Banking system and economic growth linkages in MENA region: complementarity and substitutability between Islamic and conventional banking

Abstract

Purpose The purpose of this paper is to investigate empirically the channels through which Islamic and/or conventional banking can spur economic growth in MENA region. Design/methodology/approach The study uses a range of developed econometric approaches, including panel cointegration technique, panel Granger causality test and a panel-based vector error correction model (VECM), to analyze explicitly all the causal relationships among Islamic banking, conventional banking development and economic growth in a unified framework. Findings The empirical results show that Islamic banking in MENA countries not only leads to economic growth but also affects positively and significantly conventional banking development. Thus, Islamic banking has an active role and could be classified as “supply-following” since its development only leads to economic growth, whereas conventional banking, with passive role, could be classified as “demand-following” since it only reacts to economic growth in long run. Research limitations/implications The study has two principal limitations. It is conducted within a relatively limited time period and sample of countries. Also, the used models did not take into account the impact of others financial and macroeconomic variables like stock market development, interest rate, inflation and financial crisis. Practical implications The results have two main implications. First, in MENA countries, well-functioning Islamic banking sector could not only promote economic growth but also can be served as a development factor for their conventional one. Second, unlike conventional banks, the customer of Islamic banks seems not to be motivated by interest and profits. Rather religious factors are recommended as the main motive for investing and saving in Islamic banks. Originality/value The study tries to perceive whether there exists a substitution or complementarity effect between Islamic and conventional banking in promoting economic growth for MENA countries. This situation is neither revealed nor clarified in the relevant literature.

Islamic financial development & economic growth: the emergence of Islamic financial market in Pakistan

“…Furthermore, the proxies adopted for assessing IBD are the total value of Islamic banking assets, Islamic banking deposits and Islamic bank financing. The selection of exploratory variables is in congruence with the earlier research (Ullah et al, 2021;Naz and Gulzar, 2022a;Belkhaoui, 2023). Subsequently, the Islamic bond market is measured by taking the total value of Islamic bonds (Sukuk) issued by Pakistan (Domestic and International Issuance).…”

“…Islamic banking has a more stable mechanism and exhibits better performance in economic growth than their conventional counterparts (Belkhaoui, 2023). The reason is that Islamic bank financing is based on asset-backing and has a direct impact on economic growth through consumption and spending.…”

Financial intermediation through risk sharing vs non-risk sharing contracts, role of credit risk, and sustainable production: evidence from leading countries in Islamic finance

“…Similar to previous studies, Ledhem and Mekidiche ( 2022 )—employing an experimental approach (Markov chain marginal bootstrap resampling method) with a dual banking system—argued that the Turkish economy was no exception to experiencing a positive impact from the Islamic financial sector. The complementary effect of Islamic banking has been recently witnessed in selected countries in the MENA region (Belkhaoui, 2023 ). The results showed that conventional markets prevail in MENA region; however, the Islamic financial market is not only fruitful for economic growth but also for increasing demand for the conventional market.…”

İslami Bankacılık Konvansiyonel Bankacılık Üzerinde Etkili mi? Türkiye Örneği Üzerinden Bir Nedensellik Analizi

“…Çalışma İslami bankaların bankacılık sisteminin hem borç verme hem de mevduat büyümesini iyileştirdiğini ve İslami bankaların hem varlık hem de borç kanalları yoluyla istikrara katkıda bulunduğunu göstermektedir. Belkhaoui (2022), MENA ülkelerinde İslami bankacılığın sadece ekonomik büyümeye yol açmadığını, aynı zamanda geleneksel bankacılık gelişimini olumlu ve önemli ölçüde etkilediğini ortaya koymuştur.…”

“…(2017), Rizvi vd. (2020, Belkhaoui (2022), vd. This study is important in terms of filling the important gap in the literature.…”