Islamic Finance and Economic Growth
The Case of Pakistan’s Economy
Abstract
Abstract Views: 2092
Due to the inherent instability of the conventional financial system, the demand for Islamic finance has increased. Islamic finance is more stable because it does not rely on debt-based financing. Currently, Islamic finance is one of the fastest growing sectors of economy in the Muslim world in general and in Pakistan in particular and it plays a vital role in the real sector development. This paper investigated the impact of Islamic viz a viz conventional finance on economic growth of Pakistan. For empirical analysis, quarterly data for the period 2006Q3–2017Q4 was utilized. For Islamic finance, the study used total financing (finance plus investment) by Islamic banks, whereas credit given to the private sector by conventional banks was used as the measure of conventional finance. Using GMM method of estimation, our findings revealed that Islamic finance enhances economic growth and also fulfills some specific needs of economic agents which otherwise would have remained unfulfilled by conventional finance. Further, the study also used government spending, investment, trade openness and inflation as control variables.
Downloads
References
Abduh, M., & Omar, M. A. (2012). Islamic banking and economic growth: The Indonesian experience. International Journal of Islamic and Middle Eastern Finance and Management, 5(1), 35–47. DOI: https://doi.org/10.1108/17538391211216811
Abu-Bader, S., & Abu-Qarn, A. (2005). Financial development and economic growth: Time series evidence from Egypt. Journal of Policy Modeling, 30(5), 887–898.
Al-Yousif, Y. K. (2002). Financial development and economic growth: Another look at the evidence from developing countries. Review of Financial Economics, 11(2), 131–150.
Arestis, P., & Demetriades, P. (1997). Financial development and economic growth: Assessing the evidence. The Economic Journal, 107(442), 783–799.
Arestis, P., Demetriades, P. O., & Luintel K. B. (2001). Financial development and economic growth: The role of stock markets. Journal of Money, Credit and Banking, 33(1), 16–41.
Bailliu, J. N. (2000). Private capital flows, financial development, and economic growth in developing countries. Ottawa: Bank of Canada.
Calderon, C., & Liu, L. (2003). The direction of causality between financial development and economic growth. Journal of Development Economics, 72(1), 321–334.
Cameroon, R., Crisp, O., Patrick, H. T., & Tilly R. (1967). Banking in the early stages of industrialization: A study of comparative economic history. New York: Oxford University Press.
De Gregorio, J., & Guidotti, P. E. (1995). Financial development and economic growth. World Development, 23(3), 433–448.
Demetriades, P. O., & Hussein, K, A. (1996). Does financial development cause economic growth? Time-series evidence from 16 countries. Journal of Development Economics, 51(2), 387–411.
Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74(366a), 427–431.
Fase, M. M. G., & Abma, R. C. N. (2003). Financial environment and economic growth in selected Asian countries. Journal of Asian Economics, 14(1), 11–21.
Furqani, H., & Mulyany, R. (2009). Islamic banking and economic growth: Empirical evidence from Malaysia. Journal of Economic Cooperation & Development, 30(2), 59–74.
Finance and Management, 5(1), 35–47. DOI: https://doi.org/10.1097/00006247-200411000-00017
Abu-Bader, S., & Abu-Qarn, A. (2005). Financial development and economic growth: Time series evidence from Egypt. Journal of Policy Modeling, 30(5), 887–898. DOI: https://doi.org/10.1016/j.jpolmod.2007.02.001
Al-Yousif, Y. K. (2002). Financial development and economic growth: Another look at the evidence from developing countries. Review of Financial Economics, 11(2), 131–150. DOI: https://doi.org/10.1016/S1058-3300(02)00039-3
Arestis, P., & Demetriades, P. (1997). Financial development and economic growth: Assessing the evidence. The Economic Journal, 107(442), 783–799. DOI: https://doi.org/10.1111/j.1468-0297.1997.tb00043.x
Arestis, P., Demetriades, P. O., & Luintel K. B. (2001). Financial development and economic growth: The role of stock markets. Journal of Money, Credit and Banking, 33(1), 16–41. DOI: https://doi.org/10.2307/2673870
Bailliu, J. N. (2000). Private capital flows, financial development, and economic growth in developing countries. Ottawa: Bank of Canada.
Calderon, C., & Liu, L. (2003). The direction of causality between financial development and economic growth. Journal of Development Economics, 72(1), 321–334. DOI: https://doi.org/10.1016/S0304-3878(03)00079-8
Cameroon, R., Crisp, O., Patrick, H. T., & Tilly R. (1967). Banking in the early stages of industrialization: A study of comparative economic history. New York: Oxford University Press.
De Gregorio, J., & Guidotti, P. E. (1995). Financial development and economic growth. World Development, 23(3), 433–448. DOI: https://doi.org/10.1016/0305-750X(94)00132-I
Demetriades, P. O., & Hussein, K, A. (1996). Does financial development cause economic growth? Time-series evidence from 16 countries. Journal of Development Economics, 51(2), 387–411. DOI: https://doi.org/10.1016/S0304-3878(96)00421-X
Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74(366a), 427–431.
Fase, M. M. G., & Abma, R. C. N. (2003). Financial environment and economic growth in selected Asian countries. Journal of Asian Economics, 14(1), 11–21. DOI: https://doi.org/10.1016/S1049-0078(02)00237-3
Furqani, H., & Mulyany, R. (2009). Islamic banking and economic growth: Empirical evidence from Malaysia. Journal of Economic Cooperation & Development, 30(2), 59–74.
Gheeraert, L., & Weill, L. (2015). Does Islamic banking development favor macroeconomic efficiency? Evidence on the Islamic finance-growth nexus. Economic Modelling, 47, 32–39. DOI: https://doi.org/10.1016/j.econmod.2015.02.012
Goaied, M., & Sassi, S. (2010). Financial development and economic growth in the MENA region: What about Islamic banking development. Institut des Hautes Etudes Commerciales, Carthage, (January 2010), 1–23.
Goldsmith, R. W. (1969). Financial structure and development (No. HG174 G57). New Haven: Yale University Press.
Hanif, N., Iqbal, J., & Malik, J. (2013). Quarterisation of national income accounts of Pakistan. SBP Research Bulletin, 9(1), 1–10.
Honohan, P. (2004). Financial development, growth and poverty: How close are the links? In C. Goodhart (Ed.), Financial development and economic growth: Explaining the links (p. 1–37). London: Palgrave Macmillan.
Huang, H.‐C., & Shu L.-C. (2009). Non‐linear finance-growth nexus: A threshold with instrumental variable approach 1. Economics of Transition, 17(3), 439–466. DOI: https://doi.org/10.1111/j.1468-0351.2009.00360.x
Hye, Q. M. A. (2012). Long term effect of trade openness on economic growth in case of Pakistan. Quality & Quantity, 46(4), 1137–1149. DOI: https://doi.org/10.1007/s11135-011-9612-0
Hye, Q. M. A., & Wee, L.-Y. (2015). Trade openness and economic growth: empirical evidence from India. Journal of Business Economics and Management, 16(1), 188–205. DOI: https://doi.org/10.3846/16111699.2012.720587
Imam, P., & Kpodar, K. (2016). Islamic banking: Good for growth? Economic Modelling, 59, 387–401. DOI: https://doi.org/10.1016/j.econmod.2016.08.004
Johansen, S., & Juselius, K. (1990). Maximum likelihood estimation and inference on cointegration - with applications to the demand for money. Oxford Bulletin of Economics and Statistics, 52(2), 169–210. DOI: https://doi.org/10.1111/j.1468-0084.1990.mp52002003.x
Kalim, R., Mushtaq, A., & Arshed, N. (2016). Islamic banking and economic growth: Case of Pakistan. Islamic Banking and Finance Review, 4, 14. DOI: https://doi.org/10.32350/ibfr.2016.03.03
Kassim, S. (2016). Islamic finance and economic growth: The Malaysian experience. Global Finance Journal, 30, 66–76. DOI: https://doi.org/10.1016/j.gfj.2015.11.007
Kenourgios, D., & Samitas, A. (2007). Financial development and economic growth in a transition economy: Evidence for Poland. Journal of Financial Decision Making, 3(1), 35–48.
Kim, D., Shu, L.-C., & Yu, S, B. (2011). Nonlinearity between trade openness and economic development. Review of Development Economics, 15(2), 279–292. DOI: https://doi.org/10.1111/j.1467-9361.2011.00608.x
King, R. G., & Levine, R. (1993). Finance and growth: Schumpeter might be right. Quarterly Journal of Economics, 108(3), 717–737. DOI: https://doi.org/10.2307/2118406
Levine, R. (1997). Desarrollo financiero y crecimiento económico: Puntos de vista y agenda. The Economic Journal, 35(2), 688–726.
Levine, R. (1999). Financial development and economic growth: Views and agenda. New York: World Bank.
Levine, R., Loayza, N., & Beck, T. (2000). Financial intermediation and growth: Causality and causes. Journal of Monetary Economics, 46, 031–077. Received from https://siteresources.worldbank.org/DEC/Resources/FinancialDevelopment andGrowth.pdf DOI: https://doi.org/10.1016/S0304-3932(00)00017-9
McKinnon, R. I. (2010). Money and capital in economic development. Washington, DC: Brookings Institution.
Patrick, H. T. (1966). Financial development and economic growth in underdeveloped countries. Economic Development and Cultural Change, 14(2), 174–189. DOI: https://doi.org/10.1086/450153
Rosman, R., Abd-Wahab, N., & Zainol, Z. (2014). Efficiency of Islamic banks during the financial crisis: An analysis of Middle Eastern and Asian countries. Pacific-Basin Finance Journal, 28, 76–90. DOI: https://doi.org/10.1016/j.pacfin.2013.11.001
Schumpeter, J. A. (1934). Theory of economic development. New York: Routledge.
Shahbaz, M., Ahmed, N., & Ali, L. (2008). Stock market development and economic growth: ARDL causality in Pakistan. International Research Journal of Finance and Economics, 14(1), 182–195.
Shaw, E. S. (1973). Financial deepening in economic development. Oxford: Oxford University.
Sigurjonsson, F. (2015). Monetary reform: A better monetary system for Iceland. Reykjavik – Iceland: Commissioned by the Prime Minister of Iceland.
State Bank of Pakistan. (2018, March). Islamic Banking Bulletin. Karachi: Author.
Tabash, M. I., & Dhankar, R. S. (2014). Islamic banking and economic growth: An empirical evidence from Qatar. Journal of Applied Economics and Business, 2(1), 51–67.
Yusof, R. M., & Bahlous, M. (2013). Islamic banking and economic growth in GCC & East Asia countries: A panel cointegration analysis. Journal of Islamic Accounting and Business Research, 4(2), 151–172. DOI: https://doi.org/10.1108/JIABR-07-2012-0044
Zarrouk, H., El Ghak, T., & Abu Al Haija, E. (2017). Financial development, Islamic finance and economic growth: Evidence of the UAE. Journal of Islamic Accounting and Business Research, 8(1), 2–22 DOI: https://doi.org/10.1108/JIABR-05-2015-0020
Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution (CC-BY) 4.0 License that allows others to share the work with an acknowledgement of the work’s authorship and initial publication in this journal.
