The Impact of Economic Diversification on Sustainable Development in the Kingdom of Bahrain: The Moderating Role of Islamic Banks’ Performance
DOI:
https://doi.org/10.31436/jif.v15i2.1123Keywords:
Economic diversification, Sustainable development, Islamic banking performance, Temporal disaggregation, Small-sample inferenceAbstract
This paper examines whether economic diversification has improved sustainable development in the Kingdom of Bahrain over the period 2015 to 2024, and whether the performance of the Islamic banking sector conditions that relationship. Annual data from official sources were disaggregated into quarterly series (N = 40) and analysed within an ARDL/ECM framework, with Newey-West HAC standard errors and a mean-centred interaction term used to test moderation. The results show no statistically significant direct effect of economic diversification on sustainable development in any of its dimensions, a finding consistent with the persistent gap between productive diversification (non-oil sectors average 82.5 per cent of GDP) and fiscal diversification (non-oil revenues average 28 per cent of government income). Islamic banks’ performance, by contrast, has a significant positive effect on the social dimension (β = 0.113, p = 0.018) and a strong positive effect on the environmental dimension (β = 0.385, p < 0.001) of sustainable development, and cointegration tests confirm a long-run equilibrium relationship between banking performance and development. The interaction term between diversification and banking performance is negative and significant (δ = -0.044, p = 0.018), indicating a buffering form of moderation: as Islamic banks perform better, they generate an independent development effect that reduces the economy’s reliance on the diversification path alone. The paper draws implications for Islamic finance policy under Bahrain’s Economic Vision 2030.
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