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The implications of market structure and bank efficiency on social welfare: the case of the Saudi Arabian banking system

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  • Abdullah Almounsor
  • Sami Mensi

Abstract

This paper estimates the social costs of market power in the Saudi Arabia banking system over the period 2001–2012. It also tests the so-called Quiet Life Hypothesis, which postulates a negative effect of market power on bank management efficiency (X-efficiency), cost-efficiency and profit-efficiency. The Lerner index for all Saudi banks averaged 0.66, indicating that the Saudi Arabian Banking sector is far from being competitive. Using the Harberger’s triangle methodology, the social welfare cost attributable to market power for the whole period is estimated at 0.82% of GDP. However, the research found that market power in the Saudi banking sector is a significant determinant of bank inefficiency, thereby supporting the Quiet Life Hypothesis. The paper suggests important policy implications to improve banking competition and reduce welfare losses associated with market power.

Suggested Citation

  • Abdullah Almounsor & Sami Mensi, 2016. "The implications of market structure and bank efficiency on social welfare: the case of the Saudi Arabian banking system," Middle East Development Journal, Taylor & Francis Journals, vol. 8(2), pages 329-357, July.
    • Handle: RePEc:taf:rmdjxx:v:8:y:2016:i:2:p:329-357
    DOI: 10.1080/17938120.2016.1226467
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    Cited by:

    1. Sami Al-Kharusi & Azmat Gani, 2022. "Financial Credit and Expansion of the Non-Hydrocarbon Sector in Gulf Cooperation Council Countries," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 28(3), pages 105-118, November.
    2. Adeabah, David & Andoh, Charles, 2019. "Market power, efficiency and welfare performance of banks: evidence from the Ghanaian banking industry," EconStor Preprints 192967, ZBW - Leibniz Information Centre for Economics.
    3. Otero, Luis & Razia, Alaa & Cunill, Onofre Martorell & Mulet-Forteza, Carles, 2020. "What determines efficiency in MENA banks?," Journal of Business Research, Elsevier, vol. 112(C), pages 331-341.
    4. David Adeabah & Charles Andoh, 2020. "Cost efficiency and welfare performance of banks: evidence from an emerging economy," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 16(5), pages 549-574, July.
    5. González, Luis Otero & Razia, Alaa & Búa, Milagros Vivel & Sestayo, Rubén Lado, 2019. "Market structure, performance, and efficiency: Evidence from the MENA banking sector," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 84-101.

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