Can Islamic Finance Drives Economic Growth ? : Empirical Evidence from Indonesia (original) (raw)

Islamic Finance-Growth Nexus: Evidence from Indonesia

Shirkah: Journal of Economics and Business

Previous work on the financial industry, which covers the entire financial services sector and is related to economic growth, has remained limited. This present study empirically analyzed the growth of Indonesia’s three main sectors of the Islamic Financial Industry (Islamic Capital Market, Islamic Banking, and Islamic non-bank Financial Industry) towards economic growth between 2014Q1 and 2021Q3. The quarterly data was processed through the ARDL Bound-test for cointegration and Error Correction Model (ECM). The research revealed three of the four research variables (sharia stock, Sukuk, and sharia insurance) that significantly affect GDP, while Islamic banking shows no significant effect on GDP. As a result, Indonesian Islamic banks must optimize funds for the productive sector. Future policies should consider maximizing the role of the Islamic financial industry to accelerate economic growth.

Causality between financial development and economic growth, and the Islamic finance imperative: A case study of Indonesia

2015

Indonesia has been rapidly showing signs of advanced economic development. The country’s central bank is of the view that with the unbanked accounting for more than half of the population, the potential for growth in the world’s biggest Muslim population is immense. This article makes an attempt to test the possible directions of causality between financial development and economic growth, with Indonesia as a case study. It also discusses the results in the context of the development of Islamic finance in Indonesia. The study is conducted by applying the Autoregressive Distributed Lag model (ARDL) analysis (also known as the Bounds testing procedure) proposed by Pesaran et al. (2001). This article is believed to be one of the first to extend the finance-growth nexus discussion to include the development of Islamic finance. The study finds a unique cointegrating relationship among GDP per capita, gross fixed capital formation, annual population growth rate, and domestic credit to pri...

Islamic Banking Financing and Economic Growth: An Empirical Study from Indonesia

2020

This research studies the relationship between Islamic bank financing and Indonesia's economic growth from 2017:1 to 2019:12. The analytical approach used is the Autoregressive Distributed Lag (ARDL) model, which can show the dynamics of short and long terms relationships. Also using the Granger causality test to study the relationship of causality between research variables. ARDL estimation results show the independent variable: Total Financing (TF), Mudharabah (PLS), and Murabahah (PMH) are proven to have long-term co-integration or in the long term move together in influencing Indonesia's economic growth (GDP). These three variables also have a dynamic short-term relationship with an adjustment speed of 52.47 percent per month. Furthermore, the Granger causality test results indicate that a supply-following relationship, economic growth affect the financing of Islamic banks in Indonesia. The vital record from this research is Islamic Banking intermediation empiricall...

The Influence of Islamic Financial Instrumens On Indonesia's Economic Growth: An AutoregressiveE Distributed Lag Approach

Al-Amwal: Jurnal ekonomi dan perbankan syari'ah, 2022

The growth of Islamic finance in Indonesia has experienced very significant growth. The Indonesian government hopes that the financial sector will become an important instrument in promoting economic growth in Indonesia, but it seems that the percentage of economic growth in Indonesia has declined over the past decade. This study aims to analyze the impact of Islamic financial instruments on economic growth in Indonesia. This study uses a quantitative method with an Autoregressive Distributed Lag (ARDL) model analysis tool. The results of this study show that all Islamic financial instrument variables have a negative effect on economic growth in the short term. Meanwhile, in the long term, all independent variables have a positive effect on economic growth except for Sharia Mutual Funds which show a negative effect and Sharia Bank Financing and Sharia Stocks have no effect on economic growth in Indonesia. Thus, it can be concluded that Islamic financial instruments in the long term have a positive influence on encouraging economic growth in Indonesia.

Interaction between Islamic Financial Development and Economic Growth: Empirical Evidence from Indonesia

Media Trend

Financial development and economic growth have been thoroughly analyzed in the literature extensively. The discussion revolved on whether the financial sector leads the real sector in the process of economic development or whether it is the other way around. There is now no consensus on the causal relationship between financial development and economic growth. So, it is necessary to determine the relationship between financial development and economic growth in order to make accurate economic growth estimations. This paper examines an interaction model between Islamic financial development and economic growth that assumes the consumption of real resources by the financial sector. This research used Hadri Lagrange-Multiplier to investigate association’s path between variables. As a result, the interaction between Islamic financial development and economic growth may be unidirectional. However, the Islamic financial system is unsustainable, the Islamic financial market's contribut...

Islamic Finance and Indonesia's Economy: An Empirical Analysis

Jurnal Ekonomi & Keuangan Islam, 2022

Purpose-Islamic finance is becoming increasingly important both globally and in Indonesia. However, studies on the relationship between Islamic finance and Indonesia's economy are scant. Therefore, this study aims to analyse the short-term and long-term relationship between Islamic finance and Indonesia's economy. Methodology-We use monthly data for the period 2011-2020 which are estimated using the Vector Error Correction Model (VECM). The dependent variable is Indonesia's GDP, while the independent variables are macroeconomic variables (investment, trade openness and inflation), Islamic finance (Islamic banking, capital market and Sukuk) and a Covid-19 dummy variable. Findings-We found a one-way causal relationship between Islamic finance and Indonesia's GDP. In the short-term, sukuk has a significant effect on the GDP. While in the long-term, Islamic banks and Islamic mutual funds are found to significantly impact the GDP. These suggest a positive relationship between Islamic finance and Indonesia's GDP in both the short and long-term. Investment, inflation and the occurrence of the Covid-19 pandemic also have a significant impact on the GDP. Originality-Most studies linking Islamic finance and economic size only use Islamic banking to proxy Islamic finance. However, while Islamic banking institutions dominate the Islamic finance landscape, non-bank Islamic financial institutions such as capital market is increasingly important in many countries, including Indonesia. This study fills the gap by incorporating Islamic capital market variables to explain the relationship between Islamic finance and economic size in Indonesia Research limitations-Due to data limitation, we only use Islamic mutual funds and Sukuk to represent non-bank financial institutions, which as a sector includes various other sub-sectors. Practical implications-Policymakers, industry and academics could use the research findings to accelerate the development of Islamic finance in Indonesia and strengthen its role in supporting and aiding the recovery of the Indonesian economy.

Islamic Banking and Economic Growth: The Indonesian Experience

Purpose – The purpose of this paper is to examine the short-run and the long-run relationships between Islamic banking development and economic growth in the case of Indonesia. Design/methodology/approach – Using quarterly data (2003:1-2010:2), this paper utilizes the bound testing approach of cointegration and error correction models, developed within an autoregressive distributed lag (ARDL) framework. Findings – The results demonstrate a significant relationship in short-run and long-run periods between Islamic financial development and economic growth. The relationship, however, is neither Schumpeter's supply-leading nor Robinson's demand-following. It appears to be bi-directional relationship. Originality/value – This paper uses empirical evidence to show the role of Islamic banks' financing towards economic performance of a country. To the best of the authors' knowledge, the study on the role of Islamic banking development towards economic growth is limited, particularly in the context of Indonesia.

Revisiting the Contribution of Islamic Banks’ Financing to Economic Growth: The Indonesian Experience

Shirkah: Journal of Economics and Business, 2021

The contribution of Islamic banking towards economic growth remains debatable amongst academicians and practitioners. This study investigates the relationship between Islamic banks’ financing and economic growth in Indonesia which is the largest Muslim population country. This study adopts Autoregressive-Distributed Lag (ARDL) and utilizes time-series quarterly data from 2011Q1 to 2019Q3. The study uses four predictors: financing to deposit ratio; inflation; gross capital fixed formation; and trade openness. The results from the auto-regressive distributed lag model indicate that, in the long-run, Islamic banks' financing has a significant impact on the Indonesian economy. However, in the short-run, financing does not make a substantial contribution to Indonesian economic growth. The study’s key implication is that financing by Islamic banks still makes a limited contribution to economic growth in Indonesia. This study enhances the literature review, specifically on evaluating t...

The Effect of Islamic Financial Inclusion on Economic Growth: A Case Study of Islamic Banking in Indonesia

Budapest International Research and Critics Institute (BIRCI-Journal): Humanities and Social Sciences

This research aims to examine the effects of financial inclusion in Islamic banking on economic development in Indonesia. The economic growth indicator is represented by the Industry Production Index (IPI) while the financial inclusion indicator is represented by the amount of Third Party Funds, the amount of financing, the number of Third Party Funds accounts, and the number of financing accounts. The data used is time series from January 2011 to February 2020. The Vector Error Correction Model (VECM) is used to analyze the data. The results show that in the long run, inflation has a positive effect, while in the short term, inflation has a positive effect on lag one and has a negative effect on lag 2. While the financial inclusion indicator shows that the financial inclusion of Islamic banking in Indonesia has a positive effect on economic growth.

Islamic finance and economic growth: The Malaysian experience

The increasing presence of Islamic banking and finance in Malaysia's financial sector and the country's exemplary role in the global Islamic finance industry has called for an evaluation of the contribution of Islamic finance to the real economic activity. In order to empirically investigate the impact of Islamic finance on performances of major macroeconomic indicators, this study applies the ARDL approach on quarterly data set for Malaysia covering the period from 1998 to 2013. The results suggest that Islamic finance has started to make important contributions to the real economy by effectively carrying out the financial intermediation role of pooling and channeling funds to the investment activities. In view of the important contributions of Islamic finance to the Malaysian economy, continuous efforts need to be under-taken to further expand the industry. This includes refinement of the legal and regulatory framework to enable healthier growth of the industry, thus further strengthens Malaysia's position as the leader in the Islamic finance industry at the global level.