Finance: Research, Policy and Anecdotes

Keep walking? Islamic bank borrowers don’t mind distance

Now accepted by the Journal of Corporate Finance, a paper by Ilkay Sendeniz-Yuncu, Steven Ongena and yours truly. “Keep Walking? Geographical Proximity, Religion, and Relationship Banking” has nothing to do with my love for Blended Whiskey and all with the distance between borrowers and lenders across conventional and Islamic banks in Turkey. Combining data on borrower-bank relationships from Kompass and branch location data of all Turkish banks, we find that Islamic banks are geographically more distant from to their borrowers. We also 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.  The higher distance between borrower and bank in the case of Islamic banks is stronger in cities with a higher conservative party vote and higher trust in religious institutions.  As we control for many other firm characteristics and also control for within-firm variation (for firms with both conventional and Islamic lenders), this difference seems to be driven more by demand than supply-side differences.


What do we learn from these findings? Distance is far from dead and matters for which bank a borrowers links up with. Second, Islamic financial products are sufficiently attractive for certain borrowers that they are willing to take into account longer distances to access these banking products.