Islamic Finance and Economic Growth in the Kingdom of Saudi Arabia (KSA)

Author(s)

Mosab I. Tabash and Raj S. Dhankar

Affiliations

Faculty of Management Studies (FMS) University of Delhi, Delhi-110007, India

Abstract

This paper examines the relationship between the development of Islamic finance system and economic growth in the Kingdom of Saudi Arabia. The relationship between Islamic banking and economic growth is done using econometric analysis. In this analysis, we use Islamic banks’ financing credited to private sector through modes of financing as a proxy for the development of Islamic finance system and Gross Domestic Product (GDP), Gross Fixed Capital Formation (GFCF) and Foreign Direct Investment inflow (FDI) as proxies for real economic growth. For the analysis, the unit root test, co-integration test and Granger causality tests were done. Based on the availability of data, time series data from 1990 to 2010 is used to examine the relationship between Islamic banks’ financing and GDP, FDI, and GFCF. Data for all variables are stationary after first difference. The co-integration results provide an evidence of a unique cointegrating vector. In other words, there is a long-term stable relationship between Islamic banks’ financing and economic growth in the Kingdom of Saudi Arabia. That means Islamic banks’ financing and economic growth relationships are moving together in the long- run.

The results from causality tests show that causality relation exist from the Islamic banks’ financing to investment and Foreign Direct Investment (FDI) of the Kingdom of Saudi Arabia. The results indicate that Islamic finance is a suitable environment for attracting FDI and FDI reinforces economic growth.

Keywords

Islamic finance, Economic growth, Causality, KSA

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