Islamic Banking Financing Effect on Growth

Banks and Bank Systems

Islamic finance has grown rapidly in the recent years particularly in the Middle East and the world. It receives a great attention of bankers and financial scholars due to its stability during financial shocks and crises. The paper uses empirical analysis to test the role of Islamic banking in enhancing the economic growth of United Arab Emirates (UAE). Gross Domestic Product (GDP), Gross formation (GF), and Foreign Direct Investment (FDI) are used as representatives for economic growth, while Islamic banks’ investments are used as a representative for Islamic financial sector in the UAE. The study uses time series techniques to test the link between the variables. In the current study, co-integration along with error correction models is utilized. All econometric work is done using Eviews. The findings reveal that the causal relationship between Islamic banks’ investments and economic growth of UAE is supply-leading direction. Furthermore, the findings depict that Islamic investmen...

Muslim Business and Economic Review

The aim of this investigation is to look at the effect of the Islamic banking system on the economic growth of D-8 countries as well as their relationship and the causality direction. Annual report time series data were used from 2010–2021. Islamic Banking Financing (IBF) was used as a representation of the Islamic banking sector, while Foreign Direct Investment (FDI), Gross Fixed Capital Formation (GFCF), Gross Domestic Product (GDP), and Trade were used to represent the economic sector. The econometric tools used are the panel unit root test, panel test of cointegration, and the causality test of Granger. The findings showed that, in the short and long run, Islamic banking and economic growth have a positive connection in D-8 countries. Moreover, there is bi-directional causality. That means, there is a two-way causality starting from the growth sector to Islamic banking and Islamic banking to economic growth. It is also discovered that, in the short run, investment (GFCF) and tra...

This paper examines the dynamic interactions between Islamic banking and economic growth of Malaysia by employing the Cointegration test and Vector Error Model (VECM) to see whether the financial system influences growth and growth transforms the operation of the financial system in the long-run. We use time series data of total Islamic bank financing (IBFinancing) and real GDP per capita (RGDP), fixed investment (GFCF), and trade activities (TRADE) to represent real economic sectors. We found that in the short-run only fixed investment that granger cause Islamic bank to develop for 1997:1-2005:4. Where as in the long-run, there is evidence of a bidirectional relationship between Islamic bank and fixed investment and there is evidence to support ‗demand following' hypothesis of GDP and Islamic bank, where increase in GDP causes Islamic banking to develop and not vice versa.

Journal of Business and Social Review in Emerging Economies

The purpose of this study is to investigate the dynamic interactions between five pure Islamic banks of Pakistan and economic growth by using Panel ARDL method over the period of 2006-2016. The study elaborates strong confirmation and advocates the significant positive long-run relationship with economic growth. However, in short-run, each bank has individual significant positive relationship with economic growth in its individual capacity. The findings of this study are encouraging and signify a considerable contribution to recognize how pure Islamic banks activities translated into economic performance of the country. Although prudential regulations of State Bank of Pakistan are quite sound and their legislative structure and policy framing is also equally good but they are required to enhance the number of pure Islamic banks in the country for offering multiple options to clientele in order to promote Islamic economic activities in the country to make Pakistan more prosperous.

2016

The purpose of this paper is to empirically examine the impact of the Islamic Bank Financing on Malaysia’s economic growth. Using Malaysia as a case in point, this paper employs Advance time-series ARDL bound testing technique, Vector error correction model (VECM) and variance decompositions (VDCs) to explore short-and long-run relationship and causal relationships between the development of Islamic banks and the economic growth using Islamic bank financing to the private sectors, gross domestic product as a proxy of economic growth, Gross fixed capital formation and the consumer price index variables. The paper documents significant role played by the economic growth to the development of Islamic Banks in Malaysia, supporting the growth-Islamic finance led hypothesis or the demand following view. The policy implication of this paper is to improve the efficiency of Malaysian Islamic banks as financial intermediaries that facilitate the capital accumulation and the economic growth; m...

Islamic Banking and Finance Review

Due to the inherent instability of the conventional financial system, the demand for Islamic finance has increased. Islamic finance is more stable because it does not rely on debt-based financing. Currently, Islamic finance is one of the fastest growing sectors of economy in the Muslim world in general and in Pakistan in particular and it plays a vital role in the real sector development. This paper investigated the impact of Islamic viz a viz conventional finance on economic growth of Pakistan. For empirical analysis, quarterly data for the period 2006Q3–2017Q4 was utilized. For Islamic finance, the study used total financing (finance plus investment) by Islamic banks, whereas credit given to the private sector by conventional banks was used as the measure of conventional finance. Using GMM method of estimation, our findings revealed that Islamic finance enhances economic growth and also fulfills some specific needs of economic agents which otherwise would have remained unfulfilled...

International Journal of Economics and Financial Issues, 2020

The purpose of this study is to examine the existing relationship between Islamic banks' performance and economic growth in GCC countries. In this quest, this paper attempts to examine whether Islamic banks contribute to the economic growth. We develop a structural equation model to attest these links based on the evidence that Islamic finance contributes to higher levels of economic growth. As a measure of profitability, we include several determinants that are usually ignored in the literature; namely, size, liquidity, capital adequacy, credit risk, and expense management. The study covers Islamic banks operating in Bahrain, UAE, Kuwait, Oman, Qatar and Saudi Arabia over the period 2010-2017. We show a positive relationship between Islamic banks and economic growth, especially for the years immediately after the global financial crisis. In other words, Islamic banks performance have contributed to economic growth mainly during the period right after the financial crisis. Our findings represent a significant contribution to explaining how Islamic financial institutions' activities induce economic growth. Our findings could grant the managers of the Islamic banks a better understanding on how their institutions could improve economic performance as it reduces the severity of the financial crisis by avoiding major weaknesses of the conventional banking system.

Turkish Journal of Islamic Economics (TUJISE), 2017

Islamic finance is getting much attention in the flourishing sector of banking industry due to its characteristics and prominence. Now Islamic financial industry has reached to more than $1 trillion US dollar and is growing about 20 percent annually. Its growth is not restricted to the Muslim societies but Islamic financial products are also gaining popularity among non-Muslim countries. This paper explores empirically the dynamic relationship between the development of Islamic banking and economic growth in a sample of low and middle income countries. The results show that, notwithstanding its relatively small size compared to the economy and the overall size of the financial system, Islamic banking is positively associated with economic growth even after controlling various variables, including the variable of level of financial depth. The results are robust across different specifications, sample composition and time periods. It implies that the development of Islamic banking is one of the policies, which should be considered by the government to improve their economic growth.

Journal of Emerging Economies and Islamic Research, 2014

This paper analyzes empirically the relationship between the development of Islamic finance system and growth of the economy in the United Arab Emirates (UAE). To document the relationship between development of Islamic finance and economic growth, time series data from 1990 to 2010 were used. We use Islamic banks' financing credited to private sector through modes of financing as a proxy for the development of Islamic finance system and Gross Domestic Product (GDP), Gross Fixed Capital Formation (GFCF), as proxies for real economic growth. For the analysis, the unit root test, cointegration test and Granger Causality tests were done. Our empirical results show that there is a strong positive association between Islamic banks' financing and economic growth in the UAE, which reinforces the idea that a well-functioning banking system promotes economic growth. However, our results indicate that a causal relationship happens only in one direction, i.e., from Islamic banks' financing to economic growth, which supports Schumpeter's supply-leading theory. In this case, the development in the Islamic financial sector acts as supply, leading to transfer of resources from the traditional, low-growth sectors to the modern high-growth sectors, and to promote and stimulate an entrepreneurial response in these modern sectors. Furthermore, the results show that Islamic Banks' financing has contributed to the increase of investment in UAE in the long term and in a positive way.