Competitive condition and market power of Islamic banks in Indonesia

Abstract

PurposeThe purpose of this paper is to examine the competitive conditions and market power of Islamic banks in Indonesia for the period of 2006-2013.Design/methodology/approachUsing samples of 27 Islamic 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 a set of measures of the competition and market power. The first measures, concentration ratios and Herfindahl–Hirschman index, are to determine the competitiveness level, while the second measures of Panzar–Rosse H-statistic and Lerner index are to examine the market power of Islamic banks in Indonesia.FindingsThe finding of this study has confirmed the situation of Islamic banking industry in Indonesia which is operated in a higher degree of market power which leads to a less competitive market. Islamic banks earn their revenues under monopolistic competition over the tested period. This study has also found a negative but insignificant relationship between concentration and competition which shows that in the past few years, the market power for leading firms in Indonesia Islamic banking industry has reduced.Practical implicationsThe paper is a very useful source of information that may provide relevant guidelines in guiding the future development of competition of Islamic Banking industry. In addition, the paper provides relevant guidelines for improving competitiveness of Islamic banks.Originality/valueThis study combines two approaches for bank competition measurement and bank market powers measurement which can provide more robust findings. To the best of the authors’ knowledge, the study on Islamic banking competitiveness level and market power is very limited, especially in the case of Indonesia. Therefore, this study could contribute significantly toward the literature of the related field.