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Competition - stability relationship in dual banking systems Islamic vs. conventional banks

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Date
2017
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Abstract
Numerous attempts have been made to study the impact of competition on banking-stability before and after the recent global financial crisis. In the rich theoretical and empirical literature on the topic, two contradictory views have surfaced, i.e. the competition-fragility view and the competition-stability view. This thesis provides empirical evidence of a nonlinear relationship between competition and stability that explains, at least partially, the conflicting results of previous theoretical and empirical studies. Furthermore, while the existing literature focuses on conventional banking, this thesis investigates both Islamic and conventional banks in dual banking systems and explores whether or not bank types affect the competition-stability relationship. Using GMM technique on panel data covering the dual-banking countries that have significant share of Islamic banking for the period from 2004 until 2014, this thesis finds that the relationship between market power and stability is nonlinear for both Islamic and conventional banks, albeit with a marginal difference between them. The impact of market power is initially positive "supporting the charter value theory," but it turns to be negative as soon as banks' market power exceeds a certain limit, probably because the negative impact of the "too-important-to-fail" moral hazard overcomes the initial positive impact.
Keywords
Banking stability , Islamic banks , Conventional banks , GMM technique
Citation
Abojeib, M. (2017). Competition - stability relationship in dual banking systems Islamic vs. conventional banks (Doctoral dissertation). INCEIF, Kuala Lumpur. Retrieved from https://ikr.inceif.org/handle/INCEIF/2421
Publisher
INCEIF

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