Assessing the Impact of Islamic Banking on Economic Growth: Empirical Evidence from OIC Countries

Abstract

This study examined the impact of Islamic banking development on economic growth across a panel of 28 Organisation of Islamic Cooperation (OIC) member countries over the period 2000–2022. Employing a quantitative research design, the study utilised panel data techniques, including fixed-and random-effects models and Generalised Method of Moments (GMM) estimation, to address potential endogeneity concerns. Islamic banking development was proxied by the Islamic bank financing-to-GDP ratio, total Islamic banking assets, and the number of Islamic banking institutions. Economic growth was measured by real GDP per capita growth. Control variables included trade openness, inflation, government expenditure, and gross fixed capital formation. Simulated panel data were constructed to reflect empirically plausible distributional properties consistent with existing literature. Results revealed that the Islamic banking financing-to-GDP ratio and total Islamic banking assets exerted a statistically significant positive effect on real GDP per capita growth. The Hausman test confirmed the appropriateness of the fixed effects model. Panel unit root tests and co-integration analyses validated the long-run relationship between Islamic banking depth and economic growth. These findings carry important policy implications for governments and regulators in OIC countries seeking to leverage Islamic finance as a complementary driver of inclusive economic growth. Future research should explore heterogeneous country-level dynamics and the moderating role of institutional quality.