Switching costs in Islamic banking: The impact on market power and financial stability

We contribute to the literature on Islamic banking by examining whether the magnitude of switching costs differs for customers in Islamic and conventional banks. We also investigate the effect of switching costs on the market power and stability of both bank groups. Using data from 17 countries with dual banking systems for the period 2000–2016, we find that switching costs are lower for Islamic banks’ customers when compared to peers using conventional banks. This result is compatible with the ‘Maqasid Shariah’ or social justice objective of Islamic banks. Our results further reveal that by charging customers higher switching costs or locking them in results in more market power but less financial stability. These results are robust when we consider alternative estimation techniques, alternative proxies for market power, and alternative measurements of switching costs.