Plane Thermoelastic Waves in Infinite Half-Space Caused


FACTA UNIVERSITATIS  

Series: Economics and Organization Vol. 14, N
o
 3, 2017, pp. 281 - 289 

https://doi.org/10.22190/FUEO1703281E 

Preliminary Communication 

CONCENTRATION EFFECT ON THE EFFICIENCY OF 

BANKING SECTOR IN THE REPUBLIC OF SERBIA
1
 

UDC 347.734:65.015.25(497.11) 

Eva Eraković
*
 

University of Niš, Faculty of Economics, Serbia  

Abstract. For qualitative analysis of the effect of specific activities, such as banking, on 

other movements in this sector, precise measuring is needed. Due to the transformation of 

the banking sector in the Republic of Serbia, in a relatively short period of time, there has 

been a significant reduction in the number of banks and in increasing the concentration. 

On the other hand, the business efficiency has become a key factor for the survival of banks 

in the market. In this study, the concentration was measured by Herfindahl-Hirscham Index, 

while the degree of efficiency was determined by cost to income ratio. A linear correlation 

and regression analysis examined the relationship between the degree of concentration and 

the level of efficiency of Serbian banking sector in the time interval from 2008 to 2015, which 

confirmed the existence of a strong relationship between these variables. 

Key words: concentration, efficiency, banking sector, Republic of Serbia 

JEL Classification: D40, G21 

INTRODUCTION 

In the analysis of the market structures, the basic element is the concentration. It is 

believed that a particular branch, sector or industry is concentrated when a small number 

of participants control the majority of overall activities or resources. Every company or an 

individual market participant aims to increase their market share because there is a 

positive reciprocity between market share and profitability. 

Increasing the concentration in certain sectors of the banking market can lead to 

undesirable market power of banks. Also, the accuracy and stability of the financial sector 

can variously affect the degree of the concentration and competition. The concentration of 

                                                           
Received February 28, 2017 / Revised April 25, 2017/ Revised July 07, 2017 / Accepted July 13, 2017 

Corresponding author: Eva Eraković, 
*
PhD student  

University of Niš, Faculty of Economics, Trg kralja Aleksandra 11, Serbia  

E-mail: evaerakovic89@yahoo.com 



282 E. ERAKOVIĆ 

several banks in the market indicates an unsuccessful bank competition and the inability 

of the market to prevent this phenomenon. This leads to improper functioning of the 

system and has a negative impact on the normal operation of banks. Today, the protection 

of the financial system health is one of the key objectives of banking supervision. 

Changing business conditions in the market make constant pressure on banks to increase 

their income and to control their costs. Technological innovation in the form of improved 

communication and data processing, also, emphasizes the importance of efficiency. 

Numerous statistical studies have shown that the most efficient banks have significant cost 

savings and a competitive advantage compared to those with average or below average level 

of efficiency. 

The subject of this research is to determine the relationship level between the 

concentration and efficiency in the banking sector of the Republic of Serbia, in the time 

interval from 2008 to 2015. For the purpose of the study, as a concentration indicator, 

Herfindahl-Hirschman Index was used, and as a measure of efficiency, cost to income ratio. 

1. MARKET CONCENTRATION IN THE BANKING SECTOR 

“Concentration, as an indicator of the degree to which the total production or sale in 

the market is in the hands of a small number of market participants, is the measure of the 

competition intensity. The high level of competition with the low level of concentration is 

healthy for each branch and the economy in general” (Stojanović et al., 2010, p. 58). 

The concept of concentration is one of the basic elements in the analysis of market 

structure, i.e. market power in a particular industry, sector or branch. The concentration 

exists when there is a larger part of the total resources or activities under the supervision of a 

small part of the total number of units that supervise this resource, i.e. this activity. There are 

two factors of concentration: the absolute number of enterprises, which constitute one 

industry, and the relative size of companies in relation to the entire industry. 

Concentrations can be: horizontal, vertical and conglomerate. In the banking sector, as a 

rule, concentrations are horizontal. These include connecting of competitors in a market who 

offer mutual substituent products and services. Affiliation, merging and acquisition of banks 

by more market-powerful banking institutions are the most visible aspect of concentrations 

in this area. However, due to strengthening of the banking sector, there has also been bank 

merging with other types of financial institutions which have offered different products and 

services, by which the banks expanded their range of products and services. These processes 

have resulted in a creation of large banks, i.e. "financial institutions that are so big that their 

activities represent a significant share in the payment system of a country, in the process of 

granting loans and in other financial services. The result is that any significant disruption in 

the operations of such institution has a serious impact on the financial market of that country. 

The consequence of this big to fail factor is that the country protects the business of such 

institutions and their customers in a way that does not guarantee the other market 

participants" (Petrović & Ružić, 2001, p. 9). 

As in other industries, the level of competition in the banking sector is essential to the 

production efficiency of banking services, product quality and level of innovation in the 

sector. Determining the degree of competition and concentrations in the banking sector and 

the relationship between these concepts represents the analytical and methodological issue. 



 Concentration Effect on the Efficiency of Banking Sector in the Republic of Serbia 283 

Numerous empirical studies have been devoted to this topic. Most studies reach the conclusion 

that the market conditions prevailing in banking sectors can be best characterized as 

naturally oligopolistic. This means that – in the long term – there is just room for a few 

viable banks. In this context, a highly concentrated banking sector is the logical outcome of 

market forces (Bikker & Groeneveld, 1998, p. 3). 

A group of authors Claessens, Demirguec-Kunt and Huizinga (2000) investigated the 

role of foreign banks and indicated that the entry of foreign banks makes the domestic 

banking system more efficient and reduces interest margins. Using data from the banks of 80 

countries, they examined the effects of the bank concentration and their regulation on banks 

efficiency. They came to the conclusion that the concentration of banks has a negative and 

significant impact on the efficiency of the banking system, except in rich countries with well-

developed financial systems. In addition, they consider that regulatory barriers of new banks 

entries, especially those relating to foreign banks, as well as implicit and explicit restrictions 

of the bank activities are associated with the lower level of bank margins. Their measure of 

bank efficiency, the net interest margin is not necessarily an indicator of the actual level of 

competitiveness on the market, but it can demonstrate other factors, such as market power 

and risk appetite. Claеssens and Laeven (2003) examined the relationship between the type 

of market structure and net interest margin. Using data from banks and a customized version 

of methodology Panzar and Rosse, they assessed the degree of competition in the banking 

systems of fifty countries. Their results confirm that competitiveness helps determine the 

degree of efficiency, especially through the entry of foreign banks and the elimination of 

activity restrictions. Larger presence of foreign banks and smaller number of restrictive 

measures in the banking sector make the banking system more competitive. Also, the 

restrictions on entering commercial banks reduce competition, which indicates that the most 

important element of the competitiveness is the freedom of entry. They have not shown that 

the concentration of the banking sector is negatively correlated with competitiveness. On the 

contrary, their research proves that the banking system which is more concentrated is more 

competitive. The results show that a compromise had not to exist between higher and lower 

concentrated systems. A competitive system can be more important for ensuring the 

competitiveness of the system with a low concentration. In the study of rules governing the 

banking system, including input and output constraints, Barth, Caprio and Levine (2001) 

have come to the conclusion that stricter entry conditions have a negative impact on the bank 

efficiency, which results in increase of the interest margin and costs, while restrictions on 

participation of foreign banks lead to increased fragility of banks.  

The theory provides conflicting forecasts about the relationship between regulations, 

concentration, institutions and bank efficiency. Many of these contradictions are the result of 

different beliefs about the causes of concentration. One common view holds that regulatory 

impediments to competition and monopolistic power create an environment in which a few 

powerful banks stymie competition with deleterious implications for efficiency (Demirguec-

Kunt et al., 2003, p. 1). From that aspect, concentration is a useful signal for lack of 

competitiveness, and therefore for an inefficient market. The theory of "efficiency-structure” 

claims that more effective banks have lower costs and a higher market share (Demsetz, 

1973). With this perspective, the competitive environment can produce concentrated and 

efficient banking systems. Enlargement, i.e. strengthening the concentration of banks should 

positively affect the entire economic system (Marinković, 2012). The arguments that support 

this claim are that big banks have a more efficient organization and management, and thus a 

greater potential for higher quality services. 



284 E. ERAKOVIĆ 

One of the most commonly used indicators is Herfindahl–Hirschman Index (HHI). It 

measures the concentration summing squares of market shares of all companies in an 

industry. The formula for calculating is: 

2

1

( )
n

i
i

HHI X


   

Where is n – the number of companies in the market, a X – a share of i company.  

The advantage of Herfindahl-Hirschman Index is that it includes the value of market 

shares of all the companies of an industry and, by their squaring, it gives greater weight 

shares of larger companies. The value of HHI, theoretically, may be in the range of 0 to 

10 000. In the case of monopoly, the Herfindahl-Hirschman Index value is 10 000, because the 

offer of the monopoly company equals the entire branch. In perfect competition, the offer of 

each company tends to 0, so the value of this Index tends to 0. 

Table 1 Types of markets according to the values of Herfindahl-Hirschman Index 

HHI value Concentration level 

HHI < 1000 Non-concentrated (low concentrated) offer. 

1000 ≤ HHI < 1800 Medium concentrated offer. 

1800 ≤ HHI < 2600 High concentrated offer. 

2600 ≤ HHI <10000 Very high concentrated offer. 

HHI = 10000 Monopolistic concentrated offer. 

Source: (Begović et al., 2002, p. 35) 

By Herfindahl-Hirschman Index, the concentration of the banking sector in the time 

interval from 2008 to 2015 will be analyzed. 

2. EFFICIENCY OF THE BANKING SECTOR 

Comparing the financial systems and different countries and regions, Allen and Gale 

(2001) conclude that there is inherent inefficiency within the monopolistic power of 

banks, which may also adopt an excessively conservative approach while the competitive 

nature of markets tends to encourage innovation and growth-enhancing activities (Ferreira, 

2012, p. 7). In recent decades, banks have been operating in a very competitive environment, 

and in addition to size, capitalization, liquidity and other quantitative variables, they have 

been "forced" to take into account the efficiency as well. However, it should not be 

concluded that the efficiency is a new asset for the banking system. On the contrary, this 

variable has always been an asset for the banking system, but it has not been a priority, 

because the business conditions have been different than today. The structure, performance 

and function of the banking sector had to adapt to modern conditions, demanding a higher 

level of efficiency which is crucial for their survival and it can create a competitive 

advantage for them. An efficient banking sector is able to neutralize negative shocks and to 

contribute to the stability of the financial system. The performance of each bank is 

measured relative to what the best performance of a best practice bank on the efficient 

frontier would be expected to be if it faced the same exogenous conditions as the bank 

being measured (Berger, 2007, p. 122). 



 Concentration Effect on the Efficiency of Banking Sector in the Republic of Serbia 285 

There are three categories of efficiency: productive, cost and profit efficiency (Apergis & 

Alevizopoulou, 2011, p. 330). The first type refers to the production based on given input 

parameters. The production plan is effective if there is a way to increase production with the 

same amount of inputs, i.e. it is not possible to produce the same amount with less inputs. 

The second type of efficiency measures the ability of banks to reduce costs at a given price 

of input parameters. In fact, this type of efficiency measures how close or far the costs of 

banks are from the banks with the best practice, producing the same amount in the same 

business conditions. If the costs of a bank are higher than the costs of the best bank 

practice, and that difference cannot be explained by any statistical noise, then, that bank is 

characterized as cost inefficient. Finally, profit efficiency measures the ability of banks to 

maximize profits given the prices of inputs and outputs. In fact, it implies maximizing 

production at a given level of expenditure. 

In addition to the traditional way of measuring efficiency, there are two approaches 

that can be used to assess the efficiency of banks – the parametric approach and non-

parametric approach. Both require the specification of a cost or production function or 

frontier, but former involves the specification and econometric estimation of a statistical 

or parametric function/frontier, while the non-parametric approaches provides a piecewise 

linear frontier by enveloping the observed data points (Drake & Hall, 2003, p. 897). In 

general, both approaches analyze the best practices of production, cost or profit. A serious 

lack of the non-parametric approach is that it does not allow that there is any error in the 

data, and therefore assumes that the final assessment is solely because of inefficiencies. 

In this paper, the concept of efficiency will be reflected cost to income ratio (C/I ratio). 

This indicator shows the ability of banks that, by achieved interest margin, as a major 

generator of profits, and other operating income, covers the part of business expenses arising 

mainly out of the credit-deposit operations themselves (Ljumović et al., 2011, p. 44). On the 

cost side, there are non-interest expenses, whose most important elements are gross earnings, 

depreciation expenses, tangible and intangible expenses and certain categories of 

expenditures that may arise on the basis of credit-deposit operations. In the denominator, 

there are incomes that pose a sum of net interest income and other operating incomes.  

Based on the cost-to-income ratio investors have a clear picture of how efficiently the 

firm is being run – if it is lower, the bank will be more profitable. Also, changes in the 

ratio indicate potential problems: if the ratio rises from one period to the next, it means 

that costs are rising at a higher rate than income, which could suggest that the company is 

failing to remain focused on attracting more business.  

3. DATA AND METHODOLOGY 

The subject of analysis in this study is to determine how the concentration in the 

banking sector of the Republic of Serbia affects the efficiency of the banking sector of the 

Republic of Serbia. The starting hypothesis is: higher concentration in the banking sector 

of the Republic of Serbia contributes to the reduction of efficiency. 

In this study, the methods of statistical analysis were: correlation and regression 

analysis. Using these methods it is possible to determine the nature of the connection, the 

significance of the connection and influence HHI on C/I ratio. 



286 E. ERAKOVIĆ 

For the purposes of methodological explanations and analysis, the data from the 

balance sheet and income statement which commercial banks deliver to the National Bank 

of Serbia have been used, for the period from 2008 to 2015. 

3.1. The results of research and discussion 

In the time period from 2008 to 2015 there was a decrease in the number of banks. At the 

end of 2008, in the Republic of Serbia, thirty-four commercial banks were operating, six of 

which were large, seventeen medium and eleven small ones
2
. The group of large banks, in that 

year, had 51.22% of the total assets of all commercial banks. Also, in that year, there were 

fourteen banks in majority domestic ownership (eight banks in majority state, six of them in 

majority privately owned), while twenty banks were with majority foreign ownership. At the 

end of the observed time period, or at the end of 2015, in the Republic of Serbia, thirty 

commercial banks operated, representing a decrease of 12% compared to the initial year. The 

structure of commercial banks consisted of six large banks with a share of 60.10% of the total 

assets of all commercial banks, twelve medium and twelve small banks. Of the total number of 

banks, seven banks were in majority domestic ownership (six of which were majority state-

owned and majority privately owned), and twenty-three banks with majority foreign ownership. 

In the observed period, there is a continuous increase in total assets of commercial 

banks. A decrease is only present in 2013, which is a consequence of decreasing the 

biggest key categories of assets, with the most prominent decrease in loans and advances. 

In terms of ownership structure of banks in the Republic of Serbia, foreign-owned banks 

dominate, whose shares in total assets are around 75% during each year of the period 

under consideration. 

The results of the research on the concentration, according to the Herfindahl-Hirschman 

Index, show that the banking market of the Republic of Serbia is one of the fragmented markets 

with a large number of small uncompetitive banks. 

 

Chart 1 Movement of HHI values in the period from 2008 to 2015. 
Source: Author's calculations based on data from  

commercial banks financial reports of the Republic of Serbia 

                                                           
2
 Small banks have assets of less than 1% of total assets of all banks, medium-sized banks have assets of more 

than 1% but less than 5% of the total assets of all banks, while large banks are banks with assets exceeding 5% 

of the total assets of all banks. 



 Concentration Effect on the Efficiency of Banking Sector in the Republic of Serbia 287 

Based on Chart 1, it can be seen that the Herfindahl-Hirschman Index has a maximum 

value for capital. Due to the growth of large banks, there has been an increase in the value of 

the Index. The Index value of the total assets of all banks rose from 629.58 at the end of 

2008 to 796.38 at the end of 2015. Measured by the Index, the higher level of concentration 

is present in all variables. Also, the highest concentration level was recorded in the capital in 

2015 and amounted to 855.34. For the observed period, it can be concluded, that the 

banking sector, from year to year, is characterized by a higher level of concentration. 

In the analyzed period, increasing revenues and reducing costs can be seen, which had 

a positive impact on the bank efficiency measured by the cost to income ratio. The 

banking sector was the least effective in 2010 and 2012, which resulted in a considerable 

increase in costs.  

By statistical analysis, correlation, the relationship was examined between the value of 

cost to income ratio and Herfindahl-Hirschman value Index for total assets, capital and 

net interest for the period from 2008 to 2015. The degree of quantitative agreement was -

0.721; -0.715; -0.716 respectively. The highest degree of linear correlation is between 

total assets and the level of efficiency, where Pearson's coefficient has a value of 0.043 

which indicates a high degree of linear correlation between these two variables. 

By applying the regression analysis of the cost to income ratio, which represents the 

dependent variable and Herfindahl-Hirschman Index for total assets (independent 

variable), the degree of influence of the independent variable on the dependent was 

examined. Unit increase in HHI of total assets affects the change in the value of cost to 

income ratio for the -0.721. The regression model is statistically representative and based 

on it, it is possible to predict changes in cost to income ratio at HHI increase of total 

assets. In the regression model, it can be noted that it is possible to predict the movement 

of the dependent variable values based on the changes of the independent variable. 

Table 2 Regression analysis 

 
 

Model 

Unstandardized  
Coefficients 

Standardized 
Coefficients 

t Sig. B Std. Error Beta 

1 (Constant) 1.158 .331  3.496 .013 

HHI total assets -.001 .000 -.721 -2.551 .043 

Source: Author’s calculation 

 

 

CONCLUSION 

Concentration in the banking sector is generally horizontal, which means that there is 

joining of market participants that offer substituent products. The main motives because of 

which concentration appears are: ratio economy, diversification of credit risk, improving 

organizational efficiency, lower financing costs and scale economy. However, non-

competitive market structures, especially monopolies, generate adverse effects on social 

welfare. For this reason, it is necessary to create adequate antitrust politics and to establish 

an effective antitrust institution. The politics of competition protection contributes to the 

achievement of effective competition that is a prerequisite for economic and social progress 

(Stojanović & Kostić, 2013). 



288 E. ERAKOVIĆ 

To demonstrate the state of concentration in the banking sector of the Republic of 

Serbia, a statistical analysis of the variables has been conducted: total assets, capital and net 

interest income. Concentration analysis was performed using market Herfindahl-Hirschman 

Index. The highest level of concentration measured by the Herfindahl-Hirschman Index is in 

the capital, while the lowest concentration level achieved is in net interest income. In 

general, the banking sector of the Republic of Serbia can be characterized as fragmented, 

and the degree of concentration increases from year to year.  

How the concentration and efficiency of the banking sector of the Republic of Serbia 

will change in the future depends on many external and internal factors on the state of the 

global market, new regulatory requirements and internal strategies of individual banks. 

Thereby, it should be borne in mind that prevention of monopoly in the banking sector 

should be imperative. 

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 Concentration Effect on the Efficiency of Banking Sector in the Republic of Serbia 289 

UTICAJ KONCENTRACIJE NA EFIKASNOST 

BANKARSKOG SEKTORA REPUBLIKE SRBIJE 

Za kvalitetnu analizu uticaja koncentracije specifične delatnosti, kao što je bankarstvo, na 

ostala kretanja u bankarskom sektoru neophodno je njeno precizno merenje. Usled transformacije 

bankarskog sektora u Republici Srbiji, u relativno kratkom vremenskom intervalu, došlo je do 

značajnog smanjenja broja banaka i povećanja koncentracije. Sa druge strane, ključni faktor za 

opstanak banaka na tržištu postala je efikasnost poslovanja. U radu je koncentracija merena 

Herfindahl-Hirscham-ovim indeksom, dok je stepen efikasnosti određen količnikom troškova i 

prihoda (cost to income ratio). Pomoću linearne korelacije i regresione analize ispitana je 

povezanost između stepena koncentracije i nivoa efikasnosti bankarskog sektora Republike Srbije u 

vremenskom intervalu od 2008. do 2015. godine, kojima je potvrđeno postojanje jake veze između 

ovih varijabli. 

Ključne reči: koncentracija, efikasnost, bankarski sektor, Republika Srbija