 2012 -49.155 21.480 1.716 1.906
2013 -40.002 24.000 4.524 1.801
2014 -44.002 26.400 4.976 1.981
2009 0.079 6.456 1.846 0.186
2010 0.147 6.312 1.846 0.185
2011 0.124 5.436 1.846 0.179
Market Share MS
2012 0.124 5.088 1.846 0.178
2013 0.158 5.040 1.846 0.173
2014 0.176 5.594 2.049 0.192
2009 4.644 12.216 12.116 0.206
2010 11.470 12.180 13.195 0.000
2011 10.769 10.692 10.413 0.021
Concentration Con
2012 8.916 10.692 12.883 0.037
2013 10.961 8.040 10.556 0.031
2014 12.430 9.117 11.971 0.035

The bank performance is measured by Return on banks listed in QSE. This hypothesis will test how the
Assets (ROA).where the maximum (ROA) was 4.98 in banks will differ if they are having high market share
the year of 2014. The mean was unstable between the and if they have low market share, and if they have
years and in the year 2011, so the study assumes that high or low market share how they will impacted the
unstable of banks performance due to the performance of banks listed in QSE. This hypothesis
consequences and impact of the global financial crisis. formed based on what found in previous studies about
The mean of market share was stable the same in all the market share of banks and their relationship in the
years, which indicates that the market share of banks bank's performance. In contrast, the Efficient Structure
is difficult to move between dominant sectors and it (ES) hypothesis argues that the efficient firms
could be a competition between the banks. The mean outperform the others and therefore gain higher
was increased in the second year 2010 than it started market share which results in a higher concentration
to decrease till the year 2013, This is due to that in the of the market structure. The ES hypothesis was
beginning it was concentrated in high market because proposed by Demsetz (1973) and developed by
the number of a few existing banks for the next year Brozen (1982). According to this hypothesis, the
and banks was entry into the market so doing, at least explanation of the relationship between market
the previous concentration on the banks because of the structure and performance of the individual firm are
new banks enter to the market and also the stability of the firm-specific efficiencies. This efficient bank is
data from the year 2010 to 2014 this indicate that assumed, therefore, to gain a large market share that
difficult to move between dominant sectors and it may result in high levels of concentration, and the
could be a competition between the banks. Bank’s efficiencies will be the driving force behind
the process of the market concentration.
4.3 Models testing The second hypotheses tested the relationship of
market concentration of banks assets and return on
Based on that Pooled Regression and the results of this assets in the performance of banks listed in QSE,
test can be found in table (3). according to SCP. This hypothesis measured by the
The study hypothesis may be tested as follow: market share of the assets of each bank by (HHI). This
Where the first hypothesis tested the relationship hypothesis was formed based on what was found in
of market share of deposits in the performance of previous studies regarding the market concentration of

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banks in the performance of banks. As many studies banking industries are characterized by high market
like Molyneux (2006) states that the most frequently concentration. Overall, the high degree of
used measure of market structure is concentration ratio concentration in GCC banking markets suggests that
and the second most frequently used is the Herfindahl- the strict licensing rules and restrictions on foreign
HirschmanIndex (HHI). He indicates that the GCC bank entry have helped create these market structures.

Table 3. Pooled regression results

Variables Model 1 Model 1.1 Model 1.2

Independent variables:
Constant 1.791** 3.438** 2.751**
(0.046) (0.018) (0.015)
Concentration (con) 1.417 1.579
(0.224) (0.219)
Market share (MS) 8.173*** 4.692**
(0.000) (0.000)
Control variables :
Numberof Branches 4.180*** 3.025** 2.420**
(0.000) (0.013) (0.010)
Bank size 3.214** 6.171*** 4.937***
(0.021) (0.001) (0.001)
Bank Age 1.096 2.104 1.683
(0.406) (0.279) (0.223)
R 0.321 0.297 0.192
R-squared 0.103 0.088 0.037
F-statistics 9.691*** 4.521*** 3.617***
p-value (F) 0.000 0.000 0.000
Note: OLS: t-test (top), p-value (bottom); significance at: *10%; ** 5% and ***1% levels.

After testing the hypothesis, the results are conclude that the empirical evidence supports the
summarized in table (3), that t-test of Market share basic SCP version of the market power hypothesis that
was positive and p-value is less than 5% , the market associates market concentration with profit
concentration was positive and p-value is more than performance.
5% and by testing both market share and the market
concentration found that the market share positive and 5 Discussion of conclusion and
p-value is less than 5% which is significant by using recommendations
the three models (MS, Con ,MS &Con) in table (3).
This indicates that will accept the first hypothesis The main objective of the study is to investigate the
because the p-value is less than the 5% which mean profit relationship of market structure on performance
that is significant, while rejected the second of the banks listed in QSE. The study also aimed to
hypothesis because the p-value is more than the 5% analyse this relationship in terms of market share and
which means that it's not significant. By accepting the banking concentration. There are few studies that the
first hypotheses about market shares relationship on relationship of market structure on bank performance
bank performance therefore its mean that the banks in GCC, one of these study by (Hamdan et al, 2014)
with high market share will have better performance they study Market Structure - profit relationship in
than other banks. The rejected hypotheses is the Bahrain and Kuwait. These studies were supported by
second that is about the market concentration and its different theories, had different sample size as well as
effects in the performance of banks therefore its mean different model. Conducting this study in Qatar aimed
that is no concentration in the market of banks listed to benefit shareholders, investors, bankers and other
in QSE, this is linked to the laws and regulations listed stakeholders taking financial decision. Also, it is
in Central Bank of Qatar that prevent monopoly in the beneficial to know what really affects banks
market. As many studies like Al-Muharrami and performance in this area and whether market share and
Matthewsm, (2009), conclude that there is little market concentration really affect bank performance.
evidence that banks in the more concentrated GCC Our Study built three different regression models
markets exhibit lower technical efficiency for the to study effect of market structure on bank
period 1993 to 2002. This is in contrast to Berger and performance. The first model used Market Share (MS)
Hannan (1997, 1998), who find evidence that CR3 as an indicator of performance, the second model used
proxies market power and those banks with more market concentration as an indicator of performance
market power are less diligent in controlling costs. and the third model used both market share and
The results do not support the QL hypothesis and market concentration as an indicator of performance.

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The Study notices that t-statistic of Market share (MS) 9. Athanasoglou, P.P., Brissimis, S.N. & Delis, M.D.
was positive and p-value is less than 5%, this result 2008, "Bank-specific industryspecificand
due to banks with high market share will have better macroeconomics determinants of bank profitability",
performance than other banks. Market concentration Journal ofInternational Financial Markets, Institutions
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indicates that is no concentration in the market of 2006, "Determinants of BankProfitability in the South
banks listed in QSE, this is linked to the laws and Eastern European Region", Journal of Financial
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market power of concentration, through putting more 13. Berger, Allen N., Iftekar Hasan, and Leora F. Klapper
legislation, to regulations and constantly update to (2004) "Further Evidence on the Link Between
keep pace with developments in banking business, and Finance and Growth: An International Analysis of
limit concentration of banks, as this has a significant Community Banking and Economic Performance,"
economic and social impact. Encourage banks to Journal of Financial ServicesResearch 25, 169-202.
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of advanced technologies in banking business to impact of market structure, contestability and
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and global markets and improve their returns. Our DNB Working Paper.
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