Impact of Macroeconomic Factors on the Growth of Islamic Banking: A Case of Pakistan

Abstract

The present paper attempts to investigate the impact of some selected macroeconomic factors on the growth of Islamic Banking. An Islamic banking is one of the most rapidly growing segment of the economy nowadays particularly in Pakistan and other Islamic countries around the world. Therefore, the aim of our current study is to investigate whether macroeconomic variables influence the growth of Islamic banking in Pakistan or not. For that purpose, we used seven macroeconomic factors such as, gross domestic product, Muslim population, inflation rate, money supply, total savings, interest rates, and remittances. These variables are used because they directly or indirectly influence the Islamic finance system of the country. Annual data spanning from 1985 to 2015 for six Islamic banks were used. After confirming the stationarity and long run association, we estimate model by using error correction model (ECM). Results reveal that Muslim population, GDP growth, money supply and worker's remittances play a positive and significant role in the development of Islamic banking in Pakistan. However, interest rates, savings and inflation inversely related to the growth of Islamic banks. These empirical findings can have some important policy implications.