Impact of Selected Macroeconomic Variables on the Growth of Islamic Finance

Abstract

This study is attempted to determine the impact of some selected macroeconomic variables on the growth of Islamic finance. As Islamic finance is one of the most rapidly growing segment of the economy of Pakistan and other Islamic countries of the world. So, this study investigates the influence of macro-economic variables on Islamic finance development, in the context of Pakistan. We observe the effects of only seven selected macro-economic factors i.e. gross domestic product, Muslim population, Inflation rate, money supply, total savings of the country, interest rate and remittances; on the growth of Islamic finance in the economy because many macro-economic factors are extremely influencing on both financing quality and volume of Islamic finance in the economies at world level. By checking stationarity and employing co-integration and error correction model (ECM) and time series analysis for the period (1985-2015) of Islamic banks (six banks) and Islamic banking windows of conventional banks. The result highlights the influential but inverse role of interest rate of conventional banks and consumer price index (inflation), in determining the level of financing assets of Islamic banks. In particular, higher level of GDP, Muslim population, money supply and remittances are significantly and positively correlated with higher rate of growth of Islamic finance.