Islamic banking and economic growth: the Indonesian experience

Muhamad Abduh (Department of Business Administration, International Islamic University Malaysia, Kuala Lumpur, Malaysia)
Mohd Azmi Omar (IIU Institute of Islamic Banking and Finance, International Islamic University Malaysia, Kuala Lumpur, Malaysia)

International Journal of Islamic and Middle Eastern Finance and Management

ISSN: 1753-8394

Publication date: 30 March 2012

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.

Keywords

Citation

Abduh, M. and Azmi Omar, M. (2012), "Islamic banking and economic growth: the Indonesian experience", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 5 No. 1, pp. 35-47. https://doi.org/10.1108/17538391211216811

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Publisher

:

Emerald Group Publishing Limited

Copyright © 2012, Emerald Group Publishing Limited

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