Analytical Study of Market Concentration and Bank Profitability in Nigerian Commercial Banking

The relationship between banking market concentration and profitability is theoretically ambiguous, with the structure-conduct-performance hypothesis and the efficient structure hypothesis offering competing predictions that require empirical resolution in the Nigerian context. This study analytically investigated the relationship between market concentration and profitability in Nigerian commercial banking for the period 2013 to 2023, using annual data from the Central Bank of Nigeria banking supervision reports. Market concentration was measured by the Herfindahl-Hirschman Index at the national level and the 5-bank concentration ratio. Bank profitability was measured by return on assets and net interest margin at the individual bank level. Control variables included bank size, capital adequacy ratio, non-performing loan ratio, inflation, and GDP growth. Panel data regression with fixed effects was employed. Results showed that market concentration had a significant positive effect on net interest margin (coefficient = 0.18, p < 0.05), supporting the structure-conduct-performance hypothesis. However, return on assets was not significantly predicted by market concentration, suggesting that concentration benefits are captured in margin rather than overall profit efficiency. Bank-specific efficiency (cost-to-income ratio) was the strongest predictor of return on assets (coefficient = -0.43, p < 0.001), providing partial support for the efficient structure hypothesis. Concentration effects were strongest for medium-sized banks. The study concludes that both market structure and efficiency factors drive Nigerian bank profitability in different ways and recommends differentiated competition policy responses. Keywords: market concentration, bank profitability, Nigerian commercial banking, structure-conduct-performance, Herfindahl-Hirschman Index