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

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  • Miah, Mohammad Dulal
  • Kabir, Md. Nurul
  • Safiullah, Md

Abstract

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.

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  • Miah, Mohammad Dulal & Kabir, Md. Nurul & Safiullah, Md, 2020. "Switching costs in Islamic banking: The impact on market power and financial stability," Journal of Behavioral and Experimental Finance, Elsevier, vol. 28(C).
  • Handle: RePEc:eee:beexfi:v:28:y:2020:i:c:s2214635020303361
    DOI: 10.1016/j.jbef.2020.100409
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    More about this item

    Keywords

    Switching cost; Market power; Islamic banks; Conventional banks; Stability;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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