Islamic Banking Development and access to credit

The recent expansion of Islamic banks raises questions on its economic implications. The aim of this paper is to investigate the impact of Islamic banking development on access to credit. We combine data from a unique hand-collected database that covers Islamic banks over the period of 2000 to 2005 with firm-level data covering developing and emerging countries. We find that Islamic banking development has overall no impact on credit constraints, while banking development and conventional banking development alleviate obstacles to financing. However Islamic banking development exerts a positive impact on access to credit when conventional banking development is low. Hence we support the view that Islamic banking does not overall alleviate obstacles to financing, but it can act as substitute to conventional banking.