ABSTRACT
Islamic finance is getting much attention in the flourishing sector of banking industry due to its charac- teristics and prominence. Now Islamic financial industry has reached to more than $1 trillion US dollar and is grow- ing about 20 percent annually. Its growth is not restricted to the Muslim societies but Islamic financial products are also gaining popularity among non-Muslim countries. This paper explores empirically the dynamic relationship between the development of Islamic banking and economic growth in a sample of low and middle income countries. The results show that, notwithstanding its relatively small size compared to the economy and the overall size of the financial system, Islamic banking is positively associated with economic growth even after controlling various variables, including the variable of level of financial depth. The results are robust across different specifications, sample composition and time periods. It implies that the development of Islamic banking is one of the policies, which should be considered by the government to improve their economic growth.