Accelerating Industrial Output Growth through Islamic Bank Decomposed Financing Optimization in Malaysia

Abstract

Literature shows two hypothesis ‘More finance more growth’ formed u-shape and ‘too much finance’ formed an inverted u-shape profile. Existing literature shows contradicting findings on finance growth nexus by taking only a single indicator of total financing, where financial expansion is detrimental to growth if it surpasses a specific threshold point. This gap is addressed in this study by decomposing Islamic financing into Islamic producer financing (IPF) and Islamic consumer financing (ICF) and its quadratic impact on industrial output growth in Malaysia. Autoregressive Distributive lag (ARDL) approach is applied over the period of 2008; Q1 to 2020; Q4 and, in order to visualize the effect of moderator to the nonlinear model, this study have used Dawson (2014) approach. This study demonstrates a u-shaped relationship between Islamic decomposed financing and sectoral output growth, highlighting that financial development starts to accelerate the growth, once it surpassed the calculated threshold point. With the intention to determine the right financial ceiling to restrict financial activity, threshold points are crucial to the regulators. Our findings imply that policymakers should not only enhance financing, but also improve the quality of the financial system for potential growth. This necessitates the simultaneous expansion and tightening of financial rules, as well as the attendant supervision and surveillance of financial activities, in order to preserve the integrity of finance growth nexus and avoid the ‘vanishing effect’ which may lead to the incidence of future economic crises. This study enriches the discussion on Islamic decomposed financing and the threshold effect to contribute to the economic growth of the country.

Nexus between Islamic bank decomposed financing and agriculture output growth in Pakistan

“…Deidda & Fattouh (2002) provided mathematical visualization effects of various outcomes (Chandio et al, 2016). Following that, our research shows a u-shaped profile for the IPF model, which supports the hypothesis of more finance, and more growth (Yasmin et al, 2022). Disbursement of Islamic producer finance is 4.30% disbursed in 2020Q4.…”

“…Farmers cannot yield the maximum possible production of wheat due to lack of adequate financing facilities which could be the main reason of food insecurity in Pakistan (Sardar et al, 2013). Conventional banks are providing credit against high collateral as well as on high interest rates, consequently, the profit of the borrowers decreases (Yasmin et al, 2022). Credit can have a positive significant impact to enhance productivity but financial constraints are the barriers to any income generating activity, growth can only occur if these obstacles are overcome.…”

“…A large body of research examines how a well-developed and efficient financial system is intimately related to economic growth. Research indicates that the Islamic banking system has an impact on economic growth through a variety of channels (Abduh & Azmi Omar, 2012;Arshed et al, 2020;Furqani & Mulyany, 2009;Tabash & Dhankar, 2014;Yasmin et al, 2022). The Islamic banking system is basically product and investment-based system, which has propensity to upsurge the output growth in every sector of the economy.…”

“…They concluded that a number of factors, such as bank regulation and supervision, also had an impact on this association. According to Yasmin et al (2022), when private sector lending exceeds a certain threshold, financing begins to harm growth.…”

“…Unlike traditional financing systems, Islamic financing employs the profit-sharing principle, which is free of interest (Yasmin et al, 2022). Islamic banks offer new strategies to aid agricultural growth (Kocturk et al, 2013).…”