Sustainable Business and Society in Emerging Economies
Vol. 4, No 1, March 2022
Volume and Issues Obtainable at Center for Sustainability Research and Consultancy
Sustainable Business and Society in Emerging Economies
ISSN: 2708-2504 & ISSN (E): 2708-2172
Volume 4: Issue 1 March 2022
Journal homepage: www.publishing.globalcsrc.org/sbsee
Islamic Finance: A Catalyst for Sustainable Development of Developed and
Developing Countries
Qaisar Maqbool Khan, SKANS School of Accountancy, Multan, Pakistan
Anam Zafar, Lecturer, Department of Commerce, Bahauddin Zakariya University, Multan, Pakistan
Saba Shabbir, Department of Commerce, Bahauddin Zakariya University, Multan, Pakistan
*Rehana Kouser, Department of Commerce, Bahauddin Zakariya University, Multan, Pakistan
*Corresponding author’s email address: rehanakousar@bzu.edu.pk
ARTICLE DETAILS
ABSTRACT
History
Purpose: Islamic finance includes arranging financial transactions and
Revised format: Feb 2022
financial instruments to satisfy traditional Islamic institutions that oppose
Available Online: Mar 2022
interest and participation in gambling.
Design/Methodology: The study has included a sample for eight years
Keywords
(2011-2018) of 19 developed and developing countries. The study used
Islamic Finance, Economic
the global Islamic finance country index and sustainable development
Development, Sustainable
index to compel the data concerning the main variables. The data for
Development, Financial
Economic development and financial development have been collected
Development.
from the world development indicator database of the World Bank. To
JEL Classification
moderate the problem of endogeneity generalized method of movement
F65, Q01
has been used as diagnostic testing.
Findings: Results of GMM shows that two variables broad money and
the Gross domestic product have a positive relationship with the Islamic
Finance country index, but the Stock traded turnover ratio, Sustainable
development, and Market capitalization has a negative.
Research limitations/implications: The stock traded turnover ratio has
significantly related to the dependent variable. Broad money has a
positive significant relationship with the dependent variable in both
countries developed and developing.
©2022 The authors, under a Creative Commons AttributionNoncommercial- 4.0
Recommended citation: Khan, Q. M., Zafar, A., Shabbir, S. & Kouser, R. (2022). Islamic
Finance: A Catalyst for Sustainable Development of Developed and Developing Countries.
Sustainable Business and Society in Emerging Economies, 4 (1), 205-218.
Introduction
Muslim people in Southeast Asian countries believe that Islamic finance is a form of financial
activity that need to follow Sharia law (Islamic Law) and also refers to investments accepted
under Sharia law (Siddiqi 1981).
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(Sura Al-Baqarah) Verse 279; "And if you do not do so, be informed of the war (against you)
from Allah and His Messenger. But if you regret, you may have your principal (thus) you do no
wrong, nor are you mistreated.”
Financial instruments such as Mudaraba and Musharaka reflect the sole contribution of Islamic
Finance towards the settlement of these instruments.
Other dimensions such as Riba, Gharer, and Maysir (gambling), etc. have the same concepts and
are related to other instruments. These mechanisms are strictly prohibited by Shariah because of
unlawful financing activities in the principles of Islam and can cause damage to society as well,
pre-modern Islamic world which is the period before the 18th century also known as the period of
western domination and does not provide a clear perception of the financial system.
Most financial advisors and policymakers are found to be interested in analyzing the portion of
economic growth due to Islamic finance.
Sustainable development is a concept, based on the assumption that is anticipated to meet the
needs of current and future generations without compromising the capability of the present
(WECD, 1987). Several studies provide evidence that sustainable development favorably
influences the Islamic financial system as Islamic finance fulfills the requirements of production
by institutions. Sustainable development becomes necessary to be considered in business
practices. Islamic finance needs to consider a significant tool to promote sustainable
development in developed and developing nations.
Sustainable development which is considered an essential component of economic growth is
based on principles that would promote social welfare and can help to alleviate poverty through
the use of natural resources. The social sector is concerned about issues relating to the general
public welfare, basic health and education services, safety standards, and respect for human
rights.
The development of the financial sector is considered a strategy, to aid the private sector to
promote economic growth by eradicating poverty from the society. Many studies have identified
the financial Sector development as the cost to overcome the flaws of the financial system.
The study attempts to determine to what extent practices of Islamic finance significantly
influence sustainable development, economic growth, and financial development and how much
level of these dimensions of sustainable development and economic growth can contribute
towards financial development. The objective of this research is to investigate the strong effect
of Islamic finance on achieving sustainable development in 19 developed and developing
countries for the period from 2011 to 2018.
Literature has investigated these dimensions with Islamic finance separately. So, these studies
are conducted in respect of FTSE country classification including developed and developing
countries to better know the influence of Islamic finance on dimensions of sustainable
development.
Literature Review
Islamic Financial Institutions operate in the same community where ordinary banks perform all
functions. The modern system of commercial banking was built on interest and the Islamic
interest rate was severely prohibited and declared a serious sin. Islamic finance was built to
provide an alternative to Gharar (High Risk of Outcome), Myser & Qimar (Type of Gambling),
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Pork Sales, and Nonprofits and Loss Sharing (Salman Ahmad Sheikh, 2014). Siddiqi (1999)
argued that this risk-sharing encouraged Muslim banks to be more efficient in their lending
decisions, which results to allocate more money as compared to non-Islamic banks. So, the
principle anticipated here is that there is a significant influence of Islamic finance on fiscal
growth.
Islamic finance and Economic Growth
Chowdhury &Abduh, (2012) investigated the strong association between the growth of Islamic
banks and economic growth in Bangladesh. Quarterly data are used from 2004 to 2011. Using
the merger approach and the Granger's causality method, Results show that the liquidity of
Islamic banks was positively and significantly related to long-term and short-term economic
growth.
Maamor & Abdullah, (2016) examined the relationship of Islamic finance with the economic
growth of 4 OIC countries from the period of 1990 to 2012. Results suggest that government
spending and exports have an impact on economic growth. Islamic funding was linked to the
economic development in 4 OIC countries, which indicates that the financial banking system will
promote economic growth.
Bakhita (2017) investigated the functioning of Islamic banks with economic growth. They
include the sample size of 6 banks in more than 6 states for the period of 2011 to 2013. Results
show an important relationship between the financial methods and found a negative relationship
between GDP and Z score and the Murabaha, Ijara. The test displays a negative relationship
among financial systems outside of Mudaraba. An insignificant relationship was found among
Murabaha, Z-score, and Mudaraba.
Ahmad & Ihsan, (2018) investigated the association between economic growth with the Islamic
banking system in Pakistan. The study used quarterly data ranging from 2006 to 2015. In the
analysis, unit root tests were used, descriptive statistics, regression analysis, Granger causal and
co-integration tests. Findings indicate that Islamic banking finance was better and was closely
associated with the economic development of Pakistan.
Nawaz et al., (2019) studied the dynamic link of Islamic finance with the economic growth of
Pakistan. To examine the effects of the financial system on the economic development and unit
root, co-integration and Granger causality test were used. The study used the time series of 2019.
Islamic funding, Islamic financial assets, and the population was used as an indicator of Islamic
finance while the indicators of economic growth were real GDP per capita used. Results show
that the Islamic financial system promotes economic development. A bidirectional relationship
was found between Islamic assets financing as well as population.
Salina Kassim, (2016) investigated the impact of Islamic finance on performances of major
macroeconomic parameters. Quarterly data were used for the period from 1998 to 2013. For
analysis, the ARDL approach was done. Results recommended that Islamic finance activities are
making significant influences on the real economy. Islamic deposits have no significant effect on
the real economy while a positive relationship between the Islamic deposits and the real
economy.
Grassa & Gazdar, (2013) investigated the influence of Islamic and conventional financial
development on economic growth. The data were used for the period from 1996 to 2011. For the
analysis, the generalized least square method, OLS, and panel data framework were used.
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Results show a significant association between Islamic finance and economic development but
no significant link between financial development and economic development in the five GCC
countries.
Abduh & Omar, (2012) examined the association between economic growth and Islamic banking
development for the period from 2003 to 2010 in Indonesia. The ARDL approach, co-integration
test, and error correction model were used for the short and long term. Results indicate a
significant link between economic growth and Islamic finance development.
Tabash, (2019) explored the major correlation between the economic development and Islamic
bank’s financial performance for the period from 2000 to 2014 in UAE. For the analysis, the
least-squares method combined with multipurpose testing was used. Results show that economic
development and Islamic banks’ financial performance are positively and significantly
correlated.
Al-Oqool, Okab, & Bashayreh, (2014) conducted this study and explored the link between
Jordan’s economic growth and Islamic financial banking expansion for the period from 1980 to
2012. Some proxies were used to measure the Islamic financial banking expansions which are
FINC, and DEPT while the economic growth indicator was real GDP. Unit root tests, cointegration tests, and Causality tests were used for the Results. Results show the bi-directional
causes among real-GDP and FNC.
Tabash & Dhankar, (2014) investigated the link between economic growth and Islamic financial
development in the Middle East for the period from 1990 to 2010. The study results were
analyzed by the Stationary test, co-integration, and granger causality. Results show that
economic growth can be enhanced by promoting the bank system in well-mannered the selected
countries. Long-run growth can be achieved by utilizing these activities and this would lead to
positive growth.
Ledhem & Mekidiche, (2020) investigated the relationship between Islamic finance and
performance in financial terms. The data used in the study was every quarter from the period of
2014 to 2018. The model for analysis used in the study was GMM. The result shows that Islamic
finance can contribute to internal growth features and return on equity (ROE) was the most
appropriate measure of growth.
Bakhita HGB, (2017) investigated the relationship between economic growth and Islamic
financial stability. Data was used from 2011 to 2013. Pearson regression analysis was used for
analysis. Results show that GDP indicates a significant, but negative relationship with modes of
finance such as Ijarah, Musharaka, Mudaraba, etc.
Kalim, Mushtaq, & Arshed, (2016) investigate the short-term and long-term connection between
economic growth and Islamic financial development for the period from 2006-2013 that was
based on quarters. The study used the co-integration model and error correction Model (ECMs).
Results indicated that if the banking industry performs its functions well it can contribute to
economic growth significantly. Findings were mainly based on the supply of Islamic banking
products in a specific economy.
Yusof & Bahlous, (2013) investigated Islamic finance and economic growth. The cointegration
test was applied for the period from 2000 to 2009. Results show that in short term Islamic
banking and economic development are significantly associated and strongly contributed in
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Malaysia and Indonesia than in other selected countries.
Yazdan, Farahani, & Sadr, (2012) explored the association between economic development and
Islamic banking development. Autoregressive distributed lad (ARDL), error correction model,
and bound testing approach of co-integration were used for the analysis. Quarterly data were
used from 2000:1 to 2010:4. Results show that Islamic financial development and economic
development are significantly associated in both the short and long run in Iran and Indonesia.
Abduh, Brahim, & Omar, (2012) examined the association between economic growth and
development of Islamic and traditional finance for the period from 2000:1 to 2014:4. Cointegration test and vector error correction model (VECM) were employed. Results show a
significant and positive association between Islamic finance development and economic growth
in the long run, but no evidence of a short-term link between them. Economic development and
Islamic finance were bi-directional relationships
Yükselv & Canöz, (2017) explored the effect of Islamic banking on economic growth and
industrial development. For analysis, VAR Granger causal analysis was used. Quarterly data
were used for the period 2005 and 2016. Results show that loan from Islamic banks has an
insignificant relation to economic expansion due to the very low percentage of Islamic banking
in the banking sector.
Sarwer, Ramzan, & Ahmad, (2013) explored the dynamic interaction between economic growth
and Islamic finance in Pakistan. They conducted interviews about the economic development
and the role of Islamic finance for the period 2013. Results suggest that Islamic banking takes a
positive influence on economic development and indicate that economic growth could benefit
from improving the infrastructure of Islamic finance in Pakistan.
Islamic Finance and Sustainable Development
Eradication of poverty through social inclusion and financial inclusion are some of the key parts
of Islamic support schemes. Many researchers such as Nedra, & Khoutem, (2012) created that in
a good Islamic country, contractors do not know the householder, speculation, and limited
knowledge. Therefore, financial markets can promote essential public objectives by directing
market participants to specific products. The community can benefit from the Islamic way of
promoting development, equal opportunities, and equal distribution of anti-poverty resources.
Asutay, (2012) explores that Islamic finance development would need economic competence to
meet the essential for appropriate social support selections. Expansion of finance and fiscal
consolidation take a significant influence on financial development in many forms of economics.
The expansion of Islamic financial work is driven by the development of risk sharing, better
assessment and monitoring of borrowers, increased value for money and productivity, meeting
local cultural preferences, poverty reduction, improved public health, improved education, and
gender equality, and reduced risk through small and medium enterprises.
Sarwer et al., (2013) examined the particular importance of sustainable development from an
Islamic perspective. They studied the strong relationship between the EG and Islamic banks in
Pakistan and concluded that developments in Pakistan’s Islamic financial system provide an
opportunity for economic development.
Uddin, & Ahmed, (2018) investigated the association between Islamic banks as well as green
banks contributing to sustainable development. The study used a systematic questionnaire that
included various sizes in the green Islamic bank of Bangladesh. Results show that Islamic banks
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play an active role in green banks that improve the environment such as cost and energy
efficiency, conservation of natural resources, and the need to respect all living things.
Ahmed et al., (2015) examined the financial perspective of Islam that is playing a supporting role
in the goals of sustainable development. Findings show that it all depends on the role investor
plays in the direction of the role of the Islamic financial industry in supporting the goals of
sustainable development. It is not only Islamic finance that claims to make sustainable
development, while other things are changing as well.
This study aims to introduce the main ways in which IFIs shows a key part in achieving the goals
of sustainable development. This includes five key areas to consider. We begin our discussion of
the role of Islamic Financial Institutions in contributing to the stability and resilience of the
financial sector, followed by inclusive finance, and reducing the vulnerability of the poor and
risk reduction. Finally, the contribution of IFIs to environmental and social issues, as well as
infrastructure development is reviewed (Sadiq & Mushtaq, 2015).
Ismail & Shaikh, (2018) discussed the role of Islamic social finance and commercial finance in
contributing to the achievement of sustainable development goals, especially in many Muslim
countries. Islamic finances have a positive impact on the ecosystem. Islamic social financial
institutions such as Zakat and Waqf can contribute to increasing efforts in businesses and noncommercial programs.
Financial Development and Economic Growth
Puatwoe & Piabuo, (2017) examined the impact of financial development on the evolution of the
economy. Autoregressive distributive lag was used as a statistical test. Results show that all
proxies of financial expansion have positive and tangible effects on economic expansion.
This study used the time series data collected from the CBN publication of Nigeria. Opoku,
Opoku, Ibrahim, & Sare, (2019) Investigated the effect of financial development on economic
growth for the period from 1970 to 2010. Stationary tests, co-integration tests, and VCEM were
used for analysis, and the Granger method was performed as appropriate. The result shows that
financial development takes a major effect on economic growth.
Rahman, Saba, &Kouser, (2019) focuses on social and financial development in the development
of a developed, developing economy and borders. OLS, static results, and random effect models
were used from the period of 2001 to 2017. Results show that GDP, capitalization market,
interest rate, foreign direct investment, and openness of trade were positively and significantly
correlated rather than a positive but insignificant relationship in the case of developing countries.
There was a positive association between market capitalization, Foreign Direct Investment, CO2
emissions as well as per capita GDP per health cost in the Frontier economy. Capital formation,
interest rates, household spending, and commercial openness have negative and significant
relationships with individuals. Domestic debt, market capitalization, interest rates, last family
spending, and CO2 emissions in developed countries have a negative correlation with per capita
GDP.
Zarrouk, Ghak, & Al Haija, (2017) examined the link between financial development, mainly
real economic growth, and Islamic finance for the period from 2008 to 2013 in the United Arab
Emirates (UAE). The Granger causal was used for analysis. Results show that Islamic finance is
positively and significantly correlated with economic and insignificantly correlated with
financial development.
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Abid, Bahloul, & Mroua, (2016) investigated that financial growth and economic expansion
were correlated in ten MENA countries from the period of June 2005 to December 2013. An
MVAR model was used for the analysis. Findings suggested that the dominance of GDP growth
has a greater impact on the dominance of the stock market.
Marozva, (2014) examined the link between financial development and economic growth from
the period of 1994 and 2012. They used the autoregressive distributed lag (ARDL) and the
Granger causality test. Results show that economic growth and market capitalization were
significantly correlated.
Guptha & Rao, (2018) examined the relationship between economic growth and financial
development from the period of 1996 to 2016. The causality test was used in this study. Results
show that there is no causality between finance and expansion in BRICS states.
Liu & Hsu, (2016) explored the link between finance and growth indicators for the period from
1981 to 2001 in three Asian states; (GMM) was applied for the analysis. Results show that
financial development has a positive effect on the economy of Taiwan, however an adverse
impact on other countries.
Financial Development, Economic Growth, and Sustainable Development
Jalil & Feridun, (2011) examined the impact of energy use on financial growth, and economic
development in China for the period from 1953 to 2006 by using Auto-Regressive Distributed
Lag Model. Results show that monetary growth was not caused by environmental pollution in
China. Results found that financial reforms led to a reduction in pollution.
Tamazian, Chausa, & Vadlamannati, (2009) examined the link between financial development,
environmental growth, and economic growth for the period from 1992 to 2004. Results show that
financial and economic growth influenced the environmental progress of the BRICs nation.
Results show that financial stability, as well as openness, is major elements in reducing CO2
emissions.
Shahbaz& Lean, (2012) investigated the association between electricity ingestion, financial
development, and economic growth for the period from 1971 to 2008. Autoregressive distributed
the lag bound test, co-integration and performance testing applied for analysis. Results show a
long-run association between electricity ingestion, financial development, and economic growth
in Tunisia.
Economic growth, energy consumption, financial development, trade openness, and CO2
radiation are correlated for the period from 1975 to 2011 in the situation in Indonesia examined
by (Shehbaz et al., 2013). The stationary test, ARDL test, Granger causal strategies, and the
robustness test have been assessed through an innovative accounting approach (IAA). Results
show that CO2 radiation was increased due to the economic growth and energy while financial
development and trade openness are integrated. Economic growth or openness to business can
further show a role in improving the excellence of the environment.
Shahzad et al., (2017) examined the link between trade openness, financial development, energy
consumption, and carbon radiation for the period from 1971 to 2011 in Pakistan by using the
ARDL cross-border evaluation process and co-integration testing. Granger’s results show a lack
of direction from financial development to energy consumption, openness to business and carbon
emissions, and a two-way risk between electricity consumption and development finance.
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Martínez‐Ferrero & Frías-Aceituno (2015) investigated the relationship between corporate
sustainability and financial performance (FP) in 25 countries for the period from 1960 and 2002.
Results show a positive association between social commitment as well as FP.
Busch, Bauer, & Orlitzky, (2016) explored the starring role of financial markets for sustainable
development. Financial market contributors are gradually incorporating governance, social and
environmental factors into their venture assessments. Results show that the financial market
plays a positive and significant role in promoting sustainable development indicators.
Mahmood, Z., et al (2019) and Ali et al (2021) discuss the economic perspective of corporate
social responsibility which leads toward sustainable development.
Research Methodology
The study examines the relationship between Islamic finance, Economic growth, sustainable
development, and financial development. The current study involves the sample based on data
availability and accessibility. The selected countries (6 Developed & 13 Developing) are based
on FTSE classification. The followings are the details of the variables.
𝑰𝑭𝒊𝒕 = 𝜶 + 𝜷𝟏𝑺𝑫𝒊𝒕 + 𝜷𝟐𝑭𝑫𝒊𝒕 + 𝜷𝟑𝑬𝑮𝒊𝒕 + 𝜺𝒊𝒕 Where:
Econometric Model
IF denotes Islamic Finance, SD signifies Sustainable Development, FD indicates Financial
Development, and EG denotes Economic Growth.
Analysis and Results
The table shows the descriptive statistical results (a measure of central tendency and measure of
variability) of all the research variables from 2011 to 2018.
4.1 Overall Descriptive Statistics for Developed and Developing Countries Table 1
VARIABLES
IFCI
OBS
152
MEAN
10.73691
STD. DEV.
18.22392
MIN
0
MAX
81.01
M2
152
89.61105
35.45156
49.17
189.28
STRNR
152
66.24809
52.34683
16.01
262.43
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MC
152
87.97678
57.12485
21.36
259.27
GDP
152
2.463816
2.226578
-3.022
6.53
SD
152
5.331382
0.8591688
4.233
11.175
If the mean value of any variable is greater than the standard deviation value of that same
variable it indicates that the data is free from outliers. In our statistical analysis, all the variables
have the value of mean greater than the value of standard deviation except IFCI and GDP.
Because these two variables have outliers, and their mean value is less than the value of standard
deviation. Now the sustainable development, market capitalization, stock trade turnover ratio,
and broad money are acceptable because their mean is greater than the Standard Deviation and
the GDP is near acceptable because of minor differences in mean and standard deviation.
4.2 Descriptive Statistics for Developed and Developing Countries: Table 2, 3
Results for Developed Countries:
Results for Developing Countries:
Descriptive Statistics:
Descriptive Statistics:
OBS
MEAN
STD. DEV.
MIN
MAX
VARIABLES
OBS MEAN
STD. DEV. MIN
MAX
IFCI
104
15.08846
20.63134
0
81.01
IFCI
48
1.308542
1.223737
0
4.28
M2
104
81.89338
136.8039
49.16938
136.8039
M2
48
106.3338
41.18979
51.6305
189.274
STRNR
104
59.44804
54.52664
16.00865
183.218
STRNR
48
80.98127
44.31468
26.64696
262.4277
MC
104
68.90458
37.49681
21.35571
142.8941
MC
48
129.2999
69.67173
31.63384
259.2718
GDP
104
2.913039
2.375731
-0.60113
6.499317
GDP
48
1.490297
1.46543
-3.022425
5.868557
SD
104
5.118952
0.4949
4.333
5.87
SD
48
5.791917
1.230639
4.233
VARIABLES
11.175
In our statistical analysis of developed countries, all the variables have the value of mean greater
than the value of standard deviation. Now Islamic finance, sustainable development, market
capitalization, stock trade turnover ratio, gross domestic product, and broad money are
acceptable because their mean is greater than the Standard Deviation.
In our statistical analysis of developing countries, all the variables have the value of mean greater
than the value of standard deviation except IFCI. Because this variable has outliers, and their
mean value is less than the value of the standard deviation. Now the sustainable development,
market capitalization, Gross domestic product, stock trade turnover ratio, and broad money are
acceptable because their mean is greater than the Standard Deviation.
In the Results of the correlation matrix, the Islamic financial development indicator was
negatively associated with economic development, financial development, and sustainable
development. But the two indicators of financial development have positively correlated with
economic development and sustainable development indicators but have a negative association
with IFCI.
4.3 Overall Correlation for Developed and Developing Countries:
Table No.4
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4.4 Correlation between Developed and Developing Countries: Table No. 5 and 6:
Results for Developed Countries:
Results for Developing Countries:
In table 5 Results of the correlation of all variables are given. IFCI has positively correlated with
IFCI, M2, MC, STRNR, and GDP, but has negatively correlated with the SD variable. M2 was
positively correlated with IFCI, SD, and MC but negatively correlated with STRNR and
GDP.STRNR was positively correlated with IFCI but negatively correlated with GDP, M2, MC,
and SD. GDP was positively correlated with IFCI and MC, but GDP was negatively correlated
with SD, M2 and STRNR, and MC. SD was positively correlated with M2, and MC but a
negative correlation with IFCI, GDP, and STRNR.
In table 6 Results of the correlation matrix, Islamic financial development indicators contain a
positive association with two indicators of financial development but are negatively associated
with economic development and sustainable development. But the two indicators of financial
development have positively correlated with Islamic finance, economic development, and
sustainable development.
Test
BPLM
Hausman
Overall Countries
0.000
0.4276
4.5 Diagnostic Test for panel data
Developed Countries
1.000
-----
Developing Countries
0.000
0.9928
The results of the BPLM test are significant because the value of probability is 0.00 which is less
than 0.05 % the houseman test is accepted for further test and simply regression test is rejected
which is the best fit in our model.
Hausman’s random effect test result indicates probability is greater than 0.05 which means the
random effect test is accepted and fixed effect is rejected and the Hausman random effect runs in
presence of both dependent and independent variables.
Regression Analysis for Developed and Developing Countries
The first Colum of this table shows that M2 has a positive but significant relationship with IFCI.
STRNR has a negative and significant relationship with the dependent variable of IFCI. The
variable of MC has a negative and insignificant relationship with the dependent variable. The
variable of GDP has a negative, but significant relationship with the dependent variable. SD has
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positive but insignificant associations with the dependent variable of IFCI in overall countries.
The second Colum of this table shows that M2 has a negative and insignificant relationship with
IFCI. STRNR has a positive and significant relationship with the dependent variable of IFCI.
The variable of MC has a positive and significant relationship with the dependent variable. The
variable of GDP has a positive but insignificant relationship with the dependent variable. SD was
negative, but insignificant associated with IFCI in developed countries.
The third Colum of this table shows that M2 has a positive but significant relationship with IFCI.
STRNR has a negative and significant relationship with the dependent variable of IFCI. The
variable of MC has a negative and insignificant relationship with the dependent variable. The
variable of GDP has a negative, but significant relationship with the dependent variable. SD was
positive, but insignificant associated with IFCI in developing countries.
4.6 Regression Results for Developed and Developing Countries:
Random Effect for Pooled OLS for Developed Random
Effect
overall Countries
Countries
Developing Countries
Broad Money (M2)
0.2432864***
-0.0014153
0.285666**
(0.0787246)
(0.008269 )
(0.111145)
Stock Trade Turnover -0.0536053*
0.0141125***
-0.093973*
Ratio (STRNR)
(0.0314514 )
(0.0035183)
(0.054651)
Market
Capitalization -0.0756967
0.012102***
-0.037411
(MC)
(0.0460819)
(0.0042169)
(0.087856)
Gross Domestic Product -0.7404181*
0.00571
-1.007613*
(GDP)
(0.4102721)
(0.0978637)
(0.586924)
Sustainable Development 0.6884822
-0.1504768
2.920395
(SD)
(1.340148)
(0.1696944)
(3.598460)
Cons
-2.699749
-0.3855527
-12.15558
(10.0314)
(0.9753267)
(19.89743)
Observation
152
48
104
R2
0.1471
0.4805
0.1968
F- Stat (Prob)
0.0011
0.000
0.0005
Standard Error in brackets. ***p<0.01, **p<0.05, *p<0.1
IFCI
for
Panel Generalized Method of Moments
This table shows that M2 has a positive but significant relationship with IFCI. STRNR has a
negative and significant relationship with the dependent variable of IFCI. The variable of MC
has a negative and insignificant relationship with the dependent variable. The variable of GDP
has a positive but significant relationship with the dependent variable. SD has a negative, but the
insignificant association with the dependent variable of IFCI.
Variables
4.7 Dynamic GMM for Developed and Developing Countries:
Dynamic GMM cof and St. error
Broad Money (M2)
0.290506*** (0.092371)
Stock Trade Turnover Ratio (STRNR)
-0.057082*** (0.016902)
Market Capitalization (MC)
-0.039445
(0.07657)
Gross Domestic Product (GDP)
0.708278**
(0.289158)
Sustainable Development (SD)
-0.304267
(0.875361)
IFCI(-1)
0.6988***
(0.018914)
Observation
95
Instruments Rank
19
J- statistics
0.1433
Standard Error in brackets. ***p<0.01, **p<0.05, *p<0.
Conclusion and Results
Based on research results, there is an insignificant and negative association between Islamic
finance and broad money. IFCI has a positive and significant association with STRNR and MC.
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Vol. 4, No 1, March 2022
GDP has insignificantly and positively related to the explanatory variable (IFCI). SD has
insignificant but negative relation with IFCI. The outcome is specifically related to developed
countries. M2 has a significant and positive connection with IFCI in developing countries. The
outcomes show that STRNR has a negative and significant relationship with the dependent
variable (IFCI). MC has a negative and insignificant relationship with the dependent variable in
developing countries perspectives. GDP has a significant and negative association with the
explanatory variable. SD demonstrates a positive but insignificant association with the
explanatory variable of IFCI in developing countries. M2 has a significant and positive
relationship with IFCI. STRNR has a negative and significant relationship with the dependent
variable of IFCI. The variable of GDP has a positive, but significant relationship with the
dependent variable. SD has a negative, but the insignificant association with the dependent
variable of IFCI in developed and developing countries both. The results of this study support the
endogenous growth theory because its states that economic growth can be achieved through
internal processes.
This study mainly contributes three independent variables: sustainable development, financial
development, and Economic growth, and one dependent variable, Islamic financial growth. The
previous studies took two or three variables combined, but no study combined all four variables
to the best of our knowledge. This research takes the country-level data for analysis while other
studies selected some specific countries. This study includes a total of 19 countries which are
purely based on the availability of data.
improving the further results.
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Appendix
List of Countries Involve in the Study: FTSE Classification
218