The Impact of Consolidation and Modernisation on Banking Scale and Scope Economies

Abstract

Lebanese banks recorded an enormous increase in size, customers’ base, and products variety over the past two decades, which suggests the development of economies of scale and scope in the Lebanese banking sector. This study aims at testing the presence of these economies of scale and scope in the Lebanese banking sector, particularly over the period 2000-2013. The estimation of a translogarithmic cost function by the maximum likelihood method shows that the Lebanese banks are – in general – characterised by the existence of increasing economies of scale. The analysis of economies of scope also reveals a complementarity between different outputs. Finally, the analysis of price elasticities of demand for production factors shows an important substitutability between labour and physical capital.