Abstract

The purpose of this research is to examine the relationship between market structure and performance in the
banking sector using data from Pakistani commercial banks. Investigating the effect of changes in the market
structure on profitability is based on the structure-conduct-performance (SCP) and efficient-structure (E-S)
hypotheses. We have taken a sample of 20 scheduled commercial banks incorporated in Pakistan to examine the
above hypotheses, using the annual and pooled data for a period of 9 years from year 1996-2004. Three
measures of bank’s performance are utilized: return on assets (ROA), return on capital (ROC) and return on
equity (ROE). We have used concentration ratio (CR) to measure structure-conduct-performance (SCP)
hypothesis and market share to measure efficient-structure (E-S) hypothesis. We have also used control variables
to capture market specific characteristics such as bank size, market size, risk to owners, liquidity measure,
market risk, and market growth. Using regression analysis, we have found a positive relationship of
concentration ratio (CR) with profitability. In light of these results, we conclude that there is a positive
relationship between profitability and concentration.
The results of market share (MS) which is used for efficient structure (E-S) hypothesis explain a negative
relationship with profitability. The results of our analysis do not support the efficient structure (E-S) hypothesis.
The empirical findings suggest that market concentration determines the profitability in Pakistani commercial
banks. Hence, we also conclude that there is a negative relationship between competition and profitability in the
Pakistani commercial banks. The leading banks are still enjoying the state of monopoly. But, the market trend
shows that this state will not continue for a longer period as private commercial banks have started to compete
with the existing top commercial banks.

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