Islamic finance and economic growth nexus: an empirical evidence from Southeast Asia using dynamic panel one-step system GMM analysis

Purpose - This paper aims to empirically explore the nexus between Islamic finance and economic growth across Southeast Asia based on the perception of the endogenous growth model. Design/methodology/approach - This paper applied the dynamic panel one-step system GMM as an optimum estimation approach to study the influence of Islamic finance on economic growth in Southeast Asia from 2013Q4 to 2019Q4. This paper used total Islamic financing as the major exogenous explanatory factor inside the endogenous growth model, whereas the gross domestic product was used as the measurement of economic growth. The sample consisted of all complete Islamic banks operating in Southeast Asia (Malaysia, Brunei Darussalam and Indonesia). Findings - The findings demonstrated that Islamic finance is promoting economic growth in Southeast Asia, which reflects the weighty role of Islamic finance as an energetic contributor to economic growth. Practical implications - This paper would enrich the literature by studying the nexus between Islamic finance and economic growth in Southeast Asia based on the perception of endogenous growth model, as the results of this paper assist as an attendant for financial scholars, decision-makers and policymakers to expand Islamic finance globally as an alternative funding source for the best involvement to economic growth. Originality/value - Despite the existing studies on the nexus between Islamic finance and economic growth, this paper is the first that explores empirically the nexus between Islamic finance and economic growth in Southeast Asia based on the theoretical background of the endogenous growth model to obtain solid information on this nexus.