1.1.

History of the Banking Industry

Introduction

During the past few decades the banking industry in Sri Lanka has experienced a paradigm shift
as a result of deregulation of financial services sector, development in ICT and globalization of
the industry. There were observable changes in areas such as the scope of banking operations,
number of banks, technologies used and quality of human resources in the industry.

The banking industry as a whole holds approximately 60% of the total financial and it is the
main mediator in the financial services sector in Sri Lanka. Therefore, efficiency and
productivity of the banking industry are vital aspects for the development of the sector. After
nearly 30 years of limited economic policies and financial suppression, the economic policy
reforms package which was introduced in 1977 smooth the way for structural transformation of
the economy. The alteration included some drastic policy changes in relation to deregulation of
the financial services sector, along with other economic reforms. Financial reforms in Sri Lanka
commenced in late 1977 aimed to improve the performance of banks through enhancing
competitiveness and efficiency of the industry. Initial reform measures have allowed some
structural changes in the banking sector by giving greater freedom to the private sector.

The government encouraged new entrants to the market. Those changes were affected to expand
the scope of the banking industry as well as to increase the number of firms in the industry.
Structural changes in the industry aimed to enhance competition anticipating productivity and
efficiency improvements in banks.

Further, a policy dilemma is arisen on how firms in the banking industry might allow competing
effectively in a more liberal banking market for rationalizing market structure in banking
industry. The first one lies in limiting the number of banking units in the market through
encouraging mergers among existing banks. This will help to increase the bank size for perusing
scale of economics. The second strategy is the sharing common facilities such as ATM with
other banks in the industry. On the other hand, the deregulation, the ICT and the globalization
have changed the way of competition in the banking industry. The improved level of competition
has forced banks to be more efficient.

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1.2. Company Profile

After an in depth knowledge in understanding the brief history of Banking and its core
functionalities to the economy a specific bank is selected in order to provide a more detailed
approach on market structures and how it can be segmented. The Bank selected for this purpose
of study is Pan Asia Banking Corporation PLC.
Pan Asia Banking Corporation PLC is a public limited liability company incorporated in Sri
Lanka on 6th March 1995 under the company’s act of No.17 of 1982 and reregistered under the
companies act No.07 of 2007. A licensed commercial bank and listed in the Colombo stock
exchange.
Despite the challenging economic conditions Pan Asia Bank has shown positive signs towards
growth, its major strengths are its Human capital and Liquidity management which in turn have
contributed towards reaching many milestones.
Company’s unique mission is to create the largest satisfied customer base by providing
professional, personalized, secure, quality banking and financial services, using modern
technology and innovative products. With excellent service quality standards and personalized
services to its customers has allowed them to widen the customer portfolio.

Key Highlights
 Record earnings: Gross Income grew by 19% to reach Ts. 3862 Mn and Operating
profit up by 69% to Rs. 874 Mn.
 Strong Balance Sheet : Total Assets grew by 14% to Rs. 21,559 Mn
 Customer Deposits grew by 13% to Rs. 16,329 Mn
 Recognition Award: Ranaviru Harasara project was awarded with a “Merit” from
the Ceylon Chamber of Commerce.
 A year of change with several key changes in personnel, processes and
improvement in controls.

Today Pan Asia’s branch network has widen to 37 online branches and is embarking on an
ambitious branch expansion programme by expanding the services across the country specially
in the North and East and has plans for significant growth for the next two years.

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1.3 Literature Review on Market Structures
Most of the Economists approach at the market structure with the intention of defining and
predicting consumer behavior. It is important to note that market structure does not simply
focuses on market share but instead it looks more towards the nature of competition and the
pricing techniques used.

The Essential features of a market structure are:

 Firms in the Industry - This includes the numbers of players in the domestic market and
the extent to which foreign players dominate the market.
 Market share of large firms it is measured use by the use of market concentration.
 Costs including the potential for firms to exploit economies of scale.
 Degree of vertical integration- it explains the different stages in production and
distribution of a product is under the ownership and control of a single enterprise.
 Product differentiation tends create an impact on the cross-price elasticity of demand
 Buyers in the industry possibility of monopsony power

Customer Turnover Rate i.e. it is the number of customers are whom are ready to switch their
supplier over a time period when market conditions change. The rate of customer turnover is
influenced by the degree of brand or customer loyalty and the impact on persuasive advertising
and marketing.

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Market Structures in a Nutshell

Monopoly

 Natural Monopolies
 25% Market Share
 Control over market share or output
 Price Discrimination
 High Barriers to entry
 Consumer Choice is minimal
 Abnormal Profits

Oligopoly

 Competition among the few

 Concentration Ratio
 Kinked Demand Curve
 Price Stability
 Product Differentiation
 Collusion
 Abnormal Profits
 Interdependence between firms

Monopolistic Competition

 Many buyers and sellers

 Differentiated products
 Relatively free and entry and exist
 Some control over price
 Tiny monopoly over the product

Perfect Competition

 Many buyers and sellers (in large numbers)

 Freedom of entry and exit
 Homogenous product
 Perfect information
 Sellers price takers
 Long run normal profits

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1.4 Critical Analysis on the Market Structure for Pan Asia Bank

Today competition within the industry is intensifying banks are faced with tougher challenges
both externally and internally. Innovation plays a key role in overcoming hard hit challenges;
banks are on a role in providing value addition to the products they deliver and constant
improvements to the service quality standards. In a practical sense it is a challenging task to
identify or classify bank’s under one market structure. However in general terms it does fall
under a Monopolistic Competition. Where there are few firms operating but lesser than perfect
competition.

Banks differentiate their products as mentioned above in order to survive in the market and
mostly the core banking functions are similar in respect to other market players only by means of
branding or name a change creates the edge. Since services of banks are close substitutes it is
how well banks promote themselves truly matter.

E.g. Launch of Ranaviru Harasara by Pan Asia was an instant success as they were the
pioneers in doing so.

Sampath Bank was the pioneers in introducing ATM machines in Sri Lanka.

An important quality that differentiates a Monopolistic competition from the rest is that the price
since a price increase will not mean a loss in customers where as a reduction in price would not
necessarily mean customers would shift overnight. This simply means that customer and brand
loyalty plays a crucial role in such markets. Value added services and excellent customer service
would certainly provide an advantage in retaining the customer base.

E.g. Nations Trust Bank opens up its extended banking hours in Jaffna.

High spending on promotions and advertising tends to increase market share, the primary
objective being not only for Pan Asia even for the rest of the players in the industry is building a
satisfactory market share.

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Pan Asia Bank is now offering Rs. 30,000/- for 24 carat gold such promotional offers are opened
up at Pan Asia to expand its customer base.
A suitable diagram is shown below highlighting the theory behind a monopolistic firm and how
it is made applicable to a banking industry.

Monopolistic Competition in the Long‐run

With reference to the above diagram it can be noted that in a Monopolistic Situation the demand
curve tends to be normal one as what the theory says that an increase in price would result in the
Quantity demanded to fall and vice versa.

In order to differentiate between the short-run, long-run in a monopolistic competition there

is a potential of new firms entering the market in the long-run, such a situation will arise
only if the existing firms enjoy positive profits in the short run. Identifying the opportunities
opened up in the market new firms tend to enter the market in the long run.

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With reference to the above diagram an increase the entry of new firms will increase the
supply which will result the demand curve to shit to the left this situation would come to
stand still when it reaches to a point where it tangents to the average cost curve at the profit
maximizing point as mentioned in the diagram above at this situation the firms’ profits are
said to be zero this would not motivate new firms entering the market. This situation created
ideally suits Pan Asia and the industry as a whole identifying it to be a monopolistic
competition .

Excess capacity

The concept of excess capacity comes into play when it produces below the scale it is then
said to be underutilizing its resources. In this circumstances, the firm is subjected to an
excess capacity since it a can further increase in production. This excess capacity is also
known as a cost in a monopolistic competition.

Polices on Monopolistic Competition that can be directed by the Government

Government attempts on building supply side policies have proven well with attempts to
promote more innovative behaviour. Government policies are ideally focused on frequent
improvements microeconomics.

Policy level decisions of encouraging innovative behaviour

 Allowances on investments/ Credits on Taxes
 Encouragement of SME’s and entrepreneurial build ups.
 Funding research and development by use of joint ventures
 Corporation taxes to be lowered and thereby encouraging foreign companies to establish
in Sri Lanka.
 Increased funding for research in universities

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Expected Developments
1. Innovation by smaller firms – Funding smaller firms in Research and Development in
order to widen the scope
2. Continuous process of innovation
3. Innovation is not something left to chance – the most successful firms are those that
pursue innovation in a systematic fashion
4. Key focus on demand innovation:
5. Globalization

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1.5 Conclusion

With reference to the above analysis the content can be summarized as follows
A brief history of the banking history was given as to how crucial financial sector is for an
economy and how it acts as a livewire in most of the country’s development. In order to be more
precise Pan Asia Banking Corporation PLC was selected in understanding the scope of this
assignment. The use of a single bank was coupled with other banks in the industry with specific
examples on areas which they tend to have an edge over the others.

As any reality should be proven by the use of literature, review on the literature for market
structures were mentioned in detail identifying the various types of market structures and the
essential features of it. The use literature was useful in helping to understand the reality when it
comes to application. The arguments were based upon the literature review in setting up the
scenario for banks.

A critical analysis was carried out in identifying the suitable market structure for banks in a more
practical sense with the use of diagrams and theoretical analysis. Detailed explanations were
carried out in justifying the points proposed and evaluating its pros and cons. In addition to the
above analyzing Monopolistic markets in the long run made it vital for this research paper to
further enlighten the knowledge on Market Structures.

Finally Government intervention in Monopolistic competition and the policy decisions on

innovation for such markets were highlighted to give it a sense of quality to this assignment.

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 References
Geoff Riley. (September 2006). Market Structures - Summary. Available:
http://tutor2u.net/economics/revision-notes/a2-micro-market-structures-summary.html. Last accessed
27 June 2010.

Astrid, A. (November 2002). Market Structure and Quality : An Applicatiion to the banking Industry.
Available: http://www.federalreserve.gov/pubs/feds/2003/200314/200314pap.pdf. Last accessed 26
June 2010.

Wiley Publishing, Inc. (2000-2010). Monopolistic Competition in the Long‐run. Available:

http://www.cliffsnotes.com/study_guide/Monopolistic-Competition-in-the-Longrun.topicArticleId-
9789,articleId-9776.html. Last accessed 26 June 2010.

Pan Asia Banking Corporation PLC. (2010). Corporate Information. Available:

http://www.pabcbank.com/index.php?option=com_content&view=article&id=173&Itemid=145. Last
accessed 27 June 2010.

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