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Market structure and power: comparative empirical evidence from a dual banking system

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Abstract

Countries cautiously observe their banking sector stability by virtue of its vital repercussions. Different researchers used different measures/proxies to investigate stability and its relevance to market structure and power, and mixed evidence was presented. In a dual banking system, the influence of the market structure and power on stability is overlapped given the operation of two different types of banks side by side. This paper uses advanced Z-score (time-varying Z-score and adjusted Z-score) to extend evidence and disentangle the stability linkage between the banking sector, Islamic and conventional banking markets. Quarterly data of 41 commercial banks operating in the Malaysian dual banking sector for the period 2011q4-2020q2 are obtained from FitchConnect database. The study applies the Corrected Least Square Dummy Variable (LSDVC) estimator in the investigation given its superior performance over other commonly used techniques. Diverse important results and conclusions are observed and drawn as in which manner structure and power within the banking sector at large, Islamic and conventional banking markets influence stability of each other, and to which extent the Islamic market is distinguishable and free from the influence of conventional market features. Policy makers and researchers need to be mindful of the used stability proxy and its dynamism.

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Notes

  1. Li et al. (2017) stated that there is no discussion on optimal window length. Different studies adopted different rolling time window.

  2. CAMELS acronym stands for Capital adequacy, Asset quality, Management Efficiency, Earning and profitability, Liquidity, Sensitivity to market risks; it is a rating system.

  3. Based on GLS technique, the choice between FE and RE should be subject to specific considerations such as observing Breusch-Pagan and Hausman tests, which was not considered by authors. It is not clear how the authors have overlooked these critical steps and jumped directly to the use of RE.

  4. For further details on CAMELS, please check Roman and Şargu (2013).

  5. It is worthy to mention that competition in each market does not exert significant impact on its counterpart for both models under both three- and five-period rolling windows. The results are not reported due to the prolonged table which is made to fit one page. However, it will be provided upon request. This gives further evidence on the trajectory of independency from conventional banks that Islamic banks are seeking to achieve given the relative dominance of the latter.

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Authors and Affiliations

  1. IIUM Institute of Islamic Banking and Finance (IIiBF), International Islamic University Malaysia, Gombak, Malaysia

    Rafik Harkati, Syed Musa Alhabshi & Salina Kassim

  2. Department of Accounting, Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia, Gombak, Malaysia

    Noraini Mohd Ariffin

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  1. Rafik Harkati
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  2. Syed Musa Alhabshi
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  3. Salina Kassim
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  4. Noraini Mohd Ariffin
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Correspondence to Rafik Harkati.

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Appendix

Appendix

See Tables

Table 11 Variance inflation factor for the variables used in competition estimation (P-R model)
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Table 12 Results of panel data analysis for H-statistics using total income to total assets as dependent variable (robustness check)
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Table 13 Concentration based on the five major banks
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Table 14 Concentration based on the three major banks
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Table 15 Panel A The dependent variable Z-score computed based on ROA rw5
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Table 16 Summary of Table 15 outcomes
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Table 17 Panel A The dependent variable Z-score computed based on ROWRA rw5
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Table 18 Robustness check using concentration ratios CR3 and CR5
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18

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Harkati, R., Alhabshi, S.M., Kassim, S. et al. Market structure and power: comparative empirical evidence from a dual banking system. Econ Change Restruct 55, 1815–1873 (2022). https://doi.org/10.1007/s10644-021-09369-x

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