Concentration–Profitability Nexus: New Approach from Causality

Abstract The study revisits the concentration–profitability nexus of the structure–conduct–performance (SCP) paradigm. It contributes to the literature by considering the argument from the perspective of causality since existing empirical works only consider a unidirectional relationship of concentration as being determined by profitability, neglecting the feedback relationship. Unlike the existing studies, this study includes loan and advances, and the deposit concentration besides the total asset to capture concentration for robustness. Using Nigerian banking industry to test our proposition, the empirical results show the existence of bi-directional relationship between profitability and banking concentration indices, implying that past banking industry concentration indices can explain the present level of profitability in the Nigerian banking industry and vice versa. Furthermore, the results of the study also show a negative relationship between banking concentration and profitability levels in Nigeria.