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Structure and Performance of Commercial Banks in Pakistan
Arby, M. Farooq State Bank of Pakistan

October 2003

Online at http://mpra.ub.uni-muenchen.de/4983/ MPRA Paper No. 4983, posted 07. November 2007 / 04:21

Structure and Performance of Commercial Banks in Pakistan Muhammad Farooq Arby* State Bank of Pakistan farooq.arby@sbp.org.pk

Abstract

Commercial banks undertake business of risk in an environment of asymmetric information. This is why, the industrial economists who are interested in theory of incomplete information and principal-agent framework have found the banking industry a promising field of research. There are number of studies on the behavior of commercial banks in various countries under structure-conduct-performance paradigm of industrial economics. However, there is hardly one in the context of Pakistan. This study attempted to analyze the structure and performance of commercial banks in Pakistan under the framework of industrial organization.

*

The views expressed in this paper are of the author and these may not be attributed to the State Bank of Pakistan.

Structure and Performance of Commercial Banks in Pakistan

Commercial banks have become a field of rising interest of industrial economists who endeavor in an important branch of industrial economics viz., theory of incomplete information and principal-agent framework. Asymmetry of information in the principalagent problem provides reasons for banks to play a special role to minimize the agency costs between borrowers and lenders (Diamond, 1984). Although capital market also establishes relationships among borrowers and lenders but commercial banks have comparative advantage due to their superior capability to provide debt with inside information, as explained by Fama (1985).

Although there are number of studies on market structure, conduct and performance in the banking sector conducted since 1960s for a number of...