Do Islamic banks contribute to growth of the economy? Evidence from United Arab Emirates (UAE)

Abstract

Islamic finance has grown rapidly in the recent years particularly in the Middle East and the world. It receives a great attention of bankers and financial scholars due to its stability during financial shocks and crises. The paper uses empirical analysis to test the role of Islamic banking in enhancing the economic growth of United Arab Emirates (UAE). Gross Domestic Product (GDP), Gross formation (GF), and Foreign Direct Investment (FDI) are used as representatives for economic growth, while Islamic banks’ investments are used as a representative for Islamic financial sector in the UAE. The study uses time series techniques to test the link between the variables. In the current study, co-integration along with error correction models is utilized. All econometric work is done using Eviews. The findings reveal that the causal relationship between Islamic banks’ investments and economic growth of UAE is supply-leading direction. Furthermore, the findings depict that Islamic investments have contributed in increasing investments and in bringing FDI into the country in the long-term. The study also shows that there is two-way association between Islamic banks’ investments and FDI. It shows that FDI supports Islamic banking and Islamic banking brings FDI. The paper concludes that authorities of the UAE should devote more attention for this growing banking sector by facilitating regulations for establishing new Islamic banks and then creating a suitable environment for their growth and progress in the UAE.

How Does Islamic Banking Support Economics Growth?

“…Limited studies use a mediator variable that focuses on the impact of Islamic banking financing on economic growth through mediation variables. Most researchers try to correlate the effect of Islamic Banking financing on the economic growth by using GDP directly (Abduh & Azmi Omar, 2012;Furqani & Mulyany, 2009;Tabash & Anagreh, 2017). This mediator variable is necessary to explain through which Islamic banking, especially on the financing sector, could affect economic growth.…”

“…Another reason that motivated us to conduct this study is that there were limited sources that explained how Islamic banking, represented by the number of credits provided to the people (in Islamic banking system, this is called financing) could affect economic growth. Previous studies conducted by Furqani & Mulyany (2009), Tabash & Dhankar (2014), Tabash & Anagreh (2017) investigated the role of Islamic banks on economic growth directly by using GDP variables to represent the economic growth. Daly & Frikha (2016), Caporale & Helmi (2018) included some countries on their study without differentiating the country's financial system, Lebdaoui & Wild (2016) in Southeast Asia country, and Boukhatem & Moussa (2018) in MENA region.…”

Financial Performance Comparison of Islamic and conventional banks in the United Arab Emirates (UAE)

“…Islamic banks are partially affected by the crisis and outperformed than commercial banks (Athanasoglou et al 2008, 2;Tabash and Dhankar, 2014). Also, from another side, Islamic banks contributed positively to the growth of the economy of UAE (Tabash and Anagreh, 2017).…”

How Islamic and conventional bank in Indonesia contributing sustainable development goals achievement

“…Banking system becomes essential to increase productivity, and as main internal financial resources through the raising funds ability, credit/financing to encourage investment and production, and creating economic expansion into sectors such as agriculture, industry, and trade (Abusharbeh, 2017;Robinson, 2001). Some researchers also have proven that banking industry is able to affect the country's growth (Abusharbeh, 2017;Adekola, 2016;Al-abedallat, 2017;Alkhazaleh, 2017;Josephine et al, 2016;Klein & Weill, 2018;Tabash & Anagreh, 2017).…”