ISLAMIC FINANCE AND ECONOMIC GROWTH IN OIC COUNTRIES: A SPATIAL ANALYSIS

This study aims to examine the impact of Islamic finance on economic growth in the member countries of the Organization of Islamic Cooperation (OIC) by incorporating spatial interdependence among countries. This study is motivated by the growing role of Islamic finance in the global financial system and the importance of analytical approaches capable of capturing cross-regional interactions. This research employs a quantitative approach using panel data from 12 OIC countries over the period 2015–2024. The data analysis procedure was conducted using three software packages, namely EViews, GeoDA, and Stata. The analysis begins with spatial autocorrelation testing using Moran’s I index, followed by the estimation of spatial econometric models, namely the Spatial Autoregressive Model (SAR) and the Spatial Error Model (SEM). The results indicate the presence of significant positive spatial autocorrelation, suggesting that economic growth across countries is interrelated and forms clustering patterns. Based on goodness-of-fit criteria, the SEM is selected as the best-performing model, explaining 77.34% of the variation in economic growth. Empirically, Islamic banking assets and sukuk are found to have a positive and significant effect on economic growth, while takaful exhibits a negative but insignificant effect. These findings indicate that the contribution of Islamic finance to economic growth is not uniform across sectors. Furthermore, the presence of spillover effects confirms that economic developments in one country can influence other countries within the same region. Therefore, this study highlights the importance of strengthening Islamic financial integration and policy coordination among OIC countries to promote more inclusive and sustainable economic growth.