2015-13: The 'competition-stability/fragility' nexus: A comparative analysis of Islamic and conventional banks (Working paper)

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Kabir, Md. Nurul N.
Worthington, Andrew C.
Griffith University Author(s)
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Neupane, Suman

Roca, Eduardo

Date
2015
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65 pages

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Abstract

The 'competition-stability/fragility' nexus is one of the more debated issues in the banking literature. While there is ample evidence on the relationship between competition and stability in different countries and regions, no prior study investigates the competition-stability/fragility nexus in the context of Islamic and conventional banks. We do this using data on banks drawn from 16 economies over the period 2000-2012. We measure the lack of competition using the Lerner index, stability using both accounting-based measures, such as the Z-score and the NPL ratio, and market-based measures, including Merton's distance to default. We employ PVAR and two-stage quantile regression to estimate the relationship. Our results lend support to the competition-fragility hypothesis in both Islamic and conventional banks. We also find the magnitude of the market power effect on stability is greater for conventional banks than Islamic banks. Lastly, banks in the median quantile of stability have a greater ability to reduce credit risk through gaining market power than banks in the lower and upper quantiles.

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Copyright © 2010 by author(s). No part of this paper may be reproduced in any form, or stored in a retrieval system, without prior permission of the author(s).

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Finance

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G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure

G28 - Financial Institutions and Services: Government Policy and Regulation

Competition

Stability

Lerner index

Panel VAR

Z-score

Distance-to-default

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