The role of Islamic banks in promoting economic growth and financial stability: Evidence from Saudi Arabia

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The aim of this study is to provide a suitable empirical framework for the interaction between Islamic finance, financial stability, and economic development. Additionally, it is an attempt to empirically evaluate how the levels of financial system stability and economic growth in an oil-rich nation are affected by the financing provided by Islamic banks. The study employs the fully modified ordinary least squares (FMOLS) and quantile regression (QR) based on quarterly data from 2013 to 2022. The findings indicate strong evidence that Islamic banking finance supports economic growth and improves financial system stability. Moreover, the study highlights that this positive relationship is negatively affected by inflation rates and levels of economic policy uncertainty. Financial inclusion has an important positive impact on both dependent variables, reinforcing this link. Furthermore, oil rents in Saudi Arabia (KSA) have contributed to improving economic development and supporting the financial sector’s development to achieve economic diversification as outlined in the Saudi Vision 2030. These findings confirm the necessity of paying attention to developing Islamic banking and increasing its market share by creating products and services that achieve economic efficiency in accordance with suitable policies for making the financial sector a strategic sector that supports economic development in KSA.

Acknowledgment
This work was supported and funded by the Deanship of Scientific Research at Imam Mohammad Ibn Saud Islamic University (IMSIU) (grant number IMSIU-RPP2023024).

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    • Figure A1. Quantile regression estimates (GR: the dependent variable)
    • Figure A2. Quantile regression estimates (STAB: the dependent variable)
    • Table 1. Theories between finance and economic growth
    • Table 2. Description and measurement of the variables
    • Table 3. Descriptive statistics
    • Table 4. Unit root tests
    • Table 5. Effects of IBF on economic growth
    • Table 6. Effects of IBF on financial stability
    • Table 7. Robustness check
    • Conceptualization
      Faycal Chiad
    • Data curation
      Faycal Chiad
    • Investigation
      Faycal Chiad
    • Methodology
      Faycal Chiad
    • Project administration
      Faycal Chiad, Abdelhalim Gherbi
    • Software
      Faycal Chiad
    • Supervision
      Faycal Chiad
    • Writing – original draft
      Faycal Chiad
    • Formal Analysis
      Abdelhalim Gherbi
    • Resources
      Abdelhalim Gherbi
    • Validation
      Abdelhalim Gherbi
    • Visualization
      Abdelhalim Gherbi
    • Writing – review & editing
      Abdelhalim Gherbi
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Investment Management and Financial Innovations