Islamic finance and economic growth: The Malaysian experience

The increasing presence of Islamic banking and finance in Malaysia's financial sector and the country's exemplary role in the global Islamic finance industry has called for an evaluation of the contribution of Islamic finance to the real economic activity. In order to empirically investigate the impact of Islamic finance on performances of major macroeconomic indicators, this study applies the ARDL approach on quarterly data set for Malaysia covering the period from 1998 to 2013. The results suggest that Islamic finance has started to make important contributions to the real economy by effectively carrying out the financial intermediation role of pooling and channeling funds to the investment activities. In view of the important contributions of Islamic finance to the Malaysian economy, continuous efforts need to be undertaken to further expand the industry. This includes refinement of the legal and regulatory framework to enable healthier growth of the industry, thus further strengthens Malaysia's position as the leader in the Islamic finance industry at the global level.