THE EFFECTS OF FINANCIAL DEREGULATION ON MARKET STRUCTURE AND COMPETITION: THE CASE OF NIGERIAN COMMERCIAL BANKS
THE EFFECTS OF FINANCIAL DEREGULATION ON MARKET STRUCTURE AND COMPETITION: THE CASE OF NIGERIAN COMMERCIAL BANKS
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Date
2000-09
Authors
MAITURARE, MUHAMMAD NASIRUDEEN
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Abstract
The structure and regulation of a country's financial markets and
institutions have been the focus of considerable policy attention for a number
of economic and political reasons. Banks and other financial institutions
encourage and collect the savings that finance a country's economic growth.
Thus playing an integral role in transmitting the government's monetary and
credit policies to the rest of the economy. The banking industry, particularly
commercial banking (with over 80% of total deposits) are effectively regulated
as a means to provide subsidized credit or services to targeted groups and to
protect particular groups from such activities as cut-throat competition, hostile
takeovers, and expropriation. No doubt, such restrictive regulatory policies,
regarded as "financial repression" had to some extent contributed to the
nation's development programmes, particularly in the agricultural sector and
the small scale industry. However, these regulatory policies were believed to
have had their costs on the banking system's competitiveness, efficiency and
performance.
Economic theory suggests that provided there are no externalities, the
competitive price is efficient. This theory is also applied to financial markets,
looking at the supply of funds, the demand for funds, and the market clearing
interest rate. Thus, recent research works in development finance have
advocated that financial markets need to be fully liberalized from the
"interference" of governments so as to improve the efficiency of resource
allocation.
The study, thus, made an attempt to investigate the effects of
deregulation measures on the performance of the commercial banking sector.
In particular the study evaluated the extent to which deregulation policies
affected structure, efficiency and competition in the commercial banking
market. To accomplish this objective, in the context of Nigerian commercial
banking system, three hypotheses were tested using data from 18 commercial
banks and other publicly available data from the Central Bank of Nigeria,
National Deposit Insurance Corporation and Securities and Exchange
Commission.
The major finding of the study is that the link between market structure
and efficiency, on one hand, and the relationship between entry and
competition on the other, were weak and not in conformity with stated
theoretical objectives. The study also concludes that the Nigerian banking
sector is over concentrated with the three largest banks accounting for over
60% of deposits, from the inception of financial reforms to date.
The study thus recommended a pro-competitive policy to facilitate
inter-bank rivalry among the leading banks which continue to dominate the
system, and the entry or creation of new banks with a reasonable number of
branches to minimise the current over- concentration of the market.
Furthermore, there is a need to increase the number of institutions that compete
for deposits by promoting the entry of non-bank financial institutions.
Further research into the assessment of deregulation and various
parameters of banking efficiency, could be carried out using the translog cost
equation. The methodology would allow the researcher to identify best practice
banks and thus might be useful in decisions regarding merging and closing of
banks.
Description
A Thesis Submitted to the Postgraduate School, Ahmadu Bello
University, Zaria, in Partial Fulfillment of the Requirements for the
Award of Degree of Doctor of Philosophy in Administration
September, 2000
Keywords
EFFECTS,, FINANCIAL,, DEREGULATION,, MARKET STRUCTURE,., COMPETITION,, NIGERIAN COMMERCIAL BANKS