Role of Islamic banking in economic growth: Case analysis of Malaysia

Abstract

In the Islamic paradigm, the banking sector aims at mobilizing financial resources and investing them in an attempt to achieve predetermined social and financial objectives, by following a system of reasonable profit and return from investments. Interest being the cogwheel of the modern banking, is strictly prohibited in the Islam form of banking. This paper is framed with an intention to outline in brief the conceptual framework of Islamic Banking, while aiming at conducting a deep dive analysis of its effectiveness. It seeks to examine the relationship between economic growth and development of Islamic Finance in Malaysia, using econometric analysis. The paper adopts a mathematical approach to examining practically the efficacy of Islamic finance in the perspective of an economy's GDP. The exploratory study on the subject matter was carried out by empirically analysing the relationship between Islamic Banks ‘growth, Gross Domestic Product Growth and Gross Fixed Capital Formation Growth.