Islamic banking and economic growth: the Indonesian experience

• Main Authors: Abduh, Muhamad, Omar, Mohd. Azmi
• Format: Article
• Language: English
• Published: Emerald Group Publishing 2012
• Subjects: BP173.75 Islam and economics; HB131 Methodology.Mathematical economics. Quantitative methods; HG1501 Banking
• Online Access: http://irep.iium.edu.my/23696/1/Islamic_banking_%26_growth%2C_Indonesia.pdf; http://irep.iium.edu.my/23696/; http://www.emeraldinsight.com/journals.htm?articleid=17024832

Purpose – The purpose of this paper is to examine the short-run and the long-run relationships between Islamic banking development and economic growth in the case of Indonesia. Design/methodology/approach – Using quarterly data (2003:1-2010:2), this paper utilizes the bound testing approach of cointegration and error correction models, developed within an autoregressive distributed lag (ARDL) framework. Findings – The results demonstrate a significant relationship in short-run and long-run periods between Islamic financial development and economic growth. The relationship, however, is neither Schumpeter’s supply-leading nor Robinson’s demand-following. It appears to be bi-directional relationship. Originality/value – This paper uses empirical evidence to show the role of Islamic banks’ financing towards economic performance of a country.To the best of the authors’ knowledge, the study on the role of Islamic banking development towards economic growth is limited, particularly in the context of Indonesia. Keywords: Indonesia, Islam, Banking, Islamic banking, Islamic finance, Economic growth