AN ANALYSIS OF ISLAMIC FINANCIAL ACTIVITIES AND ECONOMIC GROWTH RELATIONSHIP: ANOTHER EVIDENCE FROM MALAYSIA

Abstract

Islamic financial activities play a significant role in promoting investment and savings; it creates wealth and increase income within the economy, hence serve as critical agent of economic growth. Islamic financial activities may be influencing Malaysian economic growth and may have a causal relationship among them. The influence of Islamic finance on growth may be through specific channels. Thus, the study explored the connection concerning Islamic financial system activities and the growth of the Malaysian economy. It also identified the channels through which Islamic finance affects economic growth. This study engaged the Autoregression distributive lag bounds test approach to cointegration, using a new combination of measures of Islamic financial activities (Islamic banking deposits and Islamic stock market turnover). The assessment revealed that a long-run relationship between Islamic financial activities and economic growth in Malaysia exist. However, no sign of short-run relationship found. It evident that total investment or capital accumulation and efficiency or productivity of capital served as the channel of transmitting growth by Islamic finance in the long-run. Thus, only capital accumulation served as the channel of transmitting growth in the short-run. A bidirectional causal relationship exists between Islamic banking deposits and Malaysian GDP, but the causation between Islamic stock market turnover and GDP is unidirectional and a supply-leading. The study confirmed that the Islamic financial system in Malaysia is efficient and effective; it spurs the growth of the Malaysian economy through the quantity and quality of investment.