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Financial Structure and Bank Profitability


Asli Demirgüç-Kunt


World Bank - Financial and Private Sector Development; World Bank

Harry Huizinga


Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR)

August 2000

World Bank Policy Research Working Paper No. 2430

Abstract:     
For countries with underdeveloped financial systems, a move toward a more developed financial system reduces bank margins and profitability. Controlling for both bank and market development, financial structure per se - the development of banks relative to that of markets-appears to have no independent effect on bank performance.

Countries differ in the extent to which their financial systems are bank-based or market-based. The financial systems of Germany and Japan, for example, are considered bank-based because banks play a leading role in mobilizing savings, allocating capital, overseeing investment decisions of corporate managers, and providing risk management vehicles. The systems of the United States and the United Kingdom are considered more market-based.

Using bank-level data for a large number of industrial and developing countries, Demirguc-Kunt and Huizinga present evidence about the impact of financial development and structure on bank performance. They measure the relative importance of bank or market finance by the relative size of stock aggregates, by relative trading or transaction volumes, and by indicators of relative efficiency.

They show that in developing countries both banks and stock markets are less developed, but financial systems tend to be more bank-based. The richer the country, the more active are all financial intermediaries.

The greater the development of a country's banks, the tougher is the competition, the greater is the efficiency, and the lower are the bank margins and profits.

The more underdeveloped the stock market, the greater are the bank profits. But financial structure per se does not have a significant, independent influence on bank margins and profits.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to study financial structure and development. The study was funded by the Bank's Research Support Budget under the research project Financial Structure and Economic Development (RPO 682-41). The authors may be contacted at ademirguckunt@worldbank.org or h.p.huizinga@kub.nl.

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Date posted: December 10, 2004  

Suggested Citation

Demirgüç-Kunt, Asli and Huizinga, Harry, Financial Structure and Bank Profitability (August 2000). World Bank Policy Research Working Paper No. 2430. Available at SSRN: http://ssrn.com/abstract=632501

Contact Information

Asli Demirgüç-Kunt
World Bank - Financial and Private Sector Development ( email )
United States
202-473-7479 (Phone)
202-522-1155 (Fax)
HOME PAGE: http://econ.worldbank.org/staff/ademirguckunt/
World Bank ( email )
1818 H Street, NW
Washington, DC 20433
United States
Harry Huizinga (Contact Author)
Tilburg University - Center for Economic Research (CentER) ( email )
P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2623 (Phone)
+31 13 466 3042 (Fax)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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