Ma619 : Accounting Research : Assessment Answers

Introduction:

Competition refers to that kind of an activity or a particular kind of a condition, whereby the objective of gaining something or defeating someone for the purpose of winning something is done, for the purpose of establishing a certain level of superiority over the others, who are known as the rivals of the entity in question. It is the hallmark of a providing goods and services at healthy prices. At any kind of industry, a certain level of healthy competition is necessary for the purpose of providing goods and services to the customers at competitive and affordable prices. Competition helps in ensuring a certain kind of liberalisation in the particular industry where it occurs, it is the hallmark of the capitalistic kind of an economy, where price mechanism operates and a healthy competition exists, ensuring a better competitive environment.

Competition in the banking industry is quite different from the rest of the industries where normal goods and services are produced and sold. It is specifically different in case of the banking industry because of the different kinds of functions performed by banks in their financial market. The banks have been traditionally responsible for creating money and providing loans in exchange for some kind of security. The very nature of the banks, their way of functioning and their objectives, sets them apart and makes them more prone to the regulations and supervisions of the legislative entities. Particularly they are more vulnerable to the instability of the market and economic conditions because of the specific kind of functions performed by banks for the welfare of their customers and the economy as a whole. Since the advent of the liberalisation and globalisation drive of the 70s, the performing arena of the banks have increased considerably, and so has their competitive drive. Here in this paper, the main sections of the previous kinds of research on the competition of the banking industry have been discussed.

Discussion:

Banking competition and efficiency in the Indian, Jamaican Pakistan and the Zambian banking sector: 

The competition in the banking industry is a different world in itself and it differs from the way, competition in other industries operate. The competition in the banking system is very different from the competition in other industry works mainly because of the special kinds of functions, which are performed by banks in the financial system of an economy. The primary portions of competition of cost reduction and increasing the efficiency are not entirely suitable for the competition in the banks because of the influence of marketing failures on the banking system in the economy. It has been seen that the liberalisation and the deregulation of the developed economies of the world had resulted in the increasing competition in the banking sector of the various parts of the world (Arrawatia, Misra & Dawar, 2015).  This had led to the expansion of the banks in new markets and territories, due to the excessive pressure of market competition. It has also been seen that there has been an increase in the presence of various technologically advanced companies in the banking sector, across various parts of the world. These hi-tech companies are continuously challenging the presence and the involvement of the traditional means of conducting banking business. This has put an excessive amount of competitive pressure on the existing lines of banking businesses.

As per the research conducted by Arrawatia, Misra&Dawar, (2015), on the case of the competition in the Indian banking industry, certain important observations had been find out regarding the trend of the banking competition. It was seen that there has been an increasing competition trend, which could have been seen in the period of 1996 to 2004 (Coccorese, 2013). After the termination of this period, a fall had been seen in the banking sector’s competitiveness. It was shown by the usage of the Granger Causality tests has been shown that the competition in the industry had generally positive impact on the efficiency of the banks operating in the Indian economy.

 This finding of the positive impact of increased competition on the efficiency of the banking industry is a very important piece of information for the policymakers of the economy. This information is a symbol of the efficiency of the liberalisation and globalisation policies. This positive impact would also have a positive impact on the economic growth of the economy. Thus, by taking this cue, the policymakers can work on increasing and improving the competitiveness in the banking industry in India, which would lead to an increase in the efficiency of the banking sector in the Indian market.

In the research conducted on the inter-relationship between the competitiveness of the banking sector of Jamaica and the soundness of the Jamaican banks, some useful findings were discovered. It was conducted for the period encompassing March, 2000 until June, 2008 (Bailey-Tapper, 2009). The research was also performed on the inefficiencies of the banks operating in the Jamaican banking sector. It was found in the case of the merchant banks and various building societies, that greater competition was supplemented by the dual plagues of lower amount of capitalisation and the increased risk of insolvencies which were prevalent in these sectors. In case of the commercial banks, operating in the Jamaican section, it was seen that the greater competitive spirit had resulted in the reduction of the risk of insolvency. Additionally, an important concern was also found for the regulators of the banking industry, which pertained to the commercial banks and the different building societies. It was found that there is the presence of a U shaped relationship between the growth of loans and the ratio of non-performing loans and bad loans, which can be considered as the proxy of judging the quality of loans. This finding was based on the hypothesis that at low loan rates of growth, the growth of loan usually has a negative impact on the number of bad loans. On the other hand, at a higher growth of loan rates, it has been seen that the amount of bad and negative loans increases the growth rate of loans. This finding abides by the regulatory perception that those banks with a high rates of growth of loans, require additional observation and attention.

The banking industry in Pakistan has made rapid progress in the last few years and has the regulators have tried to distribute banking network across the nation, on a continuing basis, with the intention of connecting the entire nation into the chain of a healthy banking network (Khan & Riazuddin, 2009).  It has seen a couple of reforms such as the consolidation reforms and the various kinds of mergers and acquisitions. It has been revealed by the research conducted on the relationship between the efficiency of the banks and the competition in the banking sector of Pakistan that there has been a declining trend in the level of concentration since the year 2000. The research indicated that there was a fall in the absolute level of the Herfindahl-Hirschman Index to 1000, since 2004, for all the three major indicators of banking structure was indicative of the fact that Pakistan’s banking sector fell in the competitive market structure (Khan & Riazuddin, 2009). Moreover, by the usage of the PR model, it was also revealed that the banking sector of Pakistan, was consistent with a monopolistic competitive system.

In the banking sector of Zambia, just like any other developing country, a sleuth of changes had taken place, which had created a massive impact on the level of competition. This has been the scenario in many other countries of Africa (Simpasa, 2013). There had been a dynamic change in the banking market due to the entry of foreign banks and the wave of privatisation of the state owned banks. It was revealed that most of the banks operating in the Zambian economy had earned their incomes from the operation of the monopolistic competition. The presence of some of the major market factors had a big role to play in the increased competiveness in the banking sector of Zambia. Some of these market factors such as risk taking abilities, diversity of revenue and the intensity of the regularity upon the banking sector. On an aggregate perspective, it was found out that the competitive conditions can be further enhanced by lessening the rules and regulations which acts as an impediment on the success of the banking competitiveness in Zambia.

Financial stability and competitiveness in the banking industry in Asia pacific:

Banking competition has gained special significance in the scenario of the growing financial instability. The recent trend of financial instability, most notably the global financial crisis of 2008, have let the alarm bells ringing, as many banks and organisations have not been able to be come out of the impact created by the collapse of the house mortgage market of the United States (Chodorow-Reich, 2013). The crisis had major implications on the European banks too, affecting c, Estonia, Latvia, Lithunia, Hungary and many other countries (Weill, 2013).  Here the data of 14 Asia Pacific economies from a period ranging from 2003 to 2009, had been analysed with the purpose of analysing the impact of banking competition and regulation on the vulnerability of individual banks, which was measured by the probability of the bankruptcy and bank’s z-score (Fu, Lin & Molyneux, 2014). The results had concluded that the larger amounts of concentration results in financial vulnerability and along with this, it was also found out that reduced pricing power also increases the contact of bank risks, when various macroeconomic and bank specific and institutional factors are carefully controlled. It was also found out from the results of the research, that institutional growth and tight capital regulations and needs helps in recuperating financial stability, on the other hand, it was also revealed that property rights and deposit insurance are connected with greater bank vulnerability.  

Role of capital requirements on bank competition:

The competitiveness of the banking sector is vital due to the part played by banks in the country. After the examination of the banking industry in Kenya with regards to minimum capital prerequisites and its impact on bank competition, some observations were made (Leon, 2015). Regulatory efficiency is very important for sustained banking competitiveness. Moreover capital has a non-linear impact on competition (Gudmundsson, Ngoka-Kisinguh & Odongo, 2013). In addition to this, it was also seen that the benefits of increased capital on the banking competitiveness, starts to take place, once the process of consolidation is initiated and bank structure also has a vital role to play in the banking performance (Kamau & Were, 2013).

Measurement of banking competition: 

The research on the new way of measuring competition, which was produce d by Mr Jan Boone, has become the hallmark of measuring competition across various industries. The usage of the price cost margin method has become one of the most popular methods of assessing the competitions. However, it has not been very clear as to what kind of relation is present between competition and the PCM (Boone, 2008). The exact relation between the theoretical examples from an empirical point of view, is yet unknown, which led Mr Boone to create a new measure of competition known as the relative profit difference (RPD). RPD has a large theoretical foundation, as a measure of competition. It is an intonation in competition both when competition becomes more intense through intense through more aggressive interaction, between firms and when entry barriers to market are reduced. The data requirements of RPD is same as PCM, which is why, that any business firm level data set, which can be used for PCM can be used for RPD. Through this it can be seen what percentage of industries both measures point in the same direction. if it is seen that measures are congruent for more than 95% of the industries, then in such scenarios, PCM can be used for a measure of competition, in case of empirical research (Boone, 2008).

Multi-product approach towards banking and the banking industry competition in the Ethiopian, Turkey and Nigeria:

According to the research performed by (Barbosa,  Rocha, &Salazar, 2015) regarding a multi-product approach towards banking, some important observations were made and discovered. Banks which were providing some classical products and various other banking products, had a substantial amount of power than those banks, which were providing classical products only It was also observed that market power has been underestimated whenever, multi-product information was not taken into account. It has been revealed that the banks which offer many different range of banking services and products, had better competitive strength and power in the market, than those banks which offered only classical products and services (Assefa, Hermes & Meesters, 2013). The research had concluded that for increasing the market power in this growing age of competition in the banking sector, it was necessary for providing both financial as well as non-financial products.

It has been seen that in the Ethiopian economy, it is the banks, which occupies a very important position. The Ethiopian banking industry has been observed to be as greatly profitable, centralised and fairly competitive in nature. Specifically, as a result of which any change in their performances or way of doing things, invites serious implications upon the financial fabric of the economy as a whole. In the same way, the changes in the tectonic plates of the competitiveness in the banking sector of the economy also have some implications on the working of the economy. For the most part cases, the leading bank (Commercial Bank of Ethiopia) still occupies a quasi-monopoly influence (Eshete, Tesome, & Abebe, 2013). As far as contestability is concerned, the Ethiopian banking industry can be considered as non-penetrable as entry into the industry is very complicated and hard, because of the presence of a large number of technological, legal, and economic market barriers. Competition when seen from the perspective of price is comparatively frail in the banking industry of Ethiopia. The econometric analysis also corroborates that there is the presence of monopolistic competition amongst banks in terms of prices. When seen in a summarised and concise way, it could be seen that the banks in the Ethiopian case are challenging each other and their other rivals in terms of superiority of services and effectiveness (together with the application of technological advances) through the development of branch networks, promotional exercises and prices, put in the order of their significance (Wonglimpiyarat, 2014).

As per Kasman & Kasman, (2015) there have been a spurt in the competitiveness in the Turkish banking industry, which was evident from the research conducted in the period of 2002-12. For this research the Boone indicator and the Kerner index were used, and which had served to be efficient indicators in estimating the competitive index of the banking sector (Boone, 2008). In this research, the non-performing loans and the z-scores were used chiefly as proxies for conducting research. Here primarily, the results revealed that competition has been negatively with the non-performing loans ratio, but was positively related to the z-scores (Duygun, Shaban  & Weyman-Jones, 2013). It was also shown in the form of the results that a larger concentration has a positive effect on the non-performing loans and a negative impact on the z-score. One of the most significant conclusions, derived from the research included that the increased amount of competition in the banking industry, would lead to growing amount of instability, which could jeopardise the banking structure. As higher competition would increase the banks’ tendency to take more risks, which would eventually lead to increased instability because of the risks, undertaken.

Training and development are an important part of ensuring any organisation’s overall success. It is an indispensable tool for enhancing and improving the performance of the employees of any organisation. It is no different for a bank too. As per the research conducted by Falola, Osibanjo, & Ojo, (2014), a couple of observations were seen in respect of the effectiveness of training and development of employees’ performance and organisation’s competitiveness in the Nigerian banking industry. Training is an important part of surviving in any organisation and for ensuring the effective performance of any business organisation. Training and development plays a major role in the performance of the employees and in turn the effectiveness of the organisation concerned.  This in turn increases and improves an organisation’s competitiveness in the market amongst its rival organisations. The results indicated that the individuals must be much more active and must take the advantage of each and every opportunity which comes their way in the form of professional opportunities and skill development. Thus in this regard, it becomes essential on the part of management of the banks to prepare effective strategy sessions in the form of training sessions of the employees, whereby they can avail of these opportunities to equip them with the necessary skills, for improving their performances. This would go a long way in reviving and maintaining the competitive edge which is required by the banking companies for growing in this age of cut throat competition.

Bank risks and competition:

There is a good amount of relationship between bank risks and their competitiveness. The bank’s financial position has a major role to play in here. As the value of the franchise of the banks’ increases, it then leads to the management and the shareholders to characteristically trim down its risk exposure to safeguard its franchise value. This fundamental foundation of the franchise value is characteristically assumed to be the bank’s market power, is the one, which ultimately leads to reduced amount of competition (Jiménez, Lopez & Saurina, 2013). Thus, there is the presence of a close inter linking relationship between bank’s risk taking capabilities and risk and the competition existing in the market.

Empirical Investigation:

Various empirical researches were seen in the various cases of researches which were conducted on the banking competition scenarios, across various countries. In the Ethiopian banking industry, the PR model used in the equilibrium test along with the use of the econometric analysis validates that there is the presence of monopolistic competition amongst banks in terms of prices. While in the case of the investigation of the banking competition in the Kenyan banking industry, the Lerner index was used along with the H-statistic and some important observations were made such as capital has a non-linear influence on competition in the banking industry. Thus empirical evidences formed the crux of the investigations conducted with regards to the competitiveness in the banking industry.

Future research and Conclusion:

In the context of the competitiveness in the banking industry a series of observations were seen, in the form of the investigation of the state of the competition in the banking sector across various countries like India, Pakistan, Jamaica, Ethiopia, Turkey, Kenya, Nigeria, Zambia and Asia pacific. Wide range of researches was done in this arena, which led to various rounds of conclusive results. Some of these indicated the influence of training and development of bank employees on banking competitiveness, types of products produced and sole, positive impact of the economic policies of liberalisation and globalisation on the competitiveness both in the context of the developed as well as the developing nations. Along with all these, it was also seen that the there was also significant amount of influence of bank risks, capital requirements and financial stability on the competitiveness of the banking industry.  Each of these factors has played a major role in influencing the competitive nature of the banking sector, across various countries around the world.

However, there are also some areas, which have been overlooked, in these researches, which have a significant association with the competitiveness of the banking industries. One of these include the future research on this very research topic by investigating and analysing the fundamental effects of the constructive relationship between market power and a bank’s resolution to provide archetypal and other kinds of banking products. In addition to this, the impact of the introduction of the advancement of technological innovations on the competitiveness in the banking industry is all the more essential.

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