Market power and Shariah compliance on Islamic banks: Does public listing matter?

Purpose-This study aims to explain the effect of customer loyalty, financial performance and market power on Shariah compliance (SC). Design/methodology/approach-This study investigates 101 fully-fledged Islamic banks (IBs) from 27 countries, and panel data regression methods were used to analyze the data. This study uses alternative empirical models and the generalized method of moment (GMM) system to address endogeneity problems. Findings-This study finds that high profitability causes a decrease in SC. High levels of competition cause the IBs to make policies to increase their SC. However, the effect of competition on SC depends on the ownership status of the IBs - high levels of competition cause unlisted IBs to increase their SC. However, for listed IBs, severe competition weakens their SC. Research limitations/implications-This study focuses on interest-free IB deposit products as SC indicators. Practical implications-This paper suggests regulators should control the IBs' competition to increase the level of competition among IBs and conventional banks to increase the SC. Originality/value-This study develops two SC indicators that focus on the relationship between the rate of return for investment account holders (RRIAH) and the interest rate (IR): the difference between the IR and the RRIAH and the elasticity of the RRIAH with the IR.