The Role of Islamic Banks in Promoting Economic Growth and Financial Stability: Evidence from Saudi Arabia

Faycal Chiad and Abdelhalim Gherbi

MPRA Paper from University Library of Munich, Germany

Abstract: The aim of this research is to provide a suitable empirical framework for the interaction between Islamic finance, financial stability and economic development. Additionally, it is an attempt to empirically evaluate how the levels of financial system stability and economic growth in an oil-rich nation are affected by the financing provided by the Islamic banks. Employing fully modified ordinary least squares (FMOLS) and quantile regression (QR) based on quarterly data for the years 2013 to 2022. The paper explores strong evidence that Islamic banking finance supports economic growth (coefficients ranging from 0.14 to 0.22) and improves financial system stability, as indicated by the coefficients ranging from 0.25 to 0.32. Moreover, the study highlights that this positive relationship is negatively affected by inflation rates and levels of economic policy uncertainty. Financial inclusion has an important positive impact on both dependent variables, which reinforces this link. Furthermore, oil rents in Saudi Arabia contributed to improving economic development and supporting the financial sector's development to achieve economic diversification aimed by Saudi Vision 2030. These findings confirm the necessity of paying attention to developing Islamic banking and increasing its market share by creating products and services that achieve economic efficiency in accordance with suitable policies for making the financial sector a strategic sector that supports economic development in KSA.

Keywords: Islamic Banks; Financial Stability; Economic Growth; Quantile Regression (search for similar items in EconPapers)
JEL-codes: C21 G21 G32 O47 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-ara, nep-ban, nep-fdg, nep-fle, nep-hme and nep-isf
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