Modelling the relationship between financing by Islamic banking system and environmental quality: evidence from bootstrap autoregressive distributive lag with Fourier terms

The aim of the paper is to contribute to the extant empirical literature on the determinants of pollution by investigating the impact of financing by Islamic banking on a comprehensive index of emission in Malaysia. Using the stochastic environmental impact, population, affluence and technology (STIRPAT) framework, we controlled for the impact of industrial production index and demography. A residual augmented least squares (RALS) method is used to examine stationarity of the series. We have also used a recently proposed bootstrap autoregressive distributive lag (ARDL) test, which is further augmented with Fourier terms to cater for any nonlinearity in the estimation. The results show evidence for cointegration among the series. The long run estimates suggest that financing by Islamic banks has a negative impact on emission, while labour force increases it. The industrial production index does not have significant impact on emission. The policy implications and recommendations are discussed in the body of the paper.