Market Share, Concentration Ratio and Profitability: Evidence from Indonesian Islamic Banking Industry

Abstract

Various literatures mention that an increasingly concentrated market will have an impact on performance. This study aims to analyze the influence of market structure on the profitability of the Islamic banking industry in Indonesia, especially after the enactment of the Islamic banking act. This research used panel regression with random effect model. The result shows that market structure-proxies by market share (MS) and concentration ratio (CR4)-does not affect profitability of the Indonesian Islamic banking industry. This result implies that the performance of the Islamic banking industry in Indonesia is not supported by the traditional hypothesis and the efficient structures hypothesis. However, this research indicates that there is no collusive behavior in the Islamic banking industry in Indonesia. Meanwhile, for control variables such as liquidity ratio, default rate, and operational efficiency ratio have been found to have adverse effect on the performance of the Islamic banking industry in Indonesia.