This research is an effort to evaluate the link between Islamic bank financing and economic growth by considering the case of Malaysia and Pakistan. The study utilizes data on quarterly basis for the period of 2006 to 2014 and primarily adopts Engle Granger approach of co-integration, Auto Regressive Distributive Lag (ARDL), Error Correction Model (ECM) and Granger Causality tests for finding nexus between Islamic banking financing and economic growth. The results demonstrate a meaningful ‘supply leading’ relationship in long term as well as in short term in case of Malaysia as Islamic bank financing lead the GDP and TRADE. In the context of Pakistan, the relation was found to be insignificant between the Islamic bank financing and economic growth. Because of limited data and recent introduction of Islamic banks, there is paucity of literature on the topic, specifically in Pakistan, where there is dire need of economic development. Therefore, this study is an attempt to fill the gap in literature and the intended incremental contribution of the existing study for the Islamic banking practitioners are very clear based on the results presented.
Keywords: Islamic banking, Economic Growth, Engle Granger, Granger Causality