Analysis of Islamic banks' financing and economic growth: a panel cointegration approach

Purpose - This paper seeks to use empirical evidence to examine the role of Islamic banks' financing on economic performance of selected countries (Malaysia, Indonesia, Bahrain, UAE, Saudi Arabia, Egypt, Kuwait, Qatar and Yemen). Design/methodology/approach - Using quarterly data (2000:1‐2010:4), this paper utilizes the panel cointegration approach models framework. Findings - The results generally signify that, in the long run, Islamic banks' financing is positive and significantly correlated with economic growth and capital accumulation in these countries. The results obtained from the Granger causality test reveal a positive and statistically significant relationship between economic growth and Islamic banks' financing in the short run and in the long run. It also found that the long run relationship is stronger than the short run relationship. Originality/value - This paper uses empirical evidence to show the effect of Islamic banks' financing on economic growth of selected Islamic countries. To the best of the authors' knowledge, most of the studies in this field have applied the bound testing approach of cointegration, error correction models (ECMs), Auto Regressive Distributed lag (ARDL) and Vector Autoregressive Model (VAR), and the coefficients obtained by these models cannot be deemed as a general finding applicable for other countries. The superiority of this article is in applying the FMOLS model, which has stable and consistent coefficients and is also a dynamic model.