Finance-Growth Nexus and Dual Banking System: Relative Importance of Islamic Banks

This paper investigates the relationship between the coexistence of Islamic banks alongside their conventional counterparts and the quantitative and qualitative development of commercial banking and economic welfare. We study 22 Muslim countries with a dual banking system during the 1999-2009 period and find a positive relationship between the market share of Islamic banks and the development of financial intermediation and economic growth. The results also show a negative linkage between Islamic banks' presence and income inequality and poverty. Moreover, a greater market share of Islamic banks is associated with lower credit risk and cost inefficiency of conventional banks in certain countries. The extent and modality of the relationships considerably depend on the institutional environment within which a dual banking system operates.