Do Islamic banks have greater market power?

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Title: Do Islamic banks have greater market power?
Author: Weill, Laurent
Organization: Bank of Finland
Department / Unit: Institute for Economies in Transition (BOFIT)
Series: BOFIT Discussion Papers
Series number: 2/2010
Year of publication: 2010
Publication date: 26.2.2010
Published in: Published in Comparative Economic Studies (2011) 53, 291-306
DOI: 10.1057/ces.2011.1
Pages: 25 s.
Keywords: pankkitoiminta; kilpailu; islam; kansainvälinen; kilpailukyky; Bofit-kokoelma; Islamilaiset pankit; markkinavoima
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.

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