Bank liquidity creation and religious observance: Evidence from Ramadan fasting

Abstract

I examine the effect of religious observance, represented by fasting hours during the month of Ramadan, on bank liquidity creation. I exploit exogenous variation of Ramadan fasting hours that depends on: (1) the timing of Ramadan based on the rotating Islamic calendar; and (2) a country’s latitude. My results document that one additional Ramadan fasting hour reduces bank liquidity creation by 1.1% within countries with the share of Muslim population above 50%. No such effect is found in Muslim-minority countries. In terms of transmission channel, I find that intensified Ramadan fasting reduces the productivity of economic agents that use financial services, hence lower the demand for bank liquidity creation. My results are robust for a battery of sensitivity checks and omitted variables concerns. The results offer novel insights into the effect of a specific religious observance on bank liquidity creation in the Islamic world.