Does Islamic Finance Flatten the Environmental Kuznets Curve? Evidence from Saudi Arabia
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Abstract
This study evaluates the role of Islamic financing in moderating the Environmental Kuz-nets Curve (EKC) dynamics in Saudi Arabia using Autoregressive Distributed Lag (ARDL) approach applied to annual data from 1990 to 2024. The empirical result contradicts tradi-tional EKC hypothesis as it confirms a long-run U-shape relationship between income and CO2 emissions. However, Islamic financing exhibits a significant moderating effect that flattens the EKC. Even though Islamic financing shows a positive and linear relationship with CO2 emissions at lower income level, its negative interaction with squared per capita income dominates when per capita income passes the critical threshold value of USD 38,640. The short-run dynamics further demonstrate that all the variables under study cor-rect short-run disequilibrium with an annual adjustment rate of 44.8%. Besides, energy con-sumption, gross capital formation, inflation, industrial value added, trade openness drives short-run CO2 emissions, while FDI inflows reduce CO2 emissions, supporting the "pollution halo" hypothesis. To fully leverage the Islamic financing mechanism under Saudi Vision 2030, regulators including the Saudi Central Bank (SAMA), capital market authority, and industrial bodies should apply Sharī’ah-compliant screening, establish green asset ratio targets, expand green industries, and shift industrial financing toward green hydrogen pro-duction, industrial recycling systems, and carbon capture technologies.
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On request: The data that support the findings of this study are available from the corresponding author upon reasonable request.
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