Banking sector competitiveness: Does competition for off-balance sheet banking matter?

Despite core banking, banks also engage in off-balance-sheet (OBS) market activities. In many developed banking industries, OBS activities have grown to be significant during the last two decades. This paper provides rather scarce evidence on the competitiveness among banks for OBS activities and its impact on the degree of banking sector competition in Sri Lanka. Panzar-Ross H statistic approach employing in this study to estimate bank competition used a comprehensive set of bank-level data of the whole commercial banking sector in Sri Lanka covering the period 1996-2018. The first-round analysis of the study uncovers substantial differences among banks concerning the OBS activities. EGLS panel estimation procedure applied in this study provides evidence for a lower level of competitiveness among Sri Lankan banks for OBS activities. More interestingly, the findings further reveal that the degree of competitiveness for OBS activities has a significant positive impact on the overall competitiveness of the banking sector in Sri Lanka. These results suggest banking institutions re-visit their business models with greater emphasis on nonconventional banking activities in enhancing bank-level efficiency and hence positively contributing to the overall competitiveness of the banking sector