The ‘competition–stability/fragility’ nexus: A comparative analysis of Islamic and conventional banks

Kabir, Md. Jahangir; Worthington, Andrew C.

doi:10.1016/j.irfa.2017.02.006

Cited by 136 publications

(138 citation statements)

References 50 publications

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“…The finding is also robust either when we use the FE technique or consider the endogeneity problem by using the 2SLS technique. Our result confirms the 'competition-fragility' hypothesis in a dual market proposed by Kabir and Worthington (2017). The heightened competition between Islamic and conventional banks may encourage banks to take excessive risks that could threaten their financial stability.…”

Section: Introductionsupporting

confidence: 84%

“…Furthermore, in contrast to Kabir and Worthington (2017), who focus on both accounting (Zscore) and market-based measures of stability (distance-to-default), our approach only focuses on accounting measures because (1) it is directly related to the probability of banks' insolvency 2 , (3) it is popular and widely used in the empirical banking study and is implemented as a time-varying measure in panel studies, and (3) it uses market-based measure stock price data to estimate volatility in the stock price data, but most Islamic banks are not listed in the equity market 3 . In addition, following Leon (2015), rather than using a bank-level Lerner index as in Kabir and Worthington (2017) to measure competition, we use a weighted average Lerner index at the country level.…”

Section: Introductionmentioning

confidence: 87%

“…A recent study by Kabir and Worthington (2017), to the best of our knowledge, is the only study that specifically investigates the impact of market competition on banks' stability in the context of the dual banking system. Their results support the 'competition fragility' hypothesis.…”

Section: Introductionmentioning

confidence: 99%

“…Whereas Kabir and Worthington (2017) use panel vector autoregressive (PVAR) and two-stage quantile regression, this paper will use fixed-effect (FE) and two-stages least squares (2SLS).…”

Section: Introductionmentioning

confidence: 99%

“…In addition, following Leon (2015), rather than using a bank-level Lerner index as in Kabir and Worthington (2017) to measure competition, we use a weighted average Lerner index at the country level. We believe that this measure will be more appropriate in our case since we investigate the impact of country-level market competition, not bank-level market power.…”

Section: Introductionmentioning

confidence: 99%

See 4 more Smart Citations

Competition in Dual Markets: Implications for Banking System Stability

2018

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This paper examines the impact of market competition on the stability of Islamic and conventional banks in countries where these banks operate alongside one another. To investigate this issue, we use a sample of 100 Islamic and 390 conventional banks from 19 countries. Our baseline result shows that competition in a dual market erodes banks' stability.The heightened competitive pressure in a dual market encourages banks to engage in excessive risk-taking that can jeopardize their stability. However, the effect of competition is missing for Islamic banks, suggesting their superiority in having religious clients. Although our overall results support the 'competition-fragility' hypothesis, we find that competition can be beneficial for banks, especially at a low to medium competition level. Last, we also find that the adverse impact of competition can be reduced by having high capitalization, especially in the case of a conventional bank. Some policy implications are discussed in the paper. JEL Classifications: D40; G21; G28; Z12

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Section: Introductionsupporting

confidence: 84%

Section: Introductionmentioning

confidence: 87%

Section: Introductionmentioning

confidence: 99%

“…Whereas Kabir and Worthington (2017) use panel vector autoregressive (PVAR) and two-stage quantile regression, this paper will use fixed-effect (FE) and two-stages least squares (2SLS).…”

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Competition in Dual Markets: Implications for Banking System Stability

2018

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Banks' environmental policy and business outcomes: The role of competition

Khattak

Saiti

2020

Bus Strat Env

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By integrating the two areas of competition–performance and environment–performance, this research explores if competition matters in the relationship between environmental practices and interest margins in the market. A panel of 458 banks from 74 countries for the period of 2006–2016 is used, and the sample is further divided into developed and developing countries. This paper uses the system Generalized Method of Moments estimator to tackle potential omitted variable bias, endogeneity, and simultaneity issues. Without competition, environmental practices only affect banks in developing countries; however, the results show a significant impact for the full sample, including developed countries, when the competition is taken into consideration, suggesting that competition might play a role in the relationship of environmental practices and interest margins. In the full sample, competition impacts the relationship negatively after a moderate level of competition is reached in the market. The environmental practices in developing countries are prone to competition in the market. In developed countries, the competition is found to be lightly positively moderating the impact of environmental practices on interest margins. Based on these findings, it is recommended that developing countries should have a low or moderate level of competition to encourage environmental practices. For developed countries, however, high competition should be preferred to encourage banks to consider environmental practices as one of their core business strategies. These findings are found robust to different statistical estimators.

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Bank competition, stability, and intervention quality

et al. 2018

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We use a flexible semi‐parametric estimation approach and a sample of 7,227 U.S., U.K., and Canadian banks for 2009–2015 to provide evidence that banking stability is non‐linearly determined by competition. We show that stability is not monotonic against competition, and may increase and decrease at high competition, has a mixed behaviour at medium competition, and increases at low competition. This non‐monotonic stability behaviour at different competition levels is attributed to the intervention quality, which is found to be an important determinant of the competition–stability relation. It is non‐linearly related to and being revised at different competition levels. As intervention is a policy variable, its level can be adjusted to reduce the competition effects on stability. We illustrate that for the U.S. banking sector, the intervention quality has to hedge these competition effects. Regulators should treat intervention quality as a “hedging instrument” against the destabilizing competition effects.

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The ‘competition–stability/fragility’ nexus: A comparative analysis of Islamic and conventional banks

Cited by 136 publications

References 50 publications

Competition in Dual Markets: Implications for Banking System Stability

Competition in Dual Markets: Implications for Banking System Stability

Banks' environmental policy and business outcomes: The role of competition

Bank competition, stability, and intervention quality

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