Evaluating competition in the loan and deposit market using the Boone indicator approach

Abstract

The study evaluates competition in the loan and deposit market using the new empirical industrial organisation method of the Boone indicator for the period 2010 to 2015. The study reveals a number of interesting results. Competition was more intense in the market for loans than in the deposit market. There was more competition among domestic banks than among foreign banks. The study also reveals that there was marginal differences in the intensity of competition for loans and deposits among domestic banks. On the aggregate level, competition in the loan and deposit markets declined signifi cantly during the period. A number of developments that took place in the banking sector can be used to explain the decline in competition. These include an increase in non-performing loans (NPLs), increased regulatory intervention and economic slowdown. The regulator, perceiving that banks were overcharging the banking public, has been intervening through pricing guidelines on the market, reducing bank charges and interest rates and infl uencing the pricing behaviour of the market, hence removing banks’ incentive to compete. The study renders support to the skimping and the bad management hypotheses, which argue that owing to competition bank managers are forced to make bad decisions, which in this case led to the collapse of banks and an increase in NPLs.