Measuring the market power of commercial banks and market structure in the financial sector in Nepal

Abstract

Nepal has reformed its financial sectors to align with sector performance and growth, with the aim of mobilizing resources and capitalizing them for higher economic growth and poverty reduction throughout the country. This paper aims to measure the degree of competitiveness in financial sectors in Nepal. The research design, methods, and theory employed in this paper include both structural and nonstructural approaches. The structural approach uses concentration ratios and HHI to measure market competitiveness, while the non-structural approach uses the profit elasticity model/Boone indicator. The paper’s sample size is 6 of 22 total commercial banks in Nepal, using the sample size formula and time series data from 2011/12 to 2020/21. The authors collected the data from their annual reports. Commercial banks represent institutional power, serve as symbols of financial liberalization, and are competitive stakeholders in the post-liberalization era. Financial reforms have ushered in a banking sector that is perfectly competitive. The paper found no change rather than oligopoly market with their shareholding powers and controlled in the banking sector of the financial market in contrast to the remaining banks. The result of the structural and non-structural approach unhides low competition to the remaining rival banks. It implies that there are no significant challenges, other than the need to share power and commands in the supposedly liberal and competitive market. This is not limited to large private banks, but also extends to large public institutions. The paper found low concentration in the banking sector. Further, the policy of merger and consolidation has increased the competitiveness and oligopoly of big banks instead of strengthening and promoting a competitive open market. Therefore, we cannot expect financial reforms and liberalization to foster a competitive, open financial market without regulation. Therefore, the central bank must focus on crafting monetary policy and financial reforms, and ensuring their efficacy in a manner that promotes financial market expansion and optimal competition. The paper covered only six big commercial banks. It implies understanding the competitiveness degree of banking sectors and the financial market and finding out the best solution to strengthen the open and competitive banking sector in the financial market for a higher rate of resource mobilization and capitalization at competitive interest rates and access to banking services.