Islamic banking and economic growth in GCC & East Asia countries

Purpose - – The purpose of this paper is to assess the contribution of Islamic finance to economic growth in countries that were early adopters of Islamic banking: Malaysia, Indonesia and the Gulf Cooperation Council (GCC) countries. Design/methodology/approach - – Through panel cointegration analysis, variance decompositions (VDCs) and impulse response functions, this study investigates the Islamic finance and growth nexus. Findings - – Islamic banking is found to contribute to economic growth both in the long run and the short run for both GCC countries and the selected East Asia (EA) countries. In the short run however, Islamic banking contributes more to economic growth in Malaysia and Indonesia compared to the GCC countries. Practical implications - – The results lend support to the view that Islamic intermediation not only leads to economic benefits but also; increases managers' entrepreneurial skills through the involvement of the lender in the decision making and the partnership like relationship between the fund provider and the entrepreneur and also; reduces agency costs which produces positive impact on both the economy and the development of the society. This serves as a motivation for other countries to continuously promote Islamic finance. Originality/value - – To assess the importance of Islamic finance to economic growth, this study compares two main regional Islamic financial hubs, the GCC and EA countries. Another novel aspect of this study is in the methodology; it employs panel cointegration analysis, VDCs and impulse response functions on the set of annual data for period of 2000-2009.