Are religious beliefs a drag on economic growth?

Published: July 23, 2012
Islamic banks are on
average at least as
productive, profitable
and efficient as

Islamic banks are on average at least as productive, profitable and efficient as conventional banks. ILLUSTRATION: JAMAL KHURSHID


Many critics of the religion as a social organisation argue that Islam, like other old religions, stymied business in general and economic activity in particular. One staunch advocate of such a view is Timur Kuran who has written extensively on the negative impact of Islamic contract laws and the division of business and estate consequent to the Islamic law of inheritance. On the surface, Kuran’s view is appealing but a deeper, more objective, look reveals that it is not the institution of religion that is the cause of underdevelopment. Rather, the early stage of development in which many Muslim countries are in has caused the debilitated and enervated commercial sector which Kuran laments.

The argument can be better understood with reference to the slow growth rates in the advanced or developed countries as compared with developing countries and emerging markets, which by and large have much higher growth rates. It would be absurd to conclude from national time series data on growth rates of the countries of the world that the economic development itself is responsible for slower growth in advanced countries. Development of economies and the businesses therein is indeed a complex phenomenon and attributing slower commercial growth to one factor like the institution of religion is at best misleading.

In a country like Pakistan, it can easily be seen that the business community indeed is deeply religious. In fact, most successful business families are probably more religious than the average man on the street. Religion or faith has not deterred them from developing successful businesses. There are of course limits to growth of businesses owned by Muslims, but religion has not proven to be an encumbrance. Even in cases where Muslim owners have shown reluctance to use interest-based finance to expand their businesses, they have managed to find alternative Shari’a compliant methods to finance growth and expansion. In fact, in the contemporary context, non-availability of Shari’a compliant finance can be seen as a limit to growth, rather than the use of Shari’a principles and contracts, as a reason for poor performance or lower productivity of the businesses owned by Sharia sensitive Muslims.

Islamic banking and financial institutions provide a good example of Sharia sensitive business. There are a number of studies comparing efficiency and productivity of Islamic banks with their conventional interest-based counterparts, on the global, regional and national levels. The results of such studies are at best inconclusive, suggesting that Islamic banks are on average at least as productive, profitable and efficient as conventional banks in the jurisdictions wherein they co-exist with conventional banks.

There could be some variations to this general conclusion. For example, some studies suggest that in certain countries Islamic banking operations (in the form of Islamic windows) are more efficient than fully-fledged Islamic banks. One plausible explanation of such a trend is with reference to economies of scale. Conventional banks tend to be significantly larger than Islamic banks in terms of paid up capital and assets under management (AUM). Hence, Islamic windows of conventional banks naturally have a cost advantage over small fully-fledged Islamic banks. Bigger Islamic banks, however, do not suffer from this cost disadvantage. In Pakistan, for example, Meezan Bank is the largest fully-fledged Islamic bank, with paid-up capital of over Rs8 billion and AUM of Rs205 billion, which makes it overall one of the largest banks in the country. The bank has performed exceptionally well, with comparable performance with conventional banks.

In terms of sheer growth, businesses located in or serving large markets are expected to grow faster than those serving small markets. As it happens, there are quite a few Islamic countries with huge populations such as Indonesia with 242 million people, Pakistan with 177 million, Bangladesh with 150 million, and Turkey with 74 million. The future growth of business in such economies is expected to be significantly higher than countries with smaller markets.

Therefore, it could easily be concluded that religious beliefs are not a drag on the economic growth and business development. An array of other economic, social, legal and political factors must remain relevant. However, the market size will remain a major pull factor. Faith-related trends like consumption of Halal products or the use of Islamic financial services should not be seen as a constraint on growth but rather new opportunities for business development and improved profitability.


Published in The Express Tribune, July 23rd, 2012.

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Reader Comments (18)

  • Falcon
    Jul 23, 2012 - 4:10AM

    Humayon Sahab – Very informative article. At least I learnt something new from piece.


  • Anonymous
    Jul 23, 2012 - 7:10AM

    This article has too many assumptions. While I agree with the general view of Mr. Dar, he assumes “there are of course limits to growth of businesses owned by Muslims.” Care to explain? Loans aren’t the only way to unlimited growth.


  • DevilHunterX
    Jul 23, 2012 - 9:18AM

    Then why is that every time Ramazan comes around, the so-called religious people jack up the prices of every single item in the country!?


  • Jul 23, 2012 - 10:30AM

    Q. Are we legally allowed to give an answer anything other than a resounding “no” in this country?


  • Awans
    Jul 23, 2012 - 10:38AM

    Well once I was impressed by Islamic banking and then i tried to read the Quran and Hadees where the fundamentals are written of Islamic Economy. To be honest you cannot found a single Verse where Economic system is written. It was developed hundreds of years afterwards by the people who want Manipulation of the religion for Personal Gains. All Islam had said in Quran and Hadees that be Fair and Impartial in Dealings and also take care of those people who have difficulty in paying the debt in times of Femine or dificult time. But now we see so called Islamic Banking System that is my view is bound to fail as it is developed by Mullahs and not coming directly from Quran. Please could anybody give me a Single Reference from Quran where the Word Islamic Economy or Islamic Banking System is used???. I am not able to find a single word about it.


  • Think!!!
    Jul 23, 2012 - 11:13AM

    it is there in the Quran my friend.. all u have to do is to increase ur knowledge of how laws and teachings from the Quran r extracted.. learn about ‘ijtihad’ and study the seerat, u’ll get the answers!


  • JM
    Jul 23, 2012 - 11:25AM

    @Awans, please study the literature published by Mufti Taqi Usmani and you will find answers to your questions.


  • Ameer
    Jul 23, 2012 - 11:40AM

    Thank you for stating the obvious and exhaustively elaborating on only one notion of profitability – EOS


  • Zalim Singh
    Jul 23, 2012 - 11:47AM

    @ Awans

    modern world has centres of excellance like Finance, Science, Social studies and Mathematics etc to guide people towards prosperity. Putting more effort and pushing for them makes economies boom. Just loom at the western world. Once they got out of biblic hold, they zoomed ahead of everybody.

    Islam is an ancient text of 1400 years old. Should you guys still look into it and waste your time? Where will be Islamic countries without oil. They will occupy the pathetic bottom line of all indicators.

    Only secular beliefs in modern day industry will work. Religion will be an detriment.


  • Jul 23, 2012 - 12:35PM

    Economic growth or debt expansion, what is the difference?


  • The Truth
    Jul 23, 2012 - 12:41PM

    Putting aside Islamic Banking Institutions, What about the overall impact of how religion is viewed and applied in the day to day economic life. For example, what is the value of lost goods and services as a result of Ramadan, with reference to entire food and shopping centers shut down the entire day. The slew of strikes and protests that occur under the guise of religion, i.e. religious political parties that call for days of mourning and protest. It is a bit suspect that the writer limits the scope of his article to such a narrow aspect of the effect of religious beliefs on economic growth. I think his article is correct and well written on that narrow subject, but if I remember correctly, the title of the article was “are religious beliefs a drag on economic growth?”


  • R.A
    Jul 23, 2012 - 1:44PM

    If I am not liable for Blasphamy
    The answer is a big YES
    Just look at the ban on Shezan products

  • Awans
    Jul 23, 2012 - 1:47PM

    @Think!!!: Bro in my last comment i did mentioned what i learned from Quran. These are some points which i learnt.
    1) Islam never said of a Peculiar System of Economics but all it say be Fair and Impartial in all of your dealings.
    2) When someone is in debt and you will see that they are in trouble then help them and if they are indebted in case of Femine or hunger then try to waive their debts.
    3) Also Never ever took illegal profits from any products as it is illegal.
    4) Never ever hoard any food product as it equates to the murder of Humanity.
    5) Never took or give bribe as it spoils the Impartiality.

    Brother The above four points i have mentioned are the ones i learnt from islam. Tell me we are so busy in Implementing Islamic Banking System developed after hundreds of Islam but why we cannot implement above points which are mentioned in Quran?????. We are lying cheating, hoarding, getting illegal profits , blackmailing people with bribes, disrespecting the poor and doing every bad thing. So called Islamic Banking system will not work but the Original Teachings could change our lives.


  • Big Rizvi
    Jul 23, 2012 - 3:10PM

    You don’t need compulsory Zakat to prove one’s faith…


  • Zahra
    Jul 23, 2012 - 4:26PM

    In developing countries it is a supply side issue, firms need to be more competitive, productivity needs to be higher, deregulation should take place so that capital is invested in the right areas. Basically its an economic fact that developed countries grow slower than developing countries as they are closer to their plateau level of economic development.

    The middle east is a growth mirage, economists when studying oil producing countries tend to separate it from regular analysis since most of their income is coming from oil. This prevents economists from analysing the correct development scheme/growth rate.

    There is an interesting article on consumerism in faith in the economist, two weeks ago.


  • Dr Meekal Ahmed
    Jul 23, 2012 - 7:48PM

    If business persons are deeply religious, how come they routinely cheat on their taxes?


  • Rashid Hasan
    Jul 24, 2012 - 12:00AM

    @Loneliberal PK: Very well said.


  • Riaz Khan
    Aug 6, 2012 - 1:49PM

    Religion is dragging Pakistan down! State & religion cannot mix.


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