Islamic Banking and Economic Growth

A Case of Pakistan

Abstract

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Islamic banking in Pakistan has gained recognition in last ten to eleven years. It offers many products which are different from conventional banking and the most significant constituent is zero interest. Currently, a chunk of people have motivation towards Islamic banking compared to conventional banking in view of its growth in terms of assets, investment and deposits. This growing number of Islamic banking institutes indicates an increased trend of Islamic banking in Pakistan. People’s trust on the legitimacy of Islamic mode of banking motivates different conventional banks to open Islamic windows besides full-fledged Islamic branches to cater the increasing demand of people in Pakistan. The present study investigates short run and long run relationship between Islamic finance development, its various products and economic growth in Pakistan. Using quarterly data for the period of 2006-2013, the study applied bound cointegration test and error correction models (ECMs) developed within an autoregressive distributed lag (ARDL) structure. The study found that there is a supply side relation between economic growth and Islamic banking in Pakistan. The study also found that Islamic banking industry exerts significant impact on economic growth.