ISLAMIC BANKING SECTOR DEVELOPMENT AND ECONOMIC GROWTH: EMPIRICAL EVIDENCE FROM MALAYSIA

ABSTRACT

This paper examines the linear association between Malaysian Islamic banking sector and short- and long-run economic growth for the quarterly period of 2007Q1 - 2019Q4 by employing the Pesaran et al. (2001) Autoregressive Distributed Lag (ARDL) technique of cointegration, The findings show that in the short run, the link between Islamic bank deposits and economic growth is positively insignificant. Meanwhile, in the long run, the findings suggest that Islamic bank deposits affect growth in a positively significant way, confirming the supply-leading hypothesis. Islamic bank financing is found to have a negative significant link with short-run economic growth. Meanwhile, in the long run, Islamic bank financing has positive and significant effect on growth, hence, supporting the supply-leading hypothesis. Furthermore, there is a significant positive correlation between Islamic bank assets and short- and long-run economic development, again supporting the supply-leading hypothesis. Generally, it can be concluded that Islamic banking development is affecting economic growth positively both in the short and long run, which supports the supply-leading hypothesis, as the majority of the Islamic bank indicators are found to affect both short- and long-run economic growth positively.