ISLAMIC BANKING AND ECONOMIC GROWTH: APPLYING THE CONVENTIONAL HYPOTHESIS
Growth in Islamic banking has gained lot of interest and attention during last fewyears. The debate currently shifts from theoretical to empirical framework. Thegrowth in empirical work has given rise to a new concept, which can be called as“Islamic banking development” (IBD). It will be interesting to test nexus betweenIBD and growth, since literature suggests a positive result for conventionalfinance and growth. Our study uses a panel of 24 countries for a period of 11years using annual data (2004-2014) to test conventional hypothesis of supplyleading or demand following between IBD and growth. In addition, we alsoinvestigate direction of causality in a panel setting between the two. Apart fromthe topic, this paper differs from existing limited literature, on the basis of datasetused and the estimation procedure to assess the nexus. Our results suggest thatIBD affect growth positively. Comprehensive tests suggest the presence of a longrun relationship between IBD and growth. Moreover, the direction of causalityseems to follow supply leading hypothesis: IBD affects economic growth, and thatevidence on a reverse causality was not found. This is true, even when we controlfor CFD.
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