Evaluating Market Power in the Zimbabwean Banking Sector

Abstract

The study evaluates the nature of market structure, and the degree and determinants of market power in the Zimbabwean banking sector during the period 2009-2014. The study employs the Lerner Index approach method to assess the market power of banks. The Lerner Index approach assists in measuring the extent to which a bank has market power to set its price above marginal cost. The study results established that the banking sector operates under monopolistic competition, confirming that banks possess some market power in pricing their products. This is a result of the nature of products sold by the banking sector, which are differentiated but close substitutes. The study found that the market power of banks increased during the period and was derailed by the memorandum of association which was signed between banks and the central bank. The study established that market power is determined by capital adequacy, non-performing loans, liquidity risk, cost income ratio, economic growth, and regulatory interventions. The study recommends that the government should ensure that it puts in place measures that enhance economic growth and should desist from interfering with the operations of market forces.