Do Islamic banks contribute to growth of the economy? Evidence from United Arab Emirates (UAE)

Islamic finance has grown rapidly in the recent years particularly in the Middle East and the world. It receives a great attention of bankers and financial scholars due to its stability during financial shocks and crises. The paper uses empirical analysis to test the role of Islamic banking in enhancing the economic growth of United Arab Emirates (UAE). Gross Domestic Product (GDP), Gross formation (GF), and Foreign Direct Investment (FDI) are used as representatives for economic growth, while Islamic banks' investments are used as a representative for Islamic financial sector in the UAE. The study uses time series techniques to test the link between the variables. In the current study, co-integration along with error correction models is utilized. All econometric work is done using Eviews. The findings reveal that the causal relationship between Islamic banks' investments and economic growth of UAE is supply-leading direction. Furthermore, the findings depict that Islamic investments have contributed in increasing investments and in bringing FDI into the country in the long-term. The study also shows that there is two-way association between Islamic banks' investments and FDI. It shows that FDI supports Islamic banking and Islamic banking brings FDI. The paper concludes that authorities of the UAE should devote more attention for this growing banking sector by facilitating regulations for establishing new Islamic banks and then creating a suitable environment for their growth and progress in the UAE.