Does Islamic Banking Development Favor Macroeconomic Efficiency? Evidence on The Islamic Finance – Growth Nexus

This paper evaluates if the development of Islamic banking influences macroeconomic efficiency. We contribute then to the analysis of the relation between Islamic finance and economic growth. We do so by applying the stochastic frontier approach to estimate technical efficiency at the country level for a sample of 70 countries. We use a unique hand-collected database, which covers Islamic banks worldwide over the period 2000-2005. We find evidence that Islamic banking development favors macroeconomic efficiency. We have support for a non-linear relation with efficiency for Islamic banking development, measured by credit or by deposits. Increasing Islamic banking development enhances efficiency until a certain point beyond which expansion of Islamic banking becomes detrimental for efficiency.  

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