Ind.structure of banking Essay Example | Topics and Well Written Essays - 2000 words

Ind.structure of banking - Essay Example Some of the financial determinants that bring about financial development are the level of improvement with the quality, quantity and efficiency of financial services provided at an intermediary level (Boyd, De Nicolo and Smith, 2004). The discussion as to whether or not degree of cluster or concentration of banks at a given location brings about financial development continues to go on in literature. Very often, the expectation has been that the market structure should influence competition, which in turn should influence the way the banks should engage in the support of local businesses with financial intermediary services, and thus leading to financial development. Some of these arguments in literature are analysed below. In a study by Boyd and De Nicolo (2005), they observed that with increases in the concentration of the banking sector, there is an induced internal competition among the banks due to the existence of a perfect competition among the banks. The perfect competition existing means to the banks that there is no barrier to new entrants. This also means that they must guide their strategies along the need to maintaining their customers, while and fighting the threat of new entrants (Fama, 2010). Consequently, Boyd and De Nicolo (2005) noted that with increased banking sector concentration, banks are forced to lower deposit interest rates and rather increase loan interest rates. Once this happens, banks are likely to get more customers opening accounts and thus contributing to the overall internal growth of the banks. On the outside also, borrowers are said to be likelier to be engage in more risky projects as a way of covering up for the high loan interest rates. This way, there is lowerin g in the overall level of asset portfolio risk (Boyd and De Nicolo, 2005). Using the case of Caribbean banks, Alleyne and Waithe (2009) noticed that the increase in loan interest