Economic growth and financial performance of Islamic banks: a CAMELS approach

Abstract

PurposeThe purpose of this paper is to investigate the link between the financial performance of Islamic finance and economic growth in all of Malaysia, Indonesia, Brunei, Turkey and Saudi Arabia within the endogenous growth model framework.Design/methodology/approachThis study applied dynamic panel system GMM to estimate the impact of the financial performance of Islamic finance on economic growth using quarterly data (2014:1-2018:4). CAMELS system parameters were employed as variables of the financial performance of Islamic finance and gross domestic product (GDP) as a proxy of economic growth. The sample contained all Islamic banks working in the five countries.FindingsThe findings demonstrated that the only significant factor of the financial performance of Islamic finance, which affects the endogenous economic growth, is profitability through return on equity (ROE). The experimental findings also indicated the necessity of stimulating other financial performance factors of Islamic finance to achieve a significant contribution to economic growth.Practical implicationsThe analysis in this paper would fill the literature gap by investigating the link between financial performance of Islamic finance and economic growth, as this study serves as a guide for the academians, researchers and decision-makers who want to achieve economic growth through stimulating Islamic finance in the banking sector. However, this study may well be extended to investigate the link between the financial performance of Islamic finance and economic growth over the Z-score model as another measure for the financial performance of Islamic finance.Originality/valueThis paper is the first that investigates the link between financial performance of Islamic finance and economic growth empirically using CAMELS parameters within the endogenous growth model to provide robust information about this link based on a sample of the top pioneer Islamic finance countries.

Islamic finance and economic growth: the Turkish experiment

“…As well, Tabash and Anagreh (2017) stated that Islamic finance has enhanced investment and economic growth. Besides, Kassim (2016), Boukhatem and Moussa (2018), Ledhem (2020), Ledhem and Mekidiche (2020) and Ledhem and Moussaoui (2021) confirmed that economic growth is endorsed by the factor of Islamic finance, which has been used as an exogenous factor within the endogenous growth model.…”

Islamic securities (ṣukūk) and economic growth: New empirical investigation from Southeast Asia using non-parametric analysis of MCMC panel quantile regression

“…To demonstrate the possible impact of other economic growth determinants, several control variables are used in the estimated model to prevent the issue of bias due to the missed macroeconomic variables; these variables are used based on the literature on the association between Islamic securities and economic growth and also on the relationship between Islamic finance and economic growth. Thus, this study adopts trade openness index which signifies the external sector (TRADE) (Smaoui and Nechi, 2017; Boukhatem and Moussa, 2018; Al-Raeai et al , 2018; Yıldırım et al , 2020; Ledhem, 2020; Ledhem and Mekidiche, 2020), consumer price index (CPI) which measures inflation (Smaoui and Nechi, 2017; Kassim, 2016; Ledhem and Mekidiche, 2020; Yıldırım et al , 2020; Ledhem, 2020) and gross fixed capital formation (GFCF) as a measurement for investments (Kassim, 2016; Ledhem, 2020; Ledhem and Mekidiche, 2020) (Table 1).…”

“…Therefore, in the sense of the “endogenous growth theory”, Islamic securities are an exogenous factor that positively impacts economic growth when investments and capital stocks are raised by Islamic securities financing. As well, Islamic finance is improving economic growth internationally as an exogenous driver according to the endogenous growth concept (Ledhem and Mekidiche, 2020, 2021). Consequently, because Islamic securities are part of Islamic finance that enhance endogenous economic growth, it is easier to infer that the factor of Islamic securities is an exogenous variable that promotes economic growth in the sense of endogenous growth theory.…”

“…Studies that found Islamic finance is enhancing economic growth are many like the study of Boukhatem and Moussa (2018) and Ledhem and Mekidiche (2020). However, only limited pure studies empirically investigate the relationship between Islamic securities and economic growth.…”

The Comparative Analysis of Islam Banking Performance in Terms of Camel and Rgec Implementation

“…In various countries the CAMEL method has been used for a long time to assess the bank soundness and bank financial performance for supervisory authorities such as the United States which they have enforced since 1979. (Ledhem & Mekidiche, 2020). Meanwhile, in research conducted by Mohammad Kamrul Ahsan, the method CAMEL is also carried out in assessing the bank soundness and in general Islamic banks in Bangladesh are in a strong position in the composite rating system.…”