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Assessing the contribution of Islamic finance to economic growth: Empirical evidence from Malaysia

M. Shabri Abd. Majid (Department of Islamic Economics, Faculty of Economics, Syiah Kuala University, Banda Aceh, Indonesia.)
Salina H. Kassim (Department of Economics, Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia, Kuala Lumpur, Malaysia)

Journal of Islamic Accounting and Business Research

ISSN: 1759-0817

Article publication date: 14 September 2015

3467

Abstract

Purpose

This purpose of this paper is to empirically examine the contribution of the Islamic banking and financial institutions (IBFIs) to economic growth in Malaysia.

Design/methodology/approach

Focusing on the post-1997 economic turmoil, the paper relies on several time series tests, such as autoregressive distributed lag (ARDL), vector error correction model (VECM) and variance decompositions (VDCs).

Findings

The paper documents significant role played by the IBFIs in Malaysian economy. In particular, significant unidirectional causality was found from the IBFIs development to economic growth, supporting the finance-growth led hypothesis or the supply-leading view.

Research limitations/implications

The paper only focuses its analysis on the role of the IBFIs in the Malaysian economy and not the financial sector as a whole. Thus, the findings of this paper are indicative, but inconclusive for the entire financial sector in the country.

Practical implications

Continuous efforts should be undertaken to promote the development of the Islamic banking industry due to its significant contribution to Malaysia’s economic growth by further improving the Islamic financial infrastructure, increasing the pool of human capital in the Islamic banking industry, providing conducive legal environment to the IBFIs and maintaining the Islamic financial sector stability.

Originality/value

This paper is the first attempt to empirically assess the contribution of Islamic banking institutions in Malaysia using ARDL, VECM and VDCs.

Keywords

Acknowledgements

The authors would like to thank the referees of the journal for providing helpful comments on the earlier draft of the paper. However, the authors bear sole responsibility for any errors.

Citation

Abd. Majid, M.S. and H. Kassim, S. (2015), "Assessing the contribution of Islamic finance to economic growth: Empirical evidence from Malaysia", Journal of Islamic Accounting and Business Research, Vol. 6 No. 2, pp. 292-310. https://doi.org/10.1108/JIABR-07-2012-0050

Publisher

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Emerald Group Publishing Limited

Copyright © 2015, Emerald Group Publishing Limited

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