The Impact of Islam on Entrepreneurship Development Considering the Moderating Role of Islamic Banking: A Case Study of the OIC Member Countries

Authors

1 Assistant Professor, Faculty of Economics, Allameh Tabatabai University, Tehran, Iran

2 PhD student, Islamic Economics, Institute of Higher Education of Islamic Humanities, Al-Mustafa International University, Qom, Iran.

Abstract

Introduction: In today’s world, entrepreneurship is recognized as a key factor for economic development and job creation in various countries. However, Islamic countries face specific challenges in the field of entrepreneurship. Some researchers argue that Islam may hinder the development of entrepreneurial activities in Muslim societies, especially due to restrictions such as the prohibition of usury (Riba). However, the presence of Islamic banking, as a financial system compliant with Sharia, can provide an alternative financial tool that removes these barriers and creates favorable conditions for entrepreneurship development. Therefore, the main goal of this study is to examine the impact of Islam and the Islamic banking system on entrepreneurial activities in the member countries of the Organization of Islamic Cooperation (OIC). This study investigates whether Islam, as a religion, can hinder entrepreneurship development and how Islamic banking plays a role in enhancing or moderating these effects. The central research question is whether entrepreneurial activities are strengthened in Muslim countries with Islamic banking systems or whether Sharia restrictions still negatively affect them. This study aims to open this discussion and offer recommendations to improve entrepreneurship conditions in Islamic countries.
Methodology: To investigate the impact of Islam on entrepreneurship while considering the moderating role of Islamic banking, the study adopts regression models based on the work of Kamdjo (2024) and Farzanegan & Badrelin (2023):
1. Business Creationit = 𝜶0 + 𝜶1 Islamit + 𝜶2 Islammis Bankingit + 𝜷1 Controlsit + eit
2. Business Creationit = 𝜶0 + 𝜶1 Islamit + 𝜶2 Islammis Bankingit + 𝜶4 Islamit * + Islammis Bankingit + 𝜷1 Controlistit + eit
The interaction term (Islamit * Islammis Bankingit) reflects the moderating role of Islamic banking in stimulating business creation through increased financial inclusion for the Muslim population.
Entrepreneurship (Business creation): Number of newly registered businesses per 1,000 people of working age (15-64).
Independent variables:
Islam: A dummy variable that equals 1 if Islam is the official religion of a country and 0 otherwise.
Islamic Banking: The share of Islamic banking assets in total banking assets in the country.
Control variables:
Economic Output (GDP): The log of per capita GDP.
Bank Credit (Credit): Domestic credit provided by banks to the private sector (as a percentage of GDP).
The statistical sample includes 57 OIC member countries, and panel data analysis is performed using EViews software version 13.
Results: The findings for Model 1 show that the Islam variable has a significant negative effect on entrepreneurship by 0.21%. Additionally, economic output and bank credit have positive effects of 1.39% and 0.98%, respectively, on entrepreneurship. Based on these results, in the absence of Islamic banking, the Islam variable does not improve entrepreneurship in Muslim-majority countries.
For Model 2, the results indicate that the Islam and Islamic banking variables alone have negative effects of 0.14% and 0.36%, respectively, on entrepreneurship. However, when Islamic banking is considered alongside Islam, it has a positive and significant effect of 1.25% on entrepreneurship development. In other words, Islam can contribute to entrepreneurship development only when Islamic banking tools are available. Other coefficients show that economic output and bank credit positively impact entrepreneurship by 1.44% and 1.18%, respectively.
Discussion and Conclusion: The results of this study demonstrate that Islam, as the state religion, has a negative relationship with entrepreneurship in countries without Islamic banking. In these countries, Sharia restrictions on financing, such as the prohibition of interest, hinder entrepreneurial activities. However, in countries with Islamic banking, these negative effects are alleviated. The presence of Islamic banks provides a financial environment where entrepreneurs can access financing without facing Sharia-related barriers. The findings also suggest that when Islamic banking is present in countries where Islam is the state religion, positive impacts on entrepreneurship are observed. This indicates that the lack of Islamic financial systems, not Islam itself, hinders entrepreneurship. Strengthening and developing Islamic banks in Islamic countries could enhance entrepreneurship and economic development. These findings emphasize the importance of Islamic banking in promoting entrepreneurship and suggest that alongside fostering religious adherence, tools such as Islamic banking should be developed to fully leverage the positive effects of Islam on entrepreneurship.
Acknowledgements: The authors would like to express their gratitude to all individuals involved in the evaluation, review, and acceptance of the paper.
Conflict of Interests: The authors declare no conflict of interest related to the content of this paper.
JEL classification: G30, G21.

Keywords

References

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Journal of Economic Essays; an Islamic Approach
Volume 21, Issue 44 - Serial Number 44
December 2024
Pages 83-104

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