MARK-UP VS. INTEREST-BASED FINANCING ON GDP: AN APPLICATION OF AGENT-BASED COMPUTATIONAL MODEL
Abstract
This study aims to introduce the application of artificial intelligence in the area of Islamic finance by examining the dynamic changes of gross domestic product (GDP) under fully markup-based financing. The application of artificial intelligence using agent-based computational model (ABM) is employed to conduct the simulation. The simulation result shows that the movement of GDP under markup-based financing which represents Islamic financial system has better performance compared to interest-based lending. In this regard, profit shared to depositors has positive impact on GDP which also proofs that Islamic banking system may promote sustainable economic growth and may create wealth for the whole society. This study proofs that Islamic bank essentially more stable than conventional bank and hence may fights against crisis. This study is potentially the initial work to examine the dynamic changes of economic growth under fully Islamic financial system by applying artificial intelligence concept as its methodology. Thus, this study is expected to contribute to the development of Islamic economics and finance research.
References
Abduh, M., & Omar, M. A. (2015). Islamic banking and economic growth: The Indonesian experience. International Journal of Islamic and Middle Eastern Finance and Management, 8(2), 134–149. https://doi.org/10.1108/17538391111144515
Abdul, W. A. (2013). The role of Islamic banking on economic growth in Kenya (October, 2013) [University of Nairobi]. http://scholarship.claremont.edu/cmc_theses/642
Ahmad, A. (1984). A macro model of distribution in an Islamic economy. Journal of Research Islamic Economics, 2(1), 3–18. https://doi.org/10.1007/978-1-349-07728-1_7
Ahmad, A. (1987). Income determination in an Islamic economy (January 2008). Scientific Publishing Center, King Abdulaziz University.
Ahmed, A. (2010). Global financial crisis: An Islamic finance perspective. International Journal of Islamic and Middle Eastern Finance and Management, 3(4), 306–320. https://doi.org/10.1108/17538391011093252
Al-Suwailem, S. (2008). Complexity Islamic economics in a complex world: Explorations in agent-based simulation. Jeddah: King Fahad National Library Cataloging-in-Publication Data Islamic Development Bank.
Al-Suwailem, S. (2011). Behavioral complexity. Journal of Economic Surveys, 25(3), 481–506.
Anan’ich, B. (1999). State power and finance in Russia, 1802-1917: The credit office of the finance ministry and government control over credit institutions. Cambridge: Cambridge University Press.
Arthur, W. B. (1994). Inductive reasoning and bounded rationality. The American Economic Review, 84(2), 406–411. https://doi.org/10.2307/2117868
Arthur, W. B. (1999). Complexity and the economy. Science, 2(284), 107–109. https://doi.org/10.1126/science.284.5411.107
Arthur, W. B. (2013). Complexity economics: A different framework for economic thought. Terra Economicus, 13(2).
Arthur, W. B., Durlauf, S., & Lane, D. (1997). The Economy as an evolving complex system II (W. B. Arthur, S. Durlauf, & D. Lane (eds.); pp. 1–14). https://doi.org/10.1016/0167-2681(91)90037-X
Assenza, T., Delli Gatti, D., & Grazzini, J. (2015). Emergent dynamics of a macroeconomic agent based model with capital and credit. Journal of Economic Dynamics and Control, 50, 5–28.
Azmat, S., Ghaffar, H., Azad, A. S. M. S., & Chazi, A. (2014). Islamic banking and asset price bubbles Islamic banking and asset price bubbles. Islamic Banking and Finance Conference, 1–37.
Barr, J., Tassier, T., & Ussher, L. (2011). Introduction to the symposium on agent-based computational economics. Eastern Economic Journal, 37(1), 1-5. Retrieved February 12, 2021 from http://www.jstor.org/stable/41239487
Barth, J. R., Caprio Jr., G., & Levine, R. (2006). Rethinking bank regulation: Till angels govern. Cambridge: Cambridge University Press.
Beck, T., Demirguc-Kunt, A., and Levine, R. (2007). Finance, inequality, and the poor. Journal of Economic Growth, 12(1), 27-49.
Benhabib, J., & Spiegel, M., M. (2000). The Role of financial development in growth and investment. Journal of Economic Growth, 5, 341-360.
Bordo, M. D., & Rousseau, P. (2006). Legal-political factors and the historical evolution of the finance-growth link. NBER Working Paper, No. 12035.
Bueno de Mesquita, B., Smith, A., Silverson, R. M., & Morrow, J. D. (2003). The Logic of political survival. Cambridge: MIT Press.
Chapra, M. (1985). Towards a just monetary system. The Islamic Foundation. Clarke, G., Cull, R., D’Amato, L., and Molinari, A. (2000). The effect of foreign entry on Argentina’s domestic banking sector.
Cogan, J. F., & Taylor, J. B. (2010). What the government purchases multiplier actually multiplied in the 2009 stimulus package (No. w16505). National Bureau of Economic Research.
Cull, R., Haber, S., & Imai, M. (2007). Related lending and financial development. Stanford Center for International Development Working Paper.
Davis, L. E., & Gallman R., E. (2001). Evolving financial markets and international capital flows: Britain, the Americas, and Australia, 1865-1914. Cambridge: Cambridge University Press.
Deidda, L & Fattouh, B. (2001). Non linearity between finance and growth. Working Paper CRENoS 200104, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
de Vries, J., & der Woude, A. (1997). The first modern economy: Success, failure, and perseverance of the Dutch economy, 1500-1815. Cambridge: Cambridge University Press.
Dosi, G., Fagiolo, G., & Roventini, A. (2008). The microfoundations of business cycles: An evolutionary, multi-agent model. Journal of Evolutionary Economics, 18(3–4), 413–432.
Goldsmith, R. (1969). Financial structure and development. New Haven: Yale University Press.
El-Masri, F. (2015). Agent-based modelling and statistical analysis of complex system with applications to financial network for failing banks. [Dissertation]. George Mason University.
Elhachemi, H. G., & Othman, M. A. (2015a). Does the modern application of the Islamic financial system is the new recommended architecture to promote growth and prevent the outbreak and spread of future crises ? International
Journal of Scientific Research and Innovative Technology, 2(6), 14–26.
Elhachemi, H. G., & Othman, M. A. (2015b). Empirical analysis on the nexus between Islamic banking development in terms of size and activity, economic growth and financial crisis in Islamic Republic of Iran. International Journal of Scientific Research and Innovative Technology, 2(6), 27–44.
Farahani, Y. G., & Dastan, M. (2013). Analysis of Islamic banks’ financing and economic growth: A panel cointegration approach. International Journal of Islamic and Middle Eastern Finance and Management, 6(2), 156–172.
Fink, G., Haiss, P. R., & Mantler, H., C. (2005). The Finance-growth nexus: Market economies vs. transition countries. Available at SSRN http://dx.doi.org/10.2139/ssrn.863424
Freedman, C., Kumhof, M., Laxton, D., Muir, D., & Mursula, S. (2010). Global effects of fiscal stimulus during the crisis. Journal of Monetary Economics, 57(5), 506-526.
Furqani, H., & Mulyany, R. (2009). Islamic banking and economic growth: Empirical evidence from Malaysia. Journal of Economic Cooperation and Development, 30(2), 59–74. https://doi.org/10.1017/CBO9781107415324.004
Gaffeo, E., Gatti, D. D., Desiderio, S., & Gallegati, M. (2008). Adaptive microfoundations for emergent macroeconomics. Eastern Economic Journal, 34(4), 441–463. https://doi.org/10.1057/eej.2008.27
Goaied, M., & Sassi, S. (2011). Financial developement, Islamic banking and economic growth : Evidence from MENA Region. International Journal of Business and Management Science, 2(4), 1–23.
Haber, S. (1991). Industrial concentration and the capital markets: A comparative study of Brazil, Mexico, and the United States, 1830-1930. The Journal of Economic History, 51(3), 559-580.
Haber, S. (1997). Financial markets and industrial development: A comparative study of government regulation, financial innovation, and industrial structure in Brazil and Mexico, 1840-1930. Pablo Alto: Stanford University Press.
Haber, S., & Perotti, E. (2007). The political economy of finance. Mimeo: Stanford University.
Hachicha, N., & Amar, A. Ben. (2015). Does Islamic bank financing contribute to economic growth? The Malaysian case. International Journal of Islamic and Middle Eastern Finance and Management, 8(3), 349–368.
IFSB. (2017). Islamic financial services board Islamic financial services industry stability report. http://www.ifsb.org/sec03.php.
Imam, P., & Kpodar, K. (2015). Is Islamic banking good for growth? IMF Working Paper, No. 15(81). https://doi.org/10.5089/9781475569285.001
Jayartne, J., & Strahan, P. (1996). The Finance-growth nexus: Evidence from bank branch deregulation. Quarterly Journal of Economics, 111(3), 639-70.
Johnson, K. (2013). The role of Islamic banking in economic growth [Claremont McKenna College]. http://scholarship.claremont.edu/cmc_theses/642
Kane, E., & Rice, T. (2001). Bank runs and banking policies: Lessons for African policymakers. Journal of African Economies, 10, 36-71.
Kasekende, L., & Sebudde, R. K. (2002). The Impact of foreign ownership and financial growth in Uganda;s financial sector. Bank of Uganda Mimeo, 2002.
King, R. G., & Levine, R. (1993). Finance and growth: Schumpeter might be right. Quarterly Journal of Economics, 108(3), 717-37.
Koesrindartoto, D. P., & Novanto, E. (2011). Interbank lending decisions in an economic downturn : An agent-based approach. The Asian Journal of Technology Management, 4(1), 56–64.
Lengnick, M. (2013). Agent-based macroeconomics: A baseline model. Journal of Economic Behavior and Organization, 86, 102–120. https://doi.org/10.1016/j.jebo.2012.12.021
McKinnon, R. (1973). Money and capital in economic development. Washington D.C., Brookings Institution.
Mukhopadhyay, B., Pradhan, R. P., & Feridun, M. (2011). Finance-growth nexus revisited for some Asian countries. Applied Economics Letters, 18(16), 1527-1530.
Nabi, M. S. (2012). Dual banking and financial contagion. Islamic Economic Studies, 20(2), 29–54.
Nawab, S., & Naqvi, H. (1997). The dimension of an Islamic economic model. Islamic Economic Studies, 4(2).
North, D. C., & Weingast, B., R. (1989). Constitutions and commitment: The evolution of institutions governing public choice in seventeenth-century England. The Journal of Economic History, 44(4), 803-832.
Oh, Y. J. (2015). Agent-based network modeling for the 2008 financial crisis and the sluggish recovery [The University of Texas at Dallas]. https://doi.org/10.1017/CBO9781107415324.004
Perotti, E., and Volpin, P. (2004). Lobbying on entry. Tinbergen Institute Discussion Paper No. 04-088/2.
Ram, R. (1998). Financial Development and Economic Growth: Additional Evidence. The Journal of Development Studies, 35(4), 164-174.
Rajan, R., & Zingales, L. (1998). Financial dependence growth. American Economic Review, 88(3), 559-86.
Rousseau, P. & Sylla, R. (2003). Financial systems, economic growth, and globalization. In globalization. In historical perspective, In: M. Bordo, A. Taylor, & J. Williamson (eds), (pp 373-413). Chicago: The University of Chicago Press.
Rosly, S. A., Afandi, M., & Bakar, A. (2003). Performance of Islamic and mainstream banks in Malaysia. International Journal of Social Economics, 30(3), 1249–1265. https://doi.org/10.1108/03068290310500652
Siddiqi, M. N. (1983). Issues in Islamic Banking. The Islamic Foundation.
Silva, E. M., Moura, G., & Silva, S. (2017). Macroeconomy from the bottom-up : Studying the implications of a monetary authority’s behavior in a macroeconomic agent-based model with a central bank . (Issue July). Departamento de Economia e Relações Internacionais Working Paper. https://doi.org/10.13140/RG.2.2.20074.62401
Smolo, E., & Mirakhor, A. (2010). The global financial crisis and its implications for the Islamic financial industry. International Journal of Islamic and Middle Eastern Finance and Management, 3(4), 372–385. https://doi.
org/10.1108/17538391011093306
Sugema, I., Bakhtiar, T., & Effendi, J. (2010). Interest versus profit-loss sharing credit contract: Effciency and welfare implications. International Research Journal of Finance and Economics, 45(45), 58–67.
Tabash, M. I., & Dhankar, R. S. (2014a). Islamic banking and economic growth — A cointegration approach. The Romanian Economic Journal, 53, 61–90.
Tabash, M. I., & Dhankar, R. S. (2014b). The impact of global financial crisis on the stability of Islamic banks : An empirical evidence. Journal of Islamic Banking and Finance, 2(1), 367-388.
Takashima, K, & Ogibayashi, S. (2011). Model structure of agent-based artificial economic system responsible for reproducing fundamental economic behavior of goods market. Springer-Verlag Berlin Heidelberg.
Takashima, K., Kato, K, & Ogibayashi, S. (2014). Analysis of the influence of firm’s financing strategies for investment on GDP in an agent-based economic system. Information, 17(6b), 2538–3603.
Tesfatsion, L. (2005). Agent-based computational economics: A constructive approach to economic theory. Handbook of Computational Economics, 2, 831-880. https://doi.org/10.1016/S1574-0021(05)02016-2
Wild, H. L. J. (2015). Islamic banking presence and economic growth in Southeast Asia. International Journal of Islamic and Middle Eastern Finance and Management, 8(2), 134–149.
Wurgler, J. (2000). Financial markets and the allocation of capital. Journal of Financial Economics, 58(1-2), 187-214. https://doi.org/10.1108/17538391111144515
Zirek, D., Celebi, F., & Hassan, M. K. (2016). The Islamic banking and economic growth nexus: A panel VAR analysis for organization of Islamic cooperation (OIC) countries. Journal of Economic Cooperation and Development, 37(1), 69–100
Journal of Islamic Monetary Economics and Finance is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
