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Moazzam Farooq and Sajjad Zaheer

inconsistent with the literature that suggests a negative role of parent bank fragility on the lending of subsidiary. For example, using data of multinational bank-holding companies and their subsidiaries, Allen, Hryckiewicz et al. (2011) document the negative impact of parent bank fragility on subsidiaries’ lending. Our study, however, goes a step further and show that other than the financial strength, ‘religious branding’ in its own right, may help banks steer better through a financial panic. These results support earlier findings of relatively better performance of

Moazzam Farooq and Sajjad Zaheer
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.