Jamaica's Banking Sector

Introduction

Since the early 1990s, the Jamaican banking sector has experienced significant structural changes stemming from a disorderly financial liberalization process, which preceded a severely disruptive financial crisis. As such, the last decade has important lessons about factors influencing the relationship between competition and concentration, which has been unexplored. Over the last few months commercial banks have been under fire for their high-loan interest rates and wide spread between their fixed deposits savings accounts and lending rates.

Commercial banks within Jamaica operated under an Oligopoly market structure because there are not many commercial banks and the decision of one affects all the others. The banks use non-price competition to compete against each other not necessarily with price but mainly through promotional strategies.

Jamaica's Banking Sector

Jamaica's approximate 2.5 million bank customers enjoy the benefits of strong competition in a deregulated banking system. The dilemma is that we only get benefits from non-price competition while the real benefits of lower lending rates and higher deposit rates are nothing but a fleecing illusion to be pursued but never attained. Jamaica commenced moving from a regulated banking system to a more open competitive sector in the 1990s. While competition has affected many areas of the banking industry, there are two areas that illustrate this change more than others: marketing promotions and product choice. This competition however, has not brought about significant savings for customers due to the Oligopoly market conditions that exists, thus a much narrower choice of commercial banks are now available to the Jamaicans.

In an Oligopoly industry, there are only a few firms between them share a large proportion of the industry. Unlike firms under Monopolistic competition, there are various barriers to the entry of new firms, the size of the barriers, however, will vary from industry to industry. Because of the small numbers of firms under oligopoly, each firm will have to take account of the others action, they are interdependent. This means that each firm is affected by its rivals' actions. If one firm changes its product price or alters another part of its marketing strategy, it will have significantly impact in the rival firms. In other words, if one bank lowers its lending rate, the other banks in this industry will be affected, and they most likely will lower their rate, too. If this happens, neither company will gain a competitive advantage. Therefore, no bank can afford to ignore the actions and reactions of other banks in the industry.