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Jurnal Ekonomi Malaysia

53 (3) 2019 163 – 177

Does Efficiency Matter for Competition? A Case of Dual Banking Industry
Adakah Kecekapan Penting untuk Persaingan? Satu Kes bagi Industri Dwi-Perbankan

Pusat Kajian Global dan Ekonomi Digital
Fakulti Ekonomi dan Pengurusan
Universiti Kebangsaan Malaysia
43600 Bangi, Selangor
MALAySIA

nafisah@ukm.edu.my

Jabatan Perakaunan dan Kewangan
Fakulti Ekonomi dan Pengurusan
Universiti Putra Malaysia
43400 Serdang, Selangor
MALAySIA

junaina2012@gmail.com

Johor Islamic Studies College
Jalan Herman, Kg. Aman Larkin Jaya
80350 Johor Bahru
MALAYSIA

Organization of Islamic Economics Studies and Thoughts
45719, Desa Damai Putra,
Teras Jernang
43650 Bandar Baru Bangi
Selangor Darul Ehsan
MALAYSIA

agibab62@gmail.com

Pusat Kajian Global dan Ekonomi Digital
Fakulti Ekonomi dan Pengurusan
Universiti Kebangsaan Malaysia
43600 Bangi, Selangor
MALAYSIA

azma@ukm.edu.my

Abstract

This study provides new empirical evidence on the link between bank performance measured in terms of efficiency, and the degree of competition in the Malaysian dual banking market which comprises Islamic and conventional banking systems over the period of 1997-2016. The focal point of this study is to investigate whether the type of efficiency matters for banks to remain viable in the highly competitive market. The study is important because it compares the effect of market conditions and banks’ conduct on the level of competition for Islamic and conventional banking industries. In this study, we utilize the Panzar-Rosse (PR) H-statistics to represent the competition index. In addition, the Data Envelopment Analysis (DEA) is used to calculate the income and cost efficiencies for the banks in both banking systems. This study employs a panel data model with pooled Ordinary Least Square (OLS) to estimate the relationships of competition index with efficiency scores, concentration indexes, and other bank-specific variables. The estimation results show the existence of a positive relationship between types of efficiency and competition in the dual banking market. This evidence suggests that the existence of an ideal level of concentration and competition is important for banks in adjusting their behavior to suit market conditions and to operate efficiently. Policymakers and regulators may use the knowledge of market structure and performance from this study to formulate policies and strategies that will optimize the number of banks operating in the industry. Policymakers, through Bank Negara Malaysia (BNM), should
thus consider the relationship between market structure and bank performance to formulate policies and strategies that will optimize the number of banks operating in the industry.

Keywords

competition; concentration; efficiency; Islamic banking; Structure-conduct-performance paradigm

Author’s Acknowledgement

The first author would like to thank Universiti Kebangsaan Malaysia for funding this research under Tabung Kokurikulum PTJ, (Research Code: EP-2019-022).

http://dx.doi.org/10.17576/JEM-2019-5303-13
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Mohammed, , Muhammad, , ismail, , & Jauhari, (2019). Does Efficiency Matter for Competition? A Case of Dual Banking Industry. Jurnal Ekonomi Malaysia, 53(3), 163–177. http://dx.doi.org/10.17576/JEM-2019-5303-13

@article{mohammed2019efficiency,
  title={Does Efficiency Matter for Competition? A Case of Dual Banking Industry},
  author={Mohammed, Nafisah and Muhammad, Junaina and ismail, abdul and Jauhari, Azmafazilah Binti},
  journal={Jurnal Ekonomi Malaysia},
  volume={53},
  number={3},
  pages={163—177},
 

year={2019},
}

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