A value-based measure of market power for the participatory deposits of Islamic banks

Traditional earnings-based measures of market power cannot be applied to Islamic banks since depositors are investors and not creditors. We develop a new market power measure based on the capitalized value of a bank’s deposit funds’ management fees in which more powerful banks price deposits to create greater long-term value, whilst less powerful banks target short-term earnings or risk management goals. Applying panel VAR and two-step system GMM to international data from 1990-2022, we validate the measure by showing that deposit growth rates (Granger) cause market power and are the only significant determinant across all two-step system GMM model and sub-sample variants.