Islamic banks' contribution to Indonesia districts' economic growth and poverty alleviation
Keywords:
Islamic bank branches, Deposits, Financing, Economic growth, Poverty reductionAbstract
PurposeThis research investigates the Islamic banks’ intermediation role (e.g. branches and deposits) in financing. It also examines how financing contributes to the regions' economic growth and poverty alleviation as a predictor and mediator variable.
Design/methodology/approachA total of 297 observations were extracted from 33 Indonesian districts and 14 Islamic banks during the period 2012–2020. Fixed-effect regression analysis was used to examine variable’s interactions.
FindingsThe empirical results indicate that Islamic banks have adopted a channelling role towards redistributing capital from lender to borrower. Besides, there are crucial roles in developing economies and reducing poverty at the district level. This study also reinforces the critical role of financing in mediating the relationship between branches and deposits as predictor variables and GDP and poverty as outcome variables.
Research limitations/implicationsThe current study was limited to Indonesian Islamic banks and the district’s perspective. Future research needs to cover sub-districts and other poverty measurements (e.g. human education and development perspectives), including conventional and Islamic banks. It can help practitioners, regulators and researchers observe the dynamic behaviour of the banking sector to understand its role in the economic and social fields.
Practical implicationsBank managers and regulators should promote branches, deposits and financing. It also enlightens people about the essential role of Islamic banks and their fundamental operations in business and economics.
Originality/valueThis study contributes to economic literature, bank managers and local governments' decision-making processes by developing and testing an economic growth and poverty model.
Downloads
References
Abdul-Majeed Alaro, A. and Alalubosa, A.H. (2019), “Potential of Shari’ah-compliant microfinance in alleviating poverty in Nigeria: a lesson from Bangladesh”, International Journal of Islamic and Middle Eastern Finance and Management, Vol. 12 No. 1, pp. 115-129, doi: 10.1108/imefm-01-2017-0021.
Aggarwal, R., Demirguc-Kunt, A. and Peria, S.M. (2011), “Do remittances promote financial development?”, Journal of Development Economics, Vol. 96 No. 2, pp. 255-264, doi: 10.1016/j.jdeveco.2010.10.005.
Anwar, M.S., Junaidi, J., Salju, S., Wicaksono, R. and Mispiyanti, M. (2020), “Islamic bank contribution to Indonesian economic growth”, International Journal of Islamic and Middle Eastern Finance and Management, Vol. 13 No. 3, pp. 1-39.
Aryati, A., Junaidi, J. and Putra, R.A. (2023), “Financial Development and Economic Growth: Evidence from Indonesia Before and After the COVID-19 Pandemic”, Economy of Regions, Vol. 19 No. 4, pp. 1263-1274.
Beck, T., Demirgüç-Kunt, A. and Levine, R. (2007), “Finance, inequality and the poor”, Journal of Economic Growth, Vol. 12 No. 1, pp. 27-49, doi: 10.1007/s10887-007-9010-6.
Begum, H., Alam, A.S.A.F., Mia, M.A., Bhuiyan, F. and Ghani, A.B.A. (2019), “Development of Islamic microfinance: a sustainable poverty reduction approach”, Journal of Economic and Administrative Sciences, Vol. 35 No. 3, pp. 143-157, doi: 10.1108/jeas-01-2018-0007.
Ben Salem, A. and Ben Abdelkader, I. (2023), “Diversification and performance of microfinance institutions: does Islamic microfinance model matter?”, International Journal of Islamic and Middle Eastern Finance and Management, Vol. 16 No. 5, pp. 975-995, doi: 10.1108/imefm-01-2022-0031.
Bernini, C. and Brighi, P. (2017), “Bank branches expansion, efficiency and local economic growth”, Regional Studies, Vol. 52 No. 10, pp. 1332-1345, doi: 10.1080/00343404.2017.1380304.
Bolarinwa, S.T., Adegboye, A.A. and Vo, X.V. (2021), “Is there a nonlinear relationship between financial development and poverty in Africa?”, Journal of Economic Studies, Vol. 48 No. 7, pp. 1245-1266, doi: 10.1108/jes-10-2019-0486.
Breunig, R. and Majeed, O. (2020), “Inequality, poverty and economic growth”, International Economics, Vol. 161 No. 5, pp. 83-99, doi: 10.1016/j.inteco.2019.11.005.
Chowdhury, M.A.F., Akbar, C.S. and 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”, Managerial Finance, Vol. 44 No. 6, pp. 739-758, doi: 10.1108/mf-12-2016-0371.
Dewi, S., Abd Majid, M.S., Aliasuddin, A. and Kassim, S. (2018), “Dynamics of financial development, economic growth, and poverty alleviation: the Indonesian experience”, South East European Journal of Economic and Business, Vol. 13 No. 1, pp. 17-30, doi: 10.2478/jeb-2018-0002.
Dey, S.R. and Tareque, M. (2020), “External debt and growth: role of stable macroeconomic policies”, Journal of Economics, Finance and Administrative Science, Vol. 25 No. 50, pp. 185-204, doi: 10.1108/jefas-05-2019-0069.
Donou-Adonsou, F. and Sylwester, K. (2016), “Financial development and poverty reduction in developing countries: new evidence from banks and microfinance institutions”, Review of Development Finance, Vol. 6 No. 1, pp. 82-90, doi: 10.1016/j.rdf.2016.06.002.
Fianto, B.A., Gan, C., Hu, B. and Roudaki, J. (2018), “Equity financing and debt-based financing: evidence from Islamic microfinance institutions in Indonesia”, Pacific-Basin Finance Journal, Vol. 52, pp. 163-172, doi: 10.1016/j.pacfin.2017.09.010.
Gani, I.M. and Bahari, Z. (2021), “Islamic banking's contribution to the Malaysian real economy”, ISRA International Journal of Islamic Finance, Vol. 13 No. 1, pp. 6-25, doi: 10.1108/ijif-01-2019-0004.
Guru, B.K. and Yadav, I.S. (2019), “Financial development and economic growth: panel evidence from BRICS”, Journal of Economics, Finance and Administrative Science, Vol. 24 No. 47, pp. 113-126, doi: 10.1108/jefas-12-2017-0125.
Hayat, A. and Tahir, M. (2021), “Foreign direct investment, natural resources and economic growth: a threshold model approach”, Journal of Economic Studies, Vol. 48 No. 5, pp. 929-944, doi: 10.1108/jes-03-2020-0127.
Hayes, A.F. (2018), Introduction to Mediation, Moderation and Conditional Process Analysis: A Regression-Based Approach, 2nd ed., Guilford Press, New York, NY.
Heo, W., Rabbani, A.G. and Lee, J.M. (2021), “Mediation between financial risk tolerance and equity ownership: assessing the role of financial knowledge underconfidence”, Journal of Financial Service Marketing, Vol. 26 No. 3, pp. 169-180, doi: 10.1057/s41264-021-00088-y.
Iqbal, K., Roy, P.K. and Alam, S. (2020), “The impact of banking services on poverty: evidence from sub-district level for Bangladesh”, Journal of Asian Economics, Vol. 66, pp. 1-16, doi: 10.1016/j.asieco.2019.101154.
Islamic Financial Services Board (IFSB) (2020), “Islamic financial services industry stability report”.
Junaidi, J. (2022), “Religiosity versus profit-loss sharing: how Islamic banks brand fidelity influence the Muslim consumers' commitment”, Journal of Islamic Accounting and Business Research, Vol. 13 No. 6, pp. 960-976, doi: 10.1108/jiabr-07-2021-0188.
Khan, I., Khan, I., Sayal, A.U. and Khan, M.Z. (2022), “Does financial inclusion induce poverty, income inequality, and financial stability: empirical evidence from the 54 African countries?”, Journal of Economic Studies, Vol. 49 No. 2, pp. 303-314, doi: 10.1108/jes-07-2020-0317.
Kheir, V.B. (2018), “The nexus between financial development and poverty reduction in Egypt”, Review of Economics and Political Science, Vol. 3 No. 2, pp. 40-55, doi: 10.1108/reps-07-2018-003.
Ledhem, M.A. and Mekidiche, M. (2020), “Economic growth and financial performance of Islamic banks: a CAMELS approach”, Islamic Economic Studies, Vol. 28 No. 1, pp. 47-62, doi: 10.1108/ies-05-2020-0016.
Méndez-Morales, E.A. and Yanes-Guerra, C.A. (2021), “Financial system specialization and private research and development expenditure: research for OECD countries”, Journal of Economics, Finance and Administrative Science, Vol. 26 No. 51, pp. 41-60, doi: 10.1108/jefas-10-2019-0256.
Mensi, W., Hammoudeh, S., Tiwari, A.K. and Al-Yahyaee, K.H. (2020), “Impact of Islamic banking development and major macroeconomic variables on economic growth: evidence from panel smooth transition models”, Economic Systems, Vol. 44 No. 1, pp. 519-532.
Mills, T.C. (2019), Applied Time Series Analysis: A Practical Guide to Modeling and Forecasting, Academic Press, London.
Nugraheni, P. and Muhammad, R. (2023), “The optimisation of Qardhul Hasan management in Islamic banking: enhancing its role in empowering the community”, Journal of Enterprising Communities: People and Places in the Global Economy, Vol. ahead-of-print No. ahead-of-print. doi: 10.1108/jec-08-2022-0113.
Pesaran, M.H. (2015), Time Series and Panel Data Econometrics, Oxford University Press, Oxford.
Pradhan, R., Arvin, M.B., Bahmani, S. and Hall, J.H. (2019), “Attaining economic growth through financial development and foreign direct investment”, Journal of Economic Studies, Vol. 46 No. 6, pp. 1201-1223, doi: 10.1108/jes-04-2018-0136.
Pradhan, R.P., Arvin, M.B., Norman, N.R. and Bahmani, S. (2020), “The dynamics of bond market development, stock market development and economic growth: evidence from the G-20 countries”, Journal of Economics, Finance and Administrative Science, Vol. 25 No. 49, pp. 119-147, doi: 10.1108/jefas-09-2018-0087.
Rewilak, J. (2017), “The role of financial development in poverty reduction”, Review of Development Finance, Vol. 7 No. 2, pp. 169-176, doi: 10.1016/j.rdf.2017.10.001.
Selim, M. and Farooq, M.O. (2020), “Elimination of poverty by Islamic value based cooperative model”, Journal of Islamic Accounting and Business Research, Vol. 11 No. 5, pp. 1121-1143, doi: 10.1108/jiabr-08-2018-0125.
Tabash, M.I. (2019), “Islamic finance, investment and economic growth evidence from UAE”, International Journal of Economics and Business Research, Vol. 16 No. 1, pp. 136-145.
Tamanni, L. and Haji Besar, M.H.A. (2019), “Profitability vs Poverty alleviation: has banking logic influences Islamic microfinance institutions?”, Asian Journal of Accounting Research, Vol. 4 No. 2, pp. 260-279, doi: 10.1108/ajar-05-2019-0039.
Ullah, A., Zhao, X., Kamal, M.A., Riaz, A. and Zheng, B. (2021), “Exploring asymmetric relationship between Islamic banking development and economic growth in Pakistan: fresh evidence from a non-linear ARDL approach”, International Journal of Finance and Economics, Vol. 26 No. 4, pp. 6168-6187, doi: 10.1002/ijfe.2115.
Verma, A., Dandgawhal, P.S. and Giri, A.K. (2023), “Impact of ICT diffusion and financial development on economic growth in developing countries”, Journal of Economics, Finance and Administrative Science, Vol. 28 No. 55, pp. 27-43, doi: 10.1108/jefas-09-2021-0185.
Weqar, F., Sofi, Z.A. and Haque, S.M.I. (2021), “Nexus between intellectual capital and business performance: evidence from India”, Asian Journal of Accounting Research, Vol. 6 No. 2, pp. 180-195, doi: 10.1108/ajar-07-2020-0064.
Wooldridge, J.M. (2020), Introduction Econometrics: A Modern Approach, 7th ed., Cengage Learning, Boston, MA.
World Bank (2020), available at: https://www.worldbank.org/en/topic/poverty/overview#1 (accessed 4 March 2021).
Zarrouk, H., El Ghak, T. and Abu Al Haija, E. (2017), “Financial development, Islamic finance and economic growth: evidence from the UAE”, Journal of Islamic Accounting and Business Research, Vol. 8 No. 1, pp. 2-22, doi: 10.1108/jiabr-05-2015-0020.
Zulkhibri, M. (2018), “The impact of monetary policy on Islamic bank financing: bank-level evidence from Malaysia”, Journal of Economics, Finance and Administrative Science, Vol. 23 No. 46, pp. 306-322, doi: 10.1108/jefas-01-2018-0011.
Further reading
de Haan, J., Pleninger, R. and Sturm, J.E. (2021), “Does financial development reduce the poverty gap?”, Social Indicators Research, Vol. 161, pp. 1-27, doi: 10.1007/s11205-021-02705-8.
Gazdar, K., Hassan, M.K., Safa, M.F. and Grassa, R. (2019), “Oil price volatility, Islamic financial development and economic growth in Gulf cooperation council (GCC) countries”, Borsa Istanbul Review, Vol. 19 No. 3, pp. 197-206, doi: 10.1016/j.bir.2018.07.005.
King, R.G. and Levine, R. (1993), “Finance, entrepreneurship, and growth”, Journal of Monetary Economics, Vol. 32 No. 3, pp. 513-542, doi: 10.1016/0304-3932(93)90028-e.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2024 Junaidi Junaidi
This work is licensed under a Creative Commons Attribution 4.0 International License.
