Bangladesh Bank Training Academy Journal

Abstract

Stability in the fi nancial market is largely infl uenced by its market structure. The effi ciency of the production of fi nancial services, the quality of the fi nancial products as well as the degree of innovation of fi nancial products is also infl uenced by the degree of competition in the fi nancial sector. Moreover, the degree of competition in fi nancial sector or banking sector in specifi c, determines the accessibility of fi rms and households to the extent of fi nancial services and external fi nancing. Using a panel data framework of 36 banks for 10 years (2001-2013) and applying a non structural Conjectural Variation (CV) approach, the empirical investigation finds that the overall banking industry in Bangladesh is in a state of monopolistic competition. Segregating the whole sample into two samples based on the ownership structure of banks, the paper fi nds that the private commercial banks (PCBs) are more competitive than the government owned commercial banks (SCBs) and also reveals that more market power is exercised by the PCBs (28.5) than the SCBs (3.79%). The results reveal that banks in Bangladesh could have taken relationship lending/banking strategies and might have ensure stability in the fi nancial market protecting themselves encountered from the lemon market. The fi ndings also may help the regulators whether to increase competition in the banking industry by allowing more banks, but with the fortune of “winner’s curse”.