The Effect of Islamic Banking on Economic Growth

Currently, Islamic banking should be considered as a potentially progressive monetary structure. In a variety of Islamic and non-islamic countries around the world, Islamic banking has been adopted alongside conventional systems of banking and in some cases it has been well developed. We would introduce the theoretical foundations of Islamic banking and investigate its potential impacts on economic growth and development. The principles of Islamic banking would be established and based on these principles we would discuss the possible tools and outcomes of such a method of financing. We have compared Islamic banks and conventional banks in four different categories: efficiency, stability, moral hazard, and poverty reduction. It is found out that previous studies support the hypothesis that Islamic banking is a necessary tool of economic growth. First of all this economic growth seems to be higher than the economic growth achieved through conventional financial institutions. Secondly, an Islamic financing which instead of utilizing interest rates, takes advantage of a good amount of participatory contracts and exchange could lead to a much more stable economic development specially because it might encounter lesser and low life-time economic crises. However, one should not assume that Islamic banking would always be a wise choice for economic development. In the paper we have mentioned some situations in which sticking with Islamic banking in an inflexible manner could be a serious obstacle for development. One of the results of this study for policy makers could be the guideline that using Islamic banking as the proxy of financing could help to stabilize the macroeconomy in developing and developed countries.