Banks and economic growth in developing countries: What about Islamic banks?

Abstract

Islamic banks (IBs) have a significant role in the growth of gross domestic product of the developing countries. The Islamic participatory schemes integrate the assets of lenders and borrowers. They allow enable IBs to lend on a longer term basis to create projects with higher risk-return profiles and, thus, to support economic growth. Our investigation examines the contribution of Islamic finance in economic growth. Using a panel data-set, we compare between IBs and conventional banks in their adding to economic growth. We studied a sample of 120 banks between 2005 and 2012. By means of three ordinary least-square regressions, our empirical investigation reveals that the development of non-usurious banks supports economic growth. Moreover, the cooperation between the two financing modes improves economic growth. The integration of this new funding never neglected the role of the conventional method of financing. The practice of IBs is also away from their theoretical mode in terms of participation results.

Keywords:

• Islamic banks
• conventional banks
• economic growth
• ordinary least square

Public Interest Statement

Our research area focuses primarily on economics and Islamic finance. It is a discipline that reflects the ethical values. In some studies, it has been shown that there is no much difference between Islamic and conventional banks in terms of stability and efficiency. However, Islamic banks financing principles attach to the real economy which leads us to compare their effects on economic growth. Islamic finance also aims to promote the well-being and sustainable development. In this context, the subject was treated renewable energy to study later the relationship that can exist between these two study fields.

Notes

1. He is a global head of Islamic Finance at Moody's during the IMF and World Bank meetings held in Washington, DC—View from IMF 2014.

2. A pre-Islamic, Arabic type of finance in which one individual provides start-up capital to another individual who will do the actual work. As a financial aqreement between the financier and an entrepreneur, a one-tired mudaraba exists; a two mudaraba modifies this by introducing an intermediary between these two principles.

3. A joint enterprise or partnership structure with profit/loss sharing implications that is used in Islamic finance instead of interest-bearing loans. Musharakah allows each party involved in a business to share in the profits and risks. Instead of charging interest as a creditor, the financier will achieve a return in the form of a portion of the actual profits earned, according to a predetermined ratio. However, unlike a traditional creditor, the financier will also share in any losses.

4. According to Wikipedia:

Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is a Bahrain based not-for-profit organization that was established to maintain and promote Shariah standards for Islamic financial institutions, participants, and the overall industry.

5. Liquidity Management Centre (LMC) was established for the purpose of facilitating the investment of the surplus funds of IBs and financial institutions into quality short- and medium-term financial instruments structured in accordance with the Shariah principles.

6. The International Islamic Financial Market (IIFM) is the global standard setting body for the Islamic Capital & Money Market segment of the Islamic finance industry. Its primary focus lies in the standardization of Islamic products, documentation, and related processes.

7. Islamic International Rating Agency (IIRA) has been set up to provide independent assessments to Islamic financial institutions and capital market instruments globally. IIRA’s special focus is on development of capital markets in Islamic countries with a rating spectrum that encompasses the full array of financial transactions and institutions.

8. Shariah Review Bureau (SRB) is a Middle East-based Shariah advisory company. Licensed by the Central Bank of Bahrain, SRB’s scholarly landscape is global in its scope, and entails 28 reputable Shariah scholars from diverse geographical locations covering the world's major Shariah-compliant markets from.

9. An Islamic financing structure, where an intermediary buys a property with free and clear title to it. The intermediary and prospective buyer then agree upon a sale price (including an agreed upon profit for the intermediary) that can be made through a series of installments, or as a lump sum payment.

10. In Islamic law, a contract in which a buyer purchases an item for deferred delivery. The item must be described in detail and construction must fit the specifications. There is no set delivery date for the item. Usually, an istisna contract is made for specially made items. For example, one may make a contract to build a custom table for a client. Payment may be made in a lump sum or in installments.

11. Advance payment for goods which are to be delivered at a specified future date. Under normal circumstances, a sale cannot be affected unless the goods are in existence at the time of the bargain. However, this type of sale is an exception, provided the goods are defined and the date of delivery is fixed. The objects of sale must be tangible goods that can be defined as to quantity, quality, and workmanship.

Additional information

Notes on contributors

Saida Daly

Daly Saida is a doctor and an assistant teacher in Economy Science at the Faculty of Economics and Management of Mahdia (Tunisia). He is a member of, and researcher at, the Applied Economics Laboratory of Sfax (Tunisia). The research activities deal with Islamic finance economic growth, renewable energies, and sustainable development.

Mohamed Frikha

Frikha Mohamed is a professor at the Faculty of Economics and Management of Sfax (Tunisia). The topics of research activities deal with financial crisis, economic growth, entrepreneurship, and renewable energies.