Of Religion and Redemption: Evidence from Default on Islamic Loans (Replaced by EBC DP 2012-008)

We study default rates on conventional and Islamic loans using a comprehensive monthly dataset from Pakistan that follows more than 150,000 loans over the period 2006:04 to 2008:12. We find robust evidence that the hazard rate on Islamic loans is less than half the hazard rate on conventional loans. Across duration models we include a variety of loan contract, borrower, and bank characteristics, where possible combined with time, borrower, bank and/or borrower*bank fixed effects. In big cities Islamic loans default less likely if the share of religious parties increases, suggesting that religious motivation may determine loan default.