ISLAMIC BANKS AND LOCAL DEVELOPMENT IN INDONESIA

Yuli Andriansyah

Introduction Finance and Growth

The growth of financial institutions along with its intermediaries function is believed to be important factor that impact total productivity as well it is related to long-run economic growth (Beck, Levine, & Loayza, 2000).

For developed economies, Rioja & Valev (2004) confirm that financial institutions have positive impact on productivity while in less developed countries accumulation of capital is the way by which finance contribute to growth.

Hassan, Sanchez, & Yu (2011) suggest the importance of well-functioning financial system to guarantee steady economic growth in developing countries.

The chain by which finance can contribute to growth can be traced from saving which then channeled to investment (Pagano, 1993).

Introduction Finance and Growth in Indonesia

Indonesia has pursued the development of financial institutions, including Islamic financial institutions

Islamic financial institutions (IFIs) have taken part in Indonesia development in at least two decades since the introduction of Islamic bank in Indonesia economy in the beginning of 1990s

A new type of Islamic bank in local development in Indonesia => local development banks (or Bank Pembangunan Daerah abbreviated BPD) opened a sharia business unit

Methods Data:

assets, financing, and intermediaries function of Islamic banks

Coverage:

North Sumatera, South Sumatera, West Java, Central Java, East Java, West Kalimantan, South Sulawesi, and West Nusa Tenggara.

Range:

2005 to 2013

Macroeconomic indicators:

economic growth and

percentage of population living in poverty.

Methods: Provinces Profile

Province Area Population 2010 HD Index 2013 % of Muslim

North Sumatera 72,981.23 km2 12,982,204 75.55 64.50

South Sumatera 91,592.43 km2 7,450,394 74.36 86.00

West Java 35,377.76 km2 43,053,732 73.58 97.00

Central Java 32,800.69 km2 32,382,657 74.05 96.74

East Java 47,799.75 km2 37,476,757 73.54 96.36

West Kalimantan 147,307 km2 4,395,983 70.93 58.22

South Sulawesi 46,717.48 km2 8,034,776 73.28 89.62

West Nusa Tenggara 19,708.79 km2 4,500,212 67.73 96.00

Indonesia 1,904,569 km2 237,641,326 73.81 87.20

Results and Discussion North Sumatera

Results and Discussion South Sumatera

Results and Discussion West Java

Results and Discussion Central Java

Results and Discussion East Java

Results and Discussion West Kalimantan

Results and Discussion South Sulawesi

Results and Discussion West Nusa Tenggara

Results and Discussion Islamic banks perform well in financial performance

especially in financial intermediaries function

Achievement in intermediaries function hasn’t reflected in macroeconomic level as the growth of financing did not followed simultaneously by the reduction of poverty

stable growth in Islamic financial indicators but at the same time economic indicators fluctuate

Abu‐Bader & Abu‐Qarn’s (2008) research for Middle East and North African countries => the weak support between financial development and long-run economic growth.

Results and Discussion

Islamic Banks Performance and Local Development

Limited market share of Islamic banks about 5% in national market share

World Bank’s (2011) Financial Inclusion Data less than 20% of population are covered with financial institution

products

Results and Discussion Poverty reduction in Indonesia should not rely on economic

growth only but also has relation with many other factors, i.e. infrastructure, human capital, agricultural price incentives and access to technology (Balisacan, Pernia, & Asra, 2003).

From provincial level in Central Java for example, growth not only alleviates poverty but impacts also in inequality which implies the need of quality growth in local context Hariadi (2009).

Conclusions, Implications and Significance

Islamic banks in local development in Indonesian economy is still a new emerging topic of research

Islamic banks’ performance is financially well-developed but still in need further expansion to reach the most needed society member living in poverty.

Suggestion to systematize endeavors from Islamic banks to push wider opportunities in developing and expanding of Islamic financial institutions

Government can play significant role especially in creating better regulatory quality to meet the challenge of institutions growth.

Conclusions, Implications and Significance

Limitations

data availability in the context of local development

preliminary research in the relation between Islamic finance and local development particularly in a new emerging decentralized economy

Recommendations

inclusion of other macroeconomic data,

usage of statistical and econometrics tools, and

coverage of more provinces in Indonesia and if possible other countries.

شكرا جزيال

Thank You Very Much