MODES OF ISLAMIC FINANCING AND ECONOMIC GROWTH: EVIDENCE FROM INDONESIA

Abstract

Financing is expected to positively support economic growth, especially using Islamic contracts, which are strictly obliged to link the monetary and real sectors. Crises can devastate the financial and economy sectors, and also shock the real sector. This study aims to analyse the effect of Islamic-based financing on economic growth in Indonesia using the ARDL method. Gross fixed capital formation, household expenditure, government expenditure, exports, imports and the consumer price index, together with Islamic financing, are analysed in terms of their effect on economic growth in Indonesia during the period 2003-2018, in which the 2008 crisis is set as a dummy variable. Musharaka financing, which is based on profit-loss sharing, has a relationship with economic growth in the short run, but not in the long run. Furthermore, mudaraba financing unpredictably shows a negative relationship with economic growth, while Murabaha does not have significant effect in either short- or long-run estimation. The results imply that the prevailing economy system, which accommodates household expenditure, leads to an increase in economic growth, so is recommended as a priority sector for development. This study supports the notion that the current traditional economic stance may not suit the measurement of Islamic finance implication towards economic growth. The Maqasid sharia inclusiveness measurement is considered as an alternative estimation of the effect of modes of financing on economic growth.