Does Islamic financial development foster economic growth? International evidence

Abstract

Purpose Several studies link Islamic finance to economic growth. There are at least two major limitations in these investigations. First, the proxy used to measure Islamic finance may not represent the whole impact of Islamic finance on economic growth because it only considers a subset of variables like Islamic banks’ deposits or sukuk issuance, etc. Second, it is difficult to extrapolate findings to other markets because most studies were conducted in just one nation or a small group of countries. Overcoming these issues is the driving force behind this research. In doing so, the study aims to use the overall Islamic Financial Development Index as a proxy for Islamic finance. The index measures the quantitative growth, knowledge, corporate social responsibility, governance and awareness of the Islamic financial sector. Design/methodology/approach Using a panel data set of 67 countries starting from 2012 to 2020, this study investigates the relationship between Islamic finance and economic growth. Findings The authors find that Islamic finance contributes to economic growth. This connection is more robust in Muslim and developing nations than it is in non-Muslim and developed nations. Practical implications To promote a country’s economic growth, the authors propose that regulators should focus on development of Islamic finance. To increase the reach of Islamic products, the government should take initiatives to raise public awareness of Islamic finance. Social implications The findings imply that Islamic finance may have a more significant impact on socio-economic development in countries with a higher concentration of Muslim population and those in the developing stage. It highlights the potential role of Islamic finance in addressing socio-economic challenges and promoting inclusive growth in these regions. Originality/value This is the first study to use a more comprehensive sample of countries, covering both Muslim and non-Muslim nations, as well as both developing and developed nations. In addition, this study, unlike its predecessors, used a more robust and comprehensive index of Islamic finance developed by Thomson Reuters.

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