BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
Do Islamic banks have greater market power?
Abstract: The aim of this paper is to investigate whether Islamic
banks have greater market power than con-ventional 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; (follow links to similar papers)
JEL-Codes: D43; D82; G21; (follow links to similar papers)
25 pages, February 26, 2010
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