Foreign banks, profits, market power and efficiency in PICs: some evidence from Fiji

Abstract

Studies on bank profitability vis-à-vis market power and efficiency span a number of years, many countries, regions and methods. Yet, the experiences of the Pacific’s small states – where foreign banks are widespread and bank profits relatively high – remain unknown, leaving policy-makers ill-informed regarding relevant policy development. This study fills a huge gap in literature by providing some evidence on the issue in a Pacific Island context. Two market power hypotheses – the structure-conduct-performance (SCP) and the relative market power (RMP) hypotheses together with two measures of the efficient structure (ES) hypothesis – X and scale efficiencies are estimated. The nonparametric data envelopment analysis (DEA) technique is used to estimate efficiency scores for banks in Fiji over the period 2000 to 2010 and the dynamic GMM to estimate the relationships between market power and efficiency vis-à-vis profitability. Results show that the RMP and ES hypotheses might hold, but not the SCP. Profits appear to persist over time. Policy implications are considerable including that any suggestions to limit further mergers and acquisitions of banks in the region may have to be properly debated.