Islamic banking and economic growth: the Indonesian experience

Muhamad Rahmani Abduh · Mohd Azmi Omar

300 citations0/0 files storedInternational Journal of Islamic and Middle Eastern Finance and Management

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Islamic Finance and Banking Studies Monetary Policy and Economic Impact Banking stability, regulation, efficiency

Abstract

Purpose The purpose of this paper is to examine the short‐run and the long‐run relationships between Islamic banking development and economic growth in the case of Indonesia. Design/methodology/approach Using quarterly data (2003:1‐2010:2), this paper utilizes the bound testing approach of cointegration and error correction models, developed within an autoregressive distributed lag (ARDL) framework. Findings The results demonstrate a significant relationship in short‐run and long‐run periods between Islamic financial development and economic growth. The relationship, however, is neither Schumpeter's supply‐leading nor Robinson's demand‐following. It appears to be bi‐directional relationship. Originality/value This paper uses empirical evidence to show the role of Islamic banks' financing towards economic performance of a country. To the best of the authors' knowledge, the study on the role of Islamic banking development towards economic growth is limited, particularly in the context of Indonesia.

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References

2001Bounds testing approaches to the analysis of level relationships 1993Finance and Growth: Schumpeter Might Be Right 2000Financial intermediation and growth: Causality and causes 2012An Autoregressive Distributed-Lag Modelling Approach to Cointegration Analysis 2000Finance and the sources of growth 1974Shaw, Edward S., Financial Deepening in Economic Development, New York, Oxford University Press, 1973, xii + 260 pp. ($7.50 cloth, $3.50 paper)2003Stock markets, banks, and growth: Panel evidence 1966Financial Development and Economic Growth in Underdeveloped Countries

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