Do Islamic Banks Have Greater Market Power?

25 Pages Posted: 25 Mar 2010  

Laurent Weill

University of Strasbourg - LaRGE Research Center (Laboratoire de Recherche en Gestion et Economie)

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Date Written: February 26, 2010

Abstract

The aim of this paper is to investigate whether Islamic banks have greater market power than conventional banks. An Islamic bank, for example, might enjoy enhanced market power if a captive clientele adhering to religious principles permits it to charge higher prices. To measure market power, we compute Lerner indices for a sample of banks from 17 countries where Islamic and conventional banks coexist. Comparison of Lerner indices shows no significant difference between Islamic banks and conventional banks over the period 2000-2007. When including control variables, regression of Lerner indices even suggests that Islamic banks have less market power than conventional banks. A robustness check with the Rosse-Panzar model confirms that Islamic banks are no less competitive than conventional banks. Thus, any reduced market power of Islamic banks can be attributed to differences in norms and incentives.

Keywords: Islamic banks, Lerner index, bank competition

JEL Classification: G21, D43, D82

Suggested Citation

Weill, Laurent, Do Islamic Banks Have Greater Market Power? (February 26, 2010). BOFIT Discussion Paper No. 2/2010. Available at SSRN: https://ssrn.com/abstract=1578244 or http://dx.doi.org/10.2139/ssrn.1578244

Laurent Weill (Contact Author)

University of Strasbourg - LaRGE Research Center (Laboratoire de Recherche en Gestion et Economie) ( email )

61 Avenue de la Forêt Noire
F-67085 Strasbourg Cedex
France

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