Islamic banking and economic growth in Malaysia: evidence for a causal relationship pre and post regulatory reform

Abstract

This paper aims to examine the long-run relationship between Islamic banking development and economic growth in Malaysia for 15 years from 2004Q1 – 2018Q4. This paper employs the bound testing approach and long-run models which are developed within the autoregressive distributed lag (ARDL) framework. Islamic banking development is represented by the quarterly time-series data of Islamic banks’ total deposits [ln(dep)]. Meanwhile, Gross Domestic Products [ln(GDP)] represents economic growth. In addition, four control variables are selected, i.e. gross fixed capital formation [ln(GFCF)], trade openness [ln(OPN)], consumer price index [ln(CPI)], and general government expenditure [ln(GE)]. The findings of this research indicate that there is an Islamic finance-growth relationship in Malaysia. Besides, it also highlights the difference in the Islamic finance-economic growth nexus between pre- and post-IFSA 2013. The findings are expected to have important implications for the banking institutions, regulators, as well as policymakers, in formulating future strategies to enhance both the banking and economic development in Malaysia.