FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH: DOES ISLAMIC BANKING DEVELOPMENT HAS A SIGNIFICANT EFFECT ON THE ECONOMIC GROWTH IN MALAYSIA

It almost four decades that Islamic banking institution came into advent in the Malaysian banking system and thus believed have much cointributed to the Malaysian economic growth. Despite of the good efforts showed by the government of Malaysia, it is interesting to see whether such implementation is really leading viable and effective economic growth as hoping to. Thus the study is conducted to see whether the financial sector i.e. banking sector can bring a positive impact towards the economic growth in country. On top of that, it is also curious as to whether Islamic banking achievement is better than its rival i.e. conventional banking system. In other words, the study attempts to compare between the two systems which about to bring three different classes of the banking sectors in representing financial sector. The research applied periodical time-series data that measures on economic growth, the aggregate of banking assets from Q4:2006 to Q4:2012. The method used were cointegration and Granger’s causality, while the financial sectors were comprised of Islamic banking and conventional one stimulates the economic growth in Malaysia. Interestingly, the research has found that Islamic bank financing have indicate a significantly positive with the economic growth for both the long and short run and have leads the other categories. This implies that the development of Islamic banking is one of the policies, which should be considered by the government to improve the futures.