Nexus between Islamic bank decomposed financing and agriculture output growth in Pakistan

Abstract

Purpose: There are two alternative hypotheses "More finance, more growth" formed u-shape and "too much finance" formed an inverted u-shape profile. Literature shows contradicting findings on finance growth nexus by taking only a single indicator of total finance. Every production sector has its own composition, where financing can impact differently, so its effect may vary across the sector. This study fills this gap by breaking down Islamic finance into Islamic producer and Islamic consumer financing and examining its quadratic impact on agriculture output growth in Pakistan by obtaining quarterly data from 2010 Q1 to 2020 Q4. Further, we estimate a threshold point of each quadratic model of financing.

Methodology: Based upon quantitative time series analysis, this study has employed ARDL with quadratic specifications. Moreover, the estimated coefficients are plotted to visualize the nonlinear impact of Islamic financing.

Findings: A u-shape profile for a quadratic model of IPF confirming the hypothesis 'more finance, more growth' and an inverted U-shape profile for ICF confirming the hypothesis 'too much finance'. Indicate that more finance is not always advantageous, and highlighted a "Threshold" level of financing to facilitate agriculture growth.

Originality: This study enriches the discussion on Islamic decomposed financing and threshold effect.

Policy implications: Policymakers may revisit the Islamic finance policies, so IF sector may significantly contribute to the growth process in Pakistan. More steps are needed to liberalize the system to remove the constraints as the IF industry is linked with KIBOR, so the vanishing effect reflects near around the threshold point.