components of the external determinants are sector specific and macroeconomic factors. SECTOR SPECIFIC Market Structure- Structure -Conduct -Performance Paradigm The relationship between performance and market structure on the banking industry is based on the development of the theory in the industry organization. There are two competing hypotheses as to the relationship between profitability and market structure as discussed in the literatures. The first is the traditional market structure- conduct-performance (SCP) or collusion hypothesis following the eminent work by Bain (1951) which postulates that market structure influences conduct of firms through prices or investment policies and this in turn translates into performance. This hypothesis asserts that the setting of prices that are less favorable to consumers (lower deposit rates and higher loan rates) in more concentrated market as a result of competitive imperfections in these markets (Berger 1995). On the other hand, the traditional hypothesis was challenged by the efficient market hypothesis, which by some authors is referred to as the efficient structure hypothesis. The hypothesis is following the works of Demsetze (1973), which postulates that market concentration is not a random event but rather the result of the superior efficiency of the leading firms. Firms possessing a comparative advantage in production become large and obtain
European Journal of Business and Management ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online) Vol.6, No.14, 2014 55 a high market share and, as a consequence, the market becomes more concentrated, Smirlock (1985). Financial Structure/Deepening – Maturity of the Banking Sector Demirguc-Kunt and Huizinga (1999) present evidences that financial development and structure variables are very important. Their results show that banks in countries with more competitive banking sectors, where bank assets constitute a large portion of GDP, generally have smaller margins and are less profitable. Also, they notice that countries with underdeveloped financial systems tend to be less efficient and adopt less-than-competitive pricing behaviors. Bank Size Bank size as measured by total deposits (Civelic and Al-Alami (1991) or assets (Smirlock (1985) is one of the control variables used in analyzing performance of the bank system. This is included to control for the possibility that large banks are likely to have greater product and loan diversification. The impact of bank size on profitability is uncertain a prior for the fact that on the one hand, increased diversification implies less risk and hence a lower required return, and on the other hand, bank size takes into account differences brought about by size such as economies of scale. For large firms their size permits them to bargain more effectively, administer prices and in the end realize significant higher prices for the particular product, Agu (1992).