Religious Prohibitions and Investment: The Effect of the Islamic Moral Code on Investment in Foreign Debt Securities

The purpose of this study is to investigate whether religious prohibitions have a significant impact on the propensity to invest in foreign securities. We do this by exploring the effect of the Islamic prohibition of interest, which as we hypothesize, should impact the level of investment in foreign debt securities made from countries with a high Muslim population. We perform a panel regression analysis that gives support for this hypothesis, by demonstrating a negative relationship between the value of investments in foreign debt securities and the percentage of Muslims in the population of the investing country. Our results are robust to the inclusion of several other factors that could impact investment – including culture-related ones – and the use of different estimation procedures and dependent variables.