Impact of Islamic Finance on Economic Growth: Malaysian Experience

Islamic bank has recently received considerable attention as a result of its quantum growth. Malaysia is emerging as a leading player in Islamic finance in the world today. This paper shows whether the growth of Malaysian economies is influenced by total Islamic financing. We applied an ARDL model as a cointegration approach, on quarterly time series data (from 2018Q1 to 2022Q4) to examine and discuss the relation between economic growth and total Islamic financing. The findings show that banking Islamic finance is driving the growth of the economy in Malaysia, which is a result of the New Malaysian Economy program’s success in recent years, which aims to promote the growth of Malaysian’s economy by improving the proportion of Islamic finance in both Malaysia’s banking sector and globally. The real economy of Malaysia can be influenced by both the conventional and Islamic banking systems. This study focuses only on the effect of total Islamic finance on Malaysia’s economic growth. In the short term, we can conclude that Islamic banking has a significant and positive impact on Malaysia’s economic growth, so we suggest that countries like Algeria that are trying to boost economic growth with Islamic finance should use Malaysia’s successful experience like a way for achieving economic growth, enhancing the percentage of the banking Islamic finance.