Jurnal Ekonomi Malaysia 52(3) 2018 71 - 89 http://dx.doi.org/10.17576/JEM-2018-5203-6 The Degree of Competition in the Malaysian Dual Banking Industry (Darjah Persaingan dalam Industri Dwi Perbankan di Malaysia) Nafsah Mohammed Universiti Kebangsaan Malaysia Junaina Muhammad Universiti Putra Malaysia Abdul Ghafar Ismail Kolej Pengajian Islam Johor Organization of Islamic Economics Studies and Thoughts ABSTRACT The purpose of this study is to evaluate the degree of competition in the Malaysian dual banking industry to address the question of whether Islamic banks are able to cope with competition from the well-established conventional banks. The Panzar-Rosse (PR) method has been used to measure the degree of competition in Islamic compared with conventional banking market over the period of 1997-2016. Present study uses static panel data estimation to estimate the developed models. Results from the H-statistics values using total income show that level of competition in the Islamic banking market is more intense than conventional banking market. Hence, providing evidence that Islamic banks are able to compete with conventional banks that have long history of establishment. The H-statistic values using total interest income also indicate the same result, hence supporting the robustness of these results. The fndings also show the effectiveness of policy changes adopted by Bank Negara Malaysia in order to increase level of competition in both banking markets. Hence, knowledge on this issue is important to the policy makers for them to formulate new policy regarding banking competition. Keywords: Bank; competition; market structure; Panzar-Rosse model ABSTRAK Tujuan kajian ini adalah untuk menilai darjah persaingan dalam industri dwi perbankan di Malaysia bagi tujuan menjawab persoalan sama ada bank-bank Islam dapat menghadapi persaingan daripada bank-bank konvesional yag kukuh. Kaedah Panzar-Rosse (PR) telah digunakan untuk mengukur darjah persaingan dalam sistem perbankan Islam berbanding perbankan konvensional bagi tempoh 1997-2016. Kajian ini menggunakan kaedah data panel statik untuk menganggarkan model yang telah dibangunkan. Keputusan dari statistik H dengan meggunakan jumlah pendapatan menunjukkan tahap persaingan dalam pasaran perbankan Islam adalah semakin meningkat berbanding pasaran perbankan konvensional. Oleh itu, dapatan ini memberikan bukti bahawa bank-bank Islam mampu untuk bersaing dengan bank-bank konvensional yang telah lama wujud. Nilai statistik H yang dikira dengan menggunakan jumlah pendapatan kadar bunga juga menunjukkan hasil yang sama, seterusnya menyokong keberkesanan keputusan yang telah diperoleh. Hasil kajian menunjukkan perubahan dasar yang telah dilakukan oleh Bank Negara Malaysia telah berjaya meningkatkan tahap persaingan dalam pasaran perbankan. Oleh itu, pengetahuan tentang isu ini adalah penting kepada pembuat dasar untuk merangka dasar baru berkenaan darjah persaingan dalam industri perbankan. Kata Kunci: Bank, persaingan; struktur pasaran; model Panzar-Rosse INTRODUCTION The existence of competition is the key factor in the development of market relations. Many researchers have highlighted on the importance of competition in the fnancial market particularly in the banking industry. Staroselskaja (2011) defned competition in the banking industry as the process of rivalry between commercial banks and credit institutions to build strong positions in the banking market. Yokoi-Arai and Yoshino (2006) stated that competition is needed to transform efforts and actions of the financial institutions into being more competitive in order to gain better profts and dividend income. Free market economy is analogue to competition and its existence may improve and enhance efficiency of the financial institution and fnally enhance a country’s economy. Therefore, the restriction of competition leads to the stagnation of the economy, because commercial entities lose the incentives to improve their performance (Rajesh