Concentration and profitability: An analysis of the private financial system in Ecuador during the period 2015-2023

Abstract

Introduction: This study analyses the relationship between market concentration and profitability in Ecuador's private financial system over the period 2015-2023. Methodology: Using a quantitative approach and a panel data regression model, it examines how deposit-taking and placement operations are related to profitability indicators ROA and ROE. Results: The results show that the largest banks, such as Pichincha, Pacífico, Guayaquil and Produbanco, lead the financial market in Ecuador. However, when analysing concentration indices, such as the Herfindahl-Hirschman Index, the Dominance Index and the Kwoka Index, a low level of concentration is observed. Discussions: This indicates the absence of a clear dominance among financial institutions and the existence of a competitive market. In addition, the results reveal that loans have a significant positive impact on profitability, while deposits have a negative impact. This negative relationship is explained by the inclusion of time and demand deposits, the latter being short-term deposits, which affect profitability due to their availability in less than 30 days. Conclusions:The research results highlight the importance of maintaining an appropriate balance between deposits and placements to maximise profitability and ensure a competitive and efficient financial market.