Implications of Alternative Banking Systems

Abstract

A signi…cant number of individuals are unwilling to deposit their savings into the banking sector since it does not operate according to their religious beliefs. In this paper we provide a model that aims to answer the following questions: First, under what conditions an alternative banking system would arise? Second, what are the growth, and welfare implications of these banking systems? Our model shows that an alternative banking system would arise if individuals have religious concerns. Moreover, we show that in an economy populated with a certain number of religiously concerned individuals, the existence of an alternative baking system can generate relatively higher growth and improve welfare.