A value-based measure of market power for the participatory deposits of Islamic banks

Abstract

Traditional earnings-based measures of market power cannot be applied to Islamic banks since depositors are investors and not creditors. We develop a new market power measure based on the capitalized value of a bank’s deposit funds’ management fees in which more powerful banks price deposits to create greater long-term value, whilst less powerful banks target short-term earnings or risk management goals. Applying panel VAR and two-step system GMM to international data from 1990 to 2022, we validate the measure by showing that deposit growth rates (Granger) cause market power and are the only significant determinant across all two-step system GMM model and sub-sample variants.