How Macroeconomic Variables Affect Islamic Banking in Indonesia, Malaysia, and Pakistan

Islamic banks have continued to experience significant growth in the last few decades. Based on IFSB data, Muslim countries have always managed to reach the top position for years. However, this condition is not experienced by Indonesia and Pakistan, which have the largest Muslim population. Using data from three countries; Indonesia, Pakistan, and Malaysia, we estimate the relationship between Islamic Banking assets and macroeconomic variables during 2001-2020. The total assets (TA), the exchange rate (ER), the money supply (M2), and GDP per capita (GDPC) were investigated using the Panel Vector Error Correction Model (PVECM). This study's finding revealed a long-term link between the studied variables. In the short run, however, only the money supply variable (M2) has an impact on Islamic Banks' total assets (TA). This study proves that Islamic Banking assets can be influenced only by the money supply in Indonesia, Malaysia, and Pakistan. The macroeconomic variables do not affect the Islamic Banking Assets in this study, based on the high amount of assets owned by residents as represented by the money supply.