Does Islamic Financial Inclusion Promote Economic Growth? Evidence From Oic Countries
DOI:
https://doi.org/10.62952/shacral.v3i1.112Abstract
This study examines the relationship between Islamic financial inclusion and economic growth in Organization of Islamic Cooperation (OIC) countries using panel data analysis. Despite the rapid global expansion of Islamic finance, with assets exceeding $3.5 trillion, empirical evidence on its growth effects remains limited and inconclusive. This study addresses that gap by analyzing the impact of Islamic banking development, proxied by the average total assets of Islamic banks, on GDP per capita across OIC member states. Using a fixed effects estimation approach, we control for key macroeconomic determinants of growth, including conventional financial depth, trade openness, human capital, institutional quality, foreign direct investment, and inflation. The Hausman test confirms the appropriateness of the fixed effects specification, while clustered standard errors are employed to correct for heteroskedasticity and serial correlation. The results indicate that Islamic financial inclusion has a positive and statistically significant effect on economic growth. Specifically, a 1% increase in Islamic banking assets is associated with a 0.090% increase in GDP per capita. This finding suggests that Shariah-compliant financial services contribute meaningfully to economic development and operate as a complement rather than a substitute for conventional financial systems. Furthermore, institutional quality and private-sector credit are significant growth determinants, underscoring the importance of strong governance and well-developed financial systems. These findings imply that OIC countries can enhance economic performance by expanding Islamic banking infrastructure, strengthening regulatory frameworks, and improving institutional quality while maintaining balanced and inclusive financial ecosystems.
Downloads
References
Acemoglu, D., & Robinson, J. A. (2012). Why nations fail: The origins of power, prosperity, and poverty. Crown Business.
Askari, H., Iqbal, Z., & Mirakhor, A. (2012). Risk sharing in finance: The Islamic finance alternative. John Wiley & Sons.
Baltagi, B. H. (2021). Econometric analysis of panel data (6th ed.). Springer.
Barro, R. J. (1991). Economic growth in a cross-section of countries. The Quarterly Journal of Economics, 106(2), 407-443. https://doi.org/10.2307/2937943
Barro, R. J., & Sala-i-Martin, X. (2004). Economic growth (2nd ed.). MIT Press.
Beck, T., Demirgüç-Kunt, A., & Merrouche, O. (2013). Islamic vs. conventional banking: Business model, efficiency and stability. Journal of Banking & Finance, 37(2), 433-447. https://doi.org/10.1016/j.jbankfin.2012.09.016
Beck, T., Levine, R., & Loayza, N. (2000). Finance and the sources of growth. Journal of Financial Economics, 58(1-2), 261-300. https://doi.org/10.1016/S0304-405X(00)00072-6
Boukhatem, J., & Moussa, F. B. (2018). The effect of Islamic banks on GDP growth: Some evidence from selected MENA countries. Borsa Istanbul Review, 18(3), 231-247. https://doi.org/10.1016/j.bir.2017.11.004
Cham, T. (2018). Determinants of Islamic banking growth: An empirical analysis. International Journal of Islamic and Middle Eastern Finance and Management, 11(1), 18-39. https://doi.org/10.1108/IMEFM-01-2017-0023
Čihák, M., & Hesse, H. (2010). Islamic banks and financial stability: An empirical analysis. Journal of Financial Services Research, 38(2-3), 95-113. https://doi.org/10.1007/s10693-010-0089-0
Demirgüç-Kunt, A., & Klapper, L. (2013). Measuring financial inclusion: Explaining variation in use of financial services across and within countries. Brookings Papers on Economic Activity, 2013(1), 279-340. https://doi.org/10.1353/eca.2013.0002
Demirgüç-Kunt, A., Klapper, L., Singer, D., Ansar, S., & Hess, J. (2018). The Global Findex Database 2017: Measuring financial inclusion and the fintech revolution. World Bank Publications.
El-Gamal, M. A. (2006). Islamic finance: Law, economics, and practice. Cambridge University Press.
Gheeraert, L., & Weill, L. (2015). Does Islamic banking development favor macroeconomic efficiency? Evidence on the Islamic finance-growth nexus. Economic Modelling, 47, 32-39. https://doi.org/10.1016/j.econmod.2015.02.012
Gylfason, T. (2001). Natural resources, education, and economic development. European Economic Review, 45(4-6), 847-859. https://doi.org/10.1016/S0014-2921(01)00127-1
Greene, W. H. (2018). Econometric analysis (8th ed.). Pearson.
Hausman, J. A. (1978). Specification tests in econometrics. Econometrica, 46(6), 1251-1271. https://doi.org/10.2307/1913827
Hsiao, C. (2014). Analysis of panel data (3rd ed.). Cambridge University Press.
Imam, P., & Kpodar, K. (2016). Islamic banking: Good for growth? Economic Modelling, 59, 387-401. https://doi.org/10.1016/j.econmod.2016.08.004
Islamic Financial Services Board. (2023). Islamic financial services industry stability report 2023. Islamic Financial Services Board.
Kaufmann, D., Kraay, A., & Mastruzzi, M. (2011). The worldwide governance indicators: Methodology and analytical issues. Hague Journal on the Rule of Law, 3(2), 220-246. https://doi.org/10.1017/S1876404511200046
Kim, D. W., Yu, J. S., & Hassan, M. K. (2018). Financial inclusion and economic growth in OIC countries. Research in International Business and Finance, 43, 1-14. https://doi.org/10.1016/j.ribaf.2017.07.178
Lebdaoui, H., & Wild, J. (2016). Islamic banking presence and economic growth in Southeast Asia. International Journal of Islamic and Middle Eastern Finance and Management, 9(4), 551-569. https://doi.org/10.1108/IMEFM-03-2015-0037
Levine, R. (2005). Finance and growth: Theory and evidence. In P. Aghion & S. N. Durlauf (Eds.), Handbook of economic growth (Vol. 1A, pp. 865-934). Elsevier.
Levine, R., Loayza, N., & Beck, T. (2000). Financial intermediation and growth: Causality and causes. Journal of Monetary Economics, 46(1), 31-77. https://doi.org/10.1016/S0304-3932(00)00017-9
Mankiw, N. G., Romer, D., & Weil, D. N. (1992). A contribution to the empirics of economic growth. The Quarterly Journal of Economics, 107(2), 407-437. https://doi.org/10.2307/2118477
Mohieldin, M., Iqbal, Z., Rostom, A., & Fu, X. (2012). The role of Islamic finance in enhancing financial inclusion in Organization of Islamic Cooperation (OIC) countries. Islamic Economic Studies, 20(2), 55-120.
Neaime, S., & Gaysset, I. (2018). Financial inclusion and stability in MENA: Evidence from poverty and inequality. Finance Research Letters, 24, 230-237. https://doi.org/10.1016/j.frl.2017.09.007
Petersen, M. A. (2009). Estimating standard errors in finance panel data sets: Comparing approaches. Review of Financial Studies, 22(1), 435-480. https://doi.org/10.1093/rfs/hhn053
Pritchett, L. (2001). Where has all the education gone? The World Bank Economic Review, 15(3), 367-391. https://doi.org/10.1093/wber/15.3.367
Sachs, J. D., & Warner, A. M. (2001). The curse of natural resources. European Economic Review, 45(4-6), 827-838. https://doi.org/10.1016/S0014-2921(01)00125-8
Sethi, D., & Acharya, D. (2018). Financial inclusion and economic growth linkage: Some cross-country evidence. Journal of Financial Economic Policy, 10(3), 369-385. https://doi.org/10.1108/JFEP-11-2016-0073
Sharma, D. (2016). Nexus between financial inclusion and economic growth: Evidence from the emerging Indian economy. Journal of Financial Economic Policy, 8(1), 13-36. https://doi.org/10.1108/JFEP-01-2015-0004
Wooldridge, J. M. (2010). Econometric analysis of cross section and panel data (2nd ed.). MIT Press.
World Bank. (2022). Financial inclusion overview. World Bank Group.
Zulkhibri, M. (2016). Financial inclusion, financial inclusion policy and Islamic finance. Macroeconomics and Finance in Emerging Market Economies, 9(3), 303-320. https://doi.org/10.1080/17520843.2016.1173716
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2026 Yasmin
This work is licensed under a Creative Commons Attribution 4.0 International License.
