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Does Islamic Banking Development Favour Macroeconomic Efficiency? Evidence on the Islamic Finance – Growth Nexus

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  • Laurent Gheeraert

    (Université Libre de Bruxelles)

  • Laurent Weill

    (LaRGE Research Center, Université de Strasbourg)

Abstract

This study evaluates whether the development of Islamic banking influences macroeconomic efficiency. Thus, we contribute to the analysis of the relation between Islamic finance and economic growth by applying the stochastic frontier approach to estimate technical efficiency at the country level for a sample of 70 countries. We use a unique hand-collected database that covers Islamic banks worldwide over the period 2000-2005, finding evidence that Islamic banking development favours macroeconomic efficiency. Furthermore, we have support for a non-linear relation with efficiency for Islamic banking development, which is measured by credit or by deposits. Although increasing the development of Islamic banking enhances efficiency up to a certain point, the expansion of Islamic banking becomes detrimental for efficiency beyond this point.

Suggested Citation

  • Laurent Gheeraert & Laurent Weill, 2014. "Does Islamic Banking Development Favour Macroeconomic Efficiency? Evidence on the Islamic Finance – Growth Nexus," Working Papers of LaRGE Research Center 2014-04, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    • Handle: RePEc:lar:wpaper:2014-04
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    More about this item

    Keywords

    Islamic finance; financial development; aggregate productivity; efficiency; economic growth;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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