Islamic banking, efficiency and societal welfare: a machine-learning, agent-based study

Abstract

Purpose This paper models the benefits of Islamic banking on the efficiency of the banking sector and on societal happiness. This paper aims to examine how the adoption of Islamic banking to various degrees affects economics outcomes. Design/methodology/approach This study uses machine-learning tools to build a happiness function and integrate it in an agent-based model to test for the direct and indirect welfare effects of implementing Islamic banking principles. Findings This study shows that even though Islamic banking systems tend to reduce economic activity, financial stability and societal happiness is improved. Additionally, a banking sector using Islamic principles across all its members is better equipped to handle banking crises because contagion to both economic activity and societal welfare is greatly reduced. At the same time, adoption of the profit-and-loss sharing (PLS) paradigm by banks may also slow down economic growth. Research limitations/implications The findings extend existing literature on the advantages of Islamic banking, by quantifying the welfare benefits of the PLS paradigm on happiness and financial stability. Originality/value To the best of the authors’ knowledge, this paper is the first to combine agent-based modelling with machine learning tools to examine the benefits of the Islamic banking model on financial stability, social welfare and unemployment.