Evaluating the Relationship between Concentration Indicators and Profitability of Banking Industry in Iran

Determining the structure of a market plays an important role for policy makers to adopt efficient
policies to enhance social welfare of their societies. This welfare is happened in a competitive
framework. This study first attempt to measure the concentration level of banking industry and
then examines its relationship with profitability measure according to the calculated values. The
findings estimated indicate that the Herfindhal-Herishman index has a positive and significant
effect on the profitability of the industry. The results also demonstrate that the trend of
concentration indicators, except for year 2006, has not declined considerably during the study
period Such that the concentration ratio for the largest four banks, all the 4 banks are active in the
governmental sector, is near 0.57. Additionally, this reality in the Iranian industry is confirmed
under the Herfindhal- Herishman indicator during the period. Therefore, we can conclude that the
governmental sector is the dominant part of banking system in Iran and private sector does not
play a crucial role.