Islamic Finance and Economic Growth: Empirical Evidence from Nigeria

Abstract

Islamic finance is gradually gaining acceptance locally and internationally which Nigeria is not an exception. The emergence of Islamic finance in Nigeria can be traced back to 1991. The main objective of this paper is to assess the contribution of Islamic finance on the growth of the economy of Nigeria as well as its relationship and directions. Time series data from 2012 to 2015 was used on quarterly basis. Islamic banks’ financing credited to private sector through modes of financing was used as a proxy for Islamic finance, Foreign Direct Investment (FDI) and TRADE as explanatory variable while Real Gross Domestic Product (RGDP) was used as a measure of real economic growth called the dependent variables. For the analysis, Ordinary Least Square (OLS), the unit root test, cointegration test and Granger Causality tests was used. Our empirical results show that there is a strong positive association between Islamic banks’ financing and economic growth in Nigeria, which reinforces the idea that a well-functioning banking system promotes economic growth. Furthermore, the causal relationship happens only in one direction, i.e, from Islamic banks’ financing to economic growth, which is in compliance with the Schumpeter’s supply-leading theory

Keywords: Islamic finance, Economic growth, Causality, Nigeria, Shariah