Islamic banking and economic growth: the Indonesian experience

Muhamad Abduh and Mohd Omar

International Journal of Islamic and Middle Eastern Finance and Management, 2012, vol. 5, issue 1, 35-47

Abstract: Purpose - The purpose of this paper is to examine the short-run and the long-run relationships between Islamic banking development and economic growth in the case of Indonesia. Design/methodology/approach - Using quarterly data (2003:1-2010:2), this paper utilizes the bound testing approach of cointegration and error correction models, developed within an autoregressive distributed lag (ARDL) framework. Findings - The results demonstrate a significant relationship in short-run and long-run periods between Islamic financial development and economic growth. The relationship, however, is neither Schumpeter's supply-leading nor Robinson's demand-following. It appears to be bi-directional relationship. Originality/value - This paper uses empirical evidence to show the role of Islamic banks' financing towards economic performance of a country. To the best of the authors' knowledge, the study on the role of Islamic banking development towards economic growth is limited, particularly in the context of Indonesia.

Keywords: Indonesia; Islam; Banking; Islamic banking; Islamic finance; Economic growth (search for similar items in EconPapers)
Date: 2012
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