THE SURVIVAL OF ISLAMIC BANKING: A MICRO-EVOLUTIONARY PERSPECTIVE

Transcription

1 Islamic Economic Sudies Vol. 5 No.1 December 1997 & No. 2 April 1998 THE SURVIVAL OF ISLAMIC BANKING: A MICRO-EVOLUTIONARY PERSPECTIVE MAHMOUD A. EL-GAMAL Man economiss have sudied he macroeconomic properies of ineres-free banking in he framework of an isolaed and ideal Islamic econom. In his age of inegraed global financial markes i is imporan o consider an alernaive model where ineres-based and ineres-free banking co-eis. I presen an evoluionar game-heoreic model in which sricl profi loss sharing PLS regular ineres-based banks and banks wih Islamic windows inerac. In his model an ideal PLS regime would be he mos prosperous even from a purel financial sandpoin. However he PLS insiuions are in jeopard if he have o compee wih convenional banks. I is shown in his model ha in he face of compeiion wih ineres-based insiuions a criical iniial mass of he hbrid pe is necessar no onl for he survival bu also efficienc of he PLS in a heerogeneous environmen. 1. INTRODUCTION The Twenieh Cenur has winessed resurgence in he observance of fundamenal Islamic pracices around he world. The Islamizaion of he financial secors of man Muslim counries was a naural consequence of his resurgence and he degree of Islamizaion varied dramaicall across counries wih Muslim populaions. The Islamic Republic of Iran and Pakisan are a one ereme where he enire financial secor has been made officiall "Islamic". 1 Malasia Saudi Arabia and man Arab counries have developed a hbrid financial ssem where Islamic banks coeis wih regular financial insiuions and boh pes of financial insiuions are regulaed b he monear auhoriies of hose counries o varing degrees. 2 The auhor is Professor Chair of Islamic Economics Finance and Managemen Professor of Economics and Professor of Saisics Rice Universi MS Main Sree Houson TX U.S.A. 1 See Bank Markazi Jomhouri Islami Iran 1983 and Sae Bank of Pakisan The issue of Islamic bank regulaion is a currenl acive area of research; see Mirakhor and Ul-Haque 1997 and El-Gamal 1997.

2 2 El-Gamal: Survival of Islamic Banking This increase in he pracice of Islamic banking ransformed "Islamic economics" from a sub-field of fiqh Islamic jurisprudence and comparaive ssems ino one which ineracs posiivel wih mainsream economic heor. 3 The large ensuing lieraure since he mid-1970s significanl assised b he incepion of a number of journals devoed o he subjec has helped dispelling a number of he mhs ha surrounded he field in earlier decades. In paricular i is no longer held ha b abolishing ineres Islam denies he legiimac of ime preference and/or raes of reurn for capial [see for insance he papers in Khan 1995 on his issue]. Moreover Khan 1986 has noed ha he aboliion of ineres-based ransacions is no a subjec alien o "Wesern" economic hough. For insance Fisher 1945 Simons 1948 Friedman 1969 and ohers have argued ha he curren one-sided liabili ineres-based financial ssem is fundamenall unsable. This view was made more popular in recen ears due o he epidemic of Savings and Loans bankrupcies in he U.S. as well as he financial crises in Lain America and - more recenl - in Asia insigaed b he ambigui of he financial posiions held b banks seeking higher ineres raes on foreign currenc denominaed bonds. Zarqa 1983 Khan 1986 and a number of papers ha followed have illusraed he macroeconomic sabili of a profi and loss sharing henceforh PLS ssem which would replace ineres-based ransacions in an Islamic econom. This paper aemps o add o he eising lieraure in wo direcions. Firs I consider he sabili of he insiuion of Islamic banking from a micro-economic poin of view where he survival of his insiuion depends on is abili o mainain sound financial posiions for is cusomers devou Muslims and ohers. Second I do no limi m aenion o an idealisic Islamic econom which is isolaed from he res of he world; i.e. where all ineres-based ransacions are impossible e.g. Naqvi Insead I presen an evoluionar game-heoreic model of he dnamics of Islamic banking in he eisence of oher ineres-based financial insiuions. This model is a closer represenaion of he curren siuaion where Islamic banks operae in mos counries Islamic and non-islamic side-bside wih radiional banking insiuions. 4 3 The earlies well-known source on Islamic economics is Ahmad For a recen surve of he major figures in he field of Islamic economics see Haneef Some referees and audience members where his paper was presened have misakenl read i o sa ha he hbrid model is superior o he purel Islamic one. As will be seen laer in he paper his is incorrec. The model I presen assumes ha a purel Islamic financial secor will be more prosperous han he hbrid socie. Unforunael such a ssem canno be brough ino eisence wihou incurring monumenal coss b severing all ies wih he inernaional monear ssem. The quesion asked in his paper is wheher he hbrid ssems which currenl eis in ever Muslim socie can evolve ino a purel Islamic one and under wha condiions.

3 El-Gamal: Survival of Islamic Banking 3 A he micro-level I replace he assumpion of a populaion of homogeneous homo-islamicus Haneef 1995 agens in he econom wih one comprised of hree pes of agens: 1 sricl Islamic agens who never engage in ineres-based ransacions; 2 radiional banks and economic agens who lend and borrow wih ineres; and 3 economic agens who deal smmericall wih boh he sricl Islamic agens in which case he engage in PLS ransacions as well as regular economic agens in which case he have ineres-based ransacions. This las pe will be labeled hbrid agens e.g. banks wih "Islamic windows" or "dual ssem". Perhaps he sronges condemnaion in he lieraure of hose hbrid agens is ha in Ahmad 1992: 5 "The sad reali is ha hough ever one concedes ha Islam prohibis ineres here is no a single Muslim counr which running is financial insiuions wihou resoring o ineres. The fac is ha no one knows how o do i and when poliical pressure mouns he can onl resor o some kind of suberfuge" p.16. Laer Ahmad 1992 criicizes Islamic banks engaging in such aciviies under subsecions iled "And we claim we have abolished ineres!" and "Curren posure of Islamic Economics": "I is no clear whom we are cheaing..." p.47. "The wors par of he sor is ha Islamic economiss as a bod in heir Inernaional Monear and Fiscal Conference held in Islamabad in 1981 gave heir unreserved approval o his arrangemen. So far his is he bes ha Islamic economics has o offer viz. change he name of ineres and ou have abolished ineres". p Again referees and audiences were quick o echo he senimens in hose commens b immediael associaing he hbrid agens wih hpocries in he jurisprudenial sense. We all know man good willing devou Muslims wih banking businesses who are working hard o bring-abou he Islamizaion of our financial secors. The dual agens in his paper are sufficienl absrac ha heir inenions canno be inferred from heir acions. The someimes have o resor o Islamicall accepable ransacions e.g. murabahah which are ver similar o radiional banking pracices and oher imes ma no be able o conver heir insiuions insanl o Islamic banks. However no assumpion abou heir inenions would be appropriae based on he fac ha he have a hbrid porfolio of ransacions a an poin in ime.

4 4 El-Gamal: Survival of Islamic Banking In he model I shall presen i will be shown raher surprisingl ha i is eacl his pe of economic agens ha are needed in he inerim o ensure he economic survival of pious Muslim agens. The assumpions of he model will be moivaed b religious and heoreical consideraions as well as some empirical evidence. Though highl slized his dnamic microeconomic approach ma serve as a seed for furher heoreical and empirical invesigaions of he necessar ransiion from ineres-based o PLS ssems. Secion 2 reviews some of he general heoreical assumpions of he model presened in his paper. The assumpions of he model are moivaed b he religious heoreical and empirical findings. Secion 3 presens he model and he analsis of is dnamics and Secion 4 concludes he paper. 2. ASSUMPTIONS OF THE MODEL We ake as fundamenal he fac ha ineres raes pamen and receip are forbidden for all Muslims. Moreover we recognize ha he econom conains pious Muslims who never engage in an ransacions involving ineres pamens as well as regular economic agens and insiuions which rouinel pa and receive ineres. This hbrid economic ssem is likel o coninue for some ime and i would be idle philosoph o conemplae how a purel Muslim econom would perform wihou knowing wheher such a ssem can be susainable in he presence of ineres paing and receiving agens and insiuions. 6 A recenl conduced surve of deposiors of an Islamic bank Abdel-Kader 1995 showed ha in addiion o agens who never deal in ineres and hose who alwas do here is a large coningenc of agens who paricipae in boh ssems. In paricular he sud found ha for he deposiors of BIMB in % of deposiors had accouns wih oher ineres paing banks. Moreover he ransacions of Islamic banks are hemselves no purel Islamic: Whereas demand deposis do no pa an ineres savings deposis which remain wih he bank for a significan period e.g. 12 monhs are rewarded wih a "gif" which picall has a high correlaion wih marke ineres raes alhough he end o be lower han he marke raes BIMB 1994 Bank Negara Malasia Mos mudarabah arrangemens carr in heir conracs a clause ha if he rae of reurn o he bank or invesor is less han some percenage usuall wrien in he conrac as an absolue monear value of he 6 Some readers seemed o jump o he conclusion ha I am hus arguing ha he hbrid ssem I am suding is assumed o be superior o a purel Islamic one. Again his is compleel conrar o wha he model sas. I am simpl arguing ha a hbrid ssem eiss in reali and herefore should be our focus of sud.

5 El-Gamal: Survival of Islamic Banking 5 "profi share" he bank or invesor has he righ o audi he enrepreneur's operaions. To avoid such an audi enrepreneurs picall pa ha hreshold rae regardless of he acual profi or loss which makes ha rae funcionall equivalen o an ineres rae Khan This empirical reali moivaes our assumpion ha here are hree pes of economic agens in our evoluionar game model: 1. Sricl Islamic agens denoed P * for alwas using PLS financial insrumens insead of ineres-rae based insrumens. 2. Regular banks and economic agens denoed I * for alwas choosing he ineres-based insrumen. 3. Hbrid agens denoed W who inerac smmericall wih all agens; i.e. when making a ransacion wih a P * agen he follow PLS rules; and when making a ransacion wih an I * agen he use he marke ineres raes. In addiion o individuals who paricipae in boh banking ssems hose hpoheical W agens also represen he curren pracice of "banks wih an Islamic window" and "Islamic" banks which offer ineres-like. Our model is an evoluionar game wherein he hree pes of agens are pairwise randoml mached in each period o pla a wo-person wo-move game inerpreed as an economic ransacion. The wo moves available o each agen are P do no use ineres raes and I use ineres raes. Sricl Islamic agens -- due o he religious prohibiion -- never choose I and hence heir lifeime sraeg is P *. Tradiional economic agens are accusomed o ineres raes and believe ha i is alwas beer due o heir risk aversion i is argued below based on he "equi premium puzzle" ha his belief is empiricall unjusified. Therefore he alwas choose I aking he borrower or lender side depending on which is more advanageous a he given ineres rae. We shall consruc he normal form of he sage game as a prisoner's dilemma: P I P aa 0b I b0 cc where we shall assume ha b>a>c>0. This makes he sandard banking pracice II he unique Nash equilibrium for he sage game bu i is Pareo inferior o he Islamic oucome PP.

6 6 El-Gamal: Survival of Islamic Banking The fac ha PP is no a Nash equilibrium i.e. b>a follows immediael from he impossibili of finding a profi-sharing rule which for a generic profile of risk aversion in he populaion and disribuion of poenial profis will make he cerain equivalen of he profi share greaer han or equal o he ineres rae imes principal. Moreover if an I * agen is mached wih a P * agen since he I * pe is alwas willing o ake eiher he borrower or he lender side and since he P * agen has he opion of holding heir mone and paing 2.5% zaka al-mal or giving an ineres free loan 7 he oucome is an ineres free loan from he P * agen o he I * agen. We normalize he service fees or oher nominal fied reurn o he lender in such a ransacion a zero and he I * agen can hen inves he funds or collec unshared ineres on hem hence jusifing b>a. The fac ha he unique Nash equilibrium II is Pareo inferior o he Islamic oucome PP i.e. a>c is jusified on heoreical as well as empirical grounds. On he heoreical side one ma name: i he sabili of an Islamic financial secor in he face of macroeconomic shocks Simons 1948 Zarqa 1983 Khan 1986; ii he more efficien allocaion of resources up o a lower marginal producivi of invesmen Iqbal and Mirakhor 1987; iii he reducion of "effor aversion" which would cause poorer choice of invesmen projecs Khan 1995; iv he poenial underaking of riskier projecs wih a higher epeced profi; and above all v obedience o God; which is believed o lead o success in his life and he ne. Those heoreical consideraions suppor he assumpion ha a>c. On he empirical side an argumen ha a>c even allowing for risk aversion can easil be formulaed based on he famous "Equi-Premium Puzzle" Mehra and Presco Mehra and Presco noed ha he premium of he reurn on he S&P over he riskless rae commercial paper for he period had a mean of 6% and a sandard deviaion of 18%. This large "premium" can onl be eplained b ereme raes of risk aversion in he econom. However Weil 1989 has shown ha if such a rae of risk aversion is assumed we ge a reverse puzzle "he risk-free rae puzzle". Namel if we assume a rae of risk-aversion which 7 An funds ha remain unused for a ear are subjec o his form of wealh a of 2.5% per annum. Inerpreing he ime period in our model as a ear he P agen would -- from a purel financial poin of view -- raher lend he mone wih no ineres han hord i and pa 2.5% of is oal sum.

7 El-Gamal: Survival of Islamic Banking 7 jusifies he equi-premium hen he rae of ime preference which jusifies he risk-free rae mus be negaive. Since a negaive rae of ime preference defeas some of he mos fundamenal jusificaions for ineres raes i would seem ha risk aversion canno eplain wh PLS equi-based ssems ield reurns so much higher han riskless raes. A number of oher unsuccessful eplanaions have been proposed in recen ears bu he "puzzle" remains an uneplained empirical regulari which jusifies our assumpion ha a>c. 3. THE MODEL We sud he sage game discussed in he previous secion which shows ha whenever an wo agens are mached a an poin in ime he pla a prisoner's dilemma: P I P aa 0b I b0 cc wih b>a>c>0. We furher assume following he discussion and moivaion in he previous secion ha here are hree pes of sraegies agens use in he repeaed game: P * alwas choose P I * alwas choose I and W choose P if mached wih a P * -pe and choose I if mached wih I *. The onl remaining degree of freedom is how W acs when mached wih anoher W. The assumpion we make for such encouners is crucial for he analsis o follow. We shall consider he wo ereme cases: [Case I: WW=PP] where he hbrid pes mimic he pious pes when he inerac amongs hemselves. [Case II: WW=II] where he hbrid pes mimic he ineres-using pes amongs hemselves. Time is assumed discree. In each period all he agens in a ver large bu finie populaion are mached pairwise and he ge o pla he game for his period. The appropriael normalized paoffs in an period of he repeaed game given he hree sraegies is: P* I* W P* aa 0b aa I* b0 cc cc W aa cc dd where dd=aa in Case I and dd=bb in Case II.

8 El-Gamal: Survival of Islamic Banking 8 I direcl follows ha he epeced paoffs for each pe a an given period are a simple funcion of he proporion of agens using P * we call ha proporion and he proporion using I * we call ha proporion and - riviall - he proporion using W is Those epeced paoffs are: Which resuls in a populaion-wide paoff a ime of: Now we assume ha he agens making more mone will have a sronger presence in he marke in he following period and vice versa. This can be inerpreed as he rich having more progen/followers or simpl as being larger economic eniies which subdivide ino more "agens" whereas hose geing poorer ge smaller and fewer. The paricular dnamic model chosen here is he famous "replicaor dnamics" model which is borrowed from Biolog. This model has become he main paradigm for evoluionar game heor: 8 The dnamics of his model are srikingl differen for Case I and Case II. A schemaic skech of he phase diagrams for he model wih b>a>c>0 in CASE I and CASE II are shown in Figure 1 and 2 respecivel. In Figures 1 and 2 lines and poins in boldface represen fied poins and arrows in he inerior represen he dnamic rajecories. Figures 3 and 4 show he phase diagram and 400 numerical rajecories each for he case b=3 a=2 c=1 however he phase diagram is qualiaivel he same for an b>a>c>0 alhough he eac urning poins depend on he numerical values of hose parameers. Noice ha P * 's average 8 For a recen reamen and surve of he lieraure in Evoluionar Game Theor see Vega-Redondo ; a a P = ; c b c I + = = + = + = ; II WW Case II c a c PP WW CaseI a c a W ; 1 P + = ; 1 I + = ; 1 ; ; * * W I P + + =

9 El-Gamal: Survival of Islamic Banking 9 paoff is monoonicall decreasing in and ha I * 's paoff is monoonicall increasing in ; i.e. he I * pes are predaors and he P * are pre. The ineracion of hose wo pes wih W in cases I and II produces ineresing dnamics. I is sraigh-forward o verif he main analical properies of our phase diagrams: [In Case I] WW=PP All he poins on he -ais =0 are fied poins where he P * 's survive forever and he W's survive forever acing like P * 's. There is an isolaed fied poin a =1. All he poins wih 1- - =0 i.e. he diagonal wih no W's converge o he isolaed fied poin where all he P * 's vanish. In a neighborhood of he diagonal defined b 1- - < εabc we ge monoonic decline of o zero followed b a monoonic decline of o zero. In he limi onl W's survive and he ac in CASE I like P * 's. Wih sufficien W pes 1- - > εabc he P * pes survive forever wih lim = 0 and he W's in he limi ac like P * 's. There is no scenario in which boh lim and lim are posiive. In oher words he pious and he ineres-using canno co-eis forever! In order for Islamic banking o survive in a heerogeneous environmen i is necessar ha WW=PP see CASE II below and ha here is some mass of W pes he larger he mass he higher he chance of P * 's surviving and he faser ha ineres-based dealings perish. [In Case II] WW=II The onl manifold on which an Islamic banking can survive is defined b he -ais =0. All of he poins on ha ais converge o he isolaed fied poin a =1 i.e. where a ime =0 onl P * -pes eis. All poins wih =0 on he -ais are fied poins where he ineresusing agens survive forever and he W pes mimic hem and survive as ineres-users. Saring from an oher poin wih >0 i.e. wih he slighes deviaion from an idealisic isolaed Islamic econom lim =0.

10 10 El-Gamal: Survival of Islamic Banking There is no scenario in which boh lim and lim are posiive. In oher words he pious and he ineres-using canno co-eis forever! This is rue in boh cases I and II. Of course if we ake inermediae cases where he W pes someimes use PP and someimes use II when dealing amongs hemselves we ma sill ge he survival of Islamic banking provided ha he proporion of W's is above a criical level and ha he use PP amongs hemselves sufficienl ofen. Figures 5 and 6 illusrae wo of he more ineresing scenarios under Cases II and I respecivel. Figure 5 shows ha if WW=II we ma ge a shor period of increase in P * bu such a resurgence of Islamic banking will be shor-lived and evenuall selfdefeaing. Indeed as we know from he above analsis of he phase diagram he onl scenario under CASE II in which Islamic banking he P sraeg survives is used in he limi is for all agens o use P a ime 0. This corresponds o he radiional view of Islamic economiss ha all ineres mus be abolished insanl oherwise he Islamic pracice canno be susained. Indeed in boh cases I and II his poin =1 is riviall a fied poin and his jusifies he saemen ha if he econom were o conver o Islamic pracice all a once such pracice can survive regardless of he environmen. However his inuiion is no useful in a comple world where ineres-using agens coeis wih -- and srive o eploi -- Islamic pracice. In his environmen > 0 i is no rue ha a sufficienl large 0 coningenc of pious agens can guaranee he survival of Islamic banking. This is obvious in CASE II where all pious agens will perish if faced wih a heerogeneous populaion. I is ineresing o see in Figure 6 a scenario under CASE I where 0 is large a he epense of i.e. here are no enough W pe agens in he econom. In his case he P * pes will sill be eas pre for he I * and will be doomed o eincion. Afer all he P * pes have vanished =0 he W agens coninue o ouperform he ineresaking pes and evenuall become he onl survivors lim 1- - = 1. This limiing resul has Islamic banking surviving in he limi bu for economic raher han religious reasons since he rul pious pes are he firs o perish. Indeed he hbrid agens are he sronges economicall. In boh cases I and II he can survive in he face of he ineres-users. In CASE I he can pla an addiional role provided here are enough of hem of helping he pious agens survive in he long-run. Inerpreing he W agens as he modern Islamic banks wih some Islamic dealings and some ransacions ha eiher mimic ineres or are eplicil ineres based our resuls sugges ha he severe criicism of hose insiuions in he lieraure ma be misguided. I would be ideal o insananeousl obain universal Islamic behavior =1. However since his is no a likel scenario he "dual ssem banks" pe seems necessar o ensure he survival of Islamic economic pracice in

11 El-Gamal: Survival of Islamic Banking 11 a heerogeneous econom of Islamic and ineres-using agens. If we furher accep he limiing resul 1- - =1 as a form of Islamic banking survival despie he fac ha he rul pious agens would have perished hen he eisence of W agens has been shown o be sufficien for Islamic banking o dominae he econom in he limi. Moreover he larger he coningenc of W agens he faser an econom can rid iself of he ineres-using pes provided ha we are in CASE I where he W pes behave among hemselves in he Islamic manner. 4. CONCLUDING REMARKS Islamic economiss and Muslims in general diverge in heir view of he modern phenomenon of hbrid Islamic/radiional banking. Some view he pracices of hose Islamic banks which mimic ineres as pracical shor-run alernaives and hope ha he will graduall be replaced wih pracices ha agree wih he spiri as well as he leer of he Islamic law Khan Ohers are angered wih wha he view as an ourageous form of religious hpocris and wish o ransform he econom insananeousl o be in accordance wih Islamic law Ahmad In he highl slized model presened in his paper i has been shown ha each of hese divergen views is correc in a special case. The deermining facor in his model is he manner in which Islamic banks deal among hemselves. I is shown ha he necessar and sufficien condiion for Islamic banking o survive in he long run is he eisence of agens who are willing o inerac smmericall wih he Islamic and he ineres-based pars of he econom and ha hose agens deal amongs hemselves in an Islamic manner. I is ineresing o noe ha he Malasian Islamic banking ssem which is he mos advanced hbrid financial ssem where Islamic and regular banks coeis has recenl adoped an Islamic check-clearing ssem which would faciliae he Islamic ineracion amongs he Islamic banks Bank Negara Malasia This suggess ha our model can serve as a seed for fuure empirical heoreical and polic research on ransiion from regular ineres-based banking o Islamic banking. REFERENCES Abdel-Kader R "BIM: Marke Implicaions" in Leading Issues in Islamic Banking and Finance Chaper 8 Malasia: Pelanduk. Ahmad K Economics of Islam: A Comparaive Sud Lahore: Sh. Muhammad Ashraf Ahmad S Towards Ineres-Free Banking New Delhi: Inernaional Islamic Publishers.

12 12 El-Gamal: Survival of Islamic Banking Al-Jazeeri A Al-Fiqh `ala al-mahahib al-'arba`ah in Arabic Cairo: dar 'iha' al-orah Al-Arabi. Bank Markazi Jomhouri Islami Iran 1983 The law of Usur Ineres Free Banking Tehran: Cenral Islamic Republican Bank of Iran. Bank Negara Malasia 1994 Mone and Banking in Malasia Kuala Lumpur: Bank Negara Malasia. BIMB 1994 BIMB Annual Repor Kuala Lumpur: BIMB. El-Gamal M "Governmen Papers Accepable o Islamic Banks" paper presened a Cenral Bank of Kuwai and IMF seminar on Islamic Financial Insrumen Design and Regulaion. Fisher I % Mone New Haven: Ci Prining. Friendman M "The Monear Theor and Polic of Henr Simons" in Friedman M. ed. The Opimum Quani of Mone and Oher Essas Chicago: Aldine. Haneef M Temporar Islamic Economic Though: A Seleced Comparaive Analsis Kuala Lumpur: Ikraq. Iqbal Z. and A. Mirakhor 1987"Islamic Banking" Occasional Paper # 49 Washingon D.C.: IMF. Khan M "Islamic Banking as praciced now in he World" in Ahmad Z. M. Iqbal and M. Khan eds. Mone and Banking in Islam Islamabad: Insiue of Polic Sudies. Khan M.S "Islamic Ineres Free Banking: A Theoreical Analsis" Saff Papers of he IMF Vol. 33. Khan M.F.1995 Essas in Islamic Economics Leiceser: U.K.: The Islamic Foundaion. Mehra R. and E. Presco 1985 "The Equi Premium: A Puzzle" Journal of Monear Economics Vol. 15. Mirakhor A. and N. Ul-Haque 1997 "The Design of Insrumens for Governmen Finance in an Islamic Econom" paper presened a Cenral Bank of Kuwai and IMF seminar on Islamic Financial Insrumen Design and Regulaion IMF working paper WP/98/54. Naqvi S On Replacing he Insiuion of Ineres in A Dnamic Islamic Econom Islamabad: Insiue of Developmen Economics.

13 El-Gamal: Survival of Islamic Banking 13 Simons H Economic Polic for Free Socie Chicago: Universi of Chicago Press. Sae Bank of Pakisan 1984 Eliminaion of Ineres from he Banking Ssem in Pakisan Karachi: Sae Bank of Pakisan. Van-Redondo F Evoluion Games and Economic Behavior N.Y: Oford Universi Press. Weil P "The Equi Premium Puzzle and he Risk-free Rae Puzzle" Journal of Monear Economics Vol. 23. Zarqa M "Sabili in an Ineres-Free Islamic Econom: A Noe" Pakisan Journal of Applied Economics Vol. 2.

14 14 El-Gamal: Survival of Islamic Banking Figure 1

15 Figure 2 El-Gamal: Survival of Islamic Banking 15

16 16 El-Gamal: Survival of Islamic Banking Figure 3

17 Figure 4 El-Gamal: Survival of Islamic Banking 17

18 18 El-Gamal: Survival of Islamic Banking Figure 5

19 Figure 6 El-Gamal: Survival of Islamic Banking 19