Financial Development and Economic Growth in Indonesia : A Comparative Study Between Conventional and Islamic Bank Indri Supriani (a*), Ryan Rahmah Maulayati (b)
a) Faculty of Economics and Busniess, Airlangga University Jl. Airlangga No.4, Airlangga, Gubeng, Kota SBY, Jawa Timur Indonesia 60286. *indri.supriani-2018[at]pasca.unair.ac.id b) Faculty of Economics and Busniess, Airlangga University Jl. Airlangga No.4, Airlangga, Gubeng, Kota SBY, Jawa Timur Indonesia 60286.
Abstract
The purpose of this paper is to compare the effects of conventional banking development and islamic banking development on the economic growth in the case of Indonesia. The resistance of Islamic banking and finance in Indonesia to economic crises had been proved in 1998, when Bank Muamalat Indonesia was able to withstand the global crisis while conventional banks suffered losses. The increasing presence of Islamic banking and finance in Indonesia based on fair profit-loss sharing (PLS) and risk sharing is supposed to have a stronger contribution to encourage real economic growth compared conventional banking and finance which applies fixed interest rate with the main goal being maximizing profit without regard to clients bussines condition. In order to empirically compare and investigate the impact of financial development on performances of macroeconomic indicators, this study applies Auto-Regressive Distributed Lag (ARDL) approach on monthly data set for Indonesia covering the period from 2011 to 2013. The results signify a rejection to the hypothesis that Islamic finance significantly contribute to the acceleration economic growth compared to conventional banks. In the long run, Bound F-test cointegration demonstrates that there is statistical eviedence of a relationship between conventional banking and economic growth. However no significant relationship was observed between islamic banking development and growth. To increase the role of Indonesian Islamic banks as financial intermediaries that faciliate the capital accumulation and the economic growth, the paper suggests both the government and especially society to be more aware of commence in using islamic banking products that represent our values as muslim ummah. Moreover, islamic banks itself, should be required to improve the percentage of mudharabah and musyarakah in allocation of their financial deposito. The limitation of this study is the lack of commercial and syariah banks performance data before the economic crisis in indonesia.
Keywords: Islamic banking, Conventional banking, Real Economy, Indonesia, ARDL.
Topic: International Conference of Islamic Economic and Financial Inclusion
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