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Politics of Religiously Motivated Lending: An Empirical Analysis of Aid Allocation by the Islamic Development Bank

Hernandez , Diego ; Vadlamannati , Krishna Chaitanya

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We investigate whether lending by the Islamic Development Bank mirrors Saudi Arabia’s political interests based on religious affinity using panel data for its 56 member countries over the 1970 to 2007 period. Our results indicate that Sunni regime countries receive favorable treatment in terms of loan allocation, as well as Shia majority populated countries in exceptional occasions of conflict with other religious minority groups, while non-Muslim countries are the least favored. There is also evidence that lending by the World Bank to the same group of countries and over the same time frame does not respond to the political stance of Saudi Arabia founded on religion. These findings reveal the advantage that Saudi Arabia gains by assuming the leadership of a Regional Development Bank in contrast to coordinating common strategies in a global International Financial Institution with other large shareholders for whom religion might not be essential for political alliances.

Item Type: Working paper
Series Name: Discussion Paper Series, University of Heidelberg, Department of Economics
Volume: 0570
Place of Publication: Heidelberg
Date Deposited: 17 Jul 2014 10:21
Date: July 2014
Number of Pages: 48
Faculties / Institutes: The Faculty of Economics and Social Studies > Alfred-Weber-Institut for Economics
Subjects: 330 Economics
Uncontrolled Keywords: Development aid, Arab aid, Islamic Development Bank, Sunni-Shia politics.
Schriftenreihe ID: Discussion Paper Series / University of Heidelberg, Department of Economics
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