Financial Performance of Islamic Banks and Economic Growth: An Empirical Evidence

Abstract

The aim of this study is to investigate the relationship between the financial performance of Islamic banks and economic growth in all of Malaysia, Indonesia, Brunei, Turkey and Saudi Arabia in a frame of endogenous growth model. Unlike the previous studies, CAMELS system parameters are used as variables for the performance of Islamic banks to examine the exact relationship with economic growth, while gross domestic product (GDP) is used as a proxy of economic growth. The sample consists of all Islamic banks working in the five countries. The study period range is from the first quarter of 2014 until the last quarter of 2018. Dynamic Panel System GMM is used to estimate and examine the impact of Islamic finance performance on economic growth. The results show that the only significant exogenous factor of Islamic banking performance which affects economic growth is the profitability through the return on equity (ROE). The empirical results suggest that Islamic banks should stimulate other performance factors to achieve a significant contribution on economic growth