Implications of Sharia-compliant financing trade-offs on unemployment and growth

  • Received June 9, 2023;
    Accepted July 6, 2023;
    Published July 11, 2023
  • Author(s)
  • DOI
    http://dx.doi.org/10.21511/pmf.12(1).2023.09
  • Article Info
    Volume 12 2023, Issue #1, pp. 100-109
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As a Muslim-majority country, Indonesia possesses significant potential to harness Islamic banking as a key driver of its economy. This study aims to examine the effects of Sharia-compliant financing provided by Islamic banks in Indonesia on the unemployment rate and economic growth. The analysis utilizes data on Sharia-compliant financing for non-bank third parties, open unemployment rate, and gross regional domestic product at constant prices as proxies for economic growth. Annual panel data from 33 provinces in Indonesia covering 2010 to 2021 are employed. The analysis employs a fixed-effect regression model using the generalized least squares (GLS) estimator. The findings of this study indicate that Sharia-compliant financing has a positive impact on reducing the unemployment rate and fostering economic growth. However, it is observed that the effectiveness of Sharia-compliant financing in reducing unemployment diminishes as the share of such financing increases. Conversely, a higher market share of Sharia-compliant financing is associated with a more significant role in promoting economic growth. These findings highlight a trade-off between the impact of Sharia-compliant financing on growth and unemployment, suggesting that although growth driven by Sharia-compliant financing in Indonesia is present, it may need more inclusivity and more optimal job creation.

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    • Table 1. Descriptive statistics
    • Table 2. Multicollinearity test
    • Table 3. Regression result
    • Conceptualization
      Sri Budi Cantika Yuli, Mochamad Rofik
    • Funding acquisition
      Sri Budi Cantika Yuli
    • Investigation
      Sri Budi Cantika Yuli
    • Project administration
      Sri Budi Cantika Yuli
    • Resources
      Sri Budi Cantika Yuli
    • Supervision
      Sri Budi Cantika Yuli
    • Validation
      Sri Budi Cantika Yuli, Mochamad Rofik
    • Writing – review & editing
      Sri Budi Cantika Yuli
    • Data curation
      Mochamad Rofik
    • Formal Analysis
      Mochamad Rofik
    • Methodology
      Mochamad Rofik
    • Software
      Mochamad Rofik
    • Visualization
      Mochamad Rofik
    • Writing – original draft
      Mochamad Rofik