Impact of Islamic Modes of Finance on Economic Growth through Financial Stability

Abstract

This study aims to investigate the relation between Islamic banks performance and economic growth. It attempt to answer the question whether Islamic banks are a perquisite for economic development or whether their financial stability a consequence of it. The study follows quantitative method by employing cross sectional data context analysis. The data is collected from six banks over six countries through the period 2011-2013. Pearson regression is used to measure causal relation between GDP and banks performance representing in Islamic modes of finance, Z score. The regression tests shows significant relation between modes of finance and GDP R=0.79, there is negative causal relation between Z score and GDP, negative relation between Ijara, Murabah modes and GDP. Also the test shows significant negative relationship between modes of finance except Mudaraba and Z score R=0.93. However there is insignificant relationship between Zscore and Murabahah, Mudaraba. Two models are developed according to regression tests.