Mitigating Market Power in Banking: Cost Efficiency and the Path Toward Consumer Welfare
Article Sidebar
Welfare Economics,
Islamic Banking,
Market Power,
Financial Consumer Protection,
Quantile Regression
Main Article Content
Abstract
Purpose – This study investigates the association between cost efficiency and the welfare performance of Islamic banks in Indonesia, focusing on the social costs of market power. The analysis covers both privately owned and state-owned Islamic banks over the period 2009–2017.
Design/methodology/approach – The research utilizes Ordinary Least Squares (OLS), Fixed Effects (FE) panel regression, and Quantile Regression (QR) models to account for unobserved heterogeneity and improve policy applicability. To address potential endogeneity and reverse causality, the Two-Stage Least Squares Instrumental Variable (2SLS-IV) method is employed.
Findings – Empirical results demonstrate a significant positive link between cost efficiency and banks’ welfare performance, implying that improving efficiency can mitigate welfare losses. Furthermore, the impact of cost efficiency on welfare outcomes varies depending on the bank’s familiarity with local market dynamics. QR results highlight that while cost efficiency may not eliminate welfare losses at the lower quantiles (Q.25–Q.50), it remains a critical factor in minimizing such losses.
Article Details
References
Abojeib, M., Habib, F. 2019. Blockchain for Islamic Social Responsibility Institutions,
FinTech as a Disruptive Technology for Financial Institutions. IGI Global, 221-240.
Abu-Bakar, N., Sofian, R., Kiyotaka, U. 2017. Cryptocurrency Framework Diagnostics from
Islamic Finance Perspective: A New Insight of Bitcoin System Transaction. International Journal of Management Science and Business Administration, 4(1), 19-28.
Abu-Bakar, M.M. 2018. Shariah Analysis of Bitcoin, Cryptocurrency and Blockchain.
Ahmad, W.M.W., Marhaini, W. 2008. Some Issues of Gharar (Uncertainty) in Insurance.
Essential Readings in Islamic Finance.
Ahmat, N., Bashir, S. 2017. Central Bank Cryptocurrency: A Monetary Policy Perspective.
Bank Negara Malaysia, September.
Alam N., Gupta L., Zameni, A. 2019a. Fintech Regulation. In: Fintech and Islamic Finance,
-158. Palgrave Macmillan, Cham.
Banker, R.D., Charnes, A. and Cooper, W.W. (1984), “Some models for estimating technical and scale inefficiencies in data envelopment analysis”, Management Science, Vol. 30 No. 9, pp.1078-1092.
Berger, A.N. and Hannan, T.H. (1998), “The efficiency cost of market power in the banking industry: A test of the “quiet life” and related hypotheses”, Review of Economics and Statistics, Vol. 80 No. 3,pp.454-465.
Berger, A.N. and Humphrey, D.B. (1997), “Efficiency of financial institutions: International survey and directions for future research”, European journal of operational research,
Vol. 98 No. 2, pp.175-212.
Blundell, R. and Bond, S. (1998), “Initial conditions and moment restrictions in dynamic panel data models”, Journal of econometrics, Vol. 87 No. 1, pp.115-143.
Bokpin, G.A. (2013), “Ownership structure, corporate governance and bank efficiency: an empirical analysis of panel data from the banking industry in Indonesia”, Corporate Governance: The International Journal of Business in Society, Vol.13 No. 3, pp.274-
Chen, L. and Shapiro, S.S. (1995), “An alternative test for normality based on normalized
spacings”, Journal of Statistical Computation and Simulation, Vol. 53 No. 3/4, pp.269- 287.
Chen, S., Nazir, M.I., Hashmi, S.H. and Shaikh, R. (2019), “Bank Competition, Foreign Bank Entry, and Risk-Taking Behavior: Cross Country Evidence”, Journal of Risk and Financial Management, Vol. 12 No. 3, pp.106-131.
Färe, R., Grosskopf, S., Maudos, J. and Tortosa-Ausina, E. (2015), “Revisiting the quiet life hypothesis in banking using nonparametric techniques”, Journal of Business
Economics and Management, Vol. 16 No. 1, pp.159-187.
Lensink, R., Meesters, A. and Naaborg, I. (2008), “Bank efficiency and foreign ownership: Do good institutions matter?” Journal of Banking & Finance, Vol. 32 No. 5, pp.834-844.
Lin, H., (2011), “Foreign bank entry and firms’ access to bank credit: Evidence from China”, Journal of Banking & Finance, Vol. 35 No. 4, pp.1000-1010.
Lundvall, K. and Battese, G.E. (2013), “Firm size, age and efficiency: evidence from Kenyan
manufacturing firms”, The Journal of development studies, Vol. 36 No. 3, pp.146-163.
Maudos, J. and de Guevara, J.F. (2007), “The cost of market power in banking: Social welfare loss vs. cost inefficiency”, Journal of Banking & Finance, Vol. 31 No. 7, pp.2103-2125
Miskam, S., Shahwahid, F.M., Sholehuddin, N.B. 2018. Catching the Fintech Wave in
Islamic Finance: Regulatory Approach for Malaysia. 4th Muzakarah Fiqh & International Fiqh Conference (MFIFC 2018).
Miskam, S., Yaacob, A., Rosman, R. 2019. Fintech and Its Impact on Islamic Fund
Management in Malaysia: A Legal Viewpoint. Oseni, U., Hassan, M. and Hassan, R. (Ed.) Emerging Issues in Islamic Finance Law and Practice in Malaysia, Emerald Publishing Limited, 223-246. https://doi.org/10.1108/978-1-78973-545-120191019.
Mohamed, H., Ali, H. 2018. Blockchain, Fintech, and Islamic Finance: Building the Future
in the New Islamic Digital Economy: Walter de Gruyter GmbH & Co KG