The Effectiveness of IDB's Foreign Aid on Economic Growth : An Empirical Study of African Muslim Countries

The Islamic Development Bank (IDB) is the most leading and prominent Islamic multilateral financial and development institution in the Muslim world. Yet, with its foreign aid activities in almost four decades in various parts of the world, especially in the African continent; it is surprising to note that no empirical study is available on the impact of its foreign aid activities in Africa, particularly the African Muslim Countries (AMCs). The AMCs constitute more than two-third of the member countries of IDB from Africa. Therefore, this study provides empirical evidences from AMCs like Algeria, Egypt, Gambia, Morocco, Nigeria, Senegal, Tunisia and a host of others, on the role of IDB in accounting for growth in these countries spanning 1987-2010 through balanced panel data. Also, this study examined the nature of causality existing between foreign aid and corruption in AMCs. This is in view of the endemic prevalence of corruption in Africa. Hence, Simultaneous Equations Model (SEM) was adopted as the base model; while OLS, 3SLS and Seemingly Unrelated Regressions Estimate (SURE) methods were utilized for its estimation. On the other hand, Autoregressive Distributed Lag (ARDL) approach based on Cointegration and Granger-causality tests were used to estimate for corruption-aid nexus. Evidently, the findings from this study revealed that the foreign aid activities of IDB positively impact on the economic growth of AMCs via investment as the major transmission channel and it thus confirm the aid effectiveness hypothesis. Also, the nature of causality between corruption and foreign aid is both in the short and long-run; and our findings establish that countries like Morocco and Nigeria are victims of corruption trap. Basically, this study is perhaps the first of its kind to empirically investigate the impact of the foreign aid activities of IDB in Africa.