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, we compare these banks during a financial panic. Our 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. We also find that Islamic bank branches grant more loans during financial panics and that their lending decisions are less sensitive to changes in deposits. Our findings suggest that greater financial inclusion of faith-based groups may enhance the stability of the banking system.
deposits of Islamic Banks (IBs), Islamic Branches/Subsidiaries (ISs) and conventional banks. The liquidity crisis period runs from 27-Sep-2008 to 14-Nov-2008, during which banking sector in Pakistan lost over Rs. 130 billion or 4 per cent of deposits due to rumors regarding viability of some financial institutions. The dependent variable is change in log of deposits over seven-week liquidity crisis for bank i, branch type j (calculated as ln(deposits as on 14-Nov-2008 of Bank A Islamic operations) minus ln(deposits as on 27-Sep-2008 of Bank AIslamicoperations). For each