Economic Growth and Financial Performance of Islamic Banks: A CAMELS Approach

Abstract

Purpose – The purpose of this paper is to investigate the link between the financial performance of Islamic finance and economic growth in all of Malaysia, Indonesia, Brunei, Turkey and Saudi Arabia within the endogenous growth model framework. Design/methodology/approach – This study applied dynamic panel system GMM to estimate the impact of the financial performance of Islamic finance on economic growth using quarterly data (2014:1-2018:4). CAMELS system parameters were employed as variables of the financial performance of Islamic finance and gross domestic product (GDP) as a proxy of economic growth. The sample contained all Islamic banks working in the five countries. Findings – The findings demonstrated that the only significant factor of the financial performance of Islamic finance, which affects the endogenous economic growth, is profitability through return on equity (ROE). The experimental findings also indicated the necessity of stimulating other financial performance factors of Islamic finance to achieve a significant contribution to economic growth. Practical implications – The analysis in this paper would fill the literature gap by investigating the link between financial performance of Islamic finance and economic growth, as this study serves as a guide for the academicians, researchers and decision-makers who want to achieve economic growth through stimulating Islamic finance in the banking sector. However, this study may well be extended to investigate the link between the financial performance of Islamic finance and economic growth over the Z-score model as another measure for the financial performance of Islamic finance. Originality/value – This paper is the first that investigates the link between financial performance of Islamic finance and economic growth empirically using CAMELS parameters within the endogenous growth model to provide robust information about this link based on a sample of the top pioneer Islamic finance countries.