The Impact of Islamic Finance on Poverty and Economic Growth: Empirical Evidence from Organisation of Islamic Cooperation Countries

Abstract

Islamic finance is widely promoted as a development-oriented financial system that can foster economic growth and alleviate poverty. However, empirical evidence across Organisation of Islamic Cooperation (OIC) countries remains mixed, particularly regarding whether the expansion of Islamic financial assets translates into inclusive and growth-enhancing outcomes. This study aims to re-examine the impact of Islamic finance on economic growth and poverty in OIC countries by explicitly distinguishing between Islamic financial assets, Islamic financial inclusion, and overall financial development, while accounting for institutional quality and macroeconomic conditions. The analysis uses a balanced panel dataset of 40 OIC member countries covering the period 2013–2023, compiled from SESRIC, the World Bank, Transparency International, and other international sources. To address endogeneity, unobserved heterogeneity, and dynamic persistence in growth and poverty, the study employs dynamic panel estimators, namely First-Difference Generalized Method of Moments (FD-GMM) and System GMM (SYS-GMM). Model validity is assessed using Hansen and Arellano Bond tests, with carefully restricted and collapsed instruments. The results reveal a nuanced relationship between Islamic finance and development outcomes. Islamic financial assets exhibit a negative, statistically significant effect on economic growth and are positively associated with poverty intensity, suggesting that debt-based asset expansion does not foster inclusive development. In contrast, Islamic financial inclusion significantly reduces poverty, while trade openness and foreign direct investment support economic growth. Institutional quality and human development further condition these effects. These findings suggest that Islamic finance contributes to development not only through asset growth but also through inclusive, access-oriented, and productivity-enhancing mechanisms. Policy efforts in OIC countries should therefore shift from expanding Islamic financial assets toward strengthening Islamic financial inclusion and institutional quality to achieve sustainable growth and poverty reduction.