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The Flow of Islamic Finance and Economic Growth: an Empirical Evidence of Middle East

Received: 17 January 2014     Published: 20 March 2014
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Abstract

Islamic finance is one of the fastest growing sectors of the global banking industry and has risen to prominence recently through its distinctive characteristics. The emergence of Islamic finance can be traced back to 1963 in Egypt, while its importance comes to the global financial system only after the global financial crisis occurred in 2008. This paper explores empirically the relationship between the development of Islamic finance and economic growth in the Middle East. Three of the most important countries for Islamic finance growth from Middle East, namely Qatar, Bahrain, and United Arab Emirates (UAE), are selected for the study. To document the relationship between development of Islamic finance and economic growth, annually time-series data of economic growth and Islamic banks’ financing 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), as a proxy for economic growth. For the analysis, the unit root test, co-integration test and Granger causality tests were done. Our empirical results generally signify that in the long run Islamic banks’ financing is positive and significantly correlated with economic growth in the select countries which reinforces the idea that a well-functioning banking system promotes economic growth. The results obtained from Granger causality test reveals a causal relationship between Islamic finance and economic growth in these countries. It is neither Schumpeter’s supply-leading nor Robinson’s demand-following. It appears to be a bi-directional relationship from Islamic banks’ financing to economic growth and vice versa for Bahrain and Qatar. The results obtained from Granger causality test for UAE indicates 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. Our results also indicate that improvement of the Islamic financial institutions in the Middle East countries will benefit from economic development, and it is important in the long run for the economic welfare, and also for poverty reduction. Furthermore, the results of study are quite significant as it is one of the pioneering studies of Islamic finance.

Published in Journal of Finance and Accounting (Volume 2, Issue 1)
DOI 10.11648/j.jfa.20140201.12
Page(s) 11-19
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2014. Published by Science Publishing Group

Keywords

Islamic Finance, Economic Growth, Middle East, Causality

References
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[8] Ernst & Young. (2011a), "Islamic Funds & Investments Report: Achieving Growth in Challenging Times", June, http://www.ey.com/Publication/vwLUAssets/IFIR_2011/$FILE/ .
[9] Fase, M. M. G. and Abma, R. C. N. (2003), "Financial Environment and Economic Growth in Selected Asian Countries", Journal of Asian Economics, Vol.14, pp.11-21.
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[12] Huang, H. and Shu-Chin, Lin. (2009),"Non-Linear Finance—Growth Nexus: A threshold with Instrumental Variable Approach", Economics of Transition, Vol. 17(3), pp. 439–466.
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[18] R.E., (1988),"On the Mechanics of Economic Development", Journal of Monetary Economics, Vol. 22(1), pp. 3-42.
[19] Lucas R.E., (1988),"On the Mechanics of Economic Development", Journal of Monetary Economics, Vol. 22(1), pp. 3-42.
[20] Majid, S.A. and Kassim, S. (2008), "Islamic finance and economic growth: The Malaysian experience", In: Kuala Lumpur Islamic Finance Forum, Kuala Lumpur.
[21] McKinnon R.I., (1973), "Money and Capital in Economic Development", the Brookings Institution, Washington, DC.
[22] Odedokun, M. (1992),"Supply-Leading and Demand-Following Relationships between Economic Activity and Development Banking in Developing Countries: An Empirical Analysis", Singapore Economic Review, Vol. 37, pp. 46-58.
[23] Patrick, H.T. (1966), "Financial development and economic growth in developing countries", Economic Development and Cultural Change, Vol. 14 No. 2, pp. 174-89.
[24] Osservatore, Vatican (2009), Islamic Banking May Help Overcome Crisis, Press Release
[25] Romeo, A. (2007), "Finance and Growth in the EU: New Evidence from the Harmonization of the Banking Industry", Journal of Banking and Finance, Vol. 31, pp.1937-1954.
[26] Robinson, J. (1952), "The Generalization of the General Theory in the Rate of Interest and Other Essays", London: Macmillan.
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Cite This Article
  • APA Style

    Mosab I. Tabash, Raj S. Dhankar. (2014). The Flow of Islamic Finance and Economic Growth: an Empirical Evidence of Middle East. Journal of Finance and Accounting, 2(1), 11-19. https://doi.org/10.11648/j.jfa.20140201.12

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    ACS Style

    Mosab I. Tabash; Raj S. Dhankar. The Flow of Islamic Finance and Economic Growth: an Empirical Evidence of Middle East. J. Finance Account. 2014, 2(1), 11-19. doi: 10.11648/j.jfa.20140201.12

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    AMA Style

    Mosab I. Tabash, Raj S. Dhankar. The Flow of Islamic Finance and Economic Growth: an Empirical Evidence of Middle East. J Finance Account. 2014;2(1):11-19. doi: 10.11648/j.jfa.20140201.12

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  • @article{10.11648/j.jfa.20140201.12,
      author = {Mosab I. Tabash and Raj S. Dhankar},
      title = {The Flow of Islamic Finance and Economic Growth: an Empirical Evidence of Middle East},
      journal = {Journal of Finance and Accounting},
      volume = {2},
      number = {1},
      pages = {11-19},
      doi = {10.11648/j.jfa.20140201.12},
      url = {https://doi.org/10.11648/j.jfa.20140201.12},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jfa.20140201.12},
      abstract = {Islamic finance is one of the fastest growing sectors of the global banking industry and has risen to prominence recently through its distinctive characteristics. The emergence of Islamic finance can be traced back to 1963 in Egypt, while its importance comes to the global financial system only after the global financial crisis occurred in 2008. This paper explores empirically the relationship between the development of Islamic finance and economic growth in the Middle East. Three of the most important countries for Islamic finance growth from Middle East, namely Qatar, Bahrain, and United Arab Emirates (UAE), are selected for the study. To document the relationship between development of Islamic finance and economic growth, annually time-series data of economic growth and Islamic banks’ financing 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), as a proxy for economic growth. For the analysis, the unit root test, co-integration test and Granger causality tests were done. Our empirical results generally signify that in the long run Islamic banks’ financing is positive and significantly correlated with economic growth in the select countries which reinforces the idea that a well-functioning banking system promotes economic growth. The results obtained from Granger causality test reveals a causal relationship between Islamic finance and economic growth in these countries. It is neither Schumpeter’s supply-leading nor Robinson’s demand-following. It appears to be a bi-directional relationship from Islamic banks’ financing to economic growth and vice versa for Bahrain and Qatar. The results obtained from Granger causality test for UAE indicates 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. Our results also indicate that improvement of the Islamic financial institutions in the Middle East countries will benefit from economic development, and it is important in the long run for the economic welfare, and also for poverty reduction. Furthermore, the results of study are quite significant as it is one of the pioneering studies of Islamic finance.},
     year = {2014}
    }
    

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  • TY  - JOUR
    T1  - The Flow of Islamic Finance and Economic Growth: an Empirical Evidence of Middle East
    AU  - Mosab I. Tabash
    AU  - Raj S. Dhankar
    Y1  - 2014/03/20
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    JO  - Journal of Finance and Accounting
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    AB  - Islamic finance is one of the fastest growing sectors of the global banking industry and has risen to prominence recently through its distinctive characteristics. The emergence of Islamic finance can be traced back to 1963 in Egypt, while its importance comes to the global financial system only after the global financial crisis occurred in 2008. This paper explores empirically the relationship between the development of Islamic finance and economic growth in the Middle East. Three of the most important countries for Islamic finance growth from Middle East, namely Qatar, Bahrain, and United Arab Emirates (UAE), are selected for the study. To document the relationship between development of Islamic finance and economic growth, annually time-series data of economic growth and Islamic banks’ financing 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), as a proxy for economic growth. For the analysis, the unit root test, co-integration test and Granger causality tests were done. Our empirical results generally signify that in the long run Islamic banks’ financing is positive and significantly correlated with economic growth in the select countries which reinforces the idea that a well-functioning banking system promotes economic growth. The results obtained from Granger causality test reveals a causal relationship between Islamic finance and economic growth in these countries. It is neither Schumpeter’s supply-leading nor Robinson’s demand-following. It appears to be a bi-directional relationship from Islamic banks’ financing to economic growth and vice versa for Bahrain and Qatar. The results obtained from Granger causality test for UAE indicates 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. Our results also indicate that improvement of the Islamic financial institutions in the Middle East countries will benefit from economic development, and it is important in the long run for the economic welfare, and also for poverty reduction. Furthermore, the results of study are quite significant as it is one of the pioneering studies of Islamic finance.
    VL  - 2
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Author Information
  • Faculty of Management Studies (FMS), University of Delhi, Delhi-110007, India

  • Dean and Professor of Finance, Faculty of Management Studies (FMS), University of Delhi, Delhi-110007, India

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