THE RESILIENCE OF ISLAMIC FINANCING TO OIL PRICE VOLATILITY IN SAUDI ARABIA: A NONLINEAR ARDL APPROACH

Abstract

This study examines the resilience of Islamic financing to oil volatility in Saudi Arabia from 1996 to 2023, utilizing a Nonlinear Autoregressive Distributed Lag (NARDL) methodology to determine asymmetric impacts. The goals of this study are to examine if positive and negative oil price shocks have symmetric or asymmetric effects on Islamic financing, assess both short-run and long-run responses while taking into account real GDP, inflation, trade openness, and the Vision 2030 policy dummy, and evaluate dynamic multiplier adjustment paths. The bounds cointegration tests validate a consistent long-term equilibrium relationship with an error correction term of -0.805 signifying that 80.5% of the disequilibrium is corrected each year. The asymmetry tests reject symmetric oil price effects. In the long run, positive oil shocks increase Islamic financing by 2.11%, but negative shocks surprisingly provide a positive coefficient of 3.691, indicating structural flexibility and adaptability in accordance with Saudi Vision 2030. In the short run, negative oil shocks result in an immediate reduction of 1.29%, while positive shocks exhibit no immediate impact. Dynamic multipliers indicate that negative shocks result in a 3.7% long-run decrease, whereas positive shocks yield a 2.0% increase—1.85 times greater in absolute size. The policy recommendations of this study include the establishment of a Shari'ah-compliant counter-cyclical liquidity facility, the imposition of asymmetric oil stress tests for Islamic banks, the rapid execution of diversification-related financing, and the preparation of oil price-contingent Islamic contracts.