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Structural changes, competition and bank stability in Malaysia's dual banking system

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Date
2019
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Abstract
This paper assesses Malaysia's competition landscape and its risk implications subsequent to conventional banking consolidation and Islamic banking penetration in the aftermath of the 1997/1998 Asian financial crisis. Employing a panel sample of conventional and Islamic commercial banks, it arrives at the following conclusions. First, the consolidation exercise, which has led to a significant reduction in the number of domestic commercial banks, has not stifled banking competition. Second, the paper provides empirical support for the competition-stability relationship, particularly for the conventional banking sector. Islamic banking sector risk appears to be neutral to market competition or market power, although there is limited evidence that it increases with overall market concentration. Finally, the analysis uncovers the risk-increasing effect of the Islamic banking market structure on the conventional banking sector. By contrast, conventional banking market concentration tends to reduce the credit risk of Islamic banks.
Keywords
Dual banking system , Competition stability , Consolidation , Bias-corrected LSDV
Citation
Ibrahim, M. H., Salim, K., Abojeib, M., & Lau, W. Y. (2019). Structural changes, competition and bank stability in Malaysia's dual banking system. Economic Systems, 43, 111-129. https://doi.org/10.1016/j.ecosys.2018.09.001
Publisher
Elsevier B.V.

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