Structure, Competitiveness and Efficiency Aspects of Jordanian Banking Industry

Khaled M. Al-Zu’bi, Mohammad Z. Balloul

Abstract


Development in the Jordanian banking industry has been rapid, and the level of competition has increased in recent years. In the light of this development, it is important to investigate competitive conditions through testing the structure-performance relationship in the Jordanian banking industry. Mainly, two competing hypotheses are employed in the literature to explain the positive correlation between profitability and concentration: the Structure-Conduct-Performance Hypothesis (SCP) and the Efficient-Structure Hypothesis. The two hypotheses have radically contrasting implications for merger and antitrust policy.
This paper considers different degrees of market power and their relation with efficiency. X-efficiency is estimated here using stochastic frontier approach under the assumption that the inefficiency components of error terms follow half-normal distribution. Although little support is found for both the Structure-Conduct-Performance hypothesis (SCP) and X-efficiency version of the efficient-structure hypothesis, none of the two competing hypotheses could explain the positive relation between market structure and profitability in Jordan. Only size factor has a statistically significant and positive effect on bank performance, indicating that Jordanian banks operate at significant economies of scale.

Keywords


Structure-performance hypothesis, Jordanian banking, X-efficiency, Concentration, Profitability

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