The financial sector is often divided into two major pillars: equity markets and banking markets. The smooth functioning of these sectors is essential for ensuring economic stability and growth. Within this framework, Islamic finance, through Islamic debt instruments and equity markets, plays an increasingly important role, particularly in countries with large Muslim populations.
This study examines the short- and long-term relationships between the Islamic financial sector and sustainable economic growth in Indonesia and Pakistan, the two largest Muslim-majority economies. Using quarterly data from 2010 to 2019 and advanced econometric techniques, including the Autoregressive Distributed Lag (ARDL) model and the Error Correction Method (ECM), the research provides key insights into how Islamic finance contributes to economic sustainability.
The findings show that, in the long run, the Islamic banking sector has a significant and positive impact on achieving sustainable economic growth in both Indonesia and Pakistan. In the short run, however, the effects differ: the Islamic stock market demonstrates a positive relationship with economic growth in Pakistan, while in Indonesia, the Islamic banking sector shows a positive and significant contribution.
These results underscore the vital role of Islamic financial instruments in driving sustainable growth, with implications for policymakers, regulators, and financial practitioners who aim to strengthen the Islamic finance ecosystem.
👉 Read the full article here to explore the detailed findings and their implications for sustainable economic development.