Competition in Dual Markets: Implications for Banking System Stability

31 Pages Posted: 26 Apr 2018

See all articles by Tastaftiyan Risfandy

Tastaftiyan Risfandy

Sebelas Maret University - Faculty of Economics and Business

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science

Irwan Trinugroho

Sebelas Maret University

Date Written: March 28, 2018

Abstract

This paper examines the impact of market competition on the stability of Islamic and conventional banks in countries where these banks operate alongside one another. To investigate this issue, we use a sample of 100 Islamic and 390 conventional banks from 19 countries. Our baseline result shows that competition in a dual market erodes banks’ stability. The heightened competitive pressure in a dual market encourages banks to engage in excessive risk-taking that can jeopardize their stability. However, the effect of competition is missing for Islamic banks, suggesting their superiority in having religious clients. Although our overall results support the ‘competition-fragility’ hypothesis, we find that competition can be beneficial for banks, especially at a low to medium competition level. Last, we also find that the adverse impact of competition can be reduced by having high capitalization, especially in the case of a conventional bank. Some policy implications are discussed in the paper.

Keywords: Competition, Stability, Dual Banking, Islamic Banks, Z-Score, Lerner Index

JEL Classification: D40, G21, G28, Z12

Suggested Citation

Risfandy, Tastaftiyan and Tarazi, Amine and Trinugroho, Irwan, Competition in Dual Markets: Implications for Banking System Stability (March 28, 2018). Available at SSRN: https://ssrn.com/abstract=3158510 or http://dx.doi.org/10.2139/ssrn.3158510

Tastaftiyan Risfandy (Contact Author)

Sebelas Maret University - Faculty of Economics and Business ( email )

Jl. Ir Sutami 36 A, Kentingan
Surakarta, Jawa Tengah 57126
Indonesia

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science ( email )

5 rue Felix Eboue
Limoges, 87000
France

Irwan Trinugroho

Sebelas Maret University ( email )

Jl. Ir. Sutami 36A
Kentingan
Surakarta, Jawa Tengah
Indonesia

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