Bank profitabilty, competition, efficiency and specialization in rural banking markets

The degree of competition in rural banking markets has increased significantly resulting from the changing environment of national banking industry. The small banks located in non-metropolitan markets have to cope with many challenges. They are forced to remain profitable to maintain their viability and capital base. There are several critical elements influencing rural bank profitability.; The overall objective of this study is to identify the factors influencing rural banks' profitability. The relationship among market structure, bank specialization and profitability are evaluated to determine the components that enhance bank profitability.; Reflecting the different sources of determinants influencing bank profitability, two different models are used. The banking market profitability model is developed by incorporating variables that may influence the profitability of banks located in a market area. The variables having significant relationships with market profitability are incorporated in the bank profitability model.; The bank profitability model is designed to determine factors that are closely related to an individual bank profitability. The degree of bank specialization and the level of x-inefficiency are measured by employing two different types of loan diversity indices and bank cost data. The bank profitability model also tests the structure-conduct-performance (SCP) relationship in the rural banking industry.; Major findings of this study are: (1) higher degrees of specialization do not contribute to bank profitability; (2) market structure does not influence the degree of bank specialization; (3) market power resulting from the greater market share of a bank is a direct source of higher profitability; (4) firm-level inefficiency is an important source of declining profits; (5) banks specializing in rural business loans show higher profitability; (6) individual bank profitability is strongly affected by the market profitability.