A Distinct Market for Islamic Banking under Competition Act

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Posted on: 7 May 2012

A Distinct Market for Islamic Banking under Competition Act 2010

Azmi & Associates: Article Submission to GlobalTrade.net For online publication: May 2011 A DISTINCT MARKET FOR ISLAMIC BANKING UNDER COMPETITION ACT 2010? Introduction The Competition Act 2010 (hereinafter referred to as the Act) was passed in 2010 and will come into force in January 2012. The impact of the said Act will be felt all across the spectrum of the business community in Malaysia and abroad, including the market players within the Islamic banking and financial (hereinafter referred to as IBF) sector. The scope of prohibitions under the Act is clear. It only prohibits anti- competitive behaviour but does not prohibit anti-competitive mergers which rather concern with market structure than market behaviour. There are two types of prohibited anti-competitive behaviour under the Competition Act 2010. First, Section 4 prohibits agreements whose object or effect prevents, restricts or distorts competition in the market. Second, Section 10 prohibits independent or collective abuse of dominant position in the market. These prohibitions can impact the IBF sector as part of the wider banking and financial industry. The industry is prone to collusive arrangements within the marketing strategies and delivery of services to customers, making the industry s players (banks and financial institutions) vulnerable to being liable of anti-competitive agreements. Considering the existence of increasingly fewer but bigger players in the market, there is likelihood that the banks and financial institutions in Malaysia can be held liable for abusive conducts such as refusal to supply services (including to approve loans) to customers, tying or bundling their products, etc. Such likelihood will be greater if they are perceived as having collective dominance. This short article does not focus on anti-competitive prohibitions being tailored to the banking industry. Instead, this article will focus on the impact of market definition on the applicability of the Competition Act 2010 to Islamic banks and financial institutions. Market Definition in Competition Law Defining the relevant market is one of the crucia l steps in any competition law investigation. Without identifying the relevant market, competitors to an enterprise cannot be identified. Without it also, market power cannot be properly assessed. Assessment of market power is important in certain scenario of anti-competitive agreement (under Section 4) especially when the agreement is argued to restrict competition by effect. The relevant market must also be identified before the existence of dominant position and its abuse is determined under Section 10. A DISTINCT MARKET FOR ISLAMIC BANKING UNDER COMPETITION ACT 2010? Page 1 of 4 Azmi & Associates: Article Submission to GlobalTrade.net For online publication: May 2011 Definition of Market in Competition Act 2010 The term market is defined in Section 2 of the Competition Act as a market in Malaysia or in any part of Malaysia, and when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first-mentioned goods or services. The two categories of market are created: the product market and the geographic market. Definition of the Relevant Market in the MyCC Guidelines The Malaysian Competition Commission (MyCC) has released the Guidelines on Market Definition and the guidelines lay down specific rules in identifying the relevant market that includes product market and geographical market. Product market refers to a product which can be in the form of goods or services. In order for enterprises to operate within the same market, the products that they produce, distribute, sell or purchase must be homogenous i.e. they must be substitutable. If the supply of Product A is reduced or its price goes up, consumers are able to switch to another product easily. If they are not, the relevant market will be confined to the said product. In this regard, producers of Product A are considered competitors in such a product market. If Company A has a large production share in relation to that product, it can be considered to have market power provided that other relevant factors are fulfilled. Nevertheless market structure alone is not prohibited by the Act. It must be proven that Company A is involved in anti-competitive behaviour in order for the arms of law to be extended to the company s activities. Similar lines of arguments can be forwarded with respect to the geographic market. The definition of a market depends on whether conditions of competition are homogenous in that area. If like product is sold in mutually exclusive markets and consumers can easily switch to the same product sold in another market, the producer is not considered having market power. A Distinct Market of Islamic Banking and Financial (IBF) Services Does the sector belong to a different market from the conventional banking and financial (CBF) sector? This is a crucial question to answer considering the impact of market definition on the identification of competitors to the Islamic banks and financial institutions, the identification of the market power of those companies and the analysis of competition in the relevant market. A DISTINCT MARKET FOR ISLAMIC BANKING UNDER COMPETITION ACT 2010? Page 2 of 4 Azmi & Associates: Article Submission to GlobalTrade.net For online publication: May 2011 As said before, whether a product market is defined depends on the homogeneity or substitutability of the product (services or goods). Thus when the price of an Islamic banking or financial product goes up, the question posed will be whether consumers and producers switch to a different (conventional) product. To illustrate, if the price of the Islamic facility of al-bai bi thaman ajil goes up, we have to look at whether consumers and producers will switch to a conventional loan facility. If the answer is yes, the relevant market will be both Islamic and conventional products but if the answer is no, the relevant market will only be the Islamic banking facility. What the MyCC Guidelines Say? The MyCC Guidelines on Market Definition explain the relevant market using a test known as the Hypothetical Monopolist Test (HMT). The test provides a basis for assessing the substitutability of a certain product as against its potential substitutes. It creates a hypothetical monopolist (HM) of the focal product (FP) and a question will be posed, whether the HM will make profit should the price of the product increases by 5-10% above the competitive level. If the HM still makes profit, the relevant market will be confined to the FP. If the HM does not make profit, the FP competes with other products hence the relevant market covers a broader product. In relation to the IBF sector, a hypothetical monopolist will be created among the IBF players and the price of one of its products will be given a small but significant increase (5-10%) above the competitive level. If the hypothetical monopolist (an Islamic bank or financial institution) still makes profit in supplying say, a retail Islamic banking product, the relevant market will be confined to that product. This puts Islamic banks in competition only among themselves in the Malaysian Islamic banking market. However that may affect the computation of the market share of each individual players and in the end, the market power of certain types of Islamic banks and financial institutions may be over- inflated. So let say Bank X is a full-fledged Islamic bank with no non-Shariah counters at all. Bank X and Bank Z on the other hand supply both Islamic and conventional products most probably through different subsidiaries from their parent companies in Malaysia or in other countries (this is though Islamic financial accounting practices may require separate accounts between Islamic and conventional subsidiaries to be maintained). If computation of market shares only takes into account entities which supply Islamic banking products, Bank X will be assessed only against Bank Y and Bank Z s Islamic subsidiaries. Supposed, Bank X s market share is more than 40%, one may raise an issue whether Bank X is already in a dominant position. The answer to such a conundrum may depend again on how the relevant market is defined for IBF products. And related to that is that some Islamic banking consumers and producers may not switch to non-Islamic banking products regardless of the price increases. A DISTINCT MARKET FOR ISLAMIC BANKING UNDER COMPETITION ACT 2010? Page 3 of 4 Azmi & Associates: Article Submission to GlobalTrade.net For online publication: May 2011 Taking note that substitutability can come from both the demand and supply sides, these reactions (of both consumers and producers) will determine the size of the product market. This will be something for the businesses, consumers and the public to see whether there will be distinct product market for Islamic and financial products. Dr. Haniff Ahamat Senior Legal Executive A DISTINCT MARKET FOR ISLAMIC BANKING UNDER COMPETITION ACT 2010? 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Posted: 07 May 2012

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