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Does Islamic Banking Development Favor Macroeconomic Efficiency? Evidence on The Islamic Finance – Growth Nexus

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  • Laurent Gheeraer
  • Laurent Weill

    (EM Strasbourg Business School, University of Strasbourg)

Abstract

This paper evaluates if the development of Islamic banking influences macroeconomic efficiency. We contribute then to the analysis of the relation between Islamic finance and economic growth. We do so by applying the stochastic frontier approach to estimate technical efficiency at the country level for a sample of 70 countries. We use a unique hand-collected database, which covers Islamic banks worldwide over the period 2000-2005. We find evidence that Islamic banking development favors macroeconomic efficiency. We have support for a non-linear relation with efficiency for Islamic banking development, measured by credit or by deposits. Increasing Islamic banking development enhances efficiency until a certain point beyond which expansion of Islamic banking becomes detrimental for efficiency.

Suggested Citation

  • Laurent Gheeraer & Laurent Weill, 2013. "Does Islamic Banking Development Favor Macroeconomic Efficiency? Evidence on The Islamic Finance – Growth Nexus," Working Papers 764, Economic Research Forum, revised Sep 2013.
    • Handle: RePEc:erg:wpaper:764
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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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