Analysis of The Relationship Between Islamic Banking And Economic Growth: A Comparative Study of Indonesia And Malaysia

Abstract

Purpose — Indonesia and Malaysia are two countries that are driving the development of the Islamic finance and banking industry in the Southeast Asian region. The dual banking system implementation in the two countries, however, differs in the approach to developing its sharia banking, where Malaysia uses a state driven while Indonesia uses a market driven.

Method — This study aims to determine the relationship between Islamic banking and economic growth in Indonesia and Malaysia. This study uses quarterly data (2008Q1-2019Q4) the paper utilizes Bound Testing of approach Cointegration and Error Correction Model, developed within an Autoregressive Distributed Lag (ARDL) framework.

Result — The results show that the relationship between Islamic banking and economic growth in Indonesia and Malaysia is bi-directional causality. In Indonesia, Islamic banking and economic growth influence each other in both the short and long term. Meanwhile in Malaysia, Islamic banking has no effect on long-term economic growth, but economic growth has contributed to the development of Islamic banking. In the short term, the two influence each other