Financial development and economic diversification in Qatar: does Islamic finance matters

Abstract

Purpose: The financial system plays an essential role in facilitating the intermediation process for economic growth. Policymakers stress on achieving a well-developed and regulated financial system to achieve economic development and resiliency. Using data from the State of Qatar, this paper aims to examine the impact of financial development indicator on economic growth; the impact of financial development indicator on hydrocarbon and nonhydrocarbon sector; the impact of Islamic banking on hydrocarbon and nonhydrocarbon economic growth. Design/methodology/approach: The research uses quarterly data from 2007 to 2019 and adopts autoregressive distributed lag cointegration techniques to test the long- and short-run dynamic relationship between various measures of financial development and economic growth. Findings: The results present evidence of long-term cointegration between overall financial development indicator and economic growth. Furthermore, the authors document the existence of long-term relationship between financial development and nonhydrocarbon sector. However, there is a lack of evidence on the long-run relationship between financial development and the hydrocarbon sector. Notwithstanding, Islamic banking contributes to overall economic development, as well as to the nonhydrocarbon sector. Practical implications: This paper offers policymakers with insights to evaluate measures to diversify the economy. It also assists decision-makers in promoting Islamic finance, particularly to the banking sector as a vital contributor to economic growth. Originality/value: To the best of the author's knowledge, this paper is the first to evaluate financial development and economic growth for the case of Qatar in light of recent developments in Islamic finance.