Do Islamic Banks Have Greater Market Power?

Time and again we hear about how Islamic banking has proven to be on par with conventional banking (whether that is good is another discussion!), here we profile a recent paper that provides a similar conclusion although it uses a far more technical (and substantiated) approach.

Do Islamic Banks Have Greater Market Power?

Laurent Weill

Laboratoire de Recherche en Gestion (LARGE) (Management Research Laboratory)

Université de Strasbourg

February 2009

Abstract: "The aim of this paper is to investigate whether Islamic banks have greater market power than conventional banks. Indeed Islamic banks may benefit from a captive clientele, owing to religious principles, which would be charged greater prices. To measure market power, we compute Lerner indices on a sample of banks from 17 countries in which Islamic and conventional banks coexist over the period 2000-2007. Comparison of Lerner indices shows no significant difference between Islamic banks and conventional banks. When including control variables, regression of Lerner indices even suggests that Islamic banks have a lower market power than conventional banks. A robustness check with the Rosse-Panzar model confirms that Islamic banks are not less competitive than conventional banks. The lower market power of Islamic banks can be explained by their different norms and their different incentives."

Do Islamic Banks Have Greater Market Power?