Market Structure Of Consumer Banks In Pakistan Economics Essay


The paper focuses and explores the current market construction of banking industry of Pakistan. The structural attack of Panzar and Rosse has been used. The P-R H statistic which is the amount of snaps of decreased signifier gross equation is calculated and tested with the aid of wald co-efficient trial. The information was taken from 26 Bankss for the twelvemonth 2001-2009. The paper concludes that the Bankss in the industry are gaining their grosss in monopolistic sort of a construction. Furthermore another of import point is that the industry is heading towards perfect competition.


First of all I would wish to thank Mr. Abdul Rehman Tahir, without his Continuous attempts I would ne’er hold been able to finish my work. I would besides wish to thank Mr. Zahoor Ahmad ( Ex-GM, SNGPL ) who besides played a important function in completion of my work. In the terminal I would wish to thank Mr. Ahmed Junaid Raza ( Chief Economist, SNGPL ) and all those who gave me huge support throughout the class of my research, whether straight or indirectly and compliment them on the completion of this research paper.

Table of Contentss


Certificate OF APPROVAL IV

A© [ 2011 ] [ Zohaib Ahmad ] V



Table of Contentss IX

Introduction 1

An overview of Topic 1

Research Objective 3

Related Definitions 3

Market Structure 3

Tax return on Assetss 4

Cost of Labor 4

Cost of Funding 4

Literature Review 6

Herfindahl-Hirchman Index 18

Methodology 21

Research Type and Data 21

Panzar and Rosse Model 22

Market Structure and Characteristics 25

Theoretical Framework 26

Reference List of Variables under consideration 27

Theoretical Justification 27

Hypothesis 28

Appraisal, Analysis & A ; Consequences 30

Consequences of Parameter Tests of Significance 32

Restrictions of the Study 33

Decision 33

Mentions 34

Appendix-A I

Appendix-A two

Appendix-A three

Appendix-B four

Appendix-C V

Appendix-D six

Appendix-D seven


An overview of Topic

The Banking sector of Pakistan is seen to hold a possible for growing. During the past Decade it has experienced a really significant growing which has attracted many investors from abroad. In fact it will be really true if we say that in Pakistan, the Banking industry is the lone industry which is lending really positively in the GDP of the state. Due to its net income possible many foreign investors have besides been attracted and this consequences in addition in the entire figure of consumer Bankss. This addition finally resulted in more advanced merchandises at a cheaper monetary value thereby easing the consumers. This increase in the consumer bank has besides changed the overall construction of the industry. The industry that started off with Monopoly sort of construction is now have a really different image wholly.

Market Structure refers to the figure and features of Sellerss and purchasers in a market. Here we are concerned with the Sellerss merely. By construction we mean Monopoly ( when there is merely one marketer and who is the monetary value compositor ) , Perfect competition ( when there are many Sellerss and all of them are monetary value takers instead than monetary value compositors ) , Oligopoly ( when there are little figure of Sellerss each of whom has a really little grade of influence on monetary value ) , and etc. Market Structure is really of import factor/determinant in analysing the fight of the industry.

Banking establishments are one of the most of import establishments in the advancement of a state. During the 1970ss all the Bankss were nationalized. Normally it is difficult to accept any existent competition in such fortunes. However subsequently in 1890ss, the Bankss were de-nationalized. Now most of the Bankss are working in private sector and as such there seems a batch of competition between all the Bankss. The banking sector in Pakistan is so moneymaking that many of the foreign Bankss have besides opened their subdivisions in Pakistan. In recent yesteryear, tonss of new services have been offered to general public and this retail/consumer banking has become really of import. In such fortunes, competition is dependent on market construction.

Research Objective

The banking sector plays a really significant function in the economic system of any state. Particularly in Pakistan, its function is even more of import because the banking industry of Pakistan is amongst those few industries which are lending significantly in the Country ‘s GDP. Therefore due to this really ground it is of import to cognize that under what fortunes the Bankss are gaining their grosss. The exclusive intent of this survey is to cognize the construction of banking industry of Pakistan. This construction may be Monopoly, a Absolutely Competitive or may be someplace in between these two extremes. Therefore, in short the chief purpose of this paper is to happen out the market construction of consumer Banking industry of Pakistan. This will finally assist these Bankss to do their selling schemes and offer new merchandises consequently.

Related Definitions

Market Structure

Market Structure refers to the figure and features of Sellerss and purchasers in a market. In our peculiar instance we are concerned with Sellerss merely.

Tax return on Assetss

The dependant variable in the survey is Return on Assets ( ROA ) which is defined as the ratio of entire net income after revenue enhancement to the entire assets in the balance sheet. This Tax return on assets is influenced by assorted other factors ( independent variables ) . These include three input variables and three bank specific control variables. The input variables include the three costs i.e. the labour cost, the cost of capital and the support cost. These are defined as follows:

Cost of Labor

This refers to all the cost that is incurred straight or indirectly to pay the rewards of workers, wages of employees and other such points.

Cost of Capital: this refers to the cost of funding. It includes both the debt and equity.

Cost of Funding

These are the costs that are incurred in payments of involvement on outstanding loans etc.

In add-on to these there are three control variables which besides have their impact on the dependant variable. These include ratio of entire loans of the bank to entire assets of bank, ratio of income from other beginnings to income earned from involvement, and eventually the ratio of non-interest gaining assets to entire assets in the balance sheet.

Literature Review

Hasan ( 2007 ) assess the market construction of consumer Bankss of Pakistan. The author ‘s chief purpose is to cognize whether the Bankss of Pakistan are viing in a absolutely competitory state of affairs, Monopoly or Monopolistic competition etc. for analysis 20 six Bankss is being taken. Further the article follows structural attack of Panzar and Rosse. A measure by measure procedure is being followed. Data is taken from 1997 boulder clay 2007. First of all M-Concentration ratio is calculated by the research worker. This ratio tells the market portion of m large Bankss or in other words concentration of wealth in top m Bankss. In 2nd measure co-efficient of fluctuation is calculated. This is calculated to get the better of the defects of M-Concentration ratio. After ciphering Co-efficient of fluctuation, Herfindahl index is calculated to cognize the grade of competition. After all these computations H-statistic is calculated. Major focal point of the paper is on this h-statistic. This H-statistic surveies the impact of alterations in cost on the entire gross that bank earns. The Paper fundamentally surveies the informations from 20 six Bankss. Furthermore Panel information is being used in the research that means both the cross-sectional every bit good as the longitudinal information has been used. The dependent variables in the paper are “ Interest income and entire income. Independent variables include L-cost, F-cost and K-cost. L-cost is fundamentally the cost incurred in paying wages and rewards and other periphery benefits to the employees. K-cost is the cost of sedimentations and other adoptions whereas F-cost is cost of capital ” ( Hasan, 2009 ) . The paper concludes that the banking sector of Pakistan sing monopolistic competition and is traveling towards absolutely competitory environment.

Rozas ( 2007 ) assess the market construction of Spanish Bankibg industry i.e to happen out whether the Spanish banking industry is runing in perfect Competition, Monopoly or between these two extremes. Researcher has used P-R attack to get at the decision. The research worker has used panel informations for the past 20 old ages till 2005. Merely the commercial and salvaging Banks are taken for this intent. The dependent variable includes “ NITA which is ratio of net income to entire assets ” ( Gutierrez de Rozas, 2007 ) . On the other manus there are some other independent variables which the research worker has taken. These independent variables are divided into two classs, input variables and Bank specific variables. Input variables comprises of three variables viz. labour monetary value ( PL ) , monetary value of loanable financess ( PLF ) and monetary value of Capital outgos ( PCE ) . Further Bank specific variables include “ EQTA which is defined as Equity to entire assets, LOATA, defined as Loans to entire assets, LFTA, defined as loanable financess to entire assets and LDTLD which is proxied by single market portion to loans and sedimentations ” ( Gutierrez de Rozas, 2007 ) . The panzar and Ross theoretical account uses H-statistic which in this paper is defined as amount of intercepts of input variables. This is besides called snaps of map. In decision the research worker discovery that the banking system in Spain is sing a competition which is consequence of concentration.

Bikker and Haaf ( 2000 ) and aims to happen out the market construction of Banks, their concentration and the relationship between competition and concentration. For this purpose two attacks has been used i.e the structural attack and non-structural attack. The Panzar and Rosse attack has been used to measure the construction. The panel informations from 23 European and non-European states have been taken. The information belongs to twelvemonth 1988 boulder clay 1998. The dependant variable taken is “ INTR, which is the ratio of entire involvement gross to entire balance sheet. The independent variables include AFR- ratio of one-year involvement disbursal to entire financess, PPE-ratio of forces disbursal to entire balance sheet, PCE-ratio of physical capital to fixed assets ” ( Bikker & A ; Haaf, Competition, Concentration and their relationship, 2000 ) .

Claessens and Laeven ( 2003 fundamentally focuses on mensurating the fight among big group of states. Initially the informations from many states was collected which was so narrowed down to merely fifty states. The research workers were chiefly concerned to happen out the factors that makes the differences in Bankss places. For this intent the function of different Bankss from foreign states was analysed. The informations used in the research belongs to 1994 boulder clay 2001. It is of import to observe that in this paper all the Bankss whether that b commercial, Saving, concerted or any other type of Bankss were included. The P-R which stands for Panzar and Rosse attack was followed. The variables used in the article are categorised in twe groups viz. input variables and bank specific control variables. The input variables include monetary value of labour which is proxied by “ ratio of personal disbursal to entire assets ” ( Claessens & A ; Laeven, 2003 ) , Price of loans which is proxied by “ Gross Interest gross to entire assets ” ( Claessens & A ; Laeven, 2003 ) and monetary value of Labor which is proxied by “ runing disbursal to entire assets ” ( Claessens & A ; Laeven, 2003 ) . On the other manus, every bit far as bank control variables are concerned they include “ Y1 which is ratio of equity to entire assets ” ( Claessens & A ; Laeven, 2003 ) , “ Y2 which is ratio of net loans to entire assets ” ( Claessens & A ; Laeven, 2003 ) and “ Y3 which is log of entire assets ” ( Claessens & A ; Laeven, 2003 ) . H-Statistic which is the entire amount of snaps of Bank ‘s Gross with regard to the bank ‘s input monetary values, ranges between 0 and 1 for about all the Bankss which shows that Bankss are runing in monopolistic competition. The paper concludes that Bankss competition is strongly related with concentration and contestibility determines the competition for the Bankss.

Chun ( 2004 ) assess the market construction of banking industry of Korea. For this purpose two attacks was used. First Herfindahl index was calculated. The information set consists of informations from twelvemonth 1994 to 2001. The same was done utilizing Pansar and Rosse attack. Basically the chief ground behind utilizing this attack was that the research worker wishes to cognize under what construction the Bankss are gaining their grosss. The dependant variables which were chosen by the research worker includes “ TREV, TREVIN and ROA ” ( Chun, 2004 ) . These variables are proxied by “ entire gross to entire assets, entire involvement gross to entire assets and net net incomes to entire assets severally ” ( Chun, 2004 ) . Further independent variables include three input variables and two bank specific variables. The input variables include “ monetary value of Labor, Price of capital and Price of financess ” ( Chun, 2004 ) which are proxied by “ personal disbursals to employees, Capital disbursals to fixed assets and capital disbursals to fixed assets severally ” ( Chun, 2004 ) . Other bank specific variables include “ RISKASS which is Provisions to entire assets and BR which is no. of subdivisions of each bank to entire figure of subdivisions for all the Bankss ” ( Chun, 2004 ) . The research worker has used two attacks in this paper. First the H-statistic is calculated by utilizing twelvemonth wise informations of all the Bankss i.e the H-statistic is calculated by running the arrested development of all the Bankss for one twelvemonth and so on. The 2nd attack which is used is by taking informations of three old ages at the same clip. Both the consequences were so analyzed separately. The H-statistics scopes between 0 and 1 on the footing of which the paper concludes that the Bankss in Korean banking industry earn their grosss in a monopolistic competition.

Duncan and Langrin ( 2004 ) focuses on the market construction of banking sector of Jamaica. The chief purpose is to happen out under what conditions the Bankss are gaining their grosss. For this purpose two methodological analysiss have been adopted viz. Herfindahl Index which helps in analysing the concentration and Panzar and Rosse theoretical account which gives the empirical analysis to get at the decision. This attack fundamentally uses the H-Statistic which is the amount of snaps of gross map, to give an estimated value. This estimated value is so used to make the existent value by utilizing F trial. The informations used for the research is quarterly panel from 1989 to 2002. Furthermore 13 Bankss were taken “ The PR theoretical account was fundamentally used to prove the market construction of industry for competitiveness whereas Herfindahl index tells the amount of all the Banks ‘ squared market portions where market portion may be based on either sedimentations or assets. A quarterly HHI was calculated for both sedimentations and assets over the period of 1989 to 2002 ” ( Duncan & A ; Langrin, 2004 ) . The dependant variable taken in the income earned from involvement which is dependent on many factors. These include the monetary value of capital, monetary value of Labor, monetary value of sedimentations, and some other control variables which include “ LK ( loan to capital ) , LA ( loans to assets ) , DL ( sedimentations to loans ) , KA ( Capital to assets ) , LNA ( non executing loans to assets ) and LQA ( liquid financess to assets ) ratios ” ( Duncan & A ; Langrin, 2004 ) . The three variables viz. Price of Capital, Labor and sedimentation are called input variables, amount of whose intercepts gives the estimated value of H-Statistic. The remainder of independent variables are called the bank specific control variables. The consequences from both the methodological analysiss were different. HHI index concludes that the banking industry has decline in competition due to the amalgamations of four Bankss in late 90s. on the other manus Panzar and Rosse attack concludes that the banking sector of Jamaica is gaining their grosss in a monopolistic competition environment.

Bikker and Groeneveld ( 1998 ) focal point on concentration every bit good as on the construction of banking industry in which the Bankss are runing. The paper fundamentally analyzes the construction of all the Bankss of EU as a whole and at the same clip all the stairss are repeated for single Bankss individually for all the states. In this manner the sum of 892 Bankss were taken from 1989 boulder clay 1996 i.e. five old ages information has been taken. The Panzar and Rosse theoretical account is followed in order to get at the decision. The dependant variable taken is “ INTR which is entire involvement gross to entire balance sheet ” ( Bikker & A ; Groeneveld, Competition and Concentration in EU banking Industry, 1998 ) . The other factors or variables that influence the dependant variables include “ INTE which is proxied by involvement disbursal to entire financess, PE, proxied by ratio of personal disbursals to entire assets and CE which is proxied by Ratio of capital and other disbursal to number fixed assets ” ( Bikker & A ; Groeneveld, Competition and Concentration in EU banking Industry, 1998 ) . H-statistic which is the amount of all the intercepts of input variables comes out to be runing between 0 and 1. Therefore harmonizing to the definition of hypothesis it is a monopolistic competition. But this is the estimated value which is yet to be confirmed via the F-test. After making all the needed tests the paper concludes that the banking industry of EU states has a monopolistic competition.

Draicos and Konstantinou ( 2005 ) to happen out the market construction of Passage states because they need particular attending towards construction. The paper uses informations of different economies/countries from twelvemonth 1992 to 2002. There are entire of 218 Bankss that has been taken for analysis. These Bankss belong to different states whose economic systems have been through passage phase. These chiefly include Poland, Hungary, Czech Republic, Latvia and many more. The methodological analysis that has been used is really similar to those used by others i.e. Panzar and Rosse theoretical account is used for the analysis. The dependant variable used in the survey includes Gross gross and Return on assets which are dependent on certain independent variables which includes Leverage, net involvement border, entire assets and operating disbursals. H-Statistic is foremost calculated from reduced signifier equation. This gives the estimated value which so was further deliberate utilizing F-test. The consequences shows that the value of H lies within the scope of nothing and one which means that the construction is monopolistic. Thus the research worker concluded that the market construction of banking industries of those economic systems which have been through the passage stage earn their gross in a monopolistic environment.

Hempell ( 2002 ) aims to happen out the construction of Bankss in Germany. The research worker fundamentally has used two different methodological analysiss. The Bankss that were taken for analysis include Salvaging Banks, Co-operative Banks and Credit Banks. The information that has been used belong to twelvemonth 1993 boulder clay 1998 i.e. five twelvemonth informations. The two methodological analysiss that have been used in the paper are Herfindahl index and Panzar and Rosse attack. Herfandahl index is calculated utilizing sedimentations, Loans and Securitized loans individually. Further the panzer and rosse attack is used to measure the market construction of these Bankss. The of import point in the paper is that the research worker has individually calculated the H-statistic for all the three classs of Banks discussed before. The dependant variable that were used for the analysis include “ IINC which is involvement income from loans and money market minutess and from fixed involvement, securities unsecured bonds, TINC1Dinterest income, current income from portions and other variable output securities committee income ” ( Hempell, 2002 ) . The independent variables include some factor monetary values for illustration “ labour cost, funding cost, capital cost and other cost. These are proxied by ratio of one-year forces disbursals to entire assets, ratio of involvement disbursals to sum of sedimentations and other liabilities, ratio of capital disbursals ( depreciation, write-down on intangible and touchable assets ) and fixed assets and ratio of other non-interest disbursals to entire assets severally ” ( Hempell, 2002 ) . In add-on to these there are some other variables called bank specific variables. These include “ OItTA- ratio of other income to the entire balance sheet, EtTA- ratio of equity to entire assets, TLtTA- ratio of entire loans to entire assets, LtTL- ratio of client loans to entire loans, LtTA- ratio of client loans to entire assets, CLtTL- ratio of commercial loans to entire loans, IDtTD- ratio of interbank sedimentations to entire sedimentations and TDtTDMM- ratio of sedimentations to sedimentations plus money market liabilities ” ( Hempell, 2002 ) . The H-statistic was calculated individually for all the Bankss in one group and so after making the F-test the paper concluded that recognition Bankss are more competitory than the other two Bankss while if comparing is done for salvaging Bankss and concerted Bankss, the salvaging Bankss are more competitory than concerted Bankss.

Spierdijk ( 2009 ) emphasizes that in panzer and rosse theoretical account it is non necessary to take a scaly gross or monetary value equation. The un-scaled equation gives the best consequence. To turn out this point a panel information from 1986 to 2004 for 18000 different Bankss have been taken. The dependant variable taken is entire gross where as some other input variable which include Price of Labor, monetary value of capital and monetary value of support. “ The paper concludes that un-scaled PR theoretical account is one tailed and is inconsistent with any signifier of perfect competition ” ( Bikker, Shaffer, & A ; Spierdijk, 2009 ) .

Herfindahl-Hirchman Index

Herfindahl-Hirchman Index is a widely recognized step of market concentration. By and large the HHI is calculated for Total Assets, Entire Deposits and Entire Advances ( Loans ) etc. of a Banks. In this Paper we have calculated it for all the above mentioned points. To Calculate the HHI, foremost cipher the market portion of the single bank. Then take square of this market portion and amount it up. Finally multiply the amount by 10,000. Mathematically

HHI = *10,000

The value of HHI varies from 0 to 10,000. If it is 10,000 it means that there is merely one bank in the market that has Monopoly power and it will bear down whatever monetary value it want. On the other extreme if the value is really close to zero, it means that the market is really concentrated with big figure of Bankss and all the Bankss will be monetary value takers in this state of affairs. In between these two extremes at that place exists an oligopoly, monopolistic competition and etc. by and large the banking industry all over the universe is considered concentrated with monopolistic sort of a construction.

For our computations of HHI we have taken Total Assets, Entire Advances and Total Deposits for the computation of HHI. The different values of HHI for each twelvemonth utilizing all the three above mentioned points have been calculated.

Herfindahl hirchman Index ( HHI ) for all the three indexs is demoing a worsening tendency ( See Appendix-A ) . On the footing of entire Assets, the HHI for the twelvemonth 2001 was 1572. As the clip passes by its value falls continuously demoing that the concentration among the industry is increasing. In the twelvemonth 2009 this value falls to 927. This clearly shows that the competition among the Bankss is increasing and therefore the industry is heading towards perfect competition.

Similarly, the HHI for progresss and sedimentations is besides demoing the same consequences as that of entire assets. The values for both of these points starts from 1547 & A ; 1635 severally. As the clip base on ballss by both these points show the worsening tendency and in the period of eight old ages falls to 999 & A ; 978 severally. This besides shows that the market construction is heading toward the perfect competition. If we talk about the current values and do our determination on these values, we may reason that soon the Bankss are gaining their grosss under a monopolistic competition.


Research Type and Data

As discussed earlier that knowledge about the market construction is really of import for the Bankss that are runing in the industry. For this intent we have used two attacks in order to cognize what is the current market construction of banking industry of Pakistan. The first attack which is being used is Herfindahl-Hirchman Index ( HHI ) which is a good step of market concentration. The Second attack is besides a widely used and accepted technique to mensurate the market construction of industry. This is known as Panzar & A ; Rosse model. This is known by P-R H Statistic. The chief ground being utilizing two different attacks is the nature and sensitiveness of the subject. The consequences from both the attacks should be same and they should ne’er belie each other.

The research conducted is of Secondary nature. The information taken for both of these attacks is of 26 Bankss. For HHI, a panel information from twelvemonth 2001to 2009 has been used for all the 20 six Bankss. Equally far as P-R attack is concerned, a panel information for the old ages 2001-09 for 26 Bankss has been used. All the information is collected from SBP publications. Some of the Bankss for which information was non available for the whole period or which have posted a really big amount of loss were non included with the position that these will be the outliers which will falsify the analysis.

Panzar and Rosse Model

A Panzar & A ; Rosse technique has been used around the universe for analysing the banking industry. Economists of the World Bank, Asian development Bank, European Banks and many other research industries has used this method for the in-depth analysis of banking industry. They have analyzed the information from many states collected over a big period of clip.

In the Past, there had been a batch of attempts to analyse and gauge the construction of the market by analytical methods. However none of the techniques was found to supply an reply for the job.

In 1986-87, J.N. Rosse and J.C. Panzar developed a appraisal technique to analyse the grade of monopoly power being exercised in a peculiar market. They used house ‘s net income maximizing first order status to set up that the amount of snaps of gross grosss with regard to each input monetary value will be negative in the instance of conniving equilibrium. This amount of snaps will be less than one for the monopolistic competition. A elaborate reappraisal is provided in a paper published by Rosse and Panzar in 1987 in the diary of industrial economic sciences, vol. 35. For this analysis there are some cardinal premises. For the positive value of P-R statistic to be dependable and capable of being interpreted as in the theoretical account, the theoretical account depends on the house ‘s in inquiry of being in long tally equilibrium. The houses have stable costs and gross maps. There are besides some restrictions in the theoretical account of Panzar and Rosse which affects the overall consequences. For illustration, if the bank in the sample have non wholly adjusted to the market status and they are in passage phase in this instance the Bankss will be towards the specious visual aspect of the market power. Another restriction of the trial is that it can non distinguish between competitory pricing and cost-plus pricing because the latter is non specifically associated with the peculiar degree of market power, the deduction for reading P-R statistic are non clear.

The P-R theoretical account is fundamentally based on decreased signifier gross equation as under:

Ln ( Revenue ) =I±o+ I±1 ( LnAPF ) + I±2 ( LnAPK ) + I±3 ( LnAPL ) + I±4 ( LnLTAR ) + I±5 ( LnOITII ) + I±6 ( LnNEAS ) aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦ . ( 1 )


Ln is the natural logarithm

APF is the mean monetary value of financess

APK is the mean monetary value of capital

APL is the mean monetary value of labour

LTAR is the ratio of Loans to assets

OITII is the ratio of other income to involvement income

NEAS is the ratio of ratio of non gaining assets

I± is the coefficients

In the equation 1 the first three variables which include APK, APL and APF are the input variables where as the remainder are bank specific variables. Further from the above equation 1, P-R H Statistic, which is the amount of snaps of house ‘s factor cost, is calculated by adding the coefficients of Input variables as under:

H-Statistic = I±1+ I±2+ I±3

The readings of the values obtained are analyzed harmonizing to the rule below:

Ha‰¤0 Monopoly

H & lt ; 0 & lt ; 1 Monopolistic competition

H=1 Perfect Competition

Below are some of the features of different market constructions which a peculiar Bankss can hold:

Market Structure and Characteristics

Market construction


Entry barrier

Merchandise distinction

No. of entities

Pricing control

Perfect competition






Monopolistic competition

Relatively low

Relatively low




Oligopolistic competition

Relatively high

Relatively high

Yes or no


Certain extent






Large extent

Beginning: Wong Wing Chit ( January, 2004 ) .

Independent Variables




Theoretical Model



NEASDependent Variable









Reference List of Variables under consideration

“ L-cost ( Cost of Labor ) : Wages, allowances and other benefits to employees ” ( Hasan, 2009 )

“ F-cost ( Cost of Funding ) : Interest disbursal to average involvement bearing liabilities ” ( Hasan, 2009 )

“ K-cost ( Cost of Capital ) : Other runing cost to fixed plus ratio ” ( Hasan, 2009 )

“ LTAR: Loans to assets ratio ” ( Hasan, 2009 )

“ OITII: Other income to involvement income ratio ” ( Hasan, 2009 )

“ NEAS: Non-interest gaining assets to entire plus ratio ” ( Hasan, 2009 )

Theoretical Justification

The dependant variable in our theoretical account is the Revenue which is affected by assorted factors which includes three input variables and three bank specific variables. The three input variables include the mean monetary value of labour, mean monetary value of capital and mean monetary value of financess. The gross is affected by mean monetary value of labour in a sense that if the monetary value is increased it will cut down the entire gross. Thus we can state that both have inverse relation. Second the other two variables which include mean monetary value of fund and capital besides have reverse relation with gross. More over if we talk about the bank specific variables these include loan to plus ratio, other income to involvement income ratio and non-earning assets to entire assets ratio. Loan to plus ratio has a direct relation with the grosss because as the entire loans increases the gross is besides increased. Furthermore if we take other income to involvement income ratio, it is besides straight related to the entire grosss. If the income raises it will finally increase the grosss. Thus we can state that both are straight related with each other. In the terminal the relation between noninterest gaining assets to entire assets. This is reciprocally related with the grosss. If this is increased it will cut down the grosss.


Perfect Competition Test: By and large, if the Bankss are working under perfect competition it is most likely to go on that if we change cost by merely a certain per centum say 1 % , it will finally ensue in alteration of same sum in the gross. In our instance it will alter by 1 % . This clearly states that under perfect competition H-Statistic will be equal to one. Frankincense we will prove the undermentioned Hypothesis for this:

Holmium: H=1aˆ¦There is perfect competition among the Bankss

H1: Ha‰ 1aˆ¦There is no perfect competition among the Bankss

Monopoly Trial: Economists argues that if there is merely one house in the market, it will hold a monopoly. For Monopoly we will prove the undermentioned Hypothesis:

Holmium: Ha‰¤0aˆ¦There exists a monopoly in the industry

H1: H & gt ; 0aˆ¦There is no Monopoly in the industry

Monopolistic competition trial: If the Bankss are working in the environment which is defined as monopolistically competitory and we change its cost by say 1 % , it will finally consequences in less than 1 % alteration in its gross. For this we will prove the undermentioned hypothesis:

Holmium: 0 & lt ; H & lt ; 1aˆ¦There exists a monopolistic competition in the banking industry

H1: Ha‰¤0 or Ha‰?1: Banks are non runing in monopolistic competition

Appraisal, Analysis & A ; Consequences

For our analysis, we estimated decreased form equation by utilizing panel informations of Bankss incorporated in Pakistan for the twelvemonth 2001-09. We used both the Bankss input variables and bank specific variables ( See Appendix-B ) in our appraisal.

We used gross as our dependant variable. This is influenced by many other factors which we have discussed earlier. Further we calculated H-Statistic, which is the amount of input snaps of decreased form equation. This value of H is so tested with the aid of F-table and on footing of which the concluding decision will be drawn. While the elaborate consequences of arrested development are given in the Appendix-C along with the P-values for the hypothesis. The full hypothesis is tested at 5 percent degree of significance.

The R-Squared of our arrested development equation comes out to be 89.36 per centum which means that more than 89 per centum of the fluctuation in the dependant variable which in our instance is gross is because of independent variable and remainder is due to other factors which are vague. Furthermore we calculated the H-Statistic by adding the coefficients of input variables of our arrested development equation. This value comes out to be 0.492. This value is merely the estimated value. We will further carry on the Wald trial to get at one of the three hypothesis defined earlier See Appendix-D for inside informations. We foremost test the equation at H=0. The P-value comes out to be 0.013 and F-Stat is 6.247. We compare this F-Stat with our F-Critical which at ( 1, 176 ) DOF is 3.9. As f-stat & gt ; F-critical, therefore we reject H at zero and can reason that at that place does non be any Monopoly in the industry. Further the same process is repeated at H=1 i.e. for perfect competition. Here once more the p-value is really low i.e. 0.010 and F-Stat is 6.62. When we test at ( 1, 176 ) DOF, value of H is once more rejected at 1. Thus we may besides state that there is no perfect competition among the Bankss.

In our analysis we have rejected H at 0 and 1 which clearly proves that the value of H is someplace between zero and one and our estimated value is besides 0.492. Thus we can reason that the Bankss are runing under a monopolistic competition.

Consequences of Parameter Tests of Significance







C ( 1 )



C ( 2 )



C ( 3 )



C ( 4 )



C ( 5 )



C ( 6 )



C ( 7 )



We have calculated value of t-critical from t-table. This is equal to1.64. In the above tabular array degree Celsius ( 1 ) is the changeless, degree Celsius ( 2 ) is the L-Cost, degree Celsius ( 3 ) is the F-Cost, degree Celsius ( 4 ) is the K-Cost, degree Celsius ( 5 ) is the LTAR, degree Celsius ( 6 ) is OITII and degree Celsius ( 7 ) is NEAS. To mensurate the significance of variables we have compare the t-stat with our value of t-critical. The variable has important consequence if t-stat & gt ; t-critical. In the above tabular array all the variables except the last two which are OITII and NEAS, have the important consequence in the arrested development equation.

Restrictions of the Study

Although the subject was really wide and need tonss of resources, clip and other things for the completion of this undertaking. The lone restriction I found in this undertaking was the clip. The clip span was excessively short.


The banking sector of Pakistan has a great potency of growing. The paper fundamentally emphasized on the market construction of consumer banking industry of Pakistan. The panel informations for entire sample of 26 Bankss have been used to get at the consequences. HHI and Panzar and Rosse theoretical account has been used. The HHI really gives the tendency and the consequences from HHI shows that the market construction is heading towards competition. The P-R attack besides gave the similar consequences. The H-statistic shows concludes that the Banks are gaining their grosss in a monopolistic competition sort of a construction.