Financial development and economic growth in GCC countries : A comparative study between Islamic and conventional finance

The purpose of this paper is to compare the effects of Islamic financial development and conventional financial development on the economic growth for five GCC countries (Bahrain, Kuwait, Qatar Saudi Arabia and UAE).

Using generalized least squares, OLS and panel data frameworks, this paper employs different measures of financial development for the period (1996-2011).

Empirical results strongly support the hypothesis that Islamic finance leads to growth in the five GCC countries, however, no significant relationship observed between conventional financial development and growth.

The findings of this paper suggest the need to accelerate the financial reforms for Islamic finance that have been launched in the region since the last decade and to improve the efficiency of these countries’ Islamic financial systems to stimulate saving/investment and, consequently, long-term economic growth.

This study has several contributions to the existing literature. To the best of the authors’ knowledge, this paper is the first study that examines empirically the effect of Islamic finance on economic growth in GCC countries. As well, this paper is the first to compare the different effects of Islamic finance and conventional finance on economic growth on a context of countries having the most developed Islamic financial system in the world operating side-by-side with a conventional financial system.