Abstract

The commonly observed positive relationship between market concentration and profitability may be explained by non competitive pricing behaviour (monopoly) as argued by the structure-conduct performance hypothesis (SCP), or by the high efficiency of firms with dominant market shares as argued by the efficient-structure hypothesis. This study assesses the impact of financial sector liberalization on commercial bank profitability and discusses efficiency and monopoly with regard to banks’ financial intermediation in Zambia. By applying panel data estimation techniques to variables derived from a theoretical model, we find support for the presence of a non-competitive market structure in the Zambian banking system, possibly hampering financial intermediation. The study however found liberalization to have a significant negative impact on profitability. Hence on the basis of this result financial sector reforms are justified and should be directed more to issues of structure and domestic financing to bring about the desired change in the banking industry. Our empirical implementation of the analytical techniques also shows that competition has not increased and the banks have become more collusive. Further, the study reviews that banks have become more profitable due to the oligopolistic nature of the market that enables them to reap supernormal profits. These are important findings to the extent that regulators rely on market structure to formulate and evaluate policy decisions.

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School	: School of Law, Economics and Government
Issued Date	: 2006

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