The Impact of Market Power and Market Concentration in Shaping the Stability of Islamic Banking in Indonesia
Abstract
Introduction/Main Objectives: The increasingly concentrated market structure in Indonesia’s Islamic banking industry following the 2021 merger of Bank Syariah Indonesia (BSI) raises critical questions regarding the relationship between market structure and bank financial stability. Novelty: This study examines market concentration, measured by the Herfindahl–Hirschman Index (HHI), and individual bank market power, measured by the Lerner Index, in relation to the stability of Islamic banking in Indonesia over the 2019–2024 period. Research Methods: Using an unbalanced panel dataset of Islamic banking institutions in Indonesia, this study employs panel regression analysis to examine the relationships between HHI, the Lerner Index, and banking stability, measured by the Z-score. The appropriate panel estimation model is determined through model selection tests. Finding/Results: The results show that market concentration has a positive but statistically insignificant relationship with the Z-score, whereas market power has a negative but statistically insignificant relationship with the Z-score. Thus, neither variable provides statistically significant evidence of an association with Islamic banking stability under the estimated model. Conclusion: The findings provide inconclusive evidence regarding the relationship between market structure and Islamic banking stability in Indonesia. They highlight the importance of distinguishing between industry-level market concentration and bank-level market power, while interpreting the results in light of measurement choices, sample composition, and the limited time variation in market concentration.
References
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Boyd, J., De Nicoló, G., & Jalal, A. (2006). Bank risk-taking and competition revisited: New theory and new evidence. IMF Working Paper, WP/06/297.
Čihák, M., & Hesse, H. (2010). Islamic banks and financial stability: An empirical analysis. Journal of Financial Services Research, 38(2–3), 95–113. https://doi.org/10.1007/s10693-010-0089-0
Dinc, Y., Çetin, M., Bulut, M., & Jahangir, R. (2021). Islamic financial literacy scale: An amendment in the sphere of contemporary financial literacy. ISRA International Journal of Islamic Finance, 13(2), 251–263. https://doi.org/10.1108/IJIF-07-2020-0156
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Hassan, M. K., Ijaz, M., & Khan, M. H. (2021). Bank competition–stability relations in Pakistan: A comparison between Islamic and conventional banks. International Journal of Business and Society, 22(2), 532–545. https://doi.org/10.33736/ijbs.3733.2021
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. https://doi.org/10.1016/j.irfa.2017.02.006
Keeley, M. C. (1990). Deposit insurance, risk, and market power in banking. American Economic Review, 80(5), 1183–1200.
Khattak, M. A., Alaeddin, O., & Abojeib, M. (2022). Competition–stability relationship in dual banking systems: Evidence from efficiency-adjusted market power. The Singapore Economic Review, 67(1), 309–332. https://doi.org/10.1142/S0217590820420096
Khattak, M. A., Ali, M., Hamid, B. A., & Islam, M. U. (2021). Competition, diversification, and stability in the Indonesian banking system. Bulletin of Monetary Economics and Banking, 24(0), 59–88. https://doi.org/10.21098/bemp.v24i0.1481
Khutub, M. (2022). Potential abuse of the dominant position of Indonesian Islamic banks in legal perspective business competition. Az Zarqa': Jurnal Hukum Bisnis Islam, 14(1), 1–1. https://doi.org/10.14421/azzarqa.v14i1.2600
Louhichi, W., Ghenimi, A., & Omri, M. A. B. (2019). The interaction between bank competition and financial stability in MENA region. Research in International Business and Finance, 50, Article 101037. https://doi.org/10.1016/j.ribaf.2019.101037
McBrayer, G. A., & Yeager, T. J. (2018). The Bank Competition Index (Working Paper). Sam M. Walton College of Business, University of Arkansas.
Mishkin, F. S. (1999). Financial consolidation: Dangers and opportunities. Journal of Banking & Finance, 23(2–4), 675–691. https://doi.org/10.1016/S0378-4266(98)00084-3
Mubarok, H., Mulatsih, S., & Beik, I. S. (2025). A dynamic study on the market share growth of Islamic banks in Indonesia post spin-off, conversion, and merger. Journal of World Science, 4(9), 1197–1207. https://doi.org/10.58344/jws.v4i9.1495
Noman, A. H. M., Gee, C. S., & Isa, C. R. (2017). Does competition improve financial stability of the banking sector in ASEAN countries? An empirical analysis. PLoS ONE, 12(5), Article e0176546. https://doi.org/10.1371/journal.pone.0176546
Oktaviana, U. K., & Miranti, T. (2025). Modeling technology and profitability as moderators of competition, efficiency, and risk in Islamic bank stability. Journal of Islamic Economics Lariba, 11(2), 1049–1078. https://doi.org/10.20885/jielariba.vol11.iss2.art15
Otoritas Jasa Keuangan. (2023). Statistik perbankan syariah Juni 2023. https://ojk.go.id/id/kanal/syariah/data-dan-statistik/statistik-perbankan-syariah/
Pamungkas, P., Pratiwi, D. I., & Bakkar, Y. (2022). The merger of Islamic banks and their impact on the stability of the country’s economy. Sebelas Maret Business Review, 7(2), 57–65. https://doi.org/10.20961/smbr.v7i2.55845
Phan, D. H. B., Narayan, P. K., Rahman, R. E., & Hutabarat, A. R. (2020). Do Islamic banks experience lower systemic risk than conventional banks? Pacific-Basin Finance Journal, 62, Article 101348. https://doi.org/10.1016/j.pacfin.2020.101348
Risfandy, T., Tarazi, A., & Trinugroho, I. (2020). Competition in dual markets: Implications for banking system stability. Global Finance Journal, 52, Article 100579. https://doi.org/10.1016/j.gfj.2020.100579
Sanfíz, J. M. M., Casal, A. I., Mazahreh, Q. A. S., & Andión, M. C. L. (2025). Market structure and technical efficiency of banks in the MENA region. SAGE Open, 15(2). https://doi.org/10.1177/21582440251324792
Santoso, T., Firmansyah, E. A., Sapulette, M. S., & Setiawan, M. (2023). The impact of industry concentration on stability: The case of Indonesian Islamic commercial banks. International Journal of Islamic Economics and Finance (IJIEF), 6(2), 201–224. https://doi.org/10.18196/ijief.v6i2.17892
Saputro, S. A., & Safuan, S. (2024). Pengaruh kompetisi perbankan terhadap stabilitas keuangan: Pengujian hipotesis competition-stability vs. competition-fragility. Jurnal Ekonomi Indonesia, 13(1), 43–67. https://doi.org/10.52813/jei.v13i1.519
Setiawan, M. (2023). Assessing the bank stability nexus: Islamic bank competition in the Indonesian financial landscape. Indonesian Journal of Economics and Management, 4(1), 194–202.
Syamlan, Y. T., Wahyuni, S., & Sudiharto, L. (2023). Concentration level and market power of Islamic bank industry: Analysis of pre and post Bank Syariah Indonesia merger. Journal of Islamic Economic and Business Research, 3(2), 138–160. https://doi.org/10.18196/jiebr.v3i2.189
Utami, A. D., Risfandy, T., & Rahardjoputri, R. (2022). Islamic banks’ merger: The case of Bank Syariah Indonesia. International Journal of Monetary Economics and Finance, 15(3), 201–212. https://doi.org/10.1504/IJMEF.2022.126904
Widarjono, A., Alam, M. M., Rafik, A., Afandi, A., & Sidiq, S. (2025). Nexus between competition, concentration and bank risk-taking in Indonesian Islamic banking. International Journal of Islamic and Middle Eastern Finance and Management 18(3), 672–690. https://doi.org/10.1108/imefm-02-2024-0099
Zaini, F., & Kusuma, A. S. (2024). Market dominance in Indonesia’s Islamic banking: Critical analysis from an industrial organisation perspective. Journal of Finance and Islamic Banking, 7(1), 1–24. https://doi.org/10.22515/jfib.v7i1.8827
Alam, N., Hamid, B. A., & Tan, D. T. (2019). Does competition make banks riskier in dual banking system? Borsa Istanbul Review, 19(1), S34–S43. https://doi.org/10.1016/j.bir.2018.09.002
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. https://doi.org/10.1016/j.ememar.2019.01.003
Altunbaş, Y., Avignone, G., Kok, C., & Pancaro, C. (2023). Euro area banks’ market power, lending channel and stability: The effects of negative policy rates (ECB Working Paper No. 2790). European Central Bank.
Anginer, D., Demirgüç-Kunt, A., & Zhu, M. (2014). How does competition affect bank systemic risk? Journal of Financial Intermediation, 23(1), 1–26. https://doi.org/10.1016/j.jfi.2013.11.001
Antara, P. M., & Musa, R. (2020). Validating Islamic financial literacy instruments among mum generation: Rasch analysis approach. International Journal of Business and Society, 21(3), 1113–1121. https://doi.org/10.33736/ijbs.3315.2020
Azmi, W., Anwer, Z., Ali, M., & Mohamad, S. (2024). Competition, stability, and institutional environment: The case of dual banking economies. International Journal of Finance & Economics, 29(1), 609–631. https://doi.org/10.1002/ijfe.2700
Beck, T., Demirgüç-Kunt, A., & Levine, R. (2006). Bank concentration, competition, and crises: First results. Journal of Banking & Finance, 30(5), 1581–1603. https://doi.org/10.1016/j.jbankfin.2005.05.010
Beck, T., Demirgüç-Kunt, A., & Merrouche, O. (2013). Islamic vs. conventional banking: Business model, efficiency and stability. Journal of Banking & Finance, 37(2), 433–447. https://doi.org/10.1016/j.jbankfin.2012.08.021
Berger, A. N., Klapper, L. F., & Turk-Ariss, R. (2009). Bank competition and financial stability. Journal of Financial Services Research, 35(2), 99–118. https://doi.org/10.1007/s10693-008-0050-7
Boyd, J. H., & De Nicoló, G. (2005). The theory of bank risk taking and competition revisited. Journal of Finance, 60(3), 1329–1343. https://doi.org/10.1111/j.1540-6261.2005.00763.x
Boyd, J., De Nicoló, G., & Jalal, A. (2006). Bank risk-taking and competition revisited: New theory and new evidence. IMF Working Paper, WP/06/297.
Čihák, M., & Hesse, H. (2010). Islamic banks and financial stability: An empirical analysis. Journal of Financial Services Research, 38(2–3), 95–113. https://doi.org/10.1007/s10693-010-0089-0
Dinc, Y., Çetin, M., Bulut, M., & Jahangir, R. (2021). Islamic financial literacy scale: An amendment in the sphere of contemporary financial literacy. ISRA International Journal of Islamic Finance, 13(2), 251–263. https://doi.org/10.1108/IJIF-07-2020-0156
Fatmawati, L. C. (2026). Determinants of ASEAN banking system stability; Panel regression analysis of Z-Score and NPL. Sriwijaya International Journal of Dynamic Economics and Business, 9(4), 351–372. https://doi.org/10.29259/sijdeb.v9i4.351-372
Federal Reserve Bank of Philadelphia. (2023). Banking trends: Has the banking industry become too concentrated? Economic Insights, Q1 2023.
Fu, X. M., Lin, Y. R., & Molyneux, P. (2014). Bank competition and financial stability in Asia Pacific. Journal of Banking & Finance, 38, 64–77. https://doi.org/10.1016/j.jbankfin.2013.09.012
Hassan, M. K., Ijaz, M., & Khan, M. H. (2021). Bank competition–stability relations in Pakistan: A comparison between Islamic and conventional banks. International Journal of Business and Society, 22(2), 532–545. https://doi.org/10.33736/ijbs.3733.2021
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. https://doi.org/10.1016/j.irfa.2017.02.006
Keeley, M. C. (1990). Deposit insurance, risk, and market power in banking. American Economic Review, 80(5), 1183–1200.
Khattak, M. A., Alaeddin, O., & Abojeib, M. (2022). Competition–stability relationship in dual banking systems: Evidence from efficiency-adjusted market power. The Singapore Economic Review, 67(1), 309–332. https://doi.org/10.1142/S0217590820420096
Khattak, M. A., Ali, M., Hamid, B. A., & Islam, M. U. (2021). Competition, diversification, and stability in the Indonesian banking system. Bulletin of Monetary Economics and Banking, 24(0), 59–88. https://doi.org/10.21098/bemp.v24i0.1481
Khutub, M. (2022). Potential abuse of the dominant position of Indonesian Islamic banks in legal perspective business competition. Az Zarqa': Jurnal Hukum Bisnis Islam, 14(1), 1–1. https://doi.org/10.14421/azzarqa.v14i1.2600
Louhichi, W., Ghenimi, A., & Omri, M. A. B. (2019). The interaction between bank competition and financial stability in MENA region. Research in International Business and Finance, 50, Article 101037. https://doi.org/10.1016/j.ribaf.2019.101037
McBrayer, G. A., & Yeager, T. J. (2018). The Bank Competition Index (Working Paper). Sam M. Walton College of Business, University of Arkansas.
Mishkin, F. S. (1999). Financial consolidation: Dangers and opportunities. Journal of Banking & Finance, 23(2–4), 675–691. https://doi.org/10.1016/S0378-4266(98)00084-3
Mubarok, H., Mulatsih, S., & Beik, I. S. (2025). A dynamic study on the market share growth of Islamic banks in Indonesia post spin-off, conversion, and merger. Journal of World Science, 4(9), 1197–1207. https://doi.org/10.58344/jws.v4i9.1495
Noman, A. H. M., Gee, C. S., & Isa, C. R. (2017). Does competition improve financial stability of the banking sector in ASEAN countries? An empirical analysis. PLoS ONE, 12(5), Article e0176546. https://doi.org/10.1371/journal.pone.0176546
Oktaviana, U. K., & Miranti, T. (2025). Modeling technology and profitability as moderators of competition, efficiency, and risk in Islamic bank stability. Journal of Islamic Economics Lariba, 11(2), 1049–1078. https://doi.org/10.20885/jielariba.vol11.iss2.art15
Otoritas Jasa Keuangan. (2023). Statistik perbankan syariah Juni 2023. https://ojk.go.id/id/kanal/syariah/data-dan-statistik/statistik-perbankan-syariah/
Pamungkas, P., Pratiwi, D. I., & Bakkar, Y. (2022). The merger of Islamic banks and their impact on the stability of the country’s economy. Sebelas Maret Business Review, 7(2), 57–65. https://doi.org/10.20961/smbr.v7i2.55845
Phan, D. H. B., Narayan, P. K., Rahman, R. E., & Hutabarat, A. R. (2020). Do Islamic banks experience lower systemic risk than conventional banks? Pacific-Basin Finance Journal, 62, Article 101348. https://doi.org/10.1016/j.pacfin.2020.101348
Risfandy, T., Tarazi, A., & Trinugroho, I. (2020). Competition in dual markets: Implications for banking system stability. Global Finance Journal, 52, Article 100579. https://doi.org/10.1016/j.gfj.2020.100579
Sanfíz, J. M. M., Casal, A. I., Mazahreh, Q. A. S., & Andión, M. C. L. (2025). Market structure and technical efficiency of banks in the MENA region. SAGE Open, 15(2). https://doi.org/10.1177/21582440251324792
Santoso, T., Firmansyah, E. A., Sapulette, M. S., & Setiawan, M. (2023). The impact of industry concentration on stability: The case of Indonesian Islamic commercial banks. International Journal of Islamic Economics and Finance (IJIEF), 6(2), 201–224. https://doi.org/10.18196/ijief.v6i2.17892
Saputro, S. A., & Safuan, S. (2024). Pengaruh kompetisi perbankan terhadap stabilitas keuangan: Pengujian hipotesis competition-stability vs. competition-fragility. Jurnal Ekonomi Indonesia, 13(1), 43–67. https://doi.org/10.52813/jei.v13i1.519
Setiawan, M. (2023). Assessing the bank stability nexus: Islamic bank competition in the Indonesian financial landscape. Indonesian Journal of Economics and Management, 4(1), 194–202.
Syamlan, Y. T., Wahyuni, S., & Sudiharto, L. (2023). Concentration level and market power of Islamic bank industry: Analysis of pre and post Bank Syariah Indonesia merger. Journal of Islamic Economic and Business Research, 3(2), 138–160. https://doi.org/10.18196/jiebr.v3i2.189
Utami, A. D., Risfandy, T., & Rahardjoputri, R. (2022). Islamic banks’ merger: The case of Bank Syariah Indonesia. International Journal of Monetary Economics and Finance, 15(3), 201–212. https://doi.org/10.1504/IJMEF.2022.126904
Widarjono, A., Alam, M. M., Rafik, A., Afandi, A., & Sidiq, S. (2025). Nexus between competition, concentration and bank risk-taking in Indonesian Islamic banking. International Journal of Islamic and Middle Eastern Finance and Management 18(3), 672–690. https://doi.org/10.1108/imefm-02-2024-0099
Zaini, F., & Kusuma, A. S. (2024). Market dominance in Indonesia’s Islamic banking: Critical analysis from an industrial organisation perspective. Journal of Finance and Islamic Banking, 7(1), 1–24. https://doi.org/10.22515/jfib.v7i1.8827
Published
2026-10-31
How to Cite
IRSYAD, Syaiful Muhammad et al.
The Impact of Market Power and Market Concentration in Shaping the Stability of Islamic Banking in Indonesia.
Jurnal Cendekia Keuangan, [S.l.], v. 5, n. 2, p. 103-117, oct. 2026.
ISSN 2810-0964.
Available at: <https://ejournal.uniska-kediri.ac.id/index.php/JCK/article/view/9254>. Date accessed: 18 oct. 2026.
doi: https://doi.org/10.32503/jck.v5i2.9254.
Section
Articles
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