PurposeThe purpose of this paper is to examine the linkage between Islamic financing principles and economic growth (EG) by taking into consideration two Islamic Financing Principles: Risk Sharing and non-risk sharing separately.Design/methodology/approachThe data for this study are obtained from the annual reports of all Islamic banks from Bangladesh using Bank scope database and annual report for the period 1984-2014. The research uses an Autoregressive Distributive Lags (ARDL) approach. For robustness, this study also employs a continuous wavelet transform approach.FindingsThe empirical findings reveal that the risk sharing instruments are positively related to the EG of the country. On the other hand, non-risk sharing instruments are negatively related to the EG of the country.Research limitations/implicationsThe dominant use of non-risk sharing-based financing has undermined the greater possibility of Islamic banking to contribute more to the EG of the country. Banks and other financial institutions need to pay greater attention to systemic risk created by risk transfer and apply risk sharing methods of financing more vigorously to achieve greater equity, efficient allocation of resources, stability and growth of the financial system and welfare of the society as a whole.Originality/valueThis study has advanced the knowledge by examining the issue of Islamic financing principles and EG. This is probably one of the first attempts to find the linkage between Islamic financing principles and EG by taking into consideration two portfolios: risk sharing and non-risk sharing separately and provide significant insights for policy makers, market players and academicians.
Managerial Finance – Emerald Publishing
Published: Jun 11, 2018