Are Shariah Banking Financing Patterns Procyclical?

Abstract

The recent financial landscape has seen remarkable growth in Islamic banking and finance (IBF). This study investigates the impact of Shariah-compliant finance strategies on economic growth cycles in Asian & Gulf nations, specifically Indonesia, Bangladesh, Saudi Arabia, Oman, and Kuwait. Previous research on the relationship between Islamic financing and economic growth has yielded conflicting results. Data from 2013 to 2021 will be used, with GDP as dependent and various Shariah financing techniques as independent variables. Data is sourced from the IFSB database and the World Development Indicators. Regression analysis will assess the correlation between variables. Hausman test results indicate that the fixed effects model is the most appropriate choice for examining the pro-cyclicality of Shariah banking financing patterns in Asian countries. The findings suggest a significant influence of Islamic financing practices on Asian nations' economic growth cycles. The study emphasizes the importance of considering diverse funding options offered by Islamic banking to support economic growth and contributes to existing knowledge by shedding light on the effectiveness of specific funding strategies in stimulating economic growth. These insights can guide financial institutions and policymakers in leveraging Islamic finance to foster economic advancement.