Islamic Banking, Economic Growth, and Poverty Reduction in Indonesia

Abstract

The main aim of this study is to examine how the role of Islamic banks, economic growth, and price stability on poverty reduction in Indonesia from 2010 to 2019. Total Financing (TF), Financing to Deposit Ratio (FDR), Non-Performing Financing (NPF), Return on Assets (ROA), and Third-Party Funds (TPF) monthly time series data were used to measure Islamic banking role, while economic growth, price stability, and poverty, were measured by Industrial Production Index (IPI), Consumer Price Index (CPI), and Poverty headcount ratio (POV), respectively. The short- and long-term effects of Islamic banks, economic growth, and price stability on poverty reduction in Indonesia are examined using an Autoregressive Distributed Lag (ARDL) bound test. The study documented that Islamic banking, economic growth, and price stability had a significant short and long-term effects on poverty reduction. These findings offer various key implications for the banking industry and policymakers in order to eradicate poverty through strengthening economic growth, Islamic banking sector, and price stability. The Islamic banking industry should provide a quality of financing allocation to promote economic growth and price stability that, in turn, reduce poverty.