What Drives Banking Industry Competition in Developing Countries?

A competitive banking industry leads to an efficient allocation of financial resources, consequently increasing investment and economic growth. However, pervasive market inefficiencies and outmoded business practices often deter competition in the banking industry of developing countries. The present study examines the determinants of bank competition in such nations for the period 1995-2014 and compares that with high income countries. Employing both fixed-effects and GMM estimations and using two different measures of bank competition, we find greater diversification, credit risks and economic freedom to promote competition in developing countries while higher capitalization, profitability and cost efficiency increases market power.