Abstract

Islamic banking achieved remarkable growth as a result of structural developments in products innovation over recent decades. In the aftermath of Global Financial Crises (2008), the growth has been fuelled with faster growth in Islamic banks financing. However, the research mostly remained focused on concepts like risk sharing, liquidity issues and financial innovation, during the formative years of Islamic banking. Examining the influence of Islamic banking on the economic development under different economic condition, therefore, largely remained an unexplored area. This study aims to look into this aspect of Islamic banking and applies dynamic and sensitivity analysis techniques to determine the effects of Islamic financing on the economic growth during different economic periods. The study finds a positive relationship between Islamic banks financing and the economic development. Speed of adjustment estimator provides trade-off between speed of adjustment and cost of being off target. The study provides useful guidance for economists and policy makers to corroborate Islamic banks financing as one of the important drivers of GDP growth. Furthermore, a greater understanding of this framework could be established by investigating the comparative impact of Islamic and conventional bank financing on economic development.

Keywords

Islamic Banks Financing; Economic Growth; Dynamic Modelling.