Islamic (Participation) Banking and Economic Growth: Empirical Focus on Turkey

Abstract

The purpose of this study is to analyze the causal relationship between Islamic (participation) banking and economic growth in Turkey. A quarterly time-series data is employed from 2008:1 to 2018:1. Vector Error Correction Model (VECM) based Granger causality test is conducted to find evidence in support of “supply-leading” or “demand-following” hypothesis. Empirical results of the study suggest a significant uni-directional long-run causality from Islamic (participation) banking to economic growth that confirms the “supply-leading” hypothesis. This finding is noteworthy as it emphasizes the crucial complementary role of Islamic (participation) banking besides conventional banking in Turkey. Findings draw attention to the fact that, efforts to improve the underlying regulatory system of Islamic (participation) banking will have positive contributions on growth. Besides, new business models/ Islamic banking window and diversified instruments are expected to position Turkey in a well-deserved place in the international Islamic banking industry.