Merger and acquisitions in the banking sector of Ethiopia seems a new path to be followed by the government with the basic aim of ensuring a robust banking and financial system. In addition, it's expected that merger between local banks could enable to enhance the competitive position of banks when the foreign banks are allowed to operate in the country. but dues merger could guarantee the strength of a financial system?
Bank mergers have their advantages and disadvantages. Larger banks may operate more efficiently (economies of scale) and may therefore supply their services at lower cost. Also, a merged bank can be less risky (if the merging banks have sufficiently different risk exposure).
On the negative side, larger banks may have market power which they can exploit by charging higher spreads and higher fees. There is also the "too-big-to-fail" problem - a large bank in trouble may have to be bailed out by the government because a default of the bank has severe adverse consequences for the real economy.
All in all, there is no simple "yes or no" answer to your question, and I do not know enough about your country to weight the arguments appropriately.
Dear Mr. Boru,
I agree with Professor Theissen. Whether consolidation (e.g. mergers) in banking sector contributes to robustness of overall financial system depends upon many other factors, such as concentration, competitiveness, regulation (especially) as well as specifics of the financial system. For example, as far as B&H banking sector is concerned I found evidence of a linear link between concentration and competitiveness, but it cannot be strictly interpreted by the rule „higher/lower concentration results in higher/lower competitiveness“, because the effects are different in various markets...
Kind regards,
Emira.
Mergers in Banking sector are also done due to capital requirements. As banks with low capital will not be able to work in certain countries they have to merge to meet the requirement. The capital requirements are set but the regulatory body of banks, usually the central bank of the country. Usually the capital requirement is imposed to make the financial system stronger and let the banks to save from the bankruptcy. So yes in this sense mergers in banking sector may make the financial system stronger.
- Badges
- Science topic
- Similar topics
- Biological Science
- Bioecology
- Systems Ecology
- Landscape Ecology
- Connectivity