Macroeconomic, Legal and Cultural Determinants of Islamic Banking Development

This paper provides new evidence on the influence of macroeconomic, legal and cultural factors on the Islamic banking development, using date from 29 OIC countries over the period of 2005-2011. Using both OLS and GLS method of estimations we have find that as with conventional finance, international trade and economic development appears an important drivers of Islamic banking development. However, macroeconomic stability does not appear a significant determinant of Islamic banking development. Our results also highlight how legal and cultural factors play an important role in explaining the cross-country diversity in the level of Islamic finance development. In fact, Islamic financial system is more developed in countries where their first language is Arabic and their first religion is Islam. Shari'a law also has a positive effect on Islamic finance development. However, Civil and Common law have a negative effect on Islamic banking development