Financial development and economic growth in GCC countries

Abstract

Purpose – The purpose of this paper is to compare the effects of Islamic financial development and conventional financial development on the economic growth for five GCC countries (Bahrain, Kuwait, Qatar Saudi Arabia and UAE). Design/methodology/approach – Using generalized least squares, OLS and panel data frameworks, this paper employs different measures of financial development for the period (1996-2011). Findings – Empirical results strongly support the hypothesis that Islamic finance leads to growth in the five GCC countries, however, no significant relationship observed between conventional financial development and growth. Practical implications – The findings of this paper suggest the need to accelerate the financial reforms for Islamic finance that have been launched in the region since the last decade and to improve the efficiency of these countries’ Islamic financial systems to stimulate saving/investment and, consequently, long-term economic growth. Originality/value – This study has several contributions to the existing literature. To the best of the authors’ knowledge, this paper is the first study that examines empirically the effect of Islamic finance on economic growth in GCC countries. As well, this paper is the first to compare the different effects of Islamic finance and conventional finance on economic growth on a context of countries having the most developed Islamic financial system in the world operating side-by-side with a conventional financial system.

The Impact of Financing on Economic Growth in Saudi Arabia

“…Ageli and Zaidan (2013) found that credit provided by government specialized bank and commercial banks to private sector has a positive effect on GDP using vector error correction model (VECM). Grassa and Gazdar (2014) examined the impact of total finance, conventional finance, and Islamic finance on economic growth as proxied by the growth rate of real per capita GDP in Gulf Cooperation Council (GCC) countries, excluding Oman. The author found that total domestic credit to private sector as a percentage of GDP is not significant using OLS, Panel estimators (fixed effect and random effect), and GLS.…”

Natural Resources, Institutional Quality and Financial Development in GCC Member Countries: Visiting ‘Resource Curse Hypothesis’ by DCCE Estimation

“…Similarly, Bhattacharyya and Hodler (2014) argued that if the political-institutional quality is poor, so the result reported with statistical evidence that found a negative association. In China, Yuxiang and Chen (2011) In the case of GCC panel countries, Grassa and Gazdar (2014) by employing OLS, and GLS approaches, and result indicates the negative and significant impact of financial development on economic growth. In contrast, Bist (2018) analyzed the association of financial development on economic growth in the long run by employing the OLS approach over using panel data of 20 years.…”

Financial Development on Employment Rate in Nigeria

“…Patrick (1966) proposed the stages of development model, of financial development influencing economic growth at the primary stage of economic expansion and declines as the economy expands for economic growth to influence financial stability. Kar, Nazlıoğlu, and Ağır (2011) in the Middle East and North Africa (MENA) countries and Grassa and Gazdar (2014) in the Gulf Cooperation Council (GCC) observed neutrality. Financial and economic data support the Casino Neutrality of a non-significant relationship.…”