Bank size and efficiency in Pakistan: Interdependency of market power and economies of scale

Abstract

Purpose: The key objectives of the study are to investigate whether increased bank size is essential for banking efficiency in Pakistan, further, to explore the influence of market power or economies of scale on size–efficiency relationship. Design/Methodology/Approach: The dynamic two-step system GMM approach is applied on bank-level data of a panel set of 31 commercial banks of Pakistan, over the period 2006 to 2022. For robustness, the selected period is further divided into three time spans, 2006–2010, 2011–2019, and 2019–2022, and to explore size-efficiency association among different size categories, the entire data is divided into two groups. Findings: The study reveals two key outcomes. First, size is a c ore variable in describing efficiency movement in Pakistan as a significant positive relationship is evinced between bank size and net interest margin in both groups even in the period of COVID-19. Second, both market power and economies of scale strongly influence size–efficiency relationship. However, the impact of these variables is insignificant for medium and small banks. Further, all bank-specific and macroeconomic variables are significantly allied with banking efficiency. Originality: The study is premiered to examine the bank size–efficiency relationship in the light of market power and economies of scale for the banking sector of Pakistan. The originality of this research is the deep examination of bank size–efficiency relationship with two effectual macroeconomic variables. Research Implications: The core policy implication is that size is a fundamental factor while market power and economies of scale are driving forces of size–efficiency association in Pakistan.