On Sharia’a-compliance, positive assortative matching, and return to investment banking

• We developed a model for analysing matching of banks to entrepreneurs.
• Sharia compliancy provides a small disadvantage to Islamic banks, exacerbated by the matching process.
• The paper proposes an explanation to underperformance of Islamic banks alternative to Derigs and Marzban (2009).

In their recent paper Derigs and Marzban (2009) argued that Sharia’a-compliant strategies result in much lower portfolio performance than the conventional strategies. The main reason for their argument is of Sharia’a-compliance limits on the set of admissible investments. However, in the world of imperfect financial markets such a limitation may also have some beneficial consequences. We therefore, assume that a net disadvantage caused by such limitations is relatively small, but is magnified by equilibrium hiring strategies, which match Islamic banks with employees who have a lower average level of human capital.