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Bank Concentration And Financial Development: The Cross-Country Evidence

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  • Siong Hook Law
  • Ahmad Zainuddin Abdullah

Abstract

Concentration on banking industry may have long-lasting implication on financial market development. Some argue that concentration in the credit market introduces inefficiencies that would harm a firm's access to credit, thus hindering growth. On the other hand, some recent studies point out that some degree of monopoly power in banking is natural and beneficial. This study examines the effect of bank concentration on financial development, using a cross-country analysis on 68 economies during the period 1990-2001. The empirical results indicate that bank concentration is not a statistically significant determinant of financial development. Among the determinants of financial development, real income and institutional quality are the most prominent ones. The results suggest that concentration in the banking industry is positively associated with financial development in the lower middle-income and low-income countries. However, no such association is reported for upper-middle income countries. Therefore, the effect of bank concentration on financial development is subject to the level of economic development.

Suggested Citation

  • Siong Hook Law & Ahmad Zainuddin Abdullah, 2006. "Bank Concentration And Financial Development: The Cross-Country Evidence," The IUP Journal of Financial Economics, IUP Publications, vol. 0(2), pages 56-65, June.
  • Handle: RePEc:icf:icfjfe:v:04:y:2006:i:2:p:56-65
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