Bank market power and banking sector development in Nigeria

Abstract

The evolution of the banking industry has resulted in the implementation of several bank reforms. These reforms have affected the structure of the credit market, which is largely dominated by the banking sector, thereby leading to either a competitive or oligopolistic/monopolistic banking sector that encourages market power. While many studies have been conducted on banking sector development and economic development, few have focused on bank market power. In light of this, the study undertook the primary objective of analyzing the effect of commercial bank market power on banking sector development in Nigeria from 1981 to 2020, using the error correction model and ordinary least squares estimation technique. The results from the banking sector development model showed that market power, measured by the five commercial bank aggregate concentration ratio (CBACR_5), had a positive impact on banking sector development within the period under study. The impact was significant even after two years. Consequently, the study recommended that efforts to ensure an efficient and competitive banking system should not be entirely sacrificed in creating a banking sector that is competitive, but should ensure a tradeoff between competition and market power to meet the varied investment needs of small and medium-scale enterprises.