ROLE OF ISLAMIC BANKING ON THE ECONOMIC GROWTH OF PAKISTAN

Abstract

The world is currently experiencing a financial crisis, Islamic finance has
gained popularity and attention globally and is growing quickly, particularly in
Pakistan. Where the total assets of Islamic finance have surpassed 2.51 billion
dollars. This study gives us the empirical link between economic growth and the
evolution of the Islamic banking system. Secondary data based on quarterly data
from 2009 to 2018 has been used to analyze data for Islamic financing and
economic growth in terms of Gross Domestic Product (GDP) and Gross Fixed
Capital Formation (GFCF). This study employed gross domestic product and
gross fixed capital formation as proxies for economic growth, and Islamic
finance private lending and total assets as proxies for the expansion of Islamic
finance. Tests like the Granger causality test, impulse response function,
regression analysis, and descriptive states were used to analyze the quantitative
data. We can typically infer from empirical evidence that Islamic financing will
benefit the nation's economy in the long term. It also shows a suggestive
correlation with Pakistan's economic growth, supporting the notion that a
healthy Islamic finance system fosters economic expansion.