I have been recently working on several Islamic Finance papers. While a small part of the overall global financial system, Islamic finance is an interesting phenomenon. It aims to comply with several provisions of the Sharia of (i)
no interest and (ii) funding only transactions that are directly related to real economy transactions. This is being done partly by offering equity-like savings and loan products, partly by rearranging cash-flow claims of the bank vis-a-vis borrowers,
replacing interest rates with (partly contingent) fees. One of the challenges for researchers in this area is the access to the necessary data – using our standard database for bank-level data (Bankscope) provides only limited insights into the
functioning of Islamic finance (as done in my first paper on this topic, with Asli Demirguc-Kunt and Ouarda Merrouche). Cross-country papers using aggregate data
are subject to the usual endogeneity biases. Micro-data is the way to go.
One of the countries, which has seen a recent expansion of Islamic finance (also known as participation finance) is Turkey. In a recent paper with Steven Ongena and Ilkay, Sendeniz-Yuncu we explore the importance of distance between borrower and branches of different bank types for establishing relationship between banks and borrowers. Extant evidence across
developed and developing countries has shown that geographic proximity is important for relationships between (especially small) firms and their banks. In the case of Turkey, the average distance between the firm and the closest branch of the bank it
has a relationship with, is 1.7 km, though with substantial variation. We find that the probability for a firm to connect to a bank substantially decreases in distance, but that if the bank in the vicinity is an Islamic bank, distance plays a more muted
role, especially in cities in the Mediterranean and Aegean regions, as well as in cities with a high conservative party vote and higher trust in religious institutions. This suggests that Islamic financial products are sufficiently attractive for
certain borrowers that they are willing to take into account longer distances to access these banking products.