Islamic Finance and Indonesia's Economy: An Empirical Analysis

Abstract

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 – This study uses monthly data for the period 2011–2020 which are estimated using the Vector Error Correction Model (VECM). The dependent variable is Indonesia’s Growth Domestic Product (GDP), while the independent variables are macroeconomic variables (gross fixed capital formation, trade openness and inflation), Islamic finance (Islamic banking, capital market and Sukuk) and a Covid-19 dummy variable.Findings – The study found a one-way causal relationship between Islamic finance and Indonesia’s economy. In the short term, Sukuk (Islamic bonds) has a significant effect on Indonesia’s GDP. While in the long term, Islamic banks and Islamic mutual funds are found to impact Indonesia’s GDP significantly. These results imply a positive relationship between Islamic finance and Indonesia’s GDP in both the short and long term. It is also notable that rates of investment, inflation and the occurrence of the Covid-19 pandemic have a significant impact on 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 the capital market are becoming increasingly important in many countries, including Indonesia. This study fills the gap by incorporating Islamic capital market variables such as Islamic mutual funds and Sukuk to explain the relationship between Islamic finance and economic size in the world’s largest Muslim country.Research limitations – Due to data limitations, this study uses only 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 financial development & economic growth: the emergence of Islamic financial market in Pakistan

“…The results presented in Table 6 demonstrated that Ln(IBA) has a coefficient value (0.224) and p-value of 0.003**; it positively and significantly impacted the Ln(GDP) in the long run. Thus, the result for (H1) is analogous with the findings of Khaliq and Thaker (2017), Jawad and Christian (2019) and Sakinah et al (2022) where Islamic banking assets and real GDP can exhibit a positive long-run relationship, indicating an improvement in the quality of assets. Hence, the proposition (H1) for model Ln(IBA) is fully supported.…”

“…Studies discussing the causal relationship of Sukuk and economic growth identified that Sukuk market development can play a key role in long-term economic growth. Smaoui and Nechi (2017), Jallow and Joof (2020), Orhan and Tirman (2021), Ledhem (2022) and Sakinah et al (2022) strongly support supply-leading hypothesis. Few recent studies also investigated reciprocal relation; Basyariah et al (2021) examined how the stability of institutions and macroeconomic factors influence the growth and progress of the global Sukuk market.…”

“…On contrary, the results of model 4 Ln(IBM) verified a significant 0.018** < 0.05 but negative (À0.000) relationship with the Ln(GDP) in the short run, supporting the outcomes of Sakinah et al (2022). Therefore, for a short-run relationship among the Islamic bond market Ln(IBM) and Ln(GDP), hypothesis H4 is partially supported.…”

The Rise and Fall of Leasing Syariah During The Pandemic Covid-19

“…Overall, the Indonesian Islamic finance industry has a market share of 9.95%. 35 Distribution of sharia banking financing in 2020 grew by 8.08%, slower than the previous year, which grew by 10.89%. This slowdown was caused partly by Working Capital financing, which slowed to 4.14% compared to the previous year, which was 6.00%, and investment financing slowed to 0.16% from 14.84% the previous year.…”

Islamic Finance and Blockchain: A Bibliometric Analysis

“…Islamic capital market in Indonesia's total assets also grew very aggressively to 1.075,22 trillion rupiahs by the end of December 2020. Islamic banking has total assets of 608,90 trillion rupiahs, and the Islamic nonbank financial sector has 116.22 trillion rupiahs [7]. Islamic finance in Indonesia greatly contributes to economic growth in Indonesia, especially the growth of Islamic banking in Indonesia [8].…”