Financial Depth and Stability in Dual Banking Systems

Purpose — Islamic finance has demonstrated strong empirical resilience during global financial shocks. This paper evaluates how a dual-banking model that integrates Islamic finance with conventional systems accelerates macroeconomic growth. Design/Methodology/Approach — The study employs a panel dataset of 27 countries that operate dual-banking systems over the period 2010–2024 to evaluate both short- and long-run relationships between Islamic finance assets and gross domestic product (GDP), credit to GDP, money supply, small and medium-sized enterprise (SME) credit and stock market capitalisation. The empirical framework applies Autoregressive Distributed Lag-Pooled Mean Group (ARDL-PMG) estimation, error correction models, and Granger causality tests. The principal independent variable is the Islamic banking market share, private sector credit, and broad money supply (M2). Findings — The empirical results indicate that integrated Islamic finance asset shares significantly expand total private credit (β = 0.3725, p = 0.012) and broad money supply (β = 0.2861, p = 0.070) indicators over long horizons. Furthermore, dual-banking integration accelerates annual real macroeconomic output (β = 0.0842, p = 0.009), correlates with localised stock market expansion, increases infrastructure investment (Trade = 0.165), and enhances small enterprise credit access (IsFA = 0.784). Originality/Value — This study provides a novel multi-country panel framework that isolates the specific transmission channels through which Islamic financial depth complements conventional banking. Unlike past single-country studies, it quantifies the net developmental spillovers of integrated dual-banking systems. Research Limitations/Implications — A primary limitation is that the model focuses exclusively on the internal dynamics and asset thresholds within dual-banking systems, omitting comparison with fully singular financial regimes due to global data constraints. Practical Implications — These findings provide clear empirical justification for policymakers to foster dual-banking systems, demonstrating that specialised Islamic small and medium-sized enterprise (SME) credit lines directly complement conventional private sector development.

Hali tarjima qilinmagan