Islamic Finance: Complement or Substitute? An Empirical Analysis

The first wave of Islamic finance dates back to the 1970s—the decade of the Oil Crisis of 1973 and the most severe global recession since the end of World War Two. While it is evident that Islamic finance did not technically emerge as late as the 1970s, the influx in Islamic banking during the 1970s remains to pose an empirical puzzle: Why is it that Islamic finance experienced a boom during the 1970s and is going through a second phase of vast expansion in the early 21st century? The empirical evidence of this study supports the hypothetical conclusions found in the established literature; the first boom in Islamic finance during the 1970s is attributable to the phenomena of Pan-Islamism and the first oil price hike in history. The empirical analysis further reveals that the oil industry, sovereign wealth funds (SWF), and the Islamic banking industry are three jointly intertwined elements mutually reinforcing one another. Last, it is found that Islamic finance can serve as a useful stabilizing complement to conventional finance, as it not only introduces conservative financial products into the financial markets but also contributes to a more diversified financial marketplace.