Modes of Islamic fnancing and aggregate economic output: Evidence from Islamic banking industry of Pakistan

Abstract

With the evolution of Islamic banking, the economic impact of Islamic fnance has been studied by many authors. Islamic banks signifcantly difer from conventional banks in terms of underlying contracts. The asset side of Islamic banks is composed of diferent modes of fnancing, which can be categorized at participatory and non-participatory modes of fnancing. This study aims to examine the relationship of modes of Islamic fnancing in connection to the real economic output of Pakistan. Using quarterly data from 2005 to 2019, we use autoregressive distributive lag (ARDL) model to analyze the impact of modes of Islamic fnancing and industrial output. Our fndings reveal that non-participatory modes of Islamic fnancing play a signifcant role in deriving a healthy aggregate economic output. Therefore, Industrial production found to have a signifcant positive long run relationship with non-participatory Islamic fnancing. However, fnancing modes based on partnership does not have signifcant impact on total industrial production. The results also show that poor asset quality hinders the production process in the long run and decreases the economic outcome.