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Empirical evaluation of ‘structure-conduct-performance’ and ‘efficient-structure’ paradigms in banking sector of Pakistan

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  • Mahmood ul Hasan Khan
  • Muhammad Nadim Hanif

Abstract

Historically, the banking sector of Pakistan has been characterized by credit ceilings, directed and subsidized credit, controlled interest rates and lacking competition. This scenario prevailed till the financial sector reforms in 1990. However, after 1990, the banking sector changed significantly and the reforms led to notable improvement in the indicators of market structure of the banking industry of the country. In literature, the changes in indicators of market structure are interpreted in the context of either structure-conduct-performance (SCP) or relative market power (RMP) paradigm, and/or in relation to the efficient structure (ES) hypothesis. This paper studies relevance of SCP, RMP and ES paradigms for banking industry of Pakistan. This study uses (balanced) panel data, spanning 1996 to 2015, of 24 commercial banks to estimate banks’ profit function by using fixed effects model. Findings suggest that: (a) there is a weak association between the indicators of market structure and banks’ performance; (b) there is no empirical evidence to support SCP or RMP paradigms; and (c) the ES paradigm is relevant in the case of banking sector of Pakistan. Thus, the focus of policymakers should be to improve the efficiency of the banking sector in Pakistan. Focus on improving indicators of market structure, like concentration ratios, to encourage competition in the banking sector may not be productive.

Suggested Citation

  • Mahmood ul Hasan Khan & Muhammad Nadim Hanif, 2019. "Empirical evaluation of ‘structure-conduct-performance’ and ‘efficient-structure’ paradigms in banking sector of Pakistan," International Review of Applied Economics, Taylor & Francis Journals, vol. 33(5), pages 682-696, September.
    • Handle: RePEc:taf:irapec:v:33:y:2019:i:5:p:682-696
    DOI: 10.1080/02692171.2018.1518411
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    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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