Finance-growth nexus and dual-banking systems: Relative importance of Islamic banks

- Correlates the Islamic banks' share with the overall financial intermediation.
- Investigates on the extent of overall economic welfare.
- Reports Islamic banks affect financial deepening and intermediation positively.
- Reports that Islamic banks reduce income inequality and poverty.
- It is associated with higher efficiency of conventional banks.

This paper investigates the relative importance of Islamic banks, alongside their conventional counterparts, in relation to banking and financial development and economic welfare. Using a sample of 22 Muslim countries, with dual-banking systems, during the period 1999-2011, this paper reports some significant positive relationship between the market share of Islamic banks and the development of financial intermediation, financial deepening and economic welfare, particularly in low income or predominantly Muslim countries, and countries with a comparatively higher uncertainty avoidance index. Additionally, the results reveal that a greater market share of Islamic banks is associated with higher efficiency of conventional banks.