Abstract
Faith-based mutual funds have recently become a growing corner of the mutual fund industry, where morality and ethics is thought to exert an influence on investors’ decisions. While Islamic funds have grown, it is not entirely clear whether investors are drawn to these funds due to their own religious preferences, or differences in the financial metrics. This paper fills the gap in the literature, by providing an express linkage between religious preferences (as measured by an incentivized dictator game) and investment in an Islamic fund. Using a lab experiment in a Muslim majority country (Pakistan), we create two types of funds: a “traditional” fund that generates profits for the investor, and an “Islamic” fund that is identical to the traditional fund in every way, except for a small (1% of profits) matched donation to an Islamic institute (a local mosque). Further treatments implement a socially responsible fund, and find a similar pattern of investment, indicating that Islamic investing and socially responsible investing are driven (at least in part) by religious and social preferences respectively. When pitted directly against each other, investors prefer religious investments over socially responsible investments, suggesting that the motivation behind investment behaviour is different.