The impact of sustainable Islamic banking financing for infrastructure projects on Malaysia’s economic growth

Infrastructure is widely recognized as a catalyst for economic development in many countries; however, a significant funding gap persists. Alternative funding sources are required to address this deficit. Islamic finance presents one such alternative for infrastructure funding. Consequently, this study examines the impact of sustainable Islamic banking financing for infrastructure projects on Malaysia’s economic growth. The research employs a quantitative methodology utilizing Autoregressive Distributed Lag (ARDL) analysis to examine the long-run and short-run relationships between Islamic infrastructure financing in economic, environmental, and social sectors and Malaysia’s real Gross Domestic Products (GDP) using quarterly data from the first quarter of 2015 to the second quarter of 2024. The economic sectors include transportation and storage, and information and communication technology (ICT). The environmental sectors encompass electric, gas, and steam, and agriculture, forestry, and fishing. The social sectors comprise education, and human health and social work. The findings reveal that Islamic infrastructure financing in the transportation and storage, and ICT sectors demonstrates a positive but statistically insignificant effect on economic growth in the long run. Electric, gas, and steam financing also exhibits a positive but insignificant long-run impact, while agriculture, forestry, and fishing financing presents a negative and insignificant long-run effect. Notably, Islamic financing for education, and human health and social work sectors exhibits a positive and statistically significant long-run relationship with economic growth. The short-run analyses yield heterogeneous results across different lags for all sectors. Robustness checks utilizing FMOLS, DOLS, and CCR models corroborate the ARDL findings. The study elucidates the potential of Islamic financing from Islamic banking in promoting sustainable infrastructure development and economic growth, with implications for policymakers, Islamic financial institutions, and investors. It also identifies areas for future research, such as cross-country comparisons and sector-specific analyses.