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Effect of Mergers and Acquisitions on Market Concentration and Interest Spread

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  • Khan, Mehwish Aziz
  • Kayani, Ferheen
  • Javid, Attiya Yasmin

Abstract

This study investigates the relationship of mergers & acquisitions with the interest spread of the banking industry in Pakistan. To assess whether the merger of Pakistani banks were a success or otherwise, profitability, liquidity ratios, and net interest spread are computed which are considered essential to judge the financial performance of any bank. Data is taken for the period of 1997-2010 and this data have been used to calculate the interest spread and market concentration. Market Concentration is calculated by using Herfindahl-Hirschman Index or HHI. Findings show that the profitability and net interest spread of two merged banks declines as a result of mergers. It is also revealed that Concentration of the banking industry shows a rising trend during 2008 and 2009 after mergers occurred during 2007 as a result of merger. However, it shows the level that almost approaches the threshold i.e. 1000. One or two more mergers can push up threshold level of HH index. It means that it is the right time for banking industry of Pakistan to be reviewed by any antitrust authority to maintain the optimum level of competition.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 37311.

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Date of creation: 2011
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Publication status: Published in Journal of Economics and Behavioral Studies No. 3.3(2011): pp. 190-197
Handle: RePEc:pra:mprapa:37311

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Keywords: Mergers & Acquisitions; Market Concentration; Banking industry; Interest Spread; and Profitability;

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  1. Moshe Kim & Eirik Gaard Kristiansen & Bent Vale, 2005. "What determines banks’ market power? Akerlof versus Herfindahl," Working Paper 2005/8, Norges Bank.
  2. Demirguc-Kunt, Asli & Huizinga, Harry, 1998. "Determinants of commercial bank interest margins and profitability : some international evidence," Policy Research Working Paper Series 1900, The World Bank.
  3. Idrees Khawaja & Musleh-ud Din, 2007. "Determinants of Interest Spread in Pakistan," Macroeconomics Working Papers 22209, East Asian Bureau of Economic Research.
  4. Charles M. Kahn & George G. Pennacchi & Ben J. Sopranzetti, 2000. "Bank consolidation and consumer loan interest rates," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 563-593.
  5. Adolfo Barajas & Roberto Steiner & Natalia Salazar, 1999. "Interest Spreads in Banking in Colombia, 1974-96," IMF Staff Papers, Palgrave Macmillan, vol. 46(2), pages 4.
  6. repec:pid:journl:v:46:y:2007:i:2:p:129-143 is not listed on IDEAS
  7. Andrea Cipollini & Franco Fiordelisi, 2009. "The impact of bank concentration on financial distress: the case of the European banking system," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 09021, Universita di Modena e Reggio Emilia, Facoltà di Economia "Marco Biagi".
  8. Winston Moore & Roland Craigwell, 2002. "Market Power and Interest Rate Spreads in the Caribbean," International Review of Applied Economics, Taylor and Francis Journals, vol. 16(4), pages 391-405.
  9. Prager, Robin A & Hannan, Timothy H, 1998. "Do Substantial Horizontal Mergers Generate Significant Price Effects? Evidence from the Banking Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 46(4), pages 433-52, December.
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