IOSR Journal of Business and Management (IOSR-JBM) e-ISSN: 2278-487X, p-ISSN: 2319-7668. Volume 18, Issue 6 .Ver. I (Jun. 2016), PP 20-27 www.iosrjournals.org DOI: 10.9790/487X-1806012027 www.iosrjournals.org 20 | Page Are Macroeconomic Factors Substantially Influential For Islamic Bank Financing? Cross-Country Evidence Shamsun Nahar 1 , Niluthpaul Sarker 2 1 (Ph.D Fellow, School of Accounting, Zhongnan University of Economics and Law, P.R. China) 2 (Ph.D Fellow, School of Management, Huazhong University of Science and Technology, P.R. China) Abstract: The advent of Islamic finance has created a significant change in global financial setup and with the introduction of Islamic banking system. The objective of this study is to examine the influence of macroeconomic factors on the financing of Islamic banks. The study used FGLS regression method to analyze the unbalanced panel data of 172 Islamic banks from 48 Muslim and Non-Muslim countries that met the selection criteria and had at least three years’ financial data obtainable for the period spanning from 2004 to 2013. The results found that GDP growth rate and inflation rate have significant positive relationship with Islamic bank financing. The effect of exchange rate on Islamic bank financing was found negative, and as expected the Islamic bank financing was found to be positively significant for countries with Muslim population in majority. However, surprisingly and inconsistent with the general reports on remarkable growth of Islamic banks after global financial crises, the study found insignificant results for financing volume of Islamic banks during the post global financial crises period. Keywords: Islamic Banking, Macroeconomic Factors, Islamic bank financing, Bank Credits, Panel data. I. Introduction In the past decade increasing attention has been given to Islamic banking system, one major reason of this growing popularity of Islamic banking system was the resilience of Islamic banking as witnessed during global financial crises (GFC). Despite the financial turmoil in 2008, that crippled most of the Western institutions, Islamic banks continued to grow in size and distinction. Asian Banker Research states that the world‟s 100 largest wholly Islamic banks, ranked by assets, held more than $580 billion in assets in 2008, a 66% increase from the $350 billion they held in the previous year, which clearly depicts that Islamic banks came out of this crises quite unscathed as opposed to its conventional counterparts. The Global Islamic Finance Report (2014) [ 1 ] estimated the size of the global Islamic financial services industry at $1.813 trillion at the end of 2013 with an estimated annual growth of more than 15% per annum. Presently, Islamic banking growth rate is 50% faster than overall banking sector in several core markets and Islamic banks are now operating in more than 83 countries around the world which includes Muslim countries i.e Bahrain, UAE, Saudi Arabia, Malaysia, Brunei and Pakistan etc. and non-Muslim countries like USA, UK, Canada, Switzerland, Australia, South Africa and others. Existing literature lacks the comprehensive research on examining the financing portfolio of whole Islamic banking industry. This study will bridge this gap by discussing different macro-level factors that influence the lending decisions of Islamic Banks, so that it contributes to the researchers‟ and policy makers‟ notion. There is a general agreement in literature that Islamic banks are superior to conventional or mainstream banks in terms of their performance (Safiullah, 2010 [ 2 ]; Samad, 2004[ 3 ]; Awan, 2009[ 4 ]; Rosly and Abu Bakar, 2003) [ 5 ]. Different studies related to Islamic banking have been conducted in different areas while considering the importance of Islamic banking. It is evident from the literature that numerous studies have focused on determinants of conventional bank lending while neglecting determinants of Islamic banks financing. There are macroeconomic factors that influence the Islamic bank credits. Thus, in this study we include macroeconomic factors- conventional banks‟ interest rate, GDP growth rate, inflation and exchange rate, in order to study the impact of these variables on Islamic bank lending in 48 countries having established Islamic banking setup for the period from 2004 to 2013. II. Literature Review In the literature, there are many empirical studies that disclose the relationship between macroeconomic variables such as interest rate, inflation, exchange rates, money supply, etc., and conventional and/ or Islamic bank financing. The literature divided the determinants (factors) of banks financing in two types: the first is the micro-economic factors such as bank size, bank capitalization, liquidity and asset quality, capital ratios and collateral security and the later one refers to the macroeconomic factors such as money supply, interest rates, economic growth, inflation rate, exchange rate, and stock market index etc.