Abstract
Islamic Banking presently knows a great success and new Islamic banks are opening every day all over the world. This Shari’ah (It is the bod of Islamic law, it literally means “way” or “path”) compliant banking is expected to withstand the financial crises and to enhance economic growth. In this paper, the purpose is to analyse the relationship between Islamic banking development and economic growth in the UAE from Q1: 2004 to Q4: 2011 using co-integration and Granger causality tests. This study reveals that no relationship does exist between Islamic banking development and economic growth in the UAE. Such a result can be attributed to the small component of Islamic banking in the global banking sector and to its declining profitability in the period of study. The study enriches the literature on Islamic finance development and economic growth, which is still an under-researched area, especially in the MENA region.
Highlights
The study of financial development-economic growth nexus emerged in the early 19th century
It is noteworthy that the proponents of the supply leading hypothesis suggest that financial development precedes economic growth, while the opposite is argued by the demand following proponents
In order to depict the eventual relationship between Islamic banking and economic growth in United Arab Emirates (UAE), the study uses quarterly time series data (2004:1 – 2011:4) for the following four variables: Islamic Bank total financing, real GDP, real Gross Fixed Capital Formation (GFCF) and Trade
Summary
The study of financial development-economic growth nexus emerged in the early 19th century. It is noteworthy that the proponents of the supply leading hypothesis suggest that financial development precedes economic growth, while the opposite is argued by the demand following proponents. These studies were recently extended to the Islamic finance-economic growth nexus with the emergence and development of modern Islamic finance
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