Competitive Condition and Market Power of Islamic and Commercial Conventional Banks in Indonesia

Abstract

This study aims to examine the competitive conditions and the market power of the Islamic and conventional banks using firm level data over the period 2006–2013 in Indonesia. Using samples of 27 Islamic banks and 106 conventional commercial banks, the study uses a variety of structural and non-structural measures related to the traditional approach and the new empirical approach of the industrial organization. The methodology is based on set of measures of the competition and market power. The results of the competition analysis suggest that the banking markets of Indonesia cannot be characterized by the bipolar cases of either perfect competition or monopoly over 2006–2013. That is, banks earned their revenues operating under conditions of monopolistic competition in that period. Islamic banks in Indonesia operate in a relatively less competitive environment compared to conventional banks, or in other words, market power is higher in Islamic markets compared to conventional commercial markets.