Vol 2, No 1 (2014)

Islamic banking and economic growth: an empirical evidence from Qatar

Mosab I. Tabash, Raj S. Dhankar

Abstract

This paper examines empirically the relationship between the development of Islamic finance system and economic growth in Qatar. Using econometric analysis, annually time-series data of economic growth and Islamic banks’ financing from 1990 to 2008 were used. We use Islamic banks’ financing funds given by Islamic banks to private sector through modes of financing as a proxy for the development of Islamic finance system and Gross Domestic Product, Gross Fixed Capital Formation and Foreign Direct Investment inflow as proxies for real economic growth. For the analysis, the unit root test, cointegration test and Granger causality tests were done. The empirical results generally signify that in the long run, Islamic banks’ financing is positive and significantly correlated with economic growth in Qatar. This reinforces the idea that a well-functioning banking system promotes economic growth. Furthermore, the results show that Islamic banks’ financing has contributed to the increase of investment and in attracting FDI in the long term and in a positive way. The results obtained from Granger causality test reveals a positive and statistically significant relationship between economic growth and Islamic bank’s financing in the long run. The relationship, however, is neither Schumpeter’s supply-leading nor Robinson’s demand-following. It appears to be a bi-directional relationship. However, the results indicate that a causal relationship happens only in one direction, i.e. from Islamic banks’ financing to Foreign Direct Investment and Gross Fixed Capital Formation. It means Islamic banking attracts Foreign Direct Investment into the country. We conclude that government of Qatar should give more attention on Islamic finance to attract more investments. The findings of research will be of interest to western and Islamic finance practitioners, policy makers and academicians, who are interested in Islamic finance industry.

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Keywords

Islamic finance, Economic growth, Causality, Qatar.

Publication information

Volume 2, Issue 1
Year of Publication: 2014
ISSN: 1857 - 8721
Publisher: EDNOTERA

How to cite

Tabash, M. I., Dhankar, R. S. (2014). Islamic banking and economic growth: an empirical evidence from Qatar. Journal of Applied Economics and Business, Vol 2, No. 1, 51-67.