Economic and institutional factors influencing economic growth with emphasis on Islamic financing instruments

Subject Areas : Computational economics

hossein saveh shemshaki ¹ , mohamad dalman pour ^{2 *} , Ashkan Rahimzadeh ³ , Teymoor Mohammadi ⁴

1 - Training Department of Management and Economics, Zanjan Branch, Islamic Azad University, Zanjan, Iran
2 - Training Department of Management and Economics, Zanjan Branch, Islamic Azad University, Zanjan, Iran
3 - Assistant professor , Faculty of Economics , Zanjan Azad University
4 - Economics Department, Economics School, Allameh Tabataba'i University, Tehran, Iran.

Received: 2024-11-29 Accepted : 2025-02-11 Published : 2025-04-08

Keywords: Estimated Weighted Least Squares (EGLS) Method, Economic Growth, Islamic Financing Instruments, Governance Quality Index,

Abstract :

Abstract

One of the important issues in economic research is identifying the variables that affect economic growth. In Islamic economics, Islamic financial instruments (Sukuk) are recognized as one of the key components that distinguish Islamic economics from other economic systems. The main question is whether these instruments always have a positive effect on economic growth and what is the role of institutional factors in this? This article examines the question of what effect two main factors, namely Islamic financial instruments and institutional indicators, have on Iran's economic growth. For this purpose, economic data including capital and labor have been collected from the World Bank and information related to the issuance of Sukuk from the website (www.sukuk.ir). In this study, the weighted least squares (EGLS) model has been used to estimate the data. Also, governance indicators have been considered as representatives of institutional factors. The results of this study show that the issuance of Islamic financial instruments, improving governance indicators, gross fixed capital formation, and increasing the labor force have had positive and significant effects on Iran's economic growth.

Purpose

The purpose of this study is to examine the impact of institutional factors and the efficiency of economic variables, including Islamic financial instruments, on economic growth. Focusing on improving governance indicators and the efficiency of these instruments is of particular importance in all Islamic developing countries, especially Iran. The effectiveness of Islamic financial instruments will be maximized when attention is paid to improving governance indicators and other institutional factors. Therefore, a comprehensive study of the impact of these factors on economic growth with an emphasis on strengthening and efficiency of Islamic financial instruments is an important goal.

Methodology

According to the aforementioned studies and the literature, the estimated generalized least squares (EGLS) econometric method was used to examine the impact of economic factors including labor, capital, Islamic financing instruments, and institutional factors (governance indicators) on Iran's economic growth. In this regard, the arithmetic mean of six governance indicators published by the World Bank, including corruption control, government effectiveness, political stability and absence of violence, legislative quality, legal credibility, and criticism and accountability, was calculated and entered as a representative of institutional factors in the main research model. In the main model, GDP is the gross domestic product as the dependent variable, SUKUK is the amount of sukuk issued in the country each year as the independent variable, LF is the country's active labor force as the independent variable, GOV is the governance quality index as a representative of institutional factors as the independent variable, and GFCF is the gross fixed capital formation as the independent variable. The main model is logarithmic. The source of sukuk data is from WWW.SUKUK.IR and other data is the World Bank. The main model has been estimated for the period between (2010) and (2023) based on the available data for the Sukuk issuance index.

Finding

The findings of the model estimation shows that at a significance level of 95% and based on the data used in this study, the variables of labor force, gross fixed capital formation, governance quality and issued sukuk have a positive effect on economic growth.

Also, according to the results of the model estimation, the explanatory variables were able to explain 72% of the changes in the dependent variable, which indicates an acceptable explanatory power.

Given that the logarithm was taken from both sides of the model, the results indicate that, assuming that other conditions are constant and in the sample under study, for every one percent increase in sukuk issuance, GDP will increase by 46 thousandths of a percent. In addition, for every one percent improvement in the governance quality index, GDP will increase by 57 thousandths of a percent. Also, the sensitivity of GDP to labor force is 76 hundredths of a percent, and for every one percent increase in gross fixed capital formation, GDP will increase by 85 hundredths of a percent.

Conclusion

The output results of the estimated model showed that labor, capital, issued sukuk, and governance indicators all have a positive and significant effect on economic growth in Iran during the study period. It should be noted that labor and capital, according to the prevailing macroeconomic theories, are among the main factors affecting production and economic growth, which were statistically and empirically confirmed in the estimated model of this study.

In order to strengthen investment and improve financing methods, strengthening the issuance of Islamic financing instruments, especially sukuk, is the main recommendation of this study. Empirical and statistical findings show that increasing the issuance of sukuk plays an effective role in strengthening economic growth. Therefore, the recommendation of this study is to increase the issuance and diversification of Islamic financing instruments in order to provide the necessary conditions for sustainable economic growth.

Another basic recommendation of this study is to improve governance indicators. Improving these indicators, as a proxy for institutional factors, can have a significant impact on economic growth by protecting property rights, speeding up business processes, increasing predictability, increasing the credibility and authority of laws, and promoting political and economic stability. These measures not only increase the productivity of existing capital, but also attract new national and international capital. Therefore, both capital productivity and the amount of capital stock will increase, and as a result, economic growth will be strengthened. Therefore, one of the important recommendations of this study is to try to improve governance indicators. According to the results of this research and previous studies, it was found that if institutional quality is not improved and appropriate governance indicators are lacking in countries, the positive effect of Islamic financing instruments on economic growth will be challenged and disrupted, and this positive effect may not be realized.

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