Islamic Finance and Economic Growth: Empirical Evidence from Panel ARDL Approach

Abstract This paper applied the pooled Mean Group (PMG) /ARDL approach to examine the effect of Islamic finance on economic growth of Brunei, Indonesia, Jordan, Kuwait, Malaysia, Nigeria, Oman, Pakistan, Saudi Arabia, Sudan, Turkey and United Arab Emirates. Using variables such as gross domestic product growth rate as the dependent variable, Total Assets of Islamic Banks, Total Revenue of Islamic Banks, Total Islamic Banks financing and Sukuk Holdings as the independent variables for the period 2014Q1 – 2022Q4. Panel unit root test was carried out to ascertain that no variable was integrated of order 2. To achieve these four different types of panel unit root tests Im, Pesaran and Shin, ADF-Fisher, PP-Fisher and Levin Lin Chu tests were applied. The estimated pooled Mean Group (PMG) model established the existence a negative but significant long-run relationship between Islamic finance and economic growth of the selected countries with the exception of total assets of Islamic banks which shows a positive and statistically significant relationship with economic growth. The validity of this finding was supported by the error correction coefficient which was negative and statistically significant. Consequently, to achieve growth in GDP the study recommends that policymakers should focus on implementing policies that promote a conducive environment for Islamic banking activities and stimulate demand for Sharia-compliant financing. Another key policy recommendation is to develop a supportive regulatory framework that accommodates Islamic finance principles and facilitates the growth of Islamic banking operations. JEL classification numbers: F43, C33. Keywords: Islamic Finance, Economic Growth, Sukuk, Panel ARDL.