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Can Islamic Banking Survive? A Micro-Evolutionary Perspective

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  • El-Gamal, M.A.
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    Abstract

    Islamic banking is a growing phenomenon which came into existence to satisfy the financial needs of devout Muslims who observe the prohibition of interest-based transactions. Many economists have studied the macroeconomic properties of this institution in the framework of an isolated and ideal Islamic economy. In this age of integrated global financial markets, the instantaneous transformation of an entire financial sector to profit-and-loss sharing is very unlikely. I present an evolutionary game-theoretic model in which devout Muslims, regular interest- based banks, and "weak" (hybrid) muslims/banks interact. The third type of agents is intended to represent the behavior of current Islamic banking, which is commonly criticized for mimicking interest-based systems. It is shown in this model that a critical initial mass of the "weak" types is necessary for the survival of the devout agents in a heterogeneous environment. Moreover, it is shown that the survival of the devout agents is predicated on the islamically-"weak" agents acting among themselves in an Islamic way.

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    File URL: http://www.ssc.wisc.edu/econ/archive/wp9705.pdf
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    Bibliographic Info

    Paper provided by Wisconsin Madison - Social Systems in its series Working papers with number 9705.

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    Length: 16 pages
    Date of creation: 1997
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    Handle: RePEc:att:wimass:9705

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    Postal: UNIVERSITY OF WISCONSIN MADISON, SOCIAL SYSTEMS RESEARCH INSTITUTE(S.S.R.I.), MADISON WISCONSIN 53706 U.S.A.

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    Keywords: BANKING;

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    1. Phillippe Weil, 1997. "The Equity Premium Puzzle and the Risk-Free Rate Puzzle," Levine's Working Paper Archive 1833, David K. Levine.
    2. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    3. Abbas Mirakhor & Mohsin S. Khan, 1991. "Islamic Banking," IMF Working Papers 91/88, International Monetary Fund.
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    Cited by:
    1. El-Komi, Mohamed & Croson, Rachel, 2013. "Experiments in Islamic microfinance," Journal of Economic Behavior & Organization, Elsevier, vol. 95(C), pages 252-269.

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