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International Journal of Islamic and Middle Eastern Finance and

Management
Does Islamic bank financing contribute to economic growth? The Malaysian case
Nejib Hachicha Amine Ben Amar

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Nejib Hachicha Amine Ben Amar , (2015),"Does Islamic bank financing contribute to economic
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Does Islamic bank financing


contribute to economic growth?
The Malaysian case
Nejib Hachicha
Faculty of Economics and Management, University of Sfax, Sfax,
Tunisia, and

Amine Ben Amar

The
Malaysian
case
349
Received 5 July 2014
Revised 26 November 2014
8 March 2015
Accepted 9 May 2015

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PSL, Paris Dauphine University, Paris, France


Abstract
Purpose The purpose of this paper is to investigate empirically the impact of the Islamic Bank
Financing on Malaysias economic growth over the period 2000Q1-2011Q4.
Design/methodology/approach A neoclassical production function augmented by some
indicators of Islamic bank finance has been the theoretical framework for this papers empirical
investigation. The unit root tests show that all the variables are integrated of order 1. The test of
Johansen and Juselius (1990) has shown the existence of a single cointegrating relationship between the
gross domestic product (GDP), the investment, the labor force and the indicator of Islamic bank finance.
Hence, an error correction model has been constructed to estimate the economic growth elasticity with
respect to the different Islamic bank finance indicators.
Findings The estimated elasticities show that, in the long run, the GDP in Malaysia is not sensitive
to the Islamic financing. The estimation of an error correction model shows that the elasticity of the
Malaysian output with respect to the different Islamic financing indicators in the short run turn around
0.35. Thus, the effect of the different Islamic finance indicators on the economic growth in the long run
is less important than their effect in the short run. This economic result can be explained by the structure
of the Islamic bank financing that marginalizes the profit-and-loss sharing (PLS)-based instruments.
This turns out to be consistent with the economic reality in Malaysia, as the Islamic banks engage much
more in non-participatory activities whose impact is, generally, of short term.
Social implications To improve the efficiency of the Malaysian Islamic banks as financial
inter-mediaries that facilitate the capital accumulation and the economic growth, the paper suggests to
strengthen the weight of the PLS-based instruments in the loan portfolios of the Malaysian Islamic
banks. This may reduce inequalities and improve economic opportunities for people who have a high
potential to contribute to the capital accumulation and the creation of the value-added.
Originality/value The contribution of this paper is two-fold. On the one hand, it provides a further
contribution to the rare empirical literature relative to the impact of the Islamic finance on growth by
determining the elasticity of economic growth with respect to Islamic bank financing in Malaysia. On
the other hand, and to the best of the authors knowledge, this paper remains the first to correctly resort
to the error correction model in determining this elasticity.
Keywords Economic growth, Islamic banking, VECM
Paper type Research paper

1. Introduction
The effect of Islamic banks development on economic growth remains ambiguous at
both the empirical and the theoretical levels. Theoretically, the analytical contributions

International Journal of Islamic


and Middle Eastern Finance and
Management
Vol. 8 No. 3, 2015
pp. 349-368
Emerald Group Publishing Limited
1753-8394
DOI 10.1108/IMEFM-07-2014-0063

IMEFM
8,3

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350

of Chapra (1988, 2003), Hasan and Dridi (2010) have postulated that the integration of the
Islamic legal framework (said Sharia) in finance and banking has enhanced the
performance of the economic activity. These authors, along with many others, such as
Tag El-Din (2008), Khan and Bashar (2008), Gudarzi Farahani and Dastan (2013), Hasan
(2014), have recommended the implementation and generalization of the Islamic finance
principles. Indeed, they have considered these principles as necessary for the sake of
improving the contractual equity and economic efficiency. Conversely, Bjorvatn (1998),
Kuran (1995, 2004) as well as Yusof and Wilson (2005) have highlighted the fact that the
Islamic finance principles have handicapped the development of the economic activity.
Other economists such as Darrat (1988), Yousefi et al. (1997), Furqani and Mulyany
(2009), Ammar et al. (2013) have reached the result that the impact of the Islamic finance
on the economic activity has turned out to be ambiguous and that there are no proofs of
the superiority of the interest-free financial system over the interest-based one.
In this paper, we propose that the development of the Islamic banks, which are
supposed to meet and respect a particular legal framework (in particular, the prohibition
of riba and the integration of PLS principle[1]), does contribute in improving the
economic activity. This research proposal is based on the works of Chapra (1988, 2008a,
2008b), Tag El-Din (2008), Khan and Bashar (2008). The first author thinks that the
presence of the Islamic finance in the financial system allows a more prosperous activity
and sustainable growth through the reduction of poverty which, according to him, is a
necessary step for economic development. As for the second author, he considers that,
unlike the conventional finance, the Islamic finance principles allow a fairer distribution
of risks. Regarding Khan and Bashar (2008), they consider that implementing the
risk-sharing principle ensures the economic efficiency.
The estimation of the impact of the Islamic banking activity development has been
the subject of very few empirical studies. Most of them compare the effectiveness of the
interest-free monetary and financial system to the interest-based one. In this respect, and
by studying the Tunisian case over the period 1960-1984, Darrat (1988) has examined
the hypothesis stipulating that the financial and banking systems become more stable
as the interest is paralyzed. He has come to the conclusion that the interest-free monetary
system allows a better stability of the money velocity compared to the interest-based
one. Furthermore, he has shown that the demand for money is structurally more stable
in the absence of interest. He has also concluded that only the monetary and financial
assets which do not bear interests may be used by the Tunisian monetary authorities as
an appropriate intermediate target to reach its medium-term objectives.
Nine years later, Yousefi et al. (1997) published a paper in the same journal in which
Darrat (1988) submitted his study, criticizing his choice of Tunisia as a study case,
despite the fact that this country has no significant experience in Islamic banking[2].
However, they have proposed to replicate the study conducted by Darrat (1988) to the
Iranian case over the period 1967-1992 because, according to them, Iran has a more solid
experience than Tunisia in terms of Islamic banking. Their empirical findings partially
confirm the results of Darrat (1988) and, consequently, do not allow the validation of the
hypothesis assuming the superiority of the Islamic banks.
Charles et al. (2011) have tested the hypothesis stating that the Islamic finance is more
resilient to shocks than the conventional finance. To test this hypothesis, they have
examined the assumption whether the Islamic stock indices are more or less affected by
the changes in the volatility regimes than the conventional stock indices. They have

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found that the Islamic and the conventional indices were affected to the same degree by
the volatility changes, and discovered no empirical evidence allowing to validate the
hypothesis of the Islamic finance superiority. Arouri et al. (2013) have found that Islamic
finance helps save investors from financial crises by comparing some Islamic stock
indices to conventional ones.
Using cointegration and Granger causality tests, Furqani and Mulyany (2009) were,
to our knowledge, the first researchers who empirically investigate the relationship
between the Islamic finance and economic growth in Malaysia over the period
1997Q1-2005Q1. They have found that there is no causality between Islamic bank
financing and economic growth in the short run. Nevertheless, they have found that the
Islamic bank finance influences the fixed investment level positively. In the long run,
their results show the presence of bi-directional causal relationship between Islamic
bank financing and investments. As for the relationship between economic growth and
the Islamic finance development, the authors have revealed the existence of a
Robinsonian long-term relationship. That is to say that the development of Islamic
finance follows the development of the economic activities: the economic growth creates
a demand for the Islamic financial intermediation. Although the study of Furqani and
Mulyany (2009) has permitted to explain the relationship between Islamic finance and
economic growth, it remains based on limited observations which are not adequate in
econometrics of non-stationary time series.
Abduh and Chowdhury (2012) have investigated the long-run relationship and the
dynamic short-run interactions between the development of Islamic banking and
the economic growth in Bangladesh from 2004Q1 to 2011Q2. They have used the
cointegration methodology and the Granger causality tests. Their results suggest a
significant bi-directional relationship in the short run and the long run between the
Islamic bank financing and the economic growth. By using the bound testing approach
of cointegration and error correction models, developed within an ARDL framework,
Abduh and Omar (2012) also have obtained the same results for Indonesia over the
period 2003Q1-2010Q2. These results suggest that improving and developing Islamic
banking may be one of the relevant policies which should be considered to promote the
economic growth in Bangladesh and Indonesia.
More recently, Tabash and Dhankar (2014) have examined the relationship between
the development of Islamic finance and the real economic growth in UAE over the period
1990-2010. Their results reveal the existence of a long-run Schumpeterian
supply-leading relationship between Islamic bank financing granted to the private
sector (as a proxy for the development of Islamic finance) and economic growth (as
measured by gross domestic product (GDP)). They have also found that, in the long run,
the development of Islamic finance has positively and significantly contributed to the
increase of local and foreign investment, as measured by the gross fixed capital
formation and the foreign direct investment inflow, respectively. According to these
results, the UAE policy-makers should give more attention on Islamic finance to
stimulate the economy.
To narrow the gap in the empirical literature, Gudarzi Farahani and Dastan (2013),
Ammar et al. (2013) have used the panel approach. By studying the impact of the Islamic
financial development on the economic growth in 15 countries over the period 1990-2009
on a quarterly data, Ammar et al. (2013) have discovered a prevalence of not only a weak
correlation between economic growth and the variables measuring financial

The
Malaysian
case
351

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352

development but also a negative impact of the Islamic finance on economic growth.
Their results might be due to the use of inadequate indicators to measure the
development of the Islamic finance (cf. note[19]). As for Gudarzi Farahani and Dastan
(2013), they have examined the relationship between Islamic financial development and
economic growth by using panel data of nine countries over the period 2000Q1-2010Q4.
Their results show the presence of a significant relationship between Islamic financing
and economic growth, in both the short run and the long run. However, the long-run
relationship is stronger than the short-run one. The relationship that they have found is
neither Schumpeterian supply-leading nor Robinsonian demand-following. It seems
to be a bi-directional relationship.
In this respect, this paper provides an empirical evidence of the Islamic finance
developments effect on the Malaysian economic growth over the period
2000Q1-2011Q4. We have chosen to study the case of Malaysia for four reasons. First,
since its independence, it is one of the first countries to have made efforts to reform its
financial systems to integrate the Islamic finance. Second, the Malaysian financial
system is a mixed system characterized by the simultaneous presence of Islamic and
non-Islamic financial institutions. This allows us to obtain more indicators of the Islamic
financial development. Third, Malaysia is the country where the Islamic financial
engineering is developed most. Finally, relative to other countries that have integrated
Islamic finance, Malaysia is one of the few countries having a powerful statistical
system. This enables us to solve the problem of data unavailability characterizing the
developing countries.
The contribution of our paper is two-fold. On the one hand, it provides a further
contribution to the rare empirical literature relative to the impact of the Islamic finance
on growth by determining the elasticity of economic growth with respect to Islamic
bank financing in Malaysia. On the other hand, and to the best of our knowledge, our
paper remains the first to correctly resort to the error correction model in determining
this elasticity[3].
The rest of the paper is organized as follows. Section 2 analyzes the Malaysian
banking system reforms. Section 3 analyzes the relationship between Islamic finance
and economic activity. Section 4 presents the models theoretical specification. Section 5
outlines the econometric results and their economic and statistical interpretation.
Finally, section 6 highlights the major conclusions to be drawn.
2. The Malaysian banking system reforms
After their independence, countries with Moslem traditions discovered that Islamic
finance allows them to distance themselves from the colonial period. The oil shocks
represented the main technical element which enticed the concretization of the Sharia
compliant finance (Martens, 2001). Respect of the precepts of Islam was the slogan of
this new branch of finance. During the 1950s, while preparing its independence, the new
Malaysian government has supported the idea of creating some investment institutions
that meet the needs of the Moslem majority in the Malaysian society. In 1963, the
Malaysian government created Tabung Haji, a financial institution sponsored and
supervised by the state. Its main aim was to collect the household savings for the
pilgrimage (al-Haj) and invests in Sharia compliant projects[4].
In July 1983, under the Islamic Banking Act (IBA), Malaysia established the first
Islamic bank: Bank Islam Malaysia Berhad. Since 2005, the Central Bank of Malaysia

25

0.25
0.24

The
Malaysian
case
353

Islamic Banks Assets


Growth [YOY change]

0.23

20

0.22
0.21

15
in %

0.2
0.19

10

Non-Islamic Banks
Assets Growth [YOY
change]

0.18
0.17

0.16
0.15
2011-9

2011-4

2010-11

2010-1

2010-6

2009-8

2009-3

2008-5

2008-10

0
2007-12

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(Bank Negara Malaysia) has begun granting licenses to foreign Islamic banks to operate
in Malaysia. Currently, the Malaysian banking system contains 17 licensed Islamic
banks[5]. In March 1993, a decade after the vote for the IBA, the Malaysian authorities,
in compliance with the Islamic Banking Scheme (Skim Perbankan Islam)[6], authorized
some conventional banks[7] to have separate Islamic windows in their branches. Under
this scheme, the conventional banks must have a Shariaboard for their Islamic banking
activity. The international brilliance of this country was strengthened in 2002 when the
Central Banks and the National Monetary Authorities of some Islamic countries decided
to implant the headquarters of the Islamic Financial Services Board (IFSB) in
Malaysia[8]. Since 2005, the Bank Negara Malaysia (BNM) has transformed the Islamic
windows into Islamic subsidiaries. The removal of the commercialization constraints of
the Shariacompliant products by the conventional banks enhanced the liberalization
of the Islamic banking sector, which induced an increase in the number of participants
in the sector. In June 2011, 15 conventional banks already offered Islamic banking
services in Malaysia.
The political will to implement an adequate legal and technical infrastructure for the
Islamic finance has contributed to strengthen the weight of the Islamic banking system.
Figure 1 illustrates this catch-up effect: over the period 2007-2011, Islamic banking
assets increased at a rate faster than the conventional ones. Assuming that, at the end of
2011, the growth rates (YOY) of the Islamic and conventional banking assets remained
constant (25.14 and 13.14 per cent, respectively), we find that the assets size of the two
sub-systems (Islamic and conventional) will become equal in 2025[9]. The post-colonial
political orientations and financial reforms have not only facilitated the integration of
the Islamic bank finance in the Malaysian financial system but also allowed Malaysia to
become an international center for the Islamic finance, as indicated by Furqani and
Mulyany (2009).
As mentioned before, Malaysia has implemented financial reforms aiming at
facilitating the integration of the Islamic financial institutions in its financial system.
The fast and remarkable growth of the Islamic financial institutions weight compared
to the conventional ones in Malaysia proves the success of its implementation strategy.
The Islamic banking sub-system has grown more and more into importance in the
Malaysian banking system in terms of both balance sheet size (cf. Figure 1) and

Source: BNM/Authors calculations

Weight of the Islamic


Banks Assets with
regard to the
Convenonal Banks
Assets [Right Scale]

Figure 1.
Islamic banks assets
versus conventional
banks assets in
Malaysia

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354

participant number. This revitalization of the Malaysian banking sector may have an
impact on the economic activity. For example, the annual average growth (6.3 per cent)
of the Islamic banking finance over the period 2000Q1-2011Q4 was accompanied by a
2.7 per cent growth of the economic activity (measured by the GDP) over the same
period. Although the trend of these two aggregates seems to confirm the analyses of
Chapra (1988, 2008a, 2008b), Tag El-Din (2008) as well as those of Khan and Bashar
(2008)[10], adequate statistical and econometric evaluations are necessary to examine
the macroeconomic impact of the Islamic banking financing development.
3. Islamic finance and economic activity
3.1 Islamic finance and economic opportunities
Demirg-Kunt and Levine (2008) think that, by excluding a large share of the
population from access to finance, the financial system contributes significantly to the
persistence of inequality and to the limitation of economic opportunities for the poor.
Following the same logic, Thurow (1980) has argued that, in a conventional banking
system, the credits are granted to those who are lucky instead of financing the projects
of the most intelligent or meritocratic (Thurow, 1980). So, can a banking system
governed by the Sharia effectively reduce the exclusion of some population groups?
Theoretically, the answer is yes. In Islamic law, the exploitative or unfair contracts are
impermissible. The Islamic finance offers Sharia compliant financial products that
are supposed to meet the financial needs of the population while being in harmony with
the religious beliefs of some social groups. Some products offered by the Islamic finance
(including Mudharaba and Musharaka) are not based on the debtors creditworthiness
but rather on the projects economic viability and on the debtors entrepreneurial
abilities[11]. This encourages the entrepreneurs who have investment projects to seek
funding from the Islamic banks. Moreover, the Islamic finance does not only offer its
services exclusively to the Muslims, but also to all the economic agents in the society. It
is called Islamic just because it has to respect the Sharia principles when structuring
its products. Consequently, from this perspective, the Islamic finance can, theoretically,
reduce the proportion of people excluded from having access to finance. This allows the
Islamic finance to contribute in reducing the inequalities and improving the economic
opportunities for poor people who have a high potential to contribute to the creation of
the value-added[12].
3.2 Islamic bank functions and economic activity
It is worth highlighting that the Sharia prohibits the borrowerlender relationship as
established by the traditional bank and introduces a new participatory associative
relationship between the intervening parties in financial transactions. This legal
framework considers that the sharing of profits and losses among the funds providers
and those who provide labor is the just and fair alternative which has to replace the
interest rate practice. This structure of risk allocation makes the providers of funds more
enticed to collect, ex ante, information about the project and about the agent in need of
finance (entrepreneur) and to exercise, ex post, monitoring of the projects they fund.
Khan and Bashar (2008) think that the implementation of the PLS principle ensures
economic efficiency and leads to optimal levels of production, consumption and
exchange. By implementing the PLS principle, the Islamic finance is concerned with the
economic viability of the projects rather than the personal solvency of the entrepreneur,

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because the most creditworthy entrepreneur may not carry the most viable projects. The
financial instruments which implement the PLS principles effectively are the
Mudharaba and Musharaka contracts. Yet, the Mudharaba contract represents various
risks for agents with a financing capacity, such as the project selection risk, the risk of
opportunistic behavior (adverse selection and/or moral hazard)[13] from the user of
funds (entrepreneur), etc. To reduce these risks, the agents with financing capacity
(AFC) must actively monitor the entrepreneurs funds. Nevertheless, this monitoring
process can be so expensive (in terms of time and money) that some AFC choose not to
provide fund for the entrepreneur. If a group of AFC forms a financial intermediary that
collects the necessary information for the identification and funding of the most viable
projects, then the marginal cost of monitoring and transactions will be decreasing for
each additional AFC who decides to join this new institution. At the same time, the
entrepreneurs will find the necessary funds they need thanks to the economies of scale
realized by the financial intermediaries. The result will be an improvement of the
loanable funds use rate, which induces a better utilization of the productive capacities in
the economy. Although this theory is analytically convincing, it has not been verified
empirically for Malaysia. Table I shows that the weight of the Mudharaba financing is
marginal (0.12 per cent of the total Islamic bank financing in January 2012)[14], unlike
the Mark-up financial products (Bai Bithaman Ajil, Ijarah Thumma Al-Bai and
Murabaha) that are characterized by a significant share equal to 32, 25 and 15 per cent.
This can be explained by the fact that the PLS financing instrument, usually of long
term, naturally made the loan portfolios of banks more risky (Gudarzi Farhani and
Dastan, 2013).
Although the Islamic bank channels the deposits to the entrepreneurs having a
financing need, it does not allow the qualitative transformation of the liabilities a` la
Gurley and Shaw (1960). Theoretically, the Islamic banks liabilities are, contractually,
less liquid than those of the traditional banks; the depositors in profit-sharing
investment account (PSIA) know that their deposits do not represent a stock of money
strictly speaking. Their deposits are effectively correlated to the bank assets, as the
Islamic bank investments are theoretically backed by a real asset. Any shocks occurring
on the bank assets will be automatically transmitted to the liabilities, indicates Darrat
(1988), Yousefi et al. (1997). Moreover, the absence of an active Islamic monetary market
Financing by type

5/2011

6/2011

7/2011

8/2011

9/2011 10/2011 11/2011 12/2011 1/2012

Financing non-participatory
Bai Bithaman Ajil
34.417
Ijarah
2.270
Ijarah Thumma Al-Bai 26.080
Murabaha
14.714
Istisna
0.848

34.033
2.147
26.083
14.801
0.818

33.655
2.115
25.938
15.059
0.784

33.509
2.063
26.241
14.938
0.809

33.299
2.052
26.346
15.182
0.791

Financing PLS
Musharaka
Mudharaba
Others
Total

32.829
2.035
26.450
15.396
0.784

32.551
2.042
26.435
15.271
0.774

32.087
1.990
25.880
15.424
0.744

355

32.044
1.959
25.623
15.107
0.725

2.773
2.808
2.880
2.935
3.031
3.145
3.642
3.755
3.905
0.148
0.139
0.135
0.132
0.137
0.130
0.132
0.128
0.122
18.750 19.172 19.434 19.372 19.161 19.231 19.153 19.992 20.516
100
100
100
100
100
100
100
100
100

Source: BNM/Authors calculations

The
Malaysian
case

Table I.
Islamic bank funding
in Malaysia (%)

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356

makes the Islamic banks in a critical situation to obtain their need of liquidity in the
short run, added Khan and Mirakhor (1994).
Unlike the traditional banks, the Islamic ones, at least theoretically, do not facilitate
transactions in the short term, but, through the PLS principle, they are supposed to
encourage the medium- and long-term investment. However, encouraging long-term
investment requires an improvement of the short-term exchanges. The fact that the
Islamic bank is perfectly correlated with the real activity is not enough, because this
financial structure has to be sufficiently liquid to facilitate the short-term transactions,
which stimulates the investments and the physical capital accumulation in the long run.
4. Theoretical model, measures and data
The theoretical specification of the Islamic finance economic growth relationship in
Malaysia has been founded on the basis of the neoclassical production function
augmented by some indicators of Islamic financing. Thus, the capital[15] and the labor
force[16] are used in this paper as the control variables of the economic growth. The
construction of the Islamic finance indicators have been inspired by the analyses of
Goldsmith (1969)[17], King and Levine (1993a, 1993b), Levine (1997, 2005)[18], Galindo
and Micco (2004), Ammar et al. (2013)[19], Abu-Bader and Abu-Qarn (2008), Furqani and
Mulyany (2008), Gudarzi Farahani and Dastan (2013)[20].
To estimate the Islamic bank contribution in financing the economy, we use the
following indicators: PRIVATE, PRIVIS and INVIS. The latter are, respectively,
defined as being the ratio of the outstanding loans granted by the Islamic banks to the
total outstanding bank loans (Islamic and non-Islamic) granted to the private sector[21],
as the ratio of the bank loans granted to the private sector by the Islamic banks to the
GDP and as the ratio of the loans granted by the Islamic Financial Intermediaries to
private investments. The PRIVATE ratio allows measuring the Islamic banks
contribution in financing the economy. The PRIVIS ratio, which approximates the
PRIVY ratio proposed by Levine (1997)[22], is used as a measure of the Islamic
banking sector development. Regarding the INVIS ratio, which enables us to complete
the PRIVIS ratio, it allows to assess the contribution of the Islamic Financial
Intermediaries in the capital accumulation of the economy.
Concerning the case of the Malaysian economy, the dynamics of these indicators
during the period 2000:1-2011:4 are presented by the following figure (Figure 2).
As standard practices, we use the real GDP (on purchasing power parity (PPP)) to
measure the real income level. Several sources have been used for data collecting
purposes, namely: the Department of Statistics Malaysia for the GFCF (Gross Fixed
Capital Formation) and for the GDP, the Central Bank of Malaysia (Bank Negara
Malaysia) for the Islamic bank financing[23], the International Financial Statistics for
the labor force and Datastream for the CPI (Consumer Price Index). We have also used
Thomson-Reuters to get the series of the MYR/USD exchange rates necessary to express
all the aggregates in US dollar. All the series are in quarterly frequency, ranging over the
period extending from the first quarter of 2000 to the fourth quarter of 2011.
5. Econometric results and interpretation
To estimate the impact of the Islamic bank finance on the economic growth in Malaysia,
we use, as mentioned above, a neoclassical production function augmented by
indicators of Islamic bank finance. This function is specified as follows:

PRIVIS

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0.20

4.5

0.18

0.16

3.5

0.14

0.14

0.12

2.5

0.12

0.10

0.10

0.35

0.08

1.5

0.08

0.25

0.06

0.06

0.15

0.04

0.5

0.04

0.85

PRIVIS [L.S]

0.75
0.65

PRIVATE

0.55
0.45

Q1 2000
Q3 2001
Q1 2003
Q3 2004
Q1 2006
Q3 2007
Q1 2009
Q3 2010

Q1 2000
Q3 2001
Q1 2003
Q3 2004
Q1 2006
Q3 2007
Q1 2009
Q3 2010

PRIVATE

1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0

0.20

INVIS [L.S]

0.18

PRIVATE

0.16

Q1 2000
Q3 2001
Q1 2003
Q3 2004
Q1 2006
Q3 2007
Q1 2009
Q3 2010

INVIS [Le Scale]

5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0

357
Figure 2.
Development
indicators of the
Islamic banking
sector in Malaysia

Source: BNM/IFS/Department of Economics-Malaysia/Oxford Economics/Authors


Calculations

LYt 1 2LXt 3LWt 4LKt Ut

The
Malaysian
case

(1)

Where Y stands for the real income measured by the PPP-based GDP, X is an indicator
of the Islamic bank financing depth measured by the ratios PRIVATE, PRIVIS or
INVIS, W is the labor force and K, replaced by the GFCF, is the gross variation of the
physical capital stock during an accounting period. L denotes the natural logarithm of
variables. U is a stochastic term.
To examine the statistical properties of the time series, we conduct three different
unit root tests, namely augmented DickeyFuller (ADF), PhillipsPerron (PP) and
KwiatkowskiPhillipsScmidtShin (KPSS). The ADF and PP tests are testing the null
hypothesis of unit root against the alternative of stationarity, while the KPSS test is
testing the null hypothesis of stationarity against the alternative of unit root. The unit
root tests results reported in Table II suggest that all the variables of model (1) are
integrated of order 1. This integration degree allows us to use the Johansens procedure
to test the existence of potential cointegration vector(s) or long-run relationships
between the variables of model (1). For each Islamic financing indicator, both Trace

Variable

D(LY)

D(LK)

D(LW)

D(LPRIVIS)

D(LPRIVATE)

D(LINVIS)

Intercept
ADF-t
PP-t
KPSS-t

6.16***
6.30*
0.10

3.21**
10.16*
0.44*

9.58***
9.87*
0.31

3.26**
4.61*
0.40*

3.38**
4.58*
0.39*

4.33***
6.43*
0.33

Notes: *** , ** , and * denotes rejection of the null hypothesis of unit-roots for the (Augmented
DickeyFuller) ADF and the (PhillipsPerron) PP tests at the 1, 5 and 10 % significance levels,
respectively. For the ADF tests, number of lags was selected using the SIC criterion; * denotes rejection
of the null hypothesis of stationarity for the (Kwiatkowski, Phillips, Schmidt and Shin) KPSS tests at the
1, 5 and 10% significance levels, respectively
Source: Authors estimations

Table II.
ADF and PP unit
root tests and KPSS
stationarity test

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(trace) and Maximum Eigenvalue (max) tests reveal the existence of a single long-run
relationship between this indicator, GDP, investment and labor (cf. Table III).
The econometric results in Table III show that the long-run growth elasticity in
Malaysia is not so sensitive to the different indicators of the Islamic bank financing. In
fact, a 1 per cent increase of any Islamic financing indicator allows a growth in Malaysia
by a percentage that varies between 0.148 and 0.206 per cent only. This economic result
can be explained by the fact that the non-participatory (mark-up) Islamic bank
financing, usually of short-term nature, dominates (75 per cent) the participatory (PLS)
instruments (25 per cent), generally of long-term nature.

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The variable PRIVATE as an indicator of the Islamic bank financing


trace test
max test
Null hypothesis
r0 r1 r2
r3
r0
r1 r2
Alternative hypothesis
r1 r2 r3
r4
r1
r2 r3
LR statistics
54.98** 20.17
Critical values at 5% level 40.17
24.27
LY
Long-run relationship
1

9.68
12.32

3.29
4.12

LK
0.709 (0.03478)

r3
r4

24.81**
15.48 8.39 3.29
24.15
17.79 11.22 4.12
LW
LPRIVATE
0.524 (0.04962)
0.187 (0.01487)

The variable INVIS as an indicator of the Islamic bank financing


trace test
max test
Null hypothesis
r0 r1 r2
r3
r0
r1 r2 r3
Alternative hypothesis
r1 r2 r3
r4
r1
r2 r3 r4
LR statistics
49.35** 18.17
Critical values at 5% level 40.17
24.27
LY
Long-run relationship
1

12.05
12.32

3.75
4.12

LK
0.758 (0.01394)

31.17**
16.12 6.30 3.75
24.15
17.79 11.22 4.12
LW
LINVIS
0.423 (0.01944)
0.148 (0.00437)

The variable PRIVIS as an indicator of the Islamic bank financing


trace test
max test
Null hypothesis
r0 r1 r2
r3
r0
r1 r2 r3
Alternative hypothesis
r1 r2 r3
r4
r1
r2 r3 r4
LR statistics
57.66** 20.40
Critical values at 5% level 40.17
24.27
LY
Long-run relationship
1

Table III.
Cointegration
analysis between
GDP, GFCF, labor
and an indicator of
Islamic financing

10.82
12.32

3.60
4.12

LK
0.690 (0.04577)

27.26**
14.57 10.21 3.60
24.15
17.79 11.22 4.12
LW
LPRIVIS
0.534 (0.06456)
0.206 (0.01511)

Notes: (r) denotes the number of cointegrating vectors for cointegration test without deterministic
variables inside and outside the cointegrating vectors; to determine the cointegrating rank (r), Johansens
cointegration test proceeds sequentially from r 0 to r k-1, where (k) is the number of endogenous
variables; we stop at the cointegrating rank where we fail to reject the null hypothesis; the Trace LR statistic
tests the null hypothesis of (r) cointegrating vectors against the alternative of (k) cointegrating vectors, for
r 0,1 , ... ,k 1; the maximum eigenvalue LR statistic tests the null hypothesis of (r) cointegrating vectors
against the alternative (r1) cointegrating vectors, for r 0,1, ... ,k 1; ** denotes rejection of the null
hypothesis of cointegration rank (r) at the 5 % significance level; the 5 % critical values for the tests are
taken from Mackinnon et al. (1999); values in parentheses are standard errors

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Moreover, the elasticity of the Malaysian output with respect to the labor is about 0.5.
Thus, a 10 per cent increase in the labor force, all other factors held constant, will
increase the Malaysian output by about 5 per cent. This result seems to be consistent
with the economic structure of Malaysia. In this country, the contribution of the primary
and the tertiary sectors, which are labor-intensive sectors by nature, is around 55 per
cent on average over the period considered in this paper, and 60 per cent in 2013.
Similarly, the elasticity of the Malaysian economic growth with respect to the capital
is estimated to be around 0.7. Accordingly, a 10 per cent increase in the capital, with no
change in the other factors, will raise the output by about 7 per cent. In fact, compared to
industrialized economies, developing countries, such as Malaysia, have a relatively low
level of development. For this reason, Zhang et al. (2012) think investment opportunities
abound in developing economies. For the same reason, they add that [developing
economies] more easily absorbs and benefits from existing worldwide technology,
whereas developed economies [] have to rely on new knowledge and innovations to
shift their production frontier.
However, we believe that the elasticity of the Malaysian output with respect to the
capital is slightly biased. Indeed, the Malaysian economy is not highly capital-intensive
as it is the case in the industrialized countries (e.g. the USA, where this factor is about
0.3), and some other developing capital-intensive countries (e.g. China, where this factor
is about 0.6). This bias is may be due to the fact that we have used, because of the
unavailability of data, the GFCF as a proxy for the capital.
The existence of a long-run relationship between the variables of model (1) allows us,
in accordance with Engel and Granger representation theorem (1987), to formulate a
model with an error correction term as follows:
3

LYt 0

jLYtj
j1

CXtj Vt

jLKtj
j0

jLWtj
j0

LX
j

tj

j0

(2)

The variable X expresses an indicator of Islamic bank financing which can be either
PRIVATE, PRIVIS or INVIS. The variable ECTX expresses the residual terms or
deviations from the GDP equilibrium calculated three times by considering, first, the
indicator PRIVATE, second, the indicator INVIS and third, the indicator PRIVIS.
Three error correction equations (equations A, B and C, cf. Table IV) have been
estimated, each of them with three lags (cf. Appendix) and contains an Islamic financing
indicator (PRIVATE in equation A, PRIVIS in equation B and INVIS in equation C).
Table IV shows the econometric results.
In econometric terms, equations A, B and C reveal neither a problem of
autocorrelation, as shown by the BreuschGodfrey LM test, nor a problem of conditional
heteroskedasticity, as evidenced by the ARCH test, and not even a problem of linearity
as shown by the Ramsey RESET test. These statistical results allow us to conclude that
these estimators are efficient and, therefore, the t-statistics turn out to be reliable. The
JarqueBera test proves the normality of the shocks which makes possible the use of the
Student test.
Economically, the econometric results shown in Table IV enable us to draw several
empirical remarks. First, we note that all the adjustment forces are negative, between 0

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360

Regressors
Intercept
LYt1
LKt3
LKt
LWt3
LWt2
LWt1
LWt
LPRIVATEt
LPRIVISt2
LPRIVISt1
LINVISt2
LINVISt1
LINVISt

Coefficients of
equation A
0.0033 (0.580)
0.1922 (0.085)
0.3747*** (8.880)
0.2251 (1.396)
0.2555 (1.460)
0.2182 (1.106)
0.2907* (1.730)
0.3651*** (3.023)

Error correction term (ECT)


ECTXt1
0.7179*** (8.317)
Statistics and residual tests
0.8268
R2
DW
1.8576
LM (1) F-statistics
0.0233 (0.879)
LM (2) F-statistics
0.4638 (0.632)
ARCH (1) F-statistics
0.3362 (0.565)
ARCH (2) F-statistics
0.2674 (0.766)
RESET (1) F-statistics
1.1770 (0.285)
RESET (2) F-statistics
1.9686 (0.155)
Jarque-Bera test
1.3167 (0.517)

Table IV.
Equations of the
economic growth

Coefficients of
equation B

Coefficients of
equation C

0.0100** (2.063)
0.0416 (0.437)
0.0840 (1.560)
0.3376*** (8.709)

0.6317*** (7.546)

0.4041** (2.529)

0.2272 (1.479)

0.3553*** (3.511)
0.3736*** (3.817)

0.3188*** (3.369)
0.8389
2.4150
6.2928 (0.016)
3.0691 (0.059)
3.1443 (0.083)
1.4221 (0.253)
0.3931 (0.534)
0.8379 (0.441)
1.1710 (0.556)

0.0012 (0.233)

0.0609* (1.705)
0.1449** (2.954)
0.3355*** (4.429)
0.4363*** (3.618)
0.8399
1.5850
0.6560 (0.423)
0.5881 (0.560)
4.6510 (0.036)
2.0005 (0.148)
4.0173 (0.052)
2.3852 (0.106)
0.8970 (0.638)

Notes: Dependant variable: Y, estimation by OLS:2000 Q1-2011Q4; each of the ECM econometric
representations (equations A, B and C) contains a proxy of the development of Islamic banking
(PRIVATE in equation A, PRIVIS in equation B and INVIS in equation C); to choose the lag order
for equations A, B and C, we have used the Likelihood Ratio test and four statistical information criteria
[Final Prediction Error (FPE), Akaike Information Criterion (AIC), Schwarz Information Criterion (SIC)
and HannanQuinn Information Criterion (HQ)] (cf. Table A1 in appendix); the BreuschGodfrey serial
correlation LM test tests the null hypothesis that there is no autocorrelation in the errors up to the
selected lags; the ARCH test tests the null hypothesis that there is no conditional heteroskedasticity up
to the selected lags; the Ramsey RESET test tests the null hypothesis that there is no functional form
misspecification up to the selected lags; the JarqueBera test null hypothesis is normality of errors;
values in parentheses are t-statistics; values in brackets represent asymptotic p-values associated with
the tests; *** , ** and * indicate statistical significance at the 1, 5 and 10% level, respectively

and 1 in absolute value, and statistically significant. This indicates the existence of an
adjustment process toward the equilibrium of the GDP. Second, we notice that the
estimated adjustment coefficient in equation A is significantly greater than those of
equations B and C. This means that in equation A, 71 per cent of the GDP
deviations are corrected which is not the case in equations B and C, where we
observe a correction process estimated to 31 and 43 per cent, respectively. Thus, we can

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conclude that the inclusion of the Islamic indicator PRIVATE in equation A induces
an adjustment process that is more significant than those observed in equations B and
C, where INVIS and PRIVIS are used. This can be explained by the structure of the
Islamic bank finance indicators that we have constructed.
Indeed, the outstanding Islamic loans, appearing in the numerator, represent the
common point for the entire Islamic bank finance development indicators proposed in
this paper. The denominator, however, differs from one indicator to another. The
indicator PRIVATE is deflated by the total of the bank loans while the ratios PRIVIS
and INVIS are deflated by the GDP and GFCF, respectively. The construction of these
indicators indicate that the bank loans, as used in PRIVATE, have been more active in
correcting the GDP equilibrium than the other variables considered in the denominators
of INVIS and PRIVIS[24]. The evolution of these bank loans is more important and
volatile than the dynamics of the macroeconomic aggregates used in the other two
indicators (GDP and the GFCF). This volatility of bank loans seems to give more
dynamics to the PRIVATE, which explains the fact that the adjustment mechanism of
the GDP to the equilibrium is more important in equation A than those in equations
B and C.
Moreover, we can see in Table IV that the estimated growth elasticity with respect to
the control variables (W and K) in the short run appears to be less important than those
estimated in the long run as they appear in Table III. Furthermore, we notice that the
effect of the different variables of Islamic bank finance on the economic growth in the
short run seems to be more important than their effect in the long run. This econometric
result is in line with the economic reality in Malaysia, as the Islamic banks engage much
more in non-participatory activities (cf. Table I) whose impact is, generally, of a
short-term nature[25]. This has been confirmed by our econometric estimation, as the
GDP elasticity with respect to the financing indicators are greater in the short run than
those estimated in the long run. Table IV shows that the estimated growth elasticity
with respect to PRIVATE equals 0.365 much greater than the long-run one which
equals 0.187 as shown in Table III. In this regard, Islamic banks in Malaysia have not
played their main role as financial intermediaries that facilitate channeling savings from
surplus institutional units to long-term investment projects. This result reveals that
strengthening the weight of the PLS-based instruments in the loan portfolios of the
Malaysian Islamic banks may reduce inequalities and improve economic opportunities
for people who have a high potential to contribute to the capital accumulation and the
creation of the value-added.
6. Conclusions
In this paper, we have attempted to estimate the impact of the Islamic bank finance on
the economic growth in Malaysia over the period 2000Q1 to 2011Q4. A neoclassical
production function augmented by some indicators of Islamic bank finance has been the
theoretical framework for our empirical investigation. The unit root tests show that all
the variables are integrated of order 1. The test of Johansen and Juselius (1990) has
shown the existence of a single cointegrating relationship between the GDP, the
investment, the labor force and the indicator of Islamic bank finance. Hence, an error
correction model has been constructed to estimate the economic growth elasticity with
respect to different Islamic bank finance indicators.

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362

Based on the estimated long-run relationship, the elasticity of the GDP with respect to
the three Islamic finance indicators (PRIVATE, INVIS and PRIVIS) is equal to 0.187,
0.148 and 0.206 per cent, respectively. These estimated elasticities show that, in the long
run, the GDP in Malaysia is not so sensitive to the Islamic financing. The presence of a
cointegrating vector between the variables in question has enabled us to specify an error
correction model whose estimation has allowed us to identify the elasticity of the
economic growth with regard to the Islamic finance indicators in the short run. The
estimation of such a model shows that the elasticity of the Malaysian output with
respect to the different Islamic financing indicators in the short run turn around 0.35.
Thus, the effect of the different Islamic finance indicators on the economic growth in the
long run is less important than their effect in the short run.
This economic result can be explained by the structure of the Islamic bank financing
that marginalizes the PLS-based instruments. This turns out to be consistent with the
economic reality in Malaysia, as the Islamic banks engage much more in
non-participatory activities whose impact is, generally, of short term. Therefore, it
seems that the Malaysian Islamic banks have not played effectively their main role as
financial intermediaries that facilitate channeling savings to long-term investment
projects. Our empirical findings are in consonance with other studies which have found
that the impact of the Islamic finance on the economic growth is ambiguous.
The estimated error correction model has also shown negative and statistically
significant adjustment forces for the different indicators of Islamic financing. This
result allows us to confirm the presence of an adjustment process toward the
equilibrium level of the GDP in Malaysia. This process is more important in the equation
where the variable PRIVATE is used as an indicator of Islamic finance development.
To improve the efficiency of the Malaysian Islamic banks as financial intermediaries
that facilitate capital accumulation and economic growth, the study suggests to
strengthen the weight of the PLS-based instruments in the loan portfolios of the
Malaysian Islamic banks. This may reduce inequalities and improve economic
opportunities for people who have a high potential to contribute to the capital
accumulation and the creation of the value-added.
For future research, we also recognize that more meaningful results can be obtained
if we can examine the economic growth elasticity with respect to the different products
of Islamic finance separately. Analyzing more detailed data could be very useful to make
more detailed policy recommendation.
Notes
1. PLS stands for profit-and-loss sharing.
2. It is worth mentioning that Darrat (1988) has clearly indicated, in his paper, that his choice for
Tunisia as a study case was only due to the availability of data.
3. Although the paper of Furqani and Mulyany (2009) used an ECM model, their econometric
results remain inconsistent, as the statistical properties of this type of models are asymptotic
as these authors used only 34 observations.
4. This fund which provides for pilgrimage enjoyed a legislative support. It is a non-financial
institution charged by deposits collection from those wishing to make the pilgrimage, and it
is committed to invest the funds collected in sectors that respect the Sharia. All Malaysians

who wish to make the pilgrimage have to go through Tabung Haji. For more details, see Kahf
(2004), Chong and Liu (2009), Hasan (2014).
5. Affin Islamic Bank Berhad, Al Rajhi Banking & Investment Corporation (Malaysia) Berhad,
Alkhair International Islamic Bank Berhad, Alliance Islamic Bank Berhad, Am Islamic Bank
Berhad, Asian Finance Bank Berhad, Bank Islam Malaysia Berhad, Bank Muamalat
Malaysia Berhad, CIMB Islamic Bank Berhad, Hong Leong Islamic Bank Berhad, HSBC
Amanah Malaysia Berhad, Kuwait Finance House (Malaysia) Berhad, Maybank Islamic
Berhad, RHB Islamic Bank Berhad, Standard Chartered Saadiq Berhad, Public Islamic Bank
Berhad, OCBC Al-Amin Bank Berhad.

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6. On November 12, 1998, the Central Bank of Malaysia (BNM) issued a circular to replace the
SPTF term (Skim Perbankan Tanpa Faedah) used since 1993 by the term SPI (Skim
Perbankan Islam).
7. These banks have had their license in accordance with the Banking and Financial Institutions
Act (BAFIA) adopted by the parliament in 1989, as a substitution to the Finance Companies
Act of 1969 and the Banking Act of 1973.
8. The mandate of this authority is to ensure the stability and the solvency of the Islamic
financial service industry by the development of new standards compliant with the Islamic
Financial Institutions, and by the harmonization of the practices in the financial industry.
Along with the revision of Basel in 2005, the IFSB issued two regulatory standards on capital
adequacy and risk management by the Islamic Financial Institutions (Hesse et al., 2008, p. 180;
Warde, 2000, p. 130).
9. This projection has been made by the authors.
10. The authors consider that the development of the Islamic finance will have a positive impact
on the economic activity.
11. In theory, Islamic banking is supposed to be based on Profit-and-Loss Sharing (PLS) on
both sides of the balance sheet (Khan and Mirakhor, 1987). More recently, this model has
revived under the name Limited Purpose Banking (Kotlikoff and Leamer, 2009). In a
PLS model, deposits are shares in the underlying investments: they are not debt
obligations on the bank. In reality, Islamic banks followed the conventional model: they
take deposit as debt obligation, and finance clients also using debt instruments.
12. Chapra (2008a, 2008b) argued that poverty reduction is a necessary step for economic
development.
13. Despite the fact that moral hazard is among the most significant risks in the PLS
contracts (Bacha, 1997; Bjorvatn, 1998; Al-Jarhi, 2007; Sugema et al., 2010), it does not
explain, by itself, why the Islamic banks marginalize this type of contracts. Moral hazard
is a general problem and it is not exclusively specific to the Islamic banks: banks, whether
Islamic or Conventional, are exposed to such a risk. However, the problem [moral hazard]
is particularly serious in the developing countries where the systematic holding of a
regular accounting is rare and/or where companies, and for reasons of tax evasion, keep
several accounts. As a result, the monitoring cost that the Islamic bank has to pay to
verify the real profitability of the project is very high in comparison with the cost that
traditional banks bear, said Bjorvatn (1998). The result is a decline in the share of the real
asset-backed long-term financing based on the PLS.

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14. The obligation of backing by a real asset helps to eliminate most unproductive and
speculative transactions that involve gharar (high uncertainty) and qimar (bet), indicates
Chapra (2008a, 2008b). This favors the accumulation of physical capital which, in turn,
stimulates the economic activity. Iqbal and Mirakhor (1987) indicate that this theory has not
been empirically validated by the facts. In practice, Islamic banks are reluctant to invest in
long-term projects and prefer to fund short-term projects. This can be explained by the fact
that the long-term is unknown and unpredictable (Chapra, 2003). By focusing on financing
the working capital and trade in the short term, the Islamic banks marginalize the financing
of the long-term investment projects, thus reducing the economic growth and development
prospects.
15. In theory, the Islamic finance is perfectly correlated with the real economy as any financial
transaction must be backed by a real asset rather than by an imaginary or notional one
(Chapra, 2008a, 2008b). This principle is of paramount importance for the structuring of
certain products, such as sukuk (the name given to the Sharia compliant Bonds). For this
reason, we include, in the same way as Abu-Bader and Abu-Qarn (2008) and Furqani and
Mulyany (2008), the ratio of investment to the GDP (denoted K in the econometric
specification) in the economic growth specification.
16. As the labor force is the main factor that explains and justifies the wealth creation and capital
accumulation by the individuals in Islam (Touba, 2006), we include the labor force as an
exogenous variable to explain the dynamics of the economic activity.
17. To measure the financial development, Goldsmith (1969) uses the assets value of the financial
intermediaries divided by the gross national product (GNP), under the assumption that the
financial system size is positively correlated with the quality of the supplied financial
services. He found a strong correlation between financial development and economic growth
for 35 countries studied over the period 1866-1963.
18. King and Levine (1993a, 1993b), Levine (1997, 2005) have investigated the relationship
between financial development and economic growth for a panel of 80 countries over the
period 1960-1989. They have used four measures of the financial development level. For
instance, to measure the size of the financial intermediaries, they have used the DEPTH
ratio, which is equal to the financial systems liquid liabilities divided by the GDP. They found
a strong correlation between this ratio and the real GDP per capita.
19. Ammar et al. (2013) have used the ratio of broad money (M3) divided by the GDP to measure
the size of the Islamic financial intermediaries. This is not adequate to measure the size of the
Islamic finance because their sample, consisting of 15 countries, has included 12 countries
that have adopted the mixed system that is countries with Islamic and non-Islamic
financial intermediaries.
20. The financing variable applied by Gudarzi Farahani and Dastan (2013) is a portion of total
financing in the economy provided by Islamic banks.
21. King and Levine (1993a, 1993b), Levine (1997) have used the ratio of credits allocated to the
private companies to the total of the domestic credits (while subtracting the loans granted to
banks).
22. The purpose of the financial system is to finance the economic activity through the financing
of the private economic agents. Galindo and Micco (2004) have found that the State led banks
to not facilitate the growth of the manufacturing industries which depend on external
financing. Levine (1997, 2005) also considers that if the raison dtre of a financial system is to

fund the government, then it will be no more effective in the fulfillment of its functions,
because the financial systems that grant more credits to the private firms are more active in
the search for private information, in the monitoring of the funded projects, in the risk
management, in the mobilization of savings and in facilitating transactions. For this reason,
King and Levine (1993a,b), Levine (1997) use the PRIVY ratio, which is equal to the credit
granted to the private sector divided by the GDP, as a measure of the development of the
financial system.
23. We gathered the data on the Islamic bank financing from Tables 1.18.1, 1.19.2 and 1.19.3
available on the Web site of the BNM.

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24. The exogeneity test has also shown that PRIVATE is weakly exogenous, which indicates
that this indicator contributes to the GDP adjustment process but it does not undergo an
adjustment process. This econometric result is available on request.
25. As explained above, the engagement of the Islamic banks in the short-run activities is not
conforming to the PLS principles of the Islamic finance.
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Appendix
For equations A, B and C, Table AI shows that the LR test and two information criterion (FPE and
AIC) suggest that the optimal lag order is three.

368

Lags

Table AI.
Selection of optimal
lag length

LogL

LR

FPE

AIC

SIC

HQ

Equation A
p0
459.1711
p1
968.7140
p2
994.9377
p3
1032.940

NA
876.8879
39.03066
47.72433*

4.61e-16
7.58e-26
7.52e-26
4.68e-26*

21.12424
43.66112
43.71803
44.32281*

20.91944
42.43237*
41.46534
41.04616

21.04871
43.20799*
42.88731
43.11448

Equation B
p0
436.4584
p1
953.4049
p2
982.4764
p3
1019.596

NA
889.6288
43.26923
46.61566*

1.33e-15
1.55e-25
1.34e-25
8.70e-26*

20.06783
42.94906
43.13844
43.70215*

19.86304
41.72032*
40.88574
40.42550

19.99231
42.49594*
42.30771
42.49383

Equation C
p0
458.9342
p1
980.4084
p2
1008.535
p3
1046.422

NA
897.4207
41.86295
47.57867*

4.66e-16
4.40e-26
4.00e-26
2.50e-26*

21.11322
44.20504
44.35047
44.94985*

20.90843
42.97630*
42.09777
41.67320

21.03770
43.75192*
43.51974
43.74152

Note: * indicates lag order selected by the criterion; LR sequential modified likelihood ratio statistic;
FPE final prediction error; AIC Akaike information criterion; SIC Schwarz information criterion;
HQ HannanQuinn information criterion

Corresponding author
Amine Ben Amar can be contacted at: amine.benamar@gmail.com

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