Revisiting the Nexus between Islamic Banking Development and Economic Growth: A Panel Evidence

The Islamic banking and finance sector is experiencing rapid growth and has become a vital component of economic development strategies in many countries, including those beyond the Muslim world. This significant expansion necessitates a deeper understanding of how Islamic banking contributes to economic growth. Motivated by mixed results in existing literature, this study investigates whether Islamic banking development has a significant impact on economic growth globally. The research employs unbalanced panel data from 27 countries with active Islamic banking markets, covering the period from 2013 to 2021. Data were collected from various reputable secondary sources. The analysis utilised conventional regression techniques, supplemented by robustness tests and alternative proxies to ensure the reliability of the results. The findings revealed a positive association between Islamic banking development and economic growth. While the study explored potential non-linear relationships, the results are mixed and largely insignificant across most models. Additionally, certain macroeconomic variables, such as the Official Exchange Rate (OER) and Population Growth Rate (PGR), exhibit a positive impact on economic growth. Conversely, Foreign Direct Investment (FDI) and Gross National Expenditure (GNE) were found to have a weak relationship (mostly insignificant) with the economic growth in the selected countries. Policymakers can leverage these findings to design and implement policies that promote Islamic banking and finance.