How best to improve competition in the banking market Essay

How best to improve competition in the banking market - Essay Example This is simply because an increase in competition in the banking industry leads to a decrease in the bank’s soundness. Increased competition among banks will most likely lead to availability of a larger quantity of credit hence increased market power is needed to increase the bank’s incentives thus a higher quality of the pool of applicants. An increased completion in the banking sector has a direct effect on the growth potential and the market structure of other sectors of the economy. This therefore calls for a regulated completion and application of best ways in enhancing this competition. This paper will focus on these best ways of improving competition in the banking market. Discussion The best ways of improving competition in the banking industry is by carrying out structural reforms in the financial sector. This reforms can be carried out with the aim of restructuring distressed banks and also cleaning up non-performing assets in order to restore the viability an d profitability of these banks. This structural reforms would include privatization as well as both fiscal and monetary operations. The competitive conditions in the industry can be increased by removal of restrictions regarding foreign and domestic market entries and also privatization of state-owned banks which leads to increased number of commercial banks operating in the extremely concentrated and inefficient markets. (Beck & Fuchs, 2004) Privatization of the state-owned banks increases competition and efficiency in the banking industry since it leads to an increase in both foreign and domestic participation in the sector. According to a study by Beck, Cull and Jerome (2005), privatized banks performed worse than those banks that are privately owned before privatization but improved significantly after them being privatized. It also increases bank and financial performance significantly after divesture. Therefore, the restructuring of reforms in the banking sector leads to an in crease in the establishment of more banks hence increase in healthy competition. This is promoted by the fact that relaxation of regulations in the sector allows more banks to enter in to the market without any of the set restriction being disabled. (Beck, Cull and Jerome, 2005) Loosening of the entry barriers in to the industry can increase competition in the sector without affecting stability. This can be done by reducing the switching costs, which can be one in many ways. Switching costs are those incurred by consumers when they switch from one financial institution to another. These switching costs can be reduced by taking measure to ensure that consumers have adequate education and information in financial literacy in regard to alternative financial institutions. This will ensure that the consumers have the ability to compare various price offers by different institutions hence promoting willingness for the consumers to switch form one institution to another thus more a competi tive market. (Bikker & Haaf, 2002) These switching costs can also be reduced by developing a switching pack and making the switching steps easier hence reducing the switching burden. This can be done through a self-regulatory code between banks to help customers switch easily hence increase in competition as banks strive to keep their customers. Developing a common financial information sharing platform i.e. modifying the regulations to ensure privacy is maintained and allowing the customer form credit earning