Does competition make banks riskier in dual banking system?

Nafis Alam, Baharom Abdul Hamid, Dyi Ting Tan

Research output: Contribution to journalArticleResearchpeer-review

34 Citations (Scopus)

Abstract

This paper investigates competition and risk-taking behaviour of Islamic banks taking a sample of 59 Islamic banks and 149 conventional banks from 10 highly developed Islamic banking countries between 2006 and 2016. The level of competitiveness between the two types of banks is determined using Lerner index and estimations show that Islamic banks have lower market power than conventional banks. After controlling all the bank and country-specific variables, the results show that competition and risk are positively related for the overall banking system and inversely related for Islamic banks which undoubtedly emphasize that inherent difference between risk-competition relationships among these two distinct bank types. Overall, in the case of Islamic banks, the results provide evidence in favour of “competition stability view” where higher competitive market associated with fierce competition from conventional banks and its peers' reduce Islamic banks' risk-taking behaviour.

Original languageEnglish
Pages (from-to)S34-S43
Number of pages10
JournalBorsa Istanbul Review
Volume19
Issue numberSupplement 1
DOIs
Publication statusPublished - Aug 2019
Externally publishedYes

Keywords

  • Banking
  • Competition
  • Islamic banking
  • Regulation
  • Risk management
  • Risk taking

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