Banking for those unwilling to bank: Implications of Islamic banking systems

A significant number of Muslims are unwilling to deposit their savings into the conventional banking sector since it does not operate according to their religious beliefs. In this paper we provide a model that aims to explore growth and welfare implications of an Islamic banking system that operates according to Muslims' religious principles. Our model shows that in an economy populated with a certain number of religiously concerned individuals, the existence of an Islamic banking system can generate higher growth and improve welfare substantially. These theoretical results are in line with recent empirical findings.