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Do Islamic Banks Have Greater Market Power?

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Abstract

The aim of this paper is to investigate whether Islamic banks have greater market power than conventional banks, as they might benefit from a captive client base. To measure market power, we compute Lerner indices for a sample of banks from 17 countries where Islamic and conventional banks coexist over the period 2000–2007. We also use the Rosse-Panzar model to measure the degree of competition for each type of banks. We find that Islamic banks do not have greater market power than conventional banks. We attribute the competitive behavior of Islamic banks to differences in norms and incentives.

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Notes

  1. For a complete reference on Islamic banking, see Iqbal and Mirakhor (2007).

  2. In an interview, El-Gamal argues that he worries about the possibility that ‘some sectors of the Muslim American population might be willing to pay $500 more to buy peace of mind.’ (http://www.universityislamicfinancial.com/file/News/Voiceof%20AmericaArticle%2004.09.2007l.pdf).

  3. The computation of Lerner indices leads to some extreme values, which are likely to result from some data limitations and which can bias the comparison and the regressions. So we skip all observations with Lerner indices below the first percentile and greater than the 99th percentile.

  4. The Bankscope database does not provide information on the number of employees, so we use this proxy variable for the price of labor following Maudos and Fernandez de Guevara (2004, 2007).

  5. Data on the ratio of volume of credit to private enterprises to GDP come from the Beck et al. (2000) yearly database. Data on GDP per capita come from the World Bank's World Development Indicators. Law enforcement is measured with the Rule of Law index provided by Kaufmann et al. (2009).

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Acknowledgements

This work has benefited from a financial grant from the Economic Research Forum (ERF). The contents and recommandations do not necessarily reflect the views of the Economic Research Forum.

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  1. University of Strasbourg – EM Strasbourg Business School, 47 avenue de la Foret Noire, Strasbourg, 67000, France

    Laurent Weill

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Weill, L. Do Islamic Banks Have Greater Market Power?. Comp Econ Stud 53, 291–306 (2011). https://doi.org/10.1057/ces.2011.1

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