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Does Islamic banking promote environmental sustainability? Evidence from QISMUT countries
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Supervisor
Date
2026-03-02
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Green Finance Paper.png
PNG, 152.88 KB
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Green Finance Paper.png
PNG, 152.88 KB
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Abstract
This study investigated the correlation between the development of Islamic banking and environmental sustainability [through carbon dioxide (CO2) emissions] in regard to the QISMUT countries (Qatar, Indonesia, Saudi Arabia, Malaysia, the United Arab Emirates, and Turkey), over the 2015–2023 period. Despite the theoretical alignment between Shariah-based finance principles—which emphasize harm prevention (darar), public interest (maslahah), and environmental stewardship—and sustainability objectives, empirical evidence on whether Islamic finance translates its ethical framework into tangible environmental benefits remains limited and inconclusive. To our knowledge, this study provides the first comprehensive econometric assessment of the Islamic finance–carbon emissions relationship within the QISMUT country grouping. The study employed a unique combination of three Islamic finance development proxies (total assets, Shari'ah-compliant financing, and financing-to-GDP ratio) and panel-corrected standard errors (PCSE) as the primary estimation method, with feasible generalized least squares (FGLS) used as a robustness test to address cross-sectional dependence and economic heterogeneity. The findings indicate that there is a strong negative correlation between the development of Islamic banking and CO2 emissions under both PCSE and FGLS specifications. This supports the view that the ethical foundation of Islamic banking, when properly incorporated into lending and investment choices, can lead to the emergence of environmental advantages. The comparatively brief panel (2015–2023), the use of aggregate variables at the national level, and the lack of direct measures of transmission channels will demand future research to rely on longer time series, sector-level or project-level data, and more sophisticated identification strategies like instrumental variable methods to reinforce causal claims and explain other mechanisms through which Islamic banking influences environmental outcomes. On the whole, the research has significant implications for policymakers hoping to utilize Islamic finance to promote sustainable development goals, for Islamic financial institutions focusing on the inclusion of clear environmental standards in their financing activities, and for regulators and development partners wishing to use Islamic banking as a significant tool in the global shift to a low-carbon economy.
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