The effect of islamic banks’ factors on economic growth: Evidence in Malaysia

Islamic banking is the largest sector in the global Islamic finance asset which is contributing to 70% to the industry (ICD, 2019). As this sector remains the main contributor to the industry’s growth, there is a need to conduct new and fresh research for recent years. This research is purposely conducted to test empirically the effect of Islamic banks’ factors on economic growth from context in Malaysia. By using panel regression, this paper consistently supports the theoretical framework of Islamic banking and economic growth nexus. The secondary data of 16 Islamic banks has been extracted from the balance sheet and income statement of annual report while gross domestic product (GDP) has been collected from International Monetary Fund (IMF). The selection of variables is including total asset, total investment, total financing, total deposit, financing to deposit, non-performing financing, and total zakat. Due to the different policy, total zakat is examined within the local banks only. Therefore, this paper applies four models with a different outcome for each model which describes the impact of each bank’s factor on growth within an annual period from 2012 until 2019. It is found that total deposit, total financing, and financing to deposit have significantly influenced the economic growth of all 16 Islamic banks similar to the previous research. Additionally, total investment, total financing, total deposit, and financing to deposit by local Islamic banks affects significantly on economic growth. However, the impacts of five foreign Islamic banks have shown insignificant result which might be explained due to the small size of banks and inefficiency within those banks. Hence, this paper concludes that a better performance of Islamic banks leads to the economic development of Malays