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Competitive condition and market power of Islamic banks in Indonesia

Author

Listed:
  • Cupian
  • Muhamad Abduh

Abstract

Purpose - The purpose of this paper is to examine the competitive conditions and market power of Islamic banks in Indonesia for the period of 2006-2013. Design/methodology/approach - Using samples of 27 Islamic banks, the study uses a variety of structural and non-structural measures related to the traditional approach and the new empirical approach of the industrial organization. The methodology is based on a set of measures of the competition and market power. The first measures, concentration ratios and Herfindahl–Hirschman index, are to determine the competitiveness level, while the second measures of Panzar–Rosse H-statistic and Lerner index are to examine the market power of Islamic banks in Indonesia. Findings - The finding of this study has confirmed the situation of Islamic banking industry in Indonesia which is operated in a higher degree of market power which leads to a less competitive market. Islamic banks earn their revenues under monopolistic competition over the tested period. This study has also found a negative but insignificant relationship between concentration and competition which shows that in the past few years, the market power for leading firms in Indonesia Islamic banking industry has reduced. Practical implications - The paper is a very useful source of information that may provide relevant guidelines in guiding the future development of competition of Islamic Banking industry. In addition, the paper provides relevant guidelines for improving competitiveness of Islamic banks. Originality/value - This study combines two approaches for bank competition measurement and bank market powers measurement which can provide more robust findings. To the best of the authors’ knowledge, the study on Islamic banking competitiveness level and market power is very limited, especially in the case of Indonesia. Therefore, this study could contribute significantly toward the literature of the related field.

Suggested Citation

  • Cupian & Muhamad Abduh, 2017. "Competitive condition and market power of Islamic banks in Indonesia," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing Limited, vol. 10(1), pages 77-91, April.
  • Handle: RePEc:eme:imefmp:imefm-09-2015-0098
    DOI: 10.1108/IMEFM-09-2015-0098
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    Citations

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    Cited by:

    1. Ernaningsih, Indria & Smaoui, Houcem & Temimi, Akram, 2023. "The effect of capitalization on the competition-stability Nexus: Evidence from dual banking systems," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).
    2. Mohammad Saifuzzaman, 2023. "A Review of Challenges and Solutions in the Use of Murabaha Products in Islamic Banking," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(7), pages 906-918, July.
    3. Wajahat Azmi & Zaheer Anwer & Mohsin Ali & Shamsher Mohamad, 2024. "Competition, stability, and institutional environment: The case of dual banking economies," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 609-631, January.

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