Can Islamic Banking Survive? A Micro-evolutionary Perspective

Islamic banking is a growing phenomenon which came into existence to satisfy the nan-cial needs of devout Muslims who observe the prohibition of interest-based transactions. Many economists have studied the macroeconomic properties of this institution in the framework of an isolated and ideal Islamic economy. In this age of integrated global nancial markets, the instantaneous transformation of an entire nancial sector to proot-and-loss sharing is very unlikely. I present an evolutionary game-theoretic model in which devout Muslims, regular interest-based banks, and \weak" (hybrid) muslims/banks interact. The third type of agents is intended to represent the behavior of current Islamic banking, which is commonly criticized for mimicking interest-based systems. It is shown in this model that a critical initial mass of the \weak" types is necessary for the survival of the devout agents in a heterogeneous environment. Moreover, it is shown that the survival of the devout agents is predicated on the islamically-\weak" agents acting among themselves in an Islamic way. When the islamically-\weak" agents act in an Islamic way among themselves, it is shown that their existence is necessary and suucient for Islamic banking to survive!