01/03/2015 06:29 AST

In a working paper published by the IMF entitled Are Islamic Banks More Resilient during Financial Panics? the authors, Moazzam Farooq and Sajjad Zaheer, find evidence to suggest there is a clear role for faith-based finance.

Rapid growth of Islamic banking in developing countries is accompanied with claims about its relative resilience to financial crises as compared to conventional banking. However, little empirical evidence is available to support such claims. Using data from Pakistan, where Islamic and conventional banks co-exist, this paper compares these banks during a financial panic.

The results show that Islamic bank branches are less prone to deposit withdrawals during financial panics, both unconditionally and after controlling for bank characteristics. The Islamic branches of banks that have both Islamic and conventional operations tend to attract (rather than lose) deposits during panics, which suggests a role for religious branding. The authors also find that Islamic bank branches grant more loans during financial panics and that their lending decisions are less sensitive to changes in deposits. The findings suggest that greater financial inclusion of faith-based groups may enhance the stability of the banking system.


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