Islamic Banking and Economic Growth — A cointegration Approach

This paper explores empirically the relationship between the development of Islamic finance system and economic growth and its direction 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 as a proxy for the development of Islamic finance system and Gross Domestic Product (GDP), and Gross Fixed Capital Formation (GFCF) 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 which 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 in the long term and in a positive way in Qatar. It is one of the first pioneering studies on Islamic Banking and economic growth in Qatar, and the first to be conducted in Middle East as well, thus it has a significant contribution to the body of knowledge 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.