Examining the Status and Relationship between Market Competition, Foreign Bank Entry, and Profitability in Pakistan’s Banking Sector

https://doi.org/10.5281/zenodo.20028009

Abstract

This research study investigates competitive conditions, effect of foreign banks penetration on competition and the impact of competition on profitability within banking sector of Pakistan.  A sample of 29 commercial banks was analyzed over the period from 2010 to 2024. Competition was assessed using structural and non-structural measures. The banking sector is characterized by the monopolistic competition. The entrance of foreign banks is associated with a decline in competition within the banking sector. However, the analysis also indicates that heightened competition positively impacts bank profitability, supporting the Efficiency Structure Hypothesis. The study highlights the need for policies to foster competition, particularly in Islamic banking, to promote innovation, reduce financial costs, and enhance economic growth. The findings suggest that while both types of banks  benefit from competition, the high concentration in Islamic banks poses potential risks to financial stability, calling for a more competitive and diversified market.