Article Sidebar

Submitted
January 7, 2022
Accepted
October 13, 2022
Published
October 31, 2022
Download
Full text PDF
Statistic
Read Counter : 536 Download : 781

Downloads

Download data is not yet available.

Main Article Content

Abstract

Purpose ― This paper examines banking competition's effect on Malaysia's financial performance from 2008–2020. This study investigates the relationship between banks' market competition and financial performance by examining banks' profits and risks. Further, this current study examines whether the association differs for Islamic banks.


Methods ― The research studies Malaysia as a sample country and employs a data span from 2008-2020. In order to address omitted variable bias, simultaneity and endogeneity are avoided using a two-step GMM model.


Findings ― Our results recommend that more competition inspires the banking sector to invest in risky ventures to offset the losses in revenues. Moreover, banking today is still based on basic banking operations like granting loans (or financing in Islamic banks), collecting deposits, and managing payment systems.


Implication ― Since our findings show a negative effect of competition on the bank's financial performance, we suggest that competition lowers banks' profits and results in greater risk. It is suggested that regulators and policymakers develop the financial infrastructure in terms of controlled competition in banking and encourage banks to diversify their operations efficiently. We find no significant difference in the association between conventional and Islamic banking.


Originality ― This research is the first to examine the effect of bank competition on the financial performance of a developed dual banking system using the efficiency-adjusted Lerner index.

Article Details

License

Copyright (c) 2022 Mudeer Ahmed Khattak

Creative Commons License

This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Authors who publish with this journal agree to the following terms:

  1. Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution-ShareAlike 4.0 International License that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
  2. Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
  3. Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See The Effect of Open Access).

Creative Commons License

Economic Journal of Emerging Markets by Center for Economic Studies, Universitas Islam Indonesia is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

How to Cite
Khattak, M. A., Ali, M., & Khan, N. A. . (2022). Competition and banks’ financial performance in dual banking: Evidence from efficiency-adjusted market power . Economic Journal of Emerging Markets, 14(2), 244–258. https://doi.org/10.20885/ejem.vol14.iss2.art8
Download Citation
Endnote/Zotero/Mendeley (RIS)
BibTeX

References

  1. Alam, N., Hamid, B. A., & Tan, D. T. (2019). Does competition make banks riskier in dual banking system? Borsa Istanbul Review, 19, S34–S43. https://doi.org/10.1016/j.bir.2018.09.002
  2. Arellano, M., & Bond, S. (1991). Some ests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies, 58(2), 277. https://doi.org/10.2307/2297968
  3. Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29–51. https://doi.org/10.1016/0304-4076(94)01642-D
  4. Battese, G. E., & Coelli, T. J. (1995). A model for technical inefficiency effects in a stochastic frontier production function for panel data. Empirical Economics, 20(2), 325–332. https://doi.org/10.1007/BF01205442
  5. Besanko, D., & Thakor, A. V. (1993). Relationship banking, deposit insurance and bank portfolio Choice.
  6. Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143.
  7. Blundell, Richard, & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143. https://doi.org/10.1016/S0304-4076(98)00009-8
  8. Boyd, J. H., & De Nicolo, G. (2005). The theory of bank risk taking and competition revisited. The Journal of Finance, 60(3), 1329–1343. https://doi.org/10.1111/j.1540-6261.2005.00763.x
  9. Caminal, R., & Matutes, C. (2002). Market power and banking failures. International Journal of Industrial Organization, 20(9), 1341–1361. https://doi.org/10.1016/S0167-7187(01)00092-3
  10. Cho, S. J., Chung, C. Y., & Young, J. (2019). Study on the relationship between CSR and financial performance. Sustainability (Switzerland), 11(2), 1–26. https://doi.org/10.3390/su11020343
  11. Chong, B. S., & Liu, M. H. (2009). Islamic banking: Interest-free or interest-based? Pacific Basin Finance Journal, 17(1), 125–144. https://doi.org/10.1016/j.pacfin.2007.12.003
  12. Cihak, M., & Hesse, H. (2008). Islamic banks and financial stability: An empirical analysis (IMF Working Papers No. 2008/016).
  13. Cihak, Martin, & Hesse, H. (2010). Islamic banks and financial stability: An empirical analysis. IMF Working Papers, 38(2), 95–113. https://doi.org/10.1007/s10693-010-0089-0
  14. Clark, E., Radić, N., & Sharipova, A. (2018). Bank competition and stability in the CIS markets. Journal of International Financial Markets, Institutions and Money, 54, 190–203. https://doi.org/10.1016/j.intfin.2017.12.005
  15. Danisman, G. O., & Demirel, P. (2018). Bank risk-taking in developed countries: The influence of market power and bank regulations. Journal of International Financial Markets. https://doi.org/10.1016/j.intfin.2018.12.007
  16. Davis, E. P., Karim, D., & Noel, D. (2020). The bank capital-competition-risk nexus – A global perspective. Journal of International Financial Markets, Institutions and Money, 65, 101169. https://doi.org/10.1016/j.intfin.2019.101169
  17. Demirgüç-Kunt, A., & Detragiache, E. (2011). Basel core principles and bank soundness: Does compliance matter? Journal of Financial Stability, 7(4), 179–190. https://doi.org/10.1016/j.jfs.2010.03.003
  18. Dima, B., Dincă, M. S., & Spulbăr, C. (2014). Financial nexus: Efficiency and soundness in banking and capital markets. Journal of International Money and Finance, 47, 100–124. https://doi.org/10.1016/j.jimonfin.2014.05.002
  19. Ernst and Young. (2016). World Islamic banking competitiveness report 2016. Jordan.
  20. González, L. O., Razia, A., Búa, M. V., & Sestayo, R. L. (2017). Competition, concentration and risk taking in banking sector of MENA countries. Research in International Business and Finance, 42, 591–604. https://doi.org/10.1016/j.ribaf.2017.07.004
  21. Ibrahim, M. H., & Rizvi, S. A. R. (2017). Bank lending, deposits and risk-taking in times of crisis: A panel analysis of Islamic and conventional banks. Emerging Markets Review, 35, 31–47. https://doi.org/10.1016/j.ememar.2017.12.003
  22. Jiménez, G., Lopez, J. A., & Saurina, J. (2013). How does competition affect bank risk-taking? Journal of Financial Stability, 9(2), 185–195. https://doi.org/10.1016/j.jfs.2013.02.004
  23. Kabir, M. N., & Worthington, A. C. (2017). The ‘competition–stability/fragility’ nexus: A comparative analysis of Islamic and conventional banks. International Review of Financial Analysis, 50, 111–128. https://doi.org/10.1016/j.irfa.2017.02.006
  24. Keeley, M. C. (1990). Deposit insurance, risk, and market power in banking. The American Economic Review, 80(5), 1183–1200.
  25. Khan, F. (2010). How “Islamic” is Islamic banking? Journal of Economic Behavior and Organization, 76(3), 805–820. https://doi.org/10.1016/j.jebo.2010.09.015
  26. Khattak, M. A., Alaeddin, O., & Abojeib, M. (2021). Competition-stability relationship in dual banking systems: Evidence from efficiency-adjusted market power. Singapore Economic Review, 67(1), 1–24. https://doi.org/10.1142/S0217590820420096
  27. Khattak, M. A., & Ali, M. (2021). Are competition and performance friends or foes? Evidence from the Middle East banking sector. International Journal of Islamic and Middle Eastern Finance and Management, 14(4), 671–691. https://doi.org/10.1108/IMEFM-08-2019-0348
  28. Khattak, M. A., Hamid, B. A., Islam, M. U., & Ali, M. (2021). Competition, diversification, and stability in the Indonesian banking system. Bulletin of Monetary Economics and Banking, 24(Special Issue), 59–88. https://doi.org/10.21098/bemp.v24i0.1481
  29. Kick, T., & Prieto, E. (2015). Bank risk taking and competition: Evidence from regional banking markets. Review of Finance, 19(3), 1–38. https://doi.org/10.1093/rof/rfu019
  30. Koetter, M., Kolari, J. W., & Spierdijk, L. (2012). Enjoying the quiet life under deregulation? Evidence from adjusted Lerner indices for U.S. banks. Review of Economics and Statistics, 94(2), 462–480. https://doi.org/10.1162/REST_a_00155
  31. Laeven, L., & Levine, R. (2009). Bank governance, regulation and risk taking. Journal of Financial Economics, 93(2), 259–275. https://doi.org/10.1016/j.jfineco.2008.09.003
  32. Liu, H., Molyneux, P., & Nguyen, L. H. (2012). Competition and risk in south east Asian commercial banking. Applied Economics, 44(28), 3627–3644. https://doi.org/10.1080/00036846.2011.579066
  33. Marquez, R. (2002). Competition, adverse selection, and information dispersion in the banking industry. Review of Financial Studies, 15(3), 901–926. https://doi.org/10.1093/rfs/15.3.901
  34. Martínez-Miera, D., & Repullo, R. (2010). Does competition reduce the risk of bank failure? Documentos de Trabajo ( CEMFI ), No. 1, 2008, 23. https://doi.org/10.1093/rfs/hhq057
  35. Matutes, C., & Vives, X. (1996). Competition for deposits, fragility, and insurance. Journal of Financial Intermediation, 5(2), 184–216. https://doi.org/10.1006/jfin.1996.0010
  36. Matutes, C., & Vives, X. (2000). Imperfect competition, risk taking, and regulation in banking - An incentive structure for a financial intermediary. European Economic Review, 44(1), 1–34. https://doi.org/10.1016/S0014-2921(98)00057-9
  37. Mishkin, F. (1999). Lessons from the Asian crisis. Journal of International Money and Finance, 18(18), 709–723. https://doi.org/10.1080/14649880050008827
  38. Naceur, S. Ben, & Omran, M. (2011). The effects of bank regulations, competition, and financial reforms on banks’ performance. Emerging Markets Review, 12(1), 1–20. https://doi.org/10.1016/j.ememar.2010.08.002
  39. Noman, A. H., Gee, C. S., & Isa, C. R. (2017). Does competition improve financial stability of the banking sector in ASEAN countries? An empirical analysis. PLoS ONE, 12(5), 1–27. https://doi.org/10.1371/journal.pone.0176546
  40. Perry, F., & Rehman, S. S. (2011). Globalization of Islamic finance: Myth or reality? International Journal of Humanities and Social Science, 1(19), 107–119.
  41. Repullo, R. (2004). Capital requirements, market power, and risk-taking in banking. Journal of Financial Intermediation, 13(2), 156–182. https://doi.org/10.1016/j.jfi.2003.08.005
  42. Rizvi, S. A. R., Narayan, P. K., Sakti, A., & Syarifuddin, F. (2020). Role of Islamic banks in Indonesian banking industry: An empirical exploration. Pacific-Basin Finance Journal, 62, 101117. https://doi.org/10.1016/j.pacfin.2019.02.002
  43. Schaeck, K., & Cihak, M. (2014). Competition, efficiency, and stability in banking. Financial Management, 43(1), 215–241. https://doi.org/10.1111/fima.12010
  44. Schaeck, K., Cihak, M., & Wolfe, S. (2009). Are competitive banking systems more stable? Journal of Money, Credit and Banking, 41(4), 711–734. Retrieved from https://econpapers.repec.org/RePEc:mcb:jmoncb:v:41:y:2009:i:4:p:711-734
  45. Schaeck, K., & Martin Čihák. (2007). Banking competition and capital ratios (IMF Working Paper No. 2007/216). https://doi.org/10.1097/MAO.0000000000001282
  46. Soedarmono, W., Machrouh, F., & Tarazi, A. (2013). Bank competition, crisis and risk taking: Evidence from emerging markets in Asia. Journal of International Financial Markets, Institutions and Money, 23(1), 196–221. https://doi.org/10.1016/j.intfin.2012.09.009
  47. Tabak, B. M., Fazio, D. M., & Cajueiro, D. O. (2012). The relationship between banking market competition and risk-taking: Do size and capitalization matter? Journal of Banking and Finance, 36(12), 3366–3381. https://doi.org/10.1016/j.jbankfin.2012.07.022
  48. Tan, Y., Chi, M., Lau, K., & Gozgor, G. (2020). Competition and profitability : Impacts on stability in Chinese banking. International Journal of the Economics of Business, 28(2), 1–24. https://doi.org/10.1080/13571516.2020.1724009
  49. Turk Ariss, R. (2010). On the implications of market power in banking: Evidence from developing countries. Journal of Banking & Finance, 34(4), 765–775. https://doi.org/10.1016/j.jbankfin.2009.09.004
  50. Weber, O. (2017). Corporate sustainability and financial performance of Chinese banks. Sustainability Accounting, Management and Policy Journal, 8(3), 358–385. https://doi.org/10.1108/SAMPJ-09-2016-0066