Islamic Finance and Economic Growth: The Iranian Experience

While Islamic banking and finance has started in more than 75 countries globally, unfortunately, a few studies have been conducted about its role in contributing to the real economy in these countries. A developed Islamic financial system will mobilise more investment funds and allocate to real economy, thereby enhancing investment and real sector growth. A healthy and profitable real sector will led to more yield and grater performance of the Islamic banks. Therefore, Islamic banking should be considered as a potentially progressive monetary structure. The aim of this study is to investigate the effect of Islamic Finance on real economy (Industrial Production Index) using the autoregressive distributed lag model (ARDL) approach to cointegration for 2005:Q4 to 2015:Q4.The results show that a long-run relationship exists among variables and short-term and long-term effects of independent variables on the real economy is coordinated. The results show that the impact of Islamic banking deposit volumes and trade openness on the real economy (industrial production Index) in Iran has a negative and positive respectively.