Does islamic financial development foster environmental sustainability? A nonlinear perspective from leading dual-banking systems

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Active financial systems supporting climate-aligned investments are essential for CO 2 reductions. However, existing research rarely examines how the finance-emissions relationship varies under different financial conditions. Given the global maturity and robust environmental principles shaping the theory of Islamic finance, this study investigates the impact of Islamic financial development (IFD) on CO 2 emissions in leading dual-banking economies from 2014 Q1 to 2022 Q4. Methodologically, we employ Method of Moments Quantile Regression (MM-QR) and the asymmetric panel causality approach to account for nonlinearities and shock-dependent dynamics. The results reveal a bidirectional causal relationship between IFD and CO 2 emissions. Crucially, the MM-QR findings indicate that IFD significantly reduces CO 2 levels, particularly in countries with lower emission profiles. These results confirm the effectiveness of IFD in fostering environmental sustainability and highlight the vital role of Islamic financial institutions in the global transition to a low-carbon economy.