IMPACT OF ISLAMIC BANKING EXPANSION AND SHARIAH-COMPLIANT FINANCING ON PAKISTAN’S ECONOMIC GROWTH: A TIME-SERIES ANALYSIS (2015-2025)

Muhammad Bilal; Dr. Muhammad Muzammil

Authors

Muhammad Bilal Author
Dr. Muhammad Muzammil Author

Keywords:

Islamic Banking, Economic Growth, ARDL Bound Test, Pakistan, Shariah-Based Financing, Time Series Approach

Abstract

Research Background: The financial environment of Pakistan has changed tremendously in the wake of Islamic banking which has emerged as a potential alternative to conventional banking in Pakistan.

Purpose of the Study: The purpose of this study is to examine the impact of the growth of Islamic banking industry and Shariah-compliant financing on economic growth in Pakistan using quarterly time series data for the period 2015Q3 to 2025Q4.

Methodology: Time series data is used for the purpose of conducting an empirical investigation in which ADF test will be applied for examining unit root whereas ARDL bound testing will be applied for investigating long-run and short-run dynamics.

Variables: Growth of the economy is gauged by real GDP while Islamic banking assets, financing and KIBOR serve as independent and control variables.

Key Findings: The F-bounds test shows that there is a connection between the variables in the long term. When we look at the numbers we can see that Shariah-compliant financing and Islamic banking assets both have an effect on the economy. If financing goes up by 1 percent the economy will grow by 0.106 percent. On the hand KIBOR has a bad effect on the economy.. Banking efficiency, which is measured by ROE helps the economy grow. The error correction term is -0.385 which means that when things get off track they get back to normal in than three quarters. This tells us that the economy adjusts at a pace. The F-bounds test and the run estimates both point to the same thing: Shariah-compliant financing and Islamic banking assets are good, for the economy while KIBOR is not.

Practical Implications: It can be argued from the empirical findings that asset-based structure of Islamic financing serves well to generate real economic activities in Pakistan, thus, validating the policy efforts made by State Bank of Pakistan towards dual banking system.

Originality/Value: The study is novel contribution to the existing body of knowledge through its provision of latest evidence (up to 2025) on finance and growth linkage in Islamic economy