Islamic Finance and Economic Growth Nexus: An Econometric Analysis

Authors

  • Kashif Raza
  • Rashid Ahmad
  • Muhammad Abdul Rehman Shah
  • Muhammad Umar

DOI:

https://doi.org/10.47067/real.v2i1.7

Keywords:

Islamic banking financing, Labor force, Gross fixed capital formation, Economic Growth

Abstract

Researchers have written chain of research papers about the dynamics of financial development and economic growth. The financial capital plays a productive role when it delivers to economic agents who are facing shortage or excess of funds.  This study explores the linkages among Islamic financing and economic growth for Pakistan, by using annual time series data from 2005-2018. Islamic banks’ financing funds used as a proxy of Islamic financing, Gross Domestic Product (GDP), Gross Fixed Capital Formation (GFCF), labor force (LF),Broad money(M) and Trade openness (TO) to presents real sector of an economy. For the exploration, the unit root test, Ordinary least square technique and Granger causality test are applied. The results validate a substantial causal relationship of Islamic financing and GDP, which supports the Schumpeter’s supply-leading view. The results indicate that Islamic finance contributed towards economic growth.

 

References

Abdul, M. and Omar, M. (2012),"Islamic banking and economic growth: the Indonesian experience”, International Journal of Islamic and Middle Eastern Finance and Management, Vol. 5, No. 1, pp. 35 – 47.

Al Rajhi, Abdullah Sulaiman. (1999) “Islamic Banks: Technology and Global Challenges and Opportunities” Proceedings of the Third Harvard University Forum on Islamic Finance. Centre for Middle Eastern Studies, Harvard University, 177-178.

Bagehot, W. 1873. Lombard Street: A Description of the Money Market. Homewood, Illinois:Irwin.

Bangake, C., and Eggoh, J. (2011). “Further Evidence on Finance-Growth Causality: A Panel Data Analysis,”Economic Modeling, 35(2) 176-188.

Bashir, Abdel-Hameed M. (1999) “Monetary Policy and Economic Growth: An Islamic Perspective” Proceedings of the Third Harvard University Forum on Islamic Finance. Centre for Middle Eastern Studies, Harvard University, 13-22.

Demetriades, P.O. and Hussein, K.A., (1996). “Does financial development cause economic growth?

Time series evidence, from 16 countries,” Journal of Development Economics, Vol. 51, pp. 387-411.

Fase, M.M.,andAbma, R.C., (2003).“Financial environment and economic growth in selected Asian

countries.”Journal of Asian Economics, 14(3), pp.11-21.

Furqani, H.,andMulyany, R. (2009).“Islamic Banking and Economic Growth: Empirical Evidence from Malaysia,”Journal of Economic Cooperation, 30(2), 59-74.

King, Robert, G.,and Levine, Ross, (1993). "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 717-37.

Kusuma, Dimas B. Wiranat.,Muqorobin, M. (2014), “Assessing Financial Stability on Islamic Banks and Its Contribution to Economic Growth: Empirical Evidence from Indonesia,” ISRA International Colloquium for Islamic Financ, (IICIF 2014), 1-32.

Levine, R. (1997), "Financial Development and Economic Growth: Views and Agenda,” Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726.

Luintel, K. B.,and Khan, M. (1999),“A quantitative reassessment of the finance-growth nexus,

Evidence from a multivariate VAR,” Journal of Development Economics, 60, 381-405.

Majid, S. A., and Kassim, S. (2010),“Islamic finance and economic growth: The Malaysian experience,” In Kuala Lumpur Islamic Finance Forum, Kuala Lumpur, 2-5 August.

Manapa, Turkhan Ali Abdul., Abduhb, Muhamad., Omar, MohdAzmi., (2012), “Islamic Banking-Growth Nexus: Evidence from Toda-Yamamoto and Bootstrap Granger Causality Test.” IIUM Institute of Islamic Banking and Finance, Journal of Islamic Finance, Vol. 1 No. 1 (2012) 059 – 066.

McKinnon, Ronald I, (1973), “Money and Capital in Economic Development.” Washington DC:

Brookings Institution.

Mikhail Stolbov (2012). The Finance-Growth Nexus Revisited: From Origins to a Modern Theoretical Landscape. Economics Discussion Papers, No 2012-45, Kiel Institute for the World Economy

Mohielden, Mahmoud, Iqbal, Zamir, Rostom, Ahmed, Fu, Xiaochen. (2011) “The Role of Islamic Finance in Enhancing Financial Inclusion in Organization of Islamic Cooperation (OIC) Countries” The World Bank Working Paper No. 5920.

Nalan (2018), Growth, Islamic Banking and Schumpeterian Vision: An Emp?r?cal Evidence from the Gulf Arab States”International Journal of Islamic Economics and Finance studies Vol (4) Issue No 1 PP 40-55

Tabash, Mosab I., and Dhankar, Raj S, (2014),The Flow of Islamic Finance and Economic Growth: an Empirical Evidence of Middle East,”Journal of Finance and Accounting. Vol. 2, No. 1, pp. 11-19.

Robinson, Joan, (1952), “The generalization of the general theory. In The Rate of Interest and

Other Essays.” London: Macmillan.

Schumpeter, Joseph A, (1911), “The Theory of Economic Development.” Cambridge Mass: Harvard University Press.

Shaw, Edward S., (1973).“Financial Deepening in Economic Development.” New York: Oxford

University Press.

Stolbov, Mikhail. (2012), “The Finance-Growth Nexus Revisited: From Originsto a Modern Theoretical Landscape”, http://www.economicsejournal.org/economics/discussionpapers/2012-45

Xu, Zhenhui., (2000), “Financial development, investment, and growth.”Economic Inquiry .38:

-44.

Downloads

Published

2019-06-30

How to Cite

Raza , K. ., Ahmad , R. ., Shah, M. A. R. . ., & Umar , M. . (2019). Islamic Finance and Economic Growth Nexus: An Econometric Analysis. Review of Education, Administration & Law, 2(1), 11-22. https://doi.org/10.47067/real.v2i1.7