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
Copyright (c) 2022 Mudeer Ahmed Khattak
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References
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- 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
- 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
- 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
- Besanko, D., & Thakor, A. V. (1993). Relationship banking, deposit insurance and bank portfolio Choice.
- Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143.
- 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
- 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
- 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
- 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
- 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
- Cihak, M., & Hesse, H. (2008). Islamic banks and financial stability: An empirical analysis (IMF Working Papers No. 2008/016).
- 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
- 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
- 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
- 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
- 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
- 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
- Ernst and Young. (2016). World Islamic banking competitiveness report 2016. Jordan.
- 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
- 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
- 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
- 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
- Keeley, M. C. (1990). Deposit insurance, risk, and market power in banking. The American Economic Review, 80(5), 1183–1200.
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- Mishkin, F. (1999). Lessons from the Asian crisis. Journal of International Money and Finance, 18(18), 709–723. https://doi.org/10.1080/14649880050008827
- 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
- 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
- Perry, F., & Rehman, S. S. (2011). Globalization of Islamic finance: Myth or reality? International Journal of Humanities and Social Science, 1(19), 107–119.
- 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
- 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
- Schaeck, K., & Cihak, M. (2014). Competition, efficiency, and stability in banking. Financial Management, 43(1), 215–241. https://doi.org/10.1111/fima.12010
- 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
- Schaeck, K., & Martin Čihák. (2007). Banking competition and capital ratios (IMF Working Paper No. 2007/216). https://doi.org/10.1097/MAO.0000000000001282
- 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
- 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
- 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
- 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
- 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
References
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
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
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
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
Besanko, D., & Thakor, A. V. (1993). Relationship banking, deposit insurance and bank portfolio Choice.
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143.
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
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
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
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
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
Cihak, M., & Hesse, H. (2008). Islamic banks and financial stability: An empirical analysis (IMF Working Papers No. 2008/016).
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
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
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
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
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
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
Ernst and Young. (2016). World Islamic banking competitiveness report 2016. Jordan.
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
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
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
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
Keeley, M. C. (1990). Deposit insurance, risk, and market power in banking. The American Economic Review, 80(5), 1183–1200.
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
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
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
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
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
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
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
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
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
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
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
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
Mishkin, F. (1999). Lessons from the Asian crisis. Journal of International Money and Finance, 18(18), 709–723. https://doi.org/10.1080/14649880050008827
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
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
Perry, F., & Rehman, S. S. (2011). Globalization of Islamic finance: Myth or reality? International Journal of Humanities and Social Science, 1(19), 107–119.
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
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
Schaeck, K., & Cihak, M. (2014). Competition, efficiency, and stability in banking. Financial Management, 43(1), 215–241. https://doi.org/10.1111/fima.12010
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
Schaeck, K., & Martin Čihák. (2007). Banking competition and capital ratios (IMF Working Paper No. 2007/216). https://doi.org/10.1097/MAO.0000000000001282
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
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
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
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
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