Trade and Industry

Friday, 15 June 2001

Structure and Conduct in the Commercial Banking Sector of South Africa

  • Year: 2001
  • Organisation: TIPS; WITS
  • Author(s): Charles Okeahalam
  • Countries and Regions: South Africa

The banking sector in South Africa is highly concentrated. When there is high concentration, it is necessary to examine the effects on efficiency and prices. In this paper, we discuss the fact that there are various types of efficiency in banking, and that high levels of concentration tend to reduce the overall level of efficiency. The presence of an oligopoly structure implies that the level of competition required to induce efficiency improvements may not exist. So one of the key methods of improving efficiency is to increase the level of entry and to make the banking market more contestable, which can be done by reducing the cost of entry and the welfare costs of exit.

However, costs of entry and exit in the retail and corporate sectors of the industry are very different. Entry into multi-branch retail banking is more much more expensive than entry into single-branch corporate banking. The nature of the services provided entails the use of different types of technology for service delivery; this difference in the types of technology has implications for the nature of speed of entry and exit. This in turn has implications for the level of competition, which then affects the level of efficiency. The oligopoly structure and the perception that there are high costs in delivery of retail banking services in South Africa have militated against entry into the retail banking sector. However, a number of foreign entrants have taken advantage of the relatively lower costs of entry into the corporate banking sector, which has increased the level of choice and countervailing power in this sector. Anecdotal evidence suggests that in the corporate banking sector, interest-based income and fee income spreads are competitively driven, and the level of competition in the corporate banking sector has contributed to the level of efficiency.

Conversely, the absence of entry into the retail banking sector has had a negative effect on competition. As a result, it is fair to suggest that cost efficiency is less than it would be in the presence of greater entry into the retail sub-sector. The perception that there is an absence of competition and countervailing power has contributed to a growing debate regarding the impact of the high concentration levels on the welfare of consumers of retail banking products.

Recalling that it is necessary to examine the impact of concentration on prices as well as on efficiency, and in order to test the validity of this view, a structure conduct analysis has been undertaken in this paper so as to assess whether the level of concentration influences the pricing of retail banking products in South Africa. The findings herein suggest that the pricing of retail banking products fits with the structure-conductperformance framework, which suggests that the industrial structure influences the prices charged for banking services. Specifically, we see that banks pay lower rates to depositors and charge higher deposit rates to their borrowers than they would if the level of concentration were lower.

This elicits a number of policy responses that should be focused on methods of introducing greater competition and regulatory reform in order to reduce welfare costs.