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Of Religion and Redemption: Evidence from Default on Islamic Loans

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  • Baele, Lieven
  • Farooq, Moazzam
  • Ongena, Steven

Abstract

Do religious beliefs affect real economic decisions? We investigate this fundamental question by comparing default rates on conventional and Islamic loans using a comprehensive monthly dataset from Pakistan that follows more than 150,000 loans over the period 2006:04 to 2008:12. We find robust evidence that the default rate on Islamic loans is less than half the default rate on conventional loans. The evidence comes from a variety of specifications that contain pertinent combinations of time-varying borrower, loan contract and bank characteristics, and time, borrower, bank and borrower*bank fixed effects. For the same borrower taking both conventional and Islamic loans from the same bank, the hazard rate on Islamic loans drops to one fifth the hazard rate on conventional loans. Islamic loans are less likely to default during Ramadan and in big cities if the share of votes to religious-political parties increases, suggesting that religion--either through individual piousness or network effects--may play a role in determining loan default.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8504.

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Date of creation: Aug 2011
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Handle: RePEc:cpr:ceprdp:8504

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Keywords: Duration Analysis; Islamic Loans; Loan Default; Religion;

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Citations

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Cited by:
  1. Pejman Abedifar & Philip Molyneux & Amine Tarazi, 2013. "Risk in Islamic Banking," Review of Finance, European Finance Association, European Finance Association, vol. 17(6), pages 2035-2096.
  2. Matthew C. Mitchell & Muhamad Iqbal Mohd Rafi & Sean Severe & Jeffrey A. Kappen, 2014. "Conventional Vs. Islamic Finance: The Impact Of Ramadan Upon Sharia-Compliant Markets," Organizations and Markets in Emerging Economies, Faculty of Economics, Vilnius University, vol. 5(1).
  3. Laurent Weill & Christophe Godlewski, 2012. "Why Do Large Firms Go For Islamic Loans?," Working Papers of LaRGE Research Center 2012-05, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
  4. Sajjad Zaheer & Steven Ongena & Sweder van Wijnbergen, 0000. "The Transmission of Monetary Policy through Conventional and Islamic Banks," Tinbergen Institute Discussion Papers 12-048/2, Tinbergen Institute.
  5. Molyneux Philip & Yip John, 2013. "Income diversification and performance of Islamic banks," Journal of Financial Management, Markets and Institutions, Società editrice il Mulino, Società editrice il Mulino, issue 1, pages 36-50, January.
  6. Nathan Berg & Jeong-Yoo Kim, 2013. "Prohibition of Riba and Gharar: A signaling and screening explanation?," Working Papers, University of Otago, Department of Economics 1314, University of Otago, Department of Economics, revised Nov 2013.
  7. Filipe R. Campante & David H. Yanagizawa-Drott, 2013. "Does Religion Affect Economic Growth and Happiness? Evidence from Ramadan," NBER Working Papers 19768, National Bureau of Economic Research, Inc.
  8. Laurent Weill, 2012. "How Quality of Institutions Shape the Expansion of Islamic Finance," Working Papers of LaRGE Research Center 2012-08, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
  9. Weber, Ron & Musshoff, Oliver, 2012. "Microfinance for Agricultural Firms- Credit Access and Loan Repayment in Tanzania," 123rd Seminar, February 23-24, 2012, Dublin, Ireland, European Association of Agricultural Economists 122552, European Association of Agricultural Economists.

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