Abstract
The study is an attempt to explore the transmission channel through which
development in Islamic banking could lead to economic growth. In order to
determinethis transmission mechanism, the estimation based Vector Error
Correction model (VECM) is used. This study has tested Murabaha, Ijarah and
Diminishing Musharaka as proposed Islamic financial products because of their
majority share in Islamic financing. This study has tested two co-integrated
systems in the VECM model. The first system tests the effect of an increase in
financing in Islamic banking products on the net financing of Islamic banks and
the second system tests the effect of net financing of Islamic banks on economic
growth. The results indicate that the financing done by Islamic banking products
positively affects economic growth in Pakistan. Also, the net financing of Islamic
banks is significantly based on financing in Ijarah and Murabaha. Hence, this
study highlights the growth potential of Islamic banking which is gaining shares
in the overall banking system of Pakistan.
Afia Mushtaq, Noman Arshed, Dr. Rukhsana Kalim. (2018) Islamic Banking Financing Effect on Growth, Islamic Banking and Finance Review, Volume 5, Issue 1.
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