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

Indri Supriani -  Faculty of Economics and Business, Universitas Airlangga, Indonesia
Bayu Arie Fianto* -  Faculty of Economics and Business, Universitas Airlangga, Indonesia
Najim Nur Fauziah -  Institute of Islamic Banking and Finance, International Islamic University Malaysia, Malaysia
Ryan Rahmah Maulayati -  Faculty of Economics and Business, Universitas Airlangga, Indonesia

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, gross capital fixed formation, inflation, 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 the contribution of Islamic banks towards economic growth. Numerous existing studies on this topic covering the crisis period data, which might suffer from data bias. Therefore, this study addresses this topic, excluding the global financial crises period such as 1998, 2008, and 2020, to demonstrate Islamic banks' evident contribution to Indonesian economic growth.

Keywords : Economic Growth; Indonesian Economic Experience; Islamic Banking; Profit and Loss Sharing

  1. Abd. Majid, M. S., & H. Kassim, S. (2015). Assessing the contribution of Islamic finance to economic growth: Empirical evidence from Malaysia. Journal of Islamic Accounting and Business Research, 6(2), 292–310. https://doi.org/10.1108/JIABR-07-2012-0050
  2. Abduh, M., & Azmi Omar, M. (2012). Islamic banking and economic growth: the Indonesian experience. International Journal of Islamic and Middle Eastern Finance and Management, 5(1), 35–47. https://doi.org/10.1108/17538391211216811
  3. Abduh, M., Brahim, S., & Omar, M. A. (2012). A study on finance-growth nexus in dual financial system countries: Evidence from Bahrain. World Applied Sciences Journal, 20(8), 1166–1174. https://doi.org/10.5829/idosi.wasj.2012.20.08.2027
  4. Abu-Bader, S., & Abu-Qarn, A. S. (2008). Financial development and economic growth: The Egyptian experience. Journal of Policy Modeling, 30(5), 887–898. https://doi.org/10.1016/j.jpolmod.2007.02.001
  5. Ajmi, H., Kassim, S., Aziz, H. A., & Mansour, W. (2019). A Literature Review of Financial Contracting Theory from the Islamic and Conventional Overviews: Contributions, Gaps, and Perspectives. JKAU: Islamic Econ, 32, 25–42. https://doi.org/10.4197/Islec.32-2.2
  6. Al Arif, M. N. R. (2017). Spin-off and market share in the indonesian islamic banking industry: A difference in difference analysis. Management and Marketing, 12(4), 540–551. https://doi.org/10.1515/mmcks-2017-0032
  7. Al Arif, M. N. R. (2018). Does the spin-off policy can accelerate the deposit funds in the Indonesian Islamic banking industry? Journal of Business and Retail Management Research, 13(1), 171–178. https://doi.org/10.24052/JBRMR/V13IS01/ART-17
  8. Aldeen, K. N., Herianingrum, S., & Agawany, Z. M. W. al. (2020). Islamic vs. Conventional Banks in Syria: Analysis on Financial Performances. Shirkah: Journal of Economics and Business, 5(1), 1–26. http://dx.doi.org/10.22515/shirkah.v5i1.291
  9. Asutay, M., & Mohd Sidek, N. Z. (2020). Political economy of Islamic banking growth: Does political regime and institutions, governance and political risks matter? International Journal of Finance and Economics, 2008(February 2019), 1–36. https://doi.org/10.1002/ijfe.2011
  10. Atici, G. (2018). Islamic (participation) banking and economic growth: Empirical focus on Turkey. Asian Economic and Financial Review, 8(11), 1354–1364. https://doi.org/10.18488/journal.aefr.2018.811.1354.1364
  11. Authority Financial Service Report. (2011). Islamic Banking Statistics. https://ojk.go.id/id/kanal/syariah/data-dan-statistik/statistik-perbankan-syariah/Default.aspx
  12. Authority Financial Service Report. (2019). Islamic Banking Statistics. https://ojk.go.id/en/kanal/syariah/data-dan-statistik/statistik-perbankan-syariah/-Default.aspx
  13. Badan Pusat Statistik Indonesia. (2019). Large and Medium Manufacturing. https://www.bps.go.id/subject/9/industri-besar-dan-sedang.html#subjekViewTab1
  14. Bank Indonesia. (2008). 2008 Economic Report on Indonesia. https://www.bi.go.id/id/publikasi/lain/lainnya/Default.aspx
  15. Bank Indonesia. (2018). Monetary Policy Report Quarter I 2018. https://www.bi.go.id/id/publikasi/kebijakan-moneter/tinjauan/Default.aspx
  16. Bank Indonesia. (2020). Islamic Banking in Indonesia in Brief. https://www.bi.go.id/en/ssk/syariah/Contents/Default.aspx
  17. Ben Mimoun, M. (2019). Islamic banking and real performances in a dual banking system. International Journal of Islamic and Middle Eastern Finance and Management, 18(3), 231-247. https://doi.org/10.1108/imefm-07-2018-0223
  18. Boukhatem, J., & Ben Moussa, F. (2018). The effect of Islamic banks on GDP growth: Some evidence from selected MENA countries. Borsa Istanbul Review, 18(3), 231–247. https://doi.org/10.1016/j.bir.2017.11.004
  19. Cahyono, E. F., & Rani, L. N. (2018). Macroprudential Policy on Sharia Banking Financing The Indonesian Experience. Shirkah: Journal of Economics and Business, 3(2), 153–178.
  20. Caporale, G. M., & Helmi, M. H. (2018). Islamic banking, credit, and economic growth: Some empirical evidence. International Journal of Finance and Economics, 23(4), 456–477. https://doi.org/10.1002/ijfe.1632
  21. Chowdhury, M. A. F., Akbar, C. S., & Shoyeb, M. (2018). Nexus between risk sharing vs non-risk sharing financing and economic growth of Bangladesh: ARDL bound testing and continuous wavelet transform (CWT) approach. International Journal of Islamic and Middle Eastern Finance and Management, 44(6), 739–758. https://doi.org/10.1108/ IMEFM-07-2014-0063
  22. Daly, S., & Frikha, M. (2016). Banks and economic growth in developing countries: What about Islamic banks? Cogent Economics and Finance, 4(1), 1–26. https://doi.org/10.1080/23322039.2016.1168728
  23. Djennas, M. (2016). Business cycle volatility, growth and financial openness: Does Islamic finance make any difference? Borsa Istanbul Review, 16(3), 121–145. https://doi.org/10.1016/j.bir.2016.06.003
  24. Gheeraert, L., & Weill, L. (2015). Does Islamic banking development favor macroeconomic efficiency? Evidence on the Islamic finance-growth nexus. Economic Modelling, 47(June 2012), 32–39. https://doi.org/10.1016/j.econmod.-2015.02.012
  25. Grassa, R., & Gazdar, K. (2014). Financial development and economic growth in GCC countries: A comparative study between Islamic and conventional finance. International Journal of Social Economics, 41(6), 493–514. https://doi.org/10.1108/IJSE-12-2012-0232
  26. Gudarzi Farahani, Y., & Dastan, M. (2013). Analysis of Islamic banks’ financing and economic growth: a panel cointegration approach. International Journal of Islamic and Middle Eastern Finance and Management, 6(2), 156–172. https://doi.org/10.1108/17538391311329842
  27. Hachicha, N., & Ben Amar, A. (2015). Does Islamic bank financing contribute to economic growth? The Malaysian case. International Journal of Islamic and Middle Eastern Finance and Management, 8(3), 349–368. https://doi.org/10.1108/IMEFM-07-2014-0063
  28. Haraguchi, N., Cheng, C. F. C., & Smeets, E. (2017). The Importance of Manufacturing in Economic Development: Has This Changed? World Development, 93, 293–315. https://doi.org/10.1016/j.worlddev.2016.12.013
  29. Hayat, R., & Kabir Hassan, M. (2017). Does an Islamic label indicate good corporate governance? Journal of Corporate Finance, 43, 159–174. https://doi.org/10.1016/j.jcorpfin.2016.12.012
  30. Igonina, A., & Postaliuk, M. (2014). Islamic finance as an innovative tool for the Volga region real economy development. Investment Management and Financial Innovations, 11(4), 142–148.
  31. Imam, P., & Kpodar, K. (2016). Islamic banking: Good for growth? Economic Modelling, 59, 387–401. https://doi.org/10.1016/j.econmod.2016.08.004
  32. Islamic Financial Service Board. (2019). Islamic Financial Services Industry Stability Report. Islamic Financial Services Board.
  33. Islamic Financial Services Board. (2018). Islamic Financial Services Board Report. https://www.ifsb.org/
  34. Jawad, A., & Christian, K. (2019). Islamic Banking And Economic Growth: Applying The Conventional Hypothesis. Journal of Islamic Monetary Economics and Finance, 5(1), 37–62. https://doi.org/10.21098/jimf.v5i1.1047
  35. Juhro, S. M., Narayan, P. K., Iyke, B. N., & Trisnanto, B. (2020). Is there a role for Islamic finance and R&D in endogenous growth models in the case of Indonesia? Pacific Basin Finance Journal, 101297. https://doi.org/10.1016/j.pacfin.2020.101297
  36. Kassim, S. (2016). Islamic finance and economic growth: The Malaysian experience. Global Finance Journal, 30, 66–76. https://doi.org/10.1016/j.gfj.2015.11.007
  37. Kesumo Wardhany, N., & Arshad, S. (2015). The Contribution of Islamic Banking to Indonesia’s Economic Growth: The Evidence from the Vector Error Correction and Variance Decomposition Methods. Management and Business Administration. Central Europe, 23(3), 89–104. https://doi.org/10.7206/mba.ce.2084-3356.152
  38. Lebdaoui, H., & Wild, J. (2016). Islamic banking presence and economic growth in Southeast Asia. International Journal of Islamic and Middle Eastern Finance and Management, 9(4), 551–569. https://doi.org/10.1108/IMEFM-03-2015-0037
  39. Mensi, W., Hammoudeh, S., Tiwari, A. K., & Al-Yahyaee, K. H. (2020). Impact of Islamic banking development and major macroeconomic variables on economic growth for Islamic countries: Evidence from panel smooth transition models. Economic Systems, 44(1). https://doi.org/10.1016/j.ecosys.2019.100739
  40. Meslier, C., Risfandy, T., & Tarazi, A. (2019). Islamic banks’ equity financing, Shariah supervisory board, and banking environments. Pacific-Basin Finance Journal. https://doi.org/10.1016/j.carbpol.2020.115849
  41. Mohd. Yusof, R., & Bahlous, M. (2013). Islamic banking and economic growth in GCC & East Asia countries: A panel cointegration analysis. Journal of Islamic Accounting and Business Research, 4(2), 151–172. https://doi.org/10.1108/JIABR-07-2012-0044
  42. Narayan, P. K. (2004). Reformulating critical values for the bounds F-statistics approach to cointegration: an application to the tourism demand model for Fiji. Discussion Papers 02/04-Department of Economics Monash University, 02/04(02), 1–37.
  43. Otoritas Jasa Keuangan. (2019). Statistik Perbankan Syariah Indonesia. https://www.ojk.go.id/id/kanal/syariah/data-dan-statistik/statistik-perbankan-syariah/Pages/Stastistik-Perbankan-Syariah---September-2019.aspx
  44. Pesaran, M. H. (1999). Econometrics and Economic Theory in the 20th Century. Econometrics and Economic Theory in the 20th Century. https://doi.org/10.1017/ccol521633230
  45. Pratiwi, A. (2016). Islamic banking contribution in sustainable socioeconomic development in Indonesia: An epistemological approach. Humanomics, 32(2), 98–120. https://doi.org/10.1108/H-12-2015-0085
  46. Rafay, A., & Farid, S. (2017). Dynamic relationship between islamic banking system and real economic activity: Evidence from Pakistan. Journal of King Abdulaziz University, Islamic Economics, 30(2), 97–116. https://doi.org/10.4197/Islec.30-2.10
  47. Rajabi, E., & Muhammad, J. (2014). The Stock Markets, Banks and Growth Nexus: Asian Islamic Countries. Economic Notes, 43(2), 137–165. https://doi.org/10.1111/ecno.12022
  48. Risfandy, T., Harahap, B., Hakim, A. R., Sutaryo, S., Nugroho, L. I., & Trinugroho, I. (2020). Equity Financing at Islamic Banks: Do Competition and Bank Fundamentals Matter? Emerging Markets Finance and Trade, 56(2), 314–328. https://doi.org/10.1080/1540496X.2018.1553160
  49. Rizvi, S. A. R., Narayan, P. K., Sakti, A., & Syarifuddin, F. (2020). Role of Islamic banks in Indonesian banking industry: an empirical exploration. Pacific Basin Finance Journal, 62(August 2018), 101117. https://doi.org/10.1016/j.pacfin.2019.02.002
  50. Rusmita, S. A., & Putri, D. A. (2020). Indonesian Islamic Commercial Banks’ Efficiency: A Stochastic Frontier Analysis. Shirkah: Journal of Economics and Business, 5(3), 386–410.
  51. Su, D., & Yao, Y. (2016). Manufacturing as the Key Engine Asian Development Bank Institute. In ADBI Working Paper (Issue 573). http://www.adb.org/publications/manufacturing-key-engine-economic-growth-middle-income-economies/
  52. Sukmana, R., & Kholid, M. (2013). An assessment of liquidity policies with respect to Islamic and conventional banks: A case study of Indonesia. Qualitative Research in Financial Markets, 5(2), 126–138. https://doi.org/10.1108/QRFM-09-2011-0023
  53. Tabash, M. I., & Anagreh, S. (2017). Do Islamic banks contribute to growth of the economy? Evidence from United Arab Emirates (UAE). Banks and Bank Systems, 12(1), 113–118. https://doi.org/10.21511/bbs.12(1-1).2017.03
  54. Tabash, M. I., & Dhankar, R. S. (2014). The Flow of Islamic Finance and Economic Growth: an Empirical Evidence of Middle East. Journal of Finance and Accounting, 2(1), 11. https://doi.org/10.11648/j.jfa.20140201.12
  55. World Bank. (2015). Islamic Finance. https://www.worldbank.org/en/topic/-financialsector/brief/islamic-finance
  56. World Bank. (2020). The Global Economic Outlook During the COVID-19 Pandemic: A Changed World. https://www.worldbank.org/en/news/feature/2020/06/08/the-global-economic-outlook-during-the-covid-19-pandemic-a-changed-world
  57. Zarrouk, H., El Ghak, T., & Abu Al Haija, E. (2017). Financial development, Islamic finance and economic growth: evidence of the UAE. Journal of Islamic Accounting and Business Research, 8(1), 2–22. https://doi.org/10.1108/JIABR-05-2015-0020
  58. Zirek, D., Celebi, F., & Kabir Hassan, M. (2016). The islamic banking and economic growth nexus: A panel VAR analysis for organization of islamic cooperation (OIC) countries. Journal of Economic Cooperation and Development, 37(1), 69–100.

Shirkah: Journal of Economics and Business
Published by Faculty of Islamic Economics and Business (FEBI)
Institut Agama Islam Negeri Surakarta, Indonesia
Jln. Pandawa No. 1, Pucangan, Kartasura, Central Java, Indonesia, 57168
Phone: +62271-781516
Website: http://shirkah.or.id/new-ojs/index.php/home
Email: shirkahiainsurakarta@gmail.com

P-ISSN :2503-4235 | E-ISSN : 2503-4243

This ejournal system and it's contents licensed under
a Creative Commons Attribution-NonCommercial 4.0 International License