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Dual market competition and deposit rate setting in Islamic and conventional banks

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  • Meslier, Céline
  • Risfandy, Tastaftiyan
  • Tarazi, Amine

Abstract

This paper addresses the issue of competition in dual banking markets by analyzing the determinants of deposit rates in Islamic and conventional banks. Using a sample of 20 countries with dual banking systems over the 2000–2014 period, our results show significant differences in the drivers of Islamic and conventional banks' pricing behavior. Conventional banks with stronger market power set lower deposit rates but market power is not significant for Islamic banks. In predominantly Muslim environments, conventional banks set higher deposit rates and further higher when their market power is lower. Whereas conventional banks are influenced by the competitiveness of Islamic banks, Islamic banks are only affected by their peers in predominantly Muslim countries. Our findings have important implications regarding competition and bank stability in dual banking markets.

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  • Meslier, Céline & Risfandy, Tastaftiyan & Tarazi, Amine, 2017. "Dual market competition and deposit rate setting in Islamic and conventional banks," Economic Modelling, Elsevier, vol. 63(C), pages 318-333.
  • Handle: RePEc:eee:ecmode:v:63:y:2017:i:c:p:318-333
    DOI: 10.1016/j.econmod.2017.02.013
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    Cited by:

    1. Bitar, Mohammad & Tarazi, Amine, 2019. "Creditor rights and bank capital decisions: Conventional vs. Islamic banking," Journal of Corporate Finance, Elsevier, vol. 55(C), pages 69-104.
    2. Tastaftiyan Risfandy & Amine Tarazi & Irwan Trinugroho, 2018. "Competition in dual markets: Implications for banking system stability," Working Papers hal-01757982, HAL.
    3. Inka Yusgiantoro & Wahyoe Soedarmono & Amine Tarazi, 2017. "Bank consolidation and financial stability revisited: Evidence from Indonesia," Working Papers hal-01577970, HAL.
    4. repec:eee:finsta:v:34:y:2018:i:c:p:12-43 is not listed on IDEAS
    5. Kévin Spinassou & Leo Indra Wardhana, 2018. "Regulation of Islamic banks: Basel III capital framework and profit-sharing investment accounts," Working Papers hal-01674376, HAL.

    More about this item

    Keywords

    Deposit rate; Competition; Dual banking market; Islamic and conventional banks;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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