The Price-Concentration Relationship in the Commercial Bank Deposit Markets in Zambia
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Date
2011-04-11
Authors
Sandi, Samuel
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Abstract
Economic theory states that in situations of few well established enterprises,
competition and consumer welfare is usually affected. The reduction in competition
among other things results into consumers facing poorer service, and higher prices
of goods and services. A number of studies in the banking sector in the USA,
Europe and lately in the Southern African Monetary Area have been carried out
and most of the results indicate that in a highly concentrated banking industry i.e
few well established commercial banks, there are negative effects on the efficiency
of banks and pricing of retail banking products.
The Zambian banking sector has been and remains oligopolistic. Before
independence in 1964, two foreign commercial banks dominated the banking
sector namely Standard Bank and Barclays Banks with the Grindlays Bank providing fringe competition. In 1965, the Zambia National Commercial Bank
(ZANACO) was established and followed by the Non-Bank Financial Institutions
such as the Post Office, the Zambia National Building Society (which was a merge
of building societies), the Zambia National Provident Fund and the Zambia State
Insurance Corporation (another merge of insurance companies). Years later more
private banks entered the market. Despite the entry of local banks, the banking
industry still remains uncompetitive. Most of the banks with the notable exception
of ZANACO are predominantly urban-based. The foreign banks continue
dominating in terms of market share, loans and advances, deposits and total
assets. Such type of structure indicates that the banking industry in Zambia is
concentrated. This structure does not favour the welfare of customers. As a result
high banking costs are being borne by the depositors due to inadequate
competition prevailing in the country.
Under this study "the Price-Concentration Relationship in the Commercial Bank
Deposit Markets in Zambia", we explore the level of bank concentration in the
country and the relationship between bank concentration and the pricing of retail
banking deposit rates (i.e prices). In our analysis we uses quarterly data spanning
the period 1997 to 2007 from the Bank of Zambia annual reports and bulletins;
Commercial Banks annual reports; data from various thesis kept by the University
of Zambia library; the Central Statistics reports; data on commercial banks from
the World Bank's World Development indicators; and Ministry of Finance and
National Planning economic reports.
In analysing the data collected under this study, the time series of co-integration
and error correction modelling approaches have been used. Empirical results
suggests that there exists a unique long-run or equilibrium relationship among
consumer weighted deposit interest rates (i.e., prices) and concentration ratio, per
capita income and deposits held by commercial banks. This relationship implies
that Zambia's highly concentrated banking markets are "bad" for depositors
Description
Keywords
Price Concentration in Commercial Banks