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The power of religion: Islamic investing in the lab

Author

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  • Banuri, Sheheryar
  • Murgia, Lucia Milena
  • Haq, Imtiaz Ul

Abstract

Faith-based mutual funds have recently become a growing corner of the mutual fund industry. Morality and ethics are thought to exert an influence on investors' decisions in this segment, though their role in driving such investments is not clear as these funds are also attractive due to their distinct risk-return profile. If non-pecuniary motives are predominant, investors in such funds may be less sensitive to financial performance, resulting in different fund flows patterns relative to conventional funds. This paper fills the gap in the literature, by providing an express linkage between religious preferences and investment in an Islamic fund. Using an incentivized lab experiment, we compare the extent to which investors with religious preferences are likely to accept inferior financial performances to pursue investments aligned with their religious preferences. We show that those with stronger religious preferences are more likely to stick with their investment in Islamic funds when these funds underperform. We do not find that social preferences play a similar role in socially responsible funds, and we find that investors prefer religious investments over socially responsible investments, providing strong evidence that religious investors do not view socially responsible funds as substitutes for Islamic funds.

Suggested Citation

  • Banuri, Sheheryar & Murgia, Lucia Milena & Haq, Imtiaz Ul, 2024. "The power of religion: Islamic investing in the lab," International Review of Financial Analysis, Elsevier, vol. 96(PB).
  • Handle: RePEc:eee:finana:v:96:y:2024:i:pb:s1057521924006227
    DOI: 10.1016/j.irfa.2024.103690
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    References listed on IDEAS

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    More about this item

    Keywords

    Islamic investments; Responsible investments; Experimental finance; Mutual funds; Investment decision making;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • Z12 - Other Special Topics - - Cultural Economics - - - Religion

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