Solomon Woldegiorgis Sahile

The study used the best and widely used performance indicators; Return on Asset (ROA), Return on Equity (ROE) and Net Interest Margin (NIM) as a proxy of performance of commercial banks. Market concentration and market share are the two main explanatory variables used in explaining market structure. Market concentration was measured by concentration ratio using the four largest banks (CR4) and HHI (Herfindahl-Hirschman Index) on the basis of total assets of commercial banks while market share was computed based on bank’s total deposit and defined as bank’s deposit to total deposits of all commercial banks operating in Kenya.  Furthermore, four bank specific variables explained by loan loss provision ratio, capital ratio, total deposit, operating expense ratio and one macro economic factor represented by GDP growth were used in the study as control variables. The market structure- performance relationship was analyzed using appropriate panel data regression techniques and fixed effect estimation method. The findings of the study depicted that market concentration ratio has a negative relationship and not significantly impacted on performance of commercial banks when market share is not controlled but positively related when market share in the regression is controlled. This shows mixed results and indicates no strong evidence to support the SCP hypothesis for Kenyan banking sector. By contrast, market share was found to have positive and statistically significant coefficient that validates the RMP hypothesis indicating only large banks with some brand identification are influencing pricing and raise profits in Kenyan banking sector. The findings of the study are therefore beneficial for regulatory authorities, bank officials and researches to fix prices of credits-related products, to enhance competitiveness of Kenyan banking industry and to undertake further research in the area.