Political Economy of Islamic Banking Growth: Does Political Regime and Institutions, Governance and Political Risks Matter?

Asutay, M.; Sidek, N.Z.M.

Abstract

This article explores the political economy of Islamic banking by examining the impact of political regime types, institutional environment, government and political risk on the development of Islamic banking proxied by financing or loan growth in the case of 16 Muslims majority countries with autocratic and democratic regimes over the period of 2000–2013. The performance of Islamic banking loan growth is examined from three different perspectives—political regime and institutions, governance and political risks in both regime settings. Results suggest that loan growth is positive and significant in democratic regimes where political and civil rights are predominant. In addition, loan growths are slower during election years but higher throughout pre‐election year in democratic regimes, suggesting the opportunistic behaviour of incumbent government artificially boosting the economy in preparation for the upcoming election. It is also found that the good quality of public services, policy formulation and implementation, and credibility of government's commitment to realizing the policies are vital in ensuring positive loan growth. The lack of differences in the reaction of loan growth to the governance in democratic and autocratic regimes shows some convergence in the regimes despite having significantly different political perspective. This implies that political commitment of the ruling government is vital to set forth a strong and robust Islamic banking standing regardless of its political standpoint.

Citation

Asutay, M., & Sidek, N. (2021). Political Economy of Islamic Banking Growth: Does Political Regime and Institutions, Governance and Political Risks Matter?. International Journal of Finance and Economics, 26(3), 4226-4261. https://doi.org/10.1002/ijfe.2011

• Journal Article Type: Article
• Acceptance Date: Jun 18, 2020
• Online Publication Date: Jul 14, 2020
• Publication Date: Jul 7, 2021
• Deposit Date: Jun 29, 2020
• Publicly Available Date: Jul 17, 2020
• Journal: International Journal of Finance and Economics
• Print ISSN: 1076-9307
• Electronic ISSN: 1099-1158
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 26
• Issue: 3
• Pages: 4226-4261
• DOI: https://doi.org/10.1002/ijfe.2011
• Public URL: https://durham-repository.worktribe.com/output/1267492