Determinants of Islamic bank financing in the Middle East: Vector Error Correction Model (VECM)

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As the world has been struck with a global financial crisis, Middle Eastern countries have been affected as well. Thus, Islamic banks have expanded, and the competitive advantage has become intensive with the increased number of conventional banks in the global banking system. This manuscript is aimed to examine the impact of macroeconomic and bank-specific factors on Islamic bank financing in the Middle Eastern countries. Therefore, the Vector Error Correction Model and the Granger causality test were run from 2009 to 2018 to detect the long- and short-run relationship between the explanatory variables and Islamic bank financing. The results suggest that both inflation and profitability negatively impact Islamic bank financing in the long run. The paper also revealed bidirectional causality between the variables GDP and bank size and Islamic bank financing. It shows that GDP and bank size are highly dominant factors of Islamic bank financing in the short run. Thus, this paper provides evidence that any short-run shock in the variables of GDP, inflation, and bank size will cause a long-term relationship with Islamic bank financing. This article’s novelty is to ensure resilience within the Islamic banking system during and after the financial crisis. It provides evidence that Islamic banks can cushion their financial activities from economic volatility during the crisis. The results found can be used to predict the growth of Islamic bank financing in upcoming years in the Middle East and all emerging countries.

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    • Figure 1. Co-integration relationships
    • Figure 2. Dynamic responses of financing to the explanatory variables
    • Table 1. Variables definition and previous works used
    • Table 2. Descriptive statistics
    • Table 3. The results of unit root test
    • Table 4. The results of the co-integration rank test (Trace)
    • Table 5. VEC residual tests
    • Table 6. Results of VECM estimates
    • Table 7. The results of block exogeneity Wald test (short-run)
    • Data curation
      Mohammed Abusharbeh
    • Formal Analysis
      Mohammed Abusharbeh
    • Conceptualization
      Mohammed Abusharbeh
    • Funding acquisition
      Mohammed Abusharbeh
    • Investigation
      Mohammed Abusharbeh
    • Methodology
      Mohammed Abusharbeh
    • Project administration
      Mohammed Abusharbeh
    • Resources
      Mohammed Abusharbeh
    • Software
      Mohammed Abusharbeh
    • Supervision
      Mohammed Abusharbeh
    • Validation
      Mohammed Abusharbeh
    • Visualization
      Mohammed Abusharbeh
    • Writing – original draft
      Mohammed Abusharbeh
    • Writing – review & editing
      Mohammed Abusharbeh