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Working Paper 168 - Competition and Market Structure in the Zambian Banking Sector
Competition in the banking industy has been a subject of great scholarly inquiry and continues to occupy a large body of empirical research. From public policy perspective, competitiveness of the banking sector represents a socially optimal target, since it reduces the cost of financial intermediation and improves delivery of high quality services thereby enhancing social welfare. Banking competition also promotes economic growth by increasing firms’ access to external financing (Beck, Demirgüç-Kunt, & Maksimovic, 2004; Pagano, 1993). However, Petersen and Ranjan (1995) show theoretically that banks wielding market power tend to lend to young firms whose credit record may be opaque, hence leading to high lending rates. In practice, Cetorelli and Gamberra (2001) argue that although concentrated banking systems offer growth opportunities for young firms, there is strong evidence of a general depressing effect on growth associated with banks’ exercise of market power and this impacts all sectors and firms. Hence, competition in banking should be placed at the centre of any public policy agenda since it has the mechanism to respond to the dynamic changes in economic conditions, especially those that affect delivery of financial services.