Islamic Finance and Economic Growth: The Malaysian Case

Does Islamic Finance influence growth? The aim of this paper is to investigate empirically the impact of the Islamic Bank Financing on Malaysia’s economic growth over the period 2000Q1-2011Q4. The hypotheses addressed in this study are discussed within the framework of Demirgüç-Kunt & Levine/Chapra approach and the analysis of the Islamic Banking system. A neoclassical production function augmented by some indicators of the Islamic bank financing has been the theoretical framework of our empirical investigations. In the short-run, the estimation of an Error-Correction Model of the production in Malaysia has shown that the various indicators of Islamic financing growth elasticity vary between 0.14 and 0.20. In the long-run, this elasticity is estimated to be around 0.35.