Emergence of Islamic Finance Organizations, 1948 – 2016

Abstract

In this paper, I show two mechanisms of the emergence of non-Western organizations: demonstration of contracts and cultural resurgence. For illustration, I use the case of Islamic finance, an alternative economic organization for Muslims who are about 24% of the world population. With additional transaction costs and illegitimacy concerns, Islamic finance contracts do not usually take a formal form. However, my analyses with duration models, regressions, and semi-natural experiments over 1948 - 2016 and in 186 countries suggest that the Islamic finance contracts between supranational and national authorities inspired confidence among entrepreneurs and stakeholders that Islamic finance is socially and economically appropriate. This gave rise to Islamic finance organizations to enact such contracts, reducing the transaction costs for realizing Islamic principles in financial transactions. Also, Islamic financial organizations grew earlier in countries with aspirations for Muslim cultural resurgence in the post British colonial times.