Measuring Islamic financial inclusion and its role in promoting economic growth: the case of Malaysia
Research Question: What is the dynamic relationship between Islamic financial inclusion, trade openness, foreign direct investment (FDI), inflation, and economic growth in Malaysia? Motivation: This study is motivated by the growing importance of inclusive and ethical financial systems in suppor...
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| Main Authors: | , , , |
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| Format: | Article |
| Language: | en |
| Published: |
Malaysian Finance Association
2026
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| Subjects: | |
| Online Access: | https://irep.iium.edu.my/128295/7/128295_Measuring%20Islamic%20financial.pdf https://irep.iium.edu.my/128295/ https://mfa-cmr.com/cmr |
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| Summary: | Research Question: What is the dynamic relationship between
Islamic financial inclusion, trade openness, foreign direct investment (FDI),
inflation, and economic growth in Malaysia? Motivation: This study is
motivated by the growing importance of inclusive and ethical financial
systems in supporting sustainable economic growth in Islamic emerging
economies, particularly Malaysia, where empirical evidence on the
macroeconomic role of Islamic financial inclusion remains limited. Idea: The
study develops a composite index of Islamic financial inclusion and examines
its dynamic relationship with economic growth alongside trade openness, FDI,
and inflation, capturing both long-run equilibrium relationships and short-run
adjustment dynamics, including the impact of the COVID-19 shock. Data:
The analysis uses annual Malaysian data covering the period 2013–2022.
Method/Tools: The Augmented Autoregressive Distributed Lag (ARDL)
bounds testing approach is employed, with Augmented Dickey–Fuller (ADF)
tests confirming a mixed order of integration and justifying the ARDL
framework. Findings: The augmented bounds test provides strong evidence of
a long-run cointegrating relationship among the variables; long-run estimates
reveal that Islamic financial inclusion has a positive and statistically
significant effect on economic growth, while trade openness also promotes
long-term growth, whereas FDI exhibits a negative long-run impact and
inflation is insignificant. In the short run, the error correction term is negative
and significant, indicating rapid adjustment toward equilibrium; Islamic
financial inclusion continues to exert a strong positive contemporaneous
effect, trade openness shows a negative short-run impact likely reflecting
adjustment costs, FDI contributes positively to growth, and the COVID-19
dummy variable confirms a significant contractionary effect on GDP.
Furthermore, robustness checks using the Toda-Yamamoto causality test
confirm a distinct unidirectional causal flow running from Islamic financial
inclusion to economic growth. Contributions: This study contributes to the
literature by constructing a composite Islamic financial inclusion index and
providing robust empirical evidence on its pivotal role in enhancing macroeconomic stability and growth in Malaysia, while offering nuanced
insights into short-run and long-run trade-offs associated with external
openness and capital flows, with important policy implications for designing
resilient, inclusive, and sustainable growth strategies in Islamic emerging
economies. |
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