The Role of Islamic Banking Service on Economic Growth in Ethiopia

The main aim of this study was to examine the role of Ethiopian Islamic banking services on economic growth in Ethiopia by using an application of both fixed effect and GMM models’ approach. To achieve this objective the study used 7 years balanced panel data of four purposely selected convectional commercial banks, which have Islamic banking services annual data from 2016 to 2022. In addition, quantitative research approach and explanatory research design were employed in the study. Thus, the result of the study indicated, at a 5% level of significance Islamic Bank Financing (IBF), and Islamic Bank Deposits (IBD) are negatively correlated with RGDP Growth implying that as those independent variables increase the RGDP Growth was decrease and vice versa in Ethiopia. This shows that at this infant stage of Islamic banking services in Ethiopia it has to focus on services that enable to generate income and profit for customers to contribute for economic growth while all these banks are focusing mostly on wadia saving with zero profit for customers and murabaha financing with high commission which costing bank customers with its direct costs and increased opportunity costs both deposit and financings contributing negatively to national income or economic growth. Finally, the researcher recommended that all concerned body would better to develop effective policies that would enable all Islamic banking services to efficiently operate and increase their total deposit hence more funds, which they can give as an advance, as well in the form of credit, financing and all other banking services in order to contribute positively to economic growth in Ethiopia.