Financial development, Islamic finance and economic growth: evidence of the UAE

Abstract

Purpose Does Islamic finance affect economic growth? The empirical literature in this area seems to be in early stages and the results are often mixed and inconclusive. This paper aims to examine the causality between financial development in general, Islamic finance in particular and real economic growth in the United Arab Emirates (UAE). Design/methodology/approach Using time series data from 1990 to 2012, a bivariate vector autoregressive model was used to document the financial development-Islamic finance-growth causal nexus and to forecast growth under various scenarios. A composite indicator, as a proxy for financial development, was determined using a non-parametric approach: data envelopment analysis. Findings The direction of causality runs from financial development to economic growth and the reverse causality does not drive this relationship; however, the real gross domestic product (GDP) causes Islamic financial development with no reverse effect. Furthermore, the forecasting results indicate that the past relation has been a proxy for the future where financial development leads to better progress in real economic activity. This will likely continue to stimulate the development of Islamic finance. Research limitations/implications Because the financial markets in the UAE were established in 2000, this study ignored Islamic bonds and equity product. The value of the Sukuk listed on Dubai’s exchanges is around US$36.75bn (Thomson Reuters, 2015), reinforcing Dubai’s position as an international center for Sukuk activity. Among the most important tools of the Islamic financial sector, Sukuk deserves a closer empirical study. This can set the agenda for future work. Practical implications The financial sector appears to be one of the main drivers of real economic activity. However, more effort in the area of Islamic finance is needed to promote Shari’ah-compliant economic activities and thus better contribute toward making Dubai-UAE the capital of the Islamic economy. Originality/value A new indicator was used to evaluate the financial strength of the UAE and analyze its effect on economic development. In addition, as one of UAE’ emirates, Dubai declared its vision in 2013 to become the “capital of the Islamic economy”, this study analyzed the finance, Islamic finance and growth relations over the period 2013-2022.

The Role of Micro, Small, and Medium Enterprises Toward Sustainable Development Goals Through Islamic Financial Institutions

“…In general, the objectives of each MSMES development policy can be categorized into the following categories: For creation of an industry itself; supporting industry; Industrial sector reform; and employment [6]. In addition, Abdullah and Hoetoro further revealed that the purposes of the strategy to empower MSMEs are to [6]: (a) assist and provide incentives to MSMEs, (b) adjust industrial structures and provide suitable spaces for MSMEs for their survival and opportunities to grow [21], (c) respond to community needs because businesses can no longer focus solely on profits [22], (d) attention to individual and social balance [23].…”

“…Thus, it is expected that MSMEs in Indonesia can continue to be supported to strengthen the community-based welfare. As a result, MSMEs in relation to the SDGs can become a pillar of creating various products and services needed by the community in order to improve the quality of their living standards [2,4,7,9,21,37].…”

“…High credit interest rates and the need for material guarantees are one of the factors that cause MSMEs to experience difficulties in obtaining business capital. The existence of profit-sharing financing products offered by IFIs can help the growth of the MSMEs sector to work optimally [9,16,21]. In addition, there is a need for a financial inclusion for MSMEs, so that, the capital problems can be resolved early because, currently, more than 40% of MSMEs are still financially excluded.…”

“…Through a profit and loss sharing mechanism, its impact on economic development has the potential to become more important. Islamic financial institutions offer capital loans for the production process and with instruments aimed at contributing to the company's capital [21].…”

“…Through these instruments, Islamic financial institutions pursue specific goals, namely to support a holistic approach in supporting business and entrepreneurship; productive activities; and risk management. In addition, Islamic financial institutions also pursue Islamic religious principles that mandate social responsibility and assistance for those in need [6,21]. Islamic finance operating mechanism is shown in Figure 2.…”