Roval Romadhon, Siti Zulaikha

The Nexus Between Islamic Finance, Trade Openness, FDI, Economic Growth and Carbon Emission: Panel Data Analysis in Islamic Countries

Introduction

The nexus between islamic finance, trade openness, fdi, economic growth and carbon emission: panel data analysis in islamic countries. Analyze how Islamic finance, economic growth, trade openness, FDI, and urbanization affect carbon emissions in OIC countries. Discover varied impacts & policy insights.

Abstract

This study aims to analyze the impact of economic growth, Islamic finance, trade openness, FDI, and urbanization on carbon emissions in member countries of the Organization of Islamic Cooperation (OIC). GDP per capita serves as the indicator for economic growth, while Islamic financial assets represent Islamic finance. The study employs panel data regression analysis using the fixed effect model, identified as the best model based on the Hausman test, with data processed and analyzed through EViews 13. The results indicate a significant negative impact of economic growth on carbon emissions in high-income OIC countries, whereas in middle-income countries, economic growth has a significant positive effect on carbon emissions, partially. Simultaneously, economic growth, Islamic finance, trade openness, FDI, and urbanization collectively have a positive influence on carbon emissions in OIC member countries during the 2013–2022 period. These results can serve as a reference for governments, institutions, and organizations in formulating policies or regulations to enhance sustainable economic stability and environmental quality within the OIC member countries.

Review

This study offers a timely and relevant investigation into the intricate relationship between Islamic finance, trade openness, foreign direct investment (FDI), economic growth, urbanization, and carbon emissions within the diverse member countries of the Organization of Islamic Cooperation (OIC). Employing a panel data regression approach with a fixed effect model, the research aims to shed light on how these crucial socioeconomic factors influence environmental quality over the 2013–2022 period. The findings reveal a nuanced impact of economic growth on carbon emissions, with a significant negative effect observed in high-income OIC countries and a positive, albeit partially, effect in middle-income counterparts. Importantly, the study concludes that economic growth, alongside Islamic finance, trade openness, FDI, and urbanization, collectively contributes to an increase in carbon emissions across OIC member countries. While the study tackles a significant and under-researched area, particularly regarding the role of Islamic finance in environmental sustainability, the abstract presents certain points that warrant further clarification for a comprehensive understanding. A key strength lies in disaggregating the impact of economic growth by income level, which offers a more granular understanding of environmental dynamics within this specific context. However, the abstract only explicitly details the individual impacts of economic growth. It states a collective positive influence of *all* variables on carbon emissions but crucially omits the individual effects of Islamic finance, trade openness, FDI, and urbanization. This leaves a significant gap in understanding the specific drivers, making it difficult to fully grasp the 'nexus' as promised by the title. Furthermore, the term "partially" regarding the positive effect of economic growth in middle-income countries requires elaboration for clarity and precise interpretation. Despite these points, the research offers a valuable starting point for policymakers within OIC nations, providing preliminary insights into the trade-offs and synergies between economic development and environmental sustainability. The overarching finding that economic activities, including those influenced by Islamic finance, generally correlate with increased carbon emissions collectively, underscores the urgent need for integrating green and sustainable principles into economic policies and financial instruments. Future iterations of this work would benefit immensely from clearly delineating the individual effects of each explanatory variable beyond economic growth. Additionally, exploring specific mechanisms through which Islamic finance either mitigates or exacerbates carbon emissions, and conducting robustness checks using alternative methodologies or extended timeframes, would further enrich the study's contribution to both academic discourse and practical policymaking.

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