[Critical Analysis of Benefits of Competition in Nigerian Banking Industry]

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Critical Analysis of Benefits of Competition in Nigerian Banking Industry

Introduction

The effectiveness of monetary policy depends on the perceived degree of imperfection of financial markets. With market frictions, some borrowers have better access to external funds than others have. According to the credit view, borrowers' financial structure affects monetary transmission. As Bernanke and Gertler (1995, p. 28) describe it, the direct effects of monetary policy on interest rates are amplified by endogenous changes in the external finance premium, which is the difference in cost between funds raised externally and funds generated internally. They explain that frictions in financial markets will cause an external finance premium, and that the size of this premium will be affected by monetary policy. Such imperfection in capital markets is a prerequisite for the credit channel to exist.

The general approach to studying the credit view has concentrated on the effect of monetary policy on the supply of bank credit, and the effect of bank credit on firm behavior and consumer behavior. Much empirical work has been done on these topics. The reader is also referred to some of the papers in this issue. In this paper, however, we examine the existence of the credit view from a different perspective, by considering imperfections in the credit market directly.

We analyze the Nigerian market for consumer credit and try to measure the degree of competition. Although the consumer credit market may not be the most interesting market in terms of volume, it is definitely very interesting to both consumers and monetary authorities. For example, in February 2000 Statistics Netherlands announced that one out of three Nigerian households makes use of consumer credit. Macroeconomic concerns play a role as well. Because of income and wealth effects in consumption and the possible effect of consumer confidence, the situation in the consumer credit market likely affects the business cycle. For monetary authorities the retail banking sector is a focal point of interest. The consumer credit market is like the deposit market characterized by a close bank-customer relationship. In this paper we examine empirically whether banks and finance companies are able to exert market power on the market for revolving consumer credit, concentrating on the case of The Netherlands for the period January 1993-August 1999.

Assessing the degree of competition among banks

Various econometric models exist to test whether or not firms exert market power and to estimate the degree of competition in a market (for examples, see Martin, 1993, chapter 18). Two methods dominate, especially for more recent studies with respect to ...