Competitive Conditions of the Tunisian Banking Industry: An Application of the Panzar-Rosse Model

Competitive Conditions of the Tunisian Banking Industry:An Application of the Panzar–Rosse Model

Ines Ben Abdelkader and Faysal Mansouri�

Abstract: This study employs the Panzar–Rosse H‐statistic to assess the competitive conditions of the Tunisian bankingindustry over the period 1999 to 2003. The results show that the banking market is in long‐run equilibrium and the Panzar–RosseH‐statistic indicates that the Tunisian banking market is operating under conditions of monopoly. It seems therefore that theliberalization process and the reforms implemented since 1987 to the banking sector could not compensate, for the period understudy, the existence of market power in this sector.

1. Introduction

In the development phasemarked by economic openness and globalization, financial systems have beenmarked inmost countriesby an accelerated process of liberalization and financial deregulation. New technologies, innovations and reforms have generateda deep transformation of financial balances. In this context, the evolution of banking and financial system in general has led to apronounced trend movement of concentration and diversification. The traditional idea is that the concentration of the bankingsystem is negatively associated with competitiveness. However, with the globalization of markets and the intensification ofcompetition, the formation of large companies could be a matter of survival, on one condition that markets are contestable. Themain measure of efficiency today is market contestability. The theory of contestable markets appeared in a revival of economicand political liberalism. The basic idea of this theory is that competition is governed by the conditions of entry and exit from themarket rather than by the number of the firms in place. The objective of this work is to assess the contestability of bankingmarkets.We will focus particularly on the contestability of the Tunisian banking sector. We will try to investigate the effects of recentchanges due to movements of liberalization, deregulation andmodernization in the competitive structure of Tunisian banks and totest for evidence of contestability of this sector.

This paper is structured as follows: the second section briefly presents the theory of contestable markets. The third sectionreviews the principal changes experienced by the Tunisian banking sector. Section 4 presents the Panzar–Rosse model andprovides an overview of the empirical literature in the subject. Section 5 discusses the methodology and data issues. Finally,Section 6 presents and discusses the results of the estimated model and draws conclusions emanating from the findings.

2. The Theory of Contestable Markets

The theory of contestable markets emerged in the late 1970s and is due to three principal authors: Baumol, Panzar and Willig. Intheir book Contestable Markets and the Theory of Industry Structure (1982), they have tried to highlight their ideas on theapproach of the Chicago school of industrial organization. This theory helped to renew the field of industrial economics and has amajor impact on the conduct of competition policies and state intervention in the activities of natural monopoly. The theory ofcontestable markets has been put forward as a framework which can be applicable to a wide range of industrial markets, providinga ‘unifying framework’ for industrial organization (Baumol et al., 1982).

�Ines Ben Abdelkader, PhD student in Accounting and Financial Methods, University of Sousse, Tunisia. Professor Faysal Mansouri, Department ofEconomics and Quantitative Methods, Institut des Hautes Etudes Commerciales de Sousse, University of Sousse, Tunisia; e‐mail: [email protected]

African Development Review, Vol. 25, No. 4, 2013, 526–536

© 2014 The Authors. African Development Review © 2014 African Development Bank. Published by Blackwell Publishing Ltd,9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. 526

2.1 Presentation of the Theory of Contestable Markets

A contestable market is ‘one into which entry is absolutely free, and exit is absolutely costless’ (Baumol et al., 1982). Costless exitis one way to guarantee freedom of entry. Baumol et al. use ‘freedom of entry’ in Stigler’s sense, it means that entrants (firms whoattempt to enter the market) suffer no disadvantages in terms of production technique or production quality, access to distributionnetworks, etc. The contestability of a market requires that there be no cost discrimination against entrants. The exit is free orcostless, which means that in a contestable market a company can stop its activity and leave the market without incurring highsunk costs. It is the case if all capital is saleable or reusable without other loss than those corresponding to normal user cost anddepreciation. In these conditions any risk of entry is eliminated.

The meeting of these two conditions guaranties that no company, regardless of its size, can ensure profits above the normal rate. Amarket is perfectly contestable if entry is unrestricted and exit is absolutely costless (assuming perfect mobility of production factors).

Perfect competitive structure implies the presence of a large number of similar‐size producers; while, for the theory ofcontestable markets, if entry is free and exit is costless then production is efficient even if the industry is highly concentrated. It isthe threat of potential competition caused by the ease of entry into the market and exit that guarantees that the market can possessthese attractive characteristics.

The authors advanced that under conditions of freedom of entry and exit, the threat of entry (potential competition) guaranteesthat, whatever the number of suppliers in place, they will apply an efficient price because of the threat of new competitors(Dietsch, 1993). In other words, under pressure from potential competitors, a perfectly contestable market reaches stability andequilibrium regardless of its structure — monopoly, oligopoly, duopoly — as long as the market outcome is sustainable. Thistheory asserts that in the presence of barriers to entry, potential competition will not influence the behaviour of established firmsand therefore these firms should be subject to incentive regulation, to avoid abusive monopoly behaviour. In contrast, when entryis free and exit is costless, potential competition is sufficient to regulate the industry and will replace the regulator.

2.2 Towards the Contestability of Banking Markets

Several studies focused on the contestability of banking markets or financial markets in general; we will try to present and drawthereafter, conclusions on the determinants of the contestability of these markets.

Claessens and Laeven (2004) have attempted to identify in their work the determinants of the contestability of banking marketsby using a sample of 50 countries’ banking systems. They concluded that contestability was positively related to the existence offoreign banks and fewer entry and activity restrictions. They also found that contestability was positively correlated to theconcentration and negatively correlated to the number of banks in the market. Other authors have concluded, however, that thenumber of banks and the degree of concentration are not the only indicators of contestability; other factors play an important role,including the existence of regulations that promote competition, a well‐developed financial system, the effect of the presence ofbranch networks, as well as the impact of technological innovations (Northcott, 2004).

One of the main difficulties in evaluating the contestability of banking market is in highlighting the existence of sunk costs onthese markets, although some authors confirmed the existence of such costs, particularly in the activities of traditionalintermediation, their significance is still undetermined.

Regarding the competitive characteristics of financial markets, De Boissieu (1988) pointed out that for these markets thecondition of free entry is now widely performed and several non‐financial firms are able to penetrate with costs below those oflocal banks. However, the issue of exit costs is still largely unknown due to lack of appropriate measures. He noted, however, thatthese costs without ever being zero are generally low enough to restrain the entry of potential competitors.

In line with De Boissieu (1988), Metais (1990) noted that, due to deregulation and new technological conditions of production,a growing number of branches of the financial market can be considered as contestable markets or close to this situation. Hestressed, however, that contestability is rarely perfect.

3. The Evolution of the Tunisian Banking Sector

In recent years, the Tunisian banking sector and the financial system in general have experienced several changes as a result ofmovement of deregulation, liberalization and restructuring that have worked in the sense of weakening the barriers to entry and anintensification of competition.

Competitive Conditions of the Tunisian Banking Industry 527

© 2014 The Authors. African Development Review © 2014 African Development Bank

We should note, first, that like most emerging financial systems, the Tunisian financial system is a bank‐based system. Beingthat, banks have a basic function to attract savings, ensuring the allocation of new capital or restructuring existing capital and evencontrolling the management companies (Steinherr and Huveneers, 1993). For this reason, the banking sector is expected to bemore competitive in both national and international levels. In this context, a plan of modernization of the Tunisian banking sectorhas been started since 1987. This plan aims at:

� the restructuring of the banking system;� modernization of payments and the introduction of new financing instruments;� strengthening the security of banking;� improving the quality of bank loans and their repayment;� the improvement of the quality of the staff and management of human resources.

Before the reforms of 1987, the Tunisian financial system was characterized by financial repression that occurred through thecontrol of interest rates, sector allocation of credit and direct regulation of the quantity of money.

Until the late 1980s, the financial system experienced an administrative management. Banks had many constraints due to therestrictions imposed on them. Given that, their flexibility was very limited. Their methods of management, the products they wereallowed to offer, conditions of their marketing, interest rates, their ability to grant loans, the banking policy and competition rules,all defined by the Central Bank of Tunisia (CBT) and the Ministry of Finance. The Tunisian banking sector was highly regulatedand characterized by the absence of competition. From 1987, reform of the financial market has come to ease the bankinglegislation.

From the late 1980s, major reforms have been implemented to improve the ability of the financial system to mobilize savingsand to finance productive investment. The main measures consist in the removal of credit controls and the establishment of a newpolicy of refinancing through including the liberalization of interest rates. The financial liberalization, undertaken since 1987 andreinforced in the mid 1990s, focused on domestic financial liberalization of the banking sector, the consolidation andstrengthening of the framework for prudential management.

These newmeasures were introduced specifically to ensure the stability of the banking system. The objectives of suchmeasureswere to increase the efficiency of banks and enhance competition among Tunisian banks. These reforms implemented from 1987are articulated around the following five pillars:

1. Allowing commercial banks to make their own credit allocation decisions and set their own interest rates.2. Promoting the equity market and introducing new indirect monetary policy instruments.3. Moving to more market‐based government financing.4. Opening the financial sector to foreign financial institutions.5. Strengthening prudential regulations and banking supervision.

3.1 The Integration of Tunisia into the Global Sphere

The ongoing globalization of the international economy, and as part of it the gradual deregulation and liberalization of financialservices, have created new market realities. The integration of Tunisia into the global sphere was effected by:

� The adoption by Tunisia in 1986 of the structural adjustment plan of the World Bank. The objectives were to reduce the roleof the state (privatization of public firms and reducing the tax burden) to control the domestic demands (reducing publicinvestment, restructuring of loans and raising interest rates) and to promote exportation.

� Accession to theWorld Trade Organization (WTO) and the adhesion to the Euro‐Mediterranean partnership agreement withthe European Union in July 1995. This agreement aims at liberalizing trade, increasing financial and technical cooperation ina number of sectors and accelerating the integration of Tunisia in the global sphere of benefit.

3.2 Financial Liberalization

Liberalization of the financial sector was part of a more general structural adjustment plan aimed at establishing a market‐basedand private‐sector‐driven economy that was partly prescribed by the International Monetary Fund.


528 I. Ben Abdelkader and F. Mansouri

3.3 Restructuring of the Banking Sector

Restructuring of the commercial banking system began in 1987, and was intended to enhance competition among Tunisian banksand to allow them to become more responsible and capable of making their own credit decisions (Moore, 1991). Reforms wereintended to mobilize savings and lead to a more efficient allocation of resources.

It is therefore of utmost interest to investigate how Tunisian banking competition was influenced by these changes. One of themost popular methods used to assess competition in the banking industry is the model of Panzar and Rosse (PR). Seminal articlesby Rosse and Panzar (1977) and Panzar and Rosse (1982, 1987) provide an excellent framework for assessing degrees ofcompetition in the banking industry.

4. The Panzar–Rosse Model

The PR model has been widely applied in empirical banking studies. This approach, which measures the market power ofincumbent firms, is based on the idea that firms will employ different pricing policies in response to changes in production factorprices, in a way that depends on whether the firm is operating in a competitive market or it enjoys some monopoly power(Shaffer, 1994). The model estimates a reduced‐form equation relating gross revenue to a vector of input prices and other controlvariables.

The H‐statistic measures percentage change in the income balance caused by variations of input prices. Panzar and Rosse(1987) showed that the H‐statistic can be used to deduce the competitive structure of an industry. They verify the existence of apositive relationship between this statistic and the competitive behaviour of a sector.

The application of the PR model implies the adoption of the intermediation approach in the description of banking output.According to this approach, financial institutions collect deposits to transform them into loans by the means of labour and capitalin order to make profit. Deposits are considered as an input next to capital and labour. This approach treats the dollar value ofaccounts as outputs and production costs include both operating and interest costs. The role of a financial institution can bedescribed using two approaches: the intermediation and the production approach. For the production approach, which hasdominated the literature until the 1980s, financial institutions use resources, including capital and labour, in order to conductfinancial transactions (collection of deposits and lending etc.). Deposits and loans are considered, according to this secondapproach, as outputs. The main criticism of this definition is that it ignores the specific function of financial intermediation,collection and redistribution of capital and the fact that it implicitly considers that the management of the assets of the bank isindependent of the management liabilities.

4.1 Literature Review

To assess the contestability of a given market, previous studies used the test competition proposed by Panzar and Rosse (1987)and their ‘H’ statistic. Vesala (1995), De Bandt and Davies (2000) and others showed that the estimated H‐statistic can be anindicator of the contestability of markets with a constant price elasticity.

The PR model has been used extensively to analyse the nature of competition in banking systems developed initially in NorthAmerica (Shaffer, 1982) for the US market and Nathan and Neave (1989) for the Canadian market), then in several Europeancountries (Molyneux et al., 1994; Boutillier et al., 2004) and Japan(Tsutsui et al., 2005).

Only more recently, the PR model has been used to analyse the nature of competition of emerging markets. Actually, thereare a growing number of studies investigating the competitive structure of the African banking sector (among others,Claessens and Laeven, 2004; Buchs and Mathisen, 2005; Hauner and Pieris, 2008; Mwega, 2011; Biekpe, 2011; and Mlamboand Ncube, 2011). Most of these studies used the PR model combined with a diversity of traditional measures ofconcentrations.

Very few published works discussed the case of Arab countries, with the exception of the works of Al‐Muharrami et al.(2006), Turk‐Ariss (2009) and Poshakwale and Qian (2011). There have been no studies, to our knowledge, that haveinvestigated the degree of competition in Tunisian financial industries. Without loss of generality, Table 1 summarizes the mainresults of previous studies that have examined the competitive structure of the banking industry in a variety of countries using thePR model.



4.2 Measuring Competitive Conditions Using the Panzar–Rosse Revenue Test

The PR revenue test is usually implemented through the estimation of the following revenue equation, using firm‐level panel data.The Panzar and Rosse revenue test is based on a reduced form equation relating gross revenues to a vector of input prices and otherfirm specific control variables.

The empirical reduced form equation of the PR model is defined as follows:

lnTRit¼aþXJ

j¼1aj lnF

jit þ

XK

k¼1bk lnS

kit þ

XL

l¼1g l lnE

lit þ eit ð1Þ

eit ¼ mi þ vit

Table 1: Panzar–Rosse model results in other studies

Authors Countries Period Results

Shaffer (1982) New York 1979 Monopolistic competitionNathan and Neave (1989) Canada 1982–1984 Monopolistic competitionLloyd‐William et al. (1991) Japan 1986–1988 MonopolyMolyneux et al. (1994) Germany, Spain, France,

Italy and UK1986–1989 Monopolistic competition in France,

Germany, Spain, UK; monopoly inItaly

Vesala (1995) Finland 1985–1992 Monopolistic competitionCoccorese (1998) Italy 1988–1996 Monopolistic competitionRime (1999) Suiss 1987–1994 Monopolistic competitionDe Bandt and Davis (2000) Germany, France and Italy 1992–1996 Large banks: monopolistic competitions

for all countries Small banks:monopolistic competition in Italy andmonopoly in France and Germany

Bikker and Haaf (2000) 23 industrialized countries 1988–1998 In Global: Monopolistic competitionLarge banks: Monopolisticcompetition Small banks: Monopolyfor Australia and Greece

Bikker and Groeneveld (2000) 15 European countries 1989–1996 Monopolistic competitionBikker and Haaf (2002) 23 OECD countries 1991–1997 Monopolistic competitionGelos and Roldos (2002) Argentina, Brazil, Chile,

Mexico, Czech, Hungary,Poland and Turkey

1994–1999 Monopolistic competition

Hempell (2002) Germany 1993–1998 Monopolistic competitionBoutillier et al. (2003) Germany, Spain, France and Italy 1993–2003 Perfect competitionBuchs and Mathisen (2005) Ghana 1998–2003 Monopolistic competitionAl‐Muharrami et al. (2006) Gulf Cooperation

Council(GCC) countries1993–2002 Kuwait, Saudi Arabia and the UAE:

Perfect competitionBahrain and Qatar: Monopolisticcompetition

Turk‐Ariss (2009) 12 MENA countries 2000–2006 North African countries: MonopolyOther countries: Monopolisticcompetition

Hauner and Pieris (2011) Uganda 1999–2004 Monopolistic competitionPoshakwale and Qian (2011) Egypt 1992–2007 Monopolistic competitionBiekpe (2011) Ghana 2000–2007 Monopolistic competitionMwega (2011) Kenya 1998–2007 Monopolistic competitionMlambo and Ncube (2011) South Africa 1999–2008 Monopolistic competition

Source: Authors’ elaboration.



where TR is the total revenue (interest and non‐interest income); vector F is composed of prices of various inputs (labour, financialresources, see other inputs such as physical capital); vector S represents the scale variables measuring the operational capacity ofbanks (such as equity or total assets); vector E is the vector of exogenous variables that take into account the specificities of eachconcerned bank; with t¼ 1… T the number of years considered and i¼ 1…N the number of banking entities taken into account.eit ¼ mi þ vit is a composite error term and the mi are the individual effects.

The estimation of the previous expression gives us the degree of competition in a given sector by considering the sum ofelasticities of gross revenue with respect to input prices.The PR H‐statistic is defined by:

H ¼XJ

j¼1aj ð2Þ

The model assumes that (Bikker and Haaf, 2000):

1. the firms are at their long‐run equilibrium;2. the performance of firms is influenced by the actions of other participants (other market participants);3. the cost structure is assumed to be uniform; and4. the price elasticity of demand is greater than unity.

Competition Test

The PR revenue test for competitive conditions in banking is based on empirical observation of the impact on bank level revenueof the variations in factor input prices. The authors noted that we should consider not only the sign of Statistic ‘H’ but also itsvalue. A negative value of the H‐statistic indicates that the structure of the market is a monopoly. H is positive but less than oneunder monopolistic competition and H is equal to one under perfect competition.

Equilibrium Test

The application of the PR model relies upon an assumption that markets are in long‐run equilibrium at each point in time when thedata are observed. Such assumption is not easy to admit; it would be interesting to test it to be able to discuss the results of the H‐statistic in an appropriateway.Molyneux et al. (1994) suggested that to ensure thatfirms operate in their long‐run equilibriumwemustshow that the equilibrium prices of factors of production (inputs) are not correlated with the profitability of firms (Bikker andHaaf, 2002).

Northcott (2004) noted that to assume crucially that the market is in long‐run equilibrium may be reasonable in the case ofdeveloped economies, but it is not a good indicator for economies in transition as it is the case for Tunisia. To perform such a testwe will use the same equation (Equation 1) but the independent variable will be in this case return on assets (ROA) or return onequity (ROE). We should note that in most studies, the variable usually used is ROA. To conduct the equilibrium test, ROAreplaces total revenue as the dependent variable in the reduced‐form revenue equation keeping the same explanatory variables asthe standard PR revenue equation. The argument is that, in free entry equilibrium among homogenous firms, market forces shouldequalize ROA across firms, so that the ROA is independent of input prices (Shaffer, 1982).

Table 2 summarizes the different interpretations of the H‐statistic.

5. Methodology

5.1 Data

Our database comes from annual balance sheets and income statements reports of the Tunisian Professional Association of Banksand Financial Institutions. Themodel is estimated using a panel data set. Our sample includes 18 banks (14 commercial banks and4 development banks) studied over a period of five years from 1999 to 2003.



5.2 Model Specification

Previous studies of market structures have developed different specifications to apply the PR model in the banking industry:Molyneux et al. (1994) and Bikker and Groeneveld (2000) used the ratio of (interest income/total assets) or used the total income(interest and non interest income)/total assets as dependent variable, while Shaffer (1982), Nathan and Neave (1989), De Bandtand Davis (2000) and others have employed the interest income (or total income) as the dependent variable. Vesala (1995) notedthat the latter provided a ‘revenue equation’, while the first specification provided a ‘price equation’. Revenue and price equationswill give different estimates of the H statistic (Vesala, 1995).

We should note that we follow the work of Boutillier et al. (2004) in estimating the reduced function of revenue. Given that, wepropose to develop econometric tests based on the following two specifications.

Competition Test

First specification: The ‘revenue equation’ (model 1)

LnOIit ¼ a0 þ a1LnPLit þ a2LnPFit þ a3LnPKit þ b1LnTAit þ d1LnLOit þ d2LnDEPit ð3Þ

Second specification: ‘price equation’ (model 2)

LnTRit ¼ l0 þ m1LnPLit þ m2LnPFit þ m3LnPKit þ r1LnTAit þ y1LnLOit þ y2LnDEPit ð4Þ

For t¼ 1,… T, where T is the number of period observed and i¼ 1,… I, where I is the total number of banks. The dependentvariable in the first specification is operating income (OI) and the ratio of total revenue to total assets (TR) in the secondspecification. We will use three inputs (funds, labour and capital) to describe the production process of Tunisian banks: PL is theratio of personnel expenses/total number of employees); PF is the ratio of annual interest expenses to total funds and PK is theratio of physical capital expenditure and other expenses to total assets. PL, PF and PK are the unit prices of inputs of the banks.

We will also include in the regression several bank specific control variables to manage for potential differences in cost, size,risk, structure and product mix. Specifically, we will use TA: the logarithm of total assets to control for potential size effects. LO(ratio of total loans to total assets) and DEP (ratio of total deposits to total assets) are structure variables. All variables areexpressed in natural logarithm. Equations 3 and 4 are estimated by running panel data of Tunisian banks.

The PR model is only valid if the market is in long‐run equilibrium, we will also undertake the equilibrium test. FollowingClaessens and Laeven (2004), this test is performed by recalculating the equation after replacing the dependent variable (totalrevenue/total assets) with the natural logarithm of ROA.

Equilibrium Test

LnROAit ¼ n0 þ u1LnPLit þ u2LnPFit þ u3LnPKit þ h1LnTAit þ w1LnLOit þ w2LnDEPit ð5Þ

Table 2: Different interpretations of the ‘H’ statistic

Value of the ‘H’ statistic Competitive conditions in a sector(or competitive environment test)

– H< 0 – Monopoly– 0<H< 1 – Monopolistic competition– H¼ 1 – Perfect competition or natural monopoly in a perfectly contestable marketEquilibrium test– H< 0 – Disequilibrium– H¼ 0 – Equilibrium

Sources: Panzar and Rosse (1987); Shaffer (1982) and Nathan and Neave (1989).



The H‐statistic is defined by the sum of elasticities of the above equations (Equations 3, 4 and 5) with respect to input prices(e.g. for the ‘revenue’ equation, H ¼ a1 þ a2 þ a3). For the variable PL (personnel expenses/total number of employees) manystudies used personnel expenses/total assets (Boutillier et al., 2004; Molyneux et al., 1994; Bikker and Groeneveld, 2000),because of the lack of information about the total number of employees for all the years under study.

6. Estimations and Results

6.1 The Equilibrium Test

We find that the hypothesis of equilibrium (H¼ 0) cannot be rejected at the 95 per cent significance level, which justified theapplied methodology. For more details, Table A1 in the Appendix presents the estimation results of the equilibrium test for theTunisian banking sector throughout the period 1999–2003.

6.2 The Competitive Test

The estimation results of Equations 3 and 4 (revenue and price equation) are reported in Table 3. The estimation results for the twospecifications are different. The coefficients estimates for all variables are not of the samemagnitude but the same sign for the twospecifications.

Both input factor prices PF and PK are positive, meaning that increased factor costs lead to higher revenues; however, thecoefficient of PF is not statistically significant. Only the coefficient of PK and PL are significant in all specifications at 1 per centand 5 per cent respectively. The coefficient of labour cost (PL) is typically negative for model 1 and 2.

The scale variable total assets (TA) is highly significant and has a positive impact only in the first specification indicating thatthe size of the bank is important determinant for operating income. The ratio of deposits to total funds is negative and the loans tototal assets variable is positive in both models.

We are mainly interested in the value and significance of the H‐statistic.For both specifications the value of H is negative, respectively –0.054 and –0.014, the H‐statistic is not significantly different

from 0. The Wald tests for the full model 1 and model 2 indicate that the H‐statistic is significantly different from 0(Prob>Chi2¼ 0.000) with a chi2 of 5531.76 and 34.94 respectively. Hence, our results indicate that, over the period 1999–2003,the Tunisian banking industry is characterized by the existence of monopoly. We concluded, therefore, that there is a non‐competitive structure of the Tunisian banking industry, which limits the contestability of the market. This result is supported by anearlier study of Turk‐Ariss (2009) which found an H‐statistic of –0.897 of the Tunisian banking industry over the period 2000–

Table 3: Estimation results for model 1 and 2

Variables

Model 1 (GLS) Model 2 (GLS)

Coef. Coef.

PL –0.228�� –0.271��

PF 0.053 0.129��

PK 0.121�� 0.127��

TA 0.981�� –0.020LO 0.050� 0.074��

DEP –0.083�� –0.040_cons –0.643�� –0.439

H statistic –0.054 –0.014Wald (chi2) 5531.76 34.94

(0.00) (0.00)Obs. 90(7) 90(7)

�Significant at 10%, ��Significant at 5%, ��Significant at 1%.Source: Authors’ calculations.



2006. Moreover, for all North African countries included in the sample (Tunisia, Algeria and Morocco), the tests of hypothesisfailed to reject a monopolistic environment in the banking industry (Turk‐Ariss, 2009).

By estimating the effect of prices of production factors on net income, one could conclude that movements of liberalization,deregulation andmodernization of the Tunisian banking system could not compensate, for the period under study, the existence ofmarket power. This market power may be related to:

1. A low presence of foreign banks on the Tunisian banking industry.2. The importance of economic barriers and other important sources of market power.3. The banking sector is held by public authorities who cannot tolerate a total liberalization when banking crises serve as a

detonator for economic crises.4. Like other developing countries, Tunisia is characterized by intensive asymmetry of information on the credit market. Given

this asymmetry, Tunisian banks have an incentive to maintain a close and lasting relationship with their customers. This cancreate an advantage for Tunisian banks compared to foreign banks. On the other hand, the majority of Tunisian firms are ofsmall and medium size, the risk for these companies is great to be informationally captured by their banks, because theinformation which the latter have are usually substantially higher than those of other creditors. Investment in such arelationship can create market power for incumbent banks relative to potential competitors.

These factors and others may constitute barriers to market contestability for the Tunisian banking system. Thus, acomprehensive study of barriers to entry and exit within this market (see Table A2 in the Appendix) will be of interest to assess thecontestability of the Tunisian banking sector; such study can allow us to have a better interpretation of the results of the PRmodel.

7. Conclusion

This paper contributes to the existing literature by empirically examining the impact of liberalization and deregulation on thecompetitive conditions of the Tunisian banking industry over the period 1999–2003. The Panzar and Rosse methodology hasbeen used to test the contestability of the Tunisian banking system after these changes. Themodel has allowed us to conclude thereis an overall uncompetitive situation in the Tunisian banking sector over the period under study since the results showed theexistence of monopoly in this market. In the contemporary banking markets, the regulatory barriers have been reduced; however,the endogenous barriers relating to the nature of the production process of banks remain. The application of the theory ofcontestable markets in the Tunisian banking industry would be more interesting if it included all the banks and it was preceded byan exhaustive study of barriers to entry and exit in the sector (Table A2 in the Appendix).

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Appendix

Table A1: Equilibrium test (dependent variable ROA)

Variables Coef. Std‐Err Z P> |z|

PL –1.969091� 1.156330 –1.70 0.089PF 1.298322�� 0.230721 5.63 0.000PK 5.383808 3.299524 1.63 0.130TA 2.482347 2.422293 1.02 0.305LO 0.010269 0.462478 0.02 0.982DEP –0.0374577 0.267366 –0.14 0.889Constant 0.935077 7.050031 0.13 0.894H‐statistic Chi2(1)¼ 2.26u1þ u2þ u3¼ 0 Prob> Chi2¼ 0.1325Wald chi2(6) 66.36

(0.00)Obs 90

�Significant at 10%, ��Significant at 5%, ��Significant at 1%.Source: Authors’ calculations.

Table A2: Barriers to entry by implantation and acquisition in the banking industry

Implantation (new business) Acquisition

Regulatory barriers– Access to the domestic market – Foreign direct investment– Access to local markets – The reglementation of public takeover(OPA/OPE)– The monetary policy – The rights of employees– The banking terms – The rights of shareholders– The internal borders of the financial system – The legal status of firms

– The use of ‘poisoned’ pillsEconomic barriers– Economies of scale – Information transparency– The consumers inertia – Accounting practices– The switching costs – The ownership structure of capital– The asymmetrical differentiation – Specific banking practices– Asymmetric information– Transaction and information costsTechnological barriers Fiscal barriers– Access to electronic distribution networks – Mergers– Technological incompatibility – Holdings

– Capital gains

Source: Muldur (1991); Authors’ translation.



Documents

Competitive Conditions of the Tunisian Banking Industry: An Application of the Panzar-Rosse Model