Islamic Finance-Growth Nexus: Evidence from Malaysia

Hasan Kazak*    -  Necmettin Erbakan University, Turkey
Osman Okka  -  KTO Karatay University, Turkey

(*) Corresponding Author
DOI: 10.21580/economica.2022.13.1.9517

For many years, a plethora of theoretical and empirical studies have illustrated the relationship between financial activities and economic growth. The impact of the Islamic financial system and its instruments on economic growth has begun to emerge in recent years, parallel with its development. This study is designed to contribute to the development of Islamic finance as well as contribute to the literature by revealing the causal relationship between the development of Islamic finance and economic growth. To serve this purpose, an examination in the context of Malaysia, which has progressed more than other countries in terms of Islamic financial development, has been carried out. In exploring the causal relationship between the development of Islamic finance and economic growth in Malaysia, four variables representing Islamic banking, Sukuk market, and Islamic stock market on the gross domestic product (GDP) are discussed through data from the first quarter of 2006 to the first quarter of 2020. To analyze the relationship of the variables within the framework of the VAR model, the Johansen cointegration test, impulse-response functions, and variance decomposition was used. This study corroborates the literature on the effect of the financial sector development on economic growth by taking Islamic finance into account.

Keywords: Islamic Finance; Islamic Economy; Economic Development; Economic Growth

  1. Abedifar, P., Hasan, I., & Tarazi, A. (2016). Finance-growth nexus and dual-banking systems: Relative importance of Islamic banks. Journal of Economic Behavior & Organization, 132, 198–215. https://doi.org/10.1016/j.jebo.2016.03.005
  2. Ahmad, E., & Malik, A. (2009). Financial sector development and economic growth: An empirical analysis of developing countries. Journal of Economic Cooperation and Development, 30(1), 17–40.
  3. Al Fathan, R., & Arundina, T. (2019). Finance-growth nexus: Islamic finance development in Indonesia. International Journal of Islamic and Middle Eastern Finance and Management, 12(5), 698–711. https://doi.org/10.1108/IMEFM-09-2018-0285
  4. Alaabed, A., & Masih, M. (2016). Finance-growth nexus: Insights from an application of threshold regression model to Malaysia’s dual financial system. Borsa Istanbul Review, 16(2), 63–71. https://doi.org/10.1016/j.bir.2016.01.004
  5. Alexiou, C., Vogiazas, S., & Nellis, J. G. (2018). Reassessing the relationship between the financial sector and economic growth: Dynamic panel evidence. International Journal of Finance & Economics, 23(2), 155–173. https://doi.org/10.1002/ijfe.1609
  6. Anwar, M., & Haque, Z. (1991). The role of Islamic financial institutions in the socio-economic development in Malaysia [with Comments]. The Pakistan Development Review, 30(4), 1131–1142. https://www.jstor.org/stable/41259526%0A
  7. Asteriou, D., & Price, S. (2000). Financial development and economic growth: Time series evidence for the case of UK. Ekonomia, 4(2), 122–141. https://econpapers.repec.org/article/eknekonom/v_3a4_3ay_3a2000_3ai_3a2_3ap_3a122-141.htm
  8. Bagehot, W. (1873). Lombard Street: A Description of the Money Market. Scribner, Armstrong & Company. https://books.google.co.id/books?id=MGYuAAAAYAAJ
  9. Bajpai, N. (2011). Business research methods. Pearson Education India.
  10. Banerjee, P. K., Kayum, M. A., & Uddin, H. (2020). Financial Sector Development and Its Contribution to Economic Development of Bangladesh. In Bangladesh’s Economic and Social Progress (pp. 147–178). Springer Singapore. https://doi.org/10.1007/978-981-15-1683-2_5
  11. Basseer, P. A. (1984). The Role of Financial Intermediaries in Economic Development: The Case of Iran, 1888-1978.
  12. Bencivenga, V. R., & Smith, B. D. (1991). Financial Intermediation and Endogenous Growth. The Review of Economic Studies, 58(2), 195. https://doi.org/10.2307/2297964
  13. Berthélemy, J. C., & Varoudakis, A. (2013). Financial Development and Economic Growth. In N. Hermes & R. Lensink (Eds.), Hermes N., Lensink R.(eds.), Financial Development and Economic Growth, Routledge, New York. Routledge. https://doi.org/10.4324/9780203714287
  14. Boyd, J. H., & Prescott, E. C. (1986). Dynamic coalitions, growth, and the firm. Staff Report. https://doi.org/10.21034/sr.100
  15. Crichton, N., & De Silva, C. (1989). Financial development and economic growth: Trinidad and Tobago, 1973–1987. Social and Economic Studies, 38(4), 133–164. https://www.jstor.org/stable/27864907
  16. Datar, M. K. (1990). Financial system and economic development. Gokhale Institute of Politics and Economics (GIPE), Pune (India).
  17. Fritz, R. G. (1984). Time series evidence on the casual relationship between financial deepening and economic development. Journal of Economic Development, 9, 91–112.
  18. Garcia, V. F., & Liu, L. (1999). Macroeconomic Determinants of Stock Market Development. Journal of Applied Economics, 2(1), 29–59. https://doi.org/10.1080/15140326.1999.12040532
  19. Greenwood, J., Sanchez, J. M., & Wang, C. (2013). Quantifying the impact of financial development on economic development. Review of Economic Dynamics, 16(1), 194–215. https://doi.org/10.1016/j.red.2012.07.003
  20. Gujarati, D. N. (2003). Basic Econometrics. McGraw Hill. https://books.google.co.id/books?id=byu7AAAAIAAJ
  21. Ibrahim, M. H. (2007). The role of the financial sector in economic development: the Malaysian case. International Review of Economics, 54(4), 463–483. https://doi.org/10.1007/s12232-007-0023-4
  22. Johnston, J. (1972). Econometric Methods. McGraw-Hill. https://books.google.co.id/books?id=QLwrAAAACAAJ
  23. Jung, W. S. (1986). Financial development and economic growth: international evidence. Economic Development and Cultural Change, 34(2), 333–346. https://www.jstor.org/stable/1153854
  24. King, R. G., & Levine, R. (1993). Financial intermediation and economic development. In Capital Markets and Financial Intermediation (Vol. 156189, pp. 156–189). Cambridge University Press. https://doi.org/10.1017/CBO9780511752056.011
  25. Knight, F. H. (1951). The Rôle of Principles in Economics and Politics. The American Economic Review, 41(1), 1–29. https://www.jstor.org/stable/1815957
  26. Levine, R. (2005). Chapter 12 Finance and Growth: Theory and Evidence. In Handbook of economic growth (Vol. 1, Issue Part A, pp. 865–934). Elsevier North‐Holland. https://doi.org/10.1016/S1574-0684(05)01012-9
  27. Lin, V. L. Y. (1981). The impact of the financial sector on economic development: Some cross-section evidence. Studies In Comparative International Development, 16(1), 44–52. https://doi.org/10.1007/BF02687199
  28. Majid, M. S. A., Dewi, S., Aliasuddin, & Kassim, S. H. (2019). Does Financial Development Reduce Poverty? Empirical Evidence from Indonesia. Journal of the Knowledge Economy, 10(3), 1019–1036. https://doi.org/10.1007/s13132-017-0509-6
  29. Mirakhor, A., & Askari, H. (2010). Islam and the Path to Human and Economic Development. Palgrave Macmillan US. https://doi.org/10.1057/9780230110014
  30. Moore, B. J., & Shaw, E. S. (1975). Financial Deepening in Economic Development. Journal of Money, Credit and Banking, 7(1), 124. https://doi.org/10.2307/1991259
  31. Morrison, R. J. (1967). Financial intermediaries and economic development: The Belgian case. Scandinavian Economic History Review, 15(1–2), 56–70. https://doi.org/10.1080/03585522.1967.10414352
  32. Ndlovu, G. (2013). Financial sector development and economic growth: Evidence from Zimbabwe. International Journal of Economics and Financial Issues, 3(2), 435. https://econjournals.com/index.php/ijefi/article/view/401
  33. Nnanna, J. (2004). Financial sector development and economic growth in Nigeria: an empirical investigation. Economic and Financial Review, 42(3), 2.
  34. Patrick, H. T. (1966). Financial Development and Economic Growth in Underdeveloped Countries. Economic Development and Cultural Change, 14(2), 174–189. https://doi.org/10.1086/450153
  35. Paun, C. V., Musetescu, R. C., Topan, V. M., & Danuletiu, D. C. (2019). The Impact of Financial Sector Development and Sophistication on Sustainable Economic Growth. Sustainability, 11(6), 1713. https://doi.org/10.3390/su11061713
  36. Puatwoe, J. T., & Piabuo, S. M. (2017). Financial sector development and economic growth: evidence from Cameroon. Financial Innovation, 3(1), 25. https://doi.org/10.1186/s40854-017-0073-x
  37. Ranis, G. (1975). Economic Development and Financial Institutions. https://elischolar.library.yale.edu/egcenter-discussion-paper-series/244%0A%0A
  38. Revell, J. R. S., & Goldsmith, R. W. (1970). Financial Structure and Development. The Economic Journal, 80(318), 365. https://doi.org/10.2307/2230134
  39. Rinosha, K. F., & Mustafa, A. M. M. (2021). Nexus between financial development and economic growth: evidence from Sri Lanks. Journal of Asian Finance, Economics and Business, 8(3), 165–170. https://doi.org/10.13106/jafeb.2021.vol8.no3.0165
  40. Romer, P. M. (1986). Increasing Returns and Long-Run Growth. Journal of Political Economy, 94(5), 1002–1037. https://doi.org/10.1086/261420
  41. Salah, J. M. (1979). The role of the financial system in the economic development of Jordan. Keele University.
  42. Saleem, A., Sági, J., & Setiawan, B. (2021). Islamic Financial Depth, Financial Intermediation, and Sustainable Economic Growth: ARDL Approach. Economies, 9(2), 49. https://doi.org/10.3390/economies9020049
  43. Schumpeter, J. A. (1911). The Theory of Economic Development. Routledge. https://doi.org/10.4324/9781315135564
  44. Spears, A. (1992). The Role of Financial Intermediation in Economic Growth in Sub-Saharan Africa. Canadian Journal of Development Studies/Revue Canadienne d’études Du Développement, 13(3), 361–380. https://doi.org/10.1080/02255189.1992.9669467
  45. Tennant, D. F. (2004). The effect of financial sector intermediation on economic growth: The case of Jamaica (1986-2002). The University of Manchester (United Kingdom).
  46. Thornton, J., & Poudyal, S. R. (1990). Money and Capital in Economic Development: A Test of the McKinnon Hypothesis for Nepal: Note. Journal of Money, Credit and Banking, 22(3), 395. https://doi.org/10.2307/1992568
  47. Winston, W. L., Wells, C. E., Albright, S. C., & Broadie, M. N. (1998). Practical Management Science: Spreadsheet Modeling and Applications. Duxbury Press. https://books.google.co.id/books?id=IojMGGyOxLYC
  48. Wonnacott, T. H., & Wonnacott, R. J. (1981). Regression: A second course in statistics. Wiley New York.
  49. Zarrouk, H., El Ghak, T., & Abu Al Haija, E. (2017). Financial development, Islamic finance and economic growth: evidence of the UAE. Journal of Islamic Accounting and Business Research, 8(1), 2–22. https://doi.org/10.1108/JIABR-05-2015-0020
  50. Zhang, J., Wang, L., & Wang, S. (2012). Financial development and economic growth: Recent evidence from China. Journal of Comparative Economics, 40(3), 393–412. https://doi.org/10.1016/j.jce.2012.01.001

Open Access Copyright (c) 2022 Economica: Jurnal Ekonomi Islam

Economica: Jurnal Ekonomi Islam
Published by the Institute of Islamic Economic Research and Development (LP2EI), Faculty of Islamic Economics and Business Universitas Islam Negeri Walisongo Semarang
Jl Prof. Dr. Hamka Kampus III Ngaliyan Semarang 50185
Phone: +62 858-7654-4666
Website: https://febi.walisongo.ac.id/
Email: economica@walisongo.ac.id

ISSN: 2085-9325 (Print)
ISSN: 2541-4666 (Online)
DOI: 10.21580/economica

This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.

Get a feed by atom here, RRS2 here, and OAI Links here.

apps