The Response of Financial Performance to The Market Power of Islamic Banking in Indonesia

Chajar Matari Fath Mala, Muhammad Nadratuzzaman Hosen, Mohammad Nur Rianto Al Arif


market power of Islamic banking in Indonesia. This study contributes to filling the gap in the literature by combining the variables under the analysis of impulse response friction (IRF) about the relationship between market power, efficiency, liquidity, profitability, and stability. The data of this study covered Islamic banking in Indonesia from the period January 2010 to 2019 and used IRF from the VAR/VECM panel. This study found that shock/innovation of market power of Islamic banking in Indonesia is responded positively by efficiency, liquidity, and profitability. Meanwhile, financial stability responds negatively to shock/innovation of market power. These findings suggest that innovation in market power in Indonesian Islamic banking will lead to an increase in efficiency, liquidity, and profitability. This result poses a dilemma because competition increases stability but reduces efficiency, liquidity, and profitability. The balance between market power and stability at the macro and industrial levels becomes crucial because it is necessary to maintain the financial system’s stability and national economic growth.

How to Cite:

Mala, C. M. F., Hosen, M. N., & Al Arif, M. N. R. (2022). The Response of Financial Performance to The Market Power of Islamic Banking in Indonesia. Signifikan: Jurnal Ilmu Ekonomi, 11(2), 415-424.

JEL Classification: G18, G21, G28


market power; stability; liquidity; profitability; impulse response function

Full Text:



Albaity, M., Mallek, R. S., & Noman, A. H. M. (2019). Competition and Bank Stability in the MENA Region: The Moderating Effect of Islamic versus Conventional Banks. Emerging Markets Review, 38, 310-325.

Al Arif, M. N. R., & Awwaliyah, T. B. (2019). Market Share, Concentration Ratio and Profitability: Evidence from Indonesian Islamic Banking Industry. Journal of Central Banking Theory and Practice, 8(2), 189-201

Ariss, R. T. (2010). On the Implications of Market Power in Banking: Evidence from Developing Countries. Journal of Banking & Finance, 34(4), 765-775.

Asongu, S. A., & Odhiambo, N. M. (2019). Testing the Quiet Life Hypothesis in the African Banking Industry. Joornal of Industry, Competition and Trade, 19, 69–82.

Beck, T., De Jonghe, O., & Schepens, G. (2013). Bank Competition and Stability: Cross-Country Heterogeneity. Journal of Financial Intermediation, 22(2), 218–244.

Berger, A. (1995). The Profit-Structure Relationship in Banking: Tests of Market-Power and Efficient Structure Yypotheses. Journal of Money, Credit and Banking. 27(2), 404–431.

Berger, A., & Bouwman, C. (2009). Bank liquidity Creation. The Review of Financial Studies, 22(9), 3779–3837.

Boyd, J. H., & De Nicolo, G. (2005). The Theory of Bank Risk Taking and Competition Revisited. The Journal of Finance, 60(3), 1329-1343.

Caminal, R., & Matutes, C. (2002). Market Power and Banking Failures. International Journal of Industrial Organization, 20(9), 1341-1361.

Carbo, S., Humphrey, D., Maudos, J., & Molyneux, P. (2009). Cross-Country Comparisons of Competition and Pricing Power in European Banking. Journal of International Money and Finance, 28(1), 115–134.

Christoper, R., Maripe, O. M., & Galebotswe, O. (2020). Market Structure and Performance in Botswana’s Banking Industry. The Research Bulletin, 33(1), 33-44.

Coccorese, P., & Misra, B. S. (2022), Market Power and Efficiency of Indian Banks: Does the “Quiet Life” Hypothesis Hold?. Managerial Finance, 48(6), 953-983.

Demsetz, H. (1973). Industry Structure, Market Rivalry, and Public Policy. Journal of Law and Economics, 16(1), 1–9.

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

Hakim, M. A. (2016). Mekanisme Pasar Dalam Perspektif Islam. Iqtishadia, 8(1), 19-40.

Hicks, J. R. (1935). Annual Survey of Economic Theory: The Theory of Monopoly. Econometrica, 3, 1–20.

Horvath, R., Seidler, J., & Weill, L. (2016). How Bank Competition Influences Liquidity Creation. Economic Modelling, 52(A), 155–161. 2014.11.032 10.1016/j.econmod.2014.11.032.

Kabir, M. N., & Worthington, A. C. (2017). The “Competition–Stability/Fragility” Nexus: A Comparative Analysis of Islamic and Conventional Banks. International Review of Financial Analysis, 50, 111–128.

Kasri, R. A., & Iman, N. (2010). Analisis Persaingan Perbankan Syariah Indonesia: Aplikasi Model Panzar-Rosse. Jurnal Ekonomi dan Pembangunan Indonesia, 11(1), 1-20.

Keeley, M. C. (1990). Deposit Insurance, Risk, and Market Power in Banking. The American Economic Review, 80(5), 1183-1200.

Koetter, M., & Vins, O. (2008). The Quiet Life Hypothesis in Banking – Evidence from German Savings Banks. Finance and Accounting Working Paper Series 190.

Love, I., & Martinez Peria, M. (2012). How Bank Competition Affects Firms' Access to Finance. World Bank Policy Research Working Paper 6163.

Masykurah, E. (2017). Penduduk Muslim Sebagai Potensi Pasar Perbankan Syariah (Studi Komparasi Kekuatan Pasar Perbankan Di Indonesia). Kodifikasia: Jurnal Penelitian Islam, 11(1), 72-93.

Mukaromah, N. F., & Wijaya T. (2020). Pasar Persaingan Sempurna Dan Pasar Persaingan Tidak Sempurna Dalam Perspektif Islam. Profit: Jurnal Kajian Ekonomi dan Perbankan, 4 (2), 1-16.

Naylah, M., & Cahyaningratri. (2020). The Influence of Market Structure in Indonesian Banking Performance. Journal of Economics and Policy, 13(1), 120-134.

Nuralyza, O., Narsa, N. P. D. R. H., & Sriani, D. (2022). Bank Competition, Credit Risk, and Foreign Bank Penetration: Empirical Evidence from Indonesia. Jurnal Bisnis, Manajemen, dan Perbankan, 8(1), 7-24.

Petersen, M., & Rajan, R. (1995). The Effect of Credit Market Competition on Lending Relations. The Quarterly Journal of Economics, 110(2), 407-443.

Rahmi, A. (2015). Mekanisme Pasar dalam Islam. Jurnal Ekonomi Bisnis dan Kewirausahaan, 4(2), 177-192.

Remolona, E. M., & Shim, I. (2015). The Rise of Regional Banking in Asia and the Pacific. BIS Quarterly Review, 119-134.

Smirlock, M. (1985). Evidence on the (Non) Relationship between Concentration and Profitability in Banking. Journal of Money, Credit and Banking, 17(1), 69-83.

Van Hoose, D. (2010). The Industrial Organization of Banking: Bank Behavior, Market Structure, and Regulation. Berlin: Springer.

Yin, H. (2021). The Impact of Competition and Bank Market Regulation on Banks’ Cost Efficiency. Journal of Multinational Financial Management, 61, 100677.

DOI: Abstract - 0 PDF - 0


  • There are currently no refbacks.

View My Stats