The impact of Islamic financial development on environmental

Financial development, a key determinant of economic growth, supports investments and growth by efficiently financing economic activities. However, alongside economic growth, its environmental impacts are increasingly significant. Unlike conventional finance, Islamic finance offers a more sustainability-oriented approach through interest-free instruments, risk sharing, and ethical principles. This study investigates the environmental impacts of financial development and evaluates the role of Islamic finance within this context. Employing panel data analysis, it examines the relationship between Islamic financial development, conventional financial development, economic growth, and the environment across 11 countries (UAE, Bangladesh, Indonesia, Kuwait, Malaysia, Nigeria, Pakistan, Saudi Arabia, Turkey, Oman, and Jordan) from 2013 to 2022. To ensure robustness against heteroskedasticity and outliers, the study utilizes the Robust Least Squares (RLS) method proposed by Huber (1964). This enhances the reliability and statistical soundness of the findings. In contrast to most previous research, the study adopts two comprehensive environmental indicators: Ecological Footprint (LEF) and Load Capacity Factor (LLCF). The results show statistically significant relationships between the variables. Unexpectedly, Islamic financial development is found to have a negative environmental impact, while conventional financial development contributes positively. Furthermore, nonlinear effects of economic growth on the environment, tested through the EKC and LCC hypotheses, are not supported.