The purpose of this study is to examine how Islamic finance (IFN), grounded in ethical principles, risk-sharing, and social responsibility, contributes to environmental sustainability amid escalating challenges of climate change and global warming, an area that remains underexplored despite extensive research on green finance and renewable energy.
This study examines IFN’s contribution to reducing carbon emissions (CO2) in 15 Organization of Islamic Cooperation (OIC) countries from 2013 to 2022. Employing advanced econometric techniques, including Method of Moments Quantile Regression and Bootstrap Quantile Regression (BSQR), the analysis captures heterogeneous impacts across environmental stress levels.
The findings indicate that IFN reduces CO2 emissions, particularly in countries at lower and middle quantiles with relatively fewer environmental challenges. Conversely, economic growth, urbanization and population are positively associated with emissions, exacerbating environmental degradation. Foreign direct investment (FDI) and trade openness exert a mitigating effect on emissions, while industrialization contributes positively but insignificantly. These outcomes are consistently validated through BSQR as a robustness check. The Dumitrescu–Hurlin test reveals bidirectional links among urbanization, trade and industry, while CO2 unidirectionally causes IFN and GDP, and FDI shows no causality.
These findings underscore the potential of IFN in fostering environmental sustainability. Policymakers should prioritize ethical and socially responsible investments, strengthen technological innovation and leverage IFN as a complementary tool for achieving long-term environmental objectives in OIC countries.
To the best of the authors’ knowledge, this study is the first to empirically examine the heterogeneous impacts of Islamic finance on environmental sustainability in OIC economies using advanced econometric techniques.
