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Islamic banking boosts economies in the Middle East and North Africa

August 18th, 2020 South Ural State University
Islamic Banking Boosts Economies in the Middle East and North Africa
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Islamic banking is developing at an impressive pace, so understanding this process is of interest to scientists in the context of the economic growth of countries in various economic conditions. Aviral Kumar Tiwari, doctor of economics, professor at South Ural State University, together with colleagues from Tunisia, Oman and the United States, analyzed the relationship between the development of Islamic banking and economic growth indicators in Islamic countries of the Middle East and North Africa, as well as other countries. The research results were published in Economic Systems.

Islamic banks provide a significant share of their loans for construction and real estate projects, which in turn contributes to the expansion of fixed capital, which is the main source of economic growth. They can increase the savings of people who refrain from keeping money on deposit in conventional banks, which consistently increases the number of domestic savings and the share of financial intermediation.

The researchers examined the impact of the development of Islamic banking on economic growth in the Middle East, North Africa, and the Persian Gulf.

"We believe that all the variables of Islamic banking (loans, net loans, deposits and the size of the Islamic Bank) have a positive impact on economic growth in the normal and slow development of the financial sector, while in the context of rapid expansive development of the financial sector, Islamic Bank loans reduce economic growth for Islamic countries. Perhaps because of the higher risk distribution during economic 'overheating' or because of their propensity to invest in real estate, which may not be very productive," Dr. Tiwari explains.

The result of the study confirmed the assumption that there is an asymmetric relationship between these two variables in different economic conditions. Domestic financing provided by the Islamic banking sector in the Middle East and North Africa has been found to contribute to economic growth.

"Politicians should implement economic and financial reforms to encourage foreign direct investment and ease restrictions that prevent foreign investors from entering. This is the goal of future innovations recently adopted by the Gulf countries (for example, the Vision 2030 strategy for Saudi Arabia and Qatar). In addition, banks should be careful in allowing private sector lending to accelerate. Finally, the authorities should support increased investment in human capital to allow the economy to develop faster, and increased trade openness can be a positive factor for economic growth," Dr. Tiwari says.

According to SUSU scientists, the results of the study will have important political consequences. The conclusions will help to form the basic principles of a new economic policy for the countries of the Middle East and North Africa.

More information:
Walid Mensi et al. Impact of Islamic banking development and major macroeconomic variables on economic growth for Islamic countries: Evidence from panel smooth transition models, Economic Systems (2019). DOI: 10.1016/j.ecosys.2019.100739

Provided by South Ural State University

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