Market Power and Efficiency of Islamic Banking and Conventional Banking in Indonesia

Abstract

ASEAN Economic Community (AEC) of banking industry requires both Islamic and conventional banking to improve their efficiency because the competition in banking market industry will be more intense. Therefore, this study aims to identify the type of hyphotesis of industrial organization which exists in Islamic and conventional banks in order to investigate their readiness for AEC. The research sampling consists of 10 Islamic banks and 10 conventional banks from January 2009 to December 2016. To measure x-efficiency and scale efficiency, this research uses Data Envelopment Analysis (DEA). Meanwhile, the concentration is measured by Lerner index. The hypothesis is tested by using panel regression. The result shows SCP (Structure-Conduct-Performance) hypothesis is closely applied to Islamic and conventional banks because market concentration significantly influences profitability. RMP (Relative Market Power) hypothesis is also closely applied to Islamic and conventional banking, this indicates Indonesian banking has market power in determining prices and this condition makes the profit higher. RES (Relative Efficiency Structure) and SES (Scale Efficiency Structure) hypothesis do not exist in both conventional and Islamic banks because x-efficiency and scale efficiency do not affect profitability, concentration, and market share simultaneously. Market power and efficiency researches are commonly conducted in conventional banking, however there are only a few research in Islamic banking area. The novelty of this study is the comparison between conventional and Islamic banking in the term of market structure and efficiency.

Market power or efficiency? An empirical study on the Indonesian fertilizer industry

“…Consequently, increased profits will also enhance profitability. Mala et al (2018) show that market power positively affects performance. Based on the argument, we propose the following hypothesis: H1: Market power positively affects performance.…”

“…In this respect, concentration indicates incumbents' market power. Mala et al (2018) and Gonzalez et al (2019) demonstrate that market power positively affects performance.…”

Competitiveness and Market Concentration of Islamic Banking Industry: A Comparison Study between Indonesia and Malaysia

“…That is, banks earned their revenues operating under conditions of monopolistic competition in that period. However, research conducted by Mala, Rodoni, and Yaman (2018) about market power and efficiency of Islamic Banking and Conventional Banking in Indonesia in the period of January 2009 to December 2016 showed that SCP (Structure-Conduct-Performance) hypothesis is closely applied to Islamic and conventional banks because market concentration significantly influences profitability. RMP(Relative Market Power) hypothesis is also closely applied to Islamic and conventional banking, this indicates Indonesian banking has market power in determining prices and this condition makes the profit higher.…”

Technical Efficiency and Intellectual Capital Islamic Banks in Indonesia

“…Recent studies indicate that the efficiency of Islamic banks in Asian countries has been on the rise (Chowdhury & Haron, 2021;Mala et al, 2020;Nailah & Rusydiana, 2020;Safiullah, 2021;Serly & Handayani, 2020;Solihin et al, 2016). Data Envelopment Analysis results show that Islamic banks in Thailand and Malaysia consistently rank as highly efficient.…”