Islamic banking and economic growth: the Indonesian experience

Abstract

Purpose The purpose of this paper is to examine the short‐run and the long‐run relationships between Islamic banking development and economic growth in the case of Indonesia. Design/methodology/approach Using quarterly data (2003:1‐2010:2), this paper utilizes the bound testing approach of cointegration and error correction models, developed within an autoregressive distributed lag (ARDL) framework. Findings The results demonstrate a significant relationship in short‐run and long‐run periods between Islamic financial development and economic growth. The relationship, however, is neither Schumpeter's supply‐leading nor Robinson's demand‐following. It appears to be bi‐directional relationship. Originality/value This paper uses empirical evidence to show the role of Islamic banks' financing towards economic performance of a country. To the best of the authors' knowledge, the study on the role of Islamic banking development towards economic growth is limited, particularly in the context of Indonesia.