Relationship between Fiscal Policy and Islamic Finance: A Case Study of the Jordan Islamic Bank

Abstract

The study aims to clarify the relationship between fiscal policy and Islamic finance during the period of (2000–2020). Results of the co-integration analysis showed the existence of a long-term equilibrium relationship between the variables of the study. Analysis of a long-term relationship through the Fully Modified Ordinary Least Squares (FMOLS) model showed a positive, statistically significant effect of government spending on Islamic financing and investment and a negative, statistically significant effect of taxes on Islamic financing and investment. Causal relationship analysis showed that government spending and taxes cause Islamic financing and investment, which implies that Islamic finance follows the fiscal policy in Jordan. Results confirm the effectiveness of fiscal policy in influencing Islamic finance and investment, which indicates that fiscal policy has a role in Islamic banking financial services and in creating the appropriate environment for that. This study offers recommendations by finding new investment financial tools compatible with Islamic Sharia's provisions.