Financial Development, Islamic Banking and Economic Growth Evidence from MENA Region

By Goaied, Mohamed; Sassi, Seifallah | International Journal of Business and Management Science, December 2011 | Go to article overview

Financial Development, Islamic Banking and Economic Growth Evidence from MENA Region


Goaied, Mohamed, Sassi, Seifallah, International Journal of Business and Management Science


INTRODUCTION

The literature on the relationship between the financial development and economic growth is well documented. The theoretical underpinning of this relationship can be traced back to the works of Schumpeter (1912), Gurley and Shaw (1960), McKinnon (1973), Shaw (1973). According to the theory, the development of the banking industry is favorable to the economic growth because the activity of the banks increases the mobilization of savings, improve the efficiency of the resources allowance, and stimulate the technological innovation. However, some experiences of policies aiming the financial liberalization failed to enhance the financial development and the economic growth. This finding is considered as shortcoming for studies which highlight the strong relationship between financial development and economic growth. This doubt persisted with the numerous applied studies: If most studies emphasize; in accordance with the theoretical predictions; a positive relation between the financial development and economic growth (see, Beck, Levine and Loayza; 2000). Other studies like De Gregorio and Guidotti, (1992); Fernandez and Galetovic (1994); Ram (1999); Ben Naceur and Ghazouani (2007); Andersen and Tarp, (2003) and Favara, (2003) suggest that the relation between the financial development and economic development can be less general than the traditional literatures reveals and they highlight notably that the results of the econometric studies varies according to the sample and the period considered.

In the last two decades, we see the emergence and the development of a new financial industry: the Islamic banking. This industry is characterized by banking operations excluding the use of the interest rate "interest free banking". This banking sector have been developed everywhere through the world and record a high and unexpected growth rates.

Several theoretical studies have been undertaken in the different fields of Islamic banking. The theoretical models developed indicate that the Islamic financial system which depends crucially upon the financial instruments is superior to the conventional financial system in terms of equity stability and efficiency (See Kamaruddin, Safa, and Mohd (2008)). Many economists have highlighted the importance of Islamic financial development in the process of economic development but this relationship never has been empirically tested because aggregate data on Islamic sectors are not yet available.

The present study tries firstly to asses empirically the relationship between the financial development and growth in some countries (1) in the Middle East and North Africa (MENA) region; and checks some gap which may explain the ambiguous results of the previous studies. Secondly, after the identification of the main socio-economic characteristics of Islamic financial instruments that affect the mechanism of productivity; we will assess empirically the ability of the Islamic banking industry to lead the economic development.

Finally, we try to test the heterogeneity across MENA countries by verifying relationship stability between financial development and growth for Petroleum Exporting MENA Countries and MENA countries without oil windfall.

In the following section we discuss the literature that focus on the relationship between the financial development and economic growth. The assessment of the theoretical advantages of Islamic banking and the main developmental characteristics of its financing modes follow. At the end we discuss the data sources, definitions of the variables used in our empirical work as well as the econometric modeling. Finally, we present the empirical results and concluding remarks.

LITERATURE REVIEW

Financial Development and Growth: A Literature Review

The relation between financial development and economic growth has been recognized by the literature since six decades: Goldsmith (1969), Gurley and Shaw (1955, 1960) were the precursors. …

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