Effects of Islamic Banking on Financial Market Outcomes in GCC Countries and Iran

Abstract

Islamic banking and finance have become increasingly widespread over the past two decades, particularly in Muslim-majority countries in the Middle East, North Africa, and Southeast Asia. This paper uses country-level data to examine how growing Islamic banking sectors have affected financial market outcomes in six countries. The analysis is split into two parts, first testing the hypothesis that countries with large Islamic banking sectors were less affected by the 2008 financial crisis than countries with strictly conventional banking systems, and second testing the hypothesis that emerging Islamic banking sectors have had a positive effect on private saving in countries with large Muslim populations. I find evidence that the banking systems of countries with large Islamic banking sectors fared no better at providing credit during the financial crisis than conventional alternatives, but do find evidence supporting a positive correlation between Islamic bank development and private saving.