Islamic Development Bank, Foreign Aid and Economic Growth in Africa: A Simultaneous Equations Model Approach

Abstract

This study is an empirical investigation on the role of the Islamic Development Bank (IDB) Group through its foreign aid activities in contributing to the economic growth of African countries, especially the African Muslim Countries (AMCs). The AMCs, which is serving as the sample countries for this study constitute more than two-third of the IDB member countries from Africa. Therefore, this study provides empirical evidences from AMCs like Algeria, Burkina Faso, Egypt, Senegal, Niger, Morocco and Tunisia among others, on the impact of its development assistance (DA) on the economic growth of these countries using balanced panel data of six years average from 1987-2010. In order to accomplish the objectives of this paper, Simultaneous Equations Model (SEM) was adopted and Seemingly Unrelated Regressions Estimate (SURE) method was utilized for its estimation. In view of this, the findings from this study revealed that the DA of IDB has positive impact on the economic growth of AMCs through investment as the major transmission mechanism. Moreover, the impacts of the DA on human capital were more than that of investment and growth. This paper hereby recommends that the IDB should give more attention to these important transmission mechanisms, since they are among the expected gains of foreign aid to LDCs as theoretically advanced in the literature and empirically established. Evidently, this study is perhaps the first of its kind to empirically investigate the impact of the foreign aid activities of IDB in Africa, especially in AMCs.

Islamic finance and charity in the Muslim world. The role of the Islamic Development Bank in financing aid

“…Regarding the allocation of aid by the IsDB, there are studies in this field (Hernandez, Vadlamannati, 2017;Mustafa, Razak, 2012) that underline some critic aspects. First of all, the limited number of studies on aid allocation by Arab donors agree that predominantly Muslim countries are their main beneficiaries.…”

“…For sure, this positive impact should be accompanied by good governance in the target country that can contribute to enhancing it. Together with DA, IsDB and its partners should empower political institutions of recipient countries to "scale-up aid by making a big-push in the continent" (Mustafa and Razak, 2012).…”

“…Towards foreign aid, this should be the area of majors focus by IsDB and other development partners in order to preclude the so-called African growth paradox of "excessive wealth, excessive poverty". Foreign aid must be delivered to foster economic growth but, at the same time, to reinforce a virtuous cycle of development which requires good governance and strong institutions (Mustafa, Razak, 2012).…”

The Power of Radical Islamist Ideas in Fragile States in Parts of Sub-Saharan Africa

“…Saudi Arabia, in particular, helped found and continue to finance King Faisal University, while multilateral aid has mainly been provided through the IsDB and the Banque Arabe pour le Développement Economic en Afrique (Mustafa and Razak, 2012). …”