Faz Fachry Taqiyya, Heri Sudarsono, Andika Ridha Ayu Perdana

Examining the contribution of Islamic bank to Indonesia economic growth

Introduction

Examining the contribution of islamic bank to indonesia economic growth. Uncover how Islamic finance drives Indonesia's economic growth. This study analyzes total financing, deposits, and their long-term impact, offering key insights for policymakers to boost macroeconomic stability.

Abstract

This study thoroughly examines the impact of Islamic finance on economic growth in Indonesia, considering key variables such as total financing, total deposits, inflation, and trade openness. This study uses quarterly data covering the period from the first quarter of 2005 to the fourth quarter of 2021, providing a comprehensive overview of the dynamics between Islamic finance and economic growth for more than a decade. Through panel data regression analysis using the ARDL model, this study effectively explains the interaction between the dependent and independent variables and identifies the long-term impact of Islamic finance variables on Indonesia's economy. The findings indicate that Islamic finance positively contributes to long-term economic growth in Indonesia, with increases in total financing and deposits playing crucial roles in accelerating economic growth. These results underscore the importance of further developing the Islamic finance sector as a key driver of economic growth with significant implications for policies that support financial inclusion and macroeconomic stability. This study offers new insights for policymakers and financial practitioners to maximize the potential of Islamic finance to promote sustainable economic growth in Indonesia.

Review

This study offers a timely and relevant examination of the contribution of Islamic banking to Indonesia's economic growth, utilizing a robust dataset spanning from 2005 to 2021. The use of an ARDL model for long-term impact analysis is appropriate for time-series data, effectively capturing the dynamic relationship between Islamic finance variables and economic growth. The findings, indicating a positive long-term contribution from total financing and deposits, are significant and directly address a critical area of policy interest in Indonesia. The comprehensive data period enhances the reliability of the observed trends and provides a solid empirical basis for the study's conclusions regarding the importance of the Islamic finance sector. While the study presents compelling findings, there are a few points in the abstract that warrant clarification for enhanced methodological rigor. Firstly, the statement "Through panel data regression analysis using the ARDL model" introduces a methodological ambiguity. The ARDL model is fundamentally a time-series technique, and if it were applied in a panel data context, it would typically be referred to as Panel ARDL (e.g., using Pooled Mean Group estimation), and the abstract should specify the panel units (e.g., provinces, different types of Islamic banks). Given the focus on "Indonesia economic growth" as a single entity, it is more likely a time-series ARDL for Indonesia rather than a panel study, in which case the "panel data regression analysis" mention could be misleading. Secondly, while "total financing" and "total deposits" are identified as crucial, a brief mention of the specific types of financing (e.g., murabahah, musharakah) and deposits (e.g., wadiah, mudarabah) would offer richer insights into the mechanisms driving growth. Furthermore, the inclusion of other standard control variables in economic growth models beyond inflation and trade openness, such as government expenditure, investment, or human capital, would strengthen the robustness of the findings. Despite these minor clarifications, the study makes a valuable contribution to the literature on Islamic finance and economic development, particularly in the context of Indonesia. The clear policy implications, emphasizing the development of the Islamic finance sector for financial inclusion and macroeconomic stability, are highly pertinent for policymakers and financial practitioners. Future research could build upon this foundation by exploring the disaggregated impact of various Islamic finance products, examining regional disparities in Indonesia, or conducting comparative studies with other Muslim-majority economies. Overall, this study provides strong empirical evidence supporting the strategic importance of Islamic banking in fostering sustainable economic growth in Indonesia.

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