Do Islamic banks contribute to growth of the economy? Evidence from United Arab Emirates (UAE)
-
DOIhttp://dx.doi.org/10.21511/bbs.12(1-1).2017.03
-
Article InfoVolume 12 2017, Issue #1 (cont.), pp. 113-118
- Cited by
- 2669 Views
-
1341 Downloads
This work is licensed under a
Creative Commons Attribution-NonCommercial 4.0 International License
Islamic finance has grown rapidly in the recent years particularly in the Middle East and the world. It receives a great attention of bankers and financial scholars due to its stability during financial shocks and crises. The paper uses empirical analysis to test the role of Islamic banking in enhancing the economic growth of United Arab Emirates (UAE). Gross Domestic Product (GDP), Gross formation (GF), and Foreign Direct Investment (FDI) are used as representatives for economic growth, while Islamic banks’ investments are used as a representative for Islamic financial sector in the UAE. The study uses time series techniques to test the link between the variables. In the current study, co-integration along with error correction models is utilized. All econometric work is done using Eviews. The findings reveal that the causal relationship between Islamic banks’ investments and economic growth of UAE is supply-leading direction. Furthermore, the findings depict that Islamic investments have contributed in increasing investments and in bringing FDI into the country in the long-term. The study also shows that there is two-way association between Islamic banks’ investments and FDI. It shows that FDI supports Islamic banking and Islamic banking brings FDI. The paper concludes that authorities of the UAE should devote more attention for this growing banking sector by facilitating regulations for establishing new Islamic banks and then creating a suitable environment for their growth and progress in the UAE.
- Keywords
-
JEL Classification (Paper profile tab)O16, C32
-
References26
-
Tables8
-
Figures2
-
- Fig. 1. Islamic financial investments in UAE (1990-2014)
- Fig. 2. Study variables
-
- Table 1. Assets of Islamic banks in UAE (2014-2015)
- Table 2. Summary statistics
- Table 3. Stationary test
- Table 4. Trace test
- Table 5. Max-Eigenvalue test
- Table 6. Error correction model
- Table 7. Diagnostics tests results
- Table 8. Granger causality results
-
- Abdoh, O., and Omar, A. (2012). Islamic banking and economic growth: the Indonesian experience. International Journal of Islamic and Middle Eastern Finance and Management, 5(1), 35-47.
- Abu-Bader, S., and Abu-Qarn, A. S. (2008). Financial Development and Economic Growth: The Egyptian Experience. Journal of Policy Modelling, 30, 887-898.
- Bashir, and Hasan, M. (2003). Financial Development and Economic Growth in Some Muslim Countries, In the Fifth International Conference on Islamic Economic and Finance: Sustainable Development and Islamic Finance in Muslim Countries.
- Beck, T., Levine, R. (2004). Finance and the Sources of Growth. Journal of Financial Economics, 58, 261-300.
- Central bank report. (2015). Economic report of UAE.
- Emirates Diary report. (2015).
- Furqani, H., and Mulyany, R. (2009). Islamic banking and economic growth: empirical evidence from Malaysia, Journal of Economic Cooperation and Development, 30(2), 59-74.
- Goldsmith, R. (1969). Financial Structure and Economic Growth in Advanced Countries. National Bureau Committee for Economic Research, Capital Formation and Economic Growth, Princeton, University Press.
- Granger, C. W. J. (1987). Developments in the study of co-integrated Economic Variables. Oxford Bulletin of Economics and Statistics, 48, 213-248.
- Johansen, S., and Juselius, K. (1990). Maximum likelihood estimation and inference on cointegration with application to the demand for money. Oxford Bulletin of Economics and Statistics, 52, 169-210.
- Kar, M. S., and Agir, H. (2011). Financial Development and Economic Growth nexus in the MENA countries: Bootstrap Panel Granger Causality Analysis. Econometric Modelling, 28(2), 685-693.
- King, and Levine. (1993). Finance and Growth: Schumpeter Might be Right Robert. The Quarterly Journal of Economics, 108(3), 717-737.
- Lucas, R. E. (1988). On the Mechanics of Economic Development. Journal of Monetary Economics, 22(2), 3-42.
- Tabash, M., and Dhankar, S. (2014). The Relevance of Islamic Finance Principles in Economic Growth, International Journal of Emerging Research in Management &Technology, 3(2).
- Tabash, M., and Dhankar, S. (2015). Islamic banking and Economic Growth: A cointegration. Romanian Economic Journal, 17(53), 61-90.
- Tajgardoon, and Noormohamadi. (2012). Foreign Direct Investment and Islamic Banking: A Granger Causality Test. Economics and Finance Review, 2(5), 08-13.
- McKinnon, R. I. (1973). Money and Capital in Economic Development. The Brookings Institutions, Washington, DC.
- Narayan, P. K., and Prasad, A. (2008). Electricity consumption-real GDP causality nexus: evidence from a bootstrapped causality test for 30 OECD countries. Energy Policy, 36, 910-18.
- Odhiambo, N. M. (2011). Tourism Development and Economic Growth in Tanzania: Empirical Evidence from the ARDL-Bounds Testing Approach. Economic Computation and Economic Cybernetics Studies and Research, 45(3), 71-83.
- Patrick, H. T. (1966). Financial development and economic growth in developing countries. Economic Development and Cultural Change, 14(2), 174-89.
- Robinson, J. (1952). The Generalization of the General Theory in the Rate of Interest and Other Essays. London: Macmillan.
- Shaw, E. S. (1973). Financial Deepening in Economic Development. Oxford University Press, New York.
- Schumpeter, J. A. (1934). The Theory of Economic Development. Cambridge, MA, Harvard University Press.
- The Size of the Islamic Finance Market Report. (2016).
- World Bank report. (2015).
- World Fact Book report. (2014). United Arab Emirates report.