Impact of Islamic finance on Economic Growth : Empirical evidence from Pakistan

Abstract

After the Global financial crisis, Islamic finance gets worldwide attention and it increased with fast pace especiallyin Pakistan where total assets of Islamic Banks crossed Rs. 1.7 Trillion. This paper explores empirically the relationship between the development of Islamic banking system and economic growth in the Islamic Republic of Pakistan. Using econometric analysis, quarterly timeseries data of economic growth and Islamic banks’ financing from 2006 to 2015 were used.We use Islamic Banks’ private lending and total assets as a proxy for the development of Islamic Finance and GDP and GFCF as a proxy for Economic Growth. For the analysis, the unit root test, descriptive stats, regression analysis, co‐integrationtest, and Granger causality tests were done. Our empirical results generally signify that in the long run Islamic banks’ financing is positive and significantly correlated with economic growth in Pakistan which reinforces the idea that a well‐functioning Islamic banking system promotes economic growth. Meanwhile, there is no short‐term relationship exist in between Islamic banking and economic growth.