AN EMPIRICAL ANALYSIS OF THE ISLAMIC BANK

CONTRIBUTION TO THE INDONESIAN ECONOMIC

GROWTH

ABSTRACT
Islamic banking contribution to the economic progress in Indonesia has been investigated in this
paper Gross domestic product, Islamic deposits and Islamic banking offices have measured the
economic progress of Indonesia. Numerous research papers have taken into consideration to see the
economic impact of Islamic banking finance. The author has used the Autoregressive distributed lag
(ARDL) and vector error correction model (VECM). Furthermore, co-integration analysis has also
used for the time duration from 2009 to 2019. Many researchers included in literature supports the
positive influence of Islamic finance on economy’s progress. The result shows the important link
between the Islamic finance and economic progress for short and long period of time. Their study
also has suggested that Islamic banking and economy’s progress have a bidirectional link because
the market shares of the Islamic banks have been comparatively higher than the conventional banks
in duration of this study.

Keywords: Indonesia, Islamic banking

 TABLE OF CONTENTS:

DISSERTATION APPROVAL........................................................................................................ii
RESEARCH COMPLETION CERTIFICATE.............................................................................iii
ANTI-PLAGIARISM DECLARATION.........................................................................................iv
DEDICATION....................................................................................................................................v
ACKNOWLEDGMENT...................................................................................................................vi
ABSTRACT......................................................................................................................................vii
TABLE OF CONTENTS:..............................................................................................................viii
LIST OF ABBREVIATION.............................................................................................................ix
LITERATURE REVIEW..................................................................................................................6
METHODOLGY..............................................................................................................................12
META-ANALYSIS..........................................................................................................................13
COMPARISON OF DIFFERENT METHODOLOGIES............................................................15
CONCLUSION.................................................................................................................................16
LIMITATIONS AND FUTURE RECOMMENDATION............................................................16
REFERENCES.................................................................................................................................18
AUTHOR’S BIOGRAPHY.............................................................................................................21

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 LIST OF ABBREVIATION
ARDL = Autoregressive Distributed Lag
VECM = Vector Error Correction Model
IRFs = Impulse Response Functions
VSCs= Variance Decompositions.

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 INTRODUCTION
Islamic banking has been developed in replacement of banks that work on the interest based system
specially, in the last 20 years in banking sector of Muslim and Non-Muslims countries. The Islamic
based finance system works according to all the rules and regulations that are taught by the Allah
and the Prophet Muhammad, Last prophet (saw). The process is followed by the Shariah’s
principles. Islamic finance have received the importance in last 20 years because only one Islamic
finance system was prevailing in a country But then the number of Islamic institutes reached to 300
in above than 75 countries till 1975. The regulations of the Islamic banking can show the society
that on what system they are working on. The system of Islamic finance is getting great recognition
globally because except the religion and faith there are also other factors of this system like offering
the products and the services in interest less base which make the consumers attractive towards this
system (Awan & Azhar, 2014).
The Islamic financial banking theory based on the rule of interest which is not allowed in Islam, and
it follows the rules and guidelines provided by the Islamic teachings. The profit and loss sharing are
encouraged, and interest is prohibited. Islamic financial banking system complete the main
objective of teachings of Holy Quran. These regulations indicate the command of ALLAH (SWT)
and the principles regulations can be seen on the Muslim people life, therefore, it has some spiritual
values related to this financing system. The Islamic finance theory rely on the idea that interest is
prohibited in Islam, and that Islamic teachings provide the required guidance on which to base the
working of banks. The primary rule of the Islamic law is to not be involved into illegal or unethical
contracts that are prohibited. In this system, all the members must bear the risk and to get profit or
loss depending upon what is the outcome. No partner is allowed to get any predetermined amount
of return (Iqbal & Mirakhor, 2013).

Islamic finance banking system is a replacement of Conventional based banking system which has
inaugurated itself as an alternative. The alternate of the conventional system of banking is Islamic
system of banking in form of the allocation of the funds then the investing step and the mobilizing
funds to one firm to another. The Islamic system of banking expanded the growth of economy as
prime supervisor of investment for the distributors of income and the depositors. (S. Kassim, 2016).
It presents a great success on global level. The aim of the Sharia’ah board is to expand the
development of economy and to eliminate the factors of financial crisis. Islamic principles teach
that the riba, gambling and gharar are prohibited and all the other values that violates the
regulations of the Islamic teachings are not allowed(Ahmed, 2010).

1
The Islamic banking has contributed towards the financial system like the conventional banks do.
By adding the moral and ethical values to their financing pattern, it provides attraction and
motivation to the Muslim world to move their funds for saving and investing purposes by providing
it to the exterior means for venturing of the capital. The outline of sharing the profit and loss has
potentially great influence on the growth of economy and these institutions, and it also aims to take
part in the capital of the company by lending the funds for production purpose or by issuing
instruments(Iqbal & Mirakhor, 2011).

In Islamic teachings it is mentioned that the money should not be used in unproductive activities,
and it should be used to generate income through the legal means. Now the modern Islamic finance
has developed which uses the new and efficient features. Islamic banks lead to the development of
the economy through productive means and supporting the trading of services and goods(El-Galfy
& Khiyar, 2012).

The financial crisis of 2008 has raised the public’s interest in the Islamic system of finance because
it is comparatively have been less affected by the financial crisis then the conventional finance
system. In the Islamic finance all, financial transactions are related with trading or asset(Hidayat &
Abduh, 2012).

Muslim population supports the development of Islamic banking, world population is expected to
increase by 25% by the year 2030. It is expected to increase from 2.6 million to 6.2 million in the
United States of America. Also in numerous European countries it may be expand by more than
10% of the whole population(Solomon, 2018). The Countries where Muslim population is
dominated includes Pakistan, Iran, Indonesia, Egypt, Bangladesh, and Turkey. The highest Muslim
Population country is Indonesia having a great monetary Islamic market. The first fourth are Iran,
Malaysia, and Saudi Arabia in the international industry of finance. This is the reason Muslim
population will have played a vital role in the development and the growth of the Islamic banking
(Lebdaoui & Wild, 2016).

The Islamic banking is the rapidly developing sector of the banking region of the world. It has
expanded because of its distinguishing features. The Islamic banking have appeared in the Egypt in
1963 but it got value and significance when the financial crisis happened in the year 2008. As we
know that the product is dependent upon the acceptance of consumer. If a product which is new for
the market is not effectively accepted by the customer, it is impossible for it to grow, sustain or
even to survive in the competitive market which is currently prevailing(Bananuka, Kaawaase,
Kasera, & Nalukenge, 2019).

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The banking system have expanded phenomenally in the last decade, the current volatility and the
financial shocks gives a great chance to the non-Muslim world to obtain this banking system of
finance. This system has the structure of financial instruments and transactions which fulfil the
criteria of Shari’ah, it works on the principles of not paying against the interest and not participating
in the activities of gambling. This is a great option of banking structure where the major portion of
population are Muslims like Middle Eastern countries and South Asian countries where Muslim
population is huge to follow the financial system based on the rules and regulations of Islam(Zaher
& Kabir Hassan, 2001).

There is certainty that the improvement and growth of the financial sector have a great influence on
the progression of the overall economy. Also, numerous economists have considered that the
efficiency and effectiveness of the growth of the financial system have relation with the
development of the economy. There are many studies that are empirical shows that there is positive
and direct relation between the monetary section and the development of the economy. The Islamic
banking have promoted the monetary activities by enhancing the working capital in the economy(S.
M. Anwar, Junaidi, Salju, Wicaksono, & Mispiyanti, 2020).

Islamic finance and the fixed investment have a bi-directional relationship and the evidence
supports the growth domestic product have a positive relation with the growing of Islamic finance,
because if the GDP have been increased then the development will also be increased and if the GDP
not in the good position, then the development of Islamic banking will also fall downwards. In
Bangladesh the relation of Islamic finance and growth of economy have analysed and shows the
results that both are directly related(Zarrouk, El Ghak, & Al Haija, 2017).

The operations and the appearance of the Islamic finance in the several parts of the world specially,
in the Muslim populated countries have remained the primary cause of development and growth in
recent years. The growth of the Islamic finance denotes the targets of the prosperity of the
economic, the equal distribution of the wealth, present stability, the maximum level of development
of economy and the socio-economic justice(Mustafa, Baita, & Usman, 2018).

One of the rapidly growing Asian Country is Malaysia which has well-established financial system,
which has adopted the financial policy of Islamic terms in the early year of 1980s. For the period of
recent five decades, the Islamic Finance has achieved its goals by giving the introduction of the
financial based activities and instruments which are based on the Islamic Sharia’ah and regulations
in the different Muslim Populated countries. Numerous countries have accepted the Islamic banking
as a distinctive model for its operations and as a substitute for the conventional financing mode

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specially, in the countries where Muslim population is dominant includes Malaysia, Middle East
and Asia(Gani & Bahari, 2021).

As per the increasing trend of Islamic Finance globally, studies have concentrated on the distinctive
characteristic of the Islamic banking and its functions performing activity. It is also considered that
Islamic finance is more linked with the economic progression then the conventional banking
system. Because of the positive relation of the Islamic banking and the progress of the economy the
relationship seems to be reciprocal. Therefore, a skilfully planned and efficient Islamic banking
financial system would have utilize its funds for the investment purposes and grant them to the
enterprises, which would result in the expansion of investment and development in the real
economy. The stable and the developed economy will result in more returns to the financial Islamic
system(Newell & Osmadi, 2009).

The concept of capital accumulation has started when the Islamic financial system accepted the
deposits from the firms and the households, which created the expansion in liquidity of the Islamic
financial institutions, which also result in the expansion of investments because of the availability
of the capital and become the reason of the development of the economy. Islamic banking term
means a system which is regulated on the principles and guidelines of Islamic based economics.
Islamic financial banking have a basic rule that profit and losses both are shared and there is no
concept of taking and paying of interest by lender and to investor, it is prohibited. But the practice
of sustainability and reporting on the global level is still on the low side(Jan, Marimuthu, bin Mohd,
& Isa, 2019).

Islamic financial banking elaborates a bank as an organization that takes funds from the people or
investors of the community in terms of financing and investing to enhance the living standard of the
community. Islamic banking has the two kinds: one is the type in which there is no competition
between the conventional and Islamic finance system, other is the type in which there is high grade
comparison among the Islamic and conventional banking system, the cause is some Islamic banks
that have been also operating in non-Muslims where majority of population is non-Muslim and
there have been null idea of prohibition of interest(Elmawazini, Khiyar, & Aydilek, 2020).

The Islamic banks target is to achieve the higher rate of return on the investment to attain the higher
profit so the owner’s wealth will be increased. This is also the target of the depositors because they
invest the money and output will be shared and it will be beneficial for the depositors too. The
Islamic banking management efficiency and effectiveness has very vital influence on the credit risk
of the organization. Islamic financial banking system have numerous economic advantages and the
contribution to the economy includes investment opportunities enhancement, financial growth,

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generation of employment, direct investment internationally, reduction in the poverty level. It is
helpful for the developing countries which can be grow its finance by issuing the Islamic financial
instruments like Musharka, Murabaha, Mudarbah , Ijarah, sukuk and many more (Mustafa et al.,
2018).

Islamic banking financial system have a great effect of get rid of the unethical kind of investments
like the Al-Gharar and AL-Darar which reduces the adverse selection and moral hazards problems.
Also to expand the deposits and motivate depositors to join this mode of financing can be possible
by the Cultural programs which make people aware about this system(Goaied & Sassi, 2010).

The Islamic banking sector in the Malaysian Economy has been tremendously developed in the last
decade. It has maintained the positive and great trend of development for period 2007 to 2019. The
unique factor about their economy is that the Islamic and Conventional banking system works
altogether for operating and financial systems. The assets and the capital have been increased of the
financial banking system(Gani & Bahari, 2021).

In the economics, the role of finance-based institutes is very significant, examples include concept
of matching of demand and supply, financial market instruments dealing, transparency assurance in
the financial market, and fulfil the duty of transferring and managing of risk. The financial
intermediary effects the growth of the economy. The profitability of the banks in any economy
contributes to the firmness in the financial system by enduring external shocks(Menicucci &
Paolucci, 2016).

In this paper, we primarily target to deliver a detailed analysis on the impact of Islamic financial
system on the economic progress of Indonesia.

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 LITERATURE REVIEW
Some past studies show the relation among the Islamic finance and the economic progression. In the
Islamic banking system, the framework is built in a way that follows all the rules, laws, processes
that followed the path to ALLAH and follow the guidelines of last prophet (SAW). All the
transactions, the financial instruments and the contracts are according to Sharia’ah(Khan & Watson,
2006).
This study has said that the there is a huge impact on monetary progress of economy by the Islamic
finance-based system in Pakistan. The Islamic finance has great contributions to the economical
aspect of the financial stability as the investments become effective and easy to approach(S.
Kassim, 2016).
Many leaders have demanded the fully Islamic finance-based system or the addition of the Islamic
based system in their country as they consider it better for their economy. The studies that are
experimental shows the effectiveness of the Islamic finance-based banks in comparison to the
conventional banks, Islamic finance-based banking system resulted in sustainability of the economy
growth, reduces the inflation factor, also it helps in the reduction of the unemployment
factor(Gheeraert & Weill, 2015). It is quoted by the (Yousefi, Abizadeh, & McCormick, 1997) that
in case of comparison between interest free banking system with the interest charged banking
system, the interest charging one can never be superior as per there is no proof for it. Other scholars
said that there is no rule for the Islamic banking system to charge interest, its aim is greater than
expanding the profit only, they consider the objective of distribution of income very equally, it
made is easier for the poor ones who cannot have any accessibility of the finance. The collateral of
assets, the distribution and contribution of wealth depends upon the financial system of the country
whether Islamic or not(Abdouli, 1991).
The progress of economy of the Islamic countries would be expanded by the Islamic based
financial system as per the reserves mobilization of the non-Islamic banks is now utilized by the
individuals as per the Islamic banking system because profit will be given not the interest, this will
attract the customers resulted in the progress of the capital markets(Iqbal, 1997). For the Islamic
banking, the rule is the sharing of profit and loss with the consumers so if the bank is facing any
kind of crisis all the depositors and consumers must face that so the risk is being dispersed which
will make the chances of default of bank are very less(Zaher & Kabir Hassan, 2001).
(Lehnert, 2019) have evaluated the performance and development of the Shari’ah based financing in
total 32 developing countries and developed countries. This study has used multiple dimensions
econometrics which include fixed effects, pooling common least squares and the method which uses
different dynamic differences. The result shows that the Islamic banking system is viewed as small

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size of the whole financial sector, the relation of economic growth and the Financial Islamic banks
are considered positively correlated after monitoring and analyzing the financial structure, factors
that effect on macroeconomic level and the other variables. The Islamic banks are working harder to
get rid of the difficult and rough part of the economy so the economy can become highly self-
dependent and result in the positive effects and distribution of income equally(Sarwer, Ramzan, &
Ahmad, 2013).

This study also observed the influence of Islamic finance on the progression and development of the
industries. They used total 28 industries of 14 different countries and test the hypothesis with faith-
based model of the finance-banking system. The result tells that there is positive effect on the
development of the industrial factor in relation with the absolute size of the firm which resulted in
the economic development. The study has showed the positive results in support of Islamic
Banking(Azmat, Azad, Ghaffar, Hayat, & Chazi, 2020).

(Tabash & Anagreh, 2017) have evaluated the involvement of Islamic Finance to the monetary
development of the United Arab Emirates (UAE), the study has used the techniques of co-
integration and the Error Correction Model (ESM’s) of the time series data. The findings have
disclosed that the link among the Islamic finance and economic progression is supply-leading, and
it is long-term relation. This study also shows the bi-directional relation between the investments of
the Islamic banking and international direct investments in the UAE. For the time being, (Leon &
Weill, 2018) analyzed the influence that Islamic banking have created on the credit access potential.
This study collected the distinctive dataset on the Islamic finance, which is called IFIRST, from the
developing and developed countries of the firm level of year 2006 to year 2009. The data sample
includes 52 countries with 15,309 firms, the findings of this study indicated that the Islamic banking
having null effect on the constraints of credit. But it contains the positive effect on credit access
potential when the conventional system growth is below average. Also, (Tabash, 2018) set an
examination for the banking organizations and the economic progress in the UAE to analyze the
capacity of investments of Islamic banking to see the growth enhancement of economy. The study
used the Autoregressive distributive lag ADRL co-integration approach along with the error
correction technique on data basis on annual system. The interpretation shows the long-term
influence on the monetary progression of Islamic Finance in UAE. The relationship is positive
between the investment banks that are Islamic and the economic progress for short term and long
term both.

Moreover,(Gani & Bahari, 2021) examined the Gulf Cooperation Council (GCC) countries for the
time duration of 20 years, which is from 1996 to 2016. The study analyzed the influence of Islamic

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Finance with relation to trade of oil terms, growth tendency and the economy development on the
economies of GCC. The findings show the significant and positive relation of Islamic finance with
the growth tendency and oil trades of the economy. This study has reassessed the participation of
the banking system based on shari’ah and the progression of economy due to the Islamic banking.
For this study multicollinearity with the POLS were used for hypothesis testing. The empirical
results show the positive relationship of the growth of Islamic Financial banking and the
improvement in economy of the UAE. Policymakers of the economy of the UAE should have
encourage the growth of Islamic banking with respect to economic development(Tabash, 2019).

This study has analyzed the link of Islamic finance with the progression of economy of Malaysia.
The VAR method was used in which techniques of vector co-integration were analyzed. The
interpretation discloses the results for the short-term that there is influence of the Islamic finance on
the development(Furqani & Mulyany, 2009). Moreover, (Majid & Kassim, 2015) also investigated
the participation of Islamic finance system in the economic progress of Malaysia. VEMC, VDSs
and the ARDL approaches were used. The impact on the economy is significant of the Islamic
based banking system which shows the unidirectional casual association between the Islamic
Finance and the economic progress. S. Kassim (2016) Studied the investment made by the Islamic
financial system to the real economy which shows the accumulation of the capital but not the
transfer channel of productivity of capital as a source of Islamic Banks to the economy from 1998
to 2013. The results that show the casual results are ambiguous of this study.

(Beck, Demirgüç-Kunt, & Merrouche, 2013) also made a comparative association of the
conventional and Islamic banking system after crisis happened in 2008 by evaluating the quality of
asset, efficiency, and the stability of the data set of the minimum 4 countries. The research shows
that the Islamic Financial System managed cost effectiveness very actively, but it was less stable.
Capitalization expansion and liquidity reserves with high ratio show the positive and significant
progress of the Islamic based financial system during the duration of crisis. To compute the
performance of banking industry at the time of financial crisis, determinants of the financial
industry are significant. Literature says that the financial banking performance have been affected
by the determinants include internal and external(Hidayat & Abduh, 2012).

(Siddique, Khaleequzzaman, & Ur Rehman, 2016) studied the relation of Islamic banks which
demonstrates that the proportion of the Islamic banks has effect on the performance indicator, but it
is not significantly related with profitability measures. The study of Alkassim have found that the
relation of return on assets of the Islamic finance based banks with the coefficients of assets and
expenses which shows the positive and significant results(Alkassim, 2005).

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Hachicha and Amar (2015) also have studied the impact and influence of the Islamic financial
system in the monetary market of Malaysia. The study used the method JJ and VECM. The
interpretation of this study interpret that the Islamic banking system have positive impact on the
progress of economy for the short term, but it is not for the long-term. Although, the study has used
the types of financing which is not efficient to represent total financing system and the data
analyzed is only for 11 years which is not sufficient for long run effect. The method seems to be
weaker as compared to the by (Majid & Kassim, 2015) and (S. Kassim, 2016) which uses the
ARDL approaches. According to (Zarrouk et al., 2017), the causality direction among the
progression of financial Islamic sector and the positive monetary economy in the UAE shows no
existence from year 1990 to year 2012, the reason is the absence of financial progress in UAE. But
commonly, financial progress effect the economic development on large level.

According to Senyonyi (2018), holding the system of Islamic banking means the banks customers
must sustain the principles of corporate governance which relates to accountability and transparency
which is necessary for making sure the profitability in a business. Also, the study says the
progression of the Islamic financial system depends upon the progression of monetary market. This
study interpret the influence of the financial shocks on the banks that are based on Islamic system
and the banks based on conventional system during the financial crisis period between 1997 to
2007. The results interprets that the Islamic based banks are resistant in response of financial shocks
then the conventional banks, moreover, the Islamic financial system act significantly in response of
the crisis and non-crisis period till 2007 (S. H. Kassim & Majid, 2010).

The empirical study of Yüksel and Canöz (2017) from year 2005 to year 2016 in Turkey elaborate
that the Islamic banking have no significant influence on the economic progression because a very
small ratio of Islamic financing in Turkey. So, the Islamic banking should be supported to take
contribution in the Gross domestic Product development and financial sector improvement

Hasan and Dridi (2010) analyzed the performance of Islamic financial system and conventional
financing system of the time duration of financial crisis happened in 2008, by determining the effect
of profitability, growth of asset and credit rating during these crisis period. The conclusion shows
that Islamic banking system is less effected due their shariah based business model in year 2008 but
the profitability contrast in year 2009 due to the deficiency in the risk practices of the management.
But the credit worthiness and the progress of asset expanded in year 2008 till 2009 in comparison
with conventional banking system. The external rating was showing positive impact of the Islamic
banking financial system(Hasan & Dridi, 2010).

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Zantioti (2009) study has revealed that the equity, assets, and GDP per capita have given the
statistically important results which shows the positive relation with the profitability of the Islamic
finance banking. Islamic banking includes in the category of quickly growing financial institutions
globally, in Egypt it was first opened in 1963.(Tabash & Dhankar, 2014). It has been found that the
equity and loans financing have been affected positively by the performance of the Islamic banking
financial System which shows that if the equity and financing is higher so the Islamic banks
profitability would have to be higher. The interpretation also revealed that positive monetary effect
would be increased if the macro-economic indicators like GDP per capita got increased(Hassan &
Bashir, 2003).

The system of Islamic banking has mainstreamed all around the world which have affected the real
economy directly. According to the (Matousek & Solomon, 2018) Islamic banking system is
sustained by major portion of Muslim population which is predictable to expand by 25% of the
whole world in year 2030. This will result in expansion of population in the USA 6.2 million from
2.6 million. It will be increased by 10% in many European Countries. So, the Muslim population
have positive and significant capacity in the progress of the Islamic banking financial
institutions(Lebdaoui & Wild, 2016).

According to (Ali & Azmi, 2017), the economic development has significantly been affected by the
economic progress in the OIC countries from year 2007 to year 2013.Likewise, (Lebdaoui & Wild,
2016) determined that the deposits of banks and their assets have positively affected the economic
development from year 2000 to year 2012 in South Asia. Also, the size of Islamic banks has been
related with the economic development in context of Shariah Compliant in mobilization of funds to
the financial area.

Grassa and Gazdar (2014) have interpreted that the deposits of Islamic banks have positively
affected the economic progress from year 1996 to year 2001.Likewise Islamic banking in MENA
from year 2000 to 2014 (Boukhatem & Moussa, 2018) and in 22 different Muslim countries from
year 1999 to year 2011 have served positively for economic growth and significantly affected the
growth as a Financial Intermediary. This study collected annual data from 52 countries from year
1990 to year 2010 of Islamic banks which interprets that the services of Islamic banking finance
expand the progression of economy through the accumulation of capital and financing(Imam &
Kpodar, 2016). The system of Islamic financing and the economic development have worked all
together from year 1990 to year 2010(Dhankar, 2014).

In Indonesia, (Hasan & Dridi, 2010) gathered the data of Islamic financial banks from year 2004 to
year 2010 shows the bi-directional relation with the economic progress. This study has estimated
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the cost efficiency of the Islamic banking system by using the stochastic approach which determines
the sources which are cost inefficient, and which evaluate the impact of managerial capability. For
this data collection is made on three fully Islamic based banks and 19 number of conventional banks
which are listed on the Indonesian Stock Exchange from time duration of 2004 to 2010. The results
show that the Islamic based banking system is efficient in technical terms and cost efficiency is
relatively less than the conventional based banking system(Zuhroh, Ismail, & Maskie, 2015). For
Indonesia the study makes analysis of the Islamic and conventional banking comparatively from
year 2002 to year 2010 by using the panel data of Data Envelopment Analysis (DEA) of 116
number of banks which concluded that Islamic banks demonstrates more efficient results on small
scale of businesses(A. N. Anwar, 2016).

The study evaluated the technical efficiency of Islamic based rural banks in Indonesia by working
on the panel data of Islamic based rural banks for time duration of 2011 to 2016 which comprises
total of 58 rural Islamic based banks with 1392 number of observations. The stochastic frontier
approach was used and concluded that the Indonesian rural Islamic banks have the technical
efficiency of 86% which could be optimized by 14%(Agustina, Sholihin, & Fithria, 2019).

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 METHODOLGY
The review of the base paper has been completed by taking 40 articles into consideration in the
literature review. Thorough understanding of the topic framework was accomplished by
implementing these 40 articles. Different researchers have used the separate pattern of methodology
to seek the influence of Islamic Finance on the monetary progress.

In the article under review, the researchers aim was to analyze the short and long term effect of
Indonesian Islamic banks on the economic development for which they have taken data from 2009
to 2019. The co-integration analysis was used and to see the Granger causality between Islamic
Bank progress and economic progress autoregressive distributed lag (ARDL) and the vector error
correction model (VECM) were used. Furthermore, impulse response functions (IRFs) and variance
decompositions (VDCs) were used to attain results effectively. This is the model used in the under
review base paper:

GDP=f (TD , TF , IBO)

Following variables were used:

GDP = Gross domestic product

TD = Total deposit

TF = Total financing

IBO = Islamic bank offices.

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 META-ANALYSIS
Paper Title Authors Variables Methodology Findings

Vulnerability (Iqbal, Vulnerability The panel The results obtained from the
of Islamic Kusuma, & regression analysis vulnerability model indicated that
Credit risk
banking in Sunaryati, was used to obtain bank liquidity risk, profitability
ASEAN 2022) Liquidity risk data from five and good governance have
ASIAN countries significant impacts on
Profitability that had operated vulnerability. Conversely, credit
Economic growth Islamic banks risk and economic growth showed
from 2010 to 2019 an insignificant effect on
Good governance susceptibility. Good governance
helps increase investment
attractiveness for economic
growth and development in
Islamic banks in ASIAN.
Islamic (Gani & Dependent Variable: The data set have The results show insignificant
banking’s Bahari, been taken for 20 findings for short term. And for
• GDP = Gross
contribution 2021) years quarterly. long term the relation among
Domestic Product
to The autoregressive Islamic finance and monetary
Independent Variable:
distributive lag progression is positive.
the
• BF = Islamic Bank bounds test to co-
Malaysian
Financing integration
real economy
• IBD = Islamic approach have
Bank Deposits been used to
• GFCF = Gross analyze.
Fixed Capital
Formation; TFP =
Total Factor
Productivity
• GOVT =
Government
Expenditure
• INF = Inflation.
Types of (Elmawazin • Gross saving in In this study cross The research says that Islamic
banking i et al., the Islamic sectional finance is promoted the monetary
institutions 2020) financial system; correlated and progress more than the
and and time wise conventional banking system.
• Gross saving in autoregressive
economic
the commercial model (CCTA),
growth
financial system theoretical
• Growth is the endogenous model
growth rate of have been used.
GDP per capita
• ISL Banks
captures the value
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 of Islamic finance
• CON_Banks
variable represents
the value of loans
by conventional
banks The
All_Banks
variable is the sum
of ISL_Banks and
CON_Banks
variables.
Determinants (Bananuka Dependent variable: This study have The finding shows the positive
of the et al., 2019) Intention to adopt Islamic taken 382 relation between the behavioral
intention to Banking population of the intention and attitude to
micro business implement the Islamic finance
adopt Islamic Predictor variables:
sample. Cross banking.
banking in a
• Attitude sectional and
non-Islamic • Affective attitude correlation
developing • Cognitive attitude methods have
country • Subjective norm been used
• Religiosity
Financial (Zarrouk et • Domestic credit to This study have The findings say that the Gross
development, al., 2017) private sector by used Vector domestic product will cause the
Islamic banks as a autoregressive Islamic banking development.
percentage of model with the
finance and
GDP time duration of
economic
• Domestic credit 1990 to 2012
growth:
provided by
evidence of financial sector as
the UAE a percentage of
GDP
• Money and quasi
money as a
percentage of
GDP
Islamic (Lebdaoui Dependent variable This study uses As per the results the long term
banking & Wild, numerous methods relation among the Islamic
• Economic growth
presence and 2016) of co-integration, banking and monetary progress is
Independent variables
panel positive related. Also the role of
economic
• Assets ratio autoregressive Muslim population in this country
growth in
• Deposits ratio distributed lag have been great
Southeast Control Variables model based
Asia estimators.
• Initial income
• Inflation
• Trade openness
• Government
spending to GDP

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 • FDI
• Rural population
• Muslim
population
• Interaction term
between Muslim
population and
banking ratio

COMPARISON OF DIFFERENT METHODOLOGIES

 From base paper the study of (S. M. Anwar, Junaidi, Salju, Wicaksono, & Mispiyanti, 2020)
have done analysis of the Islamic bank contribution to the GDP for short and long term and
used different methods like Autoregressive Distributed Lag (ARDL) and the Vector Error
Correction Model (VECM), Impulse response functions (IRFs) and Variance
Decompositions (VDCs) while the study of (Gani & Bahari, 2021) have taken data for 20
years quarterly. The autoregressive distributive lag bounds test to co-integration approach
have been used to analyze. These are the variables that are additionally included in this
paper: GFCF = Gross Fixed Capital Formation; TFP =Total Factor Productivity GOVT =
Government Expenditure INF = Inflation. And the other variables were same :GDP = Gross
Domestic Product IBF = Islamic Bank Financing IBD = Islamic Bank Deposits, also there
findings are supporting the positive impact for both short and long term.
 The other study of (Iqbal, Kusuma, & Sunaryati, 2022) used the panel regression
analysis for the time period 2010-2019 and the findings say that the good governance
helps increase investment attractiveness for economic growth and development in
Islamic banks. Study of (Zarrouk et al., 2017) ]have used Vector autoregressive model
with the time duration of 1990 to 2012 and the findings say that the Gross domestic
product will cause the Islamic banking development.

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 CONCLUSION
This study has disclosed the significant link among the Islamic banking variables and economic
progression. The bidirectional relation can be seen among Islamic banks and economic growth. The
market shares of Indonesian Islamic banks are more than the conventional banks; therefore, Islamic
banking has a flourishing effect on the economic sector.

Autoregressive distributed lag models (ARDL) depict the bidirectional relation which shows that
Islamic banking helps in transferring of productive resources in the economy. Islamic finance play
the role of mediator between economy and resources. Real economy have been efficiently availing
the facility of transmission of funds from Islamic banking. The variables of Islam bank deposits,
offices and financing help in determination of economic progress for long term.

The findings of variance decompositions (VDCs) and impulse response functions (IRFs) strengthen
the outcomes discussed earlier. The findings help in identification that Islamic banking industry
would be highlighted and would have given priority to expand the economic sector progress.

As per the review, in Indonesian Islamic banking sector should have given the priority so the real
economy sector would get the funds and expand growth and have resilience at the time of economic
crisis. There should be expansion in the current asset ratio of the Islamic banks, furthermore,
number of Islamic banks should have been expanded with their superiority of quality. The
infrastructure of Islamic financial sector should have been considered for the expansion of rational
employees in future. Legal regulations facility would have also been helpful in the economic sector.
However, with the expansion in the number of Islamic banks it should be important to consider the
management of this sector on the priority, mainly for the Shari’ah advisers and members. Also it is
significant to provide the students with opportunities to learn the Islamic financial skills.

The Islamic banking system should grasp the up-to-date technology to have positive effect on the
economic sector as well as on the society by improving the products and services provided.

LIMITATIONS AND FUTURE RECOMMENDATION

The limitation of this study is that research is done for a particular period in Indonesia but the
findings can vary as per the market condition vary with time. They seem positive at a time and
opposite in another. Robust analysis should have considered to discover the findings more
effectively for more extended period. Particular sectors of Islamic finance that help in economic
growth could be efficiently identified. As (Gheeraert & Weill, 2015) evaluated the effect of Islamic
finance impact on the macro-efficiency considering the sample of 70 countries from 2000 to 2005
which shows that the Islamic finance could have positive results to a certain limit.
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Future researchers should have used the methodology sample of combined countries so the results
are more effective. Moreover, the Islamic finance system and dual banking system should be
equally analyzed by collecting the appropriate quantity of data. Also the researchers should work on
different scenarios to evaluate the impression of Islamic finance on the monetary progress more
efficiently by comparing the pre-crisis period and post-crisis period. Furthermore, researchers
should highlight this topic before and after the COVID-19 pandemic with the conventional banking
to see that Islamic financial system is promoting growth in the economic sector and in society.

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 AUTHOR’S BIOGRAPHY
Suhardi M. Anwar
Department of Management, Universitas Muhammdiyah Palopo,
Palopo, Indonesia
Junaidi Junaidi
Department of Accounting, Universitas Muhammdiyah Palopo, Palopo, Indonesia
Salju Salju
Department of Management, Universitas Muhammdiyah Palopo,
Palopo, Indonesia
Ready Wicaksono
Department of Accounting, Sekolah Tinggi Ilmu Ekonomi Balikpapan,
Balikpapan, Indonesia, and
Mispiyanti Mispiyanti
Department of Accounting, Sekolah Tinggi Ilmu Ekonomi Putra Bangsa,
Kebumen, Indonesia

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