DO ISLAMIC BANKS CONTRIBUTE TO ECONOMIC GROWTH? EVIDENCE FROM THE GCC COUNTRIES

Fatima Zahra Bendriouch,Mohamed M’Hamdi,Harit Satt

doi:10.32479/ijefi.10046

Fatima Zahra Bendriouch, Mohamed M’Hamdi + Show 1 more

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https://doi.org/10.32479/ijefi.10046

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Abstract

The purpose of this study is to examine the existing relationship between Islamic banks' performance and economic growth in GCC countries. In this quest, this paper attempts to examine whether Islamic banks contribute to the economic growth. We develop a structural equation model to attest these links based on the evidence that Islamic finance contributes to higher levels of economic growth. As a measure of profitability, we include several determinants that are usually ignored in the literature; namely, size, liquidity, capital adequacy, credit risk, and expense management. The study covers Islamic banks operating in Bahrain, UAE, Kuwait, Oman, Qatar and Saudi Arabia over the period 2010 to 2017. We show a positive relationship between Islamic banks and economic growth, especially for the years immediately after the global financial crisis. In other words, Islamic banks performance have contributed to economic growth mainly during the period right after the financial crisis. Our findings represent a significant contribution to explaining how Islamic financial institutions' activities induce economic growth. Our findings could grant the managers of the Islamic banks a better understanding on how their institutions could improve economic performance as it reduces the severity of the financial crisis by avoiding major weaknesses of the conventional banking system.Keywords: GCC countries, Islamic banks, economic growth, structural equationJEL Classifications: G20; O11DOI: https://doi.org/10.32479/ijefi.10046

Highlights

The first private commercial Islamic bank has seen light in 1975 in “Dubai Islamic Bank”
The stated above characteristics makes PLS-structural equation model (SEM) very valuable for explanatory research, in our case, Islamic Banks’ performance and economic growth
Our sample focused on GCC countries; namely, Bahrain, UAE, Kuwait, Oman, Qatar and Saudi Arabia from 2010 to 2017

Summary

Introduction

The first private commercial Islamic bank has seen light in 1975 in “Dubai Islamic Bank”. The liberalization of Islamic financial systems, the Islamic banks expanded worldwide and have been developed in many ways. In their 2008 Islamic Finance Development Report, Thomson Reuters stated that Islamic banking has become the largest sector in the Islamic finance industry having total assets of USD 1.72 trillion, which represents 71% of the industry’s assets. The higher than unexpected development and growth rate has raised many questions for the emergence of Islamic banking. These observations motivated many scholars to examine the relation between Islamic financial system and the economic growth and development. Following the seminal work and subsequent studies by Schumpeter (2003), Goldsmith (1970), Shaw (1974), extensive research in the financial economic field have put attention to the Islamic banking and economic growth nexus

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