Noninterest equality or noninterest finance? Evidence from time-varying networks

Purpose - Islamic economics was initially established as a discipline within a noninterest framework to foster equitable and sustainable growth. Its focus on noninterest equality has transitioned to noninterest finance over time. The finance-driven approach needs being reformed as it may not generate structural solutions for the current macroeconomic challenges – including high inequality of income, sluggish growth and high interest rates. This study aims to ascertain whether Islamic economics is progressing in the correct direction by estimating whether noninterest equality or noninterest finance has a greater impact on aggregate income and lending interest rates in three steps. Design/methodology/approach - The first step involves estimating the total effect centrality of income inequality and interest-bearing finance in the economies of the US, the UK and Germany. In the second stage, it is estimated whether the negative impacts of lending interest rates on aggregate income in these nations are exacerbated to a greater extent by income inequality or interest-bearing finance. The third step involves estimating whether income inequality or interest-bearing finance has a greater impact on increasing lending interest rates. Findings - The study presents four findings. First, income inequality has a greater total effect centrality than bank credits in a network of aggregate income, lending interest rates, income inequality and bank credits in the UK and Germany. Second, the rising income inequality in the United States exacerbates the adverse effects of lending interest rates on aggregate income more significantly than bank credits. The slightly declining income inequality in the UK reduces the negative impact of lending interest rate on aggregate income, whereas bank credits exacerbate it. The negative effect of lending interest rates on aggregate income in Germany is converted into a positive effect by a progressively decreasing income inequality, whereas bank credits exacerbate it. Third, the extent of income equality’s alleviating (mediating) impact on the negative influence of lending interest rates on aggregate income intensifies with a greater reduction in income inequality. Fourth, banking credits convert the negative impacts of income inequality on lending interest rates into positive effects in the UK and Germany. They amplify the positive impact of income inequality on lending interest rates in the United States. Practical implications - The study suggests that students of Islamic economics should focus on studying noninterest equality either no less than or more than noninterest finance to foster equitable growth, which is the most fundamental quantitative goal of Islamic economics. Originality/value - This study is the first, to the author’s knowledge, to compare noninterest equality of income and noninterest finance using time-varying networks and mediation analysis. The study’s findings are crucial for comprehending the importance of income inequality in Islamic economic research, particularly in relation to its comparative significance with Islamic finance. Such an insight could potentially facilitate the application of the noninterest equality of income as a viable solution to the persistent predicament facing modern economies.