An Empirical evaluation of the impact of Islamic financing on economic growth in Saudi Arabia

Abstract

This research empirically investigates the relationship between the Islamic Banking and its contribution to economic growth in the Kingdom of Saudi Arabia (KSA). The majority of the literature on the relationship between banking system and economic growth concentrates on conventional banking. Recently, some studies have focused on Islamic banks in different countries, and current research examines the role of Islamic banks financing in Saudi Arabia to stimulate economic growth by affecting the gross domestic product, gross fixed capital formation, foreign direct investment, employment, and trade volumes. This research seeks the answer to the question on the long run and short-run relationship between Islamic bank financing and economic growth in Saudi Arabia. This study covers the annual time series data from 1990 - 2015 for the macroeconomic variables and data pertaining to Islamic financing, and employs the autoregressive distributed lag (ARDL) approach to examine the empirical relationship between the selected variables. This research identifies that Islamic bank financing positively affects the macro economy of Saudi Arabia as the majority of the variables in the sample demonstrate a positive and significant relationship with Islamic bank financing. Due to the significant impact of Islamic banks’ financing on economic activity, this research provides an insight for policy makers to divert more resources for the development of Islamic financial system in the country. Keywords: Islamic banking financing, economic growth, macroeconomics, ARDL, Saudi Arabia.