Abstract
AbstractThis article explores the political economy of Islamic banking by examining the impact of political regime types, institutional environment, government and political risk on the development of Islamic banking proxied by financing or loan growth in the case of 16 Muslims majority countries with autocratic and democratic regimes over the period of 2000–2013. The performance of Islamic banking loan growth is examined from three different perspectives—political regime and institutions, governance and political risks in both regime settings. Results suggest that loan growth is positive and significant in democratic regimes where political and civil rights are predominant. In addition, loan growths are slower during election years but higher throughout pre‐election year in democratic regimes, suggesting the opportunistic behaviour of incumbent government artificially boosting the economy in preparation for the upcoming election. It is also found that the good quality of public services, policy formulation and implementation, and credibility of government's commitment to realizing the policies are vital in ensuring positive loan growth. The lack of differences in the reaction of loan growth to the governance in democratic and autocratic regimes shows some convergence in the regimes despite having significantly different political perspective. This implies that political commitment of the ruling government is vital to set forth a strong and robust Islamic banking standing regardless of its political standpoint.
Highlights
The unprecedented growth of Islamic banking and finance in recent years has prompted financial services providers to expand their product portfolios towards
By comparing conventional banking and Islamic banking in Muslim majority countries with a different ontological base and political philosophy with its relevant settings, we aim to identify the role of political regimes and institutions, governance and political risk in different political spheres in the development of banking sector in general and Islamic banking in particular
In the Islamic banks in democratic countries sub-sample, the results demonstrate that loan growth is higher a year before the election, indicating incumbent government's attempt to artificially boost the economy as part of political business cycles
Summary
This article explored the role of political regime and institutions, governance and political risks on Islamic banking growth, proxied by loan growth across both conventional and Islamic banks in Muslim dominated countries. As long as the ruling government or authority is willing to embrace financial-friendly policy framework, Islamic banking will be able to flourish anywhere implying the essential nature of the political process as an essential determinant. This is visible in the everyday practice of Islamic finance, as the Malaysian government's proactive nature in developing industry has resulted in Islamic banks and financial institutions capturing about 25% of the total financial system in the country. Political environment plays an essential role in the diffusion, development and operation of Islamic finance
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
