Is Islamic Banking Good for Growth?

Date Published: 
Apr 2015
Iman, P. & Kpodar, K.

Evaluating whether presence of Islamic banking services creates a positive impact on economic growth

This paper investigates the relationship between Islamic banking development and economic growth in a sample of low and middle income countries. It provides an empirical assessment of the impact by constructing a panel of 52 developing countries with data from 1999-2010. The paper states that over time, Islamic finance has spread beyond commercial banks, and now spans investment banks, insurance companies, as well as investment and financial companies. Through a regression analysis, it finds that holding constant the level of financial development and other growth determinants, countries where Islamic banking is present experience faster economic growth than others. The paper covers the following sections in detail:

  • Evolution of Islamic banking and a discussion on the scope of the paper;
  • Review of relevant literature with a focus on how Islamic banking could help financial deepening, and ultimately growth;
  • Methodology for empirical assessment with a focus on data sources;
  • Discussion on the results of pooled and fixed-effects regression with a focus on robustness analysis and alternative specifications;
  • Concluding remarks and identification of areas for further research.