The Negative Impact of Interest Rates on GDP, Consumption and Investment in the UK: Does Islamic Finance Offer a Solution?

English

Abstract

The objective of this study is to analyze the causal relationship between interest rates and the real sector, namely in terms of real GDP, consumption, and investment. By doing so, we intend to assess the impact of Islamic financing on the economy of the United Kingdom. This study adopts a macroeconomic framework to analyze the significance of Islamic financing in the United Kingdom, focusing on macroeconomic data and it employs a humanistic method to explore the economic behaviour of individuals. This research has implications for understanding Islamic finance in the UK by understanding the causal relationship between macroeconomic indicators and humanistic factors, namely Islam. Vector analysis is used to measure and analyze the influence between variables so that the direction of influence between interest rates, GDP, investment, and consumption can be known. The impact of interest rates on the real sector is notably adverse, as seen by the correlation between interest rates and both consumption and GDP. Based on an inverse correlation, it may be inferred that the implementation of an Islamic financial system characterized by zero interest rates or the absence of interest on capital has the potential to stimulate growth in the real economy.