Economic Growth in the Dual Banking System and the Role of Participation Finance

In today’s global economic system, the dual banking model is a structure that incorporates both conventional and Islamic banking, addressing diverse financial needs. Studies analyze how this model contributes to economic growth, particularly in developing countries. So, is the dual banking system truly a key element of economic growth? What is the role of participation finance in this process? Here are the prominent findings in light of empirical analyses… 

The Effects of the Dual Banking Model on Economic Growth 

The research evaluates the impact of the dual banking system on growth using empirical data from countries such as Turkey and Malaysia. By examining the interactions between Islamic and conventional banking, the contribution of financial systems to economic growth is analyzed. 

According to the findings of the study: 

• The banking sector may respond differently to economic crises. After economic shocks like the 2001 and 2008 crises, the flexibility of the Islamic banking model became more evident. 

• The contribution of Islamic finance to economic growth in Malaysia has a different structure compared to the conventional banking model in Turkey. In Malaysia, state-supported Islamic banking practices have been among the key factors encouraging economic growth. 

• In Turkey, Islamic banking has been positioned as an alternative to the traditional financial system, but has mostly served as a complementary structure. 

The Contribution of Islamic Banking to Growth 

The core principles of the Islamic banking system—interest-free financing, risk-sharing, and financial transactions based on the real economy—are considered elements that support long-term sustainable growth. The results of the study show that Islamic finance offers a more resilient structure, especially during periods of crisis. 

The main reasons for this are: 

• Asset-based financing models are less affected by economic fluctuations. 

• Transactions based on the principle of risk-sharing support financial stability. 

• Investments in the real sector by participation banks contribute to the sustainability of economic growth. 

Recommendations for the Future 

The research findings reveal that the dual banking system should be used more effectively within countries’ economic growth strategies. Especially, supporting Islamic banking models through regulations and increasing financial inclusion are considered critical steps for sustainable growth. 

In addition: 

• Strengthening the legal frameworks that promote Islamic banking can enhance trust in the sector. 

• Integrating Islamic financial instruments with fintech solutions can help reach a wider base of investors. 

• Financial literacy should be improved through education and awareness programs, enabling individuals to benefit more from interest-free financing opportunities. 

In conclusion, the contribution of the dual banking system to economic growth is undeniable. However, for Islamic banking to become more effective, cooperation between regulatory authorities and industry players is essential. In the future, the integration of interest-free financial models with fintech and digital banking may further increase the contribution of participation banks to economic growth.