Determinants of Financial Market Structure and Competitiveness: Evidence From Nigerian Banking Industry

Abstract

The paper estimated the degree of competitiveness and the main driving forces of the inherent market structure of the Nigerian banking industry. This is with a view to determining the structural implications of recent financial reforms on the banking sector in Nigeria. A unique contribution of this paper over any other studies on the Nigerian banking industry is the use of a detailed bank-level panel data set, and measuring competition using the PR-H-statistic and Lerner index for the period of 2000 to 2014. The empirical results showed that the estimated H-statistic is 0.51 and Lerner index estimated as (0.77) confirmed existence of market imperfection and but highly competitive market structure in Nigerian banking. Personnel cost, cost of fund and price of capital were found to contribute the most to the value of H-statistics. Macroeconomic instability impaired significantly the competitiveness of Nigeria banks while credit risk created a kind of risk aversion for the Nigerian banking sector players. Thus implying those banks in Nigeria earned their revenue under conditions of monopolistic competition and the factor prices, risk aversion as well as macroeconomic instability are important factors driving the financial inter-mediation cost in Nigeria. The findings lend support to the theoretical proposition that financial reforms and bank innovativeness are likely to have direct implications on both bank competitiveness and market structural composition and dynamics.

Keywords: Market Structure, Monetary Policy, Bank Competition, PR-H-Statistic, and Lerner Index

JEL Classification: C33, D43, G21, L13