Competition in the Kyrgyz Banking Industry: Empirical Study Based on Panzar and Rosse Model

Abstract

This study examines level of competition in the Kyrgyz banking industry over the period of 2010-2013. Calculation of concentration measures suggests that five banks in the Kyrgyz banking industry, control on average 55-60% of lending and deposit market. Concentration of lending and deposit market in the hands of few players raises concern about adequacy of competition in the banking industry. However, theory suggest that high concentration ratios does not necessarily imply that markets are not competitive. Therefore, we applied Panzar and Rosse model, which takes market structure as endogenous factor. Using the financial reports, we constructed unbalanced panel data with 86 observations and applied several econometric techniques. After testing our models for robustness, we decided that LSDV and within effect estimation are our preferred models. According to our estimations, the H-statistic is positive and significantly different from zero and unity. Therefore, we conclude that banking market of Kyrgyzstan is monopolistically competitive if average cost is U - shaped and possibly perfectly competitive if we have flat average cost. Even though, we could not identify the type of average cost which prevails in the banking market, the rejection of the null hypothesis that H<0 enables us to strongly reject possibility of monopoly and oligopoly for both types of cost. Therefore, concentration of market share in the hands of few banks does not imply significant market power in the banking market of Kyrgyz Republic.