Levine, Loayza, and Beck evaluate techniques, they find that development of financial * Whether the level of development of financial intermediaries exerts a large causal impact on growth. intermediaries exerts a casual influence on economicThe data also show that cross-country differences in growth.legal and accounting systems help determine differences * Whether cross-country differences in legal and in financial development. accounting systems (such as creditor rights, contractTogether, these findings suggest that legal and enforcement, and accounting standards) explain accounting reform that strengthens creditor rights, differences in the level of financial development.contract enforcement, and accounting practices boosts Using both traditional cross-section, instrumental-financial development and accelerates economic growth. variable procedures and recent dynamic panel This papera product of Macroeconomics and Growth, Development Research Groupis part of a larger effort in the group to understand the links between the financial system and economic growth. Copies of the paper are available free from the World Bank,

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This is the accepted version of the paper.This version of the publication may differ from the final published version. Islamic banks, controlling for time-variant country-fixed effects, we find few significant differences in business orientation. There is evidence however, that Islamic banks are less cost-effective, but have a higher intermediation ratio, higher asset quality and are better capitalized. We also find large crosscountry variation in the differences between conventional and Islamic banks as well as across Islamic banks of different sizes. Furthermore, we find that Islamic banks are better capitalized, have higher asset quality and are less likely to disintermediate during crises. The better stock performance of listed Islamic banks during the recent crisis is also due to their higher capitalization and better asset quality. Permanent repository link Cover Letter *Detailed Response to ReviewersWe compare conventional and Islamic banks across 22 countries with both bank types. Abstract: How different are Islamic banks from conventional banks? Does the recent crisis justify a closer look at the Sharia-compliant business model for banking? When comparing conventional and Islamic banks, controlling for time-variant country-fixed effects, we find few significant differences in business orientation. There is evidence however, that Islamic banks are less cost-effective, but have a higher intermediation ratio, higher asset quality and are better capitalized. We also find large cross-country variation in the differences between conventional and Islamic banks as well as across Islamic banks of different sizes. Furthermore, we find that Islamic banks are better capitalized, have higher asset quality and are less likely to disintermediate during crises. The better stock performance of listed Islamic banks during the recent crisis is also due to their higher capitalization and better asset quality.JEL classification: G21; G01; Z12

Using a unique firm-level survey data base covering 54 promoting firm growth, particularly the development of countries, Beck, Demirgiu,-Kunt, and Maksimovic the small and medium enterprise sector. But the evidence investigate whether different financial, legal, and also shows that the intuitive descriptors of an "efficient" corruption issues that firms report as constraints actually legal system are not correlated with the components of affect their growth rates. The results show that the extent the general legal constraints that predict firm growth. to which these factors constrain a firm's growth depends This finding suggests that the mechanism by which the very much on its size and that it is consistently the legal systems affects firm performance is not well smallest firms that are most adversely affected by all understood. The authors' findings also provide evidence three constraints. Firm growth is more affected by that the corruption of bank officials constrains firm reported constraints in countries with underdeveloped growth. This "institutional failure" should be taken into financial and legal systems and higher corruption. So, account when modeling the monitoring role of financial policy measures to improve financial and legal institutions in overcoming market failures due to development and reduce corruption are well justified in informational asymmetries.This paper-a product of Finance, Development Research Group-is part of a larger effort in the group to understand the link from the financial sector to economic development. Copies of the paper are available free from the World Bank,