Disruption or Catalyst? Foreign Banks' Impact on Competition in Indonesia's Islamic-Conventional Banking Ecosystem

Novita Kusuma Maharani; Alwahidin Alwahidin

Disruption or Catalyst? Foreign Banks' Impact on Competition in Indonesia's Islamic-Conventional Banking Ecosystem

Novita Kusuma Maharani, Alwahidin Alwahidin

Abstract

Research Originality: This study uniquely examines the impact of foreign bank penetration on bank competition within Indonesia's dual-banking system. By incorporating the moderating effect of Islamic banks, this research provides novel insights into the dynamics of bank competition in a multi-faceted financial ecosystem.

Research Objectives: This study investigates the impact of foreign banks on the level of competition in Indonesia's dual-banking system, encompassing both Islamic and conventional banks.

Research Methods: The study employs panel data analysis of Islamic and conventional banks in Indonesia from 2011 to 2021. Bank competition and foreign bank penetration are measured using the Lerner Index and various ratios of foreign banks, respectively.

Empirical Results: The findings reveal that an increase in the number of foreign banks enhances bank competition and reduces market power. However, increased foreign bank asset ownership is associated with reduced competition. While not statistically significant, Islamic banks tend supports increased competition in the banking sector.

Implications: To maintain a competitive balance, regulators should focus on controlling foreign asset ownership rather than merely the number of foreign banks. Furthermore, the role of Islamic banks in fostering competition warrants consideration in policy formulation.

JEL Classification: C1, E52

How to Cite:
Maharani, N. K., & Alwahidin. (2025). Disruption or Catalyst? Foreign Banks’ Impact on Competition in Indonesia’s Islamic Conventional Banking Ecosystem. Etikonomi, 24(1), 1 – 16. https://doi.org/10.15408/etk.v24i1.36338.

Keywords

foreign bank penetration; bank competition; Lerner index; foreign banks ratio; dual-banking system

References

Adhamovna, G. B. (2014). Banking Competition and Stability: Comprehensive Literature Review. International Journal of Management Science and Business Administration, 2(6), 26–33. https://doi.org/10.18775/ijmsba.1849-5664-5419.2014.26.1002

Alam, N., Hamid, B. A., & Tan, D. T. (2019). Does Competition Make Banks Riskier in Dual Banking System? Borsa Istanbul Review, 19, 34–43. https://doi.org/10.1016/j.bir.2018.09.002.

Albaity, M., Mallek, R. S., Hassan Al-Tamimi, H. A., & Noman, A. H. M. (2021). Does Competition Lead to Financial Stability or Financial Fragility for Islamic and Conventional Banks? Evidence from the GCC Countries. International Journal of Finance and Economics, 26(3), 4706–4722. https://doi.org/10.1002/ijfe.2037.

Ali, M., Haroon, O., Rizvi, S. A. R., & Azmi, W. (2020). Stability versus Fragility: New Evidence from 84 Banks. Studies in Economics and Finance, 38(2), 441–453. https://doi.org/10.1108/SEF-04-2020-0109.

Ariss, R. T. (2010). Competitive Conditions in Islamic and Conventional Banking: A Global Perspective. Review of Financial Economics, 19(3), 101–108. https://doi.org/10.1016/j.rfe.2010.03.002.

Bikker, J. A., Shaffer, S., & Spierdijk, L. (2012). Assessing Competition with the Panzar-Rosse Model: The Role of Scale, Costs, and Equilibrium. Review of Economics and Statistics, 94(4), 1025–1044. https://doi.org/10.1162/REST_a_00210.

Chen, D. (2018). Risk Aversion Decomposition and the Impact of Monetary Policy Surprises on Aggregate Tail Risk Aversion. Journal of Risk Finance, 19(5), 564–590. https://doi.org/10.1108/JRF-03-2018-0031.

Chen, J., & Zhu, L. (2019). Foreign Penetration, Competition, and Financial Freedom: Evidence from the Banking Industries in Emerging Markets. Journal of Economics and Business, 102, 26–38. https://doi.org/10.1016/j.jeconbus.2018.10.003.

Claessens, S., & Neeltje van Horen. (2014). Foreign Banks: Trends and Impact. Journal of Money, Credit and Banking, 46(s1), 295–326. https://doi.org/10.1111/jmcb.12092.

Ellis, S. (2019). The Role of Systemic Risk, Regulation and Efficiency within the Banking Competition and Financial Stability Relationship. [Unpublished Dissertation]. Northumbria University Newcastle.

Fadli, J. A., Sakti, I. M., & Jumono, S. (2021). Market Power and Bank Liquidity Risk: Implementations of Basel III using Net Stable Funding Ratio Approach. Jurnal Keuangan dan Perbankan, 25(2), 434–449. https://doi.org/10.26905/jkdp.v25i2.5525.

Fu, X. M., Lin, Y. R., & Molyneux, P. (2014). Bank Competition and Financial Stability in Asia Pacific. Journal of Banking and Finance, 38(1), 64–77. https://doi.org/10.1016/j.jbankfin.2013.09.012.

Fu, X. M., Lin, Y. R., & Molyneux, P. (2015). Bank Competition and Financial Stability in Asia Pacific. In Fu, X. M., Linm Y. R., & Molyneux, P (Eds). Bank Competition, Efficiency and Liquidity Creation in Asia Pacific, pp. 49–71. https://doi.org/10.1057/9781137533845_3.

González, F. (2022). Macroprudential Policies and Bank Competition: International Bank-Level Evidence. Journal of Financial Stability, 58, 1–18. https://doi.org/10.1016/j.jfs.2021.100967.

Hoang, K. T. A., Faff, R., & Haq, M. (2014). Market Discipline and Bank Risk Taking. Australian Journal of Management, 39(3), 327–350. https://doi.org/10.1177/0312896213496800.

İskenderoğlu, Ö., & Tomak, S. (2013). Competition and Stability: An Analysis of the Turkish Banking System. International Journal of Economics and Financial Issues, 3(3), 752–762.

Khattak, M. A., Alaeddin, O., & Abojeib, M. (2022). Competition-Stability Relationship in Dual Banking Systems: Evidence from Efficiency-Adjusted Market Power. Singapore Economic Review, 67(1), 309–332. https://doi.org/10.1142/S0217590820420096.

Khattak, M. A., Hamid, B. A., Islam, M. U., & Ali, M. (2021). Competition, Diversification, and Stability in the Indonesian Banking System. Buletin Ekonomi Moneter dan Perbankan, 24(Special Issue 2021), 59-88. https://doi.org/10.21098/BEMP.V24I0.1481.

Li, S. (2019). The Impact of Bank Regulation and Supervision on Competition: Evidence from Emerging Economies. Emerging Markets Finance and Trade, 55(10), 2334–2364. https://doi.org/10.1080/1540496X.2018.1547191.

Maharani, N. K. (2018). Do Risk, Business Cycle, and Competition Affect Capital Buffer? An Empirical Study on Islamic Banking in ASEAN and MENA. Journal of Islamic Monetary Economics and Finance, 3(2), 181–200. https://doi.org/10.21098/jimf.v3i2.756.

Mawardi, W., Mahfudz, M., Laksana, R. D., & Shaferi, I. (2020). Competition and Financial Effects between Islamic and Conventional Banking. WSEAS Transactions on Business and Economics, 17, 101–111. https://doi.org/10.37394/23207.2020.17.12.

Mulyaningsih, T., Daly, A., & Miranti, R. (2015). Foreign Participation and Banking Competition: Evidence from the Indonesian Banking Industry. Journal of Financial Stability, 19, 70–82. https://doi.org/10.1016/j.jfs.2015.02.001.

Natsir, M., Soedarmono, W., April Yudhi, W. S., Trinugroho, I., & Warokka, A. (2019). Foreign Penetration, Competition, and Credit Risk in Banking. Borsa Istanbul Review, 19(3), 249–257. https://doi.org/10.1016/j.bir.2019.05.003.

Nuralyza, O., Narsa, N. P. D. R. H., & Sriani, D. (2022). Bank Competition, Credit Risk, and Foreign Bank Penetration: Empirical Evidence from Indonesia. JBMP (Jurnal Bisnis, Manajemen dan Perbankan), 8(1), 7–24. https://doi.org/10.21070/jbmp.v8i1.1620.

Nyangu, M., Marwa, N., Fanta, A., & Minja, E. J. (2022). Bank Concentration, Competition and Financial Stability Nexus in the East African Community: Is There a Trade-Off? Cogent Economics and Finance, 10(1), 1–25. https://doi.org/10.1080/23322039.2022.2082026.

Parshakov, P., Shakina, E., & Barajas, A. (2022). Testing the Contestable Market Theory in eSports. Economic Research-Ekonomska Istrazivanja, 35(1), 122–142. https://doi.org/10.1080/1331677X.2021.1889389.

Phan, H. T., Anwar, S., Alexander, W. R. J., & Phan, H. T. M. (2019). Competition, Efficiency and Stability: An Empirical Study of East Asian Commercial Banks. North American Journal of Economics and Finance, 50, 1–17. https://doi.org/10.1016/j.najef.2019.100990.

Rahman, S. M. K., Chowdhury, M. A. F., & Tania, T. C. (2021). Nexus among Bank Competition. Journal of Asian Finance, Economics and Business, 8(2), 0317–0328. https://doi.org/10.13106/jafeb.2021.vol8.no2.0317.

Rinaldi, R., & Prasetyo, M. B. (2019). Market Structure and Bank Stability: Comparison between Conventional and Islamic Banks in Indonesia. Pertanika Journal of Social Sciences and Humanities, 27(2), 153–166.

Rizvi, S. A. R., Narayan, P. K., Sakti, A., & Syarifuddin, F. (2020). Role of Islamic Banks in Indonesian Banking Industry: an Empirical Exploration. Pacific Basin Finance Journal, 62, 1–10. https://doi.org/10.1016/j.pacfin.2019.02.002.

Schaeck, K., & Cihák, M. (2014). Competition, Efficiency, and Stability in Banking. Financial Management, 43(1), 215–241. https://doi.org/10.1111/fima.12010.

Usman, B., Syofyan, S., Nugroho, L., & Soeharjoto, S. (2018). Foreign Bank Penetration and Its Impact on Banking Industries. Eurasian Journal of Economics and Finance, 6(1), 64–83. https://doi.org/10.15604/ejef.2018.06.01.007.

Wu, J., Chen, M., Jeon, B. N., & Wang, R. (2017). Does Foreign Bank Penetration Affect the Risk of Domestic Banks? Evidence from Emerging Economies. Journal of Financial Stability, 31, 45–61. https://doi.org/10.1016/j.jfs.2017.06.004.

Yin, H. (2021). Foreign Bank Entry and Bank Competition: Cross-Country Heterogeneity. Global Finance Journal, 48, 1–14. https://doi.org/10.1016/j.gfj.2020.100558.

Full Text: PDF

DOI: 10.15408/etk.v24i1.36338