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Does Islamic banking development favor macroeconomic efficiency? Evidence on the Islamic finance-growth nexus

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  • Gheeraert, Laurent
  • Weill, Laurent

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 of 2000 to 2005, identifying evidence that Islamic banking development favors macroeconomic efficiency. Furthermore, we provide support for a non-linear relation between efficiency and 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 to efficiency beyond this point.

Suggested Citation

  • Gheeraert, Laurent & Weill, Laurent, 2015. "Does Islamic banking development favor macroeconomic efficiency? Evidence on the Islamic finance-growth nexus," Economic Modelling, Elsevier, vol. 47(C), pages 32-39.
  • Handle: RePEc:eee:ecmode:v:47:y:2015:i:c:p:32-39
    DOI: 10.1016/j.econmod.2015.02.012
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    Citations

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    Cited by:

    1. Cham, Tamsir, 2017. "Determinants of Islamic Banking Growth: An Empirical Analysis," Working Papers 2017-7, The Islamic Research and Teaching Institute (IRTI).
    2. repec:eee:ecmode:v:72:y:2018:i:c:p:353-362 is not listed on IDEAS
    3. repec:eee:ecmode:v:67:y:2017:i:c:p:300-306 is not listed on IDEAS
    4. repec:eee:finsta:v:33:y:2017:i:c:p:96-119 is not listed on IDEAS
    5. Pejman Abedifar & Paolo Giudici & Shatha Hashem, 2017. "Heterogeneous Market Structure and Systemic Risk: Evidence from Dual Banking Systems," DEM Working Papers Series 134, University of Pavia, Department of Economics and Management.
    6. Abedifar, Pejman & Hasan, Iftekhar & Tarazi, Amine, 2016. "Finance-growth nexus and dual-banking systems: Relative importance of Islamic banks," Journal of Economic Behavior & Organization, Elsevier, vol. 132(S), pages 198-215.
    7. repec:eco:journ2:2017-02-07 is not listed on IDEAS
    8. Narayan, Paresh Kumar & Phan, Dinh Hoang Bach & Narayan, Seema & Bannigidadmath, Deepa, 2017. "Is there a financial news risk premium in Islamic stocks?," Pacific-Basin Finance Journal, Elsevier, vol. 42(C), pages 158-170.
    9. repec:eee:ecmode:v:71:y:2018:i:c:p:121-133 is not listed on IDEAS
    10. Kumru, Cagri S. & Sarntisart, Saran, 2016. "Banking for those unwilling to bank: Implications of Islamic banking systems," Economic Modelling, Elsevier, vol. 54(C), pages 1-12.
    11. Narayan, Paresh Kumar & Phan, Dinh Hoang Bach, 2017. "Momentum strategies for Islamic stocks," Pacific-Basin Finance Journal, Elsevier, vol. 42(C), pages 96-112.

    More about this item

    Keywords

    Islamic finance; Financial development; Aggregate productivity; Efficiency; Economic growth;

    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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