Soft Infrastructure Driving Islamic Finance Growth: An Empirical Assessment of Institutional Determinants

This study examines whether “soft infrastructure”—governance quality, knowledge capacity, and public awareness—causally drives the growth of “hard infrastructure” in Islamic finance, namely Islamic banking, takaful, and Islamic capital markets. It addresses the “development puzzle” of why some jurisdictions build diversified Islamic finance ecosystems while others remain stuck in single-sector outcomes. Methodologically, it applies a longitudinal econometric approach using a dynamic panel of 130 OIC and non-OIC countries from 2013–2024, combining data from the Islamic Finance Development Indicator (IFDI), World Bank WDI, and Worldwide Governance Indicators. System GMM estimation is used to manage endogeneity, persistence, and unobserved heterogeneity. The study expects all soft-infrastructure dimensions to significantly deepen markets, with larger marginal returns for emerging sectors (takaful and capital markets) than for mature Islamic banking. It also anticipates threshold effects where growth accelerates only after governance and knowledge exceed critical levels. Practically, findings will guide policymakers on prioritizing reforms and investments to enable ecosystem-wide development.

Hamad Bin Khalifa University (HBKU)