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Islamic banking and economic growth: the Indonesian experience

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Author Info

  • Muhamad Abduh
  • Mohd Azmi Omar

Abstract

Purpose – The purpose of this paper is to examine the short-run and the long-run relationships between Islamic banking development and economic growth in the case of Indonesia. Design/methodology/approach – Using quarterly data (2003:1-2010:2), this paper utilizes the bound testing approach of cointegration and error correction models, developed within an autoregressive distributed lag (ARDL) framework. Findings – The results demonstrate a significant relationship in short-run and long-run periods between Islamic financial development and economic growth. The relationship, however, is neither Schumpeter's supply-leading nor Robinson's demand-following. It appears to be bi-directional relationship. Originality/value – This paper uses empirical evidence to show the role of Islamic banks' financing towards economic performance of a country. To the best of the authors' knowledge, the study on the role of Islamic banking development towards economic growth is limited, particularly in the context of Indonesia.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal International Journal of Islamic and Middle Eastern Finance and Management.

Volume (Year): 5 (2012)
Issue (Month): 1 (April)
Pages: 35-47

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Handle: RePEc:eme:imefpp:v:5:y:2012:i:1:p:35-47

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Web page: http://www.emeraldinsight.com

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Related research

Keywords: Banking; Economic growth; Indonesia; Islam; Islamic banking; Islamic finance;

References

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  1. De Gregorio, Jose & Guidotti, Pablo E., 1995. "Financial development and economic growth," World Development, Elsevier, vol. 23(3), pages 433-448, March.
  2. Neven Valev & Felix Rioja, 2002. "Finance and the Sources of Growth at Various Stages of Economic Development," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0217, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  3. Pesaran, M.H. & Shin, Y., 1995. "An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis," Cambridge Working Papers in Economics 9514, Faculty of Economics, University of Cambridge.
  4. Deidda, Luca & Fattouh, Bassam, 2002. "Non-linearity between finance and growth," Economics Letters, Elsevier, vol. 74(3), pages 339-345, February.
  5. King, Robert G & Levine, Ross, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 717-37, August.
  6. Thorsten Beck & Ross Levine & Norman Loayza, 1999. "Financial Intermediation and Growth: Causality and Causes," Working Papers Central Bank of Chile 56, Central Bank of Chile.
  7. Beck, T.H.L. & Levine, R. & Loayza, N., 2000. "Finance and the sources of growth," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125520, Tilburg University.
  8. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
  9. Pesaran, M. H. & Shin, Y. & Smith, R. J., 1996. "Testing for the 'Existence of a Long-run Relationship'," Cambridge Working Papers in Economics 9622, Faculty of Economics, University of Cambridge.
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