• Abdul-Jalil Ibrahim Islamic Finance Department, Hamad Bin Khalifa University, Qatar
  • Nasim S. Shirazi Islamic Finance Department, Hamad Bin Khalifa University, Qatar
  • Amin Mohseni-Cheraghlou Department of Economics, American University, Washington D.C, United States
Keywords: Islamic financial development, Renewable energy, Islamic banks, Energy intensity, Sustainability.


The relationship between financial development and energy intensity is yet to be firmly established as the literature is newly emerging, and the few empirical studies that have been conducted provide conflicting results. While some conclude that there is a U-shaped relationship between financial development and energy intensity, others show a linear relationship between the two variables. This study investigates the relationship between financial development and energy intensity by focusing on the role of Islamic financial development. It covers 30 countries where Islamic banks are present. Using the fixed-effects panel model, the empirical results suggest that Islamic banking development significantly increases energy intensity in the sample countries. We also identify other important factors that increase it. These include carbon emissions, renewable energy use and energy imports. The findings point to the importance of designing policies to incentivise Islamic banks and Shari'ah-compliant investors to finance clean energy technologies as a potent tool for reducing energy intensity, achieving sustainable development, and greening Islamic finance.


Abedifar, P., Molyneux, P., & Tarazi, A. (2013). Risk in Islamic banking. Review of Finance, 17(6), 2035-2096.

Acheampong, A. O. (2019). Modelling for insight: Does financial development improve environmental quality? Energy Economics, 83(September 2019), 156–179.

Akram Laldin, M., & Furqani, H. (2013). Developing Islamic finance in the framework of maqasid al-Shari'ah: Understanding the ends (maqasid) and the means (wasa'il). International Journal of Islamic and Middle Eastern Finance and Management, 6(4), 278-289.

Al-mulali, U., Fereidouni, H. G., Lee, J. Y., & Sab, C. N. B. C. (2013). Exploring the relationship between urbanisation, energy consumption, and CO2 emission in MENA countries. Renewable and Sustainable Energy Reviews, 23(July 2013), 107-112.

Al-Shalabi, A., Cottret, N., Menichetti, E., (2014). EU-GCC cooperation on energy. In: Colombo, S. (Ed.), Bridging the Gulf: EU-GCC Relations at a Crossroads. Nuova Cultura, Rome, pp. 157–222. (IAI Research Papers 1).

Asafu-Adjaye, J., Byrne, D., & Alvarez, M. (2016). Economic growth, fossil fuel and non-fossil consumption: A Pooled Mean Group analysis using proxies for capital. Energy Economics, 60(November 2016), 345-356.

Askari, H., Iqbal, Z., & Mirakhor, A. (2011). New issues in Islamic finance and economics: Progress and challenges. Singapore: John Wiley & Sons.

Azmat, S., Skully, M., & Brown, K. (2015). Can Islamic banking ever become Islamic? Pacific-Basin Finance Journal, 34, 253–272.

Beck, T., Demirguc-Kunt, A., & Merrouche, O. (2013). Islamic vs. conventional banking: Business model, efficiency and stability. Journal of Banking and Finance, 37(2), 443-447.

Beck, T., Demirgüç-Kunt, A., & Merrouche, O. (2010). Islamic vs. conventional banking: Business model, efficiency and stability. Policy Research Working Paper 5446, October 2010. The World Bank, Development Research Group Finance and Private Sector Development Team.

Bernanke, B. S. (2018). The real effects of disrupted credit: Evidence from the global financial crisis. Brookings Papers on Economic Activity, 2018(2), 251-342.

Bernardini, O., & Galli, R. (1993). Dematerialisation: Long-term trends in the intensity of use of materials and energy. Futures, 25(4), 431-448.

Bhattacharyya, S. C. (2019). Energy economics: Concepts, issues, markets and governance. London: Springer.

Bilgin, M. H., Danisman, G. O., Demir, E., & Tarazi, A. (2021). Bank credit in uncertain times: Islamic vs. conventional banks. Finance Research Letters, 39, 101563.

Boukhatem, J., & Moussa, F. B. (2018). The effect of Islamic banks on GDP growth: Some evidence from selected MENA countries. Borsa Istanbul Review, 18(3), 231-247.

Canh, N. P., Thanh, S. D., & Nasir, M. A. (2020). Nexus between financial development & energy intensity: Two sides of a coin? Journal of Environmental Management, 270, 110902.

Caporale, M.G., & Helmi, MH, (2018). Islamic banking, credit, and economic growth: Some empirical evidence. International Journal of Finance & Economics, 23(4), 456–477.

Chakraborty, S. K., & Mazzanti, M. (2020). Energy intensity and green energy innovation: Checking heterogeneous country effects in the OECD. Structural Change and Economic Dynamics, 52, 328-343.

Chen, Z., Huang, W., & Zheng, X. (2019). The decline in energy intensity: Does financial development matter? Energy Policy, 134, 110945.

Chong, B. S., & Liu, M. H. (2009). Islamic banking: Interest-free or interest-based? Pacific-Basin Finance Journal, 17(1), 125-144.

Cohen, S. (2020). Economic Growth and Environmental Sustainability. Columbia Climate School. Accessed August 19 2021 from

Dietz, T., & Rosa, E. A. (1997). Effects of population and affluence on CO2 emissions. Proceedings of the National Academy of Sciences, 94(1), 175-179.

Du, K., & Lin, B. (2015). Understanding the rapid growth of China's energy consumption: A comprehensive decomposition framework. Energy, 90(Part 1), 570-577.

Durusu-Ciftci, D., Ispir, M.S., & Yetkiner, H. (2017). Financial development and economic growth: Some theory and more evidence. Journal of Policy Modeling, 39, 290–306.

Ehrlich, P. R., & Holdren, J. P. (1971). Impact of population growth. Science, 171(3977), 1212-1217.

El-Hawary, D., Grais, W., & Iqbal, Z. (2007). Diversity in the regulation of Islamic Financial Institutions. Quarterly Review of Economics and Finance, 46, 778–800.

Frankel, J. A., & Romer, D., (1999). Does trade cause growth? American Economic Review, 89(3), 379–399.

Fung, M. K. (2009). Financial development and economic growth: Convergence or divergence? Journal of International Money and Finance, 28(1), 56-67.

Furuoka, F. (2016). Natural gas consumption and economic development in China and Japan: an empirical examination of the Asian context. Renewable and Sustainable Energy Review, 56, 100–115.

Gaies, B., Kaabia, O., Ayadi, R., Guesmi, K., & Abid, I. (2019). Financial development and energy consumption: Is the MENA region different? Energy Policy, 135, 111000.

Galli, R. (1998). The relationship between energy intensity and income levels. The Energy Journal, 19(4), 85–105.

Gheeraert, L. (2014). Does Islamic finance spur banking sector development? Journal of Economic Behavior & Organisation, 103, S4-S20.

Gillingham, K., Rapson, D., & Wagner, G. (2016). The rebound effect and energy efficiency policy. Review of Environmental Economics and Policy, 10(1), 68-88.

Goldsmith, R. W. (1969). Financial structure and development. New Haven, CT: Yale University Press

Grassa, R., & Gazdar, K. (2014). Financial development and economic growth in GCC countries: A comparative study between Islamic and conventional finance. International Journal of Social Economics, 41(6), 493-514.

Hanif, I. (2018). Impact of fossil fuels energy consumption, energy policies, and urban sprawl on carbon emissions in East Asia and the Pacific: A panel investigation. Energy Strategy Reviews, 21, 16-24.

Haniffa, R., & Hudaib, M. (2010). Islamic finance: From sacred intentions to secular goals? Journal of Islamic Accounting and Business Research, 1(2), 85-91.

Hardianto, D. S., & Wulandari, P. (2016). Islamic bank vs conventional bank: intermediation, fee based service activity and efficiency. International Journal of Islamic and Middle Eastern Finance and Management, 9(2), 296-311.

Hasan, M., & Dridi, J. (2011). The effects of the global crisis on Islamic and conventional banks: A comparative study. Journal of International Commerce, Economics and Policy, 2(2), 163-200.

Hsing, Y. (1994). Estimation of residential demand for electricity with the cross-sectionally correlated and time-wise autoregressive model. Resource and Energy Economics, 16(3), 255–263.

Hübler, M., & Keller, A., (2010). Energy savings via FDI? Empirical evidence from developing countries. Environmental Development Economics, 15(1), 59–80.

Hunjra, A. I., Tayachi, T., Chani, M. I., Verhoeven, P., & Mehmood, A. (2020). The moderating effect of institutional quality on the financial development and environmental quality nexus. Sustainability, 12(9), 3805.

Hussain, H. I., Slusarczyk, B., Kamarudin, F., Thaker, H. M. T., & Szczepańska-Woszczyna, K. (2020). An investigation of an adaptive neuro-fuzzy inference system to predict the relationship among energy intensity, globalisation, and financial development in major ASEAN economies. Energies, 13(4), 850-866.

IEA, IRENA, UNSD, World Bank & WHO (2020). Tracking SDG 7: The Energy Progress Report. World Bank, Washington DC. © World Bank. License: Creative Commons Attribution—NonCommercial 3.0 IGO (CC BY-NC 3.0 IGO).

IEA. (2021). Total Final Primary Energy Consumption. Accessed November 8, 2021 from

IFC. (2020) Climate Investment Opportunities in Emerging Markets

IFSB (2020). Islamic financial service industry stability report. IFSB.

Imam, P., & Kpodar, K. (2016). Islamic banking: Good for growth? Economic Modelling, 59, 387-401.

Iqbal, Z., & Mirakhor, A. (2011). An introduction to Islamic finance: Theory and practice (Vol. 687). Singapore: John Wiley & Sons.

IRENA. (2019). Renewable Energy Market Analysis: GCC 2019. IRENA

IRENA. (2021). Renewable Power Generation Costs in 2020. International Renewable Energy Agency, Abu Dhabi.

Izzeldin, M., Johnes, J., Ongena, S., Pappas, V., & Tsionas, M. (2021). Efficiency convergence in Islamic and conventional banks. Journal of International Financial Markets, Institutions and Money, 70, 101279.

Jian, J., Fan, X., He, P., Xiong, H., & Shen, H. (2019). The effects of energy consumption, economic growth and financial development on CO2 emissions in China: A VECM approach. Sustainability, 11(18), 4850.

Kassim, S. (2016). Islamic finance and economic growth: The Malaysian experience. Global Finance Journal, 30, 66-76.

Kenourgios, D., Naifar, N., & Dimitriou, D. (2016). Islamic financial markets and global crises: Contagion or decoupling? Economic Modelling, 57, 36-46.

Khan, T. (1995). Demand for and supply of mark-up and PLS funds in Islamic banking: some alternative explanations. Islamic Economic Studies, 3(1), 1-46.

Khan, T., & Badjie, F. (2020). Islamic Blended Finance for Circular Economy Impactful SMEs to Achieve SDGs. The Singapore Economic Review, 1-26.

Khan, A., Chenggang, Y., Hussain, J., & Kui, Z. (2021). Impact of technological innovation, financial development and foreign direct investment on renewable energy, non-renewable energy and the environment in belt & road initiative countries. Renewable Energy, 171, 479-491.

King, R. G., & Levine, R. (1993). Finance, entrepreneurship, and growth. Journal of Monetary Economics, 32(3), 513-542.

Knight, F. (1952). Economic organization. New York: Harper and Row.

Kumru, C. S., & Sarntisart, S. (2016). Banking for those unwilling to bank: Implications of Islamic banking systems. Economic Modelling, 54, 1-12.

Lescaroux, F. (2011). Dynamics of final sectoral energy demand and aggregate energy intensity. Energy Policy, 39(1), 66-82.

Levine, R., & Zervos, S. (1998). Stock markets, banks, and economic growth. The American Economic Review, 88(3), 537-558.

Liu, G., (2004). Estimating energy demand elasticities for OECD countries: A dynamic panel data approach. Discussion Papers No.373, March 2004, Statistics Norway. Research Department.

Liu, Y., & Hao, Y. (2018). The dynamic links between CO2 emissions, energy consumption and economic development in the countries along "the Belt and Road”. Science of the Total Environment, 645, 674-683.

Mahi, M., Phoong, S. W., Ismail, I., & Isa, C. R. (2020). Energy–finance–growth nexus in ASEAN-5 countries: An ARDL bounds test approach. Sustainability, 12(1), 5-20.

Medlock, K. B., & Soligo, R. (2001). Economic development and end-use energy demand. International Association Energy Economics, 22(2), 77–105.

Mensi, W., Hammoudeh, S., Tiwari, A. K., & Al-Yahyaee, K. H. (2020). Impact of Islamic banking development and major macroeconomic variables on economic growth for Islamic countries: Evidence from panel smooth transition models. Economic Systems, 44(1), 100739.

Meslier, C., Risfandy, T., & Tarazi, A. (2020). Islamic banks' equity financing, Shariah supervisory board, and banking environments. Pacific-Basin Finance Journal, 62, 101354.

Mobarek, A., & Kalonov, A. (2014). Comparative performance analysis between conventional and Islamic banks: Empirical evidence from OIC countries. Applied Economics, 46(3), 253-270.

Mulder, P. (2015). International specialization, structural change and the evolution of manufacturing energy intensity in OECD countries. The Energy Journal, 36(3), 111-136.

Mulder, P., & de Groot, H. L. F. (2012). Structural change and convergence of energy intensity across OECD countries, 1970–2005. Energy Economics, 34(6), 1910–1921.

Namahoro, J. P., Wu, Q., Zhou, N., & Xue, S. (2021). Impact of energy intensity, renewable energy, and economic growth on CO2 emissions: Evidence from Africa across regions and income levels. Renewable and Sustainable Energy Reviews, 147, 111233.

Nasreen, S., & Anwar, S., (2014). Causal relationship between trade openness, economic growth and energy consumption: A panel data analysis of Asian countries. Energy Policy, 69, 82-91.

Nie, H., & Kemp, R. (2013). Why did energy intensity fluctuate during 2000-2009? A combination of index decomposition analysis and structural decomposition analysis. Energy for Sustainable Development, 17(5), 482-488

Ozturk, I. (2010). A literature survey on energy–growth nexus. Energy Policy, 38(1), 340-349.

Pan, X., Uddin, M.K., Han, C., & Pan, X., (2019). Dynamics of financial development, trade openness, technological innovation and energy intensity: Evidence from Bangladesh. Energy, 171, 456–464.

Pham, N. M., Huynh, T. L. D., & Nasir, M. A. (2020). Environmental consequences of population, affluence and technological progress for European countries: A Malthusian view. Journal of Environmental Management, 260, 110143.

Polzin, F., Egli, F., Steffen, B., & Schmidt, T. S. (2019). How do policies mobilise private finance for renewable energy? —A systematic review with an investor perspective. Applied Energy, 236, 1249-1268.

Rjoub, H., Odugbesan, J. A., Adebayo, T. S., & Wong, W. K. (2021). Sustainability of the moderating role of financial development in the determinants of environmental degradation: Evidence from Turkey. Sustainability, 13(4), 1844-1861.

Rafiq, S., Salim, R., & Nielsen, I. (2016). Urbanization, openness, emissions, and energy intensity: A study of increasingly urbanized emerging economies. Energy Economics, 56, 20-28.

Rizvi, S. A. R., Arshad, S., & Alam, N. (2015). Crises and contagion in Asia Pacific—Islamic v/s conventional markets. Pacific-Basin Finance Journal, 34, 315-326.

Robinson, J. (1952). The generalisation of the general theory, in the rate of interest and other essays. London: Macmillan.

Sadorsky, P. (2010). The impact of financial development on energy consumption in emerging economies. Energy Policy, 38(5), 2528-2535.

Sadorsky, P. (2011). Financial development and energy consumption in Central and Eastern European frontier economies. Energy Policy, 39(2), 999-1006.

Sadorsky, P. (2013). Do urbanization and industrialization affect energy intensity in developing countries? Energy Economics, 37(May 2013), 52-59.

Sarwar, S., Chen, W., & Waheed, R. (2017). Electricity consumption, oil price, and economic growth: Global perspective. Renewable and Sustainable Energy Reviews, 76, 9–18.

Schumpeter, J. A. (1934). The theory of economic development: an inquiry into profits, capital, credit, interest, and the business cycle. Cambridge, MA: Harvard University Press.

Schumpeter, J. A. (1912), Theorie der wirtschaftlichen entwicklung (dunker and humboldt, leipzig); translated by Redvers Opie, 1934, The Theory of Economic Development. Cambridge, MA: Harvard University Press.

Šeho, M., Bacha, O. I., & Smolo, E. (2020). The effects of interest rate on Islamic bank financing instruments: Cross-country evidence from dual-banking systems. Pacific-Basin Finance Journal, 62, 101292.

Sehrawat, M., Giri, A.K., & Mohapatra, G. (2015). The impact of financial development, economic growth and energy consumption on environmental degradation. Management of Environmental Quality: An International Journal, 26(5), 666–682.

Sequeira, T., & Santos, M. (2018). Education and energy intensity: Simple economic modelling and preliminary empirical results. Sustainability, 10(8), 2625-2641.

Shahbaz, M., & Lean, H. H. (2012). Does financial development increase energy consumption? The role of industrialisation and urbanisation in Tunisia. Energy Policy, 40, 473-479.

Shahbaz, M., Hye, Q. M. A., Tiwari, A. K., & Leitão, N. C. (2013). Economic growth, energy consumption, financial development, international trade and CO2 emissions in Indonesia. Renewable and Sustainable Energy Reviews, 25, 109-121.

Shaw, E. S. (1973). Financial deepening in economic development. New York: Oxford University Press.

Sinton, J. E & Dave, R. (2016). Delivering energy efficiency in the Middle East and North Africa: Achieving energy efficiency potential in the industry, services and residential sectors. Washington DC: World Bank.

Solar Energy Industries Association, (2021). Solar Investment Tax Credit. Accessed 8th November, 2021 from

Sorwar, G., Pappas, V., Pereira, J., & Nurullah, M. (2016). To debt or not to debt: Are Islamic banks less risky than conventional banks? Journal of Economic Behavior & Organization, 132(Supplement), 113-126.

Squalli, J. (2007). Electricity consumption and economic growth: Bounds and causality analyses of OPEC members. Energy Economics, 29(6), 1192–1205.

Studenmund, A. H. (2014). Using econometrics: A practical guide, Sixth edition. Essex: Pearson.

Sukmana, R., & Ibrahim, M. H. (2017). How Islamic are Islamic banks? A nonlinear assessment of Islamic rate–conventional rate relations. Economic Modelling, 64, 443-448.

Sun, J. W. (2002). The decrease in the difference of energy intensities between OECD countries from 1971 to 1998. Energy Policy, 30, 631-635.

Tabash, M.I., & Dhankar, R.S., (2014). Islamic banking and economic growth —A co-integration approach. Romanian Economic Journal, 53, 61–89.

Tamazian, A., Chousa, J.P., & Vadlamannati, K.C., (2009). Does higher economic and financial development lead to environmental degradation: Evidence from BRIC countries. Energy Policy, 37(1), 246–253.

Tamazian, A., & Rao, B.B., (2010). Do economic, financial and institutional developments matter for environmental degradation? Evidence from transitional economies. Energy Economics, 32(1), 137–145.

Taylor, P. G., d’Ortigue, O. L., Francoeur, M., & Trudeau, N. (2010). Final energy use in IEA countries: The role of energy efficiency. Energy Policy, 38(11), 6463-6474.

Voigt, S., De Cian, E., Schymura, M., & Verdolini, E., (2014). Energy intensity developments in 40 major economies: Structural change or technology improvement? Energy Economics, 41, 47–62.

Wang, Q., Zhao, M., & Li, R. (2019). Decoupling sectoral economic output from carbon emissions on city level: A comparative study of Beijing and Shanghai, China. Journal of Cleaner Productions, 209, 126-133.

Wang, Q., & Wang, L. (2020). Renewable energy consumption and economic growth in OECD countries: A nonlinear panel data analysis. Energy, 207, 118200.

Wang, R., Mirza, N., Vasbieva, D. G., Abbas, Q., & Xiong, D. (2020). The nexus of carbon emissions, financial development, renewable energy consumption, and technological innovation: What should be the priorities in light of COP 21 Agreements? Journal of Environmental Management, 271, 111027.

Waugh, M. E. (2010). International trade and income differences. American Economic Review, 100(5), 2093-2124.

Ward, H., Radebach, A., Vierhaus, I., Fügenschuh, A., & Steckel, J. C. (2017). Reducing global CO2 emissions with the technologies we have. Resource and Energy Economics, 49, 201-217.

World Bank Group. (2020). Transformative Climate Finance: A New Approach for Climate Finance to Achieve Low-Carbon Resilient Development in Developing Countries. World Bank. Accessed August 20, 2021 from

Wu, J., Hou, H., & Cheng, S., (2010). The dynamic impacts of financial institutions on economic growth: Evidence from the European Union. Journal of Macroeconomics, 32(3), 879–891.

Xu, Z. (2000). Financial development, investment, and economic growth. Economic Inquiry, 38(2), 331-344.

Yousefi, M., Abizadeh, S., & McCormick, K. (1997). Monetary stability and interest-free banking: The case of Iran. Applied Economics, 29(7), 869-876.

Yu, E., & Choi, J., (1985). The causal relationship between energy and GNP: An international comparison. The Journal of Energy and Development, 10(2), 249–272.

Yu, S., Liu, J., Hu, X., & Tian, P. (2022). Does development of renewable energy reduce energy intensity? Evidence from 82 countries. Technological Forecasting and Social Change, 174(January 2022), 121254.

Zabavnik, D., & Verbič, M. (2021). Relationship between the financial and the real economy: A bibliometric analysis. International Review of Economics & Finance, 75, 55-75.

Zaman, Q. U., Hassan, M. K., Akhter, W., & Brodmann, J. (2019). Does the interest tax shield align with maqasid al Shariah in finance? Borsa Istanbul Review, 19(1), 39-48.

Zhang, Y. J. (2011). The impact of financial development on carbon emissions: An empirical analysis in China. Energy Policy, 39(4), 2197–2203.

How to Cite
Ibrahim, A.-J., Shirazi, N., & Mohseni-Cheraghlou, A. (2021). THE IMPACT OF ISLAMIC FINANCIAL DEVELOPMENT ON ENERGY INTENSITY: EVIDENCE FROM ISLAMIC BANKS. Journal of Islamic Monetary Economics and Finance, 7(4), 709 - 732.