Holier than thou? Identity buffers and adoption of controversial practices in the Islamic banking category

Existing scholarship on categories frequently highlights how some category members may violate codes that others diligently abide by. In this paper, we take into account the differences in identity across category members, and ask how these relative differences determine their response to a code-violating change. Taking a case where category members are clearly identified as ‘insiders’ and ‘outsiders’, we argue that insiders’ reaction to a code violation depends upon the extent to which they believe their identity to be distinct from the code violator’s, who might be an insider or an outsider. Specifically, we suggest that it is the presence or absence of an ‘identity buffer’ – i.e., a relative identity advantage – which determines insiders’ reaction. We hypothesize that when a code violation is introduced by a fellow category insider, the focal insider will be more likely to refrain from the practice. When it is an outsider who introduces the code violation, insiders will be more likely to adopt the code violation as long as they can retain an identity buffer. We further posit that when outsiders adopt code-preserving behavior, thus narrowing the identity buffer between insiders and outsiders, it will mitigate insiders’ likelihood of code violation adoption. We test and find support for our hypotheses using data on Islamic banking industry in 12 countries (2003-2014)