Of Religion and Redemption: Evidence from Default on Islamic Loans

68 Pages Posted: 12 Aug 2011

See all articles by Lieven Baele

Lieven Baele

Tilburg University - Department of Finance

Moazzam Farooq

Central Bank of Oman; Tilburg University - CentER, European Banking Center (EBC); IQRA University

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2011

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.

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

JEL Classification: A13, G21, G32, G33, Z12

Suggested Citation

Baele, Lieven and Farooq, Moazzam and Ongena, Steven R. G., Of Religion and Redemption: Evidence from Default on Islamic Loans (August 2011). CEPR Discussion Paper No. DP8504. Available at SSRN: https://ssrn.com/abstract=1908552

Lieven Baele (Contact Author)

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 3257 (Phone)
+31 13 466 2875 (Fax)

Moazzam Farooq

Central Bank of Oman ( email )

P.O. Box 1161
Postal Code 112,Ruwi
Oman

Tilburg University - CentER, European Banking Center (EBC) ( email )

PO Box 90153
Tilburg, 5000 LE
Netherlands

IQRA University ( email )

Defence View
Shaheed-e-Millat Road (Ext.)
Karachi, Sindh 75500
Pakistan

Steven R. G. Ongena

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
2
Abstract Views
1,405
PlumX Metrics