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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.
Moazzam Farooq and Sajjad Zaheer

Front Matter Page Research Department and Strategy, Policy, and Review Department Contents 1. Introduction 2. Background on Islamic Banking in Pakistan 3. The 2008 Financial Panic 4. Data Analysis and Econometric Specification 5. Results: 5.1 Islamic vs. conventional banks 5.2 Do bank fundamentals matter? 5.3 Does independent information help banks? 5.4 Bank or her (religious) depositor? 5.5 Did the liquidity shocks affect the supply of credit? 5.6 Robustness 6. Conclusions References List of tables 1. Excess

Moazzam Farooq and Sajjad Zaheer

.361*** −3.320 (2.679) (35.297) (6.528) (5.221) Bank Fixed Effects No No No Yes Observations 52 52 52 24 R-squared 0.157 0.220 0.204 0.277 *** significant at 1%, ** significant at 5%, * significant at 10 % 5.2. Do bank fundamentals matter? The specification used in Table 3 column I does not control for important factors that may affect depositor behavior during a financial panic. For example, during a crisis, rather than looking at whether a bank is Islamic or not, depositors may considering