The relationship between Islamic banking development and inclusive growth in Malaysia - an empirical analysis

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Malaysia is one of the fastest growing economy with well-developed dual banking system (Islamic and conventional). The remarkable growth of Islamic banking has led to empirically evaluate its socio-economic implications. This paper is an attempt in this direction to assess the effect of Islamic banking on inclusive and sustainable growth covering three aspects namely, economic growth, income distribution and environment. The study applies ARDL bounds test approach to cointegration. To analyze the impact of Islamic banking on economic growth we use quarterly data set for the period from 2000-2018 and annual data set from 1984-2020 for income inequality and CO2 Emission. The findings suggest that the Islamic banking development contributes only to the economic aspects (economic growth). No evidence has been found to support the contribution of Islamic banking system on social and environmental aspects. The results show that Islamic banking development does not influence income distribution either in short or long-term and decline the quality of environment (increases CO2 emission). The overall finding suggests that Islamic banking failed to foster inclusive & sustainable growth. Malaysia has a dual banking system and both system collectively affect the economy, however this research is limited to evaluate the effect of Islamic banking only on growth, inequality and emission. The research covers only 19 years (2000-2018) to study the relation between Islamic banking and economic growth in view of data availability. The result of no significant impact of Islamic banking on income inequality and positive relationship with CO2 emission is alarming. By virtue, the Islamic finance is supposed to achieve inclusive growth and minimize the gap in income & wealth inequality and contribute to improve quality of environment to achieve sustainable growth. The policymakers need to relook into the business model of Islamic banks with a view to integrate the social and environmental aspects in their business models along with economic & commercial aspects. Moreover; to design policies and improve governance mechanism to minimize imperfections and constraints in Islamic financial system and steer its development towards inclusive and sustainable growth. Further to enhance the participation of Islamic banks in the social business as part of their corporate social responsibilities. The study differs from previous studies as it tries to uncover the relationship between Islamic banking and inclusive & sustainable growth. Further it also contributes to the contemporary debate on the effectiveness of Islamic finance to promote inclusive and sustainable growth.
Islamic banking , Economic growth , Income distribution , Environment , Malaysia , Project paper (MSc)
Alam, A. (2021). The relationship between Islamic banking development and inclusive growth in Malaysia - an empirical analysis (Master dissertation). INCEIF, Kuala Lumpur. Retrieved from

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