A Dynamic Panel Data Analysis for Islamic Finance and Economic Growth

Abstract: This paper examines the dynamic interactions between Islamic Finance and economic growth by employing panel data econometrics, the Cointegration test and Unit root tests to see whether the financial system influences growth and growth transforms the operation of the financials system in the long-run. We use panel data of total Islamic bank financing and real GDP per capita, fixed investment, and other variables to represent real economic sectors. We found that in the short-run only fixed investment that granger cause Islamic bank where as in the long-run, there is evidence of a bidirectional relationship between Islamic Finance and fixed investment and there is evidence to support demand following hypothesis of GDP and Islamic Finance, where increase in GDP causes Islamic banking