Competitive Environment in Banking Industry: Evidence from an Emerging Economy

Abstract

The study investigates competitive conditions in commercial banking sector of Pakistan. The study employs a measure of estimating banking competition derived from modified Panzar and Rosse Model – The PR Model. The data was obtained from annual financial statements of 22 commercial banks listed on Pakistan Stock Exchange (PSX) for the period 2007-2016. The H-statistic for commercial banking sector is calculated through three different estimation methods (OLS, GLS fixed effects and GMM). The results depict monopolistic competition and significant role of bank size in determining the level of competition in commercial banking sector of Pakistan. The empirical evidence unveils that more competition exists between smaller banks as compared to larger banks. Further, speed of adjustment in profits with respect to factor input prices is better in smaller banks as compared to their larger counterparts. The findings imply that the speed adjustment process is slow, which allows commercial banks in Pakistan to accumulate abnormal profits.