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Title: Islamic Financial Intermediation, Sustainable Economic Growth, and Financial Depth: The ARDL Approach
Abstract: There has been much discussion regarding the superiority of Islamic finance from the standpoint of economic development. The interest-based banking system has given way to the Islamic financial system in recent decades. In a dual banking system, this study aims to investigate the dynamic interactions between Islamic financial depth (IFD), Islamic financial intermediation (IFI), and asset quality with economic growth. The paper uses quarterly data from Pakistan from 2005 to 2019 along with Granger causality, error correction model, and autoregressive distributive lag regression (ARDL) to examine the long and short run linkage. The authors run two models to compare the relative weights of Islamic and Western financial intermediation, Islamic and Western financial depths, and Islamic and Western asset quality in both financial systems. In our study, we found that both Islamic and conventional finance models had a long-term relationship between finance and growth. Furthermore, the findings suggest that both financial sectors’ crucial role in promoting economic growth is strong financial intermediation. In the short run, economic growth is aided by the economy’s higher proportion of Islamic financial assets. The findings suggest that the overall finance-growth nexus may involve a significant intervening role for asset quality.
Keywords: Islamic banking; conventional banking; asset quality; economic growth; ARDL
Paper Quality: SCOPUS / Web of Science Level Research Paper
Subject: Economics
Writer Experience: 20+ Years
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