Content area
Full Text
The objective of this paper is to empirically analyze the competition in the banking sector of Pakistan spanning the period 1995-2014. Two decades ago, banking sector reforms were initiated and implemented in Pakistan to spur competition in the banking sector. To examine competition, augmented Panzar and Rosse unscaled and scaled revenue equations is estimated by controlling risk and size of banks using balanced panel data of 22 commercial. Results are robust and reveal that the commercial banks in Pakistan generate revenues in the environment of monopolistic competition and this reflects the positive impact of banking sector reforms in creation of competition among banks.
Key words: Banking sector reforms; Market structure; Monopolistic Competition; Panzar and Rosse test; Panel data
Jel Classification: G20, G21, C23, L10
(ProQuest: ... denotes formulae omitted.)
1.Introduction
Competition is at the heart of the banking industry because any type of non- competitive behavior has persistent adverse impact on productive efficiency, consumer social welfare and economic growth. Indeed, competition in the banking sector matters for the household and business sector to access the financial goods and services. At micro level, household and firms make transaction with banks for deposits, loans and other services while at the macro level banks mobilize savings from savors to investors and playing a vital role in the transmission mechanism of monetary policy and payment system (Goddard and Wilson, 2009).
Like other industrial and developing countries, since 1989 the banking sector of Pakistan has also undergone privatization and restructuring process to create more sophisticated banking system. The prime purpose of the financial restructuring4 was to stimulate the competition in the banking sector by privatizing state-owned banks and mitigating the barriers for the entry of private and foreign banks, easing branch policy and interest rate liberalization. These have significant impact on efficiency, productivity of banks and also on economic growth. Indeed, more competitive, stable, and well capitalized banking sector would channel savings to the more productive projects to facilitate growth process. A number of studies have established a strong link between competition and economic growth (Levine et al., 2000; Bikker et al., 2012). The instrumental role of banks in the economy makes the competition in the banking sector an important issue. Therefore the objective of this paper is to...