A Literature Review on the Competition in the Banking Sector

Two of the key components in the fight against poverty are availability of financial services and competition. While competition improves markets, enables growth and productivity and also promotes innovation, access to financial services enables the poor people to save, and access other facilities such as insurance and credit giving them a chance too to contribute towards economic growth and even their consumption. Furthermore, with competition, finance becomes cheaper, further increasing accessibility of financial services. Therefore, this proposes a co-relationship between finance and competition in the area of banking. This sector’s research is still in its early stages and there is little co-relation on the same whether a strong one or not. There is no harmony on the cause or on whether competition in the sector of finance is positive or negative for markets. This paper explores the literature connected to this relationship. It proposes that concentration (as a competition gauge amid others) does not necessarily mean that there lack completion in the banking industry and that the banking industry involves that many if not most of the banking sectors indicates a monopolistic competition. Due to the threat of entry into this industry, banks behave in a competitive way and the size of the institution enhances performance rather than impede the competition. However sketchy evidence shows that there exists collusion. The two, worldwide and within South Africa, commissions that deal with competition have efficaciously indicted cartels in the banking industry. This paper concludes that, by raising queries about the approaches and methods used to study competition in the banking industry and whether these methods cover sufficiently vital features of competition in the industry.