Impact of Islamic Banking on Economic Growth and Volatility: Evidence from the OIC Member Countries

Abstract

Islamic banking has attracted attention in financial economics literature due to its fast-paced growth. Concurrently, there is established amount of literature that presents the positive impact of banking development on economic growth, which attracts attention and debates whether Islamic banking would also have a similar impact and how Islamic banking could impact the economic stability? To answer these questions, this chapter examines the impact of the development of Islamic banking on economic growth and volatility by using a sample of 21 OIC member countries having both Islamic and conventional banks for the period of 2007–2013. Results show that, even though Islamic banking is relatively smaller in size, it is found to be conducive to economic growth but does not impact economic volatility. We also found that Islamic banking is playing a complementary role toward conventional banking practices in the selected counties.