Islamic Finance, Financial Deepening and Economic Growth: Evidence from Twelve OIC Member Countries

Abstract

This study aims to examine the impact of Islamic Finance and financial deepening on the economic growth in twelve OIC member countries. Shariah-compliant financing of the Islamic banks is used as indicator of growth in Islamic finance, whereas the total assets of Islamic banks are used as representative of financial deepening. The impacts of these indicators are examined within the framework of neoclassical production function. The unavailability of data on Shariah-Compliant financing and assets of the Islamic banks constrained us to choose a sample size spanning from 2012-2019. The Hausman test preferred to use the random-effects model. Robust least squares and DOLS estimators are also used in this study. Kao cointegration test confirmed the existence of long run relationship between the targeted variables. The results of financial deepening indicator also portrayed similar kind of result. Findings revealed that growth in Islamic finance and financial deepening are essential for stimulating the economic growth in these countries. This study recommends that governments should not consider the Islamic banking industry as a niche market disconnected from the mainstream policy; rather, they should treat it as an integral part of the financial system and should emphasize on its growth and development.

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