The Role of Islamic Banking, Renewable and Non- Renewable Energy and Economic Growth on Environmental Quality: Testing the LCC Hypothesis for Selected Countries

Abstract

The financial sector is a provider of finance in the transformation of energy resources into investments. In recent years, the Islamic banking sector, which has developed rapidly as an alternative to conventional banking in the financial sector, has played an important role in financing environmentally friendly projects. In this context, the study aims to investigate the impact of Islamic banking on environmental quality under the load factor curve (LCC) hypothesis. In this direction, the load capacity factor (LCF), which is the indicator of environmental quality, was used as the dependent variable in the established research model. Islamic banking assets, return on equity, renewable/non-renewable energy and real gross domestic product per capita were considered as independent variables in the model. The study was conducted in Türkiye, the United Arab Emirates, Kuwait, Pakistan and Indonesia, which are among the leading countries in Islamic banking. The 10-year data between 20132022 of five countries was examined with a panel data analysis. As a result of the study, it was found that the LCC hypothesis is valid for the countries studied. It was found that Islamic banks' assets had a positive effect on the load capacity factor, but return on equity had a negative effect. On the other hand, the consumption of renewable energy and non-renewable energy was found to have a negative effect on the load capacity factor in the analyzed countries. Therefore, it is necessary to promote and spread the use of renewable energy by providing more financing with affordable costs and easy access for investments in clean energy instead of primary energy sources in the analyzed countries.