Testing the development impact of islamic banking: Islamic moral economy approach to development

Abstract

Redistributive justice and stakeholder development have been central objectives of the Islamic moral economy for which Islamic banking was considered a facilitatory operational tool. Being its institutional form, the emergence of Islamic finance is, therefore, related to rescuing ‘human, land, labour and capital’ so that extended stake-holding governance can be achieved. As opposed to the institutional logic of conventional finance, within the Islamic moral economy paradigm, Islamic finance, theoretically, is expected to essentialise justice and equilibrium and equalise development opportunities for all stakeholders to fulfil their development path towards perfection. To assess the Islamic moral economy performance of Islamic banking, this paper uses HDI and GINI as the dependent variables to determine short-run and long-run relationships between Islamic banking growth and the development of the economy through socioeconomic indicators. The data covers the period 2000–2021 with fourteen countries with a systemic presence of Islamic finance, The results show that although Islamic banks did not cause an increase in inequality, as opposed to expectations, they neither caused a decrease in the sampled countries. As for the effect of Islamic banking expansion on human development, it positively contributes to human development only in the long run under certain conditions, which cannot be established in the short run. If sustained, this should be considered positive progress as opposed to the experience observed in the initial period of Islamic banking.