Islamic banking and economic growth in Malaysia: evidence for a causal relationship pre and post regulatory reform

Journal of Entrepreneurship and Business 1 Abstract This paper aims to examine the long-run relationship between Islamic banking development and economic growth in Malaysia for 15 years from 2004Q1 – 2018Q4. This research employed the bound testing approach and long-run models which are developed within the autoregressive distributed lag (ARDL) framework. Islamic banking development is represented by the quarterly time-series data of the Islamic banks’ total deposits [ln(dep)], whereas Gross Domestic Products [ln(GDP)] represents the economic growth. In addition, four control variables were selected, namely gross fixed capital formation [ln(GFCF)], trade openness [ln(OPN)], consumer price index [ln(CPI)], and general government expenditure [ln(GE)]. The findings revealed that there is an Islamic finance-growth relationship in Malaysia. Besides, they also highlighted the difference in the Islamic finance-economic growth nexus between preand post-IFSA 2013. The findings are expected to have important implications for the banking institutions, regulators, and policymakers in formulating future strategies to enhance both the banking and economic developments in Malaysia.