Macroprudential Policy, Islamic Banking, and Economic Transformation: Ensuring Pro-Poor Stability

Abstract

Persistent poverty across Organisation of Islamic Cooperation (OIC) member states remains a formidable challenge, even as Islamic financial assets continue to expand at double-digit rates. This study investigates a relatively unexplored intersection: whether macroprudential instruments embedded within the Islamic banking architecture, specifically the Sharia-compliant Capital Adequacy Ratio (CAR), Loan-to-Value (LTV) regulation, and Sharia Banking Depth, exert measurable long-run effects on national poverty rates across OIC economies. Using an annual panel dataset of 30 OIC countries spanning 2000 to 2022, sourced from Bloomberg, the World Development Indicators (WDI), and SESRIC, we deploy a Vector Error Correction Model (VECM) framework to capture both long-run cointegrating relationships and short-run adjustment dynamics. System GMM estimation further validates the findings against potential endogeneity. Results confirm that Sharia Banking Depth and Islamic bank CAR exercise significant negative effects on poverty in the long run, while consumer price inflation remains the strongest pro-poverty force in the system. LTV regulation, conversely, demonstrates a regressive long-run effect, restricting credit access most acutely for lower-income households. Fiscal policy shows a conditional, governance-dependent impact. The Error Correction Term coefficient of −0.387 indicates a convergence speed of approximately 38.7% per annum. These findings yield actionable policy prescriptions for OIC financial regulators seeking to embed pro-poor objectives within macroprudential design.