EMERGENCE OF ISLAMIC FINANCE A Dissertation Presented to the Faculty of the Graduate School of Cornell University In Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy by Abdullah Ibneyy Shahid August 2022 © 2022 Abdullah Ibneyy Shahid EMERGENCE OF ISLAMIC FINANCE Abdullah Ibneyy Shahid, Ph. D. Cornell University 2022 Studies on globalization of ideas and markets largely focus on the spread of Western political and economic liberalism, secularism, and scientization. From board independence in corporate governance, democracy in political governance, central bank independence, floating exchange rate regimes, and free trade to the overall laissez-faire economic and political management, the 20th century is argued to be marked by the triumph of the Western ideas, practices, organizations, and institutions around the world. In such milieu, the rest of the world is observed as enthusiastic, imitative, or grudging adopters, futile resisters, and ignorant/incapable non-adopters. However, in the same period, the emergence of Islamic finance, unknown even in the early 20th century, questions the paucity of research and evidence on how the Muslim world and its related actors theorized an economic organization (Islamic finance), alternative to the larger paradigms, i.e., Western liberalism, communism, and secularism. I am further intrigued by how such an economic organization (Islamic finance) took shape into practices and spread to 135+ countries, and what social mechanisms were responsible for both ‘successful and failed’ transformation of economies towards Islamic finance. Moreover, the Islamic finance organizations had to allocate resources while balancing across the competing goals of economic goal of optimizing return and serving Muslim community and distributing financial resources across various groups within the Muslim community. At this backdrop, I address the following questions in this dissertation. First, I use event history models to analyze the mechanism for the emergence and growth of Islamic finance organizations in nation states over the period 1948 - 2016. I find that the act of Islamic Development Bank to implement Islamic finance contracts together with the national government actors illustrates the local viability and legitimacy of investing through Islamic means. This gives rise to local Islamic finance organizations subsequently. However, the growth of Islamic finance organizations in nation states is also paradoxically linked to the countries having a common law legacy. Second, I use comparative cases studies of four countries – Malaysia, Pakistan, Turkey, and Saudi Arabia – to understand why Islamic finance organizations were more successful in some nation states but not in others. I show that the success, timing, and nature of Islamic finance implementation relies on a complex interaction between the ‘legal contention’ in countries and the coordination across various branches of the state in responding to such contention. Furthermore, I use the case of Islamic Development Bank (IDB) to understand how an Islamic finance organization undertakes national entry and expansion strategies while balancing across multiple economic and social goals. To this end, I identify the role of wars in dividing countries across various social-civilizational groups and the effect of such grouping in the resource allocation of a supranational, faith-based financial organization. Also, I illustrate the dynamics of vicarious and experiential learning relevant to IDB. BIOGRAPHICAL SKETCH Abdullah Ibneyy Shahid was born in the village of Pukuria, Banskhali, Chittagong, Bangladesh. He received his bachelor’s degree in business administration from Independent University, Bangladesh, an MBA degree in Finance from the Institute of Business Administration (IBA) - University of Dhaka, and a Master of Science degree from Cornell University. He has experiences of working in financial sector policy, capital markets, and economic empowerment for vulnerable populations in Africa and Asia. He has taught organizations and financial accounting at Cornell University. v To Prof David Strang for helping me find my path in research and academia To Prof M. Diane Burton, Prof Richard Swedberg, and Prof Landon Schnabel for all the valuable feedback, support, and care ----- To my parents – Md Shahidul Islam and Shaheda Begum To my wife and soulmate, Nazia Ahmed Shahid To my two daughters and my grandma (Chomuda Khatun) in heaven To our son – Ayyub, and to our forthcoming daughter – Aayat To my father-in-law – Nasim Ahmed, my mother-in-law – Zara Ahmed, and my sister-in-law – Nisa Ahmed for their love To my brothers, Dr. Abdur Rahman Bin Shahid, Dr. Abdul Mutakabbir Bin Shahid, and my sisters-in-law, Kaniz Tahmina Rowshan and Farzaana Sifat for their love and dedication To M J Islam (Rokon bhai) & Mohammaed Shoaib mama for much inspiration in life ----- To Prof Dilip Sen, Prof Shubhankar Shil, Prof Nadim Jahangir, Dr Rajib Hasan, Dr. Abdullah Mamun, Prof Iftekhar Hassan, Prof M. Kabir Hassan, Dr. Amani Moin, Prof Khair Jahan Sogra, Prof Md. Mohiuddin, Prof Saif Noman Khan, Md Didarul Alam, Syed Najibullah, Sajida Begum, Mejo Nana – Zahir Ahmed, Shekhul master, Jashim mama, Galib Mujahid, Ragib Bin Haroon, Rizia Khala, Ahid bhai, Saikat Azad, Dr. Yunsub Lee, Dr. Ningzi Li, Dr. Cagri Onuk, Jaeun Lim, Shumeng Li, Jacqueline Ho, Farzana apu, & Yasin Ahmed ----- To my teachers and friends from Pukuraia (Banskhali, Chittagong), Natmura Pukuria High School (Banskhali, Chittagong), Tailardwip Barakhain Ershad Ali High School (Anwara, Chittagong), Kazem Ali High School & College (Chittagong), Govt. Hazi Mohammad Mohsin College (Chittagong), Independent University, Bangladesh, Institute of Business Administration (IBA) – University of Dhaka, and Cornell University vi ACKNOWLEDGMENTS My immense gratitude to my dissertation committee members and mentors, Prof David Strang (chair), Prof M. Diane Burton, Prof Landon Schnabel, and Prof Richard Swedberg. Every academic discipline has its idiosyncratic process of looking at human lives; I am glad that these mentors have introduced me to a process of inquiry which I have enjoyed so far. A big thank you to the following organizations for financial support/grant/awards: Cornell University for generous financial support, Cornell Institute for the Social Science (now, Cornell Center for Social Sciences), Global Religion Research Initiative (GRRI) of University of Notre Dame for a crucial research grant, Society for the Scientific Study of Religion for a research award, and Institute for the Study of Religion, Economics and Society (IRES) for workshop support. The GRRI grant allowed me to hire research assistants for data compilation efforts. I am thankful to Tanmay Bansal, Annie Fu, Christopher Elliott, and Shreya Subramaniam for their excellent assistance. Thanks to Sue and Sam for helping me with the HR aspects of this process of research assistance. I have met many scholars at the conferences/workshops organized by Academic of Management, Society for the Advancement of Socio-economics, Society for Institutional & Organizational Economics, Administrative Science Quarterly and the Darla Moore School of Business (University of South Carolina), Canadian Sociological Association, BizGov (the 3rd Annual Workshop on the Nexus of Business and Government in the Global Economy organized by the ESSEC Business School), and Mario Einaudi Center for International Studies (Cornell). Such a list of scholars is long, and I owe a big debt of gratitude to them for helping me think better. Then, the following professors have introduced me to some methods of inquiry, a big thank you to them: Prof Murillo Campello for empirical methods for corporate vii finance, Prof David Strang for event history analysis and sociology of diffusion, Prof Richard Swedberg for the art of creativity and theorizing, Prof Jordan Matsudaira for empirical strategies for policy analysis, Prof Benjamin Cornwell for social networks from sociological perspectives, Prof Eleonora Patacchini for econometrics of network analysis, Prof David Mimno for text mining, Prof Will Hobbs for machine learning and networks, Prof Shanjun Li for econometrics for microeconomic research, Prof George Gao for empirical asset pricing, Prof Lindy Williams for qualitative and mixed methods, and Prof Maureen O'hara for market microstructure. I have had the pleasure of serving as a teaching assistant for several professors. I have admired their dedication to teaching and their persistent efforts for innovation in methods of learning. A big thank you to the following professors for letting me be a part of their teaching team: Prof Kendra Bischoff (introduction to sociology), Prof M. Diane Burton (introduction to organizations & management), Prof Filiz Garip (introduction to sociology), Prof Anna R. Haskins (introduction to sociology), Prof Sunita Sah (negotiation, managing & leading organizations), and Prof Landon Schnabel (introduction to sociology, and his nomination for me to get the award for teaching). I have also learned a lot about flipping the classroom from being involved as a teaching assistant in the Cornell Active Learning Initiative; thank you to Prof Vida Maralani and the postdoctoral associates, Dr. Kelly Nielson, and Dr. Rick Moore for all the conversations about improving the learning environment. In their role as the Department Chair and/or the Director of Graduate Studies, the following individuals have been very supportive; a big thank you to them for that: Prof Benjamin Cornwell, Prof Erin York Cornwell, Prof Richard Swedberg, Prof viii David Strang, and Prof Kim Weeden. I am especially grateful to the department for various teaching and service opportunities such as teaching ‘Introduction to Organizations’, serving as a PhD admissions committee member, revising the PhD handbook, and advising PhD students through the Multicultural Academic Council. I have also admired the amazing qualities such as patience, persistence, and perseverance of the department staff, Susan Meyer (Sue), Samantha Jean Loew (Sam), Paulina Velazquez Solis, Eric Michael Giese, and Marty White; much thanks to them for all the support. Writing the thesis during the Covid pandemic has had its unique challenges. Yet, I draw immense inspiration from my thoughts about my father and my two daughters in heaven, all of whom departed during the pandemic. My father, Md. Shahidul Islam, an educationist, passed away after a Covid 19 infection. The condolences I have received from around the world after the demise of my father testify to his lifelong commitment to teaching and learning. He positively inspired thousands of students during his professional life and beyond, including our three siblings (me, Dr Abdur Rahman Bin Shahid, Dr Abdul Mutakabbir Bin Shahid). Our mother, Shaheda Begum, prioritized nothing but our health and education. Her life and financial plans were centered only on us. When I look back at life, from living in the Pukuria village (Banskhali, Chittagong, Bangladesh), the slums in Chittagong, to the cosmopolitan Dhaka and the western life in Ithaca, New York, I remember many sacrifices our mother had made to make sure we get better education. While luck and social structure matters in educational attainment, our mother exerted all agency possible to ensure that the social structure somehow would tilt in the favor of her sons. ix I would also like to acknowledge several relatives, teachers, and friends, who have inspired my academic pursuits. Apart from my parents, my early family teachers were my grandma (Chomuda Khatun), my aunt (Sajeda Begum, Shaju), my mama (Shoaib Ahmed), and my Mejo nana (Zahir Ahmed). Mejo nana taught me how markets work; we used to frequent the local bazaars together. Whenever he returned to Chittagong from Dubai, Shoaib mama used to take me to places and people, helping me learn the importance of social capital. Prof Dilip Sen (late) used to tell me stories of great scholars, especially about his friend, Prof Gary S. Becker. Dr. Sen once even called me to tell me that Prof Elinor Ostrom got awarded the Nobel Memorial Prize in Economic Sciences. Dr. Sen was the happiest when I got accepted to Cornell. I wish he could see me finish this dissertation! Mohammed J. Islam (Rokon bhai) has always inspired me to think big and aim high. I still fondly remember many of our inspiring conversations on the Jummah/Friday prayer days at his Baridhara residence in Dhaka, Bangladesh. My academic mentors at Independent University, Bangladesh, especially, Shubhankar Shil, Dr. Rajib Hasan, Dr. Dilip Sen, and Dr. Nadim Jahangir were on the same page with Rokon bhai in inspiring me to dream big in academic pursuits. Hence, to realize my PhD aspiration, I could only think as big as an Ivy League School like Cornell. Life at Cornell and in the larger Ithaca area brought joys of various sorts – not only the academic kind. I had the pleasure of living with Gamma Alpha (a grad scientific co-op I now call a family), learning to play squash, watching ice hockey (thanks to Diane and Tom for taking me to my first hockey game), picking up Chinese and Indonesian food recipes, enjoying hikes, swimming in Cayuga waters, writing x atop hills and by gorges, and developing beautiful friendships. And the serendipity had it; or as a Muslim I would call it ‘kismet’, that I met my soulmate, Nazia Ahmed Shahid. Along with her came our son (Ayyub), our forthcoming daughter (Aayat), my father-in-law (Nasim Ahmed), and my mother-in-law (Zara Ahmed). They bring immense joy to my everyday life that I had not known before. So, I owe the pleasure of dissertation writing to them as well. xi TABLE OF CONTENTS Contents Page No Abstract iii Acknowledgements vii List of abbreviations xiii Chapter 1: Introduction 1 Chapter 2: An overview of Islamic finance ideas and concepts 7 Chapter 3: Emergence of Islamic finance organizations, 1948 - 2016 30 Chapter 4: Legal contention and market formation 97 Chapter 5: Civilizational consciousness and goal multiplicity 163 Chapter 6: Dynamics of learning in a supranational bank 233 Chapter 7: Conclusions 274 Appendix – A short note on Barakah 280 xii LIST OF ABBREVIATIONS Abbreviations Full Form BOP The balance of payments BT The behavioral theory of the firm DV Dependent variable GDP Gross Domestic Product IBRD The International Bank for Reconstruction and Development IDB Islamic Development Bank IMF International Monetary Fund KSA or Saudi Arabia Kingdom of Saudi Arabia LLSV Rafael La Porta, Florencio Lopez-De-Silanes, Andrei Shleifer, and Robert W. Vishny OIC The Organisation of Islamic Cooperation, formerly the Organisation of the Islamic Conference OPEC Organization of Petroleum Exporting Countries PBUH Peace Be Upon Him UN United Nations USD United States Dollar xiii CHAPTER 1 INTRODUCTION ‘Islamic finance’ broadly refers to a type of financing and investing based on Islamic scriptures, principles, and law, often collectively known as Shariah. A wide variety of financial organizations and instruments, e.g., banks, investment funds, insurance companies, bonds, and derivatives, have Islamic counterparts (Hassan & Lewis, 2007; Hasan & Mahlknecht, 2011; Kamali & Abdullah, 2014; Thomson Reuters, 2018). Today, about 65+ countries around the world have Islamic financial organizations. In some countries (e.g., Bahrain, Iran, Kingdom of Saudi Arabia, Malaysia, and United Arab Emirates) Islamic finance constitutes a substantial portion of their financial systems1 (Islamic Finance News; Lexis Nexis). While Islam is about 1,400 years old, Islamic finance we observe today is rather a recent phenomenon. We can trace the ideas and aspirations of Islamic economic and financial exceptionalism in the classical Islamic scriptures (e.g., Quran2, Hadith), the life of Islam’s prophet, and the writings of Islamic scholars and activists (from the medieval times through the 19th and 20th century European colonization of the Islamic world). Yet, such ideas did not give rise to a pan-Islamic financial/economic identity until Islamic Development Bank (IDB; a pan Islamic financial organization/coalition with the objective to Islamize economies) was formed in 1970s. IDB, starting with a handful few countries, today has partnered with 141 countries (both Muslim and non-Muslim majority countries) as co-investors 1 This number of ‘countries’ is based on my tracking of Islamic finance developments around the world from multiple sources. Islamic Finance News (https://www.islamicfinancenews.com/) and Lexis Nexis database accessed through the Cornell University Library are the primary search sources. 2 The other spellings are Qur’an and Koran. 1 and/members3. Some of these countries have eventually formalized their economic management within some framework of Shariah, as well as contributed to the development of Islamic finance through forming financial organizations, rules, and regulations. In the process, the logics of Islamic finance are assumed to have been shaped and evolved in various ways, an issue that has been contentious in both academic and professional circles (El-Gamal, 2006; Khan, 2010). Some countries have failed to develop the Islamic finance industry, despite having demonstrated political will (e.g., Pakistan), while some have supposedly become the world leaders for Islamic finance (e.g., Malaysia), largely reflecting to the role of the multiplicity of social, economic, and political factors in the success/failure of Islamic finance. These observations inspire this sociological inquiry to understand the emergence of Islamic finance organizations around the world. The broader objective is to enrich our understanding of economic ideas and institutions through an inquiry of the interaction between economy, society, and religion. To this end, in the Chapter 3 of this dissertation, I use event history models to analyze the mechanism for the emergence of the first instance of Islamic finance organizations in nation states over the period 1948 - 2016. I find that Islamic Development Bank investments in nation states to implement Islamic finance contracts together with the national government actors illustrated the local viability and legitimacy of investing through Islamic means. This gave rise to local Islamic finance organizations subsequently. The results are robust to various alternative explanations such as consumer demand, and inter-country competition, coercion, and emulation. However, the growth of Islamic finance 3 Web access data from Islamic Development Bank Economic Intelligence Unit. 2 organizations in nation states is also paradoxically linked to the countries having a common law legacy. Contrary to the expectation that Islamic finance organizations would thrive in legal regimes with anti-British colonial legacy, Islamic finance organizations rather thrived in nation states that had strong common-law-based legal institutions. Moreover, Islamic finance organizations also thrived in nation states with strong presence of both World Bank and IDB investments/lending. Hence, I argue that Islamic finance organizations rather grew as a faith-based complement to the Western financial alternatives, not as their substitute. The quantitative approach to understanding the emergence and growth of Islamic finance organizations in Chapter 3, however, does not shed light on the dynamic, historically evolved relationships across various institutions and actors in the countries, that are yet consequential for the timing, nature, and success of Islamic finance organizations in nation states. To this end, in Chapter 4, I illustrate the contention among jurists and political leaders in the national implementation of Islamic finance. I use the comparative cases of Malaysia, Pakistan, Turkey, and Saudi Arabia for illustration. The chapter takes the debate of global norms to a contestation in a multipolar world and shows the implications of such contestation for organizational change. The chapter also removes the often- limiting assumption in the literature that ‘nation states’ are a unified unit of analysis. I rather show that the contention among the constitutive parts (executive, judiciary, legislative) of the states affects organizational change. A study of the emergence of Islamic finance remains incomplete without an inquiry into the operations and relationships of Islamic Development Bank (IDB), the pioneering supranational organization with an explicit mandate to globalize and 3 institutionalize Islamic finance. Moreover, an inquiry of IDB is important for better understanding the non-Western channels for the globalization of ideas and markets. Social sciences literature largely focusses on the globalization of ideas (mostly pertaining to economic and political liberalism) that originate in some countries, organizations, or entities in the West. In this vein, a large number of studies attempt to understand the role of Bretton Woods Institutions such as World Bank and IMF, and the role of Chicago school trained professionals (economists) in the spread of laissez- faire economics and liberal democracy (Gleditsch & Ward, 2006; Kogut & Macpherson, 2008; Simmons, Dobbins & Garrett, 2008; Woods, 2006). In such analysis, the Middle Eastern and Muslim countries are resisters or ‘grudging’ late adopters, without any organizations or institutions of their own that attempt to develop and globalize the ideas of the Middle East and/or the Muslim societies. But the institution of IDB and its efforts to Islamize economic and financial institutions around the world questions such approach. Chapter 4 and Chapter 5 are specifically devoted to understanding the operations of IDB and illustrating the relevance of such inquiry for organizational theory. In Chapter 5, I analyze the activities of the Islamic finance supranational, Islamic Development Bank, in promoting Muslim communities through investments in 135 nation states over 1976 – 2016. Islamic development investments bring the civilizational goal of promoting cultures and communities in contention with the economic goal of a fair return on investments. Moreover, such civilizational goals contend with the broader norms of rationalization and secularization. I used quasi- natural experiments and difference-in-difference regressions to illustrate how 4 resources are simultaneously allocated to all goals, while the dominant Western actors are selectively emulated to justify such allocation. Major wars heighten civilizational consciousness, alter conceptions of community among nation states, and shift resource allocation in development finance. In Chapter 6, I illustrate the role of selective vicarious learning in the nation state entry timing decisions of Islamic Development Bank. By examining the investments of IDB since its founding in 1975 till 2016, I show by using duration dependence models that IDB emulates actions of two different kinds – (1) for relatively more financially developed countries, IDB investment initiation is positively associated with high World Bank and International Monetary Fund (IMF) operations, whereas (2) for relatively less financially developed countries, IDB investment initiation is positively associated with the recent IDB investments in the neighboring countries. The results are robust to alternative economic, financial, and sociological factors of countries such as GDP growth, credit rating, legal origin, religion, language, and geographic and political similarity to the IDB home country (i.e., Saudi Arabia). 5 REFERENCES – CHAPTER 1 El-Gamal, M. A. (2006) Islamic Finance: law, economics, and practice. Cambridge University Press. Gleditsch, K. S., & Ward, M. D. (2006). Diffusion and the international context of democratization. International Organization, 60, 911 – 933. Hassan, M. K., & Lewis, M. K. (2007). Handbook of Islamic Banking. Edward Elgar Publishing. Hassan, M. K., & Mahlknecht, M. (2011). Islamic capital markets: products and strategies. Wiley. Kamali, M. H., & Abdullah, A. K. (2014). Islamic finance: issues in Sukuk and proposals for reform. United Kingdom: International Institute of Advanced Islamic Studies. Khan, F. (2010). How ‘Islamic’ is Islamic banking? Journal of Economic Behavior & Organization, 76, 805 – 820. Kogut, B., & Macpherson, J. M. (2008). The decision to privatize: economists and the construction of ideas and policies. Simmons BA, Dobbin F, Garrett G (2008) The Global Diffusion of Markets and Democracy (Cambridge University Press), 104 – 140. Simmons, B. A., Dobbin, F., & Garrett, G. (2008). Introduction: the diffusion of liberalization. Simmons BA, Dobbin F, Garrett G, eds. The Global Diffusion of Markets and Democracy (Cambridge University Press, New York), 1 – 63. Thomson Reuters. (2018). Islamic Finance Development Report 2018. Available at: https://ceif.iba.edu.pk/pdf/Reuters-Islamic-finance-developmentreport2018.pdf Woods, N. (2000). The challenge of good governance for the IMF and the World Bank themselves. World Development, 28(5), 823 – 841. 6 CHAPTER 2 AN OVERVIEW OF ISLAMIC FINANCE IDEAS AND CONCEPTS The chapter provides a brief overview of ideas, concepts, and definitions with respect to Islamic economics and finance. The task requires a comprehensive review of a vast literature on Islamic classical scriptures, their interpretations, and any pertinent discourses on practice. To make this a doable, manageable venture, I take the following approach. I give an overview of rudiments of Islamic economics and finance as proposed in the foundational religious book of Islam, The Holy Quran (Quran, in short). Then, a natural follow-up step is to examine the rudiments of economic/financial principles as practiced by the Islam’s Prophet Muhammad (pbuh), complied in his written biographical documentary known as Hadith. In the Islamic classical scriptures, Hadith is considered the 2nd most important source of Islamic principles of life and governance (El-Gamal, 2006; Hassan & Mahlknecht, 2011; Kamali, 1991). However, in this regard, I take a short-cut. I rely on the writings of two influential scholars of Islam and economy, Ibn Taymiyyah (1263–1328), and Abul A'la Mawdudi (1903- 1979). Both scholars are argued to have provided the most comprehensive coverage and interpretation on the Islamic perspectives of economy and society at two different junctures of Islamic history (Islahi, 1988/1996; Mawdudi, 1969, 2011). Taymiyyah, a mediaeval era Islamic scholar, took a stock of the Islamic world and its normative stance on economy after Islam had already experienced several centuries of success as a religion and as a source of governance around the world. However, in Taymiyyah’s time, ‘finance’ as a discipline or discourse per se was not known. On the other hand, 7 Mawdudi is a more contemporary scholar, who reinterpreted and projected Islamic normative economics in a ‘what if Islamic society’ scenario at a time when Islam as a mode of state ideology was on the decline. Also, at the same time, the European colonization of Muslim majority regions had arguably left a lasting impact on their governance, capitalism as a mode of economy was rapidly gaining legitimacy, and communism was being touted by some as a more humane alternative. Besides, the Western (secular) ideas of ‘finance’ were carving itself out from economics to become a related but a distinct discipline of academic and professional practice (Coats, 2014; Fourcade, 2009; Parrish, 1967). Then, I review the most recent literature and professional handbooks of Islamic finance to lay out various ideas, concepts, and definitions that have emerged since Mawdudi’s time. This can help us observe the nature and diversity of concepts and practices in the contemporary era, known for gradually embracing (at least in some countries) Islamic principles as an alternative way of economic organization. Rudiments of Islamic economics/finance in the holy book of Islam I searched several English translations of Quran (e.g. Itani, 2017; Nasr, Dagli, Dakake, Lumbard, & Rustom, 2015) with the following terms so as to extract the verses/quotations/discussion in the book about economy and society: ‘trade’, ‘commerce’, ‘transaction’, ‘exchange’, ‘measure’, ‘weigh’, ‘property’, ‘wealth’, ‘sale’, ‘profit’, ‘reward’, ‘loss’, ‘income’, ‘expense’, ‘expenditure’, ‘spend’, ‘earn’, ‘save’, ‘due’, ‘fraud’, ‘zakah’, ‘zakat’, ‘charity’, ‘alms’, ‘interest’, and ‘riba’. Then, I have 8 compared my search outcomes with several other compilations of Quranic verses4. While the search is not entirely complete, and the context of the verses are to be verified across multiple sources, the following rudiments of Islamic economic perspectives emerged.  Trade encouraged; interest/usury discouraged: Quran has strongly encouraged the undertaking of trade (of goods and services) and profiting from it. Such stance, some argue, is illustrated by the fact that Prophet Muhammad and his wife Khadija were traders themselves, and that Prophet was known for his honesty and success in trading. Quran has, however, warned against trading in ‘money’, suggesting some might use the word ‘trade’ to mislead people and charge interest instead. One verse (Quran, al-Baqarah, verse # 275) states: “Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, "Trade is [just] like interest." But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah. But whoever returns [to dealing in interest or usury] – those are the companions of the Fire; they will abide eternally therein.” 4 (1) https://quran.com/83 (2) https://islamiceconomicsproject.com/islamic-economics-in-quran-hadith/ 9  Justice and fairness in trade, exchange, and business: A number of verses urge justice and fairness in trade and exchange and warn against any coercion in the process. Some noted below. o “And do not approach the property of an orphan, except in the way that is best, until he reaches maturity. And fulfill [every] commitment. Indeed, the commitment is ever [that about which one will be] questioned.” (Quran, al-Isra, verse # 35) o “And give full measure when you measure, and weigh with an even balance. That is the best [way] and best in result.” (Quran, al-Isra, verse # 35) o “And measure full when you measure. And weigh with an even balance. This is better and its end is good.” (Quran, Al-Bani-Israel, verse # 35) There is one Surah/chapter (the total number of such chapters in Quran is 114) called ‘Al-Mutaffifin’ (in English ‘The Defrauding’) that prohibits various kinds of fraud. Some verses read as follows, “Woe to those who give less [than due]; who, when they take a measure from people, take in full; but if they give by measure or by weight to them, they cause loss…”. One verse emphasizes the importance of ‘just compensation’: “And that the man will not get, but what he endeavors. And that his endeavor shall soon be seen” (Quran, An-Najm, verse # 39-40).  Information quality: In a follow-up discussion to fairness in trade and exchange in Surah al-Isra, Quran further emphasizes the importance of high- 10 quality information and reduction of uncertainty in the pursuit of something. The verse states, “And do not pursue that of which you have no knowledge. Indeed, the hearing, the sight and the heart - about all those [one] will be questioned.” (Quran, al-Isra, verse #36)  Permissible vs impermissible income and consumption: There are a number of chapters in Quran that clearly prohibit certain sources of income such as bribery (Quran, Al-Baqarah, verse # 188), usurping others’ property (Quran, Al-Baqarah, verse # 188), fraud (Quran, Al-Imran, verse #161), stealing and robbery (Quran, Al-Maida, verse # 38), income from sources of vulgarity (Quran, Al-Noor, verse # 19), gambling (Quran, Al-Maida, verse # 90), wine and its business (Quran, Al-Maida, verse # 90), and interest (Quran, Al- Baqarah, verse # 275). Some verses prohibit certain types of consumption: intoxicants (Quran, Al-Baqarah, verse # 219), meat of dead animals, blood and flesh of swine (Quran, Al-Baqarah, verse # 173). Jointly, these verses and interpretation thereof are argued to have provided the foundation of ‘Halal’ (allowed) and ‘Haram’ (prohibited) when it comes to consumption and production principles in Islamic law. They also serve as the catalytic for the global rise of ‘Halal’ industry, i.e., certification and production of consumption items considered pure from the Islamic viewpoint. However, scholars argue that one must not construe from these verses that Islam encourages monasticism (Mawdudi, 1967, 2011; Islahi, 1988/1996); rather, Quran states in this regard, “…Eat of that which is lawful and good on the earth ….” (Quran, Al-Baqarah, verse # 168). 11  Welfare spending, excessive wealth accumulation through stinginess, and charity & altruism: Several verses encourage spending in general and welfare spending in particular, e.g., alms giving, altruism or charitable giving without ego and fame/recognition seeking, spending in the cause of Allah, reduction of miserliness (thereby, forbidding excessive wealth accumulation) while encouraging moderation in consumption at the same time. The general argument from these verses is that one should engage in charitable giving with the excess resources beyond one’s needs. These verses have arguably encouraged the institution of Zakah, i.e., obligatory religious tax or alms giving. Some Muslim countries often regulated the collection and disbursement of such tax. Related verses follow: o “Those who do not spend their wealth that has been given to them by Allah must not think that it is good for them; indeed it is bad for them.” (Quran, Al-Imran, verse #180) o “… Allah does not love the arrogant and the boastful, who are niggardly and bid others to be niggardly and conceal the bounty which Allah has bestowed upon them. We have kept in readiness a humiliating chastisement for such deniers (of Allah’s bounty).” (Quran, Al-Nisa, verse # 36-37) o “Say your prayers (Namaaz) and pay Zakat.” (Quran, Al-Muzammil, verse # 20) o “Establish prayer and dispense the purifying alms (Zakat) and bow in worship with those who bow.” (Quran, Al-Baqara, verse # 43) 12 o “… Waste not by extravagance. Verily, He likes not those who waste” (Quran, Al-Anam, verse #141). “…Spend not wastefully (your wealth) in the manner of a spendthrift.” (Quran, Al-Isra, verse # 26). o “So give to the kindred his due, and to Al-Miskin (the poor) and to the wayfarer…” (Quran, Ar-Rum, verse #38). o “Those people, who when they spend, are neither extravagant nor miserly but keep the golden mean between the two (extremes).” (Quran, Al-Furqan, verse #67) o “We feed you seeking Allah’s countenance only. We wish for no reward, nor thanks from you’.” (Quran, Al-Insaan, verse # 8-9) Islamic economic governance in the works of Ibn Taymiyyah Ibn Taymiyyah’s economic concepts and principles of Islam cover many issues, ranging from micro behavior to macro behavior. Laying out in his vast writings, particularly, in the publications entitled, Majmoo 'al-fatwa, al-Siyasah al-Syar'iyah fi ishah al-Ra'i wa al-Ra'iyah, and al-Hisbah fi al-Islam, Taymiyyah took upon the following issues from the perspective of Islamic jurisprudence and practice: transactions, money, interest/usury, contracts, market as a mechanism, and individual vs collective responsibility (Islahi, 1988/1996; Pancarini, 2018). Some of his stances, I shall observe, directly derive from the prior section (i.e., Quranic dictates), while some rather elaborate/interpret/extend some ideas of Quran. While Taymiyyah is known for his ‘supposedly’ puritan views on Islamic principles and conduct, one would be surprised that the ‘supposedly’ normative 13 economics of Taymiyyah rather supported market as a mechanism of exchange, with a minimal suggested role of a central authority. He denounced an absolute command- and-control economy. He suggested that the state should intervene in the market only under exceptional and necessary circumstances. He argued that there are certain needs ingrained in human nature. So, if relevant industries and vocations were not there to fulfill such needs, then the social authority would have the obligations to fulfill those needs. He interpreted the state as the social authority – the custodian of public interest and the chief enforcer of Shariah/Islamic law. Taymiyyah opined that such authority should be served by the competent people who fear God. A state was not supposed to be a money-making entity in the sense that it should not ‘profit’ from its activities. As for individual responsibility to the collectivities they belong to, Taymiyyah noted Zakah5 payments as discussed in Quran previously. He also opined that the state has the authority to charge additional taxes so that it can perform necessary duties in the service of public interest. However, he warned that tax can alter the dynamics of demand and supply in the market and can shift burden of taxes to the consumers (Islahi, 1988/1996). With respect to contracts, transactions, and exchanges, Taymiyyah noted the following essential characteristics: mutual reciprocity of benefits, willing agreement, adequate knowledge, no coercion, and no taking advantage of the dire needs of the distress or ignorance of the contracting party. While the market mechanism is supposed to support such exchange and execution of contracts, Taymiyyah pits ‘competition’ against ‘cooperation’, in a rather contradictory way. For example, he 5 Zakah and Zakat have been used interchangeably; they have the same definition. 14 drew on the life of Prophet Muhammad to argue that a Muslim is not supposed to bid against the bid of his ‘brother’, be it the case of a marriage proposal or renting a house. After a rent contract is agreed upon and a tenant is living in the house, a new, potential tenant should not try to outbid and oust the existing tenant. However, it is not very clear what Taymiyyah’s stance on contract revision or duration was. In deciding the ‘terms’ of exchange, Taymiyyah noted two concepts – ‘price of the equivalent’ and ‘compensation of the equivalent’. In his words, “Amounts quoted in contracts are of two types. First, an amount with which people are familiar and to which they are accustomed. This is the commonly accepted customary compensation. The second is the kind which is uncommon (nādir), which comes as a result of increase or decrease in volition (raghbah) or some other factors. This is expressed as price of the equivalent” (Islahi, 1988/1996). Scholars often interpret the ‘price of the equivalent’ as the competitive price, whereby market actors do not have a leeway for manipulation. Figure 1 presents the overall classification of transactions by Taymiyyah (Islahi, 1988/1996). He broadly divided economic transaction of all kinds into two categories: transactions based on justice (al-taṣarrufāt al-‘adlīyah) and those based on generosity and benevolence (al-taṣarrufāt al-faḍlīyah). The transactions based on justice are further divided into two categories – transactions through exchange (al- mu’āwaḍāt) and transactions through partnership (al-mushārakāt). Partnership transactions are again divided into two categories – partnership in property (shirkah al- amlāk) and partnership in contracts (shirkah al-‘uqūd). He noted five forms of partnerships (in contract): 15  al-Mudarabah: Capital is provided by one party whereas labor is provided by other(s).  al-Inan: Two or more people pool their capital to form a venture/work together.  al-Abdan: People partner to labor over something.  al-Wujuh: People procure goods on credit and sell.  al-Mufawadah: This is the most complex, comprehensive partnership, which is a combination of all other partnerships noted above. Economic Transactions or Behavior Transactions based on justice Transactions based on generosity Exchange Partnership In contract In property al-Mudarabah al-Inan al-Abdan al-Wujuh al-Mufawadah Figure 1. Taymiyyah’s classifications of economic transactions (Islahi, 1988/1996) 16 Taymiyyah further observed the variation in Islamic jurisprudence, notably four schools (named after four Islamic scholars, who came after Prophet Muhammad): Hanafi, Hanbali, Shafi, and Maliki. He noted that, “the Ḥanafīs and Ḥanbalīs accept, in principle, all these forms of partnership with minor differences in details. The Shāfi‘īs approve shirkah al-‘inān and shirkah al-muḍārabah only and reject the other forms of partnership. The Mālikīs stand with the Shāfi‘īs in rejecting shirkah al-wujūh, and with the Ḥanafīs and Ḥanbalīs in approving the remaining four forms of partnership.” (Islahi, 1988/1996) In all transactions and exchange, ‘money’ can play a role of facilitator of exchange. However, consistent with the Quranic verses before, Taymiyyah was against ‘trade in money’. In cases where money is to be exchanged for money, the exchange must be ‘completed simultaneously and without any delay’. This leads to Taymiyyah’s stance on ‘interest /usury’ (Islahi, 1988/1996). While there are arguments about ‘interest for loans for consumption’ vs ‘interest for loans for productive purposes’, Taymiyyah made no such distinction. He argued that interest is prohibited on the following grounds. First, it leads to exploitation of the needy and their property. Second, it has potential to impede entrepreneurship since it discourages the capital owners from directly engaging in productive ventures. Third, it creates an artificial scarcity of capital in society. Fourth, it punishes, by design, for uncertainty. In his words, “the possibility of the lender investing his money and earning profit is a matter of conjecture (amr mawhūm); it may or may not materialize. To exact a higher amount over and above the sum lent, on that conjectural basis is a kind of injustice and exploitation (ḍarar)”. 17 With respect to uncertainty and speculation, Taymiyyah’s stance remains similar to Quranic verses. However, he also suggested that ‘speculative’, ‘uncertain’ transactions be allowed for absolute necessities. He argued, for example, that crops grown below the ground (e.g., carrots, onions) might be sold as ‘they are’, while one can argue that there is a risk that the ‘actual amount’ can turn out to be different from the ‘expected amount’. In Taymiyyah’s vision of ‘permissible and impermissible’ consumption and production one can find stances similar to Quranic verses (as mentioned before). However, the following interpretations are notable. He believed that everything that Quran prohibits to be ‘Haram’ (prohibited) are to be considered prohibited for both consumption and production for Muslims. However, a Muslim trader can engage in ‘market segmentation’ based on religion. For example, a Muslim trader must not sell ‘silk’ to Muslim men (which is Haram for Muslim men), but the trader can sell the silk to any non-Muslim men. Besides, he argued that in matters of contracts, their convenience, and conflict resolution, one should consider the local customs as well. Islamic economics and finance in the works of Abul Al’a Mawdudi A 20th century scholar, Mawdudi treated ‘Islamic economics’ as a school of thought and scholarship, separate and distinct from the Western/ mainstream economics. His views on economics can be argued be ‘normative’, ‘positive’, and ‘transformative’ at the same time (Ahmad, 2011, ‘forward’ in Mawdudi, 2011). He viewed the viability of Islamic economic system to be resting upon the Islamic transformation of the entire social order across all levels – individual, society, 18 and state. Hence, in Mawdudi’s economics, the concept of ‘homo economicus’ was replaced with the ‘homo Islamicus’. Mawdudi argued that ‘homo economicus’ reduces an individual’s economic action to a ‘distinct’, ‘one-dimensional’ sphere on its own, which is a ‘narrow’, ‘wrong’, and ‘partial’ approach. He alluded to sociology and other existing knowledge on individual and society and suggested that various other aspects of society and spirituality are to be considered, coining the idea of ‘homo Islamicus’ as the broader conception. Comparing with Max Weber, one can argue that Mawdudi’s ‘homo Islamicus’ lives by some ‘value rationality’ (see Swedberg and Agevall, 2005/2016; Weber, 1922/1968/1978) where the values are derived from Islamic principles (Mawdudi, 2011). However, the difference is that Mawdudi’s conception would point to a degree of correctness and viability. Also, ‘homo Islamicus’ would not be able to survive and realize their values unless the entire society transforms to conform with Islamic principles. One must note that Mawdudi was not only a writer/scholar of Islam, but he was also a journalist and a political activist, who sought to change society and gain political power (Nasr, 1996). He founded an Islamic political party called Jamaat-e- Islami (Jamaat, in short) in British India (in 1941). The initial promise was to use Quran as the constitution of state. After British-occupied India separated into India and Pakistan in 1947, Jamaat participated in elections with the same promise. In many articles, pamphlets, and books, Mawdudi prescribed the following as the basic values of ‘economic philosophy’ of Islam: social justice, equitable economic system, people- friendly political system, and equality of opportunity (Mawdudi, 2011). He also prescribed eight ‘fundamental’ principles of economic philosophy of Islam (Mawdudi, 19 2011): (1) general accessibility of bounties of nature, (2) the right to make a living, (3) the right to ownership, (4) the spirit of healthy competition, (5) no artificial way to enforce equality, (6) no free economy, (7) certain obligatory duties for individuals, and (8) obligatory duties for the society. As these principles point out, Mawdudi was very similar to Taymiyyah in his stance towards market mechanism and the role of state. He sought minimal intervention of the state in the market but was in favor of enforcing Haram and Halal rules as noted before (in the previous subsection). He resented the idea of ‘forced equality’, suggesting everyone should be left to struggle in their own path; only the people who are incapable of economic struggle should be helped with social services from the state. He further emphasized ‘individual freedom’; he rejected communism and fascism for stripping people of their rights, abilities, and due rewards and for descending into dictatorships of the few (super capitalists). Also, he emphasized the eerie similarity between capitalism, socialism and communism: all wrongly reduce the issues of the society to be of ‘economic’ in nature only (Mawdudi, 2011). His views on Zakah, charitable giving, and state taxes align with those noted in the previous subsections. However, he emphasized that one should not construe Zakah as something ‘voluntary’, rather as an obligation for every Muslim. Mawdudi was also against interest/riba/usury. He defined ‘riba’/’interest to have the following three constituent elements: (i) an addition to the principal sum; (ii) determination of this addition according to a fixed term; and (iii) the deal (exchange) being conditional on the payment of an additional amount. Then, he took on the issue by providing counterarguments to the rationale for interest that existed in his time 20 (Mawdudi, 2011). First, some argue that interest is the ‘compensation for elements of risk and sacrifice’. Mawdudi observed that ‘sacrifice’ is overemphasized here; else, how could the lender afford to make the loan? Besides, the ‘wear and tear’ is not applicable to money the way it’s applicable to goods and services. Moreover, the benefit to be accrued to the borrower from the loan is not certain either. Second, proponents argued that interest is the ‘compensation for opportunity and grace period’. Mawdudi argued that since it is difficult to predict the future with certainty, it is hypocritical to affix a certain interest rate upfront. Third, proponents argued that interest is like ‘sharing of profit’ and capital owners undoubtedly deserve a profit. Mawdudi argued that such stance is premised on ‘profit being intrinsic to capital’. Fourth, some proponents justified interest as ‘time value of money’. Mawdudi opined that such argument is based on the idea that ‘satisfaction of the immediate’ is more important than ‘satisfaction deferred’. But he wondered how people would save so much, in that case. Fifth, Mawdudi further observed that interest is a fickle practice, since it varies so much without predictable reasons; hence, determining ‘interest rate’ upfront is also whimsical. Based on this, Mawdudi argued for partnership and contracts similar to those in Taymiyyah. In this conception, interest would be replaced with some ‘variable’ rates of profit. Capital owners thus would be a party to the risk of loss, not just guaranteed profit. Increase in principal amount invested in project/work is thus allowed, but not ‘interest’ (Mawdudi, 2011). In addition to rebutting the argument for interest rate, Mawdudi further contended that banning interest is socially desirable, since it would curb the ills of capitalism, and the dangers of unfettered accumulation of individual wealth. First, he 21 argued that ‘interest rate’ proponents suffer from a faulty assumption: the progress of a society depends on the ‘frugality’ and ‘money-mindedness’ of its actors. But Mawdudi believed such assumption is an illusion; rather, active participation in ‘real economy’ and ‘consumption’ by the actors would make a vibrant and prosperous market and society. He therefore emphasized that all sorts of investment and financing activities be directly rooted in ‘real goods’ and the risks thereof. Second, while it’s not clear how he interacted with the writings of Marx and Lenin (though he ‘outright’ rejected communism), he suggested that ‘interest rate’, from a civilizational point of view, is a tool of class oppression. Interest rate solidifies returns to capital owners (capitalists), while such capitalists take only a fixed amount of risk. Third, interest-based investment could only encourage ‘personally profitable’ goods and services to be worthy of investment, whereas ‘goods and services needed for the community’ may get ignored. In a way, he suggested ‘interest rate’ based economy would underproduce socially desirable goods. Fourth, while Mawdudi proposed himself to be a proponent of free market and individual choice, he argued against unfettered accumulation of wealth. He reasoned that Zakah (Islamic alms giving) works as a mechanism through which the society can prevent the ills of wealth concentration within a few individuals. Fifth, he interpreted capitalism as an ideology that encourages ‘saving and investing’ and then ‘multiply these savings again to accumulate more interest charges’. Hence, capitalism retards the free flow of capital, discourages investment in diverse and necessary industries, turns capital ‘impatient’ (flowing into quick, short-term ‘interest- making’ projects), and retards consumption, all of which Islam, in Mawdudi’s opinion, would disagree with (Mawdudi, 2011). 22 Note that Mawdudi sought to radically change the society through his ideals. The following are some salient aspects of his proposed strategies (Mawdudi, 2011). He opined for a wider use of ‘Ijtihad’ (an Arabic term that approximates ‘independent reasoning’ in English) among Muslims and Islamic scholars. It is pertinent to note that there has been a big controversy in Islamic jurisprudence about the idea of ‘closed gate of Ijtihad’ in the 10th century. Some scholars strongly opined that except for classical scriptures (Quran, Hadith), and analogical reasoning, Ijtihad should not be indulged as a source of Islamic jurisprudence. Mawdudi challenged such status quo. Second, he sought a system-wide (societal) transformation; and economic transformation would occur within that realm as a consequence. In this regard, he discredited any violent social revolution but indicated the fruitfulness of ‘gradual’ change. Contemporary Islamic finance: concepts and practices The contemporary Islamic finance has a wide array of concepts/practices/instruments. Here, I present a very brief description of such practices to provide a foundation for later discussion/analysis. Note that I am also limiting this discussion in the following ways. First, I am entirely focusing on financial markets, while various other aspects of Islamic economics and finance, such as macro-finance management through Zakah (and other potential fiscal and monetary financial instruments) are ignored. Such exclusion is primarily based of the fact that Islamic finance (or broadly speaking Islamic economics in a sense) has seen limited success outside the financial markets (and instruments thereof). Second, I do not speak to any concepts and practices that 23 have been in circulation unofficially/informally and/or have not been documented by the literature (academia and industry). But, again, given finance (of economically large magnitude) in the contemporary era is a heavily watched and/or regulated affair, I argue that this limitation would not impede detection of the Islamic financial practices. Summarizing the prior subsections, I synthesize the key arguments of Islamic finance into the following: (1) prohibition of use of financial instruments, contracts, and any forms of organizations and activities based on interest; use those based on either some form of risk sharing, partnership, or assets (real goods); (2) valid instruments, contracts, organizations, and activities are not associated with any production and/consumption preferences that side more with Haram than Halal; (3) valid instruments, contracts, organizations, and activities are not associated high ‘uncertainty and speculation’. Given such classification, the key concepts, practices, organizations, and activities found in the literature are summarized in the following tables: Table 1 and Table 2 (Financial Times Lexicon; Hassan & Lewis, 2007; Hassan & Mahlknecht, 2011; Khan, Hassan, & Shahid, 2007). Table 1 Partnership-Based Financial Instruments, Practices, Organizational Forms Name Definitiona Exampleb Mudaraba One partner (rabb-ul-mal) gives money (100% capital) to A venture another or multiple partners (mudarib or managing partner). capitalist Profit (loss) of the business or activity or venture is shared funding a according to a pre-agreed ratio. 24 business entirely Musharakha A partnership among multiple actors. All partners provide A business of some capital but not all participate in the management. Profit entrepreneurs (loss) of the business or activity or venture is shared and private according to a pre-agreed ratio. equity funders Permanent A type of Musharakha. Unlimited contract period (as long as Long term Musharakha all partners agree). project financing Diminishing A type Musharakha. Some partners’ share reduces over time Islamic Musharakha whereas some partners’ share increases. mortgage from a bank Notes: (a) Many variations are possible in practice. (b) There are many other possible examples and uses. Table 2 Asset/Real Goods Based Instruments, Practices, Organizational Forms6 Name Definitiona Exampleb Murabaha It’s a sales transaction, in which the A bank purchasing a car and then, (cost plus sale) buyer pays the seller a premium over reselling it to a consumer for a the cost. premium over the bank’s purchase cost. Bai muajjal It’s a sales transaction, in which the A bank purchasing a car and then, (credit sale or buyer pays the seller (entire amount reselling it to a consumer for a deferred or installment) at a future date. It’s premium over the bank’s purchase payment sale) cost. The payment will be made in 6 Note that asset-backed sales are most subject to controversies and disagreement among Islamic scholars with respect to their purity and consistency with the Shariah/Islamic principles. 25 also called credit sale or deferred future in lump sum or in payment sale. installments. Bai al inah One party (financier) buys some asset A mortgage can be issued by banks (sale and buy- from the other party (seller) at a spot using such agreement. back price. And, the financier sells the agreement) asset back to the original seller at a profit, which is paid in installment over time. Musawamah It’s similar to Murabaha, but the See the same example of Murabaha (bargaining) seller in this case is not obligated to but without the price of the good disclose the price of the goods to the being disclosed to the buyer. buyer. Istisna’a Goods or commodity is transacted (at A forward contract to buy crops (forward a specified price and a specific date) from the cultivated land of a farmer. contracts) before they come into existence. Salam It’s similar to Istisna’a contract. A forward contract to buy crops However, the payment is made in from a cultivated land of a farmer. advance. The contract tends to detail An advance payment is made to the the nature, price, quantity, quality, farmer. date and place of delivery of the goods. Ijarah It’s a contract for renting/leasing A customer leases a car from a services or property for a fixed period rental company. Very much similar and price. A variety of Ijarah to lease in the Western finance. contracts exist. There may be risk sharing (for any harm to the car) in case of Islamic finance. 26 Tawarruq A transaction in which a buyer “A customer might buy $1,000 purchases a commodity from a seller. worth of non-precious metal from a The payment is deferred. The buyer bank, to be paid in 12 months' time, sells the commodity to a third party and then immediately sells the metal (for a spot payment). back to the bank for $900 to be paid immediately. Effectively the customer will have borrowed $900 for a year at an interest rate of 11 per cent, meanwhile satisfying the Islamic requirement for tangible assets to underlie all transactions.” (verbatim from Financial Times Lexicon) Notes: (a) Many variations are possible in practice. (b) There are many other possible examples and uses. A variety of Islamic financial organizational forms exists (the Islamic version or special name, if any, noted in braces): banks, insurance companies, bonds (sukuk), derivatives, and investment funds. All of them provides financial intermediation services by drawing upon some or a combination of instruments/practices/organizational forms noted in Table 1 and Table 2. I do not assume this list to be complete. 27 REFERENCES – CHAPTER 2 Ahmad, K. (2011). ‘Forward’ in Mawdudi. (2011). First principles of Islamic economics. UK: The Islamic Foundation. Coats, A. W. (2014). The Historiography of economics: British and American economic essays, Volume III. Oxon, New York: Routledge. El-Gamal, M. A. (2006). Islamic Finance: law, economics, and practice. Cambridge University Press. Financial Times Lexicon. http://lexicon.ft.com/Overview Fourcade, M. (2009). Economists and societies: discipline and profession in the United States, Britain, & France, 1890s to 1990s. New Jersey: Princeton University Press. Hassan, M. K., & Lewis, M. K. (2007). Handbook of Islamic Banking. Edward Elgar Publishing. Hassan, M. K., & Mahlknecht, M. (2011). Islamic capital markets: products and strategies. Wiley. Islahi, A. A. (1988/1996). Economic concepts of Ibn Taymiyyah. Leicester, UK: The Islamic Foundation. Itani, T. (2017) (eds). Quran in English: clear and easy to understand modern English translation. Texas: ClearQuran. Kamali, M. H. (1991). Principles of Islamic Jurisprudence. Cambridge Islamic Texts Society, Cambridge. Khan, M. S. N., Hassan, M. K., & Shahid, A. I. (2007). Banking behavior of Islamic bank customers in Bangladesh. Journal of Islamic Economics, Banking and Finance, 3(2), 159-194. Mawdudi, S. A. A. (1969). Ma’ashiat-i Islam. Lahore: Islamic Publications Limited. Mawdudi, S. A. A. (2011). First principles of Islamic economics. Edited by Khurshid Ahmad, Translated by Ahmad Imam Shafaq Hashemi. Leicestershire, United Kingdom: The Islamic Foundation. Nasr, S. H., Dagli, C. K., Dakake, M. M., Lumbard, J. E. B., & Rustom, J. (2015) 28 (eds). The study Quran. New York: HarperCollins. Nasr, S. V. R. (1996). Mawdudi and the making of Islamic revivalism. Oxford, NY: Oxford University Press. Pancarini, A. S. (2018). Market mechanism in the view of Ibn Taymiyyah. Munich PersonalRePEc Archive. https://mpra.ub.unimuenchen.de/87024/1/MPRA_paper_87024.pdf Parrish, J. B. (1967). Rise of economics as an academic discipline: the formative years to 1900. Southern Economic Journal, 34(1), 1 – 16. Swedberg, R., & Agevall, O. (2005/2016). The Max Weber dictionary: key words and central concepts. Stanford, CA: Stanford Social Sciences. Weber, M. (1922/1968/1978). Max Weber Economy and Society. Edited by Guenther Roth and Claus Wittich. CA: University of California Press. 29 CHAPTER 3 EMERGENCE OF ISLAMIC FINANCE ORGANIZATIONS, 1948 – 2016 Abstract In this paper, I show two mechanisms of the emergence of non-Western organizations: demonstration of contracts and cultural resurgence. For illustration, I use the case of Islamic finance, an alternative economic organization for Muslims who are about 24% of the world population. With additional transaction costs and illegitimacy concerns, Islamic finance contracts do not usually take a formal form. However, my analyses with duration models, regressions, and semi-natural experiments over 1948 - 2016 and in 186 countries suggest that the Islamic finance contracts between supranational and national authorities inspired confidence among entrepreneurs and stakeholders that Islamic finance is socially and economically appropriate. This gave rise to Islamic finance organizations to enact such contracts, reducing the transaction costs for realizing Islamic principles in financial transactions. Also, Islamic financial organizations grew earlier in countries with aspirations for Muslim cultural resurgence in the post British colonial times. Keywords: emergence, supranational organizations, Islamic finance 30 Introduction Studies on the globalization of ideas and markets largely focus on the spread of Western liberal and secular paradigms. From board independence in corporate governance, democracy in political governance, central bank independence, and free trade to the laissez-faire economic and political management, the 20th century is argued to be the triumph of Western ideas, practices, experts, organizations, and institutions around the world (Gleditsch & Ward 2006; Kogut and Macpherson, 2008; Polillo & Guillén, 2005; Simmons et al., 2008; Woods 2006). The rest of the world is observed as enthusiastic, imitative, or grudging adopters, futile resistors, and ignorant, incapable non-adopters. However, in the same period, the emergence of Islamic finance, unknown even in the early 20th century, questions the paucity of research and evidence on how the Muslim world (24% of the world population) globalized an economic organization (Islamic finance), alternative to the Western liberalism and secularism. Based on Islamic scriptures, Islamic finance took shape into organizations in 65 countries over the period 1948 – 2016. My analyses using duration models, semi-natural experiments, and regressions show that Islamic finance organizations emerged in countries through two mechanisms: the demonstration of Islamic finance contracts by supranational and governmental authorities, and aspirations for cultural resurgence in the post British colonial times. Supranational organizations and states can significantly shape the nature of the economic organization in a country (Fourcade-Gourinchas & Babb, 2002; Halliday & Carruthers, 2007; Hirschman, 1989; Simmons et al., 2008; Woods, 2006). For example, World Bank and International Monetary Fund (IMF) propagated Western 31 ideas and policies through coercion or expertise (Woods, 2006). Nation states can create incentives to promote certain organizations that would otherwise not take off. However, in the emergence of Islamic finance organizations, the joint demonstration of contracts by the Islamic finance supranational - Islamic Development Bank - and state authorities, played a prominent role, owing to the transaction costs for realizing Islamic values in financial exchanges, and the illegitimacy concerns of Islamic finance. Islamic finance has several requirements (Ayub, 2009; El-Gamal, 2006; Hassan & Mahlknecht, 2011). Islamic financial exchanges must avoid excessive interest (usury), Islamically impure (haram) consumption and production, and gambling. Islamic financial exchanges must be linked to real goods, and the borrowers and lenders must share both risk and return. So, Islamic financial contracts have higher transaction cost due to additional search, evaluation, bargaining, monitoring, and enforcement. Moreover, Islamic finance faces illegitimacy concerns. The jurisdictions and expertise of the courts for economic exchanges that involve both finance and religion are not always clear. Moreover, since Muslim communities have largely adopted the Western secular finance as a globally connected and legitimate category, it was uncertain whether Islamic finance would be accepted as a viable and legitimate option (Shahid, 2020). In such circumstances, Islamic finance contracts jointly demonstrated by Islamic Development Bank (IDB) and nation states played a certifying role and inspired confidence among stakeholders that Islamic finance is socially and economically appropriate. IDB used Islamic financial contracts to invest in social and 32 physical infrastructure projects of countries such as education, healthcare, disaster aid, food aid, water supply, power plant, roads, highways, banks, and so on. Such investments showed a wide applicability of Islamic finance and the governmental willingness to support Islamic finance contracts locally. Given high transaction costs of Islamic financial contracts, it’s more efficient to structure them in greater numbers and frequencies; Islamic finance organizations emerged to serve that purpose. I also find that Islamic financial organizations grew earlier and more in countries with high aspirations for Islamic cultural resurgence. Consistent with this, countries that are Muslim majority and geographically closer to Saudi Arabia experienced faster and greater emergence. Also, countries with Sunni (an Islamic creed) over Shia (another Islamic creed) majority experienced earlier emergence. Moreover, countries with greater emergence of Islamic finance had similar political ideals at the global stage: all voted like Saudi Arabia in the United Nations. The explanation is robust to economic and financial variables, and operations or engagement of World Bank and IMF in countries. Moreover, I used two exogenous events as natural experiments – the Yom Kippur war and the Gulf war – to test if wartime alliances of countries with Saudi Arabia had altered the noted explanations. The explanation of contract demonstration and cultural resurgence holds. This paper is theoretically significant in the following ways. I illustrate one more mechanism – the joint demonstration of contracts by supranational and governmental actors– in the globalization of ideas and organizations (see Simmons et al., 2008). The illustration also contradicts the Weberian arguments that Islam neglected the confrontation between the religious ethics and secular institutions 33 (Turner, 2016; Weber, 1966). I show how such confrontation occurs in the economy, supposedly a very secular social sphere. In the global dominance of the Western rationalization and scientization, cultural aspirations for a religion-based economic paradigm, supported by the purposive actions of a supranational organization and nation states, facilitated the emergence of non-Western, non-secular organizations. Islamic finance is supported by a variety of Muslim communities. Accounting for such plurality of interests has been an ongoing focus of the studies of organizations (Greif, 2005; Swedberg, 2001). Also, the geopolitics of the Middle East and its implications for economic organizations in Muslim communities is understood in the light of cooperation. Especially, the political and Islamic creed differences and contentions among Saudi Arabia, Turkey and Iran have, for centuries, dominated the academic and popular discourses of organizations in the Middle East. After the fall of the Ottoman empire, the longest surviving Islamic state, there are lingering questions about whether the center of Islam has shifted to Saudi Arabia, the birthplace of Islam. This paper shows that the Muslim world led by Saudi Arabia (the major shareholder of IDB) found ways to cooperate in realizing Islamic values in financial transactions. Such cooperation and initiatives were supported by Turkey and Iran. Islamic Finance: background, definitions, transaction costs, and illegitimacy Background: Islam is about 1,400 years old, but Islamic finance is a recent phenomenon. Though proto-Islamic financial contracts have existed since the ruling of Prophet Muhammad (peace be upon him - PBUH) through the Ottoman empire, the vision for a global Islamic economic exceptionalism and formalization is a recent 34 development. The vision came from Organisation of Islamic Cooperation (OIC), founded in 1969, to strengthen a global Muslim identity. OIC has 57 member countries; 49 of them are Muslim majority. The population of OIC countries is about 1.81 billion. In the wake of Arab-Israeli conflicts and the oil boom in early 1970s, OIC wanted to form an economic union to protect the economic interests of Muslims. So, it founded Islamic Development Bank (IDB) in 1975, based in Saudi Arabia, to promote “in the true spirit of Islam, economic co-operation and collaboration in accordance with the tenets of Islam” (Meenai, 1989, p. 6). Globalizing Islamic finance is a major objective of IDB. The founding of IDB was a key step in instituting Islamic financial contracts and organizations as an alternative to the secular finance. Today, Islamic finance has counterparts for various Western financial organizations, such as banks, insurances, mutual funds, index funds, investment funds, and so on (El-Gamal, 2006; Hassan & Mahlknecht, 2011). In 2019 such organizations had about US$2.88 trillion assets, larger than the GDP of the United Kingdom - the 5th largest economy of the world (ICD-Refinitiv, 2020; World Bank). About 135 countries have used some form of Islamic finance through Islamic Development Bank investments at the state level. IDB uses its funds to invest in long-term social and physical infrastructure projects of the Muslim communities. Hence, in modeling the emergence of Islamic finance organizations, the role of IDB is prominent. Definitions: Islamic finance broadly refers to an economic ideology based on the principles of Islam, mainly derived from the Holy Koran (the main scripture of Islam considered as the revelation from Allah) and the Sunnah (sayings and activities of the 35 life of the Islam’s prophet Muhammad - PBUH). Two additional sources, Ijma and Qiyas, provide Islamic principles. Ijma, an Arabic term, refers to the consensus reached by Islamic scholars on a point of Islamic law. There are disagreements on who can be a part of this consensus formation. Qiyas, an Arabic term, refers to Islamic laws derived by jurists through analogical reasoning over matters not clearly covered in the Koran or the Sunnah. Islamic jurisprudences vary in their use of Ijma and Qiyas as a source of law (Kamali, 1991). Islamic finance is different from ‘other finance’ with respect to ‘no riba (usury)’, ‘permissible production and consumption’, ‘no transactions involving the unknown, uncertainty’, ‘required risk-sharing’, and ‘link to real goods’ (El-Gamal, 2006; Hassan & Lewis, 2007). Islamic finance cannot be involved with usury or excessive interest. Islamic finance prohibits dealing in uncertainty, making it illegal to gamble. Certain production and consumption are forbidden, e.g., alcohol and pornography; they are called ‘haram’ in Arabic. Also, Islamic finance requires proactive measures by contracting parties (El-Gamal, 2006). The major requirement is risk-sharing, instead of lending and borrowing in conventional finance (throughout this paper ‘conventional finance’ and ‘secular finance’ refer to finance that is not necessarily Islamic). By sharing risks, lenders and borrowers of Islamic finance become investment partners. Let us take a simple example of someone getting a loan from an Islamic financial organization (IFO) to buy a car. In one mode of Islamic financial contracts, both the IFO and the borrower become investors in the car, sharing both risks and returns (as agreed by them). As the borrower pays up the loan, their share in the car increases while the share of the IFO decreases. Islamic financial 36 exchanges can occur through a variety of contracts, e.g., Mudaraba, Musharaka, Murabaha, ijarah, Salam etc.; see Chapter 2 (Table 1 & 2) for a description of such contracts. The other requirement of Islamic financial transactions is that they are to be linked to real goods. However, the concept of real goods remains open to interpretation. Transaction costs: For the noted restrictions and requirements, Islamic financial exchanges would have higher transaction costs than the conventional finance. Here, I illustrate the transaction costs of Islamic finance after introducing several definitions of such costs. Williamson (1985) argues that transaction cost is the cost of controlling, monitoring, and managing transactions, while North (1990, 1992) suggests transaction costs consist of measurement, enforcement, ideological attitudes and perceptions, and the size of the market. Transaction costs can be divided into three broad categories (Dahlman, 1979): search and information costs, bargaining and decision costs, and policing and enforcement costs. Now let’s look at transaction costs of Islamic finance with an example. Conventionally, when an individual borrows money from a bank for purchasing a house, there are search and information costs (costs of employees, bargaining agents, credit score, background checks), legal costs for structuring and enforcing contracts, and costs of collecting loan payments. Now in that mix, introduce the requirements of Islamic values. Transaction costs would go up. First, now there are costs to find out if the borrower can be a fellow investor and if the borrower's behavior would be compliant with Islamic values. Note that in Islamic finance, borrowers and lenders become joint investors, sharing both risks and returns of a project until the ownership of the project entirely changes hands (in this case when the borrower fully 37 pays the loan). Credit models do not factor in the risk of equity partnership. In corporate finance models, equity carries greater risk after a certain point. Second, bargaining and decision costs are higher. Islamic financial organizations would need to structure typical loan contracts as equity contracts. Islamic banks/financial organizations have greater interests to monitor the conditions of the house since they share the risk of the maintenance of Islamic and physical values. Third, Islamic finance would require closer monitoring, thus higher policing, and enforcement costs. Illegitimacy concerns: The discussion about transaction costs assumes a well-defined regulatory framework and legitimacy for Islamic financial transactions. But, before the emergence of Islamic finance organizations (even after the emergence), there were no clear guidelines or consensus about the validity of financial contracts as Islamic. Also, if any disputes arise in Islamic finance transactions, it is uncertain whether Islamic courts or secular courts would adjudicate the matters (Rudnyckyj, 2014). The relevance and application of the variety of Islamic jurisprudence is ambiguous. While the conventional finance has well-developed legal systems and human resources, there is a dearth of professionals, adept in both finance and Islamic law (Askari et al., 2009). Additionally, Muslim majority countries have largely adopted Western financial organizations. While studies show a latent demand for Islamic finance (for example, the study of Prof Aziz in Malaysia in 1950s) there were no consumer or social movements for replacing Western financial organizations with Islamic alternatives (Borhan & Sa’ari, 2005; Nasser & Muhammed, 2013). Islamic political movements, e.g., the Iranian revolution, the Salafist movements, did not feature Islamic economic exceptionalism. Early aspirations for Islamic economic 38 exceptionalism remained in the writings of Islamic revivalist writers, like India’s Mawdudi, whose political influence was minimal (Mawdudi, 1969, 2011). In such an environment, entrepreneurs face the uncertainty that Islamic financial contracts would be subject to social sanctions. Some examples are telling (Shahid, 2020). In Pakistan, Islamic finance organizations were shut down due to disputes among Islamic and secular jurists and the state. In Turkey, various branches of the state, including the military, contended over Islamization projects. Secular framings of Islamic finance emerged to deal with such contentions. In Saudi Arabia, Islamic finance organizations were initially introduced locally without terming it as Islamic, to avoid the potential contention that naming any organization as Islamic would make the rest un-Islamic. In Egypt, the secular regime of Nasser declared Islamic finance organizations illegal. The role of demonstration of contracts in the emergence of organizations The global influences in the formalization of economic ideas, policies, programs, and organizations are prevalent in the literature. Some examples follow. Some stock exchanges were adopted ceremonially due to international coercion (Weber et al., 2009). The coercive or expert influences of the Bretton Woods Institutions brought about neoliberal economic policies in nation states. IMF and World Bank often provided suggestions, incentives, rescue loans, and funding cut threats that altered the nature of economic organization of countries, sometimes for political reasons and to the detriment of the stability of those economies (Barnett & Finnemore, 2003, 2004; Clifton et al., 2014; Dreher, 2009; Harrigan et al., 2006; Lipscy & Lee, 2018; Woods, 39 2006). Ideas, policies, programs, and organizations also spread globally as countries compete with and/or emulate other peer or aspirational or successful countries (Lee & Strang, 2006; Polillo & Guillén, 2005; Weber et al., 2009). States want their local industries to be competitive, relative to others. For instance, liberal tax policies and bilateral investment treaties around the world came about as countries competed to attract foreign investments (Elkins et al., 2006; Swank, 2006). The public sector downsizing occurred as countries selectively imitated the outcome of aspirational countries (Lee & Strang, 2006). None of these mechanisms – competition, coercion, and emulation – were largely dominant as Islamic Development Bank (IDB) and the willing states globalized the idea of Islamic finance and facilitated the emergence of Islamic finance organizations. Rather, the states and IDB undertook the initiative of joint demonstration of Islamic financial contracts through IDB development investments. I discuss the relevance of such a mechanism in greater detail. While Islamic Development Bank and its supporter states wanted to globalize Islamic finance, they faced two major hurdles - illegitimacy concerns and high transaction costs – which turned ‘competition’, ‘coercion’ and ‘emulation’ ineffective as mechanisms. If countries were to emulate Islamic finance friendly policies, they had no examples. The idea of competition was not relevant as less costly conventional financial organizations were prevalent. Promoting Islamic finance only for competitive reasons therefore did not make sense. Moreover, Islamic Development Bank is a much smaller organization than World Bank and IMF. Hence, it was not feasible that Islamic Development Bank coerced states into transforming economies by the principles of Islam. At this backdrop, the engagement through joint 40 demonstration of Islamic contracts rather became a much more feasible and innocuous strategy that would not face widespread attention and contention. Such strategy allowed willing states to receive investments from Islamic Development Bank, thereby serving several objectives at the same time: getting an alternative funding for development projects of the state, accumulation of experience in structuring Islamic finance contracts, and demonstration of the legitimacy of Islamic financial contracts to entrepreneurs and stakeholders. Such demonstration occurred without much contention because they did not seek to abolish the secular fiscal or monetary policies of states. Thus, the global and national suspicion of Islamization and its connotations of sponsoring terrorism and violence were avoided. Indeed, a wide variety of Islamic financial contracts – such as Mudaraba, Musharaka, Islamic leasing, installment sale, Istisna- have been used in IDB development projects (Islamic Development Bank Annual Reports). While such demonstration of Islamic finance contracts by IDB and nation states inspired confidence among entrepreneurs and stakeholders that Islamic finance was a socially legitimate and economically viable category, given high transaction costs of such contracts, it was feasible to group and organize them in organizations to achieve economies of scale with respect to transaction costs. This gave rise to Islamic finance organizations. Hence, I hypothesize the following. Hypothesis 1: The emergence of Islamic financial organizations in countries is positively affected by the engagement of Islamic Development Bank through the joint demonstration of Islamic finance contracts with states. In most countries, Islamic Development Bank operates in the presence of Western globalizers like World Bank and IMF. If IMF and World Bank oppose Islamic finance, 41 their engagement in a country would impede the emergence of Islamic finance. Hence, I hypothesize the following. Hypothesis 2: The emergence of Islamic financial organizations in countries is negatively affected by the engagement of World Bank. Hypothesis 3: The emergence of Islamic financial organizations in countries is negatively affected by the engagement of International Monetary Fund. To the contrary, if both World Bank and IDB engage in a country, it would show that conventional and Islamic finance could co-exist. Indeed, several influential papers on Islamic finance were published by Bretton Woods institutions and there is evidence of co-financing of development projects by World Bank and IDB (Beck et al., 2012; Hasan & Dridi, 2010; IDB News, 2008, 2012, 2015; Mohieldin, 2012; World Bank News, 2014). Hence, I hypothesize the following. Hypothesis 4: The emergence of Islamic financial organizations in countries is positively affected by the engagement of both World Bank and Islamic Development Bank. Aspirations for Islamic cultural resurgence through economy The demonstration of Islamic finance contracts by Islamic Development Bank (IDB) and states is a joint decision of nation states and IDB. Such ventures are likely to be undertaken in locations where they would be more effective and less opposed. Such effectiveness might have multiple manifestations, one of which is to inspire the local emergence of Islamic finance organizations, consistent with IDB objectives. A latent demand for Islamic finance in the local economies would help local demonstrations of 42 Islamic finance contracts to inspire the emergence of Islamic finance organizations. This latent demand can be understood in terms of cultural resurgence. Some examples follow. The first book written on Islamic economics, now considered a foundational text for Islamic finance, was largely premised on the failure of conventional economics and the cultural and moral superiority of the Islamic way of life over the Western capitalism and socialism (Mawdudi, 2011). The Islamic revivalist movements like Salafism, Wahabism, and the Iranian revolution were also inspired by an aspiration for cultural resurgence against the Western ways of doing things – which, Islamic scholars argue, is based on ‘one dimensional’, ‘self-interested’, ‘profit maximizing’, and ‘competition-oriented’ idea of humans. Such Islamic scholars made it a moral, cultural, and intellectual imperative of Islam to link ‘equity’ and ‘justice’ with ‘economic efficiency’ (Dallal, 1993; Jansen, 1987/1988; Mawdudi, 2011). Several public leaders and state officials of Muslim majority countries also projected Islamic finance in the light of an Islamic cultural resurgence. The founder of Pakistan, Jinnah, urged the Pakistan banking officials to implement Islamic economics to demonstrate that Islam’s way is no less than the West (Jinnah, 1948). Mahathir Muhammad, a former prime minister of Malaysia, also viewed Islamic finance in the same light – an alternative, cultural way of doing business, different from the West (Rudnyckj, 2014). Hence, aspiration for cultural resurgence, characterized by Muslim majority, former British colonies, Islamic creeds, and similarity to Saudi Arabia, is an additional mechanism for the emergence of Islamic finance organizations. Muslim majority, Sunni majority: The sentiment of local communities is important in globalization of financial ideas (Quinn & Toyoda, 2007). Hence, Islamic finance 43 organizations will emerge earlier and more in Muslim majority countries. Also, Islamic finance revivalist writers were of the Sunni creed of Islam. So, the dominance of the Sunni creed would facilitate the emergence of Islamic finance organizations. So, I hypothesize the following: Hypothesis 5: The emergence of Islamic financial organizations in countries is positively related to having Muslim majority in their population. Hypothesis 6: The emergence of Islamic financial organizations is positively related to the dominance of Sunni relative to Shia in the Muslim population of the countries. Common law origin: The British common law can positively affect the emergence of Islamic finance organizations. First, by colonizing and replacing the local legal systems, the British inspired an anti-colonial cultural resurgence. Second, the common law, flexible in dealing with institutional changes, can paradoxically help such cultural resurgence by accommodating new organizations (La Porta et al., 1997; La Porta et al., 2008). Hence, I hypothesize the following. Hypothesis 7: The emergence of Islamic financial organizations is positively affected by the common law origin of the legal systems of countries. Linguistic and geographic similarity to Saudi Arabia: Institutional conditions affect the diffusion of ideas and organizations (Strang & Meyer, 1993). Countries with institutional similarity to Saudi Arabia - the home country of IDB and the birthplace of Islam – would have greater aspirations for Islamic resurgence. I use the linguistic and geographic similarity to Saudi Arabia as proxies for institutional similarity. Linguistic similarity could mean both cultural and relational linkages. Geographic proximity to 44 Saudi Arabia would also help IDB reduce information asymmetry and moral hazard in development projects, making the demonstration of Islamic finance contracts more effective. Earlier papers have used location-based measures of information asymmetry and moral hazard (Bernile et al., 2015; Malhotra & Gaur, 2013). Hence, I hypothesize the following. Hypothesis 8: The emergence of Islamic financial organizations is positively related to the linguistic similarity of countries to Saudi Arabia. Hypothesis 9: The emergence of Islamic financial organizations is positively related to the geographic proximity of countries to Saudi Arabia. Political alliance with Saudi Arabia: The cultural resurgence for Islamic finance can be expressed by states through their alliances with major Muslim countries. Scholars have inferred alliances among countries through their voting similarity in the United Nations (UN) (Dreher et al., 2009; Dreher & Sturm, 2012). Votes like Saudi Arabia in the UN would indicate alliance with Saudi Arabia over global issues, including Islamic finance. So, I hypothesize the following. Hypothesis 10: The emergence of Islamic financial organizations is positively related to the similarity of countries to Saudi Arabia in the United Nations voting. Another way to understand such global political blocs is to take an event driven approach, e.g., how alliances between countries were formed during Saudi-led and Saudi-allied wars. I used the Yom Kippur War of 1973 (between Arab allies, and Israel allies) and the Gulf War of 1991 (between Saudi Arabia and US allies, and the rest) as relevant events. 45 Other predictions I account for several alternative explanations. First, countries with developed financial markets and institutions, if willing, may find it easier to experiment with a new variety like Islamic finance organizations, though the causal direction from economic growth to financial development is not always clear (Calderon & Liu, 2003). Second, the right organizational form can help new organizations grow by avoiding the liability of newness (Carroll, 1984; Stinchcombe, 1965). Since (Western) commercial banks are a widely diffused organizational form, I consider if the first instance of Islamic finance organizations as a commercial bank facilitated the expansion of Islamic finance organizations in countries. Third, early experience can expedite learning and develop successful models for replication. To account for early emergence, I consider the number of years it took since the UN recognition of a country for the first instance of Islamic finance organizations to emerge in the country. Fourth, Islamic finance contracts and organizations in neighboring countries can positively affect the emergence of Islamic finance organizations in a country. The summary framework of this study is in Figure 1. ---INSERT FIGURE 1 ABOUT HERE--- Variables, data, and methods I measure the emergence by the event of the first instance of a formal Islamic finance organization in a country. The unit of analysis are country-year observations. There are 186 countries with data to test the hypotheses over the period 1948 – 2016. Eventually, 65 countries experienced some local founding of Islamic finance 46 organizations. Of these years, 1948 – 1974 was foundational for the emergence of Islamic finance because they provided the historical, cultural, and intellectual background for the emergence of Islamic finance organizations later. The quantitative analysis is done over the period 1975 – 2016, with 1975 being the founding year of Islamic Development Bank. The main quantitative analysis is the duration dependence model, in which the dependent variable is the duration (the number of years without any instance of Islamic finance organizations) or the event (the first instance of Islamic finance organizations in a country). To complement this, I used a regression model to explain the progress of the countries in Islamic finance after the emergence, measured by a ranking of the countries in their Islamic finance development in 2016 – the last year of our study period. The data was censored in 2016 for the latest data availability until that year. The description of variables is in Table 1. ---INSERT TABLE 1 ABOUT HERE--- Dependent variable: To measure the dependent variable - duration (number of years without any instance of Islamic finance organizations), I would need to detect the first year in which any instance of Islamic finance organizations was observed in a country. For such detection, I created a dictionary of descriptive words for Islamic finance, complemented by any special names for Islamic financial contracts/instruments and any country-specific names for Islamic financial organizations. The final bag of words consisted of the following: “Islamic” / “Islam” & “country name” with: “finance”, “bank”, “fund”, “profit sharing”, “insurance”, “mutual fund”, “index funds”, and “bond”. Single search items were: “sukuk”, “shariah”, “sharia”, “Syariah”, “shariah bank”, “shariah finance”, “sharia bank”, “shariah finance”, “Syariah bank”, ‘Syariah 47 finance”, “zakat”, “hajj”, “pilgrimage”, “special finance house”, “mudaraba”, “musharaka”, “riba”, “takaful”, “murabaha”, “maysir”, “Istisna”, and “al wadia”. I searched the following sources using the dictionary: Google books, Google Scholar, New York Times, Thomson Reuters, Factiva, Lexis Nexis, Islamic Finance News country profiles, websites of the federal banks, Islamic finance competitiveness reports, ProQuest, and OIC, IDB, IMF, World Bank, and OECD data and publications. Multiple sources helped me avoid non-detection due to false negatives. My search for Islamic banks matched with the World Bank Database of Islamic banks. Table 2 presents the results of my search. ---INSERT TABLE 2 ABOUT HERE--- There were several attempts of Islamization of finance in the early 20th century. One such attempt was Adapazarı İslam Ticaret Bankası, founded in Turkey in 1913. Scholars do not describe it to be an entirely ‘interest-free’ organization. Rather, its objective was ‘to provide loans to Muslims with low interest’ and to protect the society from the control and occupation of foreign capital and practice of usury. ‘Islamic’ was used in the name of the bank to differentiate it from existing banks owned by non-Muslims (Özdemir & Aslan, 2018). The second attempt was the call from Muhammad Ali Jinnah, the founder of Pakistan, for an Islamic economy. He stated in his first speech to the central bank of Pakistan, “..I shall watch with keenness the work of your Organization in evolving banking practices compatible with Islamic ideas of social and economic life. We must work our destiny in our own way and present to the world an economic system based on true Islamic concept of equality of manhood and social justice” (Jinnah, 1948; Mehmood, 2002). To this end, in 1952 the 48 constitution of Pakistan stated ‘riba’ (interest) as an undesirable thing to be eliminated from the society. Jinnah’s call inspired a Muslim entrepreneur to organize an Islamic bank, but later the venture did not take off. The distinct early founding of Islamic finance organizations was in Egypt (1963), Malaysia (1963), and Philippines (1973). The rest of the Islamic financial organizations emerged after 1975, the founding year of Islamic Development Bank. I consider 1975 as the starting year; data for most variables are available after that. The results do not change qualitatively without Egypt, Malaysia, and Philippines. The first occurrence of Islamic finance organizations in a country is a proxy for emergence but it does not entirely capture Islamic finance developments in the country, which I measure by Islamic finance ranking of countries in the 2016 Global Islamic Finance Development Report (GIFR). GIFR ranked 48 countries; I assumed non-ranked countries at the 49th position. The ranking is based on the following factors (weights in parenthesis): number of Islamic banks (21.8%), number of Interest-free banking and financial institutions (20.3%), Sharia supervisory regime (19.7%), Islamic financial assets (13.9%), Muslim population (7.2%), Sukuk (6.6%), education and culture (5.7%), and Islamic regulation and law (4.9%). Independent and control variables: Demonstration of Islamic finance contracts (in short, IDB engagement) is measured by the natural logarithm of the sum of all Islamic Development Bank investments in a country (US$ millions) so far (including the current year) plus 1. Addition of 1 makes 0 values defined after a natural log transformation. World Bank engagement is measured by the natural logarithm of the sum of all World Bank (IBRD loans and credits) investments in a country (measured 49 in US$ millions) so far (including the current year) plus 1. IMF engagement is measured by the natural logarithm of the sum of all International Monetary Fund credits in a country (US$ millions) so far (including the current year) plus 1. High engagement of both World Bank and IDB is ‘1’ if the country’s investment/credit from IDB and World Bank in a year fell in the top 4th or 5th of IDB and World Bank engagement quintiles, 0 = else. Muslim majority is ‘1’ if a country has Muslim majority in the religious distribution of their population, else ‘0’. Sunni over Shia majority is 1 if a country with Sunni over Shia majority in their Muslim population, else ‘0’. Common law is ‘1’ if the legal origin of a country has a basis in common law, else ‘0’. Arabic is ‘1’ if the official or major language of a country is Arabic, else ‘0’. English is ‘1’ if the official or major language of a country is English, else ‘0’. French is ‘1’ if the official or major language of a country is French, else ‘0’. Distance from Saudi Arabia is the natural logarithm of the distance (km) of a country from Saudi Arabia. Voting like Saudi in UN is the percentage of votes on all United Nations resolutions by a country like Saudi Arabia. Yom Kippur Arab coalition is ‘1’ if a country was a member of the Arab-Muslim coalition during the Yom Kippur/Ramadan war, else ‘0’. Gulf War Saudi coalition is ‘1’ if a country was a member of the Saudi/anti-Iraq alliance during the Gulf war, else ‘0’. GDP growth rate (%) of a country for a given year is the percentage change in GDP. Financial development is the financial development index of a country, developed by an IMF staff paper, with values ranging from 0 (lowest) to 1 (highest). Higher values indicate greater financial development. Commercial banking first is ‘1’ if the first instance of Islamic financial organizations is a commercial bank, else ‘0’. Early experiment is the standardized 50 value of the number of years since the United Nations' recognition that the first instance of Islamic financial organization in a country is observed. IDB in neighbors is the proportion of neighboring countries that received investments from Islamic Development Bank so far (including the current year); for countries without any neighbors, the value is ‘0’. Neighboring countries are defined by either of the following: separated by a land or river border, separated by 12 miles of water or less, separated by 24 miles of water or less (but more than 12 miles), separated by 150 miles of water or less (but more than 24 miles), and separated by 400 miles of water or less (but more than 150 miles). IF in neighbors is the proportion of neighboring countries with the emergence of Islamic finance organizations. Descriptive statistics Table 3 presents descriptive statistics. The average Islamic Development Bank investment for country-years is about US$17 million (see example of such projects in the Appendix to this chapter), the average World Bank credit is about US$832 million, and the average IMF credit is about US$331 million. So, the lending power of World Bank and IMF is much higher than that of IDB. ---INSERT TABLE 3 ABOUT HERE--- GDP growth has high variation (M = 3.59%, SD = 7.24%). Financial development varies by country-years (M = 0.26, SD =0.19). 26% countries have common law origin; 29% countries are former British colonies; 29% countries are Muslim majority; 34% countries are Sunni majority over Shia; 13% countries have Arabic as a major language; 28% countries have English as a major language; 17% 51 countries have French as a major language. The average distance of countries from Saudi Arabia is 6,309 kilometers. The countries voted like the United States in 54% of the United Nations resolutions and voted like Saudi Arabia in 21% of resolutions. In 50% of the country-years, neighboring countries received IDB investment, and in 21% of the country-years neighboring countries had Islamic finance organizations. IDB engagement in countries is positively correlated with World Bank and IMF engagement (WB & IDB ρ: 0.37, p<.001; IMF & IDB ρ: 0.36, p<.001). The correlation between IMF and World Bank engagement (WB & IMF ρ: 0.92, p<.001) is higher than their correlations with IDB engagement. GDP growth is positively correlated with IDB engagement (ρ = 0.07, p<.001), World Bank engagement (ρ = 0.04, p<.001), and IMF engagement (ρ = 0.03, p<.05). ---INSERT TABLE 4 ABOUT HERE--- IDB engagement is positively correlated with Muslim majority (ρ = 0.75, p<.001), Sunni majority (ρ = 0.51, p<.001), Arabic as major language (ρ = 0.52, p<.001), Islamic Development Bank engagement in their neighbors (ρ = 0.50, p<.001), and Islamic finance organizations in their neighbors (ρ = 0.46, p<.001). IDB engagement in countries is negatively correlated with distance from Saudi Arabia (ρ = -0.39, p<.001), voting similarity to Saudi Arabia in the United Nations (ρ = -0.19, p<.001), common law countries (ρ = -0.03, p<.03), former British colony countries (ρ = -0.06, p<.001), and financial development (ρ = -0.09, p<.001). World Bank engagement in countries is further positively correlated with Muslim majority countries (ρ = 0.17, p<.001), Sunni majority countries (ρ = 0.25, p<.001), Arabic official/major language (ρ = 0.03, p<.05), IDB engagement in neighboring countries (ρ 52 = 0.29, p<.001), and Islamic financial organizations in neighboring countries (ρ = 0.05, p<.001). World Bank engagement is negatively correlated with financial development (ρ = -0.42, p<.001) and voting like Saudi Arabia in the United Nations (ρ = -0.21, p<.001). IMF engagement is positively correlated with Muslim majority (ρ = 0.13, p<.001), Sunni majority (ρ = 0.27, p<.001), IDB engagement in neighboring countries (ρ = 0.28, p<.001), and Islamic financial organizations in neighboring countries (ρ = 0.06, p<.001). IMF engagement is negatively correlated with financial development (ρ = -0.34, p<.001) and voting like Saudi Arabia in UN (ρ = -0.18, p<.001). Kaplan Meier survival curves for the emergence of Islamic finance organizations The Kaplan-Meier survival curve (Figure 2), estimated using the non-parametric Kaplan-Meier estimator, takes the ratios of those (nation states or countries) without events (numerator) over those at risk (denominator) and multiplies those ratios over time. The curve is a decreasing step function with a jump at each discrete event time (without censoring, the Kaplan-Meier estimator is just the empirical distribution of the data). 𝑛 − 𝑑 𝑆(𝑡) = ( ) 𝑛 | 𝑒𝑣𝑒𝑛𝑡 = 𝑜𝑐𝑐𝑢𝑟𝑟𝑒𝑛𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑓𝑖𝑟𝑠𝑡 𝐼𝑠𝑙𝑎𝑚𝑖𝑐 𝑓𝑖𝑛𝑎𝑛𝑐𝑒 𝑜𝑟𝑔𝑎𝑛𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑖𝑛 𝑎 𝑐𝑜𝑢𝑛𝑡𝑟𝑦 𝑆(𝑡) = 𝑡ℎ𝑒 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝑠𝑢𝑟𝑣𝑖𝑣𝑎𝑙 𝑝𝑎𝑠𝑡 𝑡 𝑡 = 𝑎 𝑡𝑖𝑚𝑒 𝑤ℎ𝑒𝑛 𝑎𝑡 𝑙𝑒𝑎𝑠𝑡 𝑜𝑛𝑒 𝑒𝑣𝑒𝑛𝑡 ℎ𝑎𝑝𝑝𝑒𝑛𝑑 𝑑 = 𝑡ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑣𝑒𝑛𝑡𝑠 𝑜𝑟 𝑓𝑎𝑖𝑙𝑢𝑟𝑒𝑠 𝑡ℎ𝑎𝑡 ℎ𝑎𝑝𝑝𝑒𝑛𝑒𝑑 𝑎𝑡 𝑡𝑖𝑚𝑒 𝑡 53 𝑛 = 𝑡ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑢𝑛𝑡𝑟𝑖𝑒𝑠 𝑎𝑡 𝑟𝑖𝑠𝑘 𝑎𝑡 𝑡𝑖𝑚𝑒 𝑡 , 𝑖. 𝑒., 𝑡ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑢𝑛𝑡𝑟𝑖𝑒𝑠 𝑘𝑛𝑜𝑤𝑛 𝑡𝑜 ℎ𝑎𝑣𝑒 𝑠𝑢𝑟𝑣𝑖𝑣𝑒𝑑 𝑜𝑟 ℎ𝑎𝑣𝑒 𝑛𝑜𝑡 𝑏𝑒𝑒𝑛 𝑐𝑒𝑛𝑠𝑜𝑟𝑒𝑑 𝑢𝑝𝑡𝑜 𝑡 The horizontal axis of Figure 2 represents time (years), and the vertical axis represents survival probabilities. The probability of no Islamic finance organizations in a country goes down to 65% over 42 years. Figure 3 compares the survival probabilities between Sunni over Shia majority countries and the rest. Sunni majority countries have lower survival probabilities. Note, survival curves have limitations. Data are right-censored. But countries did not disappear for entirely unknown reasons. So, here, right censoring does not cause a random loss of data. Also, since right- censoring equals no events at the end of the study, the results are robust within the covered timeframe. Furthermore, most countries are covered; the effect of right censoring is not complicated by small samples. ---INSERT FIGURE 2 ABOUT HERE--- ---INSERT FIGURE 3 ABOUT HERE--- Emergence of Islamic finance organizations: duration model results Here, I present the results of duration models to explain the effect of various factors (independent variables) on the duration (the number of periods without any Islamic finance organizations in a country) or event (the first instance of an Islamic finance organization in a country). The models are estimated using the non-parametric Cox proportional hazard model, the exponential model, the Weibull model, and the Gompertz model. 54 In the cox proportional hazard model, the hazard rate for the jth subject (for a set of covariates 𝑥 ) in the data is: ℎ 𝑡 𝑥 = ℎ (𝑡) exp 𝑥 𝛽 Here, the regression coefficient, 𝛽 is estimated from the data. In this model, the baseline hazard ℎ (𝑡) is not parametrized. Thus, ℎ (𝑡) is not estimated. The model makes no assumptions about the shape of the hazard. One subject’s hazard is the multiplicative replica of another’s (Cox & Oakes, 1984; Cleves, Gould, Guiterrez, & Marchenko, 2010). By comparing the subject j to subject w, the model states that: ℎ 𝑡 𝑥 exp (𝑥 𝛽 ) = ℎ(𝑡|𝑥 ) exp (𝑥 𝛽 ) This expression above is constant if the covariates 𝑥 and 𝑥 do not change over time. The exponential model is considered the simplest of parametric survival models. The reason is that the model assumes a constant baseline hazard (Cleves et al., 2010). The hazard function or the conditional hazard rate (for the jth subject/country) is: ℎ 𝑡 𝑥 = ℎ (𝑡) exp (𝑥 𝛽 ) = exp(𝛽 ) exp(𝑥 𝛽 ) = exp(𝛽 + 𝑥 𝛽 ) for some constant 𝛽 . From the well-known relationship for the exponential model, The cumulation hazard function, 𝐻 𝑡 𝑥 = exp(𝛽 + 𝑥 𝛽 )𝑡 The survival function, 𝑆 𝑡|𝑥 = exp{−𝑒𝑥𝑝(𝛽 + 𝑥 𝛽 )𝑡} 55 The Weibull models, unlike the exponential model, do not assume the baseline hazard to be constant. Rather, it assumes a baseline hazard of the following form: ℎ (𝑡) = 𝑝𝑡 exp (𝛽 ), where p is some ancillary shape parameter estimated from the data, and the scale parameter is parametrized as exp (β ). So, with a set of covariates 𝑥 under the proportional hazard model, the hazard function, the cumulative hazard function, and the survival function for the Weibull model are as follows (Cleves et al. 2010). Here, the estimated parameter is obtained by exponentiating the estimated intercept coefficient. ℎ 𝑡 𝑥 = ℎ (𝑡) exp (𝑥 𝛽 ) = 𝑝𝑡 exp (𝛽 + 𝑥 𝛽 ) 𝐻 𝑡 𝑥 = exp(𝛽 + 𝑥 𝛽 )𝑡 𝑆 𝑡|𝑥 = exp{−𝑒𝑥𝑝(𝛽 + 𝑥 𝛽 )𝑡 } The Gompertz model assumes a baseline hazard of the following form: ℎ (𝑡) = exp(𝛾𝑡) exp(𝛽 ). So, the hazard function, the cumulative hazard function, and the survival function in the Gompertz model are as follows (Cleves et al., 2010): ℎ 𝑡 𝑥 = ℎ (𝑡) exp (𝑥 𝛽 ) = exp(𝛾𝑡) exp (𝛽 + 𝑥 𝛽 ) 𝐻 𝑡 𝑥 = 𝛾 exp(𝛽 + 𝑥 𝛽 ){exp(𝛾𝑡) − 1} 𝑆 𝑡|𝑥 = exp[− 𝛾 𝑒𝑥𝑝(𝛽 + 𝑥 𝛽 ){exp(𝛾𝑡) − 1}] The effect of economic growth, financial development, and cultural factors: Table 5 presents the results of duration models that assume an exponential distribution of T, the non-negative random variable representing the waiting time until the occurrence of 56 the event (the appearance or emergence of the first Islamic finance organization in a country). The independent variables are added stepwise, starting with a simple model in Model 1 and then expanding up to Model 7 with more variables. Table 5 Model 1 considers only the economic and financial development variable such as GDP growth, credit rating, and financial development. The coefficients of GDP growth (p<.001), and financial development (p<.05) are positive and significant. The model is significant (LR 𝜒 = 9.60, p<.05). The positive signs of the coefficients suggest that the hazard is increasing in GDP growth and financial development. Without other factors, Islamic finance organizations emerge earlier in countries with higher GDP growth and greater financial development. Table 5 Model 2 shows that the ‘common law’ variable added to Model 1 is not significant (p>.05). ---INSERT TABLE 5 ABOUT HERE--- Table 5 Model 3 expands Model 2 by adding cultural resurgence variables: former British colony, former British colony countries with common law, and Sunni majority former British colony countries. The model is significant (LR 𝜒 = 27.8, p<.001). GDP growth (p<.001) and financial development (p<.001) still have positive and significant effects on the hazard rate. ‘Sunni majority former British colony’ has a significant and positive effect on the hazard rate (p<.001). Table 5 Model 4 expands Model 3 by adding ‘Muslim majority’, ‘Sunni over Shia majority’, ‘Arabic, ‘English’, and ‘French’. Model 4 also drops several non-significant cultural resurgence variables. The model is significant (LR 𝜒 = 105.32, p<.001). Both Muslim majority (p<.001) and Sunni over Shia majority (p<.05) are significant. Language variables are not significant. Despite inclusion of religious variables (Muslim majority, and Sunni 57 over Shia majority), ‘Sunni majority former British colony’ is significant (p<.01). ‘Sunni over Shia majority’ and ‘Sunni majority former British colony’ have high positive correlation; for its greater information, I retain the latter in subsequent models. The institutional proximity to the parent country of IDB: Table 5 Model 5 adds ‘distance from Saudi Arabia’ to Model 4 and drops ‘Sunni over Shia majority’. The coefficient on distance from Saudi Arabia is negative and significant (p<.001). Thus, the more distant a country is from KSA, the lower is the hazard rate and the later Islamic finance organizations emerge in the country. The model is significant (LR 𝜒 = 105.25, p<.001). The relative influence of the Islamic and Western globalizers: Table 5 Model 6 includes the influence of IMF and World Bank, and the role of voting similarity in the United Nations; the model is significant (LR 𝜒 = 128.72, p<.001). While IDB engagement is positive and significant (p<.001), World Bank and IMF engagement are not. The voting similarity to USA is not significant, while voting similarity to Saudi Arabia is positive and significant (p<.05). So, Islamic finance is not necessarily contested by Western institutions in non-Western countries. The joint engagement of World Bank and IDB in countries is positively related with the emergence of Islamic finance organizations; the coefficient on the relevant variable in Table 5 Model 7, i.e., high financing from both World Bank and IDB, is positive and significant (p<.05). Robustness to various distributional assumptions about ‘the waiting time till the event’: The results of parametric duration models are similar for exponential, Weibull, and Gompertz distributional assumptions about T (the waiting time until the 58 occurrence of the event of the first instance of an Islamic finance organization in the country). In Table 6 (Model 1-3) I compare the results for exponential, Weibull and Gompertz distributions for T. All the models are significant. ---INSERT TABLE 6 ABOUT HERE--- The results of the non-parametric cox proportional model (Table 6, Model 4) are qualitatively like those of the parametric models. The effect of the Islamic supranational’s presence in the neighboring countries: To further understand the role of IDB Islamic contracts demonstration, I tested the effect of IDB engagement in neighboring countries. The coefficient on IDB engagement in neighboring countries is not significant (Table 7, Model 5, 6). Hence, IDB engagement in neighbors does not have a significant effect on the emergence of Islamic finance organizations. ---INSERT TABLE 7 ABOUT HERE--- Islamic finance organizations in neighboring countries: Only in Model 4 (Table 7) the emergence of Islamic finance organizations in neighboring countries has a significant effect (p<.05) on the emergence of Islamic finance organizations in a country. The significance disappears (Table 8, Model 2 –3, 5 –10) after the inclusion of Muslim majority and high engagement from both World Bank and IDB variables. ---INSERT TABLE 8 ABOUT HERE--- Alternative tests for the effect of political relations: I considered wars in the recent Arab/Muslim history as natural experiments that divided the world into Arab/Muslim coalitions and the rest. One event is the Yom Kippur/Ramadan war of 1973 between Israel and Arab allies. The other is the Gulf War of 1991 in which Muslim countries were divided between Saudi-USA and Iraq alliances. Table 9 presents the results of 59 duration models that include a variable for the Yom Kippur war coalition. The models (Table 9, Models 1-2) show that the coefficient on the dummy variable for Yom Kippur War Arab coalition is not significant (p>.05). Likewise, models with the Gulf War (Table 10, Models 1-2) show that the coefficient on the Gulf War Saudi coalition is not significant (p>.05). So, war-based alliances of countries cannot explain the emergence of Islamic finance organizations. ---INSERT TABLE 9 ABOUT HERE--- The effect of cultural resurgence: The cultural resurgence ideas I explored previously was Sunni majority former British colony. Here, I considered the interaction between Sunni majority and Muslim majority. While coefficients on ‘Muslim majority’ and ‘Sunni over Shia majority’ are positive and significant individually, their interaction is negative and significant (Table 9, Model 1-2; Table 10, Model 2 - 3). So, there is a limit to the role of creed in the emergence of Islamic finance. ---INSERT TABLE 10 ABOUT HERE--- Expansion of Islamic finance I used the 2016 Islamic finance ranking of countries as the dependent variable (expansion of Islamic finance) (Global Islamic Finance Reports, 2016). I retained most explanatory variables from duration models, while dropping several variables for multicollinearity or lack of significance. I included a nuanced religious-cultural explanation like Sunni over Shia majority. Among language indicators, I retained only the Arabic language. I added several variables for the conditions of emergence. Table 11 presents the results. GDP growth rate is not significant (p>.05) but financial 60 development (p<.001) has a positive and significant impact on the expansion of Islamic finance. Contrary to emergence models, Islamic finance expanded greatly in common law countries; the coefficient on ‘common law’ is positive and significant (p<.01). ---INSERT TABLE 11 ABOUT HERE--- The coefficients on ‘Former British colony’ and ‘Former British colony with common law’ are not significant (p>.05). ‘Sunni over Shia majority’ and ‘Arabic’ (Table 11, Models 1 – 5) are not significant. So, while the emergence of Islamic finance organizations can be partially termed as cultural resurgence, the development of Islamic finance cannot be termed so. The coefficient on ‘distance to Saudi Arabia’ is negative and significant (Table 11, Models 1- 5); Islamic finance organizations develop more in countries closer to Saudi Arabia. IDB engagement continues to positively affect the development of Islamic finance (Table 11, Models 1 – 5). Also, the earlier the emergence of an Islamic finance organizations, the greater is expansion. The effect is strong when the first instance of Islamic finance organizations is a commercial bank. Similarity to Saudi Arabia in UN voting has a positive and significant effect on the development of Islamic finance (Table 11, Models 1 – 5); wartime alliances do not have a significant effect (p>.05). Discussion Max Weber argued that Islam did not confront the problem of the relationship between religious ethics and secular institutions (Turner, 2016; Weber, 1966). Also, the Weberian rationalization view of law and society precludes an understanding of the 61 varieties of juristic, cultural, and political communities among Muslims. The Weberian ‘Protestant Ethic’ view of Islam holds only if the Muslim leaders and public accept the European capitalistic development as the norm (Turner, 1974). The emergence of Islamic finance organizations prompts me to reevaluate the ideas of Weber and the interaction of Western capitalist, secular paradigms with Islam. The process of integrating Islamic principles and financial transactions to create Islamic financial organizations brings Islamic ethics in confrontation with secular ideas and institutions. The process manifests the variation in cultural aspirations among Muslims for an alternative economic paradigm and the role of anti-colonial cultural resurgence in such variation. Also, the geopolitics of resource allocation for transforming such aspirations into an organizational form becomes significant. Indeed, the historical backdrop of the fall of Ottoman empire and subsequent secularization in Turkey (the longest surviving Muslim state) and the economic rise of the oil-exporting Muslim countries have heightened questions about whether the leadership of the Muslim world has shifted to the birthplace of Islam, Saudi Arabia. In this paper, I attended to these tensions and dilemma in examining the global emergence of Islamic finance organizations. In a world dominated by Western institutions, Islamic financial exchanges face the constraints of high transaction costs and illegitimacy concerns. The reassuring act of investment projects thorough Islamic financial contracts by Islamic Development Bank and nations states illustrated the appropriateness of Islamic finance to relevant stakeholders and helped overcome the constraints. Then, entrepreneurs, looking for the market opportunity to realize Islamic values in finance, found it economical to group 62 many transactions together under Islamic finance organizations. This led to the emergence of various Islamic finance organizations, such as Islamic banks, Islamic insurance, and so on. Indeed, newspaper articles about IDB investments in countries provide qualitative support that such investments inspired the confidence of local stakeholders in nation states about the local viability of Islamic finance. The Thomson Reuters databases of newspapers, industry magazines, newswires and press releases, and news transcripts suggest that over the sample period about 10,000+ news items were associated with Islamic Development Bank and country-specific coverage of Islamic Development Bank investments increased with IDB engagement in each country. This also provides qualitative evidence that IDB investments increased the visibility and legitimacy of Islamic finance through written discourses. This mechanism of the emergence of Islamic organizations is much different from the mechanisms of competition, coercion, and emulation noted in the literature of the globalization of ideas and markets7 (Polillo & Guillén, 2005; Simmons et al., 2008). With greater transaction costs, Islamic financial organizations did not necessarily have greater economic efficiency (Abedifar, Hasan, & Tarazi, 2016); so, the mechanism of competition did not play a significant role. Islamic Development Bank is much less powerful than IMF and World Bank, which are known for their dominant role in changing the economic policies of nation states. Hence, coercion was not a feasible option for materializing the Islamic economic paradigm and was not 7 Also see Boli and Thomas (1997), Cole (2005), Gleditsch and Ward (2006), Meyer et al. (1975), Meyer et al. (1987), Meyer et al. (1997), Meyer and Bromley (2013), Meyer and Hannan (1979), and Woods (2006). 63 largely exercised. Rather, the demonstration of Islamic finance contracts by nation states and Islamic Development Bank was instituted. This did not require a sudden transformation of economies towards Islam and allowed opportunities for gradual changes and learning by doing. The demonstration in certain countries showed the active approval of the states and the supranational for Islamic finance organizations, without turning the regulatory environment into entirely Islamic and without inciting any widespread criticism for Islamization of economies. Albeit, from Saudi Arabia, Turkey to Malaysia, Islamic finance rules and regulations came much after the local emergence of Islamic finance organizations (Shahid, 2020). The major shareholder of Islamic Development Bank is Saudi Arabia, which subscribes to a Sunni school of Islamic jurisprudence, different from the Islamic creeds of other powerful nations in the Middle East (like Turkey and Iran). Hence, I argue that Islamic finance has been a Sunni-led economic paradigm. However, Islamic financial organizations emerged and expanded in countries that do not necessarily subscribe to the creed of Islam practiced in Saudi Arabia. For example, both Turkey and Iran gradually expanded their shareholding of Islamic Development Bank. Hence, while the geopolitics of the Middle East often point to the ongoing contestations among Saudi Arabia, Iran, and Turkey, Islamic finance shows an area of active cooperation in Muslim communities around the world. An anti-colonial cultural resurgence and the latent demand for non-Western institutions in the Muslim communities in the post British colonial times played a role here. Paradoxically, colonial origins of law and institutions were used positively in this process. The 64 colonial common law legacy left behind flexible legal systems, which facilitated the adoption of new organizational forms like Islamic finance. The findings also have implications for economic development. Islamic finance contracts are argued to have stalled the economic development of the Middle East, because of high transaction costs and difficulties of property inheritance and transfer for such contracts (Kuran, 2004, 2010). While Islamic financial organizations do not alter the law of inheritance, they endogenize various transaction costs by incorporating them inside organizations and make it easy to transfer financial instruments. Hence, contrary to expectations, Islamic finance thrived. One could make a parallel note to the emergence of private equity, venture capital, and ESG (environmental, social, and governance) investing. These organizations have additional search, monitoring, and enforcement. But, as costs are economized over a large number inside organizations, firms grow. If many firms adopt similar values and regulations are eventually enacted to mandate the realization of these social and cultural values in transactions, these organizations will become more efficient. The emergence of non-Western, non-secular organizations like Islamic finance is also influenced by the Western and secular supranationals like World Bank and IMF. The joint participation of World Bank and Islamic Development Bank in a country’s development projects helped the development of Islamic finance organizations in countries. Several reasons are likely. First, such joint participation showed the stakeholders that Islamic finance can complement the secular finance in furthering a country’s development, and the powerful actors like the supranationals and the states support it. Second, there are spillover effects from the Western 65 development projects bringing more people to the financial system, which also benefit Islamic finance organizations. A closer look at the interaction among Islamic Development Bank, International Monetary Fund, and World Bank, as found in their annual reports and press releases, are quite telling. In the early years, IDB did not receive much attention from the West; yet, recently, World Bank and IMF have participated in promoting Islamic finance alongside IDB. Islamic finance is being seen as a faith-based alternative to increase the financial inclusion of Muslim communities. The findings, however, raise the question, as to why the aspiration for Islamic cultural resurgence did not translate into large consumer or social movements for Islamic finance. One reason is that the priority of Islamic political movements was to transform a society into Islamic first; in that view, the economy, an epiphenomenon, could be changed after social transformation. Indeed, some Islamic jurists argue that if the social and economic structure of a country does not provide Islamic options for finance, Muslims do not sin by using secular finance. However, once Islamic finance options are available, Muslims have the spiritual obligation to shun the secular finance. Such adoption is likely to increase ‘baraka8’, an Islamic concept of prosperity in a Muslim’s everyday interaction with physical objects, people, and spaces. If a Muslim uses Islamic finance for satisfying Allah (Islam’s God) for the life hereafter, baraka on earth will follow. This is much different from Protestant ethics, which allows the Protestants to observe God’s grace (their predestination of having been saved) through the diligence of their everyday work. This is likely a reason why demonstration of Islamic finance contracts by Islamic Development Bank led to the 8 See the detailed explanation of this concept (baraka or barakah) in the appendix to this dissertation. 66 emergence of Islamic finance organizations. Such demonstration shows the local feasibility of Islamic finance options, which inspires entrepreneurs to found Islamic finance organizations locally to economize on the transaction costs of Islamic financial exchanges and to make such options more widely available for their local Muslim communities. Conclusion The demonstration of Islamic financial contracts by Islamic Development Bank, together with national authorities, largely influenced the local emergence of Islamic finance organizations. Hence, this paper contributes to the globalization of ideas and markets literature by proposing a mechanism different from inter-country competition, coercion, and emulation. With high transaction costs and illegitimacy concerns, Islamic finance contracts, once demonstrated by state and supranational authorities, inspired confidence among entrepreneurs and stakeholders that Islamic finance was viable. Thus, Islamic financial organizations emerged to realize the Muslims’ latent aspirations for Islamic values in financial transactions in greater quantities and frequencies. The aspirations for anti-colonial cultural resurgence played a significant role in this process as such aspiration bonded Muslim countries and communities with different Islamic jurisprudence towards a common goal. The Bretton Woods Institutions gradually played a supportive role to Islamic finance as a financial inclusion alternative to the Western finance. Also, contrary to the geopolitical conflict ideas of the Middle East, Islamic finance has been a coalition-building phenomenon in the Muslim world. 67 This paper has several limitations. While this study considers the importance of common law in the development of Islamic finance, it does not address any potential contention between secular and Islamic law. La Porta et al. 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Retrieved from: https://www.worldbank.org/en/news/press-release/2014/10/12/world-bank- and-islamic-development-bank-join-forces-to-improve-quality-and-relevance- of-education 75 Figure 1: Conceptual Framework of the Global Emergence of Non-Western Organizations, Islamic Finance The Emergence of Islamic Finance Organizations Measure: duration (the number of periods/years without any instance of Islamic finance organizations in a country) or event (the first instance of Islamic finance organizations in a country) IDB engagement or Aspirations for Islamic Other explanations demonstration of cultural resurgence Measures Islamic finance Measures: contracts 1) Economic development: 1) Muslim majority GDP growth Measure: Islamic Development Bank 2) Sunni over Shia majority 2) Financial development: investments in a Financial development index country so far 3) Common law 3) Early experiment with a 4) Arabic as a major familiar organizational form: language The emergence of Islamic 5) Geographical distance finance through commercial from Saudi Arabia banking The World Bank 6) Voting like Saudi Arabia 4) Early experiment of Islamic and International in the United Nations' finance: Number of years since Monetary Fund resolutions the United Nations' recognition operations in a that the first instance of Islamic country so far (WB 7) Member of the Arab financial organization in a engagement, IMF alliance in the Yom Kippur country is observed engagement) War 5) Islamic development bank Measures: 8) Member of the Saudi engagement in the neighboring Arabia alliance in the Gulf countries The funding and war loans of IMF and 6) Islamic financial World Bank to a organizations in the neighboring country countries 76 Figure 2: Kaplan – Meier survival estimate for the first instance of an Islamic finance organization in a country 77 Figure 3: Kaplan – Meier survival estimate for the first instance of an Islamic finance organization in a country: comparison between countries (1) that have Sunni over Shia majority in their Muslim population, i.e., sunnimajority = 1, and (2) that do not have Sunni over Shia majority in their Muslim population, i.e., sunnimajority =0. 78 Table 1: Variable, Definitions and Sources (this includes the major variables and other additional variables used in the robustness tests) Variables Definitions Sources & Imputation Demonstration This is measured by the natural logarithm of the The data source for IDB of Islamic sum of all Islamic Development Bank investments in countries is the finance investments in a country (measured in US$ website of Islamic Development contracts (IDB millions) so far (including the current year) plus Bank. No imputation. engagement) 1. Addition of 1 makes 0 values defined after a natural log transformation. This is a yearly country-level measure. World Bank This is measured by the natural logarithm of the The data source for World Bank engagement sum of all World Bank (IBRD loans and credits) investments in countries is the investments in a country (measured in US$ website of the World Bank. No millions) so far (including the current year) plus imputation. 1. Addition of 1 makes 0 values defined after a natural log transformation. This is a yearly country-level measure. IMF This is measured by the natural logarithm of the The data source for IMF credit in engagement sum of all International Monetary Fund (IMF) countries is the website of the credits in a country (measured in US$ millions) World Bank. No imputation. so far (including the current year) plus 1. Addition of 1 makes 0 values defined after a natural log transformation. This is a yearly country-level measure. High This is a dummy variable: 1 = the country’s The World Bank and IDB engagement investment from IDB and World Bank in a year websites. No imputation. from both falls in the top 4th or 5th quintile of IDB and World Bank & World Bank engagement, 0 = else. This is a IDB yearly country-level measure. Muslim This is a dummy variable: 1 = a country with This was computed from the majority Muslim majority in the religious distribution of ‘World Religion Data (v1.1)’ of their population; 0 = NOT a country with the Correlates of War Project. Muslim majority in the religious distribution of The missing years were assumed their population. This is a yearly country-level to have the same distribution of measure. Muslim population of the most recent year(s). Sunni over This is a dummy variable: 1 = a country with This was computed from the Shia majority Sunni over Shia majority in their Muslim ‘World Religion Data (v1.1)’ of population; 0 = else. This is a yearly country- the Correlates of War level measure. No yearly variation. Project. The missing years were assumed to have the same distribution of the most recent year(s). Arabic This is a dummy variable: 1 = a country with This was compiled from CIA Arabic as an official or as a major language, 0 = World Factbook, and websites of various national agencies. No 79 else. This is a country-level measure. No yearly imputation. Languages were variation. assumed constant within the sample period. English This is a dummy variable: 1 = a country with This was compiled from CIA English as an official or as a major language, 0 = World Factbook, and websites of else. This is a country-level measure. No yearly various national agencies. No variation. imputation. The languages were assumed to be constant within the sample period. French This is a dummy variable: 1 = a country with This was compiled from CIA French as an official or as a major language, 0 = World Factbook, and websites of else. This is a country-level measure. No yearly various national agencies. No variation. imputation. The languages were assumed to be constant within the sample period. Common law This is a dummy variable: 1 = a country with The main data came from common law as the legal origin, 0 = else. This is Klerman et al. (2011), a country-level measure. No yearly variation. www.spamann.net, LaPorta et al. (2008), and LaPorta et al. (2004). The websites of various national agencies of the countries were also consulted. No imputation. Former British This is a dummy variable: 1= a former British The main data came from colony colony country, 0 = else. This is a country-level Klerman et al. (2011), measure. No yearly variation. www.spamann.net, and Correlates of War Colonial History Data. The websites of various national agencies of the countries were also consulted. No imputation. Former British This is a dummy variable: 1 = a former British The main data came from colony with colony country with common law as the legal Klerman et al. (2011), common law origin, 0 = else. This is a country-level measure. www.spamann.net.and No yearly variation. Correlates of War Colonial History Data, LaPorta et al. (2008), and LaPorta et al. (2004). The websites of various national agencies of the countries were also consulted. No imputation. Sunni majority This is a dummy variable: 1 = a former British The main data came from former British colony country with Sunni over Shia majority in Klerman et al. (2011), colony their Muslim population, 0 = else. This is a www.spamann.net, and country-level measure. No yearly variation. Correlates of War Colonial History Data. The websites of various national agencies of the countries were also 80 consulted. No imputation. The missing years were assumed to have the same distribution of the most recent year(s). Distance from This is measured by the natural logarithm of the Several sources of data were Saudi Arabia distance (km) of countries from Saudi Arabia. combined: https://github.com/ra This is a country-level measure. No yearly hulbot/distances-between- variation. countries and google distance between the capital cities of countries. No imputation. The distance between countries were assumed constant. Voting like This is measured by percent of votes on all The dataset on the voting in the Saudi in UN United Nations resolutions by a country like the United Nations was obtained votes of Saudi Arabia. The value ranges from 0 from Bailey, Michael A., Anton to 1 (inclusive). This is a country-level measure; Strezhnev, and Erik Voeten. only one measure has been taken from the entire "Estimating dynamic state dataset; so, no yearly variation. preferences from United Nations voting data." Journal of Conflict Resolution 61.2 (2017): 430- 456. No imputation. Voting like This is measured by percent of votes on all The dataset on the voting in the USA in UN United Nations resolutions by a country like the United Nations was obtained votes of the United States. The value ranges from Bailey, Michael A., Anton from 0 to 1 (inclusive). This is a country-level Strezhnev, and Erik Voeten. measure; only one measure has been taken from "Estimating dynamic state the entire dataset; so, no yearly variation. preferences from United Nations voting data." Journal of Conflict Resolution 61.2 (2017): 430- 456. No imputation. Yom Kippur This is a dummy variable: 1 = a country in the This was compiled from various Arab coalition Arab-Muslim coalition during the Yom newspapers and published Kippur/Ramadan war, 0 = else. This is a books. No imputation. country-level measure. Gulf War This is a dummy variable: 1 = a country in the This was compiled from various Saudi Saudi/anti-Iraq alliance during the Gulf war, 0 = newspapers and published coalition else. This is a country-level measure. books. No imputation. GDP growth It's the GDP growth rate (%) for the year for a It was compiled in the World country. Annual percentage growth rate of GDP Bank Global Development at market prices based on constant local Indicators from various sources currency. Aggregates are based on constant 2010 such as World Bank national U.S. dollars. Higher values indicate greater GDP accounts data, and OECD growth rate. This is a yearly country-level National Accounts data files. I measure. used backward filling, i.e., used the most recent year’s data ‘within country’ to fill out any missing year. 81 Financial It is measured by an index for countries; the The data was developed for the development values of this index range from 0 (lowest) to 1 International Monetary Fund (highest). The index was developed by the Staff Discussion Note International Monetary Fund. The index “Rethinking Financial summarizes at the country level how developed Deepening: Stability and Growth financial institutions and financial markets of the in Emerging Markets”. The data country is in terms of their depth (size and were available for most countries liquidity), access (ability of individuals and over the period 1980 – 2017. I companies to access financial services) and used backward filling, i.e., used efficiency (ability of institutions to provide the most recent year’s data financial services at low cost and with ‘within country’ to fill out 1975– sustainable revenues and the level of activity of 1979. Additionally, I used the capital markets). Higher values of this indicates mean values of the variable each greater financial development of the country. year to calculate the missing This is a yearly country-level measure. values for several countries9. Credit rating The credit rating of countries is obtained from The data was developed by the ‘The International Country Risk Guide (ICRG)’. PRS Groups. I used backward The values range from 0 to 100. Higher values filling, i.e., used the most recent indicate better credit rating, i.e., greater year ‘within country’ for any creditworthiness of the countries. This is a missing values. Then, for several yearly country-level measure. countries10, I used mean values of the years since they were not given any credit rating. IDB in This is measured by the proportion of The list of contiguities of neighbors neighboring countries that received countries was obtained from the funding/investments from Islamic Development ‘Correlates of War Direct Bank so far (including the current year). Here Contiguity Data - Version neighboring countries are the countries with 3.20’. No imputation. direct contiguities, defined by the following 5 types of contiguities: 1: Separated by a land or river border; 2: Separated by 12 miles of water or less; 3: Separated by 24 miles of water or less (but more than 12 miles); 4: Separated by 150 miles of water or less (but more than 24 miles); 5: Separated by 400 miles of water or less (but more than 150 miles). The countries without any neighbors were assigned a value of ‘0’. This is a yearly country-level measure. IF in neighbors This is measured by the proportion of The list of contiguities of neighboring countries that have experienced the countries was obtained from the 9 Afghanistan, Andorra, Cuba, Iraq, Liechtenstein, Monaco, Montenegro, Nauru, Palau, Somalia, Taiwan, Zaire, and Zimbabwe. 10 Aruba, Afghanistan, Andorra, Antigua and Barbuda, Burundi, Benin, Bosnia and Herzegovina, Belize, Barbados, Bhutan, Central African Republic, Comoros, Cabo Verde, Djibouti, Dominica, Eritrea, Fiji, Micronesia, Georgia, Equatorial Guinea, Grenada, Kyrgyz Republic, Cambodia, Kiribati, St. Kitts and Nevis, Lao PDR, St. Lucia, Liechtenstein, Lesotho, Monaco, Maldives, North Macedonia, Montenegro, Mauritania, Nepal, Nauru, Palau, Rwanda, Solomon Islands, South Sudan, Sao Tome and Principe, Eswatini, Seychelles, Chad, Tajikistan, Turkmenistan, Timor-Leste, Tonga, Uzbekistan, St. Vincent and the Grenadines, Vanuatu, Samoa, and Zaire. 82 emergence of Islamic finance so far (including ‘Correlates of War Direct the current year). Neighboring countries are Contiguity Data - Version 3.20’. countries with direct contiguities, defined by the I compiled the year of the noted contiguities in the cell above. The emergence of the first instance of countries without any neighbors were assigned a Islamic finance organizations in value of ‘0’. This is a yearly country-level countries through various measure. sources discussed in the “Variables, Data, and Methods” section. No imputation. Early This is measured by the number of years since The year of the emergence of the experiment the United Nations' recognition that first instance first instance of Islamic finance of Islamic financial organization in a country is organizations in countries was observed. compiled from various sources discussed in the “Variables, Data, and Methods” section. The UN recognition of countries is obtained from the United Nations website. No imputation. Commercial This is a dummy variable: 1 = the first instance I compiled the year of the banking first of Islamic financial organizations in a country is emergence of the first instance of a commercial bank; 0 = else. Islamic finance organizations in countries through various sources (see “Variables, Data, and Methods” section). No imputation. 83 Table 2: Year of The First Instance of Islamic Finance Organizations and The First Demonstration of Islamic Finance Contracts by Islamic Development Bank and States (Note: the territories not recognized by the United Nations as countries were later removed from analysis) Year Countries with the First Instance Countries with the First Demonstration of of Islamic Finance Organizations Islamic finance contracts 1963 Egypt, Malaysia 1973 Philippines 1974 - 1975 United Arab Emirates (UAE) 1976 - Jordan 1977 Kuwait, Sudan Algeria, Bangladesh, Cameroon, Egypt, Guinea, Malaysia, Mauritania, Morocco, Niger, Pakistan, Senegal, Somalia, Sudan, Tunisia, Turkey, Yemen 1978 Jordan Chad, Indonesia, Syria, UAE, Uganda 1979 Bahrain, Pakistan Bahrain, Burkina Faso, Guinea Bissau, Mali, Oman, Palestine 1980 Canada Afghanistan, Comoros, Djibouti, Ethiopia, Gambia, Lebanon, Libya 1981 - Cyprus, Eritrea, Maldives, Vietnam 1982 Denmark, Qatar Gabon, Sierra Leone, Sri Lanka, Togo 1983 Bangladesh, Guinea, Iran, Niger, Benin, Iraq, Serbia, South Africa, USA Senegal 1984 Turkey, USA Mauritius, Philippines, Reunion Islands, Singapore 1985 Mauritania, Saudi Arabia India, Kenya, Mozambique, Saudi Arabia, Tanzania, Thailand 1986 - China, Fiji, South Korea, New Caledonia, New Zealand 1987 Thailand Congo Brazzaville, Ghana 1988 - Malawi, Zimbabwe 1989 Australia, South Africa Australia, Guyana, Kuwait, Liberia, Zambia 1990 - Iran, Nepal, Nigeria, Spain, Trinidad & Tobago 1991 Algeria, Brunei Darussalam Azerbaijan, Bulgaria, Democratic Republic of Congo, Kyrgyz Republic, Poland, Qatar, Romania, Russia, Tajikistan, Uzbekistan, Ivory Coast 1992 Indonesia Albania, Bosnia & Herzegovina, Burma, Kazakhstan, Papua New Guinea, Turkmenistan, Ukraine 1993 Iraq Rwanda 1994 Albania Burundi, Madagascar, United Kingdom 1995 Yemen Brazil, Canada, Croatia, Panama, Suriname, Venezuela 1996 - Belgium, Grenada, Macedonia 1997 Gambia, Russia, Sri Lanka Greece, Netherlands 84 1998 Afghanistan, Somalia Argentina, France, Kosovo 1999 - Martinique 2000 Bosnia and Herzegovina Mayotte, Norway 2001 - Bolivia, Montenegro 2002 Luxembourg Brunei, Switzerland 2003 Azerbaijan, Nigeria - 2004 United Kingdom - 2005 Kenya, Lebanon, Maldives, Denmark, Jamaica Rwanda 2006 Austria, Djibouti, Switzerland, Central African Rep Syria 2007 Cameroon, Morocco, Singapore - 2008 - Slovenia, Sweden 2009 China, Mauritius - 2010 France, Germany, Ghana, Georgia, Paraguay Kazakhstan, Tunisia 2011 Tanzania Ecuador, Haiti, Latvia 2012 - Austria, Germany, Swaziland 2013 Ethiopia, India, Oman Botswana 2014 Ivory Coast Cambodia, Ireland, Italy, Lesotho, Vanuatu 2015 Burkina Faso, New Zealand Barbados 2016 Malta, Suriname Antigua & Barbuda 85 Table 3: Descriptive Statistics GDP growth rate is a percentage figure. Financial development, an index, ranges between ‘0’ to ‘1’. Common law takes on a value of ‘1’ if the legal origin of a country has a basis in common law, else ‘0’. Former British colony takes on a value of ‘1’ if the country is a former British colony, else ‘0’. Muslim majority takes on a value of ‘1’ if a country has Muslim majority in the religious distribution of their population, else ‘0’. Sunni over Shia majority takes on a value of ‘1’ if a country has Sunni over Shia majority in their Muslim population, else ‘0’. Arabic is ‘1’if the official or major language of a country is Arabic, else ‘0’. English is ‘1’if the official or major language of a country is English, else ‘0’. French is ‘1’if the official or major language of a country is French, else ‘0’. Distance from Saudi Arabia is the natural logarithm of the distance (km) of a country from Saudi Arabia. Voting like Saudi in UN is the percent of votes on all United Nations resolutions by a country like the votes of Saudi Arabia. Voting like USA in UN is the percent of votes on all United Nations resolutions by a country like the votes of USA. IDB projects in neighbors is the proportion of neighboring countries that received funding/investments from Islamic Development Bank so far (including the current year). IF in neighbors is the proportion of neighboring countries that have experienced the em ergence of Islamic finance organizations. Variable N Mean Std. dev. Min Max IDB investment (US$ millions) 7,346 16.71 94.24 0.00 2,664.47 World Bank credit (US$ millions) 7,346 832.10 2,709.67 0.00 38,185.96 IMF credit (US$ millions) 7,346 331.48 1,420.98 0.00 28,850.33 GDP growth (%) 7,346 3.59 7.24 -64.05 149.97 Financial development 7,346 0.26 0.19 0.00 1.00 Common law 7,346 0.26 0.44 0.00 1.00 Former British colony 7,346 0.29 0.45 0.00 1.00 Muslim majority 7,346 0.25 0.43 0.00 1.00 Sunni over Shia majority 7,346 0.34 0.47 0.00 1.00 Arabic 7,346 0.13 0.34 0.00 1.00 English 7,346 0.28 0.45 0.00 1.00 French 7,346 0.17 0.37 0.00 1.00 Distance from Saudi Arabia 7,346 6,309.23 4,050.55 0.00 15,826.38 Voting like USA in UN 7,346 0.54 0.19 0.00 0.87 Voting like Saudi in UN 7,346 0.21 0.12 0.00 0.64 IDB projects in neighbors 7,346 0.50 0.37 0.00 1.00 IF in neighbors 7,346 0.21 0.28 0.00 1.00 86 ‘ Table 4: Correlation Matrix ’ ‘ ’ ‘ ’ ‘ ’ ‘ ’ ‘ ’ ‘ ’ ‘ ’ ‘ ’ ‘ ’ ‘ ’ ‘ ’ 87 GDP (growth) is a percentage figure. Financial development (FinDev) ranges between 0 to 1 . Common takes on a value of 1 if the legal origin of a country has a basis in common law, else 0 . Former British takes on a value of 1 if the country is a former British colony, else 0 . Muslim takes on a value of 1 if a country has Muslim majority in the religious distribution of their population, else 0 . Sunni takes on a value of 1 if a country has Sunni over Shia majority in their Muslim population, else 0 . Arabic takes on a value of 1 if the official or major language of a country is Arabic, else 0 . Dist. From Saudi (distance from Saudi Arabia) is the natural logarithm of the distance (km) of a country from Saudi Arabia. IDB is measured by the natural logarithm of the sum of all Islamic Development Bank investments in a country (measured in US$ millions) so far (including the current year) plus 1. WB is the natural logarithm of the sum of all World Bank (IBRD loans and credits) investments in a country (measured in US$ millions) so far (including the current year) plus 1. IMF is the natural logarithm of the sum of all International Monetary Fund credits in a country (measured in US$ millions) so far (including the current year) plus 1. Voting like Saudi is the percent of votes on all United Nations resolutions by a country like the votes of Saudi Arabia. IDB neigh the proportion of neighboring countries that received funding/investments from Islamic Development Bank so far (including the current year). IF neigh is the proportion of neighboring countries that have experienced the emergence of Islamic finance organizations. Table 5: Parametric Regression Model (Exponential) Coefficients The dependent variable is duration (the number of periods/years without any instance of Islamic finance organization in a country). GDP growth is a percentage figure. Financial development, an index, ranges between ‘0’ to ‘1’. Credit rating ranges from ‘0’ (lowest) to ‘100’ (highest). Common law is ‘1’ if the legal origin of a country is common law, else ‘0’. Former British colony is ‘1’ if the country is a former British colony, else ‘0’. Former British colony with common law is ‘1’ if a country is a former British colony with common law, else ‘0’. Sunni majority former British colony is ‘1’ if a country is a former British colony with Sunni over Sunni majority in their Muslim population, else ‘0’. Muslim majority is ‘1’ if a country has Muslim majority in their population, else ‘0’. Sunni over Shia majority is ‘1’ if a country has Sunni over Shia majority in their Muslim population, else ‘0’. Arabic is ‘1’if the official or major language of a country is Arabic, else ‘0’. English is ‘1’if the official or major language of a country is English, else ‘0’. French is ‘1’if the official or major language of a country is French, else ‘0’. Distance from Saudi Arabia is the natural logarithm of the distance (km) of a country from Saudi Arabia. IDB engagement is measured by the natural logarithm of the sum of all Islamic Development Bank investments in a country (US$ millions) so far (including the current year) plus 1. World Bank engagement is the natural logarithm of the sum of all World Bank (IBRD loans and credits) investments in a country (US$ millions) so far (including the current year) plus 1. IMF engagement is the natural logarithm of the sum of all International Monetary Fund credits in a country (US$ millions) so far (including the current year) plus 1. High engagement of both World Bank and IDB is ‘1’ if the country’s investment/credit from IDB and World Bank in a year fell in the top 4th or 5th of IDB and World Bank engagement quintiles, 0 = else. Voting like Saudi in UN is the percent of votes on all United Nations resolutions by a country like the votes of Saudi Arabia. Voting like USA in UN is the percent of votes on all United Nations resolutions by a country like the votes of USA. Notes: *p<.05, **p<.01, ***p<.001. Variables Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Constant -4.76*** -4.83*** -5.06*** -7.21*** -4.76*** -3.93*** -3.85*** GDP growth 0.03*** 0.03** 0.03*** 0 .01 0 .02* 0 .02 0 .02* Credit rating -0.01 -0.01 <-0.01 Financial development 1.70* 1.72* 1.74* 3.96*** 4.06*** 4.93*** 4.84*** Common law 0.17 -0.37 0.12 0.04 0.28 0.05 Former British colony -0.68 Former British colony with common -0.68 law Sunni majority former British colony 0.72*** 0.93* 1.39** 0.74 0.74 Muslim majority 2.42*** 2 .59*** 1 .97*** 2 .02*** Sunni over Shia majority 0.71* Arabic <0.01 -0.23 -0.65 -0.67 English 0.63 0.58 0.53 0.70 French 0.45 0.47 0.53 0.32 Distance from Saudi Arabia -0.27** -0.58*** -0.55*** IDB engagement 0.19* 0.13 World Bank engagement -0.04 -0.13 IMF engagement 0.12 0.14 High engagement of both World Bank 1.11* and IDB Voting like Saudi in UN 2.24* 1.20* Voting like USA in UN 0.18 -0.18 No of subjects 186 186 186 186 186 186 186 No of failures 65 65 65 65 65 65 65 Log likelihood -172 -173 -163 -124 -124 -113 -109 Degree of freedom 3 4 7 9 9 14 15 LR chi-squared 9.60* 9.96* 27.8*** 105.32*** 105.25*** 128.72*** 135.44*** 88 Table 6: Regression Model (Exponential/ Weibull/ Gompertz, Cox) Coefficients The dependent variable is duration (the number of periods/years without any instance of Islamic finance organization in a country). GDP growth is a percentage figure. Financial development, an index, ranges between ‘0’ to ‘1’. Common law is ‘1’ if the legal origin of a country is common law, else ‘0’. Sunni majority former British colony is ‘1’ if a country is a former British colony with Sunni over Sunni majority in their Muslim population, else ‘0’. Muslim majority is ‘1’ if a country has Muslim majority in their population, else ‘0’. Arabic is ‘1’if the official or major language of a country is Arabic, else ‘0’. English is ‘1’if the official or major language of a country is English, else ‘0’. French is ‘1’if the official or major language of a country is French, else ‘0’. Distance from Saudi Arabia is the natural logarithm of the distance (km) of a country from Saudi Arabia. IDB engagement is measured by the natural logarithm of the sum of all Islamic Development Bank investments in a country (US$ millions) so far (including the current year) plus 1. World Bank engagement is the natural logarithm of the sum of all World Bank (IBRD loans and credits) investments in a country (US$ millions) so far (including the current year) plus 1. IMF engagement is the natural logarithm of the sum of all International Monetary Fund credits in a country (US$ millions) so far (including the current year) plus 1. Voting like Saudi in UN is the percent of votes on all United Nations resolutions by a country like the votes of Saudi Arabia. Voting like USA in UN is the percent of votes on all United Nations resolutions by a country like the votes of USA. Variables Exponential Weibull Gompertz Cox (Model 1) (Model 2) (Model 3) (Model 4) Constant -3.93*** -3.89** -3.98*** GDP growth 0.02 0.02 0.02 0.02 Financial development 4.93*** 4.95*** 4.83*** 5.38*** Common law 0.28 0.27 0.30 0.22 Sunni majority former British colony 0.74 0.74 0.71 0.71 Muslim majority 1.97*** 1.96*** 2.01*** 1.99*** Arabic -0.65 -0.66 -0.64 -0.58 English 0.53 0.53 0.51 0.64 French 0.53 0.53 0.52 0.55 Distance from Saudi Arabia -0.58*** -0.58*** -0.58*** -0.54*** IDB engagement 0.19* 0.19* 0.18 0.20* World Bank engagement -0.04 -0.04 -0.04 -0.02 IMF engagement 0.12 0.12 0.12 0.10 Voting like Saudi in UN 2.24* 2.24* 2.22* 2.03* Voting like USA in UN 0.18 0.18 0.18 -0.06 No of subjects 186 186 186 186 No of failures 65 65 65 65 Log likelihood -113 -113 -113 -113 Degree of freedom 14 14 14 14 LR chi-squared 128.72*** 124.96*** 122.72*** 128.72*** Notes: *p<.05, **p<.01, ***p<.001. 89 Table 7: Regression (Exponential) Coefficients for Models Including IDB Projects in Neighboring Countries The dependent variable is duration (the number of periods/years without any instance of Islamic finance organization in a country). GDP growth is a percentage figure. Financial development, an index, ranges between ‘0’ to ‘1’. Common law is ‘1’ if the legal origin of a country is common law, else ‘0’. Sunni majority former British colony is ‘1’ if a country is a former British colony with Sunni over Sunni majority in their Muslim population, else ‘0’. Muslim majority is ‘1’ if a country has Muslim majority in their population, else ‘0’. Sunni over Shia majority is ‘1’ if a country has Sunni over Shia majority in their Muslim population, else ‘0’. Arabic is ‘1’if the official or major language of a country is Arabic, else ‘0’. English is ‘1’if the official or major language of a country is English, else ‘0’. French is ‘1’if the official or major language of a country is French, else ‘0’. Distance from Saudi Arabia is the natural logarithm of the distance (km) of a country from Saudi Arabia. IDB engagement is the natural logarithm of the sum of all Islamic Development Bank investments in a country (US$ millions) so far (including the current year) plus 1. World Bank engagement is the natural logarithm of the sum of all World Bank (IBRD loans and credits) investments in a country (US$ millions) so far (including the current year) plus 1. IMF engagement is the natural logarithm of the sum of all International Monetary Fund credits in a country (US$ millions) so far (including the current year) plus 1. Voting like Saudi in UN is the percent of votes on all United Nations resolutions by a country like the votes of Saudi Arabia. Voting like USA in UN is the percent of votes on all United Nations resolutions by a country like the votes of USA. IDB in neighbors is the proportion of neighboring countries that received investments from Islamic Development Bank so far (including the current year). Notes: *p<.05, **p<.01, ***p<.001 Variables Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Constant -3.93*** -4.14*** -2.65** -3.85*** -3.28** -7.57*** GDP growth 0.02 0.02 0.02 0.02* 0.02* 0.02* Financial development 4.93*** 4.90*** 3.67*** 4.84*** 5.09*** 4.53*** Common law 0.28 0.35 0.57 0.05 0.07 -0.24 Sunni majority former British colony 0.74 0.56 0.40 0.74 0.70 1.08* Muslim majority 1.97*** 1.92*** 2.02*** 1.99*** 2.22*** Sunni over Shia majority 0.28 0.41 Arabic -0.65 -0.66 -0.13 -0.67 -0.82 -0.25 English 0.53 0.54 0.14 0.70 0.77 0.81 French 0.53 0.54 0.51 0.32 0.40 0.19 Distance from Saudi Arabia -0.58*** -0.57*** -0.61*** -0.55*** -0.59*** IDB engagement 0.19* 0.17* 0.34*** 0.13 0.20 0.13 World Bank engagement -0.04 -0.04 -0.03 -0.13 -0.11 -0.13 IMF engagement 0.12 0.11 0.06 0.14 0.13 0.12 High engagement of both World Bank & 1.11* 0.99* 1.12* IDB Voting like Saudi in UN 2.24* 2.29* 2.03* 1.20* 2.07* 0.95 Voting like USA in UN 0.18 0.09 -0.32 -0.18 -0.67 -0.17 IDB in neighbors -0.71 -0.39 No of subjects 186 186 186 186 186 186 No of failures 65 65 65 65 65 65 Log likelihood -113 -112 -121 -109 -108 -115 Degree of freedom 14 15 14 15 16 15 LR chi-squared 128.72*** 129.32*** 110.87*** 135.44*** 137.94*** 123.11*** 90 Table 8: Regression (Exponential) Coefficients for Models Including Islamic Finance Organizations in Neighboring Countries The dependent variable is duration (the number of periods/years without any instance of Islamic finance organization in a country). GDP growth is a percentage figure. Financial development, an index, ranges between ‘0’ to ‘1’. Common law is ‘1’ if the legal origin of a country is common law, else ‘0’. Sunni majority former British colony is ‘1’ if a country is a former British colony with Sunni over Sunni majority in their Muslim population, else ‘0’. Muslim majority is ‘1’ if a country has Muslim majority in their population, else ‘0’. Sunni over Shia majority is ‘1’ if a country has Sunni over Shia majority in their Muslim population, else ‘0’. Arabic is ‘1’if the official or major language of a country is Arabic, else ‘0’. English is ‘1’if the official or major language of a country is English, else ‘0’. French is ‘1’if the official or major language of a country is French, else ‘0’. Distance from Saudi Arabia is the natural logarithm of the distance (km) of a country from Saudi Arabia. IDB engagement is the natural logarithm of the sum of all Islamic Development Bank investments in a country (US$ millions) so far (including the current year) plus 1. World Bank engagement is the natural logarithm of the sum of all World Bank (IBRD loans and credits) investments in a country (US$ millions) so far (including the current year) plus 1. IMF engagement is the natural logarithm of the sum of all International Monetary Fund credits in a country (US$ millions) so far (including the current year) plus 1. Voting like Saudi in UN is the percent of votes on all United Nations resolutions by a country like the votes of Saudi Arabia. Voting like USA in UN is the percent of votes on all United Nations resolutions by a country like the votes of USA. IDB in neighbors is the proportion of neighboring countries that received investments from Islamic Development Bank so far (including the current year). IF in neighbors is the proportion of neighboring countries that have experienced the emergence of Islamic finance organizations. Variables Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9 Model 10 Constant -3.93*** -3.18** -8.10*** -1.40 -1.53 -1.32 -3.36** -1.68 -3.69** -3.84** GDP growth 0.01 0.02 0.02 0.02* 0.02* 0.02* 0.02 0.02 0.02* 0.02* Financial 4.93*** 5.38*** 4.72*** 4.34*** 4.16*** 4.19*** 5.15*** 4.22*** 5.25*** 5.23*** development Common 0.28 0.29 0.01 0.49 0.36 0.34 0.17 0.46 0.27 0.26 law Sunni 0.74 0.68 1.08* 0.64 0.60 0.61 0.48 0.27 0.07 0.13 majority former British colony Muslim 1.97*** 1.89*** 2.15*** 1.91*** 2.96*** 2.96** majority Sunni over 0.33 0.54 1.26** 1.29** Shia majority Muslim -1.90** -1.84** majority X Sunni over Shia majority Arabic -0.65 -0.81 -0.15 -0.35 -0.31 -0.37 -0.86* -0.45 -0.76 -0.80 English 0.53 0.63 0.58 0.19 0.22 0.22 0.79 0.28 0.88 0.92* French 0.53 0.53 0.36 0.46 0.36 0.39 0.43 0.41 0.30 0.33 Distance -0.58*** -0.68*** -0.77*** -0.72*** -0.72*** -0.60*** -0.70*** -0.59*** -0.57*** from Saudi Arabia IDB 0.19* 0.28** 0.19* 0.47 0.34*** 0.41*** 0.19 0.37*** 0.24* 0.25* engagement 91 World Bank -0.04 -0.07 -0.05 -0.06 -0.13 -0.11 -0.12 0.37 -0.16 -0.16 engagement IMF 0.12 0.13 0.10 0.07 0.09 0.08 0.13 0.08 0.16 0.17 engagement High 0.86 0.89 0.95* 0.89 0.99* 0.97* engagement of both World Bank and IDB Voting like 2.24* 2.71** 1.31 2.55* 2.34* 2.33* 2.26* 2.53* 2.21* 2.15* Saudi in UK Voting like 0.18 -0.38 0.16 -0.80 -0.94 -1.15 -0.87 -1.38 -1.02 -1.10 USA in UN IDB in -0.61 -0.61 -0.63 -0.85 -0.74 neighbors IF in -1.05 -0.32 -1.33* -1.00 -0.62 -0.30 -0.69 -0.85 0.57 neighbors IDB in -1.33 neighbors X IF in neighbors No of 186 186 186 186 186 186 186 186 186 186 subjects No of 65 65 65 65 65 65 65 65 65 65 failures Log -113 -111 -120 -120 -118 -117 -108 -116 -102 -102 likelihood Degree of 14 15 14 15 15 16 18 18 18 18 freedom LR chi- 128.72*** 132.13*** 114.76*** 114.71*** 118.23*** 119.51*** 138.85*** 121.47*** 149.42*** 149.74*** squared Notes: *p<.05, **p<.01, ***p<.001 92 Table 9: Exponential Models including Yom Kippur Arab Coalition The dependent variable is duration (the number of periods/years without any instance of Islamic finance organization in a country). GDP growth is a percentage figure. Financial development, an index, ranges between ‘0’ to ‘1’. Common law is ‘1’ if the legal origin of a country is common law, else ‘0’. Sunni majority former British colony is ‘1’ if a country is a former British colony with Sunni over Sunni majority in their Muslim population, else ‘0’. Muslim majority is ‘1’ if a country has Muslim majority in their population, else ‘0’. Sunni over Shia majority is ‘1’ if a country has Sunni over Shia majority in their Muslim population, else ‘0’. Arabic is ‘1’if the official or major language of a country is Arabic, else ‘0’. English is ‘1’if the official or major language of a country is English, else ‘0’. French is ‘1’if the official or major language of a country is French, else ‘0’. Distance from Saudi Arabia is the natural logarithm of the distance (km) of a country from Saudi Arabia. Yom Kippur Saudi coalition is ‘1’ if a country was a member of the Arab-Muslim coalition during the Yom Kippur/Ramadan war, else ‘0’. IDB engagement is the natural logarithm of the sum of all Islamic Development Bank investments in a country (US$ millions) so far (including the current year) plus 1. World Bank engagement is the natural logarithm of the sum of all World Bank (IBRD loans and credits) investments in a country (US$ millions) so far (including the current year) plus 1. IMF engagement is the natural logarithm of the sum of all International Monetary Fund credits in a country (US$ millions) so far (including the current year) plus 1. Voting like Saudi in UN is the percent of votes on all United Nations resolutions by a country like the votes of Saudi Arabia. Voting like USA in UN is the percent of votes on all United Nations resolutions by a country like the votes of USA. IDB in neighbors is the proportion of neighboring countries that received investments from Islamic Development Bank so far (including the current year). IF in neighbors is the proportion of neighboring countries that have experienced the emergence of Islamic finance organizations. Variables Model 1 Model 2 Constant -3.62** -3.78** GDP growth 0.02* 0.02* Financial development 5.24*** 5.23*** Common law 0.25 0.24 Sunni majority former British colony 0.04 0.09 Muslim majority 2.94*** 2.93*** Sunni over Shia majority 1.37** 1.30** Muslim majority X Sunni over Shia majority -1.88** -1.82** Arabic -0.69 -0.72 English 0.89 0.94* French 0.28 0.30 Distance from Saudi Arabia -0.60*** -0.58*** Yom Kippur Arab coalition -0.17 -0.20 IDB engagement 0.24* 0.25* World Bank engagement -0.16 -0.16 IMF engagement 0.16 0.17 High engagement of both World Bank and IDB 1.00* 0.98* Voting like Saudi in UN 2.25* 2.19* Voting like USA in UN -0.99 -1.07 IDB in neighbors 0.60 0.60 IF in neighbors -0.86 -0.75 IDB in neighbors X IF in neighbors -1.40 No of subjects 186 186 No of failures 65 65 Log likelihood -102 -102 Degree of freedom 20 21 LR chi-squared 149.42*** 149.88*** Notes: *p<.05, **p<.01, ***p<.001 93 Table 10: Exponential Models including Gulf War Saudi coalition The dependent variable is duration (the number of periods/years without any instance of Islamic finance organization in a country). GDP growth is a percentage figure. Financial development, an index, ranges between ‘0’ to ‘1’. Common law is ‘1’ if the legal origin of a country is common law, else ‘0’. Sunni majority former British colony is ‘1’ if a country is a former British colony with Sunni over Sunni majority in their Muslim population, else ‘0’. Muslim majority is ‘1’ if a country has a Muslim majority population, else ‘0’. Sunni over Shia majority is ‘1’ if a country has Sunni over Shia majority in their Muslim population, else ‘0’. Arabic is ‘1’if the official or major language of a country is Arabic, else ‘0’. English is ‘1’if the official or major language of a country is English, else ‘0’. French is ‘1’if the official or major language of a country is French, else ‘0’. Distance from Saudi Arabia is the natural logarithm of the distance (km) of a country from Saudi Arabia. Gulf War Saudi coalition is ‘1’ if a country was a member of the Saudi/anti-Iraq alliance during the Gulf war, else ‘0’. IDB engagement is the natural logarithm of the sum of all Islamic Development Bank investments in a country (US$ millions) so far (including the current year) plus 1. World Bank engagement is the natural log of the sum of all World Bank (IBRD loans and credits) investments in a country (US$ millions) so far (including the current year) plus 1. IMF engagement is the natural log of the sum of all International Monetary Fund credits in a country (US$ millions) so far (including the current year) plus 1. Voting like Saudi in UN is the percent of votes on all United Nations resolutions by a country like the votes of Saudi Arabia. Voting like USA in UN is the percent of votes on all United Nations resolutions by a country like the votes of USA. IDB in neighbors is the proportion of neighboring countries that received investments from Islamic Development Bank so far. IF in neighbors is the proportion of neighboring countries that have experienced the emergence of Islamic finance organizations. Variables Model 1 Model 2 Model 3 Constant -3.41** -3.73** -3.87** GDP growth 0.02* 0.02* 0.02* Financial development 5.14*** 5.21*** 5.20*** Common law 0.13 0.03 0.21 Sunni majority former British colony 0.51 0.13 0.18 Muslim majority 1.88*** 2.92*** 2.92*** Sunni over Shia majority 0.29 1.30** 1.24* Muslim majority X Sunni over Shia majority -1.92** -1.86** Arabic -0.85 -0.75 -0.78 English 0.81 0.90 0.94* French 0.45 0.32 0.34 Distance from Saudi Arabia -0.59*** -0.58*** -0.57*** Gulf War Saudi coalition 0.16 0.23 0.21 IDB engagement 0.19 0.24* 0.24* World Bank engagement -0.11 -0.14 -0.15 IMF engagement 0.12 0.16 0.16 High engagement of both World Bank and IDB 0.94 0.96* 0.95* Voting like Saudi in UN 2.23* 2.19* 2.15* Voting like USA in UN -1.03 -1.22 -1.28 IDB in neighbors -0.57 -0.80 -0.71 IF in neighbors -0.35 -0.62 0.40 IDB in neighbors X IF in neighbors -1.19 No of subjects 186 186 186 No of failures 65 65 65 Log likelihood -107 -102 -102 Degree of freedom 19 20 21 LR chi-squared 139.06*** 149.85*** 150.10*** Notes: *p<.05, **p<.01, ***p<.001 94 Table 11: Regression for Explaining the Expansion of Islamic Finance Organizations The dependent variable is the standardized value of the ranking (reversed) of countries in the development of Islamic finance according to Global Islamic Finance Reports 2016. GDP growth is a percentage figure. Financial development, an index, ranges between ‘0’ to ‘1’. Common law is ‘1’ if the legal origin of a country is common law, else ‘0’. Sunni majority former British colony is ‘1’ if a country is a former British colony with Sunni over Sunni majority in their Muslim population, else ‘0’. Muslim majority is ‘1’ if a country has a Muslim majority population, else ‘0’. Sunni over Shia majority is ‘1’ if a country has Sunni over Shia majority in their Muslim population, else ‘0’. Arabic is ‘1’if the official or major language of a country is Arabic, else ‘0’. Distance from Saudi Arabia is the natural logarithm of the distance (km) of a country from Saudi Arabia. Gulf War Saudi coalition is ‘1’ if a country was a member of the Saudi/anti-Iraq alliance during the Gulf war, else ‘0’. IDB engagement is the natural logarithm of the sum of all Islamic Development Bank investments in a country (US$ millions) so far (including the current year) plus 1. World Bank engagement is the natural log of the sum of all World Bank (IBRD loans and credits) investments in a country (US$ millions) so far (including the current year) plus 1. IMF engagement is the natural log of the sum of all International Monetary Fund credits in a country (US$ millions) so far (including the current year) plus 1. Voting like Saudi in UN is the percent of votes on all United Nations resolutions by a country like the votes of Saudi Arabia. Voting like USA in UN is the percent of votes on all United Nations resolutions by a country like the votes of USA. IDB in neighbors is the proportion of neighboring countries that received investments from Islamic Development Bank so far (including the current year). Commercial banking first’ is ‘1’ if the first instance of Islamic financial organization is a commercial bank, else ‘0’. Early emergence is the standardized value of the number of years since the United Nations' recognition that first instance of Islamic financial organizations in a country is observed. Variables Model 1 Model 2 Model 3 Model 4 Model 5 Constant 1.09* 1.21* 1.20* 1.22* 1.02 GDP growth <-0.01 <-0.01 <-0.01 <-0.01 <-0.01 Financial development 1.40*** 1.37*** 1.37*** 1.39*** 1.33*** Common law 0.59** 0.50*** 0.50*** 0.50*** 0.49*** Former British colony 0.05 Former British colony with common law - 0.15 Sunni over Shia majority -0.11 -0.11 -0.11 Arabic -0.01 <0.01 <0.01 0.07 0.06 Distance from Saudi Arabia - 0.27*** - 0.28*** - 0.28*** -0.29*** -0.26*** Yom Kippur War coalition -0.19 -0.39 Gulf War Saudi coalition 0.08 Yom Kippur Arab coalition X Gulf War Saudi coalition 0.53 IDB engagement 0.08* 0.09** 0.09** 0.09** 0.09** World Bank engagement -0.07 -0.07 -0.06 -0.07 -0.08 IMF engagement 0.07 0.07 0.07 0.08 0.09 Voting like Saudi in UN 0.80* 0.77* 0.77* 0.82* 0.83* Voting like USA in UN -0.46 -0.40 -0.40 -0.44 -0.53 IDB in neighbors -0.07 -0.01 Early emergence 0.25** 0.25** 0.25* 0.24** 0.24** Commercial banking first 0.42 0.43* 0.44* 0.45 0.45* N 187 187 188 188 188 F-Stat 17*** 18*** 21*** 10*** 21*** R-squared 0.685 0.686 0.686 0.688 0.693 Notes: *p<.05, **p<.01, ***p<.001 95 Chapter 3 Appendix – An example of joint projects undertaking by Islamic Development Bank and Nation States (source: Islamic Development Bank Website) 96 CHAPTER 4 LEGAL CONTENTION AND MARKET FORMATION: THE CASE OF ISLAMIZATION OF FINANCE IN FOUR COUNTRIES Abstract In global forums countries often agree on a contentious idea. However, the local implementation of such idea depends on the coordination among various branches of the state and the contention in the local legal field. I illustrate this for Islamic finance, an economic paradigm for Muslims, 24% of the world’s population. Four national cases studies are telling about the nature of implementation of this idea, opposed to liberalism, socialism, and secularism. A high coordination state with low legal contention led to pragmatic implementation that promoted co-existence of Islamic finance with secular institutions, while a high coordination state avoided legal contention by implementing Islamic finance through obfuscation. On the other hand, a low coordination state coupled with high contention legal field led to market failure. In a low coordination state with low legal contention, Islamic finance implementation depended largely on the activities of external actors. Key words: globalization, contentiousness, Islamic finance 97 Introduction Islamization, a process of governing the state, society, and economy with Islamic laws, is a contentious issue (Ciment, 2007; Hodgson, 1974; Kepel, 2000/2002; Tuğal, 2009). Islamization has often been associated with social movements, polarization, stigmatization, conflicts, and wars as Muslim communities contended with secular and religious institutions. During European colonization, Islamization inspired anti- colonial social movements (Jones, 1989; Lapidus, 1988, 1997; Metcalf, 2014). Given such history of anti-colonial Islamic social movements, one would expect the Muslim majority countries to discard their European colonial institutions and revitalize Islamic governance once the colonization ends (Lapidus, 1997). However, some empirical patterns of Islamization were quite paradoxical. Islamic finance, a shorthand for ‘economic’ Islamization, emerged much slower in countries with greater Muslim population, greater economic capacity, and more active Islamic institutions, while countries with much less Muslim population and much more secular orientation had a thriving Islamic finance sector in terms of high proportion of total banking assets of a country in Islamic finance and a country’s share in the total Islamic finance assets of the world. In this paper I argue that the timing and nature of implementation of Islamic finance in countries was driven by a complex interaction between local ‘legal contention’ and ‘state coordination’. The pluralistic regimes, strictness of Islamic jurisprudence, and overlapping secular and Islamic judicial systems fostered legal contentions about Islamic finance. The variation in state coordination stemmed from 98 disagreements across various branches of the state, bureaucrats, political leaders, and ruling pollical party coalition members. The type of state coordination (high or low) in dealing with legal contention (high or low) determined the nature of Islamic finance implementation (see Figure 1). I use four case countries (Malaysia, Pakistan, Turkey, and Saudi Arabia) to illustrate the process. In Malaysia legal contention was low and various branches of the state coordinated well over implementation; Islamic finance was implemented by the state using market pragmatism and had most success. In Saudi Arabia legal contention was very high; a highly coordinated state managed such contention by implementing Islamic finance through obfuscation strategies. In Turkey legal contention was low and the state branches lacked coordination; Islamic finance was determined by the interaction between external forces such as the European Union, Middle Eastern countries, and Bretton Woods Institutions. In Pakistan initial high legal contention met low state coordination; Islamic finance initiatives failed. Later, when various branches of the state coordinated well, Pakistan achieved much success in Islamic finance. This paper extends the literature of globalization of ideas and markets. I argue that the influence legal origin of countries on the financial development cannot be considered predominantly unitary and Euro-centric (e.g., LLSV, 1997; La Porta, Lopez-de-Silanes, & Shleifer, 2008). European colonies experienced resurgence of local jurisprudences that contented with the colonial legacy institutions. Such contention was variously consequential for the emergence, globalization, and institutionalization of ideas. Then, contrary to the prior literature (Fourcade- Gourinchas & Babb, 2002; Ingram & Rao, 2004; Zelner, Henisz, & Holburn, 2009), I 99 show ‘state’ as a dynamic unit with various branches, and the interaction among the executive, the bureaucrats, the military, the legislative, and the judiciary affect the ways market ideas are implemented in a state. Not all branches of the state have similar interests and approaches in dealing with contention and contestation about markets and ideas. Furthermore, I show the mechanisms of the emergence of markets as a continuous disequilibrium, instead of discreate settled points of implementation and retrenchment. Rise of Pan-Islamic Exceptionalism called Islamic Finance Islam is about 1,400 years old, yet Islamic finance organizations is a recent phenomenon. Islamic scriptures provided only rudimentary ideas for Islamic economics (Henry & Wilson, 2004; Kuran, 1995, 2011; Warde, 2000). Even the longest surviving Islamic state, the Ottoman empire, did not institutionalize any pan- Islamic economic ideology, though its Muslim11 citizens practiced proto-Islamic finance contracts (Kuran, 2011). The turning point for Islamic economic exceptionalism was the Arab-Israel war in the early 1970s, in which the West sided with Israel. Muslim nations perceived the war as a clash between Islam and the West which encouraged them to establish a pan-Islamic organization called Organization of Islamic Cooperation (OIC) to foster a global identity of ‘Ummah’, i.e., Muslims as one people (Meenai, 1989). In 1975, OIC facilitated the founding of Islamic Development Bank (IDB) for enhancing economic cooperation and development of Muslim 11 ‘Islam’ refers to religion and ‘Muslim’ refers to the people who follows the religion. 100 communities. IDB aims to promote “in the true spirit of Islam, economic co-operation and collaboration in accordance with the tenets of Islam” (Meenai, 1989, p. 6). Also, IDB seeks to globalize Islamic finance and illustrate its economic soundness. Initially institutionalized by Islamic Development Bank, Islamic finance refers to a type of financing based on Islamic principles, collectively known as Shariah. Islamic finance organizations comply with the following principles of Islamic finance in their sources and uses of funds: ‘no riba’ (no usury), ‘risk-sharing’, ‘no betting on uncertainty’, and ‘permissible production and consumption’ (El-Gamal, 2006; Hassan & Lewis, 2007). Here, permissible consumption and production are those not associated with forbidden products and services such as alcohol and pornography. Islamic finance contracts should be based on sharing risks among partners or investors; so, borrowers and lenders become investment partners in Islamic finance. Moreover, Islamic finance should be linked to real goods. To illustrate the noted principles of Islamic finance, let us consider a hypothetical case of getting a loan from a bank to purchase a house. In the conventional finance, an individual borrows from a bank, purchases the house, and gets the ownership of the house. The bank, as the lender, gets some sort of installment (principal payment + interest payment) payment on the loan from the borrower. As the owner of the house, the borrower bears all the risks (e.g., upkeep, maintenance, disaster) of the house and pays back to the lender. On the other hand, if a borrower obtains funds from an Islamic bank, the ownership of the house does not shift to the borrower immediately. Rather, the borrower and the lender (the bank) become joint 101 investors of the house. The ownership of the house is gradually transferred to the borrower to the proportion of their payments. Once the borrower entirely pays for the house, the ownership of the house is fully transferred from the lender to the borrower. Over the period of the payments, risks of the house are jointly and proportionately borne by the borrower and the Islamic bank. Additionally, in a simple case of Islamic financing, the bank charges periodic payments based on the market condition, and thus, does not charge fixed interest payment from the borrower. There are Islamic counterparts for a variety of financial organizations and instruments, e.g., banks, funds, insurance, bonds, and derivatives (Hassan & Lewis, 2007; Hassan & Mahlknecht, 2011; Kamali & Abdullah, 2014). As of 2017, 65 countries have Islamic financial organizations. In 2019 such organizations had about US$2.88 trillion assets, larger than the GDP of the United Kingdom - the 5th largest economy of the world (ICD-Refinitiv, 2020; World Bank). Even though Islamic Development Bank set the initial global agenda for Islamic finance, it delegated the task of implementation to respective Muslim countries. IDB neither strictly defined the contentious issues of Islamic finance nor set up any enforcement body for Islamic finance. In such milieu, the legal contention about Islamic finance within nation states, and the state coordination in dealing with such contentions affected the timing and nature of local implementation of Islamic finance, which had consequences for the Islamic finance growth in those countries. 102 From legal origin to legal contention The financial literature takes legal origin of a country as a constant. Countries are argued to have one major legal origin of the European sorts, as the European colonization presumably eliminated local laws. In these arguments, countries fall in two categories – those adopted the British legal code through colonization or voluntarily (common law countries) and those adopted non-British, European civil legal codes through colonization or voluntarily (civil law countries). Common law arguably provides better legal environment for financial development by cultivating greater freedom from social conditionality. This inspires entrepreneurial initiatives and innovative private contracting (La Porta et al., 1997). To the contrary, civil law provides less flexibility from social conditionality and favors the state over the private contracting rights of the individuals. The legal origins extend to the modus operandi of the judiciary, with common law having the greatest judicial flexibility (free from control of the state and other influences), followed by the German civil code and then, by the French civil code (La Porta et al., 2008). Such categorization of legal origins limits our understanding of ‘legal pluralisms’ or ‘multiple normative orders’ or ‘legal hybridity’ that persisted in some countries throughout their colonization (Berman, 2009; Merry, 2007; Tamanaha, 2008). La Porta et al. (2008), pioneers of the ‘legal origin’ theory for financial development, argued that understanding such hybridity is important but requires meticulous tracking down of historical changes. 103 The sociological literature rather proposes a dynamic contention in interpretation, implementation, and retrenchment of laws and policies (Halliday & Carruthers, 2007; Zelner, Henisz, & Holburn, 2009). Initial arguments - the world society theories and isomorphism - were limited to the Western actors as the main diffuser of policies; the rest of the world gradually adopts the Western norms, normatively converging to rationalization, scientization, and secularization (Gleditsch & Ward, 2006; Meyer & Bromley, 2013). Recent arguments focus on the interdependence among countries through competition12, learning13, emulation and imitation14. The ‘competition’ argument suggests that policies of one country affect the resource access and allocation of other countries, resulting in countries having similar policies and programs due to competitive pressures. The ‘learning’ mechanism suggests that countries rationally learn from observing the policies of others. Such learning can be social knowledge, Bayesian updating, channel learning, and neighborhood effects. The ‘emulation’ argument illustrates the logic of appropriateness, overlapping with the idea of ‘normative convergence’ for diffusing norms. The process can be ‘irrational herding’ and ‘imitation’, i.e., action without any evidence or based on selective evidence. 12 See details in Garrett and Mitchell (2001), Kelemen and Sibbitt (2004), Massey (1999), Oats (2001), Porter (1999), Quinn (1997), Rogowski (2003), Simmons and Elkins (2004), and Wheeler (2001). 13 Learning has been illustrated by Brooks (2005), Khamfula (1998), Lee and Strang (2006), Leng (1983), Levy (1994), Meseguer (2004), Meseguer (2005), Powell (1988), Reiter (1996), and Wagner (1989). 14 Emulation and imitation have been illustrated by Berkovitch and Bradley (1999), Boyle and Preves (2000), Cole (2005), Meyer, Ramirez, Rubinson, and Boli-Bennett (1977), Meyer, Ramirez, and Soysal (1992), Ramirez and Boli (1987), Ramirez and McEneaney (1997), and Ramirez, Soysal, and Shanahan (1997). 104 Scholars have additionally argued for policy implementation as an ongoing sociopolitical process (Meyer et al., 1997) since global coercive pressures cannot always overcome the incongruent local conditions. Some examples follow. Global forces often resulted in reversal or incomplete implementation of capital account liberalization and stock market creation (Quinn & Toyoda, 2007; Weber, Davis, & Lounsbury, 2009). Cross-national and ethnic diversity led to contestations about education policies, presumed as a globally institutionalized means to convert masses into citizens (Ramirez, 2006). The implementation of neoliberal policies was determined by state-society relations (Fourcade-Gourinchas & Babb, 2002). Policy implementation also faces the discrepancy between the values and objectives of the adopted and to-be-replaced policies (Zelner et al., 2009). The contention can also arise due to a break in legality between old and new order (Rao & Hirsch, 2003). Recent studies have focused on ongoing contention among several co-existing global norms and actors. To this end, comparative case studies of financial (Halliday & Carruthers, 2007) and labor and environmental regulation (Bartley, 2007) showed that policy implementation is a recursive process in which global norms are influenced by domestic actors after a policy’s local implementation through a feedback loop between local and global forces. Note that across all these strands of literature the normative order is the western and secular legal order, in a way like the legal origin literature. Within that unitary order, contention occurs, coercion takes place, and implementation is panned out. Such conceptualization excludes non-Western actors and institutions and multiple 105 legal orders that existed even in European colonies. In the British India, Muslims and Hindus practiced their religious jurisprudences in family, inheritance, and related matters (Anderson, 1993; Chapman, 1993). Non-European laws were often different from the European version of rationality, which emphasizes calculability and predictability over traditions and religions in the adjudication and administration of law (Treviño, 2008). Hence, in most Muslim majority/Muslim countries, this legal pluralism has led to coexistence of Islamic (Shariah) courts along with secular courts, facilitating a dynamic intellectual discourse and contention between Islamic jurisprudences and the Western jurisprudences. Such legal pluralism continued in the post-colonial era (March, 2015; Scott, 2012). At this backdrop of legal pluralism, Islamic finance, an emerging religious idea, contended with the institutionalized, secular laws of finance. Moreover, Islamic jurists and activists contended among themselves about the nature of Islamic finance. So, an exploration of such contention can enhance the understanding of the globalization of Islamic finance. Role of state coordination in dealing with legal contention State is a prominent actor in the diffusion of ideas and organizations. Broad theoretical traditions of globalization – the world systems theory and the world society theory - consider state as a fundamental unit of inquiry (Meyer et al., 1995; Meyer et al., 1997; Wallerstein, 1979, 2000). In the globalization of economic ideas and organizations, states play a prominent role in local adaptations, acting in relation to peer or aspirational states and facilitating interactions with global actors (Fourcade- 106 Gourinchas & Babb, 2002; Lee & Strang, 2008; Rao & Hirsch, 2003; Simmons & Elkins, 2004; Zelner et al., 2009). States affect the legitimacy of ideas and organizations, often through creating an enabling or disabling environment. States also influence identity mobilization through formal and informal channels. The literature largely assumes ‘state’ as a well-coordinated entity, which excludes our understanding of the contention across its branches. For a contentious idea like Islamic finance to convert into policy and institutions, various actors and branches of the state may not be well-aligned with each other in interests and activities. Such disagreement can span among the executive, the legislative, incumbent political parties, and the military. Sometimes, the executive can exacerbate legal contention by creating overlapping and ambiguous jurisdictions and judiciaries. Overall, this paper illustrates how the dynamic interactions of state coordination and legal contention affects the timing and nature of Islamic finance. Case country selection and data Comparing country cases is an important methodological tool for comparative sociological studies (Fourcade-Gourinchas & Babb, 2002). I chose Malaysia, Pakistan, Saudi Arabia, and Turkey to compare the nature and extent of Islamization of financial institutions. The extent of Islamic financial institutions in a country is measured by the share of Islamic finance in the total financial system of the country and the country’s ranking in the Islamic Finance Country Index (IFCI). IFCI is an annual ranking of countries based on Islamic finance assets and environment (Global 107 Islamic Finance Country Report, 2016). Countries vary in legal contention and state coordination, providing telling accounts of their different levels of Islamic finance (Table 1). I have excluded some major countries such as United Arab Emirates, Iran, Qatar, and Kuwait as they are like Malaysia in having low legal contention and high state coordination (Liau, 2017). ----INSERT TABLE 1 ABOUT HERE---- I used the following sources to identify the appearance of Islamic financial organizations, and relevant regulatory developments in countries: Google books, Google Scholar, Google Ngram, New York Times, Thomson Reuters, Factiva, Lexis Nexis, Islamic Finance News, websites of the federal or central banks of all countries, Islamic finance competitiveness reports, ProQuest, Organization of Islamic Cooperation publications, and Islamic Development Bank data and publications. I used a combination of the following terms (with “Islamic” or “Islam”): “finance”, “bank”, “fund”, “profit sharing”, “insurance”, “mutual fund”, “index funds”, and “bond”. I also used the following single search terms: “sukuk”, “shariah”, “sharia”, “zakat”, “hajj”, and “pilgrimage”. Thus, I identified Islamic finance organizations in 65 countries. I obtained data about social and economic characteristics of countries from World Bank, CIA World Factbook, Pew Research Center, and World Atlas. Market failure to pragmatism in Islamic finance of Pakistan Since its independence in 1947, Pakistan had favorable conditions for the Islamization of economy. The majority population of Pakistan are Muslims (96.4%). Pakistan is an 108 Islamic republic, with constitutional commitment to Islamize its institutions. The ethnic demographics of Pakistan was conducive to Islamization, unlike Malaysia. For most of its post-independence years, Pakistan had greater economic capacity (e.g., greater GDP and lower inflation) than many Muslim countries. The Islamic jurisprudence of Pakistan is not the most restrictive. Despite such favorable conditions, initial Islamic finance initiatives in Pakistan paradoxically failed. An analysis of socio-economic-political processes in Pakistan would show that the unexpected early difficulties stemmed from high legal contention and poor state coordination. Later, with increased coordination among its branches, the state could curb legal contention and re-launch Islamic finance successfully. Of late, Pakistan is a major growth market for Islamic finance, consisting of banks, bonds (sukuks), funds, and insurance. Islamic banks have 15% of the country’s banking asset and 15.6% of deposits (State Bank of Pakistan, 2019). Also, Pakistan ranks 9th globally in the Global Islamic Finance Index (2016), showing its growing prominence in the overall Islamic finance assets and enabling environment. Early sources of legal contention and lack of state capacity for Islamic finance The legal contention in Pakistan can be traced back to the British colonization of the Indian subcontinent, including Pakistan. The British imposed their law in India, but allowed multiple legal systems - Islamic, British, and others. This fostered intellectual discourses over the difference among jurisprudences. Towards the end of the British colonial period, anti-British, anti-Western ideologies emerged. Notably, Mawdudi, an Islamic revivalist, promoted a vision of Islamic economic exceptionalism, opposed to 109 the Western secular, capitalist, and socialist ideologies. He is credited with coining the term ‘Islamic economics’ and its concepts, which have influenced the Islamic finance literature (Ahmad, 2011; Hasan, 2016; Islahi, 2015). Jinnah, known as the founding father of Pakistan, was influenced by Islamic revivalist theorists such as Mawdudi and Iqbal and pitted Islamic and Western ideas of economy against each other in his first speech to the State Bank of Pakistan during its opening ceremony on July 1, 1948, “..I shall watch with keenness the work of your Organization in evolving banking practices compatible with Islamic ideas of social and economic life. We must work our destiny in our own way and present to the world an economic system based on true Islamic concept of equality of manhood and social justice” (Jinnah, 1948; Mehmood, 2002). Jinnah promised the state support to entrepreneurs (especially, the business tycoon, Adamjee) for founding Islamic banks (Burki 2015). However, both Adamjee and Jinnah died soon afterwards and no strong public or private sector leaders for Islamic finance emerged right after them. Besides, facing an influx of refugees from India, Pakistan lacked state resources to implement Islamization projects (Bose, 2000). The political leaders rather focused on Islamization in names and laws. For instance, ‘interest’ was declared constitutionally illegal in 1952, inciting contention between Islamic and secular jurists. Military takeover and the puritan, top-down implementation of Islamic finance With improved economic conditions in the 1970s, Zia, the Military ruler of Pakistan (President, 16 September 1978 to 17 August 1988), insisted on Islamizing the economy, “A man-made law or principle cannot be as true and everlasting as the 110 word of God. God says in the Koran don't indulge in usury, in interest, and therefore I feel that the charging of interest is unholy," (Elliott, 1984, August 10). Social analysts argue several reasons for Zia’s Islamization projects. The right-wing parties considered the symbolic Islamic initiatives of the former prime minister, Bhutto (Pakistan People’s Party - PPP) as trivial. So, Zia wanted substantial Islamization to secure support from the right-wing parties. Besides, the economic hardship of Pakistan was associated with secular socialism; Islamism could extend Zia’s legitimacy (Kennedy, 1990). Islamization would also give Zia advantages in international relations – the Islamic world’s support against Soviet invasion in Afghanistan, and US support against communists (Amin, 1982; Nasr, 2004). Zia promoted Islamic finance as Musawat-i-Muhammadi (the equality of Muhammad) and Islamic Musawat (Islamic equality). He undertook several initiatives from 1977 to 1988 (his accidental death) to separate Islamic legality from the secular legality: establishment of a separate Islamic parliament (Masjis-e-Shoora) and Shariah court, appointment of religious judges (Qazis), and empowerment of the supreme courts to review the existing laws for Islamic compliance and turning secular banks into Islamic banks. In the absence of agreed upon definitions of Islamic finance, such initiatives created overlapping jurisdictions. From voluntary to forced implementation without coordination In 1981 Zia asked financial institutions to adopt Islamic finance voluntarily (Elliott, 1984, August 10). After three years, only 22% of the deposits of state banks became Islamic. At the backdrop of slow Islamization, Zia’s finance minister declared in the 111 1984 national budget that ‘interest’ would soon be disallowed except for ‘international operations’ of foreign financial institutions. In this vein, the ministry of finance declared that ‘interest’ would be entirely removed by March 1985 as a ‘godly’ initiative (Evans, 1983, March 13; “Islamic system takes over”, 1985, April 1). Various stakeholders lamented that such interest-ban lacked a wide consultative process and coordination. Businesses and banks were unaware of tax implications. A businessperson noted, "How can we have a partnership with our banks when we all have two sets of accounts -- one genuine and the other for the tax inspector. Which set would we show the banks?" (Elliott, 1985, March 27). The banks delayed mortgage lending since banks, under Musharaka (a type of Islamic finance contract), would have to buy a house before financing to customers (“Islamic system takes over”, 1985, April 1). Besides, financial return was low for various Islamic finance services (Aftab, 1985, May 7). The bankers also resented the Islamic idea of loss-sharing, “'Nobody is in business to help cover somebody else's losses. All they care about is making a profit. It doesn't matter what a holy book said 1,400 years ago.'' (Evans, 1986, March 13). The lack of coordination in the military government was also evident in the contention from allied right-wing parties, which criticized Islamic ‘mark-up’ financing as disguised interest (Evans, 1986, March 13; Elliott, 1985, March 27). Post military top-down Islamization projects, and the varieties of legal contention The post-Zia, democratic Sharif government continued with top-down, uncoordinated implementation, in coalition with Islamic parties. A former finance minister of Zia, 112 Sharif reaffirmed Zia’s legacy and enforced Shariah Act 1991. The Act (Article 3) reads, “(1) The Shari’ah that is to say the Injunctions of Islam as laid in the Holy Qur’an and Sunnah, shall be the supreme law of Pakistan…” In Nov 1991 the court declared interest illegal and required twenty-two secular banking and insurance laws comply with Islam (Evans, 1992, January 13; “Pakistan moves to amend fiscal laws”, 1991, November 16). The Shariah court ruled that a puritan Islamic model be followed like Saudi Arabia and Iran while, in fact, both countries allowed interest as ‘profit’ or ‘commission’ (Evans, 1992, January 13). The ruling created a decade-long contention within various branches of the state, and between the secular and shariah courts. The secular parties renounced Islamic finance as anti-democratic and, paradoxically, oppositional to the country’s founder Jinnah, who was assumed to have made only verbal promises for Islamization (Akhtar, 1991, June 22). The government ministries and bureaucrats contended over the ruling’s implementation. The minister of religions affairs declared the government would abolish ‘interest’ as per the ruling (Hussain, 1992, January 22), while the minister of economic planning contradicted by asserting that Islamic banking system would destroy the financial system of Pakistan and scare foreign investors. The finance bureaucrats argued Islamic finance was difficult to implement, while the prime minister and the finance minister declared implementation would go on without any harm to foreign investors (“Premier bids to still interest fears”, 1992, February 21). Several state banks (National Bank of Pakistan and Agricultural Development Bank) appealed against the ruling, arguing that ‘interest’ was outside the scope of Islamic courts (Evans, 1992, January 22; “More Pakistani banks appeal Islamic court ban on 113 interest”, 1992, May 10). The law minister suggested the secular system be continued since it was ‘deeply entrenched’ and lacked a viable alternative (Evans, 1992, January 22). In response, the Islamist party of the ruling coalition threatened to quit the government if secular finance was continued (Hussain, 1992, January 22); they wanted the issue to be resolved by Shariah experts (Evans, 1992, January 22). The legal hold-up, the eventual repeal of usury ban, and transition to a hybrid system The appeals against Islamic finance led to a decade-long conflict between secular and Islamic jurists, and various branches of the executive. So, the Sharif government and the subsequent secular government continued with the existing secular system (“Islamic court to work out banking system”, 1999, January 30). Forming government again in 1997, Sharif restarted various Islamization projects. In 1999 the Sharif government petitioned in the Supreme Court to open Islamic finance (“Government applies to Supreme Court.”, 1999, February 15). In response, the Shariat Appellate Branch of the Supreme Court sought expert opinions by asking, "If all forms of interest or mark-up are held to be repugnant to Islamic injunctions, what modes of financing do you suggest for financing trade and industry, budget deficit, acquiring foreign loans and similar other needs and purposes?" (Alam, 1999, March 3; “Government applies to Supreme Court...”, 1999, February 15). After expert hearing, the Court declared ‘interest’ illegal (“Pakistani Supreme Court declares interest un- Islamic”, 1999, December 23). Again, debates and appeals ensued. While the Sharif government wanted to Islamize economy, various branches of the government were not ready. The ministry 114 of finance reaffirmed its commitment to foreign investors and lenders that the new interest ban would not affect them. Even the Sharif government’s privatization commission chair, Shah opposed the usury ban and rather argued for a hybrid (Islamic/secular mixed) financial system. Economists generally denounced the supreme court usury ban decision because “a significant proportion of government expenditure is financed through domestic borrowings” (Bokhari, 2000, January 4). A majority state-controlled bank, United Bank Limited (UBL), appealed against the Supreme court 1999 usury ban on the basis of the following: (i) the task of law making and framing is outside the jurisdiction of the judicial branch of the government; (ii) only the parliament/legislature can make law, while the judiciary can declare any law or provision ‘un-Islamic’; (iii) the judiciary cannot force the executive to take steps (like usury ban) that can paralyze the financial system; (iv) the court decree would lead to no funding from foreign investors and lenders; (v) the decree is not humane since it could lead to large withdrawal of deposits, harming the needy like widows, orphans, and pensioners (“Court: SC issues notices in review petition challenging declaration of interest as un-Islamic”, 201, April 11). In response to the appeal, the Supreme Court allowed the government one-year extension to implement Islamic banking (“Pakistan Supreme Court grants extension for interest-free Islamic banking”, 2001, June 14). The right-wing parties denounced the decision as contradictory to the ideology and competence of the government, and challenged the decree in the Supreme Court, arguing it violated the Constitutional Articles 2A, 19, and 227 and other Islamic clauses of the constitution (“Courts: JI challenges SC order regarding time extension in Riba case”, 2001, September 4). 115 While the legal battles were in place, the State Bank of Pakistan governor, Dr Hussain, who considered Islamic banking as the only viable solution to the country’s economic hardship, took decisive steps for Islamic transition by issuing guidelines for opening Islamic banks and allowing foreign owners of Islamic banks to repatriate dividends (“Riba free banking: Governor SBP”, 2001, September 8). At this backdrop, a consortium of Pakistani and Middle Eastern investors opened Meezan Bank, the first Islamic bank in Pakistan (Bokhari, 2001, December 4). In the meantime, UBL continued their appeal against usury ban. They argued that the secular system was not un-Islamic and that Islamic systems unduly gave the rich immunity from interest. Agreeing with UBL, some economists suggested the government, being the largest borrower, should not receive immunity from interest (Iqbal, 2002, June 14). Eventually, the supreme court decreed ‘interest-based’ banking not un-Islamic (Nischalke, 2002, June 25). In mid-2001, the Sharif government was out of power. The military ruler Musharraf assumed state control (20 June 2001 – 18 August 2008), consolidated all the branches of the state and prioritized economic pragmatism. To increase the support of his administration among the Islamist parties, Musharraf supported Islamic finance (“President Musharraf Islamic banking”, 2002, September 17). However, the Musharraf government implemented an ‘evolutionary, non-instantaneous’ hybrid model in which both the secular and Islamic financial system could operate (“Finance Minister Riba-Free financial system”, 2002, September 17). Since then, Islamic finance had this pragmatism, hybridity, and gradualism. 116 Saudi Arabia: a globalize with a locally invisible frame Kingdom of Saudi Arabia (KSA) is one of the most developed Islamic finance markets in the world, having 50% of banking assets in Islamic banks and ranking 2nd in the Islamic Finance Country Index (2016). Sixteen banks (including partial services) provide Sharia compliant banking in KSA (Islamic Financial Services Board, 2019). Thirty-five insurance companies, collectively having US$15 billion in assets, operate on some Islamic principles, the largest for any country (Thomson Reuters, 2018). The Saudi paradox for Islamic finance Saudi Arabia (KSA) is the birthplace of Islam and the first Islamic state (629 AD). The country has mostly been under Islamic rule ever since. The Islamic jurisprudence of KSA is the most restrictive. Largely composed of Arabs (90%) and Muslims (85-9% Sunni, 10-15% Shia), Saudi Arabia is ethnically and religiously homogeneous. The economic capacity (GDP) of KSA has been one of the highest in the Muslim world since the oil boom of the 1970s. These conditions imply Saudi Arabia should have been the global hub of Islamic finance since its early days. Yet, the modern Islamic finance in KSA was not locally born until 1985. How come a state with constitutional commitment to Islam delayed the local development of Islamic finance organizations? Why did the KSA government wait for a private sector entity to set up the first Islamic bank and co-create Islamic finance fields along the way? Such paradox can be clarified by examining the interaction between ‘legal contention’ and ‘state coordination’ in KSA. 117 The legacy of puritan Islamic jurisprudence in KSA During the 9th century expansion of Islam, some Islamic law scholars were concerned with the corruption of Islam by various cultures and customs. In such milieu, Ahmad Ibn Hanbal, a scholar from Iraq (adjacent to Saudi Arabia), provided a puritanical basis of Islamic jurisprudence, which later became known as the Hanbali school (Melchert, 2006). The school became very restrictive during the Mongol occupation of a large part of Middle East in the 13th century. Mongol rulers sought to integrate in the Muslim society in various ways, sometimes converting to Islam. The Hanbali scholars viewed such conversion as a Mongol social propaganda to undermine and corrupt the values of the Muslim society. The scholars reacted by creating even a stricter version of ‘real Islam’ (Jansen, 1987/1988). In this regard, Ibn Taymiyyah, a Hanbali scholar, rose to prominence for his puritan Islamic jurisprudence and remains a distinctive voice of puritan Islam even today. During European colonization in the 18th century, Ibn Wahab, an ally of the predecessors of House of Saud - the current ruling royal family - was inspired by the writings of Ibn Taymiyyah to develop even stricter ideas of Islamic jurisprudence, now known as Wahabism. The contemporary ruling Islamic clerics of KSA follow Wahabism, whose central tenet is to resist any foreign, particularly, European practices (Cook, 1992; Yamani, 2008). For a long time, Wahabis and the House of Saud were committed to each other. Wahabis needed a ruler to further their Islamic social ideals, while the royal family needed the Wahabis to legitimize their monarchy. However, this relationship between Wahabi clerics and the ruling family began to weaken after anti- 118 monarchy Salafi activists from Egypt escaped persecution by the secular Gamal Abdel Nasser in 1950s and took refuge in KSA. The House of Saud later became worried that Salafists, with their anti-ruling class sentiments, would antagonize the Saudi Wahabi clerics against the monarchy. Additionally, the anti-ruling class, anti- monarchic revolution in neighboring Iran (in 1979) and the Afghan war fueled such fears. As a response, the royal family sought to solidify their relationship with Wahabi clerics by giving the clerics even more power to adjudicate social matters (Wilson & Graham, 1994). The increased power of the Wahabi clerics had affected the nature of Islamization of economy. These strict religious clerics - both practicing jurists and those giving sermons in the mosques - have been publicly repugnant to interest. To them, ‘riba’ or ‘interest’ is tantamount to godlessness. For example, in the wake of the global financial crisis of 2008, the grand cleric Abdul Aziz al-Sheikh told the Mecca pilgrims that the global financial crisis stemmed from ignoring God’s rules and allowing usury, "Today we watch as this financial crisis unfolds and some companies and banks go bankrupt… This is the result of ignoring God's rules. Muslims must abide by God's rules, and build their economies accordingly" (“Saudi mufti says credit crunch due to ignoring god’s rules”, 2008, December 7). The clerics were also against the idea of ‘insurance’ that guarantees against the loss in the future, which, in their opinion, is in the custody of Allah only. 119 Finance without religious jurisdiction Given a puritan Islamic jurisprudence and strict clerics, the executive – led by the royal family - kept the economy out of the jurisdiction of the religious clerics. The assumption was that any organizations approved by the executive is Islamic as KSA is an Islamic state. With such popular assumption, the central bank of Saudi Arabia, the Saudi Arabia Monetary Authority (SAMA) was modeled after the Western central banks and IMF prescriptions. SAMA adopted risk management standards like the Western central banks, e.g., Basel committee recommendations. SAMA also adopted various global regulatory policies following the financial crisis of 2008 (Ramady, 2009). The conventional banks are also allowed to function in Saudi Arabia (Marar, 2004). Instead of terms indicating ‘interest’, the financial organizations in KSA use ‘commission’ or variants of the term ‘income’ to avoid any conflicts with the Shariah courts and clerics. With regards to insurance, the general secretariat of the board of senior clerics ruled after a 1977 ban on insurance that only co-operative insurance could be allowed; in co-operative insurance policyholders are entitled to the income of insurance companies, consistent with Islamic finance (O’Sullivan, 1983, April 25). The matters of insurance disputes are kept within the Ministry of Finance, not Sharia courts, to avoid any potential legal contention (Marar, 2004). Islamic finance without naming it The Saudi royal administration has been a staunch patron of the institutionalization and globalization of Islamic finance and has played a major role in sponsoring the formation of Islamic Development Bank, a supranational development finance 120 organization for Muslims in 1975. However, the executive branch of KSA – led by the royal family - delayed local imposition and implementation of Islamic finance. The contradictory legal pluralism is one major reason for that. Naming anything Islamic suddenly would question whether similar things were un-Islamic before and would cast doubt on the religious legitimacy of the executive (royal administration) among Islamic jurists. Also, ‘Islamic’ labeling of financial organizations could put the matters of adjudicating financial transactions in the hands of religious clerics, which the royal administration carefully avoided. Moreover, ‘Islamization of finance’ had the risk of being perceived by the public and clerics as Europeanization of Islam. Thus, it was more pragmatic to let the economy and society continue under the assumption that everything in KSA was Islamic already, without requiring any change (Wilson, 2009). Indeed, Al-Rajhi Bank, founded in 1985, the first Islamic financial organization in KSA, was a private sector initiative. The bank did not call itself Islamic; rather it operated as a ‘profit-loss-sharing’ bank. In 1990s, Islamic finance was allowed to be more explicit; ‘interest rate’ was consequently changed to ‘service charges’ (Wilson, 2002). The weakening cleric power at the backdrop of the Gulf War is a major reason. Note that the Salafi and Wahabi clerics negatively viewed the relationship between KSA and USA in the Gulf war, like Saddam Hussein, the erstwhile President of Iraq, who criticized the presence of US troops in KSA as ‘defiling of the holy land of Muslims’ (Kepel, 2000/2002). As a fallout, the royal family slowly delimited the power of the clerics. With weakened clerics, Islamic finance was allowed to be more explicit. 121 Continued self-governance, less emphasis on local standardization The royal administration of KSA did not promulgate any official policies for disclosures and governance of Islamic finance organizations even in the 1990s and 2000s. Note that the global Islamic finance standardization organizations – Islamic Financial Services Board (IFSB), and Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) were not established or hosted by Saudi Arabia, rather by Malaysia and Bahrain respectively. The Saudi Arabian state was only indirectly involved in these organizations through private organizations and the supranational Islamic Development Bank. Saudi firms have been allowed to self- govern and co-organize any practices with their supply chain members. Given clerics were on supervisory boards, inter-cleric communication or consensus was not sought. Islamic finance thus became a public phenomenon in KSA, under the implicit in-firm legitimation. In 2017 KSA experienced the second most growth of Islamic banking. The other aspects of Islamic finance – insurance, bonds, and funds – also developed with no explicit references to Islam. The first Islamic bond was issued in 2003. Islamic insurance was allowed by passing a law to enable ‘cooperative’ insurance model in 2003, which also did not use explicit ‘Islamic’ word (e.g., Takaful). The first Islamic global equity fund, Al-Ahli Global Trading Equity Fund was launched in 1995 without ‘Islam’ in its title. 122 Malaysia: the case of pragmatism in Islamic finance Malaysia is considered the global innovator of Islamic finance. Malaysia ranked 1st in the Islamic Finance Country Index (Global Islamic Finance Report, 2016). Malaysia innovated many Islamic finance services, now having the widest variety of Islamic finance and 17% share of global Islamic finance assets. About 21% of banking sector assets of Malaysia are in Islamic banks. Thirty-eight Islamic banks of Malaysia have about US$201 billion assets, as of 2017 (Thomson Reuters, 2018). Malaysia has a dynamic Islamic insurance (Takaful) market with 20 takaful operators having a total of US$9 billion assets in 2017. Malaysia has issued the most Islamic bonds (in number and amount). As of 2017, about 1,900 sukuks were issued and remained outstanding, with a value of US$204 billion. Malaysia has 300 Islamic funds with a total of US$27 billion assets under management. Malaysia also has the largest number of Shariah scholars (Thomson Reuters, 2018). The surprising rise of Islamic finance in Malaysia If we consider the early stages of Malaysian economic development, it will appear surprising that Malaysia became a world leader in Islamic finance. Saudi Arabia and Pakistan were larger economies with expressed commitment to Islamization than Malaysia when it became an independent country in 1957. Both Saudi Arabia and Pakistan had higher proportion of Muslim population and stricter Islamic jurisprudences than Malaysia. Both KSA and Pakistan had Islamic governance, KSA having an absolute Islamic monarchy, and Pakistan being an Islamic republic. On the other hand, Malaysia adopted Islam as the state religion but did not Islamize its 123 constitution. Ethnic tensions and riots between Malays (Bumiputera, who are primarily Muslims) and non-Malays (particularly Chinese descendants) were rife in the early years of Malaysia. Despite such unfavorable conditions, the nature of legal contention and the centralization of state paved the Malaysia’s successful path for gradualism and pragmatism in Islamic finance. The legacy of the dual legal system since the British colonial period Malaysia has a dual system of Islamic and secular laws. Even during the British colonial period, when the courts were staffed by British trained judges, states were allowed to enforce Islamic laws for Muslim rituals and family matters. In 1957, thirteen British colonies in Malaysia became independent. The colonies adopted the constitution of a federal nation, which eventually became Malaysia. According to the constitution, the states could identify with any interpretation of Islamic laws; and there was no unified interpretation and application of Islamic laws. The federal law remained secular (Shuaib, 2012). This coexistence of secular law and a flexible Islamic jurisprudence led to lower legal contention for Islamic finance in Malaysia. Introduction of Islamic finance in 1963 as a federal government pragmatic initiative The federal government of Malaysia introduced Islamic finance in the country for pragmatic reasons. The government commissioned a study by Royal Prof Ungku Abdul Aziz (University of Malaya) in 1950s to find out untapped sources of savings in the rural economy. The study revealed that Muslims in Malaysia primarily kept their savings for pilgrimage to Mecca under pillows, mattress, cupboard, and earthen jars as secular financial organizations were not holy for saving for religious causes. The 124 pilgrimage expenditure for Malaysia at that time amounted to a sizable sum of about 3 million Malaysian Ringgit per annum. To mobilize the pilgrimage savings for national development, the federal government founded an Islamic finance organization named Perbadanan Wang Simpanan Bakal-bakal Haj, or Pilgrim’s Savings Corporation (Borhan & Sa’ari, 2005; Nasser & Muhammed, 2013). There was no explicit role of local political parties, consumer movements, and international agencies in this process. From Vietnam war: move away from the West towards the East As Malaysia took a neutral position during the Vietnam war and strengthened ties with Vietnam after the war, international relations between USA and Malaysia turned sour. For example, USA did not provide the support Malaysia requested for implementation of its (Malaysia) economic policies. Such distance between Malaysia and the Western world inspired Malaysian leaders to look for local economic ideals and to forge political and economic solidarity with the Muslim world. Indeed, Malaysia’s first prime minister Tuku Abdul Rahman (in office 1957 – 1970) played a leading role in the formation of Islamic Development Bank. He strengthened ties with Saudi Arabia and emphasized the importance of improving political and economic relations between Muslim countries. With the global rise of political Islam in 1970s, Islam also became a center piece in Malaysian developmental policies (Lai & Samers, 2017). Introduction of Islamic Banking: co-creation, pragmatism, and sequential gradualism The Islamic politics and its influence on the economic and development policies of Malaysia rose to prominence in 1980s. Islamic parties like Malaysian Islamic Youth Movement (ABIM, in short – founded in 1971) became an important voice for 125 Islamization. Inspired by the ideology of the erstwhile Muslim Brotherhood of Egypt, ABIM embraced ‘reform from within’ as a policy for social change in Malaysia. ABIM formed an alliance with the major Islamic party, Parti Islamic Se Malaysia (Pan-Malaysian Islamic Party – a major opposition party to UMNO – the United Malays National Organization). UMNO – the parliament majority party of Tunku Abdul Rahman and Dr. Mahathir Mohammad did not want to give the space of ‘Islamic politics’ away to Islamic parties only (Thirkell-White, 2006). But, with the painful history of ethnic conflicts between Muslim Malays and Chinese in 1969, the ruling parties did not want to bring about any drastic Islamic institutional change either. So, Mahathir and other ministers emphasized Islamic finance initiatives would only be for ‘developmental’ needs, not for Islamic reforms lest such initiatives are construed as exclusionary. In the early 1980s, in response to the calls from his coalition members to ban gambling business (not Islamic finance), Mahathir refused, “We are running a government ---- not a reform movement”. Anwar Ibrahim, one of the ministers of Mahathir’s cabinet, emphasized, “Islam in Malaysia is a development ideology. We want to make Islam a tool to motivate people” (Robinson, 1983, June 20). Hence, facing the demands of Islamic parties for Islamic banks, Mahathir did not rush into official pronouncements but engaged in a broad consultative process through a committee for a feasibility study. Based on the study, the parliament passed a separate Banking Act for Islamic banks and the first Islamic Bank, Bank Islamic Malaysia Berhad was founded by the federal government in 1983. Several aspects of the subsequent development of Islamic 126 finance - flexible definition, co-creation, gradualism, and co-optation - are notable (Nasser & Muhammed, 2013; Rethel, 2010; Rudnyckyj, 2014). Flexible definition and co-creation: While the idea of ‘interest-free’ was prominent in the Islamic Banking Act of 1983, the definition of ‘Islamic banking’ and its products and services were kept flexible, to be figured out through pragmatic considerations by stakeholders. Emphasizing the importance of pragmatism over puritanism, Mahathir asserted on the inauguration of Bank Islamic Malaysia Berhad, “Islamic bank is not the nation’s status symbol, rather it can play a role in nation’s economy” (“Islamic bank launched”, July 4, 1983). Sequential gradualism: The 2nd Islamic bank in Malaysia was founded 10 years after the first one. Tan Sri Nor Mohamad Yakcop, the official responsible for the implementation of Islamic banking at the central bank of Malaysia in the early 1990s made a cultural and ecosystem argument in this regard. He suggested that the Malaysia approach is to do things step by step and not take any big risk with respect to changing institutions. The idea is to develop the ecosystem - product and services variety, a solid customer base, and supporting institutions - in which Islamic finance organizations could thrive. Consistent with that, the Takaful Act was enacted in 1984, one year after the Islamic Banking Act, such that Islamic insurance could take off alongside Islamic banking. In August 2015, the first takaful company, Syarikat Takaful, was started with the majority shareholding of the first Islamic bank. To support the short-term borrowing needs of Islamic banks and insurance companies, the 127 Malaysia government also developed the Islamic money market in 1994, the first ever for any country. Co-optation: In keeping with sequential gradualism, the government of Malaysia sought to expand Islamic banking through the existing network of conventional banks. It started an interest-free banking scheme called Skim Perbankan Tanpa Faedah (SPTF) in 1993 and allowed conventional banks to offer this service alongside their conventional banking. This co-optation strategy expanded the reach of Islamic banking products without a rapid change. After conventional banks have had some experience with SPTF, the government allowed conventional banks to transition into full-fledged Islamic banks from December 1, 1998. Emergence first, standardization later, yet with low legal contention The Malaysian government initiated the standardization in Islamic finance much after the emergence of Islamic finance organizations, thereby allowing experimentation and innovation. For example, Bank Negara Malaysia suggested the first model financial statement for Islamic banks in October 1996 and the central Shariah advisory council be set up in 1997, more than a decade after the first Islamic bank was founded. In this process, Islamic finance did not face any legal conflicts or opposition from the judiciary in Malaysia. Neither was there a push from the Shariah courts/Islamic jurists for puritan Islamic finance. Several factors, in addition to the coexistence of secular and Islamic law, could be argued to have played a role in flexible, yet no judicial/legal conflicts in the expansion of Islamic finance in Malaysia. Mahathir Mohammad as the prime minister 128 (PM) consolidated the power of the executive and legislative to the weakening of the judiciary. Through the Constitutional Amendment Act 1988, PM Mahathir removed the terms ‘judicial power’ and ‘vested’ from the constitution and undermined the judicial power by adding that the courts ‘shall have such jurisdiction and powers as may be conferred by and under federal law’ (Tew, 2011). Through an amendment in 1983, Mahathir also weakened the constitutional power of the monarchy in state affairs. These amendments made the Royal powers of assent almost irrelevant and transferred to the Prime Minister alone the power to declare a state of emergency (Sherwell, 1984, August 31). Moreover, the Malaysian government did not allow Islamic finance or any financial transactions to be a part of the Syariah court (or any state court), rather treated Islamic finance as a matter of federal secular courts (Shuaib, 2012). Additionally, Mahathir and the ruling political party promoted Islamic finance strictly as an economic option besides the conventional finance, not an issue of racial or religious superiority. In this regard, Mahathir asserted, "Among the Islamic values is that we do not force others to follow us. Islam prefers persuasion to force…. To paint a picture of Islam as a religion which is not tolerant, with no feelings and with cruelty, is an action which smears Islam's good name and curtails its expansion." (Haupt, 1987, April 27). Asian financial crisis, rejection of western debt, and strengthening of Islamic finance As a fallout of the Asian Financial Crisis of 1997, the Malaysian government further distanced itself from Western institutions. Malaysia rejected IMF funding and reforms, unlike Indonesia, Thailand, and the Philippines which experienced the crisis as well. 129 Instead, Prime Minister Mahathir reiterated the role of South-South cooperation, “The nation will continue placing emphasis on special cooperative endeavors with developing countries and upgrading South-South ties” (“Mahathir pledges to preserve Islam’s sanctity”, 1999, September 23). In this vein, the government of Malaysia opened the country to foreign investors from Asia and the Middle East. In 2004 Malaysia allowed the following Middle Eastern corporations to operate in Malaysia: Al Rajhi Banking & Investment Corporation (Malaysia) Bhd., Kuwait Finance House (Malaysia) Bhd., and Asian Finance Bank Bhd (Mason & Omar, 2003). Also, the Malaysia government adopted Islamic finance as the strategic sector in the country’s 10-year plan. The plan sought to increase Islamic banking share to 20% by 2011, with specific annual targets (“Financial Sector Master Plan 2001”). The government introduced tax neutrality for Islamic financial organizations, creating a level-playing field in tax for all financial organizations. In line with the plan, Malaysia has also provided Islamic bank subsidiary license to conventional banks. The case of Turkey: Islamic finance in a secular label Turkey is a large economy with US748 billion GDP (2018) at current prices, 20th in the world. The 2018 GDP growth rate of Turkey is 2.6%. With an initial slow start, Turkey has recently experienced significant growth in Islamic finance. Turkish Islamic banks, known as ‘Participation Banks’, have about 5.5% share of the banking assets of the country (European Banking Federation) and Turkey ranks 13th in the Islamic 130 Finance Country Index (2016). Other aspects of Islamic finance such as Islamic funds and insurance are at a nascent stage in Turkey. The Islamic finance contradictions of Turkey Since the fall of the Ottoman empire, Turkey has constitutionally banned Islamism and the Turkish military has consistently opposed any Islamization projects. This would suggest there would be no Islamic finance in Turkey. On the other hand, Turkey is a Muslim majority nation with homogeneous, flexible Islamic jurisprudence and one of the largest national incomes (GDP) among the Muslim countries. These conditions, to the contrary, imply Islamic finance should have had flourished in Turkey. The resultant of these contradictory forces on Islamic finance in Turkey is better understood through ‘legal contention’ and ‘state coordination’. With a legacy of flexible Islamic jurisprudence and the singular secular court system; the legal contention was low in Turkey. However, lack of coordination among various branches of the state led to slow progress in Islamization projects. Islamic finance was rather introduced in Turkey to meet external funding needs. During low economic capacity and a political fallout with the USA, the military-led state allowed Islamic finance under secular labels to attract investments from the Middle East. Such labels complied with the Turkish aspiration to become a member of the secular European Union. An adaptive Sharia background from the Ottomans Islam arrived in Turkey in the 7th century, and the Sunni Islam as a state rule was consolidated in the 10th century. Since the 13th century, the Ottomans introduced some variations of Sunni Islam to support the empire’s legitimacy in the evolving socio- 131 cultural milieu. The dominant religious (Shariah) creed since then is a brand of the Hanafi School of jurisprudence, that recognizes free-will and reason in interpreting classical scriptures and the role of customs and traditions in legal practices. Katz (2009) describes, “...custom played an explicit and important role in Ottoman legal practice. The system allowed a significant degree of autonomy to various social collectivities in handling their internal affairs and differences according to their custom. These collectivities ranged from tribes, villages, residents of the same urban quarters, and guilds to large religious communities (millets). So long as they managed their affairs peacefully, their practices did not concern the law.” The Ottoman empire also promulgated various statutes (kanuns) and decrees (firman) “…to permit the integration of culturally and religiously different groups, while also encouraging assimilation” (Benton, 2002). Such spirit of Islamism influenced the Islamic commerce in the Ottoman Empire. The issue of riba (interest) was either ignored or not punished in Ottoman courts (Kuran, 2004, 2010). The Ottomans did not develop any unique financial system and supported the financial activities of the Christian and Jew merchants. Adapazarı Islamic Trade Bank, founded in 1913 towards the end of the Ottoman empire, is considered the first institutional experiment with Islamic finance in Turkey. Official reports, however, do not describe it to be an entirely ‘interest-free’ organization. Its stated objective was ‘to provide loans to Muslims with low interest’ and to protect the society from the control and occupation of foreign capital and practice of usury. ‘Islamic’ was used in the name of the bank to differentiate it from the existing banks owned by non-Muslims (Özdemir & Aslan, 2018). 132 Secular reforms after the fall of Ottomans and abolishment of ‘Islamic’ label 1923 officially marked the fall of Ottomans and the start of parliamentary, secular, representative democracy in Turkey. The secular government, led by Ataturk, removed ‘Islamic’ from the title of ‘Adapazarı Islamic Trade Bank’ in 1928 claiming that no Christian banks existed, and so ‘Islamic’ name differentiation was unnecessary (Findikoglu, 1966; Kutluata, 1970; Özdemir & Aslan, 2018). The government also adopted many secular reforms, including Turkish Civil Code 1926, which was inspired by German and French Civil Codes. This secular code has dominated the law and rulemaking in Turkey ever since, even after the Islamic-leaning, right-wing Justice and Development Party has been in power for the last two decades (Orucu, 1987; Yilmaz, 2016). External funding needs and the arrival of both Islamic and neoliberal Western debt The Ataturk administration initially pursued a free-market regime. However, the balance of payment crisis in the late 1950s and a coup d’état in 1960 prompted state interventions in the economy, especially with respect to trade, financial markets, and foreign exchange. Such intervention persisted over 1960 -1980 as the government determined ceilings on interest rate, subsidized lending to priority private sector projects, and created entry and exit barriers for foreign banks. For the state priority of the development of local industries instead of imports, this period (1960 -1980) is known as ‘import-substituted industrialization’ (ISI) era (Mustafa, 2019). In the ISI era, the right-wing parties, especially, Milli Selament Partisi (MSP), sought to start Islamic banking as a local industrial initiative. To this end, ‘State Industrial and Labor 133 Investment Bank’ (DESIYAB in short) was permitted through a statutory decree in April 1975. The founders of DESIYAB, with the support of MSP, proposed ‘profit and loss sharing’ as its objective, communicating a vision for ‘interest-free’ banking. However, the Council of Ministers, led by the ruling Justice Party, argued that such naming could imply a state support for Shariah, which the public might resent. So, the DESIYAB’s stated objective omitted ‘loss’ to avoid Shariah connotations and retained ‘profit sharing’ only (Özdemir & Aslan, 2018). MSP made no other efforts of Islamization and supported ISI and secular developmentalist approaches. Though policymakers initially praised ISI for expediting industrialization, the policies had adverse consequences. State interventions in the economy led to non- transparent exchanges between the bureaucracy and the private sector, e.g., random imposition of trade quotas and tariffs, lax monitoring of subsidies, and favoritism in import licenses. Combined with high inflation (Figure 2), the policies led to corruption and economic crises, which prompted the military – National Security Council (MKG) – to take over the government on September 12, 1980. MKG banned all political parties and trade unions and declared opposition to communism and sectarianism. To tackle the economic crisis, the military government resorted to IMF’s short-term fiscal stabilization measures and long-term structural reforms. The military government also sought to find other sources for financing the economy, e.g., Middle Eastern investors. ----INSERT FIGURE 2 ABOUT HERE---- 134 Threats of Islamism, and the paradoxical introduction of Islamic finance The ruling military faced economic challenges and rising Islamism. With Islamic movements around the world, the Turkish Islamic party MSP’s appeal for Islamic moral development and ties with the Muslim countries became popular (Atacan, 2005). The military sought to counter Islamism by publicizing that the Turkish Sunni Islam was known for tolerance and inclusiveness. Some argue, this brought the military closer to Islamic parties and softened the boundary between Islamism and secularism (Özdemir & Aslan, 2018). Rising Islamism, along with the challenges of inflation, corny capitalism, growing inequality, and falling domestic credit inspired the Military to tap the oil-rich Muslim world for investment in Turkey, in addition to the Western debt (Figure 3, 4). This was a turning point for Islamic finance development in Turkey. ----INSERT FIGURE 3, 4 ABOUT HERE---- To attract Middle Eastern investors, the military government announced a ruling in 1983 to allow ‘special finance house’ (SFHs), a secular label under which Islamic banks could be operated. SFHs would have commitment to ‘interest –free’ transactions. However, instead of specifying the nature of such transactions, the Turkish government delegated Islamization decisions to the internal boards of SFHs, who could self-govern, develop networks with secular organizations, and access the secular financial markets, e.g., money market and foreign exchange. SFHs were prohibited to use words like ‘Islam’ and ‘Shariah’ in their advertisements to avoid wider contentions. Nonetheless, the presence of SFHs were acknowledged and 135 criticized by various stakeholders (Ozcan & Haziroglu, 2000; Özdemir & Aslan, 2018). Aspirations for European Union membership, and secular re-framing of Islamic finance Turkey sought to be a part of the European community since secularization reforms by Kemal Ataturk. However, the intervening military coups strained Turkish relations with Europe. In April 1987, Turkey applied to accede to the European Economic Community, the predecessor of the European Union (EU). Since then, the Turkish government actively sought to comply with the requirements for EU accession, e.g., Copenhagen criteria (1993) and the Treaty of Maastricht (Article 49), which embrace the principles of liberty, democracy, respect of human rights and fundamental freedoms. This aspiration for EU membership and access to IMF and World Bank debts have influenced the nature of Islamization and Islamic finance in Turkey even after the Islamic-leaning, right-wing party AKP came to power in 2001. Despite its rhetoric for Islamic governance, the AKP administration continued its efforts for EU accession and implemented IMF’s liberal programs adopted by the former Ecevit government (Erkoc, 2019; Patton, 2006). The prominent aspects of the program were privatization, promotion of foreign direct investment, fiscal discipline, tight monetary policies, economic and political stability, political reforms for EU membership, a reform of the social security system, reforms in health and education, social aid, and rural development projects (Acar, 2009; Pamuk, 2008). The IMF reforms persisted till 2008; coming to power in 2001 right after the banking crisis, AKP did not have an 136 alternative plan to IMF reforms and EU economic criteria already in place (Öniş, 2012). Even though AKP is considered an Islamist party, its support to Islamic finance was initially based on the secular-Islamic interaction in society and economic pragmatism. Note that the 2001 banking crisis hit the Special Finance Houses severely. During the crisis, Ihlas Finans, an SFH, failed to fulfil its obligations to account holders. In such milieu, to improve the overall economic sustainability of SFHs, the AKP administration founded ‘Guarantee Funds’ to back the savings of SFH accountholders, removed double taxation from SFHs, and reduced the regulatory uncertainty of SFHs through official announcements on a case-by-case basis. Thus, the Turkish government gradually created a sound legal framework for SFHs. At this backdrop, it reframed SFHs as ‘Participation Banks’; the word ‘participation’ strategically indicated ‘profit loss sharing’ (Islamic) mode of SFHs, and ‘bank’ indicated SFHs’ status as banks. The status of banks allowed ‘Participation Banks’ more access to domestic funds and dispelled the confusion about their identity as financial institutions (Özdemir & Aslan, 2018). The rise of explicit Islamic finance discourses Over 2008 – 2018, AKP increasingly embraced the Islamic and national identity. The AKP administration often projected the economic performance of Turkey as religious identity ‘as Muslims, we can do this as well’, implying autonomy from Western institutions. The administration departed from IMF reforms; there was a large dip in World Bank credit to Turkey. 137 The AKP embrace of Islamism also altered the state relationship with the economic and political elites. AKP’s relationship with the Turkish Industry and Business Association (TÜSİAD), the established secular and western-leaning business association, became strained (Öniş, 2012). Rather, AKP allied with and favored the Independent Industrialists and Businessmen’s Association (MÜSİAD), a rising business elite group of Anatolia with skepticism towards Western institutions (Öniş, 2012). The members of MÜSİAD were Islam-leaning and criticized the structure of the economy in which large investment opportunities were reserved for the Eurocentric, Western entrepreneurs (Gürakar, 2016). In recent years, AKP Leader, Turkish Prime Minister (now President) Erdoğan openly criticized interest rate – calling it ‘immoral’ from the religious viewpoint, and ‘cause of inflation’ from a pragmatic viewpoint. While the AKP administration continues to use secular labels for Islamic financial institutions, it has further contributed to Islamic finance development by facilitating introduction of new Islamic finance products and services, e.g., introduction of the first Islamic sovereign sukuk by the Turkish treasury and establishment of two state-owned participation banks in 2015. Discussion The prior literature on the role of ‘law’ in financial development is premised on the legal origin of countries being a unitary and uncontested concept (La Porta et al., 1997, 2008). The assumption is that the European colonization had uprooted the traditional normative order to become the dominant legal regime such that legal 138 pluralism turned inconsequential. A similar assumption is found in the sociological literature on the globalization of ideas and markets, whereby the broader normative order is the secular domain of law and contestation within (Meyer & Bromley, 2013). But these assumptions limit our understanding of the effect of multiple legal origins of colonial and traditional sorts, the contention between ‘secular’ and ‘religious’ (Islamic) institutions, and varieties of interpretation and implementation of non-secular (Islamic) legal origins. Moreover, the literature often assumes ‘state’ as a unified entity in dealing with societal contentions, but, in fact, the state consists of various branches which may disagree over implementation of ideas, laws, and policies. In this paper, I relaxed the noted assumptions in the context of globalization and local implementation of Islamic finance in four major Muslim countries - Malaysia, Pakistan, Saudi Arabia, and Turkey. Islamic economic exceptionalism as an idea took institutional shape in 1970s after Muslim countries formed Islamic Development Bank and agreed to Islamize local financial systems. This marked the global rise of Islamic finance as an alternative to the Western secular finance. However, country-level Islamic finance implementation depended on the nature of local legal contention and state coordination in dealing with such contention, irrespective of economic development and Muslim majority population. The contentions stemmed from a multiplicity of factors such as prior pluralistic legal regimes, strictness of Islamic jurisprudence, and creation of overlapping jurisdictions of secular and non-secular jurists by the state. 139 In Pakistan, the contention was high and explicit. Multiple legal systems since the British colonial period allowed continuation of Islamic law along with the secular law. Towards the end of British era, some Islamic activists converted the Islamic jurisprudence into an Islamic paradigm for politics and economy, giving rise to the idea of Islamic exceptionalism, including Islamic finance. The idea also played a role in the emergence of Pakistan as a separate country from India based on religious exceptionalism. Islam was the foundation of Pakistan’s constitution, which later supported creation of Islamic legal courts alongside secular legal courts. Multiple courts led to overlapping jurisdictions over economy and fostered legal contentions. The flexible Islamic jurisprudence of Pakistan contributed to this contention by creating scopes of multiple interpretations for Islamic finance. When the state lacked a coordination across its branches and stakeholders, high legal contention ensued, leading to the shutdown of Islamic finance. However, when the executive branch of the state engaged in a wide consultative process and tightly coordinated among various branches of the state, Islamic finance was re-launched using market pragmatism, mix of secular and Islamic finance, and sequential gradualism. High legal contention in KSA was characterized by strict Islamic jurisprudences, the resistance of clerics to anything European, and a group of entrepreneurs and the executive branch of the state with an aspiration to lead Islamization through even ‘secular means’ and integrate KSA with the world economy. KSA jurists and clerics relied on the Wahabi and Salafi ideas that would allow only puritan application of Islamic principles to economy. This meant that the Western secular idea of ‘interest’ would be considered ‘unholy’. Aware of the puritan jurists’ 140 potential opposition to any less-than-pure Islamic finance, the KSA royal administration and entrepreneurs worked together to implement Islamic finance through obfuscating labels so that such finance remained outside the domain of Islamic jurists. Having high state coordination, the executive branch could confine conflicts related to financial transactions within the ministries and secular courts, such that the Islamic jurists would not contend over the nature of financial transactions and their Islamic purity. The Turkish Islamic finance was influenced by low legal contention and low state coordination. The low legal contention in Turkey was characterized by the abolition of Islamic law and adoption of a secular legal code in the early 19th century and a flexible Islamic jurisprudence with a history of co-existence with secular and other religious jurisprudences. At this backdrop, I do not observe any strong legal contention about Islamic finance for overlapping jurisdictions and juristic, cleric, and political party dissent over the nature of Islamic finance. Low legal contention in Turkey met low coordination among various branches of the state – especially between the military and the executive (coalition of incumbent political parties). The military, known as the custodian of the Turkish democracy, often disagreed with Islamization projects proposed by the executive. Thus, Islamization projects were implemented based on external influences. During low economic capacity, the military-led state allowed Islamic finance in secular labels to attract the Middle Eastern investors to Turkey. However, such labels conformed to the Turkish aspiration to become a member of the secular European Union. 141 The Malaysian Islamic finance was developed very pragmatically early on, given low legal contention and high state coordination. Even though Malaysia had a legacy of multiple legal systems (Islamic and secular law) since the British colonial times, the flexible Islamic jurisprudence allowed wide adaptation and interpretation. The states of the Malaysian federation were allowed to adapt Islamic law as necessary for their populace. The well-coordinated federal government developed Islamic finance as a matter of pragmatism and kept it outside the scope of Islamic courts. Hence, even though the federal government heeded to Islamic parties’ demand for Islamization of economy, they (government) prioritized pragmatism, stakeholder engagement, and sequential gradualism in Islamic finance. This led to ‘Islam’ becoming a ‘developmental ideology’ of Malaysia, not a ‘reform movement’. The national cases of this paper illustrate the usefulness of removing the assumption that the state is a unitary entity. I find multiplicity of the ways various branches of the state - executive, military, legislative, judiciary - contend over the timing, interpretation, adoption, and implementation of a policy. The state bureaucrats can disagree with the incumbent pollical leaders of the executive and/or the legislative branches. Ministers of the incumbent political coalition can also disagree with the approach of implementation. Thus, peering into ‘within state’, we further appreciate manifold interests, contentions and contestations over laws and policies. This paper is closely aligned with Ingram and Rao (2004), who studied the importance of ‘intrastate political activity’ for ‘interstate diffusion of anti-store-chain legislation’ and found that legislator diversity significantly affected the adoption of 142 anti-store chain legislation. The homogeneity of ‘independents’ led to in-group cohesion and facilitate collective action to secure anti-store outcomes. The Ingram and Rao (2004) study is, however, limited to one country (USA). I rather explored the legal contention the settings of multiple countries and actors, and additionally, reflected upon the role of the historical legal origins and pluralism. The nature of state coordination and the concurrent external influences through USA, Middle Eastern countries, the Bretton Woods institutions, and the European Union also informed analyses and arguments. Such richness and variation could not be understood in a single country context. This paper further extends the literature of identity mobilization. I show that contentions among stakeholders who appear to be distant from the market forces are also consequential for market development. Islamic finance became a center for identify mobilization and expression for various stakeholders, ranging from clerics, jurists, and military to various branches of the state and political parties. Thus, a multilevel inquiry of these stakeholders can highlight new mechanisms of market development. In this vein, Stryker (2002, p. 173) argues an “adequate political approach must be a multilevel approach…We must always map how organizational actors, interests, resources and conflicts are shaped by and in turn, shape the actors, interests, resources and conflicts that operate at the level of organizational fields, and the broader political economy”. By this multi-level approach, I also illustrate the premise of the diffusion and institutional change literature that change in one social unit affects changes in others (DiMaggio & Powell, 1983; Haunschild & Miner, 1997; Haveman, 1993; Strang & Soule, 1998). 143 This paper also illustrates the arguments of the institutional isomorphism literature. In this line of inquiry, DiMaggio (1988) urges researchers to “pay more attention to preexisting institutional conditions, what the alternative institutional projects are in a given situation, and the political process by which projects win out” (Fligstein & Mara Drita, 1996, p. 27). Even though the world society literature argues for organizational isomorphism, Islamic finance shows that varieties of organizations emerge from the same idea through legal contention and state coordination. Such varieties can be in substance as well as in names, giving rise to organizational heterogeneity across time and space. The idea of discrete adoption and retrenchment (Zelner, Henisz, & Holburn, 2009) is not enough to explain such phenomenon since such conceptualization has a beginning (implementation) and an end (retrenchment) and ignores the dynamic interaction between legal contention and state coordination. Conclusion This paper shows two interactive local processes of legal contention and state coordination in the implementation of Islamic finance in four major Muslim countries. The legal contention can arise in the markets in various ways, ranging from overlapping legal jurisdictions of Islamic and secular laws to the variety of strictness of Islamic jurisprudences. The strictness of religious law does not always have a similar outcome for legal contention and market development. Flexible religious jurisprudences can increase contentions among stakeholders of religions whereas strict jurisprudences can increase contentions between the secular and religious actors by 144 preventing a coexistence of secular and religious institutions. The nature of state coordination in implementing an economic idea can also vary. The normative expectations of the military can influence the way economic ideas are implemented – as the case of Turkey shows. The central coordination among various branches of the state is not necessarily democratic. The royal administration of Saudi Arabia, the military administration of Pakistan, and the democratic majority of Malaysia all succeeded in avoiding or reducing legal contentions and in inspiring Islamic finance developments through coordination and/or consultation among various branches of the state, entrepreneurs, bureaucrats, and bankers. Future studies can address several areas. The processes of contentions at the intersection of religion, society, and economy might be different in countries where Islam is not the major religion. The growing halal industries in the West can be a case for further exploration in this regard. There are also emerging areas of scientization and markets (e.g., vaccines, genetics), in which religious clerics and leaders might have alternative perspectives. 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Administrative Science Quarterly, 54, 379 – 412. 157 Figure 1: Conceptual figure 158 Figure 2: Inflation Rate Trend among case coutries 120 Malaysia Pakistan Saudi Arabia Turkey 100 80 60 40 20 0 1960 1970 1980 1990 2000 2010 Year Source: World Development Indicators, World Bank 159 % Figure 3: Official development assistance for case countries 12 10 Malaysia Pakistan Saudi Arabia Turkey 8 6 4 2 0 1960 1970 1980 1990 2000 2010 -2 YEAR Source: World Development Indicators, World Bank Figure 5: World Bank (IBRD and IDA) credit Malaysia Pakistan Saudi Arabia Turkey 18 16 14 12 10 8 6 4 2 0 1 9 7 0 1 9 7 5 1 9 8 0 1 9 8 5 1 9 9 0 1 9 9 5 2 0 0 0 2 0 0 5 2 0 1 0 2 0 1 5 YEAR Source: World Development Indicators, World Bank 160 BILLION US$ PERCENT OF GROSS NATIONAL INCOME Table 1: Characteristics of case countries Characteristics/Country Pakistan Malaysia Turkey Saudi Arabia Ranking on the Islamic 9th 1st 13th 2nd Finance Country Index 201615 Islamic banking share of 10.4% 21.3% 5.5% 51.2% the country 201616 Legal contention High Low Low High State coordination Low High Low High Economic capacity Medium Medium High High Islamic jurisprudence Mid Low Mid Most restrictive restrictive restrictive restrictive Level of Islamic finance Low High Low High 15 Global Islamic Finance Report 2016. 16 World Islamic Banking Competitiveness Report 2016. 161 Table 2: Additional case country characteristics Factors Malaysia Pakistan Saudi Arabia Turkey Influences of IMF, Low High Low High World Bank IMF Credit None High None High World Bank Loans None High None High and Grants Influence at IDB (% Low High 1st 5th share) Influence of IDB Low (31st) High (3rd) Medium (9th) High (5th) (IDB funds) FDI, net High inflow Low inflow High outflow Low inflow External debt stock Low Very High Low Very High Current account Positive, high Negative, high Positive, low Negative, high balance (% of GDP) Official development Low Very High Low High assistance Nominal GDP 26th 43rd 18th 20th ranking (2018) Style of government Federal Federal Monarchy, Constitutional constitutional democratic Quran as democracy, monarchy (Islam republic (Islam constitution secular state religion) state religion) Coordination in Not contentious Contentious – Tight, Contentious - functions of between military centrally between government & judiciary controlled, not military and contentious executive Economic planning Mixed (mostly Mixed Central, royal Mixed (not free market) elite laissez faire) dominated Origin of secular law British British British Swiss/French Muslim majority Yes Yes Yes Yes Islamic jurisprudence Shafi Maliki Hanbali, Hanafi Wahabi, Salafi Islamic banking 31.4% 15% 49% 5% (2019 figures) /total banking 162 CHAPTER 5 CIVILIZATIONAL CONSCIOUSNESS AND GOAL MULTIPLICITY IN ORGANIZATIONS: EVIDENCE FROM ISLAMIC DEVELOPMENT INVESTMENTS, 1976 – 2016 Abstract In this paper, I present a theory of conflicting social and economic goals of organizations and test three related hypotheses. In the absence of immediate and easily communicable feedback criteria on goal performance, organizations allocate resources in its primary observable activity such that they appear to simultaneously commit to some broad definitions for all goals. Such allocation ensures that one part of the activity highly supports the social goal, providing social legitimacy, while another part supports the economic goal, providing a necessary monetary return (the goal rationing hypothesis). Several external, global actors are selectively emulated to justify resource allocation (the goal justification hypothesis). Extraordinary events like wars alter the civilizational consciousness and trigger new emphasis on goals (the goal discovery hypothesis). I find empirical support for the hypotheses using Islamic development investments in 135 countries over 1976 – 2016, which had the social-civilizational goal of promoting Muslim communities while earning a fair monetary return. Quasi- natural experiments and difference-in-difference regressions provided robust evidence that accounted for alternative economic and sociological explanations. The results have implications for theories on multiple goals and interorganizational emulation. Keywords: multiple goals, emulation, international organizations, civilization 163 “With the end of the Cold War, international politics moves out of its Western phases, and its center-piece becomes the interaction between the West and non-Western civilizations and among non-Western civilizations. In the politics of civilizations, the peoples and governments of non-Western civilizations no longer remain the objects of history as targets of Western colonialism but join the West as movers and shapers of history,” --- Samuel P. Huntington (1993) “Civilizational formations are based on combinations of cultural visions of the world with regulative frameworks of social life, but the relationship between the two levels is open to conflicting interpretations and strategic uses of them.” --- S. N. Eisenstadt (2000) Introduction The presence of conflicting goals is a common organizational dilemma. Organizations face the competing goals of ‘exploration’ vs ‘exploitation’ (March, 1991; Levinthal & March, 1993), ‘replication vs innovation’ (D’Adderio, 2014), ‘safety vs profitability’ (Gaba & Greve, 2019), and ‘safety vs efficiency vs reliability’ (Hu & Bettis, 2018). There are two approaches in understanding such a dilemma of organizations: sequential and situational. In the sequential approach, once the highest priority goal is achieved, the attention is given to the second priority goal, as if one goal can be put on hold while the other is being achieved (Cyert & March, 1963). The other approach argues that certain situational factors, in the presence of clear and immediate feedback, triggers differential actions on goals (Gaba & Greve, 2019; Greve, 2008; Rowley et al., 2017; Stevens et al., 2015). But organizations do not always pursue goals with immediate, market-oriented, and direct feedback. Some organizational projects have a long start-up time; some projects gradually benefit clients over a long period. In the 164 for-profit world, to-be-built manufacturing plants compliant with both the environmental goal of pollution abatement and the economic goal of monetary return are an example. In the development world, social and physical infrastructures projects by development organizations and nation states with the social goal of serving communities and the economic goal of a fair return are an example. Moreover, some organizations pursue conflicting goals that are also contradictory to the dominant Western civilizational norms, dubbed in the clash of civilizations between ‘the West and Islam’ and ‘the West and China’ (Bräutigam, 2011; Callahan, 2001; Huntington, 1993, 1996). Some examples are non-Western aid agencies and non-Western organizations like African Development Bank, New Development Bank, and Islamic Development Bank. How do such organizations allocate resources to conflicting goals - in the absence of an immediate, direct feedback and in the presence of alternative dominant norms? Does the behavior of such organizations propose any revisions in organizational theories? This paper addresses these questions. In answering these questions, I integrate theories of conflicting goals, organizational emulation, international organizations, and civilizations to develop a theory of multiple goals. I derive and test three hypotheses - the goal rationing hypothesis, the goal justification hypothesis, and the goal discovery hypothesis –in the context of Islamic development investments to 135 countries, over the period 1976 – 2016. Islamic Development Bank (IDB) was founded in 1975 to protect the economic interests of Muslims, in the wake of the Arab-Israel conflicts in early 1970s that were perceived as a clash between Islamic and Judo-Christian civilizations. So, the social goal of IDB is civilizational in nature; IDB invests in countries to promote the cultures 165 and communities of Muslims around the world, who are 24% of the world’s population. To this end, IDB invests in social and infrastructural projects such as power plants, water supply, roads, railways, education, food aid, climate change aid, disaster aid, healthcare, capital for banks and trade finance for manufacturing. These investments often have a long-start up time and benefit their stakeholders over a long- period; short-term performance feedback is not readily available. Additionally, in making these investments, IDB has the economic goal of earning a fair monetary return. Thus, the goals of IDB are conflicting, mutually constitutive, and interdependent; the civilizational interest of safeguarding Muslim cultures and communities cannot be put-on-hold in the pursuit of economic return, while the disregard of the monetary return would deplete the capital needed to serve the civilizational goal. I propose that in the absence of immediate, direct feedback on goals like those of IDB, organizations allocate resources into its primary, observable activity (e.g., investments of IDB) such that the allocation reflects simultaneous commitment to some broad conception of all goals. To this end, I find that IDB largely invests in Muslim majority countries, supporting the social-civilizational goal. But IDB investee countries vary in the level of development, signaling a simultaneous commitment of IDB to ensure a safe return through risk diversification of investments (economic goal). This supports the goal rationing hypothesis. The investments in less developed (riskier) countries are justified because of the similarity in their creed (Sunni type of Islamic creed) with the dominant IDB member countries and their positive correlation with World Bank credit, whereas the investment in more developed (safer) countries is 166 positively related to the IMF credit to those countries. Such selective external justification through adaptive emulation of multiple development models (IMF and World Bank) for resource allocation is the essence of the goal justification hypothesis. Moreover, goals can change. Extraordinary social, natural, and technological events can trigger the discovery of new goals. Using two natural experiments of the Yom Kippur War and Gulf War, I find that wars lead to a revision of civilizational consciousness and discovery of new bonds among nation states. This altered the communities served by Islamic development investments –the essence of the goal discovery hypothesis. The results are robust to alternative economic and sociological explanations. This paper contributes to organizational theories on multiple goals and adaptations (e.g., Cyert & March, 1963; Ethiraj & Levinthal, 2009; Gaba & Greve 2019; Greve, 2008; Hu & Bettis, 2018). It shows how an organization allocates resources across conflicting goals in the absence of an immediate, direct feedback on performance and uses external actors for justifying their resource allocation. Moreover, wars and humanitarian crises can lead to new goals. Moreover, the paper extends the contemporary debates on international organizations and adaptive emulation. International organizations such as United Nations, World Bank, IMF, World Health Organization, and World Trade Organization, are an active area of inquiry in social sciences17. The two most 17See the following papers: Bowett (1982), Boughton (2004), Bown (2005), Cox and Jacobson (1973), Goldstein et al. (2001), Kratochwil and Ruggie (1986), Presbitero and Zazzaro (2012), Reinalda and Verbeek (2004), Shoyer (2003), Simmons et al. (2008), Steinberg (2004), Stiglitz (2002), Vreeland and Dreher (2014), and Woods (2006). 167 prominent arguments on explaining their decisions and behaviors are principal-agent and Western convergence models. In the principal agent models, organizations (agents) are designed to promote liberal values of Western countries (principals) (Daku & Pelc, 2017; Dreher et al., 2009; Humphrey & Michaelowa, 2013; Fleck & Kilby, 2006; Nielson & Tierney, 2003; Reynaud & Vauday, 2009; Thacker, 1999). Such pursuit of international organizations is supported by norm-making communities like economists, professionals, and educationists, who are trained in and promote Western liberalism (Hall, 1989; Haas, 1992; Hirschman & Berman, 2014; Ikenberry, 1992; Kogut & Macpherson, 2011; Meyer & Bromley, 2013; Vreeland, 2007). Using the context of an international, faith-based development finance organization, I test the contention and interaction between Western secular development models and non- Western non-secular development models. I find partial support for Western convergence. Islamic Development Bank draws on Western development models to partially support its pursuit of goals, while also maintaining its major commitment to Muslim communities. For a part of its investment portfolio, IDB appears to emulate the IMF model whereas for another part of its portfolio IDB appears to emulate the World Bank model. Such adaptive emulation was found in state policies (Lee & Strang, 2006) as a response to the success and failure of policies. Here, I find adaptive emulation in an international organization that follows process emulation (investment allocation) of other international organizations with certain traits like greater information advantages and legitimacy of IMF and World Bank. 168 Multiple goals in organizations The literature of organizations has long argued that organizations consist of divergent groups and interests. Such heterogeneous interests give rise to pursuit of different goals within the same organization. Theories have proposed several mechanisms to deal with the governance and managerial challenges of such heterogeneous preferences and information sets (Ethiraj & Levinthal, 2009): organization design (Simon, 1957), incentives (Barnard, 1938; Cyert & March 1963), and organizational structures (Jensen & Meckling, 1976; Lawrence & Lorsch, 1967; Thomson, 1967). However, literature has increasingly recognized that the problem of heterogeneous preferences is not the same as the problem that organizations pursue multiple goals with inherently negative correlations or weakly positive correlations that are yet tied to the expected performance of organizations (Ethiraj & Levinthal, 2009; Gaba & Greve, 2019). For example, financial organizations with the mandate for socioeconomic development and public goods are also expected to generate a fair return. In for-profit organizations, various goals of increasing market share, improving profitability, realizing sales growth, improving customer satisfaction, reducing costs, and improving quality are not positively correlated; rather, intermediate goals of profit maximization are often negatively correlated (Meyer, 2002). The literature has dealt with multiple organizational goals in the following ways. Simon’s idea of bounded rationality and the search for a satisficing outcome from many alternatives is with respect to independent and potentially conflicting constraints (Simon, 1955). In such constrained optimization models, multiple goals can be argued to be the necessary constraints. Some scholars have elaborated on such problems. In the event of multiple goals, 169 organizations take a sequential approach, a priority order is followed in which organizations attend to secondary goals only after the primary goal is achieved (Cyert & March, 1963). Empirical research shows that low performance on a low priority goal generates reactions only when performance on a higher-priority goal indicates success (Greve, 2008; Rowley et al., 2017; Stevens et al., 2015). Organizational size, a secondary goal, is activated once organizations achieve profitability beyond a desired level (Greve, 2008). Financial performance acts as a moderator to CEO attention to social goals, showing that the top management takes a sequential approach to goal attainment (Stevens et al., 2015). The priority order of goals emerges from clear information on performance feedback on the goals. When performance shortfalls on a goal trigger concern about organizational survival, the goal is prioritized and prompts actions, an idea empirically shown by the airlines’ dual foci of safety and profitability (Gaba & Greve, 2019). However, other empirical realities, discussed next, lead me to question some assumptions in the literature. Goals and resource allocation Let us consider the following empirical possibilities of conflicting goals. i. One goal cannot be excluded at the expense of others. Goals are mutually constitutive and interdependent; so, they are to be pursued simultaneously. That is, one goal cannot be put on hold, while the other goal is being achieved. ii. The goals and their realizations are to be manifested directly in the primary activity of the organizations. 170 iii. There are no closely replicable and market-oriented measures to track the immediate progress towards goals and communicate them easily to broader stakeholders. The activities of organizations and their outcomes span over a long period of time such that short-term performance feedback is not always available. iv. The changes in the external environment can trigger new emphasis on goals. Hence, changes in the primacy of goals are dependent on the changes in the environment, instead of being entirely driven by internal actions and structure of organizations. Organizations and goals with the noted characteristics are quite prevalent in the development and public sector, and to some degree, in the for-profit sector as well. Many public and development projects are to promote socioeconomic development and generate public goods, while also ensuring a monetary return. Some examples are social and physical infrastructure projects like schools, colleges, universities, training programs, health care facilities, community housing, museums, libraries, gardens, prisons, railways, roads, and the like. These projects can take years to build (a long start-up time) and years of operations to realize their intended outcomes of serving society while also ensuring a fair economic return. Here, rather the communicated intentions of serving the multiple goals - ‘serving community’ (the social goal) and ‘safe return’ (the economic goal) - are to be simultaneously reflected in the way the investments are made in the projects. Nation states, international development organizations, aid agencies, and non-profit organizations often take upon such projects. In the domain of for-profit organizations, the increasing societal awareness of environmental, social, and governance (ESG) norms are providing the 171 organizations with goals of actively generating positive externalities and reducing negative externalities (the social goal), while also generating a considerable monetary return to the shareholders (the economic goal). Consider the case of a firm that wants to build a new manufacturing plant compliant with ESG expectations. The enterprise would not be ESG compliant if it says this plant will generate a great return though it will violate ESG norms and charitable donations will be made as compensation. But to be ESG compliant, the plant is to be compliant with ESG norms themselves (e.g., pollution abatement), while also promising a safe return. So, the sequential and hold- for-another project approach for conflicting goals is not always possible, even in for- profit enterprises. In managing such conflicting goals noted above – the social goal and the economic goal – I argue that organizations undertake projects that cater to both goals at the same time. However, in the absence of short-term and frequent feedback measures, organizations rely on a broader category of ‘social’ and ‘economic’ goal as provided by various external, normative societal agents to ensure their primary activities reflect a pursuit of all goals. The ‘social’ and ‘economic’ goals can and do change over time, with the changing primacy of various societal agents and with changes in the external environment. These alter the proportion of activities devoted to the enactment and realization of conflicting goals. Such changes are not necessarily triggered by the immediate survival-at-stake situations, but for ensuring an ongoing external legitimacy of the organizations. 172 The discussion above is summarized in Figure 1 in terms of a typology of multiple and conflicting social and economic goals. In Figure 1, cell B (high economic goal and high social goal) represents ideal cases, whereas cell D (low economic goal and low social goal) are deviant cases. Cell D cases endanger both social legitimacy and economic viability of organizations. Unless serious corruption is prevalent in organizations, cell D is not usually pursued. On the other hand, cell B cases are ideal – both socially legitimate and economically viable. However, such cases are not usually feasible – largely, because of the limitations of technologies at a certain point in time. The feasible alternatives are ‘cell A’ and ‘cell C’. They call for varying resource allocation on goals in the primary activities of an organization. Such emphasis however does not vary a lot and remains within a small, middle part of the dotted diagonal line (‘Action Space) between cell A and cell C. The left-most part of the ‘Action Space’ supports the economic goal without largely deviating from the social goal; the right-most part of the ‘Action Space’ supports the social goal without largely deviating from the economic goal. Such resource allocation is justified through selective emulation of external actors with superior information and legitimacy. Also, external events can alter goal emphasis and lead to new goals, and shift resource allocation across the dotted line, or to cell B or D. Islamic development investments, presented next, reflect the characteristics of multiple goals noted here. 173 Islamic development investments, civilizational consciousness, and multiple goals Islamic Development Bank, a development bank based in Saudi Arabia, provides Islamic development investments to countries. IDB was founded on April 3, 1975, by Finance Ministers of some Muslim majority countries, as the Arab Israeli conflicts and Yom Kippur War prompted Muslim-majority countries to form a union to protect the Figure 1: A typology of multiple and conflicting social and economic goals High B: Ideal cases Econo Action mic A: Externally Space Goal Low D: Deviant cases C: Externally Low Social High economic interests of Muslims. TheG foouanl ding objective of IDB was “encouraging and promoting in the true spirit of Islam, economic co-operation and collaboration in accordance with the tenets of Islam, to promote the development of Islamic countries and to foster their economic growth and economic cooperation and to seek and promote investment of the funds of the Bank based on sound banking principles to ensure a fair return to the Bank and benefits to the participants” (Meenai, 1989, pp. 6). IDB also aims to position itself as “global leaders in Islamic finance” while also 174 fostering the socioeconomic development of Muslim communities in non-Member countries (IDB website). The noted statements of IDB reflect the role of civilizational consciousness in prompting its establishment and its goal of serving the Islamic civilization. The cultures and communities, inspired by Islam, are often collectively referred to as ‘Muslim civilization’ or ‘Islamic civilization’ in social and political sciences. Civilizations broadly refer to historical formations of minds and mentalities that define our view of time, space, causality, the self, the otherworld, and the spiritual forces. Such formation takes place over a long period, across two or more peoples, societies, and territories. Civilizations can lead to collective and individual structures of consciousness across sacro-magical, faith, and rationalized types (Nelson, 1973, 1999; Nielson, 2001). The intra-civilizational processes involve, among others, different primacy of these structures, conflicts among groups over the interpretations of the civilization’s key categories, and polarities within civilizational groups against the institutionalized variants of the civilization (Nielson, 2001). The founding figures of sociology have used ‘civilizations’ in their analysis of societies. Durkheim viewed ‘civilization’ as a ‘total social phenomenon’ with a ‘greater coefficient of expansion and internationalization’; civilization is much more than one ‘society’ or ‘nation state’ (Durkheim & Mauss, 1971). The Weberian writings of rationalization reflect hesitations about ‘Islam’ as civilization, but Weber increasingly showed concerns for understanding what happened outside the Western civilization (Swedberg, 2001). Contemporary scholars used ‘civilization’ as the collective expressions and action of 175 Muslim peoples and their cultures that transcend societies and nation-states (Eisenstadt, 1977, 2000; Huntington, 1993; Kalberg, 2021) The IDB statements about serving Muslim communities and cultures across societies and nation states show that its social goal (Figure 1) is civilizational in nature. To this end, IDB invests in long-term social and physical infrastructures of the Muslim communities. IDB promotes Islamic principles by structuring their financial investments in compliance with the principles of Islam and their cultural variants (referred to as ‘Islamic finance’). Majority shareholders (capital providers) of IDB are Muslim majority countries, preserving the continued support to the civilizational goal18. The economic goal of IDB is to ensure fair monetary return in the pursuit of the social goal. The social and economic goals of IDB are conflicting. Muslim majority countries are less integrated with the world through financial markets (Figure 2); they also have less developed financial markets and institutions internally (Figure 3). Hence, there is a need to obtain external finance to support Muslim economies. The credit scores of Muslim majority countries are less than those of the rest (Figure 5). At this backdrop, conflicts between the economic goal (credit) and the social goal (civilization) can arise in several ways. First, to serve Muslim communities, located 18 IDB had 59 member countries (called ‘shareholders’), which contributed to its capital (ownership or share), whereas the World Bank has 189 member countries. However, the top five shareholders of IDB are Saudi Arabia (26.57%), Algeria (10.66%), Iran (9.32%), Egypt (9.22%), and Turkey (8.41%), whereas the top five shareholders of the World Bank are United States (16.77%), Japan (7.22%), China (4.65%), Germany (4.21%), and France (3.94%). So, Western countries dominate the World Bank and Muslim majority countries dominate IDB (IDB Annual Reports, World Bank Annual Reports). In 2017, IDB had US$27.3 billion assets, compared to US$197 billion assets of the World Bank, the Western analog of IDB. 176 mostly in Muslim majority countries, Islamic Development Bank is to invest in low credit countries. Second, there is a large variation in the external finance needs of Muslim majority countries, as evidenced through the dispersion of their GDP growth rates and credit scores (Figure 4, 6). The less developed ones – also with low credit rating –will need financing from Islamic Development Bank. Indeed, a positive relationship between credit (rating) and financial development of a country is observed (Figure 7). ---INSERT FIGURES 2 - 7 ABOUT HERE--- Note that the explicit and primary activity to be undertaken by IDB towards its goals is investments. Having established the empirical setting and the clear tension present in it in terms of conflicting goals, I present the hypotheses, divided into three sets. The goal rationing hypotheses are about how social and economic goals interact to affect the allocation of investments. The goal justification hypotheses present the underlying mechanisms of external justification for investment allocations into social and economic goals. The goal discovery hypotheses discuss how external events lead to new goals and alter investment allocations. Goal rationing hypotheses: Facing conflicting and simultaneous goals, organizations would apportion its primary activity to reflect commitment to all goals. Such allocation is proposed by an ethnographic study in a Fortune 500 US manufacturing company (D’Adderio, 2014) and by studies on performance feedback in automobile manufacturing (Hu & Bettis, 2018) and in airlines industry (Gaba & Greve, 2018). In Islamic development investments, such goal rationing suggests that the investment 177 portfolio will reflect both social and economic goals. The obvious social goal is to invest in the Muslim communities, who reside in both Muslim majority and other countries. However, such a goal statement makes it intractable. So, a greater investment in Muslim majority countries would indicate that IDB is serving the social goal of promoting certain civilization. However, investments in Muslim majority countries do not indicate that the bank is ensuring the economic goal of safe return. So, while investing largely in Muslim majority countries, IDB investee countries will have variation in their financial development. High financial development of countries indicates a potential to generate a safe return on IDB investments, thereby serving the economic goal, which then supports investments in low financial development countries, thereby demonstrating the commitment to the social goal. Hence, I hypothesize the following. Hypothesis 1 (the social goal hypothesis): Islamic development investment is higher in Muslim-majority countries. Hypothesis 2 (the economic goal hypothesis): The countries in the Islamic Development Bank investment portfolio vary in their financial development. Goal justification hypotheses: Drawing on external actors is important, especially if a clear and immediate performance feedback mechanism is not available. Such uncertainty leads to imitation in organizations (DiMaggio & Powell, 1983; Haunschild & Miner, 1997; Lee & Strang, 2006; Tolbert & Zucker, 1983). The underlying process for such imitation can be frequency imitation (copying very common practices), trait imitation (copying practices of others with certain features), and outcome imitation 178 (imitation based on practice’s apparent impact on others) (Haunschild & Miner, 1997). Early institutional research points to frequency imitation (DiMaggio & Powell, 1983; Tolbert & Zucker, 1983). However, later research provided evidence for trait and outcome imitation; organizations do not merely copy when faced with ambiguities and uncertainties (Griliches, 1957; Lee & Strang, 2006; Levinthal & March, 1993; Mansfield, 1961; Reinganum, 1981; Rogers, 1995; Still & Strang, 2009). For example, the managers of a global bank do not copy what they do not understand (Still & Strang, 2006; Strang, 2010). Rather, a theory driven learning and emulation is used by large organizations like a financial conglomerate and nation states (Lee & Strang, 2006; Strang, 2010). Hence, imprecise goal definitions and an imprecise and infrequent feedback on the performance of goals would prompt organizations with multiple goals to seek externally valid justification criteria, which can be in the form of observable process emulation of organizations with superior information and legitimacy. Such emulation would signal to stakeholders that the organization has committed resources to both goals. Let me illustrate this in the context of Islamic development investments. The prominent development finance organizations are the World Bank and IMF. They have been in this business since 1945, whereas Islamic Development Bank (IDB) was founded much later in 1975. Given their experience, World Bank and IMF are deemed to have superior information advantages and legitimacy than other development organizations. Hence, it is likely that Islamic Development Bank would emulate the investment patterns of the World Bank and IMF. There is qualitative evidence that in early years, IDB attempted to emulate the World Bank and IMF 179 operations (Meenai, 1989). In recent years IDB has partnered with the World Bank and IMF in various projects (International Monetary Fund, 2011; Islamic Development Bank, 2015, 2016; World Bank, 2012). Based on the prior documented behavior of large organizations (Lee & Strang, 2006; Still & Strang, 2009), I argue that any emulation by IDB would not be mere pattern following; rather it would be driven by the need to justify the resource allocation for both social and economic goals. Such justification would also lead to a selective use of the World Bank and IMF model in Islamic investments in different countries. Generally, World Bank credit is geared towards development projects in less developed countries whereas IMF credit is geared towards financing countries during their budget and balance of payment (BOP) problems (Driscoll, 1995; Woods, 2000). So, while Islamic Development Bank would invest more in Muslim majority countries, it would emulate the World Bank for investing in less developed countries. World Bank credit to such countries would provide assurance that relevant institutions of the country have the experience of dealing with development finance. On the other hand, IDB investment in developed countries would emulate IMF credit. While investments in developed countries do not necessarily cater to the social-civilizational goal of IDB, they promise a safer return. However, such countries are likely to need development funding if they have large budget and BOP problems. So, if IDB seeks to support less-developed Muslim communities in developed countries, it would do so when IMF investment in them promise a safe return despite any potential budget and BoP problem. Furthermore, IDB would use additional external legitimation for investment in less developed and non-Muslim majority countries. Such countries are ‘deviant cases’ of Figure 1. 180 However, Muslim communities in the non-Muslim majority countries could need development finance for their socioeconomic development. However, in non-Muslim majority countries faith-based financing may not receive necessary support for implementation. In such a situation, the prominent presence of a certain Islamic creed (Sunni) community which allies with the Islamic creed of the dominant member countries of IDB would signal that IDB investments would receive appropriate social commitment and legitimacy for implementation. Hence, I hypothesize the following. Hypothesis 3: The relationship of Islamic development investment with the World Bank and IMF credit varies by the level of financial development of countries. Hypothesis 4: Islamic development investment in less developed countries is positively associated with the significant presence of Sunni Muslim population in these countries. Goal discovery hypotheses: Organizational goals are not fixed. Internal actions and feedback– such as operational accidents and poor performance – lead to differential attention to goals (Greve, 2008; Gaba & Greve, 2019; Stevens et al., 2015; Rowley et al., 2017). External actors can lead to changes in goals. State authorities can create incentives for certain organizational design, as found in health maintenance organizations (Strang, 1995); this can alter goal emphasis. Broader evaluative principles, espoused in the concept of mixed economy, can also shift resource allocations in organizations (Stark, 1996). Extraordinary events like natural disasters can spur founding of new organizations, as shown in the organizational ecology 181 literature (Dutta, 2017). This suggests that large events can also alter goal emphasis or lead to entirely new goals. In the empirical context of this paper, the motivating event of organizing a faith-based development bank was the Yom Kippur war that triggered civilizational consciousness to protect the cultural and community interests of Muslims (Meenai, 1989). Note that the Yom Kippur War took place in October 1973 between Israel and a coalition of Muslim-majority Arab countries including Saudi Arabia. In that war won by Israel, the Christian-majority West sided with Israel, triggering the call for a global Muslim unity, which propagated the idea of a common economic union for Muslims through the founding of Islamic Development Bank. This shows how wars can trigger a civilizational consciousness of promoting certain cultures, communities, and faith. Not all Muslim countries, however, took an active part with the Arab coalition in the Yom Kippur war. Hence, even though serving Muslim community is the social goal of IDB, the goal is likely to be manifested strongly in the Yom Kippur Arab coalition (including Saudi Arabia). However, if the war only triggered a temporary sense of community in a clique of Muslim countries, the war coalition with Saudi Arabia would not affect IDB investments. Another major event that divided the Muslim world into Saudi vs non-Saudi alliance was the Gulf War of 1991. The war involved significant resources from 35 participating countries. The war provided a significant demarcation line for whether countries defended and stood with the birthplace of Islam, Saudi Arabia. Hence, the event revealed to the pan-Islamic 182 organizations (like IDB) a new community to protect and promote. Hence, I hypothesize the following. Hypothesis 5: Islamic development investment is higher in the countries that were members of the Arab coalition in the Yom Kippur War. Hypothesis 6: Islamic development investment is higher in the countries that were members of the Saudi coalition in the Gulf War. Variables and data Dependent variable: The dependent variable of this study is Islamic Development Bank (IDB) investments in countries. The period is 1976 – 2016. IDB, founded in 1975, made their first investment in 1976. 2016 is the latest year with recent data for the variables. The dependent variable, IDB investment in a country for a given year is measured by the natural logarithm of all IDB investments (US$ millions) in a country plus 1. Addition of 1 makes 0 values defined after a natural log transformation. Independent variables – normative influence of other development models: World Bank credit is measured by the natural logarithm of all World Bank loans and credits in a country (US$ millions) for a given year plus 1. IMF credit is measured by the natural logarithm of all IMF credits in a country (US$ millions) for a given year plus 1. Independent variables – financial development and creditworthiness: Financial development (Fin Dev) is measured by the financial development index of a country, 183 developed by an IMF staff paper, with values ranging from 0 to 1; higher values indicate greater financial development. GDP growth rate for the year for a country is the percentage change in GDP. Credit rating, a measure of creditworthiness of a country for a given year, ranges from 0 to 100; higher values indicate greater creditworthiness, i.e., lower credit risk. Financial globalization, a measure of financial integration of a country with the rest of the world for a given year, ranges from 0 to 100; higher values indicate greater financial integration. Independent (social, civilizational goal) variables: Muslim majority is ‘1’ if a country has Muslim majority in the religious distribution of their population, else ‘0’. Sunni over Shia majority is ‘1’ if a country with Sunni over Shia majority in their Muslim population, else ‘0’. Yom Kippur Arab coalition is ‘1’ if a country was a member of the Arab coalition during the Yom Kippur war, else ‘0’. Gulf War Saudi coalition is ‘1’ if a country was a member of the Saudi alliance during the Gulf war, else ‘0’. Post 1991 year is ‘1’ if a year is after 1991, else ‘0’. Control variables – location-based measures of information asymmetry: Distance from Saudi Arabia and USA are location-based measures of information asymmetry. Distance from Saudi is the natural logarithm of the distance (km) of the countries from Saudi Arabia. Distance from USA is the natural logarithm of the distance (km) of a country from the USA. Legal origin is ‘1’ if the legal origin of a country has a basis in common law, else ‘0’. Controls for cultural influences: Former British colony is ‘1’ if a country is a former British colony, else ‘0’. Muslim majority former British colony is ‘1’ if a country is a 184 former British colony with Muslim majority population, else ‘0’. Arabic is ‘1’ if the official or major language of a country is Arabic, else ‘0’. English is a ‘1’ if the official or major language of a country is English, else ‘0’. French is ‘1’ if the official or major language of a country is French, else ‘0’. Controls for the effect of learning: IDB projects in neighbors measures the effect of IDB learning in neighboring countries, whereas one-year lag of IDB investment measures learning in the same country. IDB projects in neighbors is the proportion of neighboring countries that received IDB investments so far (including the current year). Neighboring countries are defined by either of the following: separated by a land or river border, separated by 12 miles of water or less, separated by 24 miles of water or less (but more than 12 miles), separated by 150 miles of water or less (but more than 24 miles), and separated by 400 miles of water or less (but more than 150 miles). The data sources for all the variables are in Table 1. ---INSERT TABLE 1 ABOUT HERE--- Descriptive statistics Table 2 presents the list of countries and territories that received investments from Islamic Development Bank. Table 3 presents descriptive statistics of variables. The average Islamic Development Bank (IDB) investment for country-years is about US$17 million (SD ≈ US$95mil). See example of such projects in the Appendix to this chapter. The average World Bank credit for country-years is about US$847 185 million (SD ≈ US$2,734mil). The average IMF credit is about US$337 million (SD ≈ US$1,434mil). The average World Bank and IMF credit to countries is higher than IDB investment. Note, I use the term ‘investment’ for IDB lending to countries but use the term ‘credit’ for World Bank and IMF lending to countries. The reason is that IDB lends through Islamic principles, which restrict interest-based lending; hence the term ‘investment’. ---INSERT TABLE 2, 3 ABOUT HERE--- Countries vary in GDP growth (M = 3.6%, SD =7.2%), financial development (M = 0.26, SD = 0.19), financial globalization (M = 50.52, SD = 17.97), and credit rating (M = 64.87, SD = 12.82). About 26% of the countries have common law origin; 29% countries are former British colonies; 25% countries are Muslim majority; and 34% countries have Sunni majority over Shia; 13% countries have Arabic as an official (or major) language; 28% countries have English as an official (or major) language; 17% countries have French as an official (or major) language. The average distance of the countries from Saudi Arabia and USA is about 6,309 kilometers and 8,685 kilometers respectively. The countries voted like the United States in 54% of the UN resolutions and voted like Saudi Arabia in 21% of resolutions. In 51% of the country-years, neighboring countries received IDB investments. Table 4 presents correlations among variables. IDB investment in countries is positively correlated with World Bank and IMF credit (WB & IDB ρ: 0.30, p<.001; IMF & IDB ρ: 0.29, p<.001). The correlation between IMF and World Bank credit (IMF & WB ρ: 0.85, p<.001) is higher than each of their correlation with IDB 186 investment. GDP growth is positively correlated with IDB investment (IDB & GDP growth ρ = 0.07, p<.001) and World Bank credit (WB & GDP growth ρ = 0.05, p<.001). The relationship between IMF credit and GDP growth is not significant (ρ = 0.02, p>.05) as IMF lends to countries during their economic crises. IDB investment, and World Bank and IMF credit are negatively correlated with credit rating of countries (IDB & Credit rating ρ = -0.06, p<.001; WB & Credit rating ρ = -0.38, p<.001; IMF & Credit rating ρ = -0.31, p<.001); this is consistent with the idea that development banks lend to less developed, low credit economies. This result is consistent with the negative correlations of financial development of countries with IDB investment and World Bank and IMF credit: IDB & Fin Dev ρ = -0.06, p<.001; WB & Fin Dev ρ = -0.39, p<.001; IMF & Fin Dev ρ = -0.32, p<.001). ---INSERT TABLE 4 ABOUT HERE--- IDB investment is further positively correlated with Muslim majority countries (ρ = 0.64, p<.001), Sunni majority countries (ρ = 0.41, p<.001), Arabic official/major language (ρ = 0.40, p<.001), and IDB investment in neighboring countries (ρ = 0.35, p<.001). IDB investment is negatively correlated with distance from Saudi Arabia (ρ = -0.30, p<.001), voting similarity to Saudi Arabia in the United Nations (ρ = -0.12, p<.001), and common law countries (ρ = -0.04, p<.01). The World Bank credit in the countries is further positively correlated with Muslim majority countries (ρ = 0.18, p<.001), Sunni majority countries (ρ = 0.23, p<.001), Arabic as a major language (ρ = 0.03, p<.05), and IDB investment in neighboring countries (ρ = 0.27, p<.001). World Bank credit is negatively correlated with voting like Saudi Arabia in UN resolutions (ρ 187 = -0.19, p<.001). The IMF credit in countries is positively correlated with Muslim majority (ρ = 0.14, p<.001), Sunni majority (ρ = 0.26, p<.001), and IDB investment in neighboring countries (ρ = 0.26, p<.001). The IMF credit is negatively correlated with voting like Saudi Arabia in UN resolutions (ρ = -0.16, p<.001). Results for goal rationing hypotheses Table 5 presents the results of the regression (Equation 1) for explaining country-level Islamic investments (IDB investment, the dependent variable). The major explanatory variable is Muslim majority population of the countries, while accounting for alternative explanations. I used a one-year lag of the following variables to address potential endogeneity: IDB investment, World Bank credit, IMF credit, financial development, GDP growth, credit rating, and financial globalization. The model has country-specific and time-specific fixed effects considered through country and time dummies. Note, the measures of IDB investment, World Bank credit, and IMF credit are the natural logarithm of their values (US$ millions) plus 1. 𝐼𝐷𝐵 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 = 𝛽 + 𝛽 𝐼𝐷𝐵 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 + 𝛽 𝑊𝑜𝑟𝑙𝑑 𝐵𝑎𝑛𝑘 𝑐𝑟𝑒𝑑𝑖𝑡 + 𝛽 𝐼𝑀𝐹 𝑐𝑟𝑒𝑑𝑖𝑡 + 𝛽 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑑𝑒𝑣𝑒𝑙𝑜𝑝𝑚𝑒𝑛𝑡 + 𝛽 𝐺𝐷𝑃 𝑔𝑟𝑜𝑤𝑡ℎ + 𝛽 𝐶𝑟𝑒𝑑𝑖𝑡 𝑟𝑎𝑡𝑖𝑛𝑔 + 𝛽 𝐷𝑖𝑠𝑡𝑎𝑛𝑐𝑒 𝑓𝑟𝑜𝑚 𝑆𝑎𝑢𝑑𝑖 + 𝛽 𝐷𝑖𝑠𝑡𝑎𝑛𝑐𝑒 𝑓𝑟𝑜𝑚 𝑈𝑆𝐴 + 𝛽 𝐿𝑒𝑔𝑎𝑙 𝑜𝑟𝑖𝑔𝑖𝑛 + 𝛽 𝑀𝑢𝑠𝑙𝑖𝑚 𝑚𝑎𝑗𝑜𝑟𝑖𝑡𝑦 𝑓𝑜𝑟𝑚𝑒𝑟 𝐵𝑟𝑖𝑡𝑖𝑠ℎ 𝑐𝑜𝑙𝑜𝑛𝑦 + 𝛽 𝐴𝑟𝑎𝑏𝑖𝑐 + 𝛽 𝐸𝑛𝑔𝑙𝑖𝑠ℎ + 𝛽 𝐹𝑟𝑒𝑛𝑐ℎ + 𝛽 𝑉𝑜𝑡𝑖𝑛𝑔 𝑙𝑖𝑘𝑒 𝑆𝑎𝑢𝑑𝑖 𝑖𝑛 𝑈𝑁 + 𝛽 𝑉𝑜𝑡𝑖𝑛𝑔 𝑙𝑖𝑘𝑒 𝑈𝑆𝐴 𝑖𝑛 𝑈𝑁 + 𝛽 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑔𝑙𝑜𝑏𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 + 𝛽 𝑀𝑢𝑠𝑙𝑖𝑚 𝑚𝑎𝑗𝑜𝑟𝑖𝑡𝑦 + 𝛽 𝐼𝐷𝐵 𝑝𝑟𝑜𝑗𝑒𝑐𝑡𝑠 𝑖𝑛 𝑛𝑒𝑖𝑔ℎ𝑏𝑜𝑟𝑠 + 𝑖. 𝑐𝑜𝑢𝑛𝑡𝑟𝑦 𝑑𝑢𝑚𝑚𝑖𝑒𝑠 + 𝑖. 𝑦𝑒𝑎𝑟 𝑑𝑢𝑚𝑚𝑖𝑒𝑠 + 𝑢 --- (Equation 1) The coefficient on the Muslim majority dummy variable (Table 5) is significant and positive (p<.001). Hence, Islamic development investment is much 188 higher in Muslim majority countries. Financial development is not significant (p >.05). GDP growth rate is statistically significant and positive (p <.05), and credit rating is also significant and positive (p<.01). World Bank credit is significant and positive (p<.01) in this full sample model, but IMF credit is not. The measures involving voting in the United Nations and distance from Saudi Arabia are not significant, while Arabic as an official language is positive and significant (p<.05). The financial integration of a country with the rest of the world negatively affects IDB investments in countries (p<.001). While IDB investments appear to aim for good credit rating countries, they also flow to countries lacking access to the world economy. Unlike the predictions in the economic literature (La Porta et al., 2008), legal origin (of common law) is not statistically significant. However, it is consistent with the idea that development finance would behave differently from commercial finance. The influence of IDB investments in neighboring countries is not significant (p >.05). Overall, Hypothesis 1 is supported– Islamic finance investments is higher in Muslim majority countries. ---INSERT TABLE 5 ABOUT HERE--- Now note the results for the second hypothesis: whether there is a significant variation in the state of development among IDB investee countries. The confirmation of the first hypothesis (higher investment in Muslim majority countries) together with any confirmation of the second hypothesis would provide evidence for goal rationing. Figure 8 shows the trend of financial development index of IDB investee countries- categorized by the Muslim majority and other countries. Figure 9 shows the trend of 189 credit rating of IDB investee countries - categorized by the Muslim majority and other countries. The figures show dispersion in financial development and credit scores of IDB investee countries, supporting Hypothesis 2. ---INSERT FIGURE 8, 9 ABOUT HERE--- I also computed the yearly Herfindahl-Hirschman Index (HHI) for the distribution of Islamic development investments across countries in financial development index quintiles. The formula is as follows, where s1= the percentage of IDB investment in quintile 1 of financial development index, s2 = the percentage of IDB investment in quintile 2 of financial development index, s3 = the percentage of IDB investment in quintile 3 of financial development index, s4 = the percentage of IDB investment in quintile 4 of financial development index, and s5 = the percentage of IDB investment in quintile 5 of financial development index. 𝐻𝑒𝑟𝑓𝑖𝑛𝑑𝑎ℎ𝑙 − 𝐻𝑖𝑟𝑠𝑐ℎ𝑚𝑎𝑛 𝐼𝑛𝑑𝑒𝑥 = 𝑠 + 𝑠 + 𝑠 + 𝑠 + 𝑠 Hypothetically, if all IDB investment is concentrated in countries with one level (a specific quintile here) of financial development, the index would have a value of 1. So, lower values would indicate equitable distribution of IDB investment across countries with various states (quintiles) of financial development. If the investment is equally divided across the five quintiles, the HHI value should be 5 X (0.25)2 = 0.31. The average HHI over 41 years is 0.32, which is significantly less than ‘1’ in one sample test of means (p<.001) and less than 0.50 (p<.001), but not much different from 0.31 (p = .08). This provides further evidence of IDB portfolio diversification across countries with different levels of financial development. 190 I also compare the average Islamic development investments between high (above average) financial development and low (average and below) financial development countries through a t-test of means. The difference of IDB investments between these two categories is not significant. However, I find IDB investments go more towards low credit rating (below average) countries, suggesting that while IDB rations investments across countries with differential levels of development, the investments go more towards countries with low credit rating. I repeat the regression analysis of Equation 1, additionally including the interaction between financial development dummy (high financial development = 1 if a country has above average financial development in a year, else 0) and credit rating dummy (high credit rating = 1 if a country has above average credit rating score in a year, else = 0). In high credit rating and high financial development countries, Islamic financial investment is higher; also, greater investments go to low credit rating countries whereas financial development (dummy) is not significant on its own (Table 6). Hence, credit rationing occurs across countries with different levels of development, serving the goal of community while also maintaining a scope for safe economic return. ---INSERT TABLE 6 ABOUT HERE--- Results for goal justification hypotheses Table 7 presents the results for Hypothesis 3 that IDB emulation of World Bank and IMF is conditional on the state of financial development of the investee countries. In low financial development (average and less) countries, the coefficient on World Bank 191 credit is significant and positive (p<.001), whereas the coefficient on IMF credit is negative and significant at only 5% (p<.05). In high financial development countries (above average financial development index), the coefficient on World Bank credit is not significant whereas the coefficient of IMF credit is significant and positive (p<.01). Hence, in developed countries, IDB investment is influenced by the IMF model, whereas in less developed countries, IDB investment is influenced by the World Bank model. Hence, Hypothesis 3 is supported; Bretton Woods institutions provide examples for IDB investments, conditional on the financial development of investee countries. ---INSERT TABLE 7 ABOUT HERE--- Table 8 presents the results for Hypothesis 4. The coefficient on the variable, Sunni over Shia majority, is significant and positive in the full sample (p<.05). However, in low financial development countries, Sunni over Shia majority has significant and positive (p<.001) influence on IDB investments, whereas in high financial development countries, Sunni over Shia majority has significant and negative (p<.05) influence on IDB investments. So, I find partial support for Hypothesis 4. In low financial development countries, IDB prioritized creed (Sunni) over credit (safe return) whereas in high financial development countries, IDB prioritized credit (safe return) over creed (Sunni). From the viewpoint of the goal rationing hypothesis, one type of investment supports the other, such that both the economic and social goal is safeguarded. ---INSERT TABLE 8 ABOUT HERE--- 192 Results for goal discovery hypotheses I used two quasi-natural experiments – the Yom Kippur War of 1973 and the Gulf War of 1991 –that divided countries into the Saudi Arabia alliance and the rest. The Yom Kippur War Arab coalition, led by Egypt and Syria, was supported by Saudi Arabia, Algeria, Jordan, Iraq, Libya, Kuwait, Tunisia, Morocco, Cuba, and the Soviet Union. In the Gulf War, Saudi Arabia supported and played a prominent role in the USA-led coalition of 35 countries against Iraq. Both events serve to discover the social goal (civilizational community) of IDB. The effect of Yom Kippur War coalition: To understand the effect of Yom Kippur war coalition (Hypothesis 5), I first use a difference analysis that compares the treatment group (a country was part of the Arab coalition) and control group (a country was not part of the Arab coalition). The following equation reflects this difference in difference analysis, where Gulf War Saudi coalitionit is ‘1’ if a country was in the Yom Kippur War Arab coalition, else ‘0’. 𝐼𝐷𝐵 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 = 𝛽 + 𝛽 𝑌𝑜𝑚 𝐾𝑖𝑝𝑝𝑢𝑟 𝐴𝑟𝑎𝑏 𝑐𝑜𝑎𝑙𝑖𝑡𝑖𝑜𝑛 + 𝛽 𝐼𝐷𝐵 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 + 𝛽 𝑊𝑜𝑟𝑙𝑑 𝐵𝑎𝑛𝑘 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 + 𝛽 𝐼𝑀𝐹 𝑐𝑟𝑒𝑑𝑖𝑡 + 𝛽 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑑𝑒𝑣𝑒𝑙𝑜𝑝𝑚𝑒𝑛𝑡 + 𝛽 𝐺𝐷𝑃 𝑔𝑟𝑜𝑤𝑡ℎ + 𝛽 𝐶𝑟𝑒𝑑𝑖𝑡 𝑟𝑎𝑡𝑖𝑛𝑔 + 𝛽 𝐷𝑖𝑠𝑡𝑎𝑛𝑐𝑒 𝑓𝑟𝑜𝑚 𝑆𝑎𝑢𝑑𝑖 + 𝛽 𝐷𝑖𝑠𝑡𝑎𝑛𝑐𝑒 𝑓𝑟𝑜𝑚 𝑈𝑆𝐴 + 𝛽 𝐿𝑒𝑔𝑎𝑙 𝑜𝑟𝑖𝑔𝑖𝑛 + 𝛽 𝑀𝑢𝑠𝑙𝑖𝑚 𝑚𝑎𝑗𝑜𝑟𝑖𝑡𝑦 𝑓𝑜𝑟𝑚𝑒𝑟 𝐵𝑟𝑖𝑡𝑖𝑠ℎ 𝑐𝑜𝑙𝑜𝑛𝑦 + 𝛽 𝐴𝑟𝑎𝑏𝑖𝑐 + 𝛽 𝐸𝑛𝑔𝑙𝑖𝑠ℎ + 𝛽 𝐹𝑟𝑒𝑛𝑐ℎ + 𝛽 𝑉𝑜𝑡𝑖𝑛𝑔 𝑙𝑖𝑘𝑒 𝑆𝑎𝑢𝑑𝑖 𝑖𝑛 𝑈𝑁 + 𝛽 𝑉𝑜𝑡𝑖𝑛𝑔 𝑙𝑖𝑘𝑒 𝑈𝑆𝐴 𝑖𝑛 𝑈𝑁 + 𝛽 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑔𝑙𝑜𝑏𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 + 𝛽 𝑆𝑢𝑛𝑛𝑖 𝑜𝑣𝑒𝑟 𝑆ℎ𝑖𝑎 𝑚𝑎𝑗𝑜𝑟𝑖𝑡𝑦 + 𝛽 𝐼𝐷𝐵 𝑝𝑟𝑜𝑗𝑒𝑐𝑡𝑠 𝑖𝑛 𝑛𝑒𝑖𝑔ℎ𝑏𝑜𝑟𝑠 + 𝑖. 𝑐𝑜𝑢𝑛𝑡𝑟𝑦 𝑑𝑢𝑚𝑚𝑖𝑒𝑠 + 𝑖. 𝑦𝑒𝑎𝑟 𝑑𝑢𝑚𝑚𝑖𝑒𝑠 + 𝑢 --- (Equation 2) The coefficient on Yom Kippur Arab coalition (in full sample) is not significant (Table 9). However, the coefficient on Yom Kippur Arab coalition is positive and 193 significant (p<.01) in the case of developed countries. Hence, the influence of the Yom Kippur War coalition on IDB investment is conditional on the level of financial development of countries. ---INSERT TABLE 9 ABOUT HERE— The effect of Gulf War coalition: The difference of IDB investments between the Gulf War Saudi coalition countries and the rest increased further after the Gulf War in 1991 (Figure 10). ---INSERT FIGURE 10 ABOUT HERE— To understand the effect of Gulf War more precisely, I use a difference-in-difference analysis that compares the pre and post treatment changes of IDB investment of the treatment group with the pre and post treatment changes of IDB investment of the control group, where the treatment years are the post 1991 years, and the treatment is membership in Gulf war Saudi coalition (Equation 3). The Gulf War affects only the treatment group (Gulf War Saudi coalition). Here, Post 1991 yearit is ‘1’ if t is the post treatment period (1992 onwards), else ‘0’, and Gulf War Saudi coalitionit is ‘1’ if a country was in the Gulf War Saudi coalition, else ‘0’. 𝐼𝐷𝐵 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 = 𝛽 + 𝛽 𝑃𝑜𝑠𝑡 1991 𝑦𝑒𝑎𝑟 + 𝛽 𝐺𝑢𝑙𝑓 𝑊𝑎𝑟 𝑆𝑎𝑢𝑑𝑖 𝑐𝑜𝑎𝑙𝑖𝑡𝑖𝑜𝑛 + 𝛾. 𝑃𝑜𝑠𝑡 1991 𝑦𝑒𝑎𝑟 . 𝐺𝑢𝑙𝑓 𝑊𝑎𝑟 𝑆𝑎𝑢𝑑𝑖 𝑐𝑜𝑎𝑙𝑖𝑡𝑖𝑜𝑛 + 𝛽 𝐼𝐷𝐵 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 + 𝛽 𝑊𝑜𝑟𝑙𝑑 𝐵𝑎𝑛𝑘 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 + 𝛽 𝐼𝑀𝐹 𝑐𝑟𝑒𝑑𝑖𝑡 + 𝛽 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑑𝑒𝑣𝑒𝑙𝑜𝑝𝑚𝑒𝑛𝑡 + 𝛽 𝐺𝐷𝑃 𝑔𝑟𝑜𝑤𝑡ℎ + 𝛽 𝐶𝑟𝑒𝑑𝑖𝑡 𝑟𝑎𝑡𝑖𝑛𝑔 + 𝛽 𝐷𝑖𝑠𝑡𝑎𝑛𝑐𝑒 𝑓𝑟𝑜𝑚 𝑆𝑎𝑢𝑑𝑖 + 𝛽 𝐷𝑖𝑠𝑡𝑎𝑛𝑐𝑒 𝑓𝑟𝑜𝑚 𝑈𝑆𝐴 + 𝛽 𝐿𝑒𝑔𝑎𝑙 𝑜𝑟𝑖𝑔𝑖𝑛 + 𝛽 𝑀𝑢𝑠𝑙𝑖𝑚 𝑚𝑎𝑗𝑜𝑟𝑖𝑡𝑦 𝐵𝑟𝑖𝑡𝑖𝑠ℎ 𝑐𝑜𝑙𝑜𝑛𝑦 + 𝛽 𝐴𝑟𝑎𝑏𝑖𝑐 + 𝛽 𝐸𝑛𝑔𝑙𝑖𝑠ℎ + 𝛽 𝐹𝑟𝑒𝑛𝑐ℎ + 𝛽 𝑉𝑜𝑡𝑖𝑛𝑔 𝑙𝑖𝑘𝑒 𝑆𝑎𝑢𝑑𝑖 𝑖𝑛 𝑈𝑁 + 𝛽 𝑉𝑜𝑡𝑖𝑛𝑔 𝑙𝑖𝑘𝑒 𝑈𝑆𝐴 𝑖𝑛 𝑈𝑁 + 𝛽 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑔𝑙𝑜𝑏𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 + 𝛽 𝑆𝑢𝑛𝑛𝑖 𝑜𝑣𝑒𝑟 𝑆ℎ𝑖𝑎 𝑚𝑎𝑗𝑜𝑟𝑖𝑡𝑦 + 194 𝛽 𝐼𝐷𝐵 𝑝𝑟𝑜𝑗𝑒𝑐𝑡𝑠 𝑖𝑛 𝑛𝑒𝑖𝑔ℎ𝑏𝑜𝑟𝑠 + 𝑖. 𝑐𝑜𝑢𝑛𝑡𝑟𝑦 𝑑𝑢𝑚𝑚𝑖𝑒𝑠 + 𝑖. 𝑦𝑒𝑎𝑟 𝑑𝑢𝑚𝑚𝑖𝑒𝑠 + 𝑢 --- (Equation 3) The coefficient of interest, 𝛾 is positive and significant in full, low development, and high development samples (Table 10). Hence, in post 1991 periods countries in the Saudi coalition in the gulf war received significantly more IDB investments than other countries. Unlike the Yom Kippur War, the discovery of community during the Gulf War had a persistent effect on resource allocation to goals. ---INSERT TABLE 10 ABOUT HERE— Tests for alternative explanations Short-term vs long-term effect of the Gulf War treatment: The results of the Gulf War treatment is much stronger in the longer term than shorter-term. One plausible reason is that development projects have long durations, and investment in such projects is done incrementally over time. Placebo effect of the gulf war treatment: I tested if IDB investments prior to the Gulf War were different between the Gulf War Saudi coalition and other countries. I chose 1983, the mid-year between 1976 (the sample start year) and 1991 (the gulf war year), as the placebo effect year. The interaction between the placebo year (‘1’ if 1991>= year >1983, ‘0’ if 1983>= year >=1976) and the Gulf War Saudi coalition dummy variable is not significant. The placebo effect of the Gulf war treatment does not work, providing stronger evidence for the Gulf war treatment. 195 Non-Muslim, non-Arab alliance countries: 118 countries (3,473 country-years) are non-Muslim, non-Sunni majority and are neither in Yom Kippur Arab coalition nor in Gulf War Saudi coalition. Of them, 63 countries (only 217 country-years) received IDB investment; such investment is very small and is largely driven by the last year’s IDB investment in countries. Discussion The results from Islamic development investments over the period 1976 – 2016 in 135 countries provide evidence for the theory of multiple goals presented in this paper. The results have implications for organizations with conflicting goals without any clear criteria for immediate feedback on the performance of those goals. The empirical context shows the importance of understanding goals as mutually constitutive and interdependent, often justified through selective emulation of legitimate external actors and altered by external events. In the event of the noted characteristics of multiple, conflicting, and interdependent social and economic goals, organizations ration resources such that the primary activity reflects certain allocation of resources towards all goals. Such allocation ensures that the social-civilizational goal of serving certain cultures and communities is simultaneously balanced with allocation of resources to the economic goal of earning a fair monetary return; that is the essence of the goal rationing hypothesis. Also, in the absence of immediate, market-oriented feedback criteria on goals, organizations use broader conception of such goals in the society to indicate 196 their resources are purposely allocated towards achievement of those goals –that would appear so in their primary, observable activity. In context of Islamic development investments, I find that Islamic Development Bank, having similar goal characteristics, largely allocates its investments (the primary, observable activity) to the Muslim majority countries, thereby serving its social-civilizational goal of promoting Muslim communities and cultures. However, its investee countries vary in their level of development such that a fair overall return is achieved by safer return from developed countries and less-than-safe return from less developed countries. Thus, the bank (IDB) simultaneously communicates its intention to achieve both social and economic goals by a strategy of goal rationing. Thus, this paper is a departure from the prior arguments that goals are pursued in a simultaneous fashion, that is one after another (Cyert & March, 1963; Greve, 2008), where such simultaneity is altered through economic and survival contingencies as found through clear feedback to performance (Ethiraj & Levinthal, 2009; Gaba & Greve, 2019), as if one goal can be put hold where the other is being achieved. Rather, goals are mutually constitutive, the ‘social goal’ supports the social legitimacy of organizations, and the economic goal supports the economic legitimacy of the organization, and both are pursued simultaneously, one supporting the other in the primary, observable activity of organizations– as shown in the case of Islamic development investments. The annual reports and press releases of Islamic Development Bank provide qualitative evidence for such resource allocation. The Chairman of the bank noted the prevalent ‘approval culture’ in the bank, which refers to ‘approval of investments’ as the primary activity of the bank. However, such approval culture also rests on the contributor countries for 197 a source of funds. The chairman has recently called for changing such a culture by using private sector funds. If this change occurs, IDB is likely to be exposed to various other interest groups and it remains to be seen whether the civilizational interests of the social goal are protected after private investors are allowed on board. The statements of IDB chairman in the annual report of 2007 reads verbatim, “We need to keep our development model in step with these challenges require a shift in our business model from an approval culture to one leveraging more private capital, engaging more with civil society and philanthropic foundations, strengthening partnerships with development partners to mobilize additional resources and sharing best practices on what has worked in development activities.” (Islamic Development Bank Annual Report, 1428H). The absence of immediate, clear market-oriented criteria to communicate performance towards goals suggests that organizations selectively emulate legitimate actors in the external environment to provide justification for their pursuits – that is the essence of the goal justification hypothesis. Islamic Development Bank appears to selectively emulate the Western development finance models of the World Bank and IMF. The prior literature suggests nation states emulate economic policies of other nation states (Lee & Strang, 2006) and that international organizations and nation states affect each other (Copelovitch, 2010; Nielson & Tierney, 2003; Humphrey & Michaelow, 2013; Simmons et al., 2008; Woods, 2006). This paper specifies why and how development models of international organizations influence each other: in less developed countries IDB emulates the World Bank and in developed countries IDB emulates IMF. Also, IDB annual reports and press releases provide evidence for 198 the goal justification hypothesis, especially with reference to the World Bank and International Monetary Fund. In 2007, IDB became a sponsor of the World Bank administered International Comparison Programme (ICP), considered the world’s largest statistical initiative that produces comparable economic data for countries. Various reports and press releases support increasing IDB engagement with the World Bank. In 2009, IDB participated in developing a report with other multilateral development banks (MDBs), as they are termed, to craft a strategy to support the World Bank and other MDBs. Moreover, if the strategy of the report is implemented through greater cross-financing among MDBs, the goal justification hypothesis would receive greater support in the future. IDB has used its research wing, Islamic Research and Training Institute, and its sponsored standard-setting body, Accounting and Auditing Organisation for Islamic Financial Institutions, to collaborate with IMF for developing standards for management, transparency, capital adequacy, accounting practice, and special needs of Islamic investments. Another source of IDB emulation of the western development models are development goals set by the United Nations like the sustainable development goals. Such goals have featured heavily in recent annual reports of IDB. Goal rationing and justification cannot explain changes in resource allocation to goals due to changes in the external environment; the goal discovery hypothesis attends to such explanation. For example, the idea of primary communities, their roles, and their needs in a civilization can change. In case of the founding and investments of IDB, I find the role of wars in triggering civilizational consciousness to protect and promote certain faith, cultures, and communities. The Yom Kippur/Ramadan War of 199 1973 provided the foundation for creating a common economic union for Muslims in their conflicts against the Judo-Christian civilizations. This prompted the establishment of Islamic Development Bank. Then, the event of Gulf War of 1991 revealed which nation states stood with Saudi Arabia in the event of a major crisis. I find such events implicitly change the conception of community as evidenced through differential allocation of IDB investments between Arab alliance countries and the rest (in the Yom Kippur War), and between Saudi alliance countries and the rest (in the Gulf War). However, in recent times, there is an increasing political engagement between the Middle Eastern Arab countries and Israel (Rahman, 2021). Such engagement can alter the civilizational demarcation among Islamic, Christian, and Jewish communities and the patterns of Islamic development investments in future. Conclusion Conflicting goals are prevalent in various organizations: for-profit and non-profit firms, nation states, and development agencies. Social and environmental interest groups are also providing organizations with diverse goals. Increasing civilizational consciousness, from the West, China to the Muslim world, is giving rise to organizations with civilizational goals that contend with economic goals. Here, organizations cannot necessarily halt resource allocation to one goal, while the others are being achieved. Goals are mutually constitutive yet conflicting and lack direct, immediate feedback. So, organizations simultaneously allocate resources to broader concepts of all goals and selectively emulate legitimate actors to justify such 200 allocation. External events like wars can alter the goals and change resource allocations. These ideas – as espoused by Islamic development investments– support the theory of multiple goals of this paper. The classical theories and contemporary debates on multiple organizational focus heavily on sequential attention to goals. I rather show that goals, conflicting yet mutually constitutive, lead to simultaneous resource allocation to demonstrate a pursuit of all of them. The external environment often takes a back-seat in the debate of multiple goals; but I show the strategic emulation of external actors and the influence of external events in justifying and discovering goals. In the realm of international organizations, this paper shows the interaction between secular development models and a non-secular development model and informs how different civilizational ideas and organizations interact. This paper has several limitations as it does not measure the direct effect of external goal monitoring agencies. Such organizations are quite prevalent, such as audit firms for exchange listed companies, and funding agencies of non-profit organizations. Also, the cooperation and competition between international development organizations can be further examined. 201 REFERENCES – CHAPTER 5 Barnard, C. I. (1938). The Functions of the Executive. Harvard University Press, Cambridge, MA. Boughton, J. M. (2004). 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Cornell University Press, Ithaca & London. 208 Figure 2 : Average Financial Globalization Index of Muslim Majority Countries and Not Muslim Majority Countries 70 Muslim Majority Not Muslim Majority 60 50 40 30 20 10 0 1976 1981 1986 1991 1996 2001 2006 2011 2016 Year Figure 3: Average Financial Development Index of Muslim Majority Countries and Not Muslim Majority Countries Muslim Majority Not Muslim Majority 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 1976 1981 1986 1991 1996 2001 2006 2011 2016 Year 209 Financial Development Index (0 to 1) Financial Globalizaiton Index (0 to 100) Figure 4: Comparative Standard Deviation of GDP Growth Rate between Muslim Majority and Not Muslim Majority 20 Countries 18 Muslim Majority Not Muslim Majority 16 14 12 10 8 6 4 2 0 1976 1981 1986 1991 1996 2001 2006 2011 2016 Year Figure 5: Average Credit Rating Scores of Muslim Majority and Not Muslim Majority Countries 80 70 60 50 40 Muslim Majority Not Muslim Majority 30 20 10 0 1976 1981 1986 1991 1996 2001 2006 2011 2016 Year 210 Credit Rating Score (0 to 100) GDP Growth Rate (%) Figure 6: Standard Deviation of Credit Scores of Muslim 18 Majority and Not Muslim Majority Countries 16 Muslim Majority Not Muslim Majority 14 12 10 8 6 4 2 0 1976 1981 1986 1991 1996 2001 2006 2011 2016 Year 211 Credit Rating Score (0 to 100) Figure 7: Scatter Plot between Financial Development Index and Credit Rating Quintiles 212 Figure 8: Dispersion of Financial Development Index for Countries that Received Islamic Development Investments (X-axis is year, Y-axis is financial development index for a country-year) 213 Figure 9: Dispersion of Crediting Rating for Countries that Received Islamic Development Investments 214 Figure 10: Comparison of IDB Investments between the Gulf War Saudi Coalition and Not Gulf War Saudi Coalition Countries Yearly Average IDB Investment By Gulf War Groups 2.5 Gulf War Saudi Coalition 2 Not Gulf War Saudi Coalition 1.5 Gulf War 1 0.5 0 1976 1981 1986 1991 1996 2001 2006 2011 2016 Year 215 Natural Log of IDB Investment ($US millions) Table 1: Variable, Definitions and Sources Variable Definitions Sources & Imputation s IDB This is measured by the natural The data source for IDB investme logarithm of annual Islamic Bank investments in countries is nt Development investments (US$ the website of Islamic millions) in a country plus 1. Development Bank. Addition of 1 makes 0 values defined after a natural log transformation. World This is measured by the natural The data source for World Bank logarithm of the annual World Bank Bank credits in countries credit (IBRD loans and credits) investments is the website of the (US$ million) in a country plus 1. World Bank. This is a country-level measure. IMF This is measured by the natural The data source for IMF credit logarithm of the annual International credit in countries is the Monetary Fund credits (US$ million) World Bank website. to a country plus 1. Muslim This is a dummy variable: 1 = a This was computed from majority country with Muslim majority in the the ‘World Religion Data religious distribution of their (v1.1)’ of Correlates of population; 0 = else. War Project. The missing years were assumed to have the same distribution of the recent years. Sunni This is a dummy variable: 1 = a This was computed from over Shia country with Sunni over Shia the ‘World Religion Data majority majority in their Muslim population; (v1.1)’ of the Correlates of 0 = else. This is a yearly country- War Project. The missing level measure. years were assumed to have the same distribution of the most recent years. Arabic This is a dummy variable: 1 = a This was compiled from country with Arabic as an official or CIA World Factbook, and as a major language; 0 =else. websites of various national agencies. Languages were assumed constant within a country. 216 English This is a dummy variable: 1 = a This was compiled from country with English as an official or CIA World Factbook, and as a major language; 0 = else. websites of various national agencies. Languages were assumed constant within a country. French This is a dummy variable: 1 = a This was compiled from country with French as an official or CIA World Factbook, and as a major language; 0 = else. websites of various national agencies. Languages were assumed constant within a country. Legal This is a dummy variable: 1 = a The main data came from origin country’s legal system has a basis in Klerman et al. (2011), common law, 0 =else. It indicates the www.spamann.net, legal origin of countries. LaPorta et al. (2008), and LaPorta et al. (2004). The websites of various national agencies of the countries were also consulted. Former This is a dummy variable: 1= a The main data came from British country is a former British colony, 0 Klerman et al. (2011), colony = else. www.spamann.net, and Correlates of War Colonial History Data. The websites of various national agencies of the countries were also consulted. Former This is a dummy variable: 1 = a The main data came from British country is a former British colony Klerman et al. (2011), colony with common law as the legal origin, www.spamann.net, and with 0 = else. Correlates of War common Colonial History law Data, LaPorta et al. (2008), and LaPorta et al. (2004). The websites of various national agencies of the countries were also consulted. 217 Sunni This is a dummy variable: 1 = a The main data came from majority former British colony country with Klerman et al. (2011), former Sunni over Shia majority in their www.spamann.net, and British Muslim population; 0 = else. Correlates of War colony Colonial History Data. The websites of various national agencies of the countries were also consulted. The missing years were assumed to have the same distribution of Muslim population of the most recent years. Distance This is measured by the natural Several sources of data from logarithm of the distance (km) of a were Saudi country from Saudi Arabia. combined: https://github.c om/rahulbot/distances- between-countries and google distance between the capital cities of countries. The distance between countries were assumed constant. Distance This is measured by the natural Several sources of data from logarithm of the distance (km) of the were USA countries from USA. combined: https://github.c om/rahulbot/distances- between-countries and google distance between the capital cities of countries. The distance between countries were assumed constant. Voting This is measured by percent of votes The dataset on the voting like on all United Nations resolutions by a in the United Nations was Saudi in country like the votes of Saudi obtained from Bailey, UN Arabia. The value ranges from 0 to 1 Michael A., Anton (inclusive). This is a country-level Strezhnev, and Erik measure; only one measure has been Voeten. "Estimating taken from the entire dataset; so, no dynamic state preferences yearly variation. from United Nations voting data." Journal of 218 Conflict Resolution 61.2 (2017): 430-456. Voting This is measured by percent of votes The dataset on the voting like USA on all United Nations resolutions by a in the United Nations was in UN country like the votes of the United obtained from Bailey, States. The value ranges from 0 to 1 Michael A., Anton (inclusive). This is a country-level Strezhnev, and Erik measure; only one measure has been Voeten. "Estimating taken from the entire dataset; so, no dynamic state preferences yearly variation. from United Nations voting data." Journal of Conflict Resolution 61.2 (2017): 430-456. Yom This is a dummy variable: 1 = a This was compiled from Kippur country in the Arab-Muslim coalition various newspapers and Arab during the Yom Kippur/Ramadan published books. coalition war, 0 = else. Gulf War This is a dummy variable: 1 = a This was compiled from Saudi country in the Saudi/anti-Iraq alliance various newspapers and coalition during the Gulf war, 0 = else. published books. GDP It's the GDP growth rate (%) for the It was compiled in the growth year for a country. Annual World Bank Global percentage growth rate of GDP at Development Indicators market prices based on constant local from various sources such currency. Aggregates are based on as World Bank national constant 2010 U.S. dollars. This is a accounts data, and OECD yearly country-level measure. National Accounts data files. I used backward filling ‘within country’ to fill out any missing year. Financial It is measured by an index for The data was developed developm countries, which is based on a relative for the International ent ranking of countries on the depth, Monetary Fund Staff access and efficiency of their Discussion Note financial institutions and markets. “Rethinking Financial The values of this index range from 0 Deepening: Stability and (lowest) to 1 (highest). The index was Growth in Emerging developed by the International Markets”. The data were Monetary Fund. The index available for most summarizes at the country level how countries over the period developed financial institutions and 1980 – 2017. I used 219 financial markets of the country is in backward filling, i.e., used terms of their depth (size and the most recent year’s data liquidity), access (ability of ‘within country’ to fill out individuals and companies to access 1975– 1979. Additionally, financial services) and efficiency I used the mean values of (ability of institutions to provide the variable each year to financial services at low cost and with calculate the missing sustainable revenues and the level of values for several activity of capital markets). Higher countries19. values indicate greater financial development. This is a yearly country-level measure. Financial It is one of the two subcomponents of The data was developed Institutio the financial development index; its for the International ns values range from 0 (lowest) to 1 Monetary Fund Staff (highest). It is an aggregate of the Discussion Note financial institutions’ depth, financial “Rethinking Financial institutions’ access, and financial Deepening: Stability and institutions’ efficiency indices. Growth in Emerging Financial institutions’ depth is based Markets”. The data were on bank credit to the private sector in available for most percept of GDP, pension fund assets countries over the period to GDP, mutual fund assets to GDP, 1980 – 2017. I used and insurance premiums (life & non- backward filling ‘within life) to GDP. Financial institutions’ country’ to fill out 1975– access is based on bank branches per 1979. Additionally, I used 100,000 adults and ATMs per the mean values of the 100,0000 adults. Financial variable each year to institutions’ efficiency is based on calculate the missing banking sector net interest margin, values for several lending-deposits spread, non-interest countries20. income to total income, overhead costs to total assets, return on assets, and return on equity. 19 Afghanistan, Andorra, Cuba, Iraq, Liechtenstein, Monaco, Montenegro, Nauru, Palau, Somalia, Taiwan, Zaire, and Zimbabwe. 20 Afghanistan, Andorra, Cuba, Iraq, Liechtenstein, Monaco, Montenegro, Nauru, Palau, Somalia, Taiwan, Zaire, and Zimbabwe. 220 Financial It is one of the two subcomponents of The data was developed Markets the financial development index for the International noted above. The values of this index Monetary Fund Staff subcomponent range from 0 (lowest) Discussion Note to 1 (highest). It is an aggregate of “Rethinking Financial financial markets depth, financial Deepening: Stability and markets access, and financial markets Growth in Emerging efficiency. Financial markets’ depth Markets”. The data were is based on stock market available for most capitalization to GDP, international countries over the period debt securities of government to 1980 – 2017. I used GDP, and total debt securities of backward filling, i.e., used financial and non-financial the most recent year’s data corporations to GDP. Financial ‘within country’ to fill out markets access is based on percent of 1975– 1979. Additionally, market capitalization outside of top I used the mean values of 10 largest companies and total the variable each year to number of issuers of debt (domestic calculate the missing and external, nonfinancial, and values for several financial corporations) per 100,000 countries21. adults. Financial markets efficiency is based on stock market turnover ratio. Credit The credit rating of countries is The data was developed rating obtained from ‘The International by the PRS Groups. I used Country Risk Guide (ICRG)’. The backward filling, i.e., used values range from 0 to 100. Higher the most recent year values indicate better credit rating, ‘within country’ for any i.e., greater creditworthiness of missing values. Then, for countries. This is a yearly country- several countries22, I used level measure. mean values of the years since they were not given any credit rating. 21 Afghanistan, Andorra, Cuba, Iraq, Liechtenstein, Monaco, Montenegro, Nauru, Palau, Somalia, Taiwan, Zaire, and Zimbabwe. 22 Aruba, Afghanistan, Andorra, Antigua and Barbuda, Burundi, Benin, Bosnia and Herzegovina, Belize, Barbados, Bhutan, Central African Republic, Comoros, Cabo Verde, Djibouti, Dominica, Eritrea, Fiji, Micronesia, Georgia, Equatorial Guinea, Grenada, Kyrgyz Republic, Cambodia, Kiribati, St. Kitts and Nevis, Lao PDR, St. Lucia, Liechtenstein, Lesotho, Monaco, Maldives, North Macedonia, Montenegro, Mauritania, Nepal, Nauru, Palau, Rwanda, Solomon Islands, South Sudan, Sao Tome and Principe, Eswatini, Seychelles, Chad, Tajikistan, Turkmenistan, Timor-Leste, Tonga, Uzbekistan, St. Vincent and the Grenadines, Vanuatu, Samoa, and Zaire. 221 Financial It is a measure of the extent of The data were available Globaliza integration of a country to the rest of for most countries over the tion the world in terms of various period 1970 – 2017. It was financial aspects such as, foreign from the KOF index in direct investment, portfolio 2019 file. I used backward investment, international debt, filling, i.e., used the most international reserves, international recent year ‘within income payments, investment country’ for any missing restrictions, capital account openness, values. Then, for several and international investment countries23, I used mean agreements. The values range from’0’ values of the years since (lowest) to ‘100’ (highest). Higher they were not given any values indicate greater integration. credit rating. IDB in This is measured by the proportion of The list of contiguities of neighbors neighboring countries that received countries was obtained funding/investments from Islamic from the ‘Correlates of Development Bank so far (including War Direct Contiguity the current year). Here neighboring Data - Version 3.20’. countries are the countries with direct contiguities, defined by the following 5 types of contiguities: 1: Separated by a land or river border; 2: Separated by 12 miles of water or less; 3: Separated by 24 miles of water or less (but more than 12 miles); 4: Separated by 150 miles of water or less (but more than 24 miles); 5: Separated by 400 miles of water or less (but more than 150 miles). The countries without any neighbors were assigned a value of ‘0’. This is a yearly country-level measure. 23 Nauru, Romania, South Sudan, and Zaire. 222 Table 2: Year of The First Investment in Countries by Islamic Development Bank24 Year Countries with the First Investment from Islamic Development Bank 1976 Jordan 1977 Algeria, Bangladesh, Cameroon, Egypt, Guinea, Malaysia, Mauritania, Morocco, Niger, Pakistan, Senegal, Somalia, Sudan, Tunisia, Turkey, Yemen 1978 Chad, Indonesia, Syria, UAE, Uganda 1979 Bahrain, Burkina Faso, Guinea Bissau, Mali, Oman, Palestine 1980 Afghanistan, Comoros, Djibouti, Ethiopia, Gambia, Lebanon, Libya 1981 Cyprus, Eritrea, Maldives, Vietnam 1982 Gabon, Sierra Leone, Sri Lanka, Togo 1983 Benin, Iraq, Serbia, South Africa, U.S.A. 1984 Mauritius, Philippines, Reunion Islands, Singapore 1985 India, Kenya, Mozambique, Saudi Arabia, Tanzania, Thailand 1986 China, Fiji, South Korea, New Caledonia, New Zealand 1987 Congo Brazzaville, Ghana 1988 Malawi, Zimbabwe 1989 Australia, Guyana, Kuwait, Liberia, Zambia 1990 Iran, Nepal, Nigeria, Spain, Trinidad & Tobago 1991 Azerbaijan, Bulgaria, Democratic R. Of Congo, Kyrgyz Republic, Poland, Qatar, Romania, Russia, Tajikistan, Uzbekistan, Ivory Coast 1992 Albania, Bosnia & Herzegovina, Burma, Kazakhstan, Papua New Guinea, Turkmenistan, Ukraine 1993 Rwanda 1994 Burundi, Madagascar, U.K. 1995 Brazil, Canada, Croatia, Panama, Suriname, Venezuela 1996 Belgium, Grenada, Macedonia 1997 Greece, Netherlands 1998 Argentina, France, Kosovo 1999 Martinique 2000 Mayotte, Norway 2001 Bolivia, Montenegro 2002 Brunei, Switzerland 2005 Denmark, Jamaica 2006 Central African Rep 2008 Slovenia, Sweden 2010 Georgia, Paraguay 2011 Ecuador, Haiti, Latvia 2012 Austria, Germany, Swaziland 2013 Botswana 2014 Cambodia, Ireland, Italy, Lesotho, Vanuatu 2015 Barbados 2016 Antigua & Barbuda 24 Countries and territories not recognized by the United Nations have been excluded from analysis due to lack of data for necessary variables, leading to 135 investee countries of Islamic Development Bank. 223 Table 3: Descriptive Statistics Variable N Mean Std. dev. Min Max IDB investment (US$ million) 7,198 17.06 95.17 0.00 2,664.47 World Bank credit US$ million) 7,198 847.48 2,734.89 0.00 38,185.96 IMF credit (US$ million) 7,198 337.87 1,434.76 0.00 28,850.33 GDP growth (%) 7,198 3.60 7.20 -64.05 149.97 Credit rating 7,198 64.57 12.82 13.04 95.42 Financial development 7,198 0.26 0.19 0.00 1.00 Financial globalization 7,198 50.52 17.97 4.67 98.20 Legal origin 7,198 0.26 0.44 0.00 1.00 Former British colony 7,198 0.29 0.45 0.00 1.00 Muslim majority 7,198 0.25 0.43 0.00 1.00 Sunni over Shia majority 7,198 0.34 0.47 0.00 1.00 Muslim majority former British colony 7,198 0.05 0.22 0.00 1.00 Arabic 7,198 0.13 0.33 0.00 1.00 English 7,198 0.28 0.45 0.00 1.00 French 7,198 0.17 0.37 0.00 1.00 Distance from USA 7,198 8,685.55 3,583.85 0.00 16,181.36 Distance from Saudi 7,198 6,309.64 4,051.32 0.00 15,826.38 Voting like USA in UN 7,198 0.54 0.19 0.00 0.87 Voting like Saudi in UN 7,198 0.21 0.12 0.00 0.64 IDB projects in neighbors 7,198 0.51 0.37 0.00 1.00 Note: Note that in this table IDB investment, World Bank credit, and IMF credit are in US$ million figures. I take natural logarithm of them in correlations and regressions. IDB investment is the annual Islamic Bank Development investments (US$ millions) in a country. World Bank credit is the annual World Bank (IBRD loans and credits) investments (US$ million) in a country. IMF credit is the annual International Monetary Fund credits (US$ million) to a country. GDP growth is a percentage figure. Credit rating ranges from 0 to 100. Financial development, an index, ranges from ‘0’ to ‘1’. Financial globalization ranges from 0 to 100. Legal origin is ‘1’ if the legal origin of a country is common law, else ‘0’. Former British colony is ‘1’ if a country is a former British colony, else ‘0’. Muslim majority is ‘1’ if a country has Muslim majority in its population, else ‘0’. Sunni over Shia majority is ‘1’ if a country has Sunni over Shia majority in their Muslim population, else ‘0’. Muslim majority former British colony is ‘1’ if a country is a former British colony with a Muslim majority in their population, else ‘0’. Arabic is ‘1’if the official or major language of a country is Arabic, else ‘0’. English is ‘1’if the official or major language of a country is English, else ‘0’. French is ‘1’ if the official or major language of a country is French, else ‘0’. Distance from Saudi is the natural logarithm of the distance (km) of a country from Saudi Arabia. Distance from USA is the natural logarithm of the distance (km) of a country from USA. Voting like Saudi in UN is the percent of votes on all United Nations resolutions by a country like the votes of Saudi Arabia. Voting like USA in UN is the percent of votes on all United Nations resolutions by a country like the votes of USA. IDB projects in neighbors is the proportion of neighboring countries that received funding/investments from Islamic Development Bank so far (including the current year). 224 Table 4: Correlations Table 225 Note: IDB (short for IDB investment) is the natural logarithm of annual Islamic Bank Development investments (US$ millions) in a country plus 1. WB (short for World Bank credit) is the natural logarithm of the annual World Bank (IBRD loans and credits) investments (US$ million) in a country plus 1. IMF (short for IMF credit) is the natural logarithm of the annual International Monetary Fund credits (US$ million) to a country plus 1. GDP growth is a percentage figure. Credit rating ranges from 0 to 100. Fin Dev (short for Financial development), an index, ranges from ‘ 0’ to ‘ 1’ . Legal origin is ‘ 1’ if the legal origin of a country is common law, else ‘ 0’ . Muslim majority is ‘ 1’ if a country has Muslim majority population, else ‘ 0’ . Sunni majority (short for Sunni over Shia majority) is ‘ 1’ if a country has Sunni over Shia majority in their Muslim population, else ‘ 0’ . Arabic is ‘ 1’ if the official or major language of a country is Arabic, else ‘ 0’ . Dist from Saudi (short for Distance from Saudi Arabia) is the natural logarithm of the distance (km) of a country from Saudi Arabia. Voting like Saudi (short for, Voting like Saudi in UN) is the percent of votes on all United Nations resolutions by a country like the votes of Saudi Arabia. IDB projects in neighbors is the proportion of neighboring countries that received funding/investments from Islamic Development Bank so far. Table 5: Regression of Islamic Development Investments on Various Explanatory Variables Dependent Variable (DV): IDB investments Coefficients IDB investment (t – 1) 0.52*** World Bank credit (t-1) 0.03** IMF credit (t-1) 0.01 Financial development (t-1) 0.09 GDP growth (t-1) 0.003* Credit rating (t-1) 0.01** Distance from Saudi 0.58 Distance from USA 0.78 Legal origin -0.06 Muslim majority former British colony -0.11 Arabic 2.95* English 0.33 French -0.04 Voting like Saudi in UN 2.39 Voting like USA in UN 2.63 Financial globalization (t-1) -0.01*** Muslim majority 0.43** IDB projects in neighbors -0.03 Constant -14.51 Country fixed effects Yes Time (year) fixed effects Yes N 7,010 R-squared 0.76 F stat 89.76*** Degree of Freedom (236, 6773) Note: ‘t’ refers to year; so (t-1) refers to the last year. The dependent variable, IDB investment, is the natural logarithm of annual Islamic Bank Development investments (US$ millions) in a country plus 1. World Bank credit is the natural logarithm of the annual World Bank (IBRD loans and credits) investments (US$ million) in a country plus 1. IMF credit is the natural logarithm of the annual International Monetary Fund credits (US$ million) to a country plus 1. Financial development, an index, ranges from ‘0’ to ‘1’. GDP growth is a percentage figure. Credit rating ranges from 0 to 100. Financial development, an index, ranges from ‘0’ to ‘1’. Distance from Saudi is the natural logarithm of the distance (km) of a country from Saudi Arabia. Distance from USA is the natural logarithm of the distance (km) of a country from USA. Legal origin is ‘1’ if the legal origin of a country is common law, else ‘0’. Muslim majority former British colony is ‘1’ if a country is a former British colony with a Muslim majority in their population, else ‘0’. Arabic is ‘1’if the official or major language of a country is Arabic, else ‘0’. English is ‘1’if the official or major language of a country is English, else ‘0’. French is ‘1’ if the official or major language of a country is French, else ‘0’. Voting like Saudi in UN is the percent of votes on all United Nations resolutions by a country like the votes of Saudi Arabia. Voting like USA in UN is the percent of votes on all United Nations resolutions by a country like the votes of USA. Financial globalization ranges from 0 to 100. Muslim majority is ‘1’ if a country has Muslim majority in its population, else ‘0’. IDB projects in neighbors is the proportion of neighboring countries that received funding/investments from Islamic Development Bank so far (including the current year). 226 Table 6: Regression of Islamic Development Investments on Various Explanatory Variables, Including Financial Development Quintiles, and Credit Risk Quintile DV: IDB investment Model with the Interaction between High Financial Development and High Credit Rating dummy variables IDB investment (t – 1) 0.52*** World Bank credit (t-1) 0.03** IMF credit (t-1) 0.004 High financial development -0.04 High credit crating -0.16** High financial development X High credit rating 0.23*** GDP growth (t-1) 0.004** Distance from Saudi 0.53 Distance from USA 0.78 Legal origin -0.35 Muslim majority former British colony -0.13 Arabic 2.83 English 0.28 French 0.02 Voting like Saudi in UN 2.20 Voting like USA in UN 3.03 Financial globalization (t-1) -0.01*** Muslim majority 0.42** IDB projects in neighbors -0.05 Constant -13.65 Country fixed effects Yes Time (year) fixed effects Yes N 7,010 R-squared 0.76 F stat 89.46*** Degree of Freedom (237, 6772) Note: ‘t’ refers to year; so (t-1) refers to the last year. The dependent variable, IDB investment, is the natural logarithm of annual Islamic Bank Development investments (US$ millions) in a country plus 1. World Bank credit is the natural logarithm of the annual World Bank (IBRD loans and credits) investments (US$ million) in a country plus 1. IMF credit is the natural logarithm of the annual International Monetary Fund credits (US$ million) to a country plus 1. High financial development is ‘1’ if a country has above average financial development in a given year, else 0. High credit rating is ‘1’ if a country has an above average credit rating in a given year, else = 0. GDP growth is a percentage figure. Distance from Saudi is the natural logarithm of the distance (km) of a country from Saudi Arabia. Distance from USA is the natural logarithm of the distance (km) of a country from USA. Legal origin is ‘1’ if the legal origin of a country is common law, else ‘0’. Muslim majority former British colony is ‘1’ if a country is a former British colony with a Muslim majority in their population, else ‘0’. Arabic is ‘1’if the official or major language of a country is Arabic, else ‘0’. English is ‘1’if the official or major language of a country is English, else ‘0’. French is ‘1’ if the official or major language of a country is French, else ‘0’. Voting like Saudi in UN is the percent of votes on all United Nations resolutions by a country like the votes of Saudi Arabia. Voting like USA in UN is the percent of votes on all United Nations resolutions by a country like the votes of USA. Financial globalization ranges from 0 to 100. Muslim majority is ‘1’ if a country has Muslim majority in its population, else ‘0’. IDB projects in neighbors is the proportion of neighboring countries that received funding/investments from Islamic Development Bank so far (including the current year). 227 Table 7: Regression of Islamic Development Investments on Various Explanatory Variables in Financial Development (Low and High) Subsamples DV: IDB investment Full sample Low (average & less) High (above financial development average) subsample financial development subsample IDB investment (t – 1) 0.52*** 0.46*** 0.49*** World Bank credit (t-1) 0.03** 0.06*** -0.01 IMF credit (t-1) 0.01 -0.03* 0.02** Financial development 0.09 GDP growth (t-1) 0.003* 0.001 0.003 Credit rating (t-1) 0.01** -0.003 0.01*** Distance from Saudi 0.58 -0.17 0.65** Distance from USA 0.78 -0.08 -0.11 Legal origin -0.06 0.06 -0.36 Muslim majority former British colony -0.11 0.27 -0.72 Arabic 2.95* 1.19 1.52*** English 0.33 -0.08 0.26 French -0.04 0.50 0.53* Voting like Saudi in UN 2.39 0.36 0.41 Voting like USA in UN 2.63 0.10 -0.52 Financial globalization (t-1) -0.01*** -0.01*** -0.01*** Muslim majority 0.43** -0.01 0.98*** IDB projects in neighbors -0.03 -0.09 0.13 Constant -14.51 2.25 -5.67 Country fixed effects Yes Yes Yes Time (year) fixed effects Yes Yes Yes N 7,010 3,541 3,469 R-squared 0.76 0.72 0.81 F stat 89.76*** 48.41*** 82.22*** Degree of Freedom (236, 6773) (181, 3359) (174, 3294) Note: ‘t’ refers to year; so (t-1) refers to the last year. The dependent variable, IDB investment, is the natural logarithm of annual Islamic Bank Development investments (US$ millions) in a country plus 1. World Bank credit is the natural logarithm of the annual World Bank (IBRD loans and credits) investments (US$ million) in a country plus 1. IMF credit is the natural logarithm of the annual International Monetary Fund credits (US$ million) to a country plus 1. Financial development, an index, ranges from ‘0’ to ‘1’. GDP growth is a percentage figure. Credit rating ranges from 0 to 100. Financial development, an index, ranges from ‘0’ to ‘1’. Distance from Saudi is the natural logarithm of the distance (km) of a country from Saudi Arabia. Distance from USA is the natural logarithm of the distance (km) of a country from USA. Legal origin is ‘1’ if the legal origin of a country is common law, else ‘0’. Muslim majority former British colony is ‘1’ if a country is a former British colony with a Muslim majority in their population, else ‘0’. Arabic is ‘1’if the official or major language of a country is Arabic, else ‘0’. English is ‘1’if the official or major language of a country is English, else ‘0’. French is ‘1’ if the official or major language of a country is French, else ‘0’. Voting like Saudi in UN is the percent of votes on all United Nations resolutions by a country like the votes of Saudi Arabia. Voting like USA in UN is the percent of votes on all United Nations resolutions by a country like the votes of USA. Financial globalization ranges from 0 to 100. Muslim majority is ‘1’ if a country has Muslim majority in its population, else ‘0’. IDB projects in neighbors is the proportion of neighboring countries that received funding/investments from Islamic Development Bank so far (including the current year). 228 Table 8: Regression of Islamic Development Investments on Various Explanatory Variables (including Sunni over Shia majority) in Financial Development (Low and High) Subsamples DV: IDB investment Full sample Low (average & High (above less) financial average) financial development development subsample subsample IDB investment (t – 1) 0.52*** 0.46*** 0.50*** World Bank credit (t-1) 0.03* 0.05** -0.004 IMF credit (t-1) 0.01 -0.02 0.03** Financial development 0.08 GDP growth (t-1) 0.004** 0.001 0.01*** Credit rating (t-1) 0.01** -0.003 0.01*** Distance from Saudi -0.01 0.07 -0.26 Distance from USA 0.22 -0.07 -0.30 Legal origin -0.02 -0.01 -0.004 Muslim majority former British colony 0.29 0.19 0.25 Arabic 1.68 1.62 1.84*** English -0.01 0.02 -0.04 French 0.42 0.33 0.10 Voting like Saudi in UN 0.62 0.67 -0.25 Voting like USA in UN 2.18 -0.57 1.39 Financial globalization (t-1) -0.01 -0.01*** -0.01*** Sunni over Shia majority 0.08* 0.25*** -0.12* IDB projects in neighbors -0.03 -0.07 0.12 Constant -2.95 -0.12 4.41 Country fixed effects Yes Yes Yes Time (year) fixed effects Yes Yes Yes N 7,010 3,541 3,469 R-squared 0.76 0.72 0.81 F stat 89.68*** 48.77*** 81.80*** Degree of Freedom (236, 6773) (181, 3359) (174, 3294) Note: ‘t’ refers to year; so (t-1) refers to the last year. The dependent variable, IDB investment, is the natural logarithm of annual Islamic Bank Development investments (US$ millions) in a country plus 1. World Bank credit is the natural logarithm of the annual World Bank (IBRD loans and credits) investments (US$ million) in a country plus 1. IMF credit is the natural logarithm of the annual International Monetary Fund credits (US$ million) to a country plus 1. Financial development, an index, ranges from ‘0’ to ‘1’. GDP growth is a percentage figure. Credit rating ranges from 0 to 100. Financial development, an index, ranges from ‘0’ to ‘1’. Distance from Saudi is the natural logarithm of the distance (km) of a country from Saudi Arabia. Distance from USA is the natural logarithm of the distance (km) of a country from USA. Legal origin is ‘1’ if the legal origin of a country is common law, else ‘0’. Muslim majority former British colony is ‘1’ if a country is a former British colony with a Muslim majority in their population, else ‘0’. Arabic is ‘1’if the official or major language of a country is Arabic, else ‘0’. English is ‘1’if the official or major language of a country is English, else ‘0’. French is ‘1’ if the official or major language of a country is French, else ‘0’. Voting like Saudi in UN is the percent of votes on all United Nations resolutions by a country like the votes of Saudi Arabia. Voting like USA in UN is the percent of votes on all United Nations resolutions by a country like the votes of USA. Financial globalization ranges from 0 to 100. Sunni over Shia majority is ‘1’ if a country has Sunni over Shia majority in their in their Muslim population, else ‘0’. IDB projects in neighbors is the proportion of neighboring countries that received funding/investments from Islamic Development Bank so far (including the current year). 229 Table 9: Regression of Islamic Development Investments on Various Explanatory Variables (including Yom Kippur Arab Coalition) in Financial Development (Low and High) Subsamples DV: IDB investment Full sample Low (average & High (above less) financial average) financial development development subsample subsample Yom Kippur Arab Coalition 0.05 00.39 1.77** IDB investment (t – 1) 0.52*** 0.46*** 0.50*** World Bank credit (t-1) 0.03* 0.05** -0.004 IMF credit (t-1) 0.01 -0.02 0.03** Financial development 0.09 GDP growth (t-1) 0.004** 0.001 0.01*** Credit rating (t-1) 0.01** -0.003 0.01*** Distance from Saudi -0.01 0.07 -0.26 Distance from USA 0.22 -0.07 -0.30 Legal origin -0.02 -0.01 -0.004 Muslim majority former British colony 0.29 0.19 0.25 Arabic 1.68 1.62 0.07 English -0.01 0.02 -0.04 French 0.42 0.33 0.10 Voting like Saudi in UN 0.62 0.67 -0.25 Voting like USA in UN 2.18 -0.57 1.39 Financial globalization (t-1) -0.01 -0.01*** -0.01*** Sunni over Shia majority 0.08* 0.25*** -0.12* IDB projects in neighbors -0.03 -0.07 0.12 Constant -2.95 -0.12 4.41 Country fixed effects Yes Yes Yes Time (year) fixed effects Yes Yes Yes N 7,010 3,541 3,469 R-squared 0.76 0.72 0.81 F stat 89.68*** 48.77*** 81.80*** Degree of Freedom (236, 6773) (181, 3359) (174, 3294) Note: ‘t’ refers to year; so (t-1) refers to the last year. The dependent variable, IDB investment, is the natural logarithm of annual Islamic Bank Development investments (US$ millions) in a country plus 1. Yom Kippur Arab coalition is a country-level dummy variable: 1 = a country was a member of the Arab-Muslim coalition during the Yom Kippur/Ramadan war, 0 = else. World Bank credit is the natural logarithm of the annual World Bank (IBRD loans and credits) investments (US$ million) in a country plus 1. IMF credit is the natural logarithm of the annual International Monetary Fund credits (US$ million) to a country plus 1. Financial development, an index, ranges from ‘0’ to ‘1’. GDP growth is a percentage figure. Credit rating ranges from 0 to 100. Financial development, an index, ranges from ‘0’ to ‘1’. Distance from Saudi is the natural logarithm of the distance (km) of a country from Saudi Arabia. Distance from USA is the natural logarithm of the distance (km) of a country from USA. Legal origin is ‘1’ if the legal origin of a country is common law, else ‘0’. Muslim majority former British colony is ‘1’ if a country is a former British colony with a Muslim majority in their population, else ‘0’. Arabic is ‘1’if the official or major language of a country is Arabic, else ‘0’. English is ‘1’if the official or major language of a country is English, else ‘0’. French is ‘1’ if the official or major language of a country is French, else ‘0’. Voting like Saudi in UN is the percent of votes on all United Nations resolutions by a country like the votes of Saudi Arabia. Voting like USA in UN is the percent of votes on all United Nations resolutions by a country like the votes of USA. Financial globalization ranges from 0 to 100. Sunni over Shia majority is ‘1’ if a country has Sunni over Shia majority in their in their Muslim population, else ‘0’. IDB projects in neighbors is the proportion of neighboring countries that received funding/investments from Islamic Development Bank so far (including the current year). 230 Table 10: Difference in Difference Regressions for Pre- and Post-Gulf War IDB Investment Difference between Gulf War Saudi Coalition vs Not Gulf War Saudi Coalition DV: IDB investment Full sample Low (average & High (above less) financial average) financial development development subsample subsample Post 1991 year 0.34** 0.34* 0.43** Gulf War Saudi coalition -0.46 -1.02* -0.67 Post 1991 year X Gulf War Saudi coalition 0.31*** 0.43*** 0.22*** IDB investment (t – 1) 0.51*** 0.45*** 0.49*** World Bank credit (t-1) 0.03*** 0.05** 0.01 IMF credit (t-1) 0.01 -0.02 0.04*** Financial development -0.21 GDP growth (t-1) 0.004** 0.001 0.01*** Credit rating (t-1) 0.01** -0.003 0.01*** Distance from Saudi -0.56 -0.95** -0.60 Distance from USA -0.26 -0.26 -0.15 Legal origin 0.24 0.19 0.51 Muslim majority former British colony 0.16 -0.07 0.25 Arabic 0.09 -1.02* 1.46** English -0.30 -0.51 -0.08 French 0.79 0.87 0.16 Voting like Saudi in UN -1.29 -2.98* 0.22 Voting like USA in UN 2.27 4.85 2.89* Financial globalization (t-1) -0.01*** -0.01*** -0.01*** Sunni over Shia majority 0.09* 0.27*** -0.12* IDB projects in neighbors -0.04 -0.05 0.09 Constant 7.55 12.24** 5.49 Country fixed effects Yes Yes Yes Time (year) fixed effects Yes Yes Yes N 7,010 3,541 3,469 R-squared 0.76 0.72 0.81 F stat 89.98*** 48.77*** 81.85*** Degree of Freedom (237, 6772) (181, 3359) (175, 3293) Note: ‘t’ refers to year; so (t-1) refers to the last year. The dependent variable, IDB investment, is the natural logarithm of annual Islamic Bank Development investments (US$ millions) in a country plus 1. Gulf War Saudi coalition is a dummy variable: 1 = a country was a member of the Saudi/anti-Iraq alliance during the Gulf war, 0 = else. Post 1991 year is ‘1’ if a year is after 1991, else ‘0’. World Bank credit is the natural logarithm of the annual World Bank (IBRD loans and credits) investments (US$ million) in a country plus 1. IMF credit is the natural logarithm of the annual International Monetary Fund credits (US$ million) to a country plus 1. Financial development, an index, ranges from ‘0’ to ‘1’. GDP growth is a percentage figure. Credit rating ranges from 0 to 100. Financial development, an index, ranges from ‘0’ to ‘1’. Distance from Saudi is the natural logarithm of the distance (km) of a country from Saudi Arabia. Distance from USA is the natural logarithm of the distance (km) of a country from USA. Legal origin is ‘1’ if the legal origin of a country is common law, else ‘0’. Muslim majority former British colony is ‘1’ if a country is a former British colony with a Muslim majority in their population, else ‘0’. Arabic is ‘1’if the official or major language of a country is Arabic, else ‘0’. English is ‘1’if the official or major language of a country is English, else ‘0’. French is ‘1’ if the official or major language of a country is French, else ‘0’. Voting like Saudi in UN is the percent of votes on all United Nations resolutions by a country like the votes of Saudi Arabia. Voting like USA in UN is the percent of votes on all United Nations resolutions by a country like the votes of USA. Financial globalization ranges from 0 to 100. Sunni over Shia majority is ‘1’ if a country has Sunni over Shia majority in their in their Muslim population, else ‘0’. IDB projects in neighbors is the proportion of neighboring countries that received funding/investments from Islamic Development Bank so far (including the current year). 231 Appendix – An example of Islamic Development Bank Investment in Countries (source: Islamic Development Bank Website) 232 CHAPTER 6 DYNAMICS OF VICARIOUS AND EXPERIENTIAL LEARNING IN A SUPRANATIONAL DEVELOPMENT BANK: EVIDENCE FROM ISLAMIC DEVELOPMENT INVESTMENTS IN NATION STATES, 1976 – 2016 Abstract I show the presence of ‘selective vicarious learning’ in the internationalization decision of a supranational bank (IDB - Islamic Development Bank), a hybrid development bank with dual social and economic goals. I examine the investments of IDB since its founding in 1975 till 2016. I show by using duration dependence models that IDB emulates actions of two different kinds. For relatively more financially developed countries, IDB investment initiation is positively associated with high World Bank and International Monetary Fund (IMF) operations, whereas, for relatively less financially developed countries, IDB investment initiation is positively associated with the recent IDB investments in the neighboring countries. The results are robust to alternative economic, financial, and sociological explanations. Keywords: emulation, vicarious learning, experiential learning, supranational organizations 233 Introduction International business (IB) scholars have recently called for the application of the behavioral theory of organizations to explain the dynamic behavior of transnational firms. Surdu, Greve, and Benito (2021) argue that the dominant theoretical perspectives of IB – the Uppsala model (Johanson & Vahlne, 1977, 2009) and internationalization theories (Narula, Asmussen, Chi, & Kundu, 2019; Buckley and Casson, 1976; Hennert, 1982; Rugman, 1980; Teece, 1986) originally incorporated some behavioral assumptions. But, the emphases of such assumptions have declined over time, leading to proliferation of theories which embraced the idea of a static external environment. Yet, transnational firms share the individual and organizational characteristics of firms in general such as bounded rationality, uncertainty avoidance, multiple goals, and multiple actors, and thus, can be subject to the mechanisms in the behavioral theory such as ‘problemistic search’, ‘learning by doing’, and ‘vicarious learning’ in making their pre-internationalization and post-internationalization decisions. In this paper, I argue and show the presence of ‘selective vicarious learning’ in the internationalization decision of Islamic Development Bank, a hybrid development bank with the dual focus of promoting the socio-economic development of Muslim communities while striving to achieve a fair economic return. IDB invests in long- term social and physical infrastructure projects of nation states such as water supply, power plants, roads, railways, education, food aid, climate change aid, disaster aid, healthcare, bank capital, and trade finance. Such long-term investments benefit their 234 clients over a long period of time. Moreover, the causal-link from these investments to the intended outcome of socioeconomic development is not necessarily straightforward. I examine these investments of IDB since its founding in 1975 till 2016 and show by using duration dependence models that IDB emulates actions of two different kinds – (1) for relatively more financially developed countries, IDB investment initiation is positively associated with high World Bank and International Monetary Fund (IMF) operations, whereas (2) for relatively less financially developed countries, IDB investment initiation is positively associated with the recent IDB investments in the neighboring countries. The results are robust to alternative economic, financial, and sociological factors of countries such as GDP growth, credit rating, legal origin, religion, language, and geographic and political similarity to the IDB home country (i.e., Saudi Arabia). The results have the following implications and contributions for the international business literature. First, I show that a transnational hybrid organization engages in selective emulation of actions – sometimes, imitating based on the actions of other transnational organization with similar hybridity (development and economic return), and sometimes, drawing upon its own experiences in the proximate geographies. Here, the action in consideration is the ‘time to entry’ (investment initiation) in a nation state. The action emulated by the organization is extent of operations of similar organizations or of itself in near geographies, which provide scope of learning and inspire confidence for entering a new market. Thus, in the absence of an experimentation and learning from self, in entering new markets, a transnational organization can draw on a variety of sources for emulation and 235 vicarious learning. Future researchers, can investigate, in greater scope, such multi- actor and multi-action sources of emulation and benchmarking in answering the questions of a firm’s internationalization decisions. Second, organizational hybridity – multiple competing goals – can play a role in the dynamics of vicarious learning. For example, as a development bank, the mandate of IDB is to invest in less developed countries that are not well-served by other international development banks. IDB investment initiation in those countries is not dependent on emulating the World Bank and IMF operations. However, IDB rather learns from the neighboring countries prior to investing in such less developed countries. Vicarious learning Vicarious learning refers to making meaning of, and imitating (most likely with some adaptations), the actions and characteristics of other organizations, in the belief that emulating them is associated with a higher likelihood of achieving a better result than if a firm would make this decision in isolation, perhaps through a lengthy process of trial-and-error (Duysters et al. 2019; Haunschild & Miner, 1997; Surdu et al., 2021). Identifying positive outcomes, with some regularity, reaffirms beliefs that the actions observed were appropriate. On the other hand, when actions are repeatedly observed with negative outcomes, such actions are deemed as inappropriate. Surdu et al. (2021) argue that this type of learning is particularly important for multinational enterprises. I argue that such learning mechanism is even more important when the firm is making the decision to enter a market for the first time. Recent advances in international 236 business literature (e.g., Johanson & Vahlne, 2009) have also emphasized the importance of learning from others as a mechanism in the decisions of international business. Vicarious learning is fraught with several difficulties (Surdu et al., 2021). First, sometimes, one can observe the actions of others but not necessarily the outcomes of those actions immediately, plausibly because the process that converts actions into outcomes is very lengthy (Kim & Miner, 2007). Second, sometimes, the causal relationship between actions and outcomes is ambiguous. To complicate that, an outcome can be a consequence of multiple actions (Myers, 2018). Given the noted difficulties, managerial vicarious learning is not quite random, unlike the scientific research. The search for relevant knowledge through benchmarking can lead managers to select companies based on the dependent variable (Strang, 2010). While there are allegations of managerial oversampling of successes of other to learn from (Denrell, 2003), firms also learn from failures or near failures of other firms (Ingram & Baum, 1997; Kim & Miner, 2007). Sometimes, the magnitude of success or failure can also impact learning of managers (Aranda, Arellano, & Davilla, 2017). The context also matters for managerial learning. For example, managers tend to learn less from an external event if they have, encountered such event in the past (Mitsuhashi, 2012). Firms can also learn from their competitors, not necessarily through industrial intelligence or espionage; sometimes, firm cooperate (while also competing) and such interaction between firms can serve as valuable inputs to learning (Myers, 2018). 237 Researchers find an interactive effect of experiential and vicarious learning, with respect to the location choices of firms and its branches. Through an analysis of the Ontario nursing home chains’ acquisition location choices from 1971 to 1996, researchers find support for both experiential learning and vicarious learning. Nursing homes are found to replicate themselves by acquiring components geographically and organizationally like their own most recent and most similar prior acquisitions and their own current components. But they also imitate location choices of other visible and comparable chain’s most recent acquisitions and prior acquisitions nearest to potential targets (Baum, Li, & Usher, 2000). Learning, as it applies to location choices, is also related to the maturity of the firm. In a recent study on a European travel company’s target setting, managers relied heavily on the performance of the comparable branches in the early years. However, as a branch matured, managers relied more on the recent performance of the branch itself (experiential learning) and less on the performance of the comparable branches (vicarious learning). In a way, over time, experiential learning replaced vicarious learning (Aranda, Arellano, & Davilla, 2017). The context of Islamic development investments and vicarious learning Islamic Development Bank was founded in 1975 by the Organization of Islamic Cooperation (OIC), a pan-Islamic political entity to foster the global solidary of Muslims communities. In the wake of the Arab Israeli war in the early 1970s in which the Western countries sided with Israel, leaders of several Muslim majority countries 238 felt the need for an economic union to protect the economic interests of Muslim communities around the world. The leaders also called for utilizing the wealth gain of certain Muslim countries in the oil boom of the 1970s for the socioeconomic development of the Muslim umma, i.e., the Muslim as one people (Meenai, 1989). At this backdrop, IDB was founded in Jeddah, Saudi Arabia, with major shareholding of KSA, which continues to be a major shareholder of the bank (IDB member information). IDB has 57 members (countries/territories) as of January 24, 2022, who contributed capital to the bank and became its shareholders. IDB invests in nation states, mostly in partnerships with the governments. The projects are typically long-term, involving social and physical infrastructure development in the areas such as education, health care, power plants, roads, highways, food, disaster aid, climate change aid, capital for banks, and so on. For several reasons, IDB is an interesting context for illustrating vicarious learning as mechanism in internationalization decisions of organizations.  IDB projects are typically long-term in nature. Once initiated, such projects will remain a part of the bank for a long time.  IDB largely invest in countries through various Islamic finance instruments. Such instruments often require both risk and return sharing.  The institutional environment of countries varies. So, experiential learning in one country may not always be directly relevant for others. At this backdrop, I argue that IDB would depend on learning from the experience of other development banks. However, all development banks do not operate globally 239 and the relationship between development projects and socioeconomic development does not materially quickly. In such circumstances, IDB would rely on observing the actions of the world leaders of development finance, World Bank and IMF in countries, before initiating investment in those countries. Indeed, in modeling its operations during its founding, IDB had actively sought to learn from other development banks, especially, the Bretton Woods institutions like World Bank and IMF, which have pioneered the global development finance. Moreover, in countries, where World Bank and IMF do not have a significant presence, IDB would additionally learn from its own investments in the neighboring countries. Such countries are likely to be low financially developed countries neglected by the larger development banks. Hence, I hypothesize the following: Hypothesis 1 (Vicarious learning from similar organizations): Islamic Development Bank investment initiations in countries are positively influenced by the presence of World Bank and IMF operations in those countries. Hypothesis 2 (Experiential learning from own experience in close geographies): Islamic Development Bank investment initiations in countries are positively influenced by its own investments in the neighboring countries. Variables and data Dependent variable: I measure the dependent variable, ‘the time to entry’ by the event of the first investment of Islamic Development Bank in a country or by duration (number of years without the first IDB investment in a country). IDB was founded in 240 1975 and it made its first investment in 1976. The sample year starts in 1975 and ends in 2016 due to availability of data for variables. Independent variables: The independent variables for the are study are ‘World Bank operations’, ‘IMF operations’, ‘High IMF and WB operations’, and ‘IDB projects in neighbors’. World Bank operations is the natural logarithm of the sum of the last three years’ World Bank (IBRD loans and credits) investments in a country (measured in US$ millions) so far (including the current year) plus 1. IMF operations is the natural logarithm of the sum of the last three years’ International Monetary Fund credits in a country (measured in US$ millions) so far (including the current year) plus 1. High IMF and WB operations is ‘1’ for a country in a given year if both IMF and World Bank credit to the country are above average to the credit made to all countries for the year, else ‘0’. Control variables: GDP growth rate (%) of a country for a given year is the percentage change in GDP. Financial development is the financial development index of a country, developed by an IMF staff paper, with values ranging from 0 (lowest) to 1 (highest). Higher values indicate greater financial development. Credit rating ranges from 0 to 100. Higher values indicate better credit rating. Common law is ‘1’ if the legal origin of a country is common law, else ‘0’. Muslim is ‘1’ if a country has Muslim majority in their population, else ‘0’. Arabic is ‘1’if the official or major language of a country is Arabic, else ‘0’. English takes on a value of ‘1’if the official or major language of a country is English, else ‘0’. French takes on a value of ‘1’if the official or major language of a country is French, else ‘0’. Distance from Saudi 241 Arabia is the natural logarithm of the distance (km) of a country from Saudi Arabia. Voting like Saudi in UN is the percent of votes on all United Nations resolutions by a country like the votes of Saudi Arabia. Voting like USA in UN is the percent of votes on all United Nations resolutions by a country like the votes of USA. IDB projects in neighbors is the proportion of neighboring countries that received funding/investments from Islamic Development Bank so far (including the current year). Table 1 in Appendix provides a summary of the sources of these data for these variables. ---INSERT TABLE 1 ABOUT HERE--- Results from Kaplan-Meier survival estimates The Kaplan-Meier survival curve (Figure 1), estimated using the non-parametric Kaplan-Meier estimator, takes the ratios of those (nation states or countries) without events (numerator) over those at risk (denominator) and multiplies those ratios over time. 𝑛 − 𝑑 𝑆(𝑡) = ( ) 𝑛 | 𝑒𝑣𝑒𝑛𝑡 = 𝑜𝑐𝑐𝑢𝑟𝑟𝑒𝑛𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑓𝑖𝑟𝑠𝑡 𝐼𝑠𝑙𝑎𝑚𝑖𝑐 𝐷𝑒𝑣𝑒𝑙𝑜𝑝𝑚𝑒𝑛𝑡 𝐵𝑎𝑛𝑘 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑖𝑛 𝑎 𝑐𝑜𝑢𝑛𝑡𝑟𝑦 𝑆(𝑡) = 𝑡ℎ𝑒 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝑠𝑢𝑟𝑣𝑖𝑣𝑎𝑙 𝑝𝑎𝑠𝑡 𝑡 𝑡 = 𝑎 𝑡𝑖𝑚𝑒 𝑤ℎ𝑒𝑛 𝑎𝑡 𝑙𝑒𝑎𝑠𝑡 𝑜𝑛𝑒 𝑒𝑣𝑒𝑛𝑡 ℎ𝑎𝑝𝑝𝑒𝑛𝑑 242 𝑑 = 𝑡ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑣𝑒𝑛𝑡𝑠 𝑜𝑟 𝑓𝑎𝑖𝑙𝑢𝑟𝑒𝑠 𝑡ℎ𝑎𝑡 ℎ𝑎𝑝𝑝𝑒𝑛𝑒𝑑 𝑎𝑡 𝑡𝑖𝑚𝑒 𝑡 𝑛 = 𝑡ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑢𝑛𝑡𝑟𝑖𝑒𝑠 𝑎𝑡 𝑟𝑖𝑠𝑘 𝑎𝑡 𝑡𝑖𝑚𝑒 𝑡 , 𝑖. 𝑒., 𝑡ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑢𝑛𝑡𝑟𝑖𝑒𝑠 𝑘𝑛𝑜𝑤𝑛 𝑡𝑜 ℎ𝑎𝑣𝑒 𝑠𝑢𝑟𝑣𝑖𝑣𝑒𝑑 𝑜𝑟 ℎ𝑎𝑣𝑒 𝑛𝑜𝑡 𝑏𝑒𝑒𝑛 𝑐𝑒𝑛𝑠𝑜𝑟𝑒𝑑 𝑢𝑝𝑡𝑜 𝑡 The horizontal axis of Figure 1 represents time (years), and the vertical axis represents survival probabilities. The probability of no Islamic Development Bank investment in a country yet goes down to 30% in 42 years. Muslim majority countries have lower survival probabilities (Figure 2). Survival curves have several limitations. The sample is right-censored. But right-censoring does not cause random loss of data, as countries did not disappear for entirely unknown reasons. Also, since the right-censoring equals to no events at the end of the study, the results are robust within the covered timeframe. Moreover, since I include most countries, the effect of right censoring is not complicated by small samples. ---INSERT FIGURE 1 – 2 ABOUT HERE--- Descriptive statistics Table 2 shows the IDB investment initiation years for countries. Islamic Development Bank initiated investments in 128 countries25. ---INSERT TABLE 2 ABOUT HERE--- 25 Note that this excluded countries and territories not recognized by the United Nations as countries and those with zero or negative survival times as they did not contribute any new information to the analysis. 243 See Table 3 for the characteristics of the sample countries. The average World Bank credit is about US$847 million, and the average IMF credit is about US$338 million. The average IDB investment is about US$17 million, much less than the average credit of World Bank and IMF. Sample countries vary largely in their GDP growth (M = 3.6%, SD = 7.2%), credit rating (M = 64.6, SD = 12.8), and financial development (M = 0.26, SD = 0.19). 26% countries have common law origin; 25% countries have Muslim majority in their population; 13% countries have Arabic as a major language; 28% countries have English as a major language; 17% countries have French as a major language. The average distance of countries from Saudi Arabia is 6,309 kilometers. The countries voted like the United States in 54% of the United Nations resolutions and voted like Saudi Arabia in 21% of resolutions. In 51% of the country- years, neighboring countries received IDB investment. ---INSERT TABLE 3 ABOUT HERE--- Table 4 presents the correlations among the major variables. World Bank operations (investments in the last three years) with countries is positively correlated with GDP growth (ρ = 0.03, p<.01), but is negatively correlated with credit rating (ρ = -0.43, p<.001), and financial development (ρ = -0.48, p<.001). IMF operations (credit last three years) with countries is not significantly correlated with GDP growth (p>.05) but is negatively correlated with credit rating (ρ = -0.36, p<.001) and financial development (ρ = -0.42, p<.001). These findings are consistent with the idea that development finance goes more towards less developed countries or countries in need of external funding for socioeconomic development. Such statement is further 244 supported by weak correlations between World Bank and IMF credit to legal origin (common law) of countries. The flow of external private sector finance in countries has been found to be strongly associated with the common law legal system of countries, as such systems tend to provide greater freedom in private contracting and greater legal protection (La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 19997; La Porta, Lopez-de-Silanes, & Shleifer, 2008). However, external development finance does not appear to have such association with common law. Geographic distance from Saudi Arabia is not strongly correlated with credit from IMF and World Bank. Voting like Saudi Arabia in the United Nations is positively correlated with World Bank operations/credit (ρ = 0.40, p<.001) and IMF operations/credit (ρ = 0.34, p<.001). Islamic Development projects in neighboring countries is positively correlated in World Bank operations (ρ = 0.24, p<.001) and IMF operations (ρ = 0.24, p<.001). ---INSERT TABLE 4 ABOUT HERE--- Emulation in the IDB investment initiation decisions: results from duration models Here I present the results of duration models to explain the effect of various factors (the independent variables and control variables) on the duration (the number of years of without the initiation of Islamic Development Bank investment in countries) or event (the initiation of IDB investment in countries). The results are estimated using the Cox proportional hazard model, the exponential model, the Weibull model, and the Gompertz model. 245 In the cox proportional hazard model, the hazard rate for the jth subject (for a set of covariates 𝑥 ) in the data is: ℎ 𝑡 𝑥 = ℎ (𝑡) exp 𝑥 𝛽 Here, the regression coefficient, 𝛽 is estimated from the data. In this model, the baseline hazard ℎ (𝑡) is not parametrized. Thus, ℎ (𝑡) is not estimated. The model makes no assumptions about the shape of the hazard. One subject’s hazard is the multiplicative replica of another’s (Cox & Oakes, 1984; Cleves, Gould, Guiterrez, & Marchenko, 2010). By comparing the subject j to subject w, the model states that: ℎ 𝑡 𝑥 exp (𝑥 𝛽 ) = ℎ(𝑡|𝑥 ) exp (𝑥 𝛽 ) This expression above is constant if the covariates 𝑥 and 𝑥 do not change over time. The exponential model is considered the simplest of parametric survival models. The reason is that the model assumes a constant baseline hazard (Cleves et al., 2010). The hazard function or the conditional hazard rate (for the jth subject/country) is: ℎ 𝑡 𝑥 = ℎ (𝑡) exp (𝑥 𝛽 ) = exp(𝛽 ) exp(𝑥 𝛽 ) = exp(𝛽 + 𝑥 𝛽 ) for some constant 𝛽 . From the well-known relationship for the exponential model, 246 The cumulation hazard function, 𝐻 𝑡 𝑥 = exp(𝛽 + 𝑥 𝛽 )𝑡 The survival function, 𝑆 𝑡|𝑥 = exp{−𝑒𝑥𝑝(𝛽 + 𝑥 𝛽 )𝑡} The Weibull models, unlike the exponential model, do not assume the baseline hazard to be constant. Rather, it assumes a baseline hazard of the following form: ℎ (𝑡) = 𝑝𝑡 exp (𝛽 ), where p is some ancillary shape parameter estimated from the data, and the scale parameter is parametrized as exp (β ). So, with a set of covariates 𝑥 under the proportional hazard model, the hazard function, the cumulative hazard function, and the survival function for the Weibull model are as follows (Cleves et al. 2010). Here, the estimated parameter is obtained by exponentiating the estimated intercept coefficient. ℎ 𝑡 𝑥 = ℎ (𝑡) exp (𝑥 𝛽 ) = 𝑝𝑡 exp (𝛽 + 𝑥 𝛽 ) 𝐻 𝑡 𝑥 = exp(𝛽 + 𝑥 𝛽 )𝑡 𝑆 𝑡|𝑥 = exp{−𝑒𝑥𝑝(𝛽 + 𝑥 𝛽 )𝑡 } The Gompertz model assumes a baseline hazard of the following form: ℎ (𝑡) = exp(𝛾𝑡) exp(𝛽 ). So, the hazard function, the cumulative hazard function, and the survival function in the Gompertz model are as follows (Cleves et al., 2010): ℎ 𝑡 𝑥 = ℎ (𝑡) exp (𝑥 𝛽 ) = exp(𝛾𝑡) exp (𝛽 + 𝑥 𝛽 ) 247 𝐻 𝑡 𝑥 = 𝛾 exp(𝛽 + 𝑥 𝛽 ){exp(𝛾𝑡) − 1} 𝑆 𝑡|𝑥 = exp[− 𝛾 𝑒𝑥𝑝(𝛽 + 𝑥 𝛽 ){exp(𝛾𝑡) − 1}] Table 5 shows the determinants of IDB investment initiation or entry in countries as found in duration models. A positive coefficient on an explanatory variable suggests that the variable expedited the entry (led to early entry) whereas a negative coefficient on an explanatory variable suggests the variable delayed IDB investments in countries. The following factors have statistically significant effect on the IDB investment initiation in countries: GDP growth, Muslim (majority), IMF operations, French (as an official or major language) and IDB project in neighboring countries (see Table 5). The coefficient on GDP growth is negative (p<.01), indicating that higher GDP growth delays the IDB entry in countries. This suggests that IDB entry in countries occurs earlier in countries with lower GDP growth. This is consistent with IDB mandate to support less developed countries. The coefficient on Muslim (majority) is positive (p<.001); so, IDB entry occurs earlier in countries that have a Muslim majority population. The coefficient on French is positive (p<0.05); hence, IDB entry occurs earlier in countries that have French as an official or major language. It can appear surprising that French language countries receive IDB funding so early. But it is largely driven by the correlation between French colonization in the African countries and the Muslim majority population of those countries. Indeed, one of the official languages of Islamic Development Bank is French. The coefficient on IMF operations is positive and significant (p<.05); thus, there appears to be emulation of IMF credit to countries in IDB investment initiations. The coefficient on ‘IDB 248 projects in neighbors’ is positive (p<.001); this suggests that there is a spatial learning process for IDB entry in countries. IDB enters earlier in countries whose neighboring countries received IDB investments already. All models are significant (Exponential: LR 𝜒 = 132.24, p<.001; Weibull: LR 𝜒 = 133.74, p<.001; Gompertz: LR 𝜒 = 128.94, p<.001; Cox: LR 𝜒 = 122.72, p<.001). ---INSERT TABLE 5 ABOUT HERE--- Evidence for emulation and learning Table 6 presents the results of selective emulation and learning. The hypothesis I test is that for investing in countries with different levels of financial development, Islamic Development Bank relies on different sources for emulation. For investing in less financially developed countries, IDB relies on its prior operations in the neighboring countries whereas, for investing in high financially developed countries, IDB relies on the prior high operations of World Bank and IMF in the countries. Consistent with this, Table 8 (Model 1) shows that for the high financially developed countries that ‘High IMF and WB operations’ is positive and significant (p<.001) but the coefficient on ‘IDB projects in neighbors’ is not significant (p>.05). Table 8 (Model 2) shows that for low financially developed countries that the coefficient on ‘IDB projects in neighbors’ is positive and significant (p<.001) but the coefficient on ‘High IMF and WB operations’ is not significant (p>.05). All models are statistically significant 249 (Table 8; Model 1: LR 𝜒 = 42.16, p<.001; Model 2: LR 𝜒 = 112.12, p<.001). ---INSERT TABLE 6 ABOUT HERE--- Tests for other explanations Event driven political grouping: I have so far accounted for global political relationships among countries through their similarity with Saudi Arabia in the United Nations voting. Another approach of addressing such relationship is to consider coalitions among countries based on major events. To this end, I consider the Gulf War of 1991, which divided the world into Saudi/USA (anti-Iraq) alliance and the rest. So, I re-estimated the results of Table 6, now additionally including the dummy variable, ‘Gulf War Saudi Coalition’ (1 = if a country was a member of the USA and Saudi alliance during the Gulf War, 0 = else). The results are in Table 7. The effect of the Gulf War Saudi Coalition is positive and significant only in the high financial development subsample (p<.05); in the low financial development subsample such effect is not significant (p>.05). Both models are overall significant (Table 7; Model 1: LR 𝜒 = 48.70, p<.001; Model 2: LR 𝜒 = 112.63, p<.001). The inclusion of this dummy variable does not alter the selective emulation and learning previously found. Hence, the results for the hypotheses are robust to war-driven political groups among countries. ---INSERT TABLE 7 ABOUT HERE--- 250 Sunni over Shia majority: For a nuanced explanation of Islamic religiosity, I now include a dummy variable, Sunni, which takes on a value of ‘1’ if a country has Sunni over Shia majority in their Muslim population, else ‘0’. Since the initial theorization of Islamic finance came from the Sunni school of jurisprudence, such variable might provide additional explanation. The results of Table 6 are replicated in Table 8, now replacing ‘Muslim’ with ‘Sunni’ variable and adding the effect of Gulf War Saudi Coalition (see Table 8, Model 1 & Model 3). The models are significant (Table 8; Model 1: LR 𝜒 = 46.64, p<.001; Model 3: LR 𝜒 = 85.21, p<.001). The results of Table 8 are qualitatively very similar to those of Table 6, thereby providing further support for the process of selective emulation and learning, even after accounting for the effect of Sunni Islamic jurisprudence and the Gulf War based political groups among countries. ---INSERT TABLE 8 ABOUT HERE--- Economic integration of countries: I additionally tested if the economic integration of countries with the rest of the world explains away the selective emulation and learning as shown above. To this add, I added the variable ‘economic globalization’ as measured by the KOF economic globalization index (Dreher, 2006; Gygli, Haelg, Potrafke, & Sturm, 2019). The results are presented in Table 8 (Model 2 and Model 4); both models are significant (Table 8; Model 2: LR 𝜒 = 47.86, p<.001; Model 4: LR 𝜒 = 90.27, p<.001). The explanation of selective emulation and learning still holds. 251 Re-entry: Re-entry (i.e., the second IDB investment in a country) is largely driven by Muslim majority population, IDB investments in neighboring countries, with some influence of IMF operations and financial development of countries (see Table 9, Model 1). In high and low financial development subsamples, the influence of Muslim majority population and the IDB investments in neighboring countries continue to be significant (see Table 9, Models 2 – 5). In ‘low (financial) development’ subsample, high IMF and World Bank operations is positive and significant (see Table 9, Model 5). ---INSERT TABLE 9 ABOUT HERE--- IDB investment frequency: Here, IDB investment frequency is a full-sample measure for each country. It is measured by the frequency of yearly IDB investment in a country as a percent of the number of years the country is in the sample. This dependent variable and explanatory variables are all measured in the year 2016, the ending year of the sample. In the full sample (Table 10, Model 1), Muslim majority population (p<.001), financial development (p<.01), French (p<.01), World Bank operations (p<.05), and IDB projects in neighboring countries (p<.05) led to greater frequency of IDB investments entries in countries. However, credit rating (p<.05) is negatively related with IDB investment frequency, which shows that IDB has invested more frequently in countries with lower credit rating. In another full sample model (Table 10, Model 2), I include a dummy variable for high IMF and WB operations (p<.001), which has had a positive and significant effect on IDB investment frequency. In subsamples of high and low financial development (see Table 10, 252 Model 3 – 4), positive and significant explanatory variables are Muslim majority population (p<.001 in both Model 3 & 4) and high IMF and World Bank operations (p<.001 in Model 3, p<.05 in Model 4). In such subsamples, IDB projects in neighboring countries and credit rating are no longer significant. ---INSERT TABLE 10 ABOUT HERE--- Discussion Using the case of Islamic Development Bank investments from 1976 – 2016, I find support for vicarious learning from similar organizations and experiential learning from own experience in close geographies in the national entry (investment imitation) decisions of a transnational organization. The use of duration models in examining the decision of IDB investment initiations (entry decisions) in countries facilitates accounting for the dynamic observation and learning from the operations of the bank and its similar organizations and the changing social, economic, and political features of the countries. Thus, this paper responds to the call of the recent scholars of international business to move away from static theorizing in explaining the behavior of multinational organizations. The experiential and vicarious learning illustrated here is tenable with the following boundary conditions and assumptions. First, institutional environments of countries are different in many ways. So, one way to understand the organization-environment fit is to see if similar organizations have invested in the environment over a relatively long term. This is also important as the development 253 investments/lending are long-term in nature and provide benefits to their clients or stakeholders over a long period of time. Second, vicarious learning of other similar organizations is plausible as there is explicit knowledge sharing between organizations, which has been quite the case for the relationship between Islamic Development Bank and the Bretton Woods Institutions. There is collaboration among these financial organizations in terms of sharing of data, policies, and operational processes. In IDB early years, IDB executives even spent time with World Bank and other development banks so that such knowledge help IDB executives develop organizational structures, policies, and routines (Meenai, 1989). There are examples of high-level human capital transfers from World Bank and Islamic Development Bank. Also, there is evidence of direct co-financing of projects between IDB and World Bank, which suggest that even though their development models are not all the same, they have common interests to learn from. Third, the investments of the Bretton Woods Institutions in countries can also demonstrate to the other development banks like IDB that the national bureaucracies have capacities to deal with the process of implementing development projects. Fourth, learning from own investments in neighboring countries can facilitate learning as countries spatially closer to each other have common ‘features’ in their institutional environment. Such commonality can inspire confidence in investment managers that learning in one context can be beneficial for investment ventures in countries closer to that context. Some of it can be beneficial social capital that investment managers acquire by operating in near locations. Such social capital can reduce information asymmetry. This view of 254 information asymmetry is much more dynamic than the static distance between the headquarters and the nations. This approach of flexible and dynamic s learning has been proposed in the literature as an avenue for furthering our understanding of international business. One major reason is that business operations in the international context requires a greater degree of flexibility to deal with uncertainty of various sorts. The existing Uppsala models are not flexible to adjustments required in business operations in response to changing levels of uncertainty in different markets. Such models often assume cumulative learning and stability, as if firms’ behavior changes only incrementally after the initial export step. This, furthermore, indicates a cumulative learning. However, researchers argue that international investment is hardly an outcome of progressive reasoning and path dependence (Aharoni, 1966); rather, dynamic adjustments are necessary in the dynamic and heterogeneous international contexts (Aharoni, Tihanyi, & Connelly, 2011). In a further rebuttal to the environmental stability argument of the Uppsala model, we should note that achieving economic efficiency is not the only goal of firms which have the twin objectives of promoting institutional development while ensuring a reasonable monetary return. Such organizations (including IDB) might also invest in countries very much for the reason that the countries lack stability and would need financial and expert help to improve their investment climate. Therefore, financial models, premised on economic efficiency, would not necessarily reflect the investment decisions of such firms. This is very much reflected in the IDB emulation of the Bretton Woods institutions, which also share some semblance of its own multiple objectives. 255 The findings of this paper also correspond to the growing research on how organizations adopt either proximate solutions (exploitation) or search for distant opportunities (exploration) (e.g., March 1991; Lavie, Stettner, & Tushman, 2010). The findings inform how an organization, operating in the international context, draws on various forms and sources of learning to inform its strategic behaviors. Note that IDB has both exploration and exploitation mandates. As a development bank for certain communities, IDB cannot continually invest in just one country or only a select part of its Muslim communities; rather, it has to look for ways to expand its services to Muslim communities around the world. Hence, the challenge of exploring new markets and investing in them is very much its mission. Hence, IDB operations have appeared to be like that of a nascent multinational enterprise, as it cannot rely on its legacy of operations like established multinationals. In realizing this mission, we find that IDB draws on its proximate peer organizations as well as its own experience in the proximate geographies to invest in countries. Thus, here, the behavioral theory of firms is better suited for explanatory purposes. While internationalization theories include, bounded rationality, primarily through the cost of information argument (Casson, 1999, 2000), one cannot flexibly arrive at IDB investment initiation and re- entries if the host countries have high cost of information. Albeit IDB invests heavily in countries where the cost of information is high, as the low credit rating of IDB investee countries indicate. 256 Conclusion This paper illustrates the behavioral theory of the firms as it applies to the country- level investment initiation and re-investment of a multinational development bank, namely Islamic Development Bank (IDB). The flexible theorizing of BT shows how the firm learns from its own actions as well as the actions of its proximate peers in making investments in heterogenous, less stable, and high information cost countries. The long-term nature of investment projects undertaken by IDB makes such observed learning mechanism tenable. The paper has the following limitations. First, given the long-term nature of investments and the absence of a clearly communicated criteria of performance feedback on those investments, the nature of learning could not be further disentangled. Second, given IDB is a development bank with a certain mission, the specific findings might not be entirely applicable for for-profit banks or firms. However, the pattern of learning and its general arguments are quite relevant for organizations with multiple competing goals, which would include for-profit firms as well. Third, for other firms, the geopolitical importance of certain communities would not be similar to those of Islamic Development Bank. So, in explaining the behavior of other firms with a community mission, scholars should carefully measure the relevant characteristics of the communities of concern. Fourth, there is scope for further understanding the telling details of internal actions, activities, and routines a firm develops in such process of learning. 257 Figure 1: Kaplan – Meier survival estimate for IDB investment initiation in nation states Figure 2: Kaplan-Meier Survival estimates between Muslim vs Not Muslim Majority Countries 258 Table 1: Variable and Sources Variables Sources & Imputation IDB time to entry The website of Islamic Development Bank World Bank The website of World Bank (World Bank databank). operations, IMF Operations, High IMF and WB operations Muslim The ‘World Religion Data (v1.1)’ of the Correlates of War Project. Missing years assumed to have the same distribution of the most recent year(s). Arabic, English, CIA, The World Factbook, and websites of national agencies. French Common law Klerman et al. (2011), www.spamann.net, LaPorta et al. (2008), and LaPorta et al. (2004), and websites of national agencies of the countries. The missing years assumed to have the same distribution of the most recent year(s). Distance from Saudi https://github.com/rahulbot/distances-between-countries and google distance. Arabia The distance between countries were assumed to remain constant. Voting like Saudi in Bailey, Michael A., Anton Strezhnev, and Erik Voeten. "Estimating dynamic UN, Voting like USA state preferences from United Nations voting data." Journal of Conflict in UN Resolution 61.2 (2017): 430-456. GDP growth World Bank. I used backward filling for any missing year. Financial IMF Staff Discussion Note “Rethinking Financial Deepening: Stability and development Growth in Emerging Markets”. I used backward filling ‘within country’ to fill out 1975– 1979. Mean values of the variable each year to calculate the missing values for Afghanistan, Andorra, Cuba, Iraq, Liechtenstein, Monaco, Montenegro, Nauru, Palau, Somalia, Taiwan, Zaire, and Zimbabwe. Credit rating PRS Groups. I used backward filling ‘within country’, and for several countries26 with no credit rating, I used mean values of the years. IDB in neighbors ‘Correlates of War Direct Contiguity Data - Version 3.20’ and United Nations. Other sources discussed in the “Variables, Data, and Methods” section. 26 Aruba, Afghanistan, Andorra, Antigua and Barbuda, Burundi, Benin, Bosnia and Herzegovina, Belize, Barbados, Bhutan, Central African Republic, Comoros, Cabo Verde, Djibouti, Dominica, Eritrea, Fiji, Micronesia, Georgia, Equatorial Guinea, Grenada, Kyrgyz Republic, Cambodia, Kiribati, St. Kitts and Nevis, Lao PDR, St. Lucia, Liechtenstein, Lesotho, Monaco, Maldives, North Macedonia, Montenegro, Mauritania, Nepal, Nauru, Palau, Rwanda, Solomon Islands, South Sudan, Sao Tome and Principe, Eswatini, Seychelles, Chad, Tajikistan, Turkmenistan, Timor-Leste, Tonga, Uzbekistan, St. Vincent and the Grenadines, Vanuatu, Samoa, and Zaire. 259 Table 2: IDB entry year by countries and territories Year Countries with the first initiation of IDB investments 1976 Jordan 1977 Algeria, Bangladesh, Cameroon, Egypt, Guinea, Malaysia, Mauritania, Morocco, Niger, Pakistan, Senegal, Somalia, Sudan, Tunisia, Turkey, Yemen 1978 Chad, Indonesia, Syria, UAE, Uganda 1979 Bahrain, Burkina Faso, Guinea Bissau, Mali, Oman, Palestine 1980 Afghanistan, Comoros, Djibouti, Ethiopia, Gambia, Lebanon, Libya 1981 Cyprus, Eritrea, Maldives, Vietnam 1982 Gabon, Sierra Leone, Sri Lanka, Togo 1983 Benin, Iraq, Serbia, South Africa, USA 1984 Mauritius, Philippines, Reunion Islands, Singapore 1985 India, Kenya, Mozambique, Saudi Arabia, Tanzania, Thailand 1986 China, Fiji, South Korea, New Caledonia, New Zealand 1987 Congo Brazzaville, Ghana 1988 Malawi, Zimbabwe 1989 Australia, Guyana, Kuwait, Liberia, Zambia 1990 Iran, Nepal, Nigeria, Spain, Trinidad & Tobago 1991 Azerbaijan, Bulgaria, Democratic Republic of Congo, Kyrgyz Republic, Poland, Qatar, Romania, Russia, Tajikistan, Uzbekistan, Ivory Coast 1992 Albania, Bosnia & Herzegovina, Burma, Kazakhstan, Papua New Guinea, Turkmenistan, Ukraine 1993 Rwanda 1994 Burundi, Madagascar, United Kingdom 1995 Brazil, Canada, Croatia, Panama, Suriname, Venezuela 1996 Belgium, Grenada, Macedonia 1997 Greece, Netherlands 1998 Argentina, France, Kosovo 1999 Martinique 2000 Mayotte, Norway 2001 Bolivia, Montenegro 2002 Brunei, Switzerland 2005 Denmark, Jamaica 2006 Central African Rep 2008 Slovenia, Sweden 2010 Georgia, Paraguay 2011 Ecuador, Haiti, Latvia 2012 Austria, Germany, Swaziland 2013 Botswana 2014 Cambodia, Ireland, Italy, Lesotho, Vanuatu 2015 Barbados 2016 Antigua & Barbuda 260 Table 3: Descriptive Statistics IDB investment is the annual Islamic Development Bank investments in a country (in millions of US dollars). World Bank credit is the annual IBRD loans and credit to a country (in millions of US dollars). IMF credit is the annual International Monetary Fund credit to a country (in millions of US dollars). GDP growth is a percentage figure. Credit rating ranges from 0 to 100. Financial development, an index, ranges between ‘0’ to ‘1’. Common law is ‘1’ if the legal origin of a country is common law, else ‘0’. Muslim is ‘1’ if a country has Muslim majority in their Muslim population, else ‘0’. Arabic is ‘1’if the official or major language of a country is Arabic, else ‘0’. English takes on a value of ‘1’if the official or major language of a country is English, else ‘0’. French takes on a value of ‘1’if the official or major language of a country is French, else ‘0’. Distance from Saudi is the natural logarithm of the distance (km) of a country from Saudi Arabia. Voting like Saudi in UN is the percent of votes on all United Nations resolutions by a country like the votes of Saudi Arabia. Voting like USA in UN is the percent of votes on all United Nations resolutions by a country like the votes of USA. IDB projects in neighbors is the proportion of neighboring countries that received funding/investments from Islamic Development Bank so far (including the current year). Std. Variable N Mean dev. Min Max IDB investment ($millions) 7,198 17.06 95.17 0.00 2,664.47 World Bank credit ($millions) 7,198 847.48 2,734.89 0.00 38,185.96 IMF credit ($millions) 7,198 337.87 1,434.76 0.00 28,850.33 GDP growth (%) 7,198 3.60 7.20 -64.1 149.97 Credit rating 7,198 64.57 12.82 13.04 95.42 Financial development 7,198 0.26 0.19 0.00 1.00 Common law 7,198 0.26 0.44 0.00 1.00 Muslim 7,198 0.25 0.43 0.00 1.00 Arabic 7,198 0.13 0.33 0.00 1.00 English 7,198 0.28 0.45 0.00 1.00 French 7,198 0.17 0.37 0.00 1.00 Distance from Saudi 7,198 6,309.64 4,051.32 0.00 15,826.38 Voting like Saudi in UN 7,198 0.54 0.19 0.00 0.87 Voting like USA in UN 7,198 0.21 0.12 0.00 0.64 IDB projects in neighbors 7,198 0.51 0.37 0.00 1.00 261 Table 4: Correlation Table 262 263 Table 5: Models for the Initiation of Islamic Development Bank Investments The dependent variable is duration - the number of years without the first Islamic Bank investment in a country. GDP growth is a percentage figure. Credit rating ranges from 0 to 100. Financial development, an index, ranges between ‘0’ to ‘1’. Common law is ‘1’ if the legal origin of a country is common law, else ‘0’. Muslim is ‘1’ if a country has Muslim majority in their Muslim population, else ‘0’. Arabic is ‘1’if the official or major language of a country is Arabic, else ‘0’. English takes on a value of ‘1’if the official or major language of a country is English, else ‘0’. French takes on a value of ‘1’if the official or major language of a country is French, else ‘0’. Distance from Saudi is the natural logarithm of the distance (km) of a country from Saudi Arabia. World Bank operations is the natural logarithm of the sum of the last three years’ World Bank (IBRD loans and credits) investments in a country (measured in US$ millions) so far (including the current year) plus 1. IMF operations is the natural logarithm of the sum of the last three years’ International Monetary Fund credits in a country (measured in US$ millions) so far (including the current year) plus 1. Voting like Saudi in UN is the percent of votes on all United Nations resolutions by a country like the votes of Saudi Arabia. Voting like USA in UN is the percent of votes on all United Nations resolutions by a country like the votes of USA. IDB projects in neighbors is the proportion of neighboring countries that received funding/investments from Islamic Development Bank so far (including the current year). Variables Exponential Weibull Gompertz Cox GDP growth -0.03** -0.03* -0.03** -0.03* Credit rating -0.01 -0.02 -0.01 -0.01 Financial development 1.30 1.06 1.30 1.51 Common law 0.02 0.04 0.02 -0.01 Muslim 1.96*** 2.12*** 1.96*** 1.87*** Arabic 0.27 0.31 0.27 0.22 English 0.28 0.30 0.29 0.29 French 0.52* 0.56* 0.52* 0.46 Distance from Saudi -0.04 -0.03 -0.04 -0.07 World Bank operations 0.001 -0.002 0.001 0.002 IMF operations 0.04* 0.04* 0.04* 0.04* Voting like Saudi in UN 0.43 0.33 0.43 0.58 Voting like USA in UN -0.17 -0.06 -0.17 -0.47 IDB projects in neighbors 1.00*** 0.83** 1.00*** 0.94** Constant -3.89*** -4.17 -3.90 No of subjects 181 181 181 181 No of failures 128 128 128 128 Log likelihood -209.90 -208.76 -209.90 -538.44 Degree of freedom 14 14 14 14 LR chi-squared 132.24*** 133.74*** 128.94*** 122.72*** Notes: *p<.05, **p<.01, ***p<.001 264 Table 6: Models for the Initiation of IDB Investments by Financial Development Subsamples The dependent variable is duration - the number of years without the first Islamic Bank investment in a country. GDP growth is a percentage figure. Credit rating ranges from 0 to 100. Financial development, an index, ranges between ‘0’ to ‘1’. Common law is ‘1’ if the legal origin of a country is common law, else ‘0’. Muslim is ‘1’ if a country has Muslim majority in their population, else ‘0’. Arabic is ‘1’if the official or major language of a country is Arabic, else ‘0’. English takes on a value of ‘1’if the official or major language of a country is English, else ‘0’. French takes on a value of ‘1’if the official or major language of a country is French, else ‘0’. Distance from Saudi is the natural logarithm of the distance (km) of a country from Saudi Arabia. High IMF and WB operations is for a country in a given year if both IMF and World Bank credit to the country are above average to the credit made to all countries for the year. Voting like Saudi in UN is the percent of votes on all United Nations resolutions by a country like the votes of Saudi Arabia. Voting like USA in UN is the percent of votes on all United Nations resolutions by a country like the votes of USA. IDB projects in neighbors is the proportion of neighboring countries that received funding/investments from Islamic Development Bank so far (including the current year). Variables Model 1: High (above Model 2: Low (average and average) development below) development sample sample GDP growth -0.02 -0.05*** Credit rating 0.02 -0.03* Common law 0.24 -0.23 Muslim 1.62* 2.05*** Arabic 0.34 0.04 English 0.20 0.55 French -0.21 0.51 Distance from Saudi -0.17 -0.10 High IMF and WB 1.29*** 0.53 operations Voting like Saudi in UN -0.05 2.6 Voting like USA in UN -0.13 -1.98 IDB projects in neighbors 0.65 1.35*** Constant -4.14** -3.32* No of subjects 104 128 No of failures 57 71 Log likelihood -94.43 -102.78 Degree of freedom 12 12 LR chi-squared 42.16*** 112.12*** Notes: *p<.05, **p<.01, ***p<.001 265 Table 7: Models for Initiation of IDB Investments with Financial Development Subsamples and Gulf War Groups The dependent variable is duration - the number of years without the first Islamic Bank investment in a country. Gulf War Saudi Coalition is ‘1’ if a country was a member of the USA and Saudi Arabia (anti-Iraq) coalition during the Gulf War of 1991, else ‘0’. GDP growth is a percentage figure. Credit rating ranges from 0 to 100. Financial development, an index, ranges between ‘0’ to ‘1’. Common law is ‘1’ if the legal origin of a country is common law, else ‘0’. Muslim is ‘1’ if a country has Muslim majority in their population, else ‘0’. Arabic is ‘1’if the official or major language of a country is Arabic, else ‘0’. English takes on a value of ‘1’if the official or major language of a country is English, else ‘0’. French takes on a value of ‘1’if the official or major language of a country is French, else ‘0’. Distance from Saudi is the natural logarithm of the distance (km) of a country from Saudi Arabia. High IMF and WB operations is for a country in a given year if both IMF and World Bank credit to the country are above average to the credit made to all countries for the year. Voting like Saudi in UN is the percent of votes on all United Nations resolutions by a country like the votes of Saudi Arabia. Voting like USA in UN is the percent of votes on all United Nations resolutions by a country like the votes of USA. IDB projects in neighbors is the proportion of neighboring countries that received funding/investments from Islamic Development Bank so far (including the current year). Variables Model 1: High (above Model 2: Low (average and average) development below) development sample sample Gulf War Saudi Coalition 1.04* 0.33 GDP growth -0.02 -0.05*** Credit rating 0.02 -0.03* Common law 0.20 -0.24 Muslim 1.73** 1.99*** Arabic -0.57 0.10 English 0.29 0.56 French -0.18 0.53 Distance from Saudi -0.17 -0.06 High IMF and WB 1.52*** 0.53 operations Voting like Saudi in UN -0.02 2.15 Voting like USA in UN -1.26 -2.19 IDB projects in neighbors 0.73 1.42*** Constant -3.93* -3.54* No of subjects 104 128 No of failures 57 71 Log likelihood -91.16 -102.53 Degree of freedom 13 13 LR chi-squared 48.70*** 112.63*** Notes: *p<.05, **p<.01, ***p<.001 266 Table 8: Models for Initiation of IDB Investments with Financial Development Subsamples, Gulf War Groups, and Economic Globalization The dependent variable is duration – the number of years without the first Islamic Bank investment in a country. Gulf War Saudi Coalition is ‘1’ if a country was a member of the USA and Saudi Arabia (anti-Iraq) coalition during the Gulf War of 1991, else ‘0’. GDP growth is a percentage figure. Credit rating ranges from 0 to 100. Financial development, an index, ranges between ‘0’ to ‘1’. Common law is ‘1’ if the legal origin of a country is common law, else ‘0’. Sunni is ‘1’ if a country has Sunni over Shia majority in their Muslim population, else ‘0’. Arabic is ‘1’if the official or major language of a country is Arabic, else ‘0’. English takes on a value of ‘1’if the official or major language of a country is English, else ‘0’. French takes on a value of ‘1’if the official or major language of a country is French, else ‘0’. Distance from Saudi is the natural logarithm of the distance (km) of a country from Saudi Arabia. High IMF and WB operations is for a country in a given year if both IMF and World Bank credit to the country are above average to the credit made to all countries for the year. Voting like Saudi in UN is the percent of votes on all United Nations resolutions by a country like the votes of Saudi Arabia. Voting like USA in UN is the percent of votes on all United Nations resolutions by a country like the votes of USA. IDB projects in neighbors is the proportion of neighboring countries that received funding/investments from Islamic Development Bank so far (including the current year). Variables Model 1: Model 2: Model 3: Model 4: Low High (above High (above Low (average (average and average) average) and below) below) development development development development sample sample sample sample Gulf War Saudi Coalition 0.91* 0.85* 0.86 0.71 GDP growth -0.01 -0.02 -0.05** -0.04** Credit rating 0.01 0.02 -0.03* -0.02* Economic globalization -0.01 -0.03* Common law 0.69 0.67 -0.06 <-0.01 Sunni 0.79* 0.79* 0.14 0.13 Arabic -0.36 -0.13 1.45 1.54** English -0.11 -0.13 0.30 0.33 French <-0.01 -0.08 0.80* 0.53 Distance from Saudi -0.34* -0.33* -0.07 -0.07 High IMF and WB 1.19** 0.37 1.27*** 0.41 operations Voting like Saudi in UN 1.42 1.31 2.64* 1.88 Voting like USA in UN -1.97 -1.84 -4.07 -2.62 IDB projects in neighbors 0.74 0.87* 1.56*** 1.77*** Constant -2.69* -2.63 -2.99* -2.07 No of subjects 104 104 128 128 No of failures 57 57 71 71 Log likelihood -92.19 -91.58 -116.24 -113.71 Degree of freedom 13 14 13 14 LR chi-squared 46.64*** 47.86*** 85.21*** 90.27*** Notes: *p<.05, **p<.01, ***p<.001 267 Table 9: Models (Exponential) for the Second (Re-entry) Islamic Development Bank Investments The dependent variable is duration – the number of years without the second Islamic Bank investment in a country. Gulf War Saudi Coalition is ‘1’ if a country was part of the USA/Saudi coalition during the Gulf War, else ‘0’. GDP growth is a percentage figure. Credit rating ranges from 0 to 100. Financial development, an index, ranges between ‘0’ to ‘1’. Common law is ‘1’ if the legal origin of a country is common law, else ‘0’. Muslim is ‘1’ if a country has Muslim majority in their Muslim population, else ‘0’. Arabic is ‘1’if the official or major language of a country is Arabic, else ‘0’. English takes on a value of ‘1’if the official or major language of a country is English, else ‘0’. French takes on a value of ‘1’if the official or major language of a country is French, else ‘0’. Distance from Saudi is the natural logarithm of the distance (km) of a country from Saudi Arabia. World Bank operations is the natural logarithm of the sum of the last three years’ World Bank (IBRD loans and credits) investments in a country (measured in US$ millions) so far (including the current year) plus 1. IMF operations is the natural logarithm of the sum of the last three years’ International Monetary Fund credits in a country (measured in US$ millions) so far (including the current year) plus 1. High IMF and WB operations is for a country in a given year if both IMF and World Bank credit to the country are above average to the credit made to all countries for the year. Voting like Saudi in UN is the percent of votes on all United Nations resolutions by a country like the votes of Saudi Arabia. Voting like USA in UN is the percent of votes on all United Nations resolutions by a country like the votes of USA. IDB projects in neighbors is the proportion of neighboring countries that received funding/investments from Islamic Development Bank so far (including the current year). Variables Model 1: Model 2: Model 3: High Model 4: Model 5: Low Full sample High development Low development development sample development sample sample sample Gulf War Saudi Coalition 0.40 0.87* 0.72 0.13 0.22 GDP growth -0.02 0.01 0.01 -0.04* -0.04* Credit rating -0.02 0.01 0.01 -0.02 -0.02 Financial development 2.12* Common law 0.14 0.26 0.24 0.08 0.10 Muslim 1.94*** 1.34* 1.21* 2.17*** 2.00*** Arabic -0.01 -0.80 -0.75 0.06 0.10 English 0.32 -0.02 -0.05 0.51 0.50 French 0.47 -0.03 -0.05 0.44 0.40 Distance from Saudi -0.07 -0.28 -0.26 -0.15 -0.12 World Bank operations 0.01 0.01 0.01 IMF operations 0.05* 0.05 0.04 High IMF and WB operations 0.74 0.78* Voting like Saudi in UN 0.63 1.13 1.32 1.85 1.94 Voting like USA in UN -0.92 -0.94 -1.20 -4.27 -4.44 IDB projects in neighbors 1.42*** 1.09* 1.15** 1.68*** 1.70** Constant -4.51*** -3.66* -3.37 -3.86* -4.01 No of subjects 183 114 114 130 130 No of failures 112 51 51 61 61 Log likelihood -172.49 -82.29 -84.62 -83.00 -83.26 Degree of freedom 15 14 13 14 13 LR chi-squared 146.44*** 47.19*** 42.53** 111.76*** 111.24*** Notes: *p<.05, **p<.01, ***p<.001. High development > average financial development index, Low development <= average financial development index. 268 Table 10: Regressions for IDB Investment Frequency in Countries All variables are measured in 2016. The dependent variable is IDB investment frequency, i.e., the frequency of yearly IDB investment in a country as a percent of the number of years the country is in the sample. Gulf War Saudi Coalition is ‘1’ if a country was part of the USA/Saudi coalition during the Gulf War, else ‘0’. GDP growth is a percentage figure. Credit rating ranges from 0 to 100. Financial development, an index, ranges between ‘0’ to ‘1’. Common law is ‘1’ if the legal origin of a country is common law, else ‘0’. Muslim is ‘1’ if a country has Muslim majority in their Muslim population, else ‘0’. Arabic is ‘1’if the official or major language of a country is Arabic, else ‘0’. English takes on a value of ‘1’if the official or major language of a country is English, else ‘0’. French takes on a value of ‘1’if the official or major language of a country is French, else ‘0’. Distance from Saudi is the natural logarithm of the distance (km) of a country from Saudi Arabia. World Bank operations is the natural logarithm of the sum of the last three years’ World Bank (IBRD loans and credits) investments in a country (measured in US$ millions) so far (including the current year) plus 1. IMF operations is the natural logarithm of the sum of the last three years’ International Monetary Fund credits in a country (measured in US$ millions) so far (including the current year) plus 1. High IMF and WB operations is for a country in a given year if both IMF and World Bank credit to the country are above average to the credit made to all countries for the year. Voting like Saudi in UN is the percent of votes on all United Nations resolutions by a country like the votes of Saudi Arabia. Voting like USA in UN is the percent of votes on all United Nations resolutions by a country like the votes of USA. IDB projects in neighbors is the proportion of neighboring countries that received funding/investments from Islamic Development Bank so far (including the current year). Variables Model 1 Model 2 Model 3: High Model 4: Low Development Development Sample Sample Gulf War Saudi Coalition 0.04 0.04 0.09 0.05 GDP growth 0.004 0.01* 0.0006 0.01* Credit rating -0.01* -0.01** -0.001 -0.002 Financial development 0.35** 0.28** Common law 0.04 0.02 0.09 0.0003 Muslim 0.49*** 0.48*** 0.46*** 0.47*** Arabic 0.02 0.03 0.03 0.01 English 0.04 0.05 0.08 0.03 French 0.11** 0.11** 0.03 0.08 Distance from Saudi -0.02 -0.02 -0.02 -0.08 World Bank operations 0.01* IMF operations 0.001 High IMF and WB operations 0.15*** 0.23*** 0.10* Voting like Saudi in UN 0.03 0.04 -0.06 0.18 Voting like USA in UN -0.13 -0.22 0.04 -0.40 IDB projects in neighbors 0.09* 0.09* 0.01 0.08 Constant 0.37 0.41 0.26 0.77 N 188 188 94 94 R-squared 0.77 0.76 0.76 0.78 F-stat 57.81*** 68.85*** 32.64*** 48.40*** DF (15, 172) (14,173) (13, 80) (13,80) Notes: *p<.05, **p<.01, ***p<.001. 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International Interactions, 39, 265-291. https://correlatesofwar.org/data-sets/world-religion-data 273 CHAPTER 7 CONCLUSIONS The inquiry of this dissertation confirms as well as extends the existing arguments about Islamic finance, which I divide into four categories (with short names) based on their similarity: economic puritanism (Kuran, 2004, 2011), financial efficiency (Bitar et al. 2017, Bitar et al., 2020; Doumpos et al., 2017), religious incoherence (Irfan, 2014; Fadel, 2008), and hegemony and/or deception (El-Gamal, 2006; Pitluck, 2012). The major argument of the economic puritanism school is that even though Islamic modes of contracting could have been efficient at a certain period in history and in certain communities, relative to the general, contemporary economic principles the contracts are limiting; they rather discourage economic exchange, constrain transfer of ownership, and impede firm growth. These arguments are tested by financial efficiency scholars who empirically compare the Islamic financial organizations (e.g., Islamic banks) with their conventional/secular counterparts. The evidence largely shows that Islamic finance organizations do not necessarily enjoy greater financial success, based on a wide variety of secular benchmarks. The religious incoherence arguments have some similarity with economic puritanism. The idea is that there are ambiguities in the Islamic restrictions and requirements which can lead to multiple interpretations and contentions. The hegemony/deception arguments critique contemporary contractual innovations in Islamic financial products/services. According to them, such innovations are often indirect ways of making Islamic 274 finance closer to secular finance/capitalism. In this line of reasoning, Islamic finance is a façade, albeit serving certain capitalists trying to exploit the religious sentiments of Muslims. The common theme across these four categories is that Islamic finance organizations are an inefficient and non-viable organizational form, and such forms are largely an elite-driven, top-down development. Once we combine the agreements in the literature with the data on the expansion of Islamic finance organizations around the world, we are confronted with new questions. Today, Islamic finance practices and organizations have spread to about 135 countries, and about 65 countries have Islamic finance organizations locally. The total asset size of Islamic financial organizations exceeds the GDP of the United Kingdom27, the 5th largest economy in the world in terms of national incomes28. There are Islamic counterparts of most varieties of secular financial organizations and instruments, ranging from commercial banks, insurance companies, investment funds, bonds, to financial derivatives. At this backdrop, I ask several questions. First, even though Islamic finance organizations are not economically more efficient, where and how do they emerge and expand most? The answer is provided in Chapter 3. Then, the existing argument indicates incoherence and ambiguities in Islamic finance contracts and organizations. If that is true, Islamic finance would face legal contentions by various stakeholders. Thus, I ask how legal contentions about Islamic finance organizations occur in national economies and how various branches 27 https://www.statista.com/statistics/1004432/gdp-of-england/ 28https://www.bnymellon.com/us/en/insights/all-insights/the-growing-global-appeal-of-islamic- finance.html#:~:text=In%202019%2C%20Islamic%20finance%20assets,since%20the%20global%20fina ncial%20crisis. 275 of the state deal with such contention. The answer is provided in Chapter 4. Third, Islamic finance organizations are argued to be at a crossroad. On the one hand, they are to compete with the secular capitalism, and on the other hand, they are to serve the religious interests of the Muslim community. These goals are argued to be incompatible with each other. Hence, I ask how Islamic finance organizations allocate resources in the face of conflicting goals. The answer is provided in Chapter 5 and Chapter 6 through a case analysis of Islamic Development Bank investments over four decades in more than 135 countries. In Chapter 3, I show that the emergence of local Islamic finance organizations in the local national economies is positively correlated with the Islamic Development Bank (IDB) investments in these economies. The earlier the IDB investments, the earlier the local emergence of Islamic finance organizations. Using duration models with data about 186 countries over the period 1948 – 2016, I show that such findings are robust to alternative social, economic, and political explanations. The mechanism makes sense as IDB investments in national economies using Islamic finance contracts serve several purposes – illustration of Islamic finance and their applicability in various local projects, and the tacit support of the local stakeholders for Islamic finance without any drastic Islamic legal change. This chapter further shows that while prior studies on the globalization of ideas and markets largely focus on competition, emulation, and coercion as mechanisms, the globalization of Islamic finance does not fit exactly any of them. Hence, we are to rethink various macro-mechanisms of globalization once we consider the diffusion of ideas and organizations originating from the global south. The mechanism of IDB investment is largely ‘illustration’, i.e., 276 setting the stage for ‘emulation’ for local organizations’, while the most difficult cynics, including the proponents of the hegemony arguments, could say it is ‘illustration’ coupled with ‘coercion’. In a world dominated by the World Bank and IMF models of development finance, the cynical answer does not receive strong empirical support. Also, contrary to the expectation of the Islamic finance ideal types, Islamic finance organizations rather grow most in the Muslim majority countries that receive IDB investments and yet, has common law as the major legal paradigm. It appears that the common law frameworks rather provide opportunities for innovation of new financial products and services involving Islamic kind. In Chapter 4, I provide details of various ways Islamic finance was implemented in four major countries – Malaysia, Pakistan, Turkey, and Saudi Arabia. Drawing on a rich archive of news articles, bank reports, laws, and official pronouncements, I illustrate that the legal contentions in the countries and the state coordination in response to such contention determined the timing and nature of Islamic finance implementation. The paper also shows the empirical necessity for understanding the role of legal pluralism (instead of one legal origin’s dominance) and heterogeneous preferences with the branches of the state (instead of a unitary, unified state assumption) in shaping financial market development. In Chapter 5, I draw on IDB development investments in 135 countries over the period 1976 – 2016 and difference-in-difference regressions to show how Islamic Development Bank appears to allocate resources in balancing multiple competing goals. In doing so, I present a theory of conflicting social and economic goals of 277 organizations. In the absence of immediate and easily communicable feedback criteria on goal performance, IDB allocates resources in its primary observable activity such that they appear to simultaneously commit to some broad definitions for all goals. Such allocation ensures that one part of the activity highly supports the social goal, providing social legitimacy, while another part supports the economic goal, providing a necessary monetary return. Several external, global development banks like the World Bank and IMF are selectively emulated to justify resource allocation. Extraordinary events like the Gulf war triggers new emphasis on goals. In Chapter 6, I show the role of exemplar banks (like World Bank and IMF) in understanding various learning processes found in IDB investment initiation in the national economies. The results of Chapter 5 and Chapter 6 show the role of the external environment, specifically, civilizational-religious community groups in the conception and implementation of multiple, competing goals in a supranational organization. These chapters also empirically address the industry-specific debate about Islamic finance as to whether Islamic finance is to be seen as a substitute or as a complement to secular finance. Collectively, this dissertation provides evidence that sides with the idea of Islamic finance being a ‘complement’ to the secular alternatives. The dissertation has several notable limitations, and they are largely mine. The study has largely drawn on secondary data and documents; but that means that subjective experiences of social actors have not been documented beyond the boundary of the data and documents. Then, while quasi-experiments have been used as an identification and casual strategy; as a student of sociology, I would not interpret results beyond correlations bracketed by social structure and time. 278 REFERENCES – CHAPTER 7 Bitar, M., Hassan, M. K., & Walker, T. (2017). Political systems and the financial soundness of Islamic banks. Journal of Financial Stability, 31, 18–44. Bitar, M., Pukthuanthong, K., & Walker, T. (2020). Efficiency of Islamic vs. conventional banking: the role of capital and liquidity. Global Finance Journal, 46. Doumpos, M., Hasan, I., & Pasiouras, F. (2017). Bank overall financial strength: Islmaic versus conventional banks. Economic Modelling, 64, 513 – 523. El-Gamal, M. A. (2006) Islamic Finance: law, economics, and practice. Cambridge University Press. Fadel, M. (2007 – 2008). Riba, efficiency, and prudential regulation: preliminary thoughts. Wisconsin International Law Journal, 25(4), 655 – 702. Irfan, H. (2014). Heaven’s bankers: inside the hidden world of Islamic finance. Little, Brown Book Group. Kuran, T. (2004). Islam and Mammon: the economic predicaments of Islamism. Princeton University Press, New Jersey. Kuran, T. (2010). The Long Divergence: How Islamic law held back the Middle East. Princeton University Press, New Jersey. Pitluck, A. (2013). Islamic banking and finance: alternative of Façade? In K. K. Cetina & A. Preda (Ed.). The Oxford Handbook of the Sociology of Finance (pp.431-449). Oxford University Press. 279 APPENDIX A SHORT NOTE ON BARAKAH Abstract In this paper, I explore the concept of Barakah - an Islamic view of the presence of divine grace in the material world, as individual interacts with other people, places, objects, and time. Previous studies have largely sought to describe Barakah through its references in the scriptures of Islam: The Holy Quran, i.e., the revelation of Allah, and the Hadith, i.e., the documented sayings and behavior of Islam’s Prophet Muhammad (peace be upon him). I rather explore Barakah as it is presented and explained by some Islamic preachers/scholars during their sermons in the Jummah/Friday Muslim prayers in congregations. Using the transcribed scripts of these Friday sermons on Barakah, as uploaded, or streamed live on YouTube, I inductively summarize various aspects of the definitions and contemporary illustrations of Barakah proposed by the preachers. Moreover, I list the proposed ways of attaining Barakah and suggestions about averting attitudes and actions that would possibly reduce Barakah. Based on the findings, I propose several ways of incorporating Barakah as a mechanism in the academic analyses of Islamic economics and finance. Keywords: Barakah, Islam, divine grace, economy 280 Introduction Max Weber’s thesis of Protestant ethics is a major argument about the effect of religious ideologies on economic development. It suggests that the Calvinist religious values inspired its followers to work harder and save more; thus, Protestant-dominated regions in Europe prospered earlier and more (Becker & Woessmann, 2009; Weber, 2002). To the contrary, certain religious values, like Islam, are suggested to have deterred economic development. Some argue that the prominence of Islam in the political governance has held back the economic development of the Middle Eastern countries (Kuran, 2010). Paradoxically, however, in an era of rapid secularization and scientization, Islam has made a comeback in economic exchanges. One clear manifestation is that Islamic religious principles have provided foundations for the emergence of Islamic finance, which have propagated Islamic counterparts for various financial organizational forms like commercial banks, insurance companies, mutual funds, and bonds. More than 60 countries have some form of local Islamic finance organizations (Shahid, 2021). At this backdrop of the paradoxical return of Islam in the economy, in this paper I examine what Islamic values guide and govern its followers’ (Muslims) interaction with the material world. If such values exist, how are such values communicated to the masses by the intellectual public leaders, the supposed interpreters and/or gatekeepers of religious knowledge? In this regard, Islamic scriptures, the revealed holy book of the Quran and Hadith or the sayings of its Prophet Muhammad (PBUH - peace be upon him), refer to the notion of ‘Barakah’, 281 the presence of divine grace in an individual’s interaction with other people, places, objects, and time (Damirel & Sahib, 2015; Schimmel, 1994). In its ideal sense, obtaining Barakah (or the fear of losing it) should guide the actions and intentions of a Muslim’s purposive acts in the material world. In this paper, I take an inductive approach and analyze the transcripts of eleven lectures on Barakah by Islamic preachers. The lectures were largely delivered in mosques, while some were specially curated for the social media platform, YouTubes’ audience. Using both close reading and computational text analyses of these transcripts, I define Barakah and summarize examples/contexts used by the preachers to explain it. I also provide a summary of the ways to obtain Barakah and warnings about ways that could withhold Barakah from an individual, as noted by the preachers. In the end, I discuss several potential ways of incorporating and using Barakah as a mechanism29 for empirically testing production and consumption decisions of Muslims. Data Islam does not have a prescribed hierarchy of who can preach or be called an Islamic scholar. Thus, in searching the opinions of ‘Islamic preachers’ or ‘Islamic scholars’ on Barakah, I considered the following: (1) the scholar has publicly expressed a substantially detailed opinion on Barakah; (2) such opinion was curated to inform the 29 I largely draw on the rich analyses of ‘social mechanism’ as proposed by Hedström and Swedberg (1998). 282 public and is publicly available; (3) the preacher/scholar has well-defined audience; and (4) there is potential of growth in their audience. Fitting with the criteria, I considered the ‘Khutbah’ (sermon) served in the Friday weekly congregation prayers, also known as Jummah prayer. Muslims, as a community, have a history of coming together to pray the special Friday prayer that is preceded by Khutbah. While a Muslim has daily prayers to perform (which is done individually or in groups), the Friday prayer is performed as a community. The sermon is usually exhortatory (Geaves, 2006). Some of these ‘Khutbahs’ have been streamed live on YouTube or recorded and uploaded on YouTube later. I searched for them using the following terms: “Barakah in Islam”, “Baraka in Islam”, “Barakah”, “Barakah”. I sorted the videos by YouTube filter of “Relevance”, “Upload date”, “View count”, and “Rating”. Then, within each search I browsed through the first 50 videos. I excluded any videos that did not appear to be a Barakah related video. Also, I excluded any short videos (less than 2 minutes) even though they may have covered Barakah. I checked the description of the videos to see if they were presented as a Khutbah or to inform the public about the concept of Barakah. Then, I have Google searched the background of the preachers to find out if they have public presence in terms of being recognized as a leader/scholar of a mosque and/or being a leader of any Islamic lifestyle promoting organizations. The search initially led to 22 videos. Of these, I have excluded videos that largely used the life of the preacher as an illustration of ‘Barakah’; such videos lacked a general discussion of the topic. I have excluded most videos that had muted the 283 ‘Open transcript’ option of YouTube and were difficult to transcribe. My final sample was 11 YouTube video lectures offered by preachers/scholars with the following last names, listed in the alphabetical order: Alkiek, Baajour, Colan, ElBarki, Elshinawy, Faris, Ibrahim, Jangda, Saleem, Suleiman, and Yusuf. The links and details of their videos are provided at the end of this note. I edited the transcripts of all the videos by listening to them. YouTube transcripts had numerous errors, which I corrected manually. After an initial reading and analysis of these transcripts by using the qualitative text analysis software NVivo, I further edited the transcripts as follows. Allah and Prophet have been described in various ways with various adjectives added. To ensure the references and counts, I have replaced them with ‘Allah’ and ‘Prophet’. The transcripts often used ‘nabi’, ‘rasulullah’, ‘rasulallah’ as synonyms for ‘prophet’. They were replaced with ‘prophet’ since NVivo did not seem to have a large repertoire of synonyms for English transliteration of Arabic words. ‘Dua’, an Arabic word for personal invocation/supplication/prayer30 was also noted at ‘du’a’, ‘duas’. While 'duas' refer to plural, NVivo might not have right stemming for Arabic transliteration, such that dua and duas would be considered having similar roots. I replaced them with ‘dua’. Ritualistic prayers have been referred to as both ‘Salah’ and ‘Salat’, I used ‘Salat’ for all. Mosques had various spellings; I used ‘Masjid’ for all. 30 Unlike the structured prayers like Salat, du’a or dua are free form prayers. Geaves (2006) notes, “Dua’s consist of varying forms of personal prayer often containing supplication and pleading for intercession, sometimes made through Muhammad. Du’a prayers do noy follow any necessary pattern or ritual and the petitioners may use their own words, derivations from the QUR’AN or other sources” (p. 28). 284 The average length of the videos are about 914 seconds, with a minimum length of 177 seconds and a maximum length of 2,815 seconds. The average length of the processed video transcripts are about 2,012 words, with a minimum of 359 words and a maximum of 7,735 words. The word frequency (after stemming) table (see Table 1) shows that the top 10 frequent words in the video transcripts are ‘Allah’, ‘barakah’, ‘time’, ‘knows’, ‘one’, ‘just’, ‘blessings’, ‘things’, ‘prophet’, and ‘people’. ---INSERT TABLE 1 ABOUT HERE--- Table 2 shows the automated sentiment detection (at the paragraph level) by NVivo software. The documents vary in their presence of various levels of sentiments – ranging from very positive to very negative. ---INSERT TABLE 2 ABOUT HERE--- Table 3 shows that the distribution of themes across the video transcripts, detected automatically by NVivo software. The documents have large variation in the presence of various themes. Hence, it suggests that manual coding through close reading is likely to generate meaningful presence of various themes, the results of which are presented in the subsequent sections. ---INSERT TABLE 3 ABOUT HERE--- Barakah: definitions and examples “Barakah”, an Arabic word, can roughly be translated as blessings. The other phrases or words that the preachers have used to define Barakah are ‘perpetually increasing’, 285 ‘exponentially benefit blessings’, ‘attachment of divine goodness in something’, ‘value’ (in the way modern marketers understand it), ‘miracles of Allah’, ‘hidden element of success’, ‘the spiritual coefficient that multiplies efforts, and helps achieve success beyond expectations’, and ‘ability to do more with less’. The preachers emphasize that ‘Barakah’ can be granted only by Allah and warn individuals against seeking Barakah from others. So, one cannot seek Barakah from another individual or even the Prophet, though the prophet can be a channel through which Allah can endow Barakah. The preachers have used various expositions, involving children, food, greetings, money, investment, place, scholarship, resource management, marriage, family and children, reproductive outcomes, to explain what Barakah means or how it might manifest. Some expositions even go back to the miracles performed by the prophet and other miraculous historical occurrences passed down through oral history. These expositions point to the following about the presence of Barakah in humans’ interaction (with people, place, objects, and time). First, Barakah, if present in something, increases it. Second, if an individual already has something and is content with it and wishes its goodness to be preserved, the presence of Barakah can help with that preservation. Third, if Allah endows Barakah, an individual may obtain some worldly thing that they did not even think of before. So, in a sense, the presence of Barakah leads to ‘preservation’, ‘increases’, ‘growth’, and ‘endowment’ for an individual’s material possession. Some examples of Barakah are when a small amount of food suffices the hunger of many, a small amount of drink meets the thirst of many, favorable weather conditions for crops, fertility in humans, publications productivity 286 as a scholar, high impact of scholarly works, harmonious conjugal life, and good outcomes in business ventures. However, preachers note, Barakah is not just about material possession. First, time must be considered, as Baraka could also mean an individual is able to accomplish a task with less time. Second, one could have some resources in little amounts, but its impact would feel greater if Barakah is present in it. The idea is often referred to as greater contentment when it comes to greater enjoyment from an individual personal small act or limited possessions. Third, social interactions, including those experienced in marriage, with children, and with family members, would bring much more joy with the presence of Barakah than without. Fourth, Barakah connects individual actions in the material world with the outcomes in the life hereafter, i.e., the life after death. The actions that had Barakah in this world, such as generating good knowledge and leaving behind righteous children will bring ease in the life hereafter, which, in the Islamic belief, is the final and perpetual adobe of human souls. Fourth, one’s ability to work for ‘Deen31’, i.e., the cause of Islam is also a manifestation of Barakah being present in one’s life. 31 Gevaes (2006) argues the Islamic concept of ‘deen’ refers to the Islamic way of life that encompasses more than the western concept of religion (and its practices). According to Gevaes (2006), “the term conveys the idea that religion is all-encompassing and influences every aspect of human life right down to everyday details of human existence” (p. 28). 287 Obtaining Barakah: paths and ways The preachers have suggested the following ways of obtaining Baraka, which range from the very broad concept of 'please Allah' to very concrete actions of 'asking Allah' and greeting each other with praying for Barakah: asking Allah, pleasing Allah, avoiding sins, charity, gratitude, dua, fair mehr in marriage, fair transaction, family time, Islamic greetings, Iman, intention, Istigfar, just in work, morning, parents, pray fajr, putting due effort and trust, Quran recitation, right company and community, Sadaqat32 with time, Salat, Sunnah, Zikr, and teaching salat to children. Greetings: The ways of Baraka are very much ingrained in the daily practices and rituals of Muslims. For example, when two Muslims meet each other is to greet with 'Salam', i.e., greet each other by saying, "Assalamu alaikum wa rahmatullahi wa barakatuh", which means, "may the peace, mercy, and blessings of Allah be with you". In reply to such a greeting, the appropriate reply is to say, "waalaikumsalam warahmatullahi wabarakatuh", which is translated as "may peace, mercy, and blessings of Allah be upon you, too". In this very greeting, the word 'Barakah' is mentioned and prayed for. Muslims should practice this upon entering their house as well. Such a greeting is suggested to bring Barakah and improve their relationships with their family. 3232 Geaves defines Sadaqat or Sadaqah as, “A good deed or voluntary payment of charity that is independent and extra to the obligatory payment of ZAKAH”(p. 94), whereas he defines Zakah as “The third of the five pillars of Islam is the annual payment of obligatory for all Muslims…”(p. 121). Kuran (2020) argues, “In the early years of Islam, payments that Muslims made under the rubric of zakat financed the nascent Islamic state. Zakat revenue compensated state employees, delivered public goods, and provided what we now call social security. Before long, though, various wealthy constituencies gained exemptions for one reason or another, reducing the transfer system’s resource base. In the process, zakat lost its relevance to Islamic rule.” (p. 396). 288 Morning: Starting the day early is considered to be a prominent way of getting Barakah. As Muslims have the obligatory morning (fajr) prayer at dawn, waking up early also facilitates fajr prayer on time. Suleiman also notes that the Prophet himself was a morning person. Hence, starting the day early also conforms to following Sunnah (the behavior of the Prophet), which is argued to bring Barakah. Baajour notes that the Prophet himself prayed for the people who start their day early. Baajour also notes the presence special Barakah in praying the morning prayers in congregation, “Allah ya Akhwan33, Barakah of Salatir Fajr in Jamah34, Wallahi, you will see it in your health, in your wealth, in your children, in your job, in everything”. Fair Mehr in marriage: 'Mehr' or 'mahr' is a practice in Islam in which the groom is to pay a certain amount of money to the bride. Instead of money, the bride can agree on anything equivalent as well, for example, clothes and jewelry. In practice, the bride can also consider a deferred payment on this, which becomes an important issue during any potential dissolution of marriage (Oman, 2010). One preacher argues that sometimes the parents of the bride try to negotiate an exorbitant amount of 'Mehr' as an insurance that the relationship will be better, and their daughter would be treated well in the marriage. Sometimes, high Mehr is set and publicized as a social status of marriage. Baajour argues that such high Mehr can rather reduce Barakah in marriage; the bride's party therefore should not insist on high Mehr, rather should focus on the good character and righteousness of the groom. That will bring greater Barakah in marriage. 33 Ikhwan or Akhwan refers to ‘brotherhood’ or ‘fraternity’. 34 Jamah here refers to congregation. 289 Salat: Muslims perform Salat, i.e., prayers as part of their daily rituals and remembrance of Allah. Performance of Salat is obligatory. Sunni Muslims, the largest part of the Muslim community, pray Salat five times a day: Fajr (prayed at dawn), Zuhr (prayed at noon), Asr (prayed in the late afternoon), Maghrib (prayed after sunset, but not too late after sunset), and Isha (prayed at dusk). Shia Muslims, another sect of Islam, are allowed to combine these five prayers into three times. The performance of Salat also brings Barakah a Muslim life. To further obtain Barakah through Salat, a Muslim is recommended to teach Salat to their children. The belief is that the Salat and good deeds of children is also a conduit through which parents, in the life after death, continue to receive the blessings of Allah. Fair and just in economic exchange: One can bring Barakah through fair and just dealings in economic exchange. Economic exchanges there should avoid deception and duplicity. Also, economic exchanges or businesses that deal in Halal or Islamically pure activities attract Barakah in them. A worker can also receive Barakah, if they perform their work properly and not engage in negligence. In this regard, Baajour concretely points to the wasteful and unauthorized use of social media by workers in the workplace. Charity: Charity can increase Barakah. But charity is not about giving only when one has a lot of surpluses. Elshinawy argues that some mosques do not allow fundraising in the mosque by external parties fearing that such fundraising will reduce the donation the mosque itself is likely to receive. He points out that rather the mosques that allow other fundraisers to collect donations in the mosque sites often end up raising more for itself. He notes, “We all run on donations. And so they they limit the 290 opportunity to the needs of the masjid, right. And these are the masjids actually who struggle the most financially. You can actually notice this…The masjid that actually allows more and more, they are actually the masjid that struggle less financially.” Another example of charity through sharing comes from Faris. To get Barakah he suggests, “It is said that, is a prophetic tradition that says the food of one person is enough for two. the food of two people is enough for four. And the food of four people is enough for eight. So, an action item for you is to literally share a meal, share tonight's dinner with somebody. Don't buy them a meal. Literally split your meal in half…Just that experience of splitting your own meal and sharing with somebody else, you will taste the Barakah. Not only will you feel full, but you'll have an amazing conversation. And you'll see and sense this idea of Barakah.” Suleiman argues that Barakah is also not just about donating money or other tangible resources; it is also about giving time. He notes, “Sparing your time for service to do acts of shukr, volunteerism. Some people think well I can't find time for the volunteerism and doing the acts of gratitude. Allah extended the years of Dawood, who worked acts of gratitude and it extended his life….. And so you know I want to be very clear here. This is not just swiping a credit card or now whatever you know doing it online and just donating something…acts of gratitude with your time will put barakah in your time. Volunteering your time for something good in an act of gratitude will actually bless your time as well.” Expressions of gratitude: General expressions of gratitude, in addition to acts of charity, can also increase Barakah. Faris explains such gratitude as a feeling of 291 contentment, “..contentment is to have that feeling of that, I'm content with what I have. Remember I said Barakah is doing more with less. Well, the first step is to be content with that less.” Suleiman argues, “Allah says if you are grateful, I will increase you. Now in regards to faith as a whole your perspective but also in regards to the specific thing that you are showing shukr35 with. What does it mean to be grateful with your health? Allah will increase you when you're grateful with your health. When you use your health to work acts of gratitude.” Quran recitation: The recitation of the holy book of Quran is argued to be a great source of Barakah (Yusuf). Suleiman argues, in addition, that some specific chapters (surat/surah) of Quran can increase Barakah as well. He notes, “a daily recitation of the Quran specifically surat al-baqarah. The prophet talked about al-baqarah when it comes to baraka in time. The prophet said in an authentic Hadith, Prophet recites Suratul Baqarah; when you do so you are unlocking all sorts of barakah.” Serve to family: Service to family, spending time with family, and illustrating Islamically righteous behavior to the family members are all argued to increase Barakah. In this regard, Baajour suggests individuals to patiently encourage their spouse and children to perform Salat. Saleem suggests taking care of parents, praying for parents, and listening to parents are activities that increase Barakah. family time, take care of parents, spend time in illustrating good behavior to children. Baajour says, one can also serve a family by praying, “Ya Allah, put Barakah in my son, in his 35 Shukr, an Arabic word, is derived from the trilateral root sh-k-r. It means ‘to thank, praise, eulogize or commend someone for a benefit or service’. Various derivatives of Sukhr are found the Qur’an a total of 75 times. Of these, God is the subject of Shukr 8 times (Khalil, 2015). 292 children, in his wife, in his love… And similarly, you make dua for your children, Allah will put Barakah in their life.” Suleiman argues that sometimes people wrongly think that spending time with family is a time wasted and pulls someway away from money-making activities. He suggests that the Prophet has actually argued for a work- life balance, “..And the prophet is saying that in the design of Allah, spending time with your family, being good to your family actually increases the barakah of your earning and the barakah of your time. And we trust in Allah with that. And that's why you read about the prophet, and you say how was he able to balance.” Right companion and community: Allah has revealed and urged in Quran to take a community approach to good deeds. In this regard, he urges in Surah Asr that Muslims should enjoin each other in doing righteous acts and forbid each other from committing sins. Suleiman also argues that right companionship and community can help individuals increase Barakah in their life. He notes, “..dear brothers and sisters, keep the company a productive people. Righteous people are of categories. But specifically productive righteous people. Keep their company. Where Allah says, keep the company of those who are calling upon Allah night and day. Seek patience through them. Keep yourself resilient by their company.” Ask Allah: Asking Allah for help is an act of Barakah itself. One can ask Allah through prayers, through supplication (dua), and through regular remembrance (zikr). Also, one can request their parents to make pray on their behalf to Allah to increase Barakah. It is argued that parents’ prayers for children are answered. With regards to Zikr, Sufis have developed many methods and ways of Allah’s remembrance, which is 293 beyond the scope of this short note. Nonetheless, Zikr is very important. Yusuf argues, ““Allah says that I am with the servant as he thinks of me. I am with my servant as he thinks of me, within reason.” By emphasizing the importance of Zikr, Suleiman argues that the remembrance of Allah should not be limited to the daily ritual prayers, rather it can be anytime, anywhere, while also part of a routine, “You don't have to separate it like I can only do Zikr only in the masjid after salat. Zikr is something that you bring into your routine.....So for the brothers and the sisters, incorporate dua into your actual routine. Don't just relegate it to a place. And that will increase what you earn in the hereafter as well as what you bless in this life.” Istigfar: One special way of remembering Allah is to seek His forgiveness, or to do Istigfar through which one can repent for past sins and commit to not doing those sins again. Suleiman says that a great scholar of Islam (Imam Malik36) compared sins to something that extinguishes the light one a person’s heart. Right intentions: In conducting acts to get Barakah, one’s intention should be to please Allah. For example, Yusuf argues that prayers to seek wealth for greed and for amassing fortune is not a noble intention. Faris also argues that when splitting meals with someone, one’s intention should be sincerely sharing. Without sincere and righteous intentions in acts, Barakah will not follow. Iman, Taqwa, Sunnah, Fear and Please Allah: There are several broad act or concepts bring Barakah; they can all be termed under the broader idea of ‘pleasing Allah’. For 36 Sunni Muslims subscribes to one of the four schools of Islamic jurisprudences Ḥanafī, Ḥanbalī, Mālikī, and Shāfiʿī. The Mālikī school was named after Imam Malik (Hallq, 1997). 294 example, following Sunnah, i.e., the sayings and behavior of the Prophet brings Barakah. “Imaan” (faith in Islam) and “Taqwa” also bring Barkah. Taqwa is a concept, that is related to consciousness of Allah, in love, in fear, and in restraint. Baajour argues, If the people of the city, of the community, of the family have Imaan and Taqwa, Allah will give them Barakat (plural of Barakah) from the skies, and from the earth, from everywhere. He suggests, “Taqwa with the way you treat your spouse, Taqwa with the you raise your children, Taqwa with the way you do business, Taqwa with the way you treat non-Muslims, Taqwa in every aspect of our lives. When we practice that Tawa, really, not only in Masjid, everywhere in our lives, then we start seeing Barakah.” Losing Barakah Deal in interest: Baajour suggest charging high interest (riba) in economic exchange can reduce or withhold Barakah in various spheres of a person’s life. He notes, “Now what will eliminate, get rid of Barakah in my life, disappear from my life. Riba. You have a great home, big home, we love each other, we have children, we have a great job, why are we always fighting. Problem is day and night, I make so much money, yet I cannot make it to the fifteenth of the month. Allah said, Allah will destroy, diminish, eliminate any barakah from someone who is dealing with riba.” If one has somehow been involved in riba, they should pray to Allah, “Ya Allah I promise you, this is it, I am done. Ya allah please help me get out of this slump. Allah is Ghani, if He sees 295 sincerity in your heart, Wallahi that loan will disappear in no time.” Baajour also contrasts ‘riba’ with ‘Sadaqat’ (charity). Allah prefers and rewards the acts of Sadaqat. False oath: While fair, just and sincere acts in business increases Barakah, false oaths take Barakah away. Colan argues with respect to Barakah in money, “Beware of swearing oaths when selling, for it may help you to make a sale but it can destroy the blessing." Impure earnings: Money that is generated from Islamically impure (Haram) means reduce Barakah. Colan argues, “When money is earned from impure ways it loses its blessings.” Insincere act: In doing acts of charity or any act in general, one should be sincere. For example, in splitting meal with someone, one’s intention should not be about showing off or personal pleasure; that would repel Barakah. In the previously noted cases of splitting meals with someone as an act of charity, Faris argue, “…you need to be sincere. See there's no, if you try to do something just for the sake of showing off, for just the sake of your own personal pleasure, that's when you repeal Barakah from yourself. But you got to do something genuinely sincerely wanting to help others.” Sins and drama: Sins and drama reduce Barakah from people’s lives (Yusuf, Suleiman). Suleiman explicates, “And if you occupy that with sins and the consequences of sins, the messiness of sins, then naturally that's going to paralyze you from being able to be productive with your time. Because you're always trying to get yourself out of a sin that you committed. They're mostly self-inflicted, right. Grudges take up heart space, drama takes up time space, all of it takes up head space, right. It 296 just takes away from what time you have and so if you're a person who's not messy, who generally avoids drama and causing drama and inflicting wounds and gossiping and things of that sort, you likely have a lot more time to focus on what's important. Rather than always trying to climb out of something that you've inflicted upon yourself. So that's the second thing.” Unjust work: As a worker one should not be unjust and negligent as this would reduce Barakah in their lives. The money earned should be deserved. Else, Baajour warns in this regard, “But if you don’t, no matter how much wealth you make, and there will be no Barakah in it. And, Prophet Sallallahu Alaihissalam, he said, the example of that person is the example of a person who eats, eats, and eats but never satisfied, Allahu Akbar.” Lack of gratitude: Complaining about lives through social comparison is not a sign of gratitude and can rather reduce Barakah. Baajour notes, sometimes people complain about not having what others have, “Why did she get that big bag, why did she get that expensive shoe, why did they have their wedding in there, and my wedding is in the masjid. Always comparing to the other people, higher people in their status. They are not satisfied.” Faris notes this behavior as well, “If you're always frustrated, if you are always miserable, think of what you do not have that's when you repel barakah from your life.” Baajour argues such complaint is like complaining about what Allah Himself. So, Allah will take Barakah away for such complaint. 297 Discussion: Barakah as a social mechanism for economic behavior The preachers’ discussion of Barakah suggests that the link between Barakah and economic prosperity – at any level – individual and social level – is not straightforward. One can work hard and spend more time and resources towards the achievement of an economic goal, but that does not mean more favorable outcome will follow; not does it mean that the outcome will have either short-term or long-term impact. If Barakah is missing, the hard work, time spent, and resources deployed would not generate either the outcome or the impact of that outcome. While the preachers have suggested various ways of obtaining Barakah and averting reasons that would possibly withhold Barakah, the underlying theme of these ways and reasons is that the intention and act of pleasing Allah should be prevalent for any act and its outcomes to be enriched with Barakah. When it comes to building wealth, Barakah would not accompany acts that aim to accumulate wealth without doing necessary charity; Barakah would also be absent in business activities that are Islamically impure or Haram. This finding is also consistent with the findings of Damirel and Sahib (2015) about the central reference to Allah with respect to Barakah as revealed through coding of the chapters and verses in the Holy Quran37 and various sayings of the prophet (PBUH). 37 Damirel and Sahib (2015) find the following chapters and verses in Quran have some references to Barakah or words derived from it (the first number in brace refers to the chapter number and the second number refers to the verse number): Fussilat (41:10), Al-A’raf (7: 137), Al-Isra’ (17:1), Al-Anbiya (21, 50, 21: 71, 21: 81), Saba’ (34: 18), Al-Saffat (34:18), Al-Naml (27:18), Al-Mu’minun (23:14), Al- Furqan (25:1, 25:10, 25:61), Ghafir (40:64), Zukhruf (43:85), Al-Rahman (55:78), Al-Mulk (67:1), Al- A’raf(7:96), Hud (11:48, 11:73), Al-An’am (6:92, 6:155), Sad (38:29), Al-i-Imran (3:96), Maryam (19:31), Al-Mu’minun (23:29), Qaf (50:9), Al-Nur (24:35, 24:61), Al-Qasas (28:30), Al-Dukhan. 298 Barakah, as understood, as a divine grace, share some similarities of the idea of divine grace in the other Abrahamic religions, but has some differences as well. Barakah can be observed and felt in the material world but also can be a grace to be attained in the life hereafter. Note that the ‘life hereafter’ in the Islamic understanding is the eternal life. Barakah can be realized at both individual and community levels. Here, community does not mean only Muslim community. Rather, Islam views that God is in charge of Barakah for everyone, both Muslims and non-Muslims. Also, Barakah can even stem from ‘righteous intention’, not only from ‘righteous deeds’. Hence, Islamic concept of grace involves both individual attitudes and behavior. This conception is different from the idea of grace in the Protestant ethics, which involves tireless toiling due to the fact that ‘the idea of being chosen to be saved’ is only known to God. So, in the Protestant conception of ‘grace’, a person cannot know whether there is salvation for them. The Protestant conception of grace is much different from the Catholic conception of grace. The idea of grace has been a central dividing issue for the Christian sects (Vacek, 2015). But, it is also considered one of most obscure concepts in theology (Macquarrie, 1955). Christian churches have excommunicated each other over the idea of grace (Ryrie, 1963). Vacek (2015) provocatively urges the readers to think about grace in Christianity as not just as mystical moments, but something that is felt ‘as emotion of love’, “God’s love for us, our love for God, and the mutual union that results” (Vicek, 2015, p. 65). He suggests that humans are religious “to the degree that we experience many and deep emotions towards God. We experience from good affirmation, forgiveness, and union” (Vacek, 2015, p. 66). Such emotion plays a significant role through which grace transforms human lives. Here, by 299 ‘love’, Vicek (2015) means, “Love is an emotion, affirming participation in the dynamism of the beloved to realize its goodness” (Vacek, 1994; Vicek, 2015, p. 66). Hence, if one assumes that ‘emotion for the love of God’ is the manifestation of grace in Christianity, Barakah through its manifestations in people’s attitudes and feelings, can be similar to Christianity to some extent. The idea of Barakah is also different from grace in the Buddhism and Hinduism, in which a similar concept is the attainment of ‘nirvana’, i.e., the extinction of the individuals and their desires. In the conception of Judaism, the salvation of the individual is inextricably connected to the salvation of the Jewish people. Having explained the meaning and processes of Barakah, I propose next how Barakah can work as a mechanism for understanding ‘Islamically inspired economic behavior’. Barakah as a mechanism of Islamic decision making: It is a matter of empirical inquiry, how individual Muslims view the influence of Barakah in their social, economic, and political activities. Barakah can serve as a mechanism of individuals’ Islamically motivated behavior, that can, in turn, manifest in the collective behavior of communities, firms and states. Thus, we need to understand, the extent and limit of the preachers’ concepts of Barakah in the individual and collective decisions of Muslims community to gain a deeper understanding the influence of orientation to God’s grace in the material decisions of Muslims. Moreover, with the rise of the portfolio approach 300 in personal finance and household consumption and investment38, and organizational39 decision making, one can also investigate how this portfolio approach affects or is affected by how individuals, households, and organizations incorporate Barakah in their social and economic decisions. Barakah and firm growth: So, collectively what would Barakah mean for ‘economic prosperity’ of firms, specifically, Islamic finance organizations? Let us consider the growth of firms through retained earnings and reinvestment. A part of the ‘profit’ generated by this organization through Islamically pure means should be spent for the betterment of people and societies, while a part can be reinvested for the growth. However, it is not clear ‘what’ that part should be. To some extent, this allocation of profit between retained earnings or reinvestments and charity can be empirically investigated as to the causes. We also need to consider whether the stakeholders of Islamic finance organizations consider entirely retaining profit/ reinvesting in itself as an act of pleasing Allah, since the profit is reinvested for enhancing Islamically pure activities of Islamic finance organizations. Barakah and the cost of products and services: Let us consider the issue of production cost and prices of the products/services of Islamic finance organizations. If the additional transaction costs (for auditing, monitoring, and enforcement) are higher for Islamic finance organizations, should the cost be borne by the producers or the consumers? The question is again subject to empirical investigation. If the producers 38 See the following for a sample of papers on portfolio approach in the household decision making: Al-Zu’bi and Murinde (2011), Mok (2002), and Willenborg and Clapper (1976). 39 See Liesiö, Salo, Keilser, and Morton (2021) for an overview of the portfolio decision making applied in various organizations. 301 take the effort to obtaining Barakah upon themselves, they will take a profit cut. On the other hand, if the consumers take the effort of obtaining Barakah entirely on themselves, they would be willing to pay a higher price to obtain Islamically produced products/services. There can also be a middle ground whereby both producers and consumers share in the increased costs. The context and frames through which such sharing occurs can be examined, especially through laboratory and/field experiments. This can be particularly applied to Islamic finance to understand what drives the profit-loss-sharing rates between borrowers and lenders. 302 REFERENCES – APPENDIX Al-Zu’bi, B., & Murinde, V. (2011). Household portfolio behaviour: evidence from Middle East economies. Applied Financial Economics, 21(17), 1281 – 1289. Becker, S. O., & Woessmann, L. (2009). Was Weber wrong? A human capital theory of Protestant economic history. Quarterly Journal of Economics, 124(2), 531 – 596. Demirel, S., & Sahib, H. B. (2015). Concept of Barakah in Qur’ān and Sunnah: Towards its realization in modern discourse. Journal of Humanities and Social Sciences, 5. Geaes, R. (2006). Key words in Islam. Washington, D.C.: Georgetown University Press. Hallaq, W.B. (1997). A History of Islamic Legal Theories: An Introduction to Sunnī Usul Al-fiqh. Cambridge, UK: Cambridge University Press. Hedström, P., & Swedberg, R. (1998). Social mechanisms: An analytical approach to Social theory. Eds. Cambridge, New York: Cambridge University Press. Khalil, A. (2015). On cultivating gratitude (Shukr) in Sufi virtue ethics. Journal of Sufi Studies, 1– 26. Kuran, T. (2010). The Long Divergence: How Islamic law held back the Middle East. Princeton University Press, New Jersey. Kuran, T. (2020). Zakat: Islam’s missed opportunity to limit predatory taxation. Public Choice, 182, 395–416. Liesiö, J., Salo, A., Keilser, J., and Morton, A. (2021). Portfolio decision analysis: recent developments and future prospects. European Journal of Operational Research, 293(3),811 – 825. Macquarrie, J. (1955). An Existentialist Theology: A Comparison of Heidegger and Bultmann. London: SCM Press. Mok, D. (2002). Sharing the risk of home-ownership: a portfolio approach. Urban Studies, 39(7), 1095 – 1112. 303 Oman, N. B. (2010). 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(1976). Life insurance demand and household portfolio behavior: comment. Journal of Risk and Insurance, 43(2), 325 – 331. 304 Table 1: Frequency of words in the corpus of video transcripts Weighted Word Length Count Similar Words Percentage Allah 5 230 2.36 Allah Barakah 7 184 1.88 barakah, 'barakah' Time 4 145 1.49 time, times, timings Knows 5 106 1.09 know, knowing, knows One 3 106 1.09 one, ones Just 4 95 0.97 Just Blessings 9 90 0.92 bless, blesse, blessed, blesses, blessing, blessings Things 6 89 0.91 thing, things Prophet 7 86 0.88 prophet, prophetic, prophets People 6 81 0.83 People Something 9 78 0.80 Something Come 4 76 0.78 come, comes, coming Like 4 76 0.78 like, liked, likely, likes Want 4 74 0.76 want, wanted, wanting, wants Make 4 71 0.73 make, makes, making Person 6 65 0.67 person, personal, personally, persons’ Get 3 63 0.65 get, gets, getting Gives 5 63 0.65 give, gives, giving Life 4 62 0.63 Life Now 3 56 0.57 Now 305 Table 2: Sentiment analyses of video transcripts Note: Cell values denote the number of paragraphs with the corresponding sentiment class. Preachers Very negative Moderately Moderately Very positive (rows); negative positive Sentiments (columns) Alkiek 1 0 0 1 Baajour 7 2 7 5 Colan 1 0 0 1 ElBakri 0 1 0 1 Elshinawy 1 0 0 1 Faris 1 0 0 1 Ibrahim 1 0 1 0 Jangda 1 0 0 1 Saleem 1 0 0 1 Suleiman 1 0 0 1 Yusuf 1 0 0 1 306 Table 3: Distribution of NVivo auto-coded themes in the video transcripts Note: A*= Alkiek, B*=Baajour, C*=Colan, EB = ElBarki, ES*=Elshinawy, F*=Faris, I*=Ibrahim, J*=Jangda, SA*=Saleem, SU*=Suleiman, Y*=Yusuf A* B* C* EB* ES* F* I* J* SA* SU* Y* Allah 1 0 0 0 0 0 1 0 0 2 1 Barakah 0 0 0 0 0 2 0 0 0 1 0 Benefit 0 2 0 0 0 0 0 0 0 0 1 Blessing 2 0 1 0 0 0 1 1 0 2 0 Brothers 0 0 0 0 0 0 0 0 1 1 1 Cause 1 0 0 0 1 0 0 0 0 2 1 Child 0 0 0 0 0 0 0 0 0 1 2 Collection 0 0 0 0 0 0 0 0 0 0 3 Concept 0 0 0 0 0 0 1 2 0 0 0 Dua 1 0 0 0 0 0 0 0 1 1 0 everything 0 0 0 0 0 0 0 0 1 1 1 girls 0 0 0 0 0 0 0 0 0 0 2 gold coins 0 0 0 0 0 1 0 0 0 0 0 good 0 7 0 0 0 2 0 0 0 2 2 great 0 0 0 0 0 0 0 0 0 0 1 scholar hadith 0 0 0 0 1 0 0 0 0 1 2 house 0 1 0 0 0 1 0 0 0 0 0 level 0 0 0 0 0 3 0 0 0 1 0 life 0 0 0 0 0 1 1 0 0 2 0 man 0 0 0 0 0 2 0 0 0 0 0 money 0 0 2 0 0 0 0 0 0 0 0 morning 1 0 0 0 0 1 0 0 0 3 0 people 0 0 0 0 0 0 0 0 0 2 3 person 0 0 0 0 0 0 0 0 0 2 2 productive 0 0 0 0 0 0 0 0 0 2 1 productivit 0 0 0 0 0 3 0 0 0 0 0 y prophet 1 0 0 0 0 0 0 0 0 3 0 307 Details of Video Transcripts Preacher/Scholar/Speaker: Alkiek Topic: Ep 10: Take Advantage of Barakah | Habits to Win Here and Hereafter | Dr. Tesneem Alkiek YouTube upload/streaming date: Jan 18, 2022 Total Length of Video: 3 minutes 45 seconds Link:https://www.youtube.com/watch?v=UjdTaAw_F6E&feature=emb_imp_woyt&ab_chann el=YaqeenInstitute Views: 23,261 views as of February 16, 2022; Likes: 1.5K Producer: Yaqeen Institute; Number of subscribers: 709K subscribers Preacher/Scholar/Speaker: Baajour Topic: Barakah: The missing ingredient | Ustadh Mohamad Baajour Jumuah Khutbah YouTube upload/streaming date: May 28, 2021 Total Length of Video: 37 minutes 15 seconds Link: https://www.youtube.com/watch?v=IZhhQUsXwAU&t=462s&ab_channel=EPICMASJID Views: 15,292 views s as of February 28, 2022; Likes: 573 as of February 28, 2022 Producer: EPIC MASJID; Number of subscribers: 227K subscribers as of Feb 28, 2022 Preacher/Scholar/Speaker: Colan Topic: Forgotten blessing: Barakah in Money YouTube upload/streaming date: Jul 20, 2020 Total Length of Video: 2 minutes 57 seconds Link: https://www.youtube.com/watch?v=nIfHYImGyXs&ab_channel=AlmirColan Views: 5,186 views as of February 17, 2022; Likes: 391 as of February 17, 2022 Producer: Almir Colan; Number of subscribers: 24.9K subscribers Preacher/Scholar/Speaker: ElBarki Topic: Calculate Your Barakah? YouTube upload/streaming date: Nov 27, 2019 Total Length of Video: 8 minutes, 7 seconds Link: https://www.youtube.com/watch?v=tfj1onenIjM Views: 95 views as of February 17, 2022; Likes: 0 Producer: Shaykh ElBakri; Number of subscribers: 981 subscribers as of February 17, 2022 Preacher/Scholar/Speaker: Elshinawy Topic: The Barakah Is from Allah | Sh Mohammad Elshinawy YouTube upload/streaming date: Apr 25, 2021 Total Length of Video: 8 minutes 30 seconds Link: https://www.youtube.com/watch?v=ioiHlFLy5Bc&ab_channel=SunnahStation Views: 642 views as of February 17, 2022; Likes: 35 as of February 17, 2022 Producer: Sunnah Station; Number of subscribers: 2.39K subscribers as of February 17, 2022 Preacher/Scholar/Speaker: Faris Topic: WDS 2017 - Keynote Address: "Barakah: The Missing Soul of Productivity" YouTube upload/streaming date: Oct 16, 2017 308 Total Length of Video: 20 minutes, 42 seconds Link:https://www.youtube.com/watch?v=x8mVbLirw3w&t=377s&ab_channel=TheProductiv eMuslimCompany Views: 22,753 views as of February 16, 2022; Likes: 702 as of February 16, 2022 Producer: The Productive Muslim Company; Number of subscribers: 88.3K subscribers as of February 16, 2022 Preacher/Scholar/Speaker: Ibrahim Topic: 3 Aspects of Barakah - Yahya Adel Ibrahim YouTube upload/streaming date: Jun 15, 2018 Total Length of Video: 5 minutes, 11 seconds Link: https://www.youtube.com/watch?v=WuTkxkRDMAU&t=29s Views: 3,084 views as of February 16, 2022; Likes: 106 as of February 16, 2022 Producer: Muslim Central; Number of subscribers: 331K subscribers as of February 16, 2022 Preacher/Scholar/Speaker: Jangda Topic: To do more with less (What is Barakah?)| Quantity vs Quality YouTube upload/streaming date: Jan 1, 2019 Total Length of Video: 4 minutes, 24 seconds Link: https://www.youtube.com/watch?v=BL74RdUeMGI&ab_channel=FreeQuranEducation Views: 18,619 as of February 16, 2022; Likes: Producer: FreeQuranEducation; Number of subscribers: 1.2K as of February 16, 2022 Preacher/Scholar/Speaker: Saleem Topic: INCREASE YOUR WEALTH | BARAKAH IN RIZQ YouTube upload/streaming date: April 16, 2020 Total Length of Video: 6 minutes, 12 seconds Link: https://www.youtube.com/watch?v=xLc_Gvi3LJU&ab_channel=OnlyQuranAndSunnah Views: 1,037 views as of February 17, 2022; Likes: 66 as of February 17, 2022 Producer: Only Quran And Sunnah; Number of subscribers: 16K subscribers as of February 17, 2022 Preacher/Scholar/Speaker: Suleiman Topic: 7 Ways To Increase Baraka In Your Time | Khutbah by Dr. Omar Suleiman YouTube upload/streaming date: Nov 19, 2021 Total Length of Video: 23 minutes, 40 seconds Link: https://www.youtube.com/watch?v=4YTfDUqGlZs&t=37s Views: 449,050 views as of February 28, 2022; Likes: 13K as of February 28, 2022 Producer: Yaqeen Institute; Number of subscribers: 714K Preacher/Scholar/Speaker: Yusuf Topic: Bringing Barakah into Our Lives by Mufti Abdur Rahman ibn Yusuf YouTube upload/streaming date: Jul 10, 2011 Total Length of Video: 46 minutes, 55 seconds Link: https://www.youtube.com/watch?v=i- pG7aX_rSw&t=449s&ab_channel=ZamZamAcademy Views: 35,425 as of February 16, 2022; Likes: 588 as of February 16, 2022 Producer: ZamZamAcademy ; Number of subscribers: 72.1K 309