Abstract

Purpose:

There are two alternative hypotheses "More finance, more growth" and "too much finance" found in the literature. This study fills that gap by dividing Islamic finance into consumer financing (ICF) and producer financing (IPF) and assessing their quadratic role in agricultural productivity in Pakistan employing quarterly data from 2010 Q1 to 2020 Q4. We will also estimate a threshold point for each financing category.

Methodology:

This study has used auto-regressive distributive lag (ARDL) with quadratic specifications, which is based on quantitative time series analysis. Additionally, the nonlinear effect of Islamic financing is visualized by plotting the predicted coefficients.

Findings:

This research showed a u-shape profile for a quadratic model of IPF confirming the hypothesis of 'more finance, more growth', whereas an inverted u-shape profile for the quadratic model of ICF confirming the hypothesis 'too much finance'. Empirical findings indicate that additional finance is not necessarily desirable, and highlighted that a ‘Threshold’ level is more important to facilitate agriculture output growth in Pakistan.x

Originality:

This study adds to the body of knowledge regarding the threshold impact of Islamic financing on agricultural productivity.

Policy Implication:

One of the key implications to policymakers is to reconsider Islamic financing policies to contribute significantly to Pakistan's growth process. More efforts are required to liberalize the financing system to eradicate financial restraints since the Islamic finance industry is also tied to KIBOR, so the vanishing impact reflects near the financing threshold.

Keywords

Islamic Consumer Finance, Islamic Producer Finance, Threshold effects, Output Growth