Political economy of Islamic banking growth: Does political regime and institutions, governance and political risks matter?

Abstract

This 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.

The metamorphosis of the Islamic political economy publications (1980-2021) – a bibliometric analysis

“…The authors in Cluster 2 are as follows: Pollard and Samer (2007) published in Transactions of the Institute of British Geographers with 11 cluster frequency and 101 normalized local citation score; Hanieh (2020) published in New Political Economy with 1 normalized local citation score; Ali (2014) published in The Journal of Asian and African Studies with 9 normalized local citation score; Abghari (2007) published in Journal of Third World Studies with 5 normalized local citation score; the rest of the publications have 11 cluster frequency i.e. Choudhury (1997a, 1997b, 1998, 2004), Asutay and Mohd Sidek (2021) published in International Journal of Finance and Economics, Nnadozie and Dwight (1990) published in Scandinavian Journal of Development Alternative and Imran and Siddiqui (2010) published in European Journal of Social Sciences. Cluster 3, in the lower left corner of the matrix, has an Impact of 1 with a centrality level of 3.876, where the composition of the discussion material is focused on Islamic politics with Conf of 100%, Middle East having Conf of 100% and Islamic Republic with Conf of 80%.…”

“…In addition, several authors discuss the political systems in Asia and Europe and economic revival fuelled by culture and the country's democratic transition system; some authors also discuss the concept of capitalism and socialism to explain the phenomenon of modern economic activity (Q2). Choudhury (1997aChoudhury ( , 1997bChoudhury ( , 1998Choudhury ( , 2004, Asutay and Mohd Sidek (2021)…”

Islamic banking, efficiency and societal welfare: a machine-learning, agent-based study

“…The author suggests that Islamic finance can be a serious candidate as a reform agenda for conventional economic systems, but only if its doctrines are internalised by economic agents or, alternatively, strictly enforced by authorities. The role of institutions is also discussed by Asutay and Mohd Sidek (2021), who find that, despite a higher value of Islamic assets in autocratic regimes, “good” institutions can encourage the development of Islamic banking in terms of higher loan growth. On the other hand, they also demonstrate that there is an opportunistic political business cycle in democratic regimes, with an often-artificial pre-election boost to economic activity.…”

Revisiting the Contribution of Islamic Banks’ Financing to Economic Growth: The Indonesian Experience

“…Most previous studies find that an Islamic bank has a positive impact on economic growth. There are significant differences between the short-and long-run relationships in each country, because of different social, political, economic and Islamic governance systems (Asutay & Mohd Sidek, 2020). The above studies were mostly conducted before the global crisis and use data that are a combination of before and after the Asian financial crises of 1998 and 2008, the subprime-mortgage crisis (Bank Indonesia, 2008).…”