Increasing users of Sharia financial products can provide a stimulus for economic growth contribution in Indonesia. Considering that fact, this study aims to monitoring Islamic Finance activities on Economic Growth in the long and short term. Granger causality and VECM tests are appropriate analytical tools to determine the purpose study. The data from this research was taken from Indonesia financial service authority and Indonesia central bureau of statistics from 2009Q1 to 2023Q1. The results obtained show that the Islamic capital market influences economic growth, because investment can develop countries and at the end increase people's income. The implication research is that the government is expected to increase the stability of capital market conditions so that investors will generate capital gains from investment activities which in turn will increase economic growth. In addition, innovation and regulation are needed to increase the contributions of the Islamic banking and Islamic insurance sector to the Indonesian economic growth.
Top1. Introduction
Generally, a financial system is made up of two components: the bank-based component and the market-based component. If an economy is driven by financial intermediaries – such as banks and bank-like financial institutions – more than it is driven by financial markets – such as stock and bond markets – that economy’s financial system is generally referred to as a bank based financial system. If securities markets share center stage with banks in driving economic growth via savings mobilization and allocation, corporate control, and risk management, that economy’s financial system is generally referred to as a market-based financial system (Nyasha & Odhiambo, 2015). Furthermore, according to Ul Din et al. (2017), financial sector not only bank but also insurance (Islamic financial non-bank), based on his research non-life insurance has relationship with economic growth for developing countries whereas, in case of developed countries, the results are only significant when insurance density is used as a proxy for insurance. Moreover, the role of non-life insurance is more significant for developing countries as compared to developed countries. Islamic insurance is also a financial institution that plays a role in channeling funds to the public. The main activity carried out by Islamic insurance is to protect and help between a number of people from the risks to be faced. In addition, Islamic insurance also invests a collection of Tabarru ‘funds and investment funds in non-usury instruments or in accordance with sharia (Lone, 2016:13).
According to the FSA in 2017 the market share of Islamic insurance is 4.94% with the growth in the number of assets each year. Data from the FSA shows if in 2018 Islamic insurance assets reached Rp41.96 trillions, with sharia life insurance as the biggest contributor. According to oke finance the sharia financial industry increased by 25% in February 2018 which increased Indonesia’s position for a country with the potential for the development of the sharia industry in the world (Laucereno, 2017).
The Indonesian Islamic Banking SnapShoot in 2019 issued by the FSA (Financial Services Authority, 2019), Islamic banking has a positive growth based on asset development, disbursed funds and third party funds which are also in line with the positive main ratios. On the other hand, Activities undertaken by Islamic banking in general are raising funds from the community, channeling funds to the public and services. Islamic banking channel funds to the public in the form of financing and placement of other funds. This was done to prevent idle fund. From the distribution of funds, Islamic banking will get profits in accordance with the form of distribution of funds made (Lone, 2016:3).
Some previous research states that the activities of financial institutions have a role in supporting economic growth. As in research by Abduh (2012) which examines the relationship between Islamic banking and growth in Indonesia. In this study, Islamic banking are the whole of Islamic commercial banks, Islamic business units and Islamic people’s finance banks, proxy for economic growth using GDP. The result of ARDL is found a significant positive relationship and correlation between Islamic bank financing with economic growth, this result also in line with Imam & Kpodar (2016). On the other side Nyasha and Odhiambo (2015) examines the impact of both bank- and market-based financial development on economic growth in South Africa during the period from 1980 to 2012. The empirical results of this study show that there is a positive relationship between bank-based financial development and economic growth but fail to find any relationship between market-based financial development and economic growth in South Africa
Separately, Ul Din (2017) examines the relationship between insurance and economic growth with proxy insurance activities are life insurance premiums and general insurance. The proxy of economic growth is GDP. This research also classifies Indonesia as a developing country, where the majority of people tend to choose general insurance. Similar research was conducted by Haiss (2008) which examines the relationship of insurance and economic growth. The variables used in this study are GDP, investment insurance, premiums from life and non-life insurance using panel data. This study in line with Chau et al. (2013), Oyodetun & Adesina (2015) and Webb et al. (2005) that states the positive impact of life insurance on economic growth in several countries.