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.