The role of religion and social trust in financial development and structure

We examine whether religion influences the financial development and structure of a country. In a sample of 46 countries between 1996 and 2015, we find that religiosity fosters financial development and a market-based financial structure, whereas religious hierarchy and moderate religious heterogeneity induce a lower level of financial development and a more bank-based financial structure. Furthermore, these religious effects are more pronounced for countries with a weaker contractual environment, supporting the ameliorating role of social trust in a contractual environment. Overall, our study provides the first evidence that religion influences financial development and structure through the channel of social trust. (JEL G10, G21, O16, Z12)