Financial foundations of economic growth: A study on the role of Islamic banking in Turkey and Malaysia

Islamic banking is not merely a financial model but also a holistic system that promotes economic and social justice. Rooted in the principles of interest-free finance, this approach emphasizes risk-sharing to reduce income inequalities and make economic activities more inclusive. However, the contribution of this system to economic growth is directly linked to the robustness of a country's financial infrastructure, efficiency in resource management, and implemented policies. In this context, the aim of the study is to examine the relationship between Islamic banking and economic growth in Turkey and Malaysia. Using quarterly data from the period 2010:Q1 to 2024:Q1, the study employs Gross Domestic Product (GDP) as the dependent variable, while the total assets, financing and funding by Islamic banks are selected as independent variables. The ARDL bounds testing method is applied, and Granger causality testing is conducted to determine the direction of causality between the variables. The results reveal that in Turkey, funds disbursed and collected by Islamic banks have a significant and negative impact on economic growth in the long run, while the banks' assets have a significant and positive effect. In Malaysia, the funds collected by Islamic banks negatively influence economic growth, whereas their assets positively contribute to growth. Furthermore, the Granger causality test indicates a causal relationship from Islamic banking to economic growth in both Turkey and Malaysia.