Does islamic banking have significant effect on economic growth ? evidence from Malaysia

Islamic banking started three decades ago in Malaysia and was expected to have a significant relationship and contribution towards the economic growth of the country. Despite the good efforts shown by the government of Malaysia, it is interesting to see whether such efforts really led to viable and effective economic growth or not. Thus the study is conducted to see whether the financial sector i.e. banking sector can bring about a positive impact on the economic growth in the country. On top of that, it is worth investigating whether Islamic banking achievement is better than its rival i.e. conventional banking system. In other words, the study attempts to compare the two systems which bring about three different classes of banking sectors to represent the financial sector. Using cointegration and Granger-causality methods, we evidenced financial sectors which consist of Islamic banking and conventional one stimulated the economic growth in Malaysia. Interestingly, Islamic bank financing is found to have a positive and significant relationship with economic growth both in the long and short run and leads the other categories. It implies that the development of Islamic banking is one of the policies, which should be considered by the government to improve in the futur