The theoretical literature of economic growth (endogenous and exogenous growth model) and empirical evidence in developed and developing countries show that without financial reform, sustainable development is impossible. The positive effects of financial sector development on economic growth and developments in the international financial sector make a more important issue. Some economists believe that financial reforms through increasing the level of savings and investment can provide economic growth. Also, some economists believe that financial reform by international capital mobility and technology transfer can cause income convergence among countries. This study investigates the theoretical foundations of financial development, financial system and its functions, and also the analysis of the effect of financial reform on economic growth and creating income convergence among selected Islamic countries during 2008-1979. Estimation results show that financial reform through liquidity has direct and significant impact on economic growth. The crossover effect of economic growth and liquidity has direct and statistically significant effect on income convergence.

Keywords: Financial Reform, Economic Growth, Income Convergence, Financial System

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