Twinkle, Twinkle, Little Star, How Wonder Islamic Finance: Up Above the World So High, Like a Diamond in the Sky

Abstract:

This study investigates empirically into the acclaimed positive role played financial market leading growth, with evidence from the MENA Islamic finance. Utilising, several econometric techniques models, such as unit root test, co-integration test and formal tests of ARDL framework developed by Granger causality and quarterly MENA data for the period 2000:1- 2014:2. Empirical findings revealed that both Engle-Granger and Johansen co-integration test support the view that there is a short and long-run relationship between financial Islamic banking development and economic growth in MENA. On the other hand, there was no evidence to support the view that financial Islamic banking development in MENA is a leading sector in the process of the country's economic development. In particular, the causality relationship between RGDP growth and finance of Islamic banks in MENA is a bi-directional long-run granger causality, which reflects positively growth contribution of financial Islamic banking development in the economic development. Higher development in the financial Islamic banking causes higher real economic growth. High economic growth in turn promotes development in the financial Islamic banking.

This study's results will be useful in reaching policy decisions to develop financial Islamic banking to increase economic growth in developing countries or/ emerging economies, in general, and within MENA, in particular. Furthermore, providing empirical evidence regarding this critical issue within specific emerging economies will add to the literature on financial Islamic banking related to the role of Islamic finance development and its influence on economic growth and, thus, initiate an exciting topic for research as it is one of the pioneering studies of Islamic finance.