EMPIRICAL ANALYSIS ON THE NEXUS BETWEEN ISLAMIC BANKING DEVELOPMENT IN TERMS OF SIZE AND ACTIVITY, ECONOMIC GROWTH AND FINANCIAL CRISIS IN ISLAMIC REPUBLIC OF IRAN

Purpose - This paper use empirical analysis to examine Iran’s Islamic banking development in terms of size and activity -growth-crisis nexus and identify the Granger causality relationship among them over the period of 1990Q1 to 2010Q4. Design/methodology/approach - This study utilizes the Auto Regressive Distributed Lag ARDL models to identify the short and long run estimations. Findings - The results generally signify that, in the long run there is a bidirectional hypothesis exists between Islamic banking development in terms of activity and size, growth, while in the short run both of Islamic banking activity and size development don’t Granger cause growth and financial crisis. Furthermore, the finding show that generally Islamic banking activity based system is more appropriate compared to Islamic banking size based system to achieve a growth without crises in Islamic republic of Iran. In the end, despite the selected Islamic country suffer since more than 30 years from strong international economic and political siege, the results show that Islamic banking system played significant role in promoting growth and absorbing the negative effects of the internal and international financial and economic crises. Research limitations/implications - Data were not available after 2010 in Islamic republic of Iran. Practical implications - This study is helpful for the investors, bankers and policy makers for formulating the future policy Originality/value - This paper is a first attempt to study the relationship between Islamic banking development in terms of Activity and size and economic growth without ignoring the potential causal link between Islamic financial development and financial crisis.