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Why do large firms go for Islamic loans?

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  • Weill, Laurent
  • Godlewski, Christophe

Abstract

This paper examines motivations for large firms to choose an Islamic loan over a conventional loan. This investigation helps understanding the causes of the expansion of Islamic finance activities. We employ a dataset of Islamic and conventional syndicated loans from countries from the Middle East and from Southeast Asia for the period 2001-2009, testing determinants for the choice of an Islamic loan at the facility, firm, and country level. We find that loan characteristics do not influence the choice of an Islamic loan, suggesting that borrowers asking for an Islamic loan are not rationed in terms of maturity and amount. The quality of the borrower does not lead to influence the choice of an Islamic loan, meaning that Islamic loans are not associated with a different default risk than conventional loans. We identify three country-level determinants as potential driving forces expanding the preference for Islamic loans. The strongest determinant is religiosity, i.e. the share of Muslim population in a country, but the quality of institutions and level of financial development also play substantial roles.

Suggested Citation

  • Weill, Laurent & Godlewski, Christophe, 2012. "Why do large firms go for Islamic loans?," BOFIT Discussion Papers 7/2012, Bank of Finland Institute for Emerging Economies (BOFIT).
    • Handle: RePEc:zbw:bofitp:bdp2012_007
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    1. Baele, Lieven & Farooq, Moazzam & Ongena, Steven, 2014. "Of religion and redemption: Evidence from default on Islamic loans," Journal of Banking & Finance, Elsevier, vol. 44(C), pages 141-159.

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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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