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research article
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https://doi.org/10.17059/ekon.reg.2023-4-23 UDC 330, 336, 338 JEL: E37, E66, G2
Aryati Aryati a> © E. Junaidi Junaidi b> (3D, Randi Ariyadita Putra c> ©
a) Indonesian Muslim University, Makassar, Indonesia
b) Palopo Muhammadiyah University, Palopo, Indonesia
c) State Islamic Institute of Kendari, Kendari, Indonesia
Financial Development and Economic Growth: Evidence from Indonesia Before and After the cOVID-19 Pandemic1
Abstract. During the COVID-19 pandemic, most countries suffered economically. Financial institutions play an important role in enhancing economic growth through intermediation. However, preliminary studies focused on common aspects of financial institutions rather than the banking context, and the majority of the literature was written prior to the COVID-19 pandemic. This study examines the banking sector's role in short-run and long-run contributions to economic growth from 2009 to 2021. Indicators of the number of banking deposits, offices and public financing were used as proxies to validate the relationship between Indonesian financial development and economic growth (gross domestic product) in the vector error correction model (VECM). The Indonesian bank's contribution to the country's economic growth was examined. Data were collected from banks' annual reports. This study found a strong short-and long-term correlation between financial development and Indonesia's economic growth. There is a bidirectional relationship between Indonesia's Islamic Bank (IIB) and GDP. The relationship between the conventional bank and Indonesia's economic growth is unidirectional. Therefore, policymakers should enhance the intensified mobilisation of loans obtained for capital and productive projects. This study also shows that macroeconomic and microeconomic stability can be improved by enhancing capital inflows and investments in lucrative sectors, as the research goal was to examine the effect of financial development before and after the COVID-19 pandemic, which detriments most countries' stability. However, future studies need to confirm banks' contributions to specific sectors such as agriculture and small and medium enterprises due to their strong correlation with developing countries.
Keywords: conventional bank, Islamic bank, Indonesian economic growth, GDP, financing, deposits, ARDL, VECM
For citation: Aryati, A., Junaidi, J., & Putra, R. A. (2023). Financial Development and Economic Growth: Evidence from Indonesia Before and After the Covid-19 Pandemic. Ekonomika regiona / Economy of regions, 19(4), 1263-1274. https://doi. org/10.17059/ekon.reg.2023-4-23
1 © Aryati A., Junaidi, J., Putra, R. A. Text. 2023.
исследовательская статья
А. Арьятиа) © И, Дж. Джунаиди б) О, Р. А. Путрав) ©
а) Мусульманский университет Индонезии, г. Макассар, Индонезия б) Университет Мухаммадия в Палопо, г. Палопо, Индонезия в) Государственный исламский институт Кендари, г. Кендари, Индонезия
Финансовое развитие и экономический рост Индонезии до и после пандемии COVID-19
Аннотация. Пандемия COVID-19 негативно повлияла на экономическое развитие большинства стран. Финансовые институты, выступая в качестве посредников, играют важную роль в ускорении экономического роста. Однако предыдущие работы исследовали финансовые организации в общем, не учитывая банковский контекст. Кроме того, большинство исследований было выполнено до пандемии COVID-19. В статье рассматривается краткосрочное и долгосрочное влияние банковского сектора на экономическое развитие Индонезии в период 2009-2021 гг. Показатели количества вкладов, количества банковских офисов, а также общественного финансирования были использованы в качестве переменных для анализа взаимосвязи между финансовым развитием и экономическим ростом (валовым внутренним продуктом). С этой целью авторы использовали векторную модель коррекции ошибок. Проведенная на основе данных годовых отчетов оценка влияния индонезийских банков на экономический рост страны выявила краткосрочную и долгосрочную корреляцию между финансовым развитием и экономическим ростом Индонезии. Между деятельностью исламских банков Индонезии и ВВП существует двухсторонняя взаимосвязь, а между деятельностью традиционных банков и экономическим ростом - односторонняя. Таким образом, следует позволить банкам выдавать больше кредитов на инвестиционные и производственные проекты. Исследование финансового развития до и после пандемии COVID-19 показало, что макро- и микроэкономическая стабильность может быть восстановлена путем увеличения притока капитала и инвестиций в прибыльные секторы. В дальнейшем необходимо проанализировать влияние банков на конкретные секторы, такие как сельское хозяйство и малый и средний бизнес, играющие важную роль в развивающихся странах.
Ключевые слова: традиционный банк, исламский банк, экономический рост Индонезии, ВВП, финансирование, вклады, модель авторегрессии и распределённого лага, векторная модель коррекции ошибок
Для цитирования: Арьяти, А., Джунаиди, Дж., Путра, Р. А. (2023). Финансовое развитие и экономический рост Индонезии до и после пандемии СОУЮ-19. Экономика региона, 19(4), 1263-1274. https://doi.org/10.17059/ekon.reg.2023-4-23
Introduction
Economic growth, stability, and positive sus-tainability have been the principal concerns for developing countries. However, local financing resources are necessary to support the development projects and investments. The majority of developed and developing countries heavily depend on sources of external capital such as foreign productive investment, cross-border interbank borrowing, and concessional loans and remittances. Capital inflow and financing play an important role in improving the national gross domestic product (GDP). Besides, financial development, such as the number of offices to facilitate lenders and borrowers to intermediate banking in financing and credit, also has an essential role in improving the economy. The crucial role of the financial sector after two economic and financial crises in 1997-1998, 2007-2008, and during the COVID-19 pandemic has become an essential topic for discussion in both theoretical and empirical aspects. During the COVID-19 pandemic, most countries suffered economic and financial downturns.
The global economic downturn made some countries concerned about enhancing the facilitation of production and demand of products and services, supply chain and market disruption to support distribution processes, and firms and financial markets1. This phenomenon pursues regulatory remedies to prevent economic troubles. The bank regulator, government, and supervisor have enforced the effective functioning of domestic banking systems in resource transformation and liquidity. However, theoretical and empirical studies have broadly debated the interconnection between intermediary banking's role and economic growth. Some scholars elaborated on the causality between financial development and economic growth (Cong, 2022; Ginevicius et al., 2019; Nuru & Gereziher, 2021). The banking sector had an essential role in attracting consumers
1 The market watches. (2020). Retrieved from: https:// www.marketwatch.com/press-release/global-development-boards-market-2020-size-share-growth-trends-and-forecast-2026-business opportunities-and-future-investments-2020-0 6-17-91974236-1916287672 (Date of access: 07.09.2021).
to save their money and distributing the deposits as lending activities to provide loans for financing and investment.
The financial system fosters productivity improvement by providing financing and various innovative activities (Rani et al., 2022; Tinta, 2022). The intermediary financial role towards deposits and financing has a significant and positive impact on economic growth (Beck et al., 2000; Levine, 1997). For instance, based on six alternative financial development indicators, the relationship between financial inclusion and economic growth is demand-following and supply-leading. It implies that banking plays an important role in facilitating the relationship between borrowers and lenders (Anarfo et al., 2019; Haini, 2019; Anwar et al., 2020). During the COVID-19 pandemic, Indonesia's economy (e. g., GDP) plummeted to -7.1 % until -7.5 % in 2020. This trend was still elevated at -7.9 % in 01 2021. However, in 02 2021, Indonesian GDP was expected to rebound by 4.4 % in 2021 and to accelerate to 5.0 % in 20221.
Prior studies raised more concerns across the regions (Ma et al., 2020; Mhadhbi et al., 2020), for instance, the Association of Southeast Asian Nations (ASEAN) countries (Haini, 2019; Pradhan et al., 2014), Organisation for Economic Cooperation and Development (OECD) countries (Mtar & Belazreg, 2020), and sub-Saharan African countries (Akinlo et al., 2020). Financial inclusion (e. g., saving) also played a crucial role in improving 179 countries during 2011-2017 (Chakraborty & Abraham, 2021). Similarly, money supply and financing had a strong correlation with economic growth in 12 low-income countries during 1980-2016, in Ghana over the period 1971-2012 (Alhassan et al., 2022), and in Eswatini during 1996-2018 (Fakudze et al., 2022). Meanwhile, in the countries of the Southern African Development Community (SADC) during 1990-2015, financial development had a negative effect on economic growth (Taivan & Nene, 2016). Hence, this topic is worthwhile to validate.
How about Indonesia? The lack of research focused specifically on the context of a country with dual banking systems (e. g., conventional and Islamic banks) makes the role of the financial sector inconclusive. The present study seeks to address these questions and contribute to the research on relationship between financial development (e. g., conventional and Islamic banks) and
1 World Bank (2021). Retrieved from: https://www.worid-bank.org/en/country/indonesia/publication/indonesia-econom-ic-prospects-iep-june-2021-boosting-the-recovery. (Date of access: 29.03.2022).
economic growth in Indonesia. It is the primary goal of this work.
In answering these questions, this research extends the existing literature and practical contributions. First, the study attempts to fill this gap by concentrating on both conventional and Islamic banks and combining these sectors. Preliminary studies focus more on either conventional or Islamic banks. Very few studies combine conventional and Islamic banking. Hence, it is important to examine the relationship between financial development and economic growth in a country that has a dual banking system. This study used Granger causality and vector error correction model (VECM) to validate the bidirectional relationship between financial development and Indonesia's economic growth. However, there is a lack of research focused on investigating the two-way linkages between financial development and economic growth.
Second, prior studies on financial development and economic growth have neglected to combine both types of banks (e. g., conventional and Islamic). This approach involves several endogenous variables explained by their delayed values on the relationship between financial development and economic growth (Levine, 1997; Levine et al., 2000; Mhadhbi et al., 2020), economic growth on financial development (Ginevicius et al., 2019; Mtar, & Belazreg, 2020; Opoku et al., 2019) using the systems autoregressive distributed lag model (ARDL) and VECM.
Third, this study observes the relationship between financial development and economic growth with a combination of financial and non-financial aspects such as the number of offices and employees. It makes the results coherent and robust (Cheng & Hou, 2020; Kim et al., 2018). In this study, forecast variance decompositions (VDCs) and impulse response functions (IRFs) are applied to predict the effect of economic growth on financial development (FD). The financial crisis of 2008 required the examination of the interdependence between these sectors and economy. However, few studies examine this field, and the majority of the researchers elucidated these parts separately. There are at least two major limitations in prior studies. First, the used cross-sectional data lacks the ability to solve country-specific problems (Haini, 2019; Pradhan et al., 2014). Second, the majority of previous studies are derived from a bidirectional causal analysis with the likelihood of the bias of the variables. The results of the bidirectional causality test may be invalid due to the omission of an essential variable in the causality model (Le & Tran-Nam, 2018).
Indonesia was selected for analysis in the present study. The choice was motivated by three main reasons. First, Indonesia has reformed its financial systems and combined conventional and Islamic banks. Second, Indonesia has a robust system and potential for growth in conventional and Islamic finance institutions. Third, in the last decade, Indonesia's banking assets and offices have been growing rapidly. However, the country's economic growth was stagnant at around 5 % and worse during the COVID-19 pandemic. Hence, the government needs a solution, specifically the baking system's contribution to economic growth.
2. Conceptual Background
There are four famous financial structure theories on economic activities, such as those that develop fundamental studies to validate the relationship between financial development, financial structure, and economic growth (Beck et al., 2000). However, this study examined the financial structure based on the financial system for economic growth. First, the authors concluded that financial development played an important role in economic growth, while financial structure had a lesser role in 48 countries from 1980 until 1985. In the second study, the authors concluded that financial development without a specific type of financial scheme has a positive and significant effect on economic growth in 40 countries (Demiurgic-Kunt & Maksimovic, 2002).
Financial development influences economic growth with regard to four economic theories: bank-based, market-based, financial services, and legal views (Levine, 2002). The author concluded that financial structure does not have a crucial role in economic growth, capital distribution, or personal income. Furthermore, other scholars concluded that bank-based lending has a positive and significant effect on economic growth, the development of companies, and capital budgeting efficiency across countries and firms (Beck & Levine, 2002). They found that, overall, financial development and legal system efficiency play an important role in economic growth, whereas bank-based approach has a smaller impact on the enhancement of some regions' GDP. Scholars have produced notable results regarding financial development and economic growth as a result of education quality (Hanushek & Woessmann, 2007), population (Mason & Lee, 2022), and income equality (Levine, 1997; Topuz, 2022). In addition, the financial role of economic growth depends on the indicators that researchers adopt as proxies in their studies (Adu et al., 2013).
In Ghana (Adu et al., 2013) and Malaysia (Anwar & Sun, 2011), credit or financing of the private sector for consumption and investment has a positive effect on economic growth, whereas the stock market has a less positive effect on GDP. This indicator, as well as employment, capital inflow, inflation, and exports have a negative effect on economic growth in China (Wang et al., 2015). Similarly, financial liberalisation has a negative effect on economic growth in 10 Southern African Development Community (SADC) countries (Taivan & Nene, 2016). Grassa and Gazdar (2014) concluded that Islamic banks have a greater effect on economic banks than conventional banks in five Gulf Cooperation Council (GCC) countries. Bolbol et al. (2005) found that bank-based indicators and market-based indicators positively reinforced economic growth in Egypt. In other words, education, income distribution, and population in the economy are divided among social groups and classes, and the economic system's performance is measured.
Recently, the empirical studies have focused more on the panel of countries and individual-country studies (Ledhem & Mekidiche, 2020; Rani et al., 2022). One assumption in the theory of economic growth is whether the institution has a positive effect on economic growth. Endogenous growth theory was developed by Romer and Lucas in the 1980s (Romer, 2011). It places greater emphasis on human capital (e. g., employees and consumers) as a lender and borrower relationship effect to economic growth towards education, knowledge, and training. Islamic banks positively affect Indonesia's economic growth and investments (Anwar et al., 2020). Islamic banks not only have economic goals (e. g., profit) but also have social contributions towards financing and social activities (Junaidi, 2021; Junaidi et al., 2023).
The concept of financial development's role in economic growth comprises three hypotheses, namely supply-leading, demand-following, and bidirectional, of the financial deepening-growth nexus. The supply-leading hypothesis assumes that financial development positively affects economic growth as a valuable process (Haini, 2019; Rani et al., 2022) and is caused by the increase in rate savings and investment. Several recent studies have examined this approach through three types of economic integration, including overall integration, financial integration, and trade integration, in Vietnam from 1986 to 2015 (Nguyen et al., 2019). It means that banks as intermediaries transferring deposits to financing have a positive effect on economic growth. Similarly, in Austria, the evolution of GDP and savings from 1998 to 2016 positively influenced GDP (Ginevicius et al., 2019). This indi-
cates that the developing countries' policy of financial reforms leads to improved economic growth (Dyakov, 2022). Other scholars got the same result in different regions, such as Malaysia (Gani & Bahari, 2021), Nigeria (Karimo & Ogbonna, 2017), Austria, France, and Korea (Cheng & Hou, 2020), 16 African and non-African low-income countries (Bist, 2018), China and India (Kandil et al., 2017), as well as South Asia (Munir & Shahid, 2021). Interestingly, during the financial crisis in 20082009, financial development consistently promoted economic growth in ASEAN countries (Haini, 2019) and Europe (Asteriou & Spanos, 2018). Similarly, in Middle East and North Africa from 2000 to 2014 (Boukhatem & Mousa, 2018) and in 22 Muslim countries during the period 1999-2011, the financial intermediary role of Islamic banks has positively impacted economic growth (Abedifar et al., 2016). Recently, with applied VAR, IRFs, and Granger causality, it was revealed that financial development positively affects economic growth in 55 Organisation of Islamic Cooperation (OIC) countries (Kim et al., 2018).
The second hypothesis is demand-following. It refers to financial development having a positive and significant effect on economic growth. The third fund party has a strong correlation to GDP in Denmark, Portugal, and Latvia (Ginevicius et al., 2019; Nuru & Gereziher, 2021). With applied ARDL and VECM, financial development has different effects in the short and long run on Malaysian GDP (Gani & Bahari, 2021). A unidirectional causality between economic growth and financial development in OECD countries was described (Mtar & Belazreg, 2020). Lastly, bidirectional causality implies a mutual or two-way causal relationship between financial development and economic growth. Several previous studies have approved this hypothesis. Deposits play an important role in enhancing the amount of financing in Luxembourg, France, and the United Kingdom (Ginevicius et al., 2019). In ASEAN during 19612012 (Pradhan et al., 2014) and African countries in the period 1980-2016, financial development and economic growth effectively worked together (Opoku et al., 2019). In addition, financial development must be supported to promote income equality and economic growth in developing countries (An et al., 2021; Nyasha & Odhiambo, 2014).
Banks, securities, or financial services could all form the foundation of a financial system (Demirgü^-Kunt & Levine, 2001). The bank-based theory concentrates on the advantages of banks for economic development and expansion as well as the shortcomings and defects of the financial system based on securities. According to this hy-
pothesis, banks might affect economic growth in developing countries more so than the securities market. The concept of a bank-based system also highlights the shortcomings and flaws of the basis system, one of which is that the securities-based system has reduced the motivation for investors to seek out information by making it public. On the other hand, banks, by developing a long-term connection with businesses, remove the interruptions brought on by inconsistent information. Therefore, as opposed to securities-based systems, bank-based arrangements may improve corporate governance and optimal allocation. Additionally, securities-based theory examines the advantages of the market's increased performance and points out the disadvantages of the bank-based system.
3. Data and Research Method
The recent study validates the contribution of the Indonesian bank (e. g., conventional and Islamic) to GDP based on quarterly data from 2009 to 2021 (see Table 1). All variables measured by finance extend to the real economy, which is divided by the nominal GDP. Data were obtained from banks' websites and Indonesian Central Agency of Statistics.
In this study, GDP was adopted as a proxy for economic growth (Abedifar et al., 2016; Anwar et al., 2020). Furthermore, the number of banking deposits, offices and public financing are considered as intermediaries (Gani & Bahari, 2021; Ginevicius et al., 2019; Haini, 2019; Nuru & Gereziher, 2021). Therefore, the models contain four variables TDep, TFin, IBOff, and GDP. The study focuses on the following model.
GDP = f(TDep, TFin, IBOff) (1)
where GDP = Gross domestic product, TDep = Total banking deposits, TFin = Total public financing, IBOff = Indonesian bank offices.
To examine cointegration among variables, the research performed Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests and refers to Narayan (2004) (Table 2).
AGDPt = a1 + ¿3AGDPt _1 + £eil. ATDept _x +
i=1 i=1
+¿01- A TFint-1 + ¿01- AIBOfft_x + st, (2)
i=1 i=1
4. Results and Discussion 4.1. Unit root tests
This study applied an alignment of ADF and PP unit root tests. The first-generation panel unit root tests are Levin-Lin-Chu (hereafter, LLC)
SCB = Shariah commercial banks, SBU = Shariah business units, SRB = Shariah rural banks, CB = Conventional bank, CRB = Conventional rural banks, * in trillion rupiah (IDR). Source: Indonesia's financial service authority.
Table 2
ADF unit root test
Table 1
Data on Indonesian Banks (IB)
Islamic Banks
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
SCB 11 11 11 11 12 12 13 13 14 14 14 12
SBU 23 24 24 23 23 22 22 21 20 19 19 25
SRB 150 155 158 163 163 163 166 167 165 164 167 165
Offices 2,101 2,101 2,663 2,990 2,922 2,747 2,654 2,664 2,724 2,917 2,034 2,045
Assets" 148.98 186.74 199.71 248.10 272 304 366 425 490 538 609 725
Financing" 105.33 118.95 151.06 188.56 201 220 256 287 330 366 396 415
Deposits" 117.51 126.70 150.46 187.20 222 236 285 342 380 425 476 521
Conventional Banks
CB 122 120 120 120 119 118 116 115 115 110 107 108
CRB 1.706 1.669 1.653 1.635 1.643 1.637 1.633 1.619 1.597 1.545 1.496 1.521
Offices 19,510 20,980 23,713 26,226 27,753 40,810 41,459 41,087 40,615 39,983 40,514 40,612
Assets" 31.338 38.256 44.776 52.059 59.099 64.477 70.974 78.011 85.207 90.630 80.796 84.245
Financing" 18.889 23.601 24.218 35.722 39.952 43.515 47.141 51.210 57.228 60.922 59.515 60.126
Deposits" 24.615 29.408 29.988 39.300 44.382 47.163 51.976 57.159 61.024 65.265 62.819 65.200
Islamic bank Conventional bank Islamic and conventional bank
Variables Level 1st level Level 1st level Level 1st level
ADF PP ADF PP ADF PP ADF PP ADF PP ADF PP
TD 1.588 5.374 -7.104*** -7.438*** 0.148 0.253 -6.928*** -6.940*** 0.232 0.349 -6.870*** -6.940***
TF 1.502 1.433 -8.724*** -8.678*** 0.241 0.241 -6.708*** -6.708*** 0.262 0.287 -6.688*** -6.688***
TO -0.633 -0.598 -7.253*** -7.257*** -0.928 -0.945 -6.051*** -6.077*** -0.439 -1.026 -7.258*** -6.205***
GDP -1.563 -1.268 -7.889*** -12.350***
Notes: *** significance at the 1 per cent level. Source: Author's calculations.
(Levin et al., 2002) and Im-Pesaran-Shin (hereafter, IPS) panel unit root tests (Im et al., 2003). The basic equation for the first-generation panel unit root tests is:
k
AY; ,t = h +P; Ag i ,t-1 , j ,t - j +ei ,t;
j=1
i = 1, 2, 3, ..., N; t = 1, 2, 3, ..., T, (3)
where g is the GDP growth rate, i is the personal fixed effect and the autoregressive parameter of variables, and t is the error term. The LLC test assumes homogeneity of i across banks and variables. The test uses an augmented Dickey-Fuller (ADF) unit root test for each variable, which is a common statistical test applied to examine the stationary time series data observed. This step is a crucial factor in time series (Table 2).
It can be seen that the data series of variables gross domestic product (GDP) and Indonesian bank (e. g., conventional and Islamic) deposits, finance, and offices are stationary at level I(1) rather
than I(0). It implies that the ARDL approach can be further applied.
4.2. The cointegration test: Bounds f-test
It means that for three models, the calculated F-statistics are higher than the upper critical bounds at the 1 % and 5 % level of significance for the three models (4.1343 > 3.67, 4.0119 > 3.67, 5.110 > 4.66), respectively (see Table 3). It implies
Table 3
Bounds F-Test statistic for the long-run relationship
Sig., % Islamic bank Conventional bank Islamic and conventional bank
I (0) I (1) I (0) I (1) I (0) I (1)
1 -3.57 4.66 3.65 4.66 3.65 4.66
5 -2.92 3.67 2.79 3.67 2.79 3.67
10 -2.60 3.20 2.37 3.20 2.37 3.20
F-value = F-value = F-value =
4.1343 4.0119 5.1180
Source: Author's calculations.
5 % and 4 %, respectively. Meanwhile, bank offices have a strong impact, with a 5 % change in Islamic bank branches leading to 0.90 %. This is expected since few of the deposits and consumers in the whole Indonesian banking system are meant for financing productive sectors.
For example, the coefficients of GDP equal to 0.528, 0.686, and 0.743 for Islamic, conventional, and both banks, respectively. This shows that the deviation from the long-term path of Islamic banks has a positive effect on economic output and is corrected by 52.8 percent, 68.6 percent from the conventional bank, and 74.3 percent from the whole banking system in each period.
4.4. Estimates of the short-run relationship and the ECM
Islamic bank deposits, financing, and GDP have bidirectional causality (Table 5). Meanwhile, the relationship between the conventional bank and Indonesia's economic growth is unidirectional. It
Table 4
ARDL short-run estimate of the long-run relationship
Islamic bank Conventional bank Islamic and conventional bank
Regressor Coefficients t Statistics Coefficients t Statistics Coefficients t Statistics
Deposits -0.172 -1.883 0.005*** 3.294 0.005*** 3.339
Financing 0.233*** 3.744 0.003** 2.379 0.003** 2.127
GDP 0.528*** 3.546 0.686*** 4.455 0.743*** 4.786
Offices -0.147 4.139 0.403*** 3.091 0.011* 1.897
ARDL (1, 1, 0, 0) (1,1, 0, 0) (1, 1, 0, 0)
Diagnostic R2 = 0.67 R2 = 0.69 R2 = 0.69
Statistics DW = 1.98 DW = 2.10 DW = 2.27
Notes: ***, **, * statistical significance at 1 %, 5 %, 10 % respectively. Source: Author's calculations.
Table 5
Granger causality based on vector error correction model (VECM)
Financial IIB-led GDP GDP-led IIB CB-led Growth Growth-led CB IB-led Growth Growth-led IB
Indicators Short run ECTt - 1 Short run ECTt - 1 Short run ECTt - 1 Short run ECTt - 1 Short run ECT - 1 Short run ECT 1
Total deposits 7.519** -0.131*** 9.644** -0.007 1.0556 -0.0101*** 3.0600* -3.1455*** 1.1227 -0.0423*** 3.0337* -3.6699***
Total financing 12.07** -0.005*** 0.010 -0.483 1.0796 0.0089*** 3.5877* -5.5155*** 1.1441 0.0388*** 3.6118* -4.4355***
Offices 1.206 -0.300** 7.258** 0.086* 0.0623 0.1540** 0.0623* 0.0004*** 0.0892 0.5442 4.8650** 0.0005***
Notes: *, **, *** represent statistical significance at 10 %, 5 % and 1 % respectively. IIB = Indonesia Islamic bank, CB = conventional bank, IB = Indonesian bank (e. g., Islamic and conventional bank). Source: Author's calculations.
Table 6
Granger causality during and after the COVID-19 pandemic (2000-2021)
Indicators IIB-led GDP GDP-led IIB CB-led GDP GDP-led CB IB-led GDP GDP-led IB
Total deposits 0.306 1.084 2.969 0.071" 0.304 1.070
Total financing 5.918'" 4.244* 3.362 0.052" 5.929"* 4.272"
Offices 4.243" 2.215 0.315 0.732 0.361 1.636
Notes: *, **, *** represent statistical significance at 10 %, 5 % and 1 % respectively. IIB = Indonesia Islamic bank, CB = conventional bank, IB = Indonesian bank (e. g., Islamic and conventional bank). Source: Author's calculations.
that Indonesian banks and economic growth have a strong long-term correlation.
4.3. Estimates of the long-run relationship
After unit root and cointegration tests, the next step is to estimate the relationship between short-and long-run cointegration parameters. It can be seen in Table 4 that three models were estimated in this study (e. g., Islamic, conventional, and both banks combined) where banking deposits, public financing, offices, and GDP are seen as indicators of financial development. Indonesian Islamic bank (IIB) financing and offices have a positive and significant effect on economic growth. At the same time, Indonesian Islamic bank deposits were found to have a negative effect on GDP in the short run, where, at the 1 % level of significance, a change in Islamic bank deposits and financing leads to an approximately 0.08 % increase in economic growth. This pattern is slightly similar to conventional and all Indonesian banks, with effects of around
also indicates that any deviations from long-run equilibrium take about four to three quarters for short-run adjustment to restore into long-run equilibrium.
This study also investigates conventional and Islamic banks' contributions to Indonesia's economic growth under uncertainty, which is during and after the COVID-19 pandemic (2020-2021). It can be seen in Table 6 that Indonesian Islamic bank (IIB) deposits do not have a correlation with GDP, whereas total financing and the number of offices have become economic downturn triggers. Interestingly, all indicators from conventional banking have less effect on economic growth. Contrarily, economic growth has a positive effect on enhancing conventional bank deposits and public financing. Hence, in general, total financing in Indonesia has a positive and significant effect on economic growth. Meanwhile, the total deposit and number of offices have less effect on it.
These results are not surprising, in particular that the break of regulations is likely to affect people's self-reliance and the stability of the financial system. The results further show that domestic deposits and public financing have a significant positive effect on economic growth in normal conditions. This result is consistent with prior studies, which concluded that the long-run relationship shows that, ceteris paribus, a 10 percent increase in the inward deposit and financing ratio is associated with higher GDP (Abedifar et al., 2016; Anarfo et al., 2019). Furthermore, the recent study applied variance decompositions (VDCs) to confirm this result.
The VDCs were computed concurrently to assess the short-run dynamics of the relationship between economic growth and the Indonesian bank (IB). This was achieved by determining how much each variable contributed to oscillations in the others. The VDC findings shown in Table 7 proTable 7
Variance Decomposition (VDCs)
Period SE Deposits Financing Offices GDP
Variance decomposition of GDP:
2009 66.36904 (0.059)" 0.000000 0.000000 0.000000 100.0000
2010 79.55838 2.230881 2.301467 6.325094 89.14256
2011 92.13548 16.80861 1.752384 13.93899 67.50002
2012 104.1656 28.27132 1.804531 13.77888 56.14527
2013 112.4978 30.64290 1.563673 12.75833 55.03510
2014 119.0594 31.73856 1.406942 12.73022 54.12427
2015 125.6751 34.05743 1.265701 13.19195 51.48492
2016 132.4228 36.46562 1.165964 13.29097 49.07745
2017 138.6537 37.99607 1.075831 13.17526 47.75284
2018 144.4049 39.05800 0.995204 13.13627 46.81053
2019 149.9589 (0.996) 40.09699 0.927214 13.18142 (0.495) 45.79438
2020 161.7665 40.78377 1.976780 18.05051 60.66703
2021 165.8977 41.87556 1.985682 19.02158 61.25857
Source: Author's calculations. Table 8 Impulse response functions (IRFs)
Period Deposits Financing Offices GDP
Impulse response functions of GDP:
2009 0.000000 0.000000 0.000000 66.36904
2010 11.88295 12.06947 20.00873 35.17755
2011 35.85623 -1.756916 27.98078 9.366464
2012 40.50554 -6.858668 17.65787 19.02600
2013 28.46963 -1.447214 10.93569 29.54794
2014 24.91767 1.241475 13.77906 26.59091
2015 29.66699 -0.687007 16.70455 21.43516
2016 31.86571 -2.133827 15.71976 21.78233
2017 30.16876 -1.538133 14.22135 23.96440
2018 28.98261 -0.837105 14.36500 24.10156
2019 29.53302 -0.990552 14.99723 23.16880
2020 39.07320 -1.805601 13.56740 26.76201
2021 39.87552 0.258355 13.89755 27.25885
Source: Author's calculations.
vide information on the IB deposits, public financing, and offices. It has been discovered that deposits have the strongest correlation with GDP. The previous conclusion that the variables under consideration demonstrate short-run dynamic causal linkages is supported by this result.
In general, the processing of the impulse response function by the Cholesky decomposition enabled the evaluation of the GDP reaction to IB shocks during the previous eleven years. However, the ordering factors affect how this function turns out. IB development shows an initial significant positive correlation with GDP during the examined period, with the exception of public financing, as shown in Table 8. It affects the direction of economic growth over the long and short terms. This shows that the coefficients of the error correction model are all long-term stable. The approximated ARDL models are capable of making reliable predictions for both the short- and long-term relationships between the IB and economic growth.
5. Conclusion and Implications
In Indonesia, financial institutions are essential for ensuring that business transactions go smoothly because deposit money banks are effective at guaranteeing that money flows to various business partners. In addition, the banks are expected to raise money and meet both short-term and long-term financial demands given their position as the only player in the financial market. Numerous econometric techniques are used in the study to identify the structural break in the financial sector's output before and after the COVID-19 epidemic in Indonesia. This time frame coincides with the global financial crisis and economic collapse. This study discovered that conventional and Islamic banks have a less substantial impact on the actual economy in the short term when it comes to mobilising deposits and public financing based on the defined ARDL models. However, over the long term, it has a more favourable impact.
In general, the projected results confirm earlier findings by demonstrating that financial and institutional development has a favourable and considerable impact on Indonesia's economic growth. Though conventional and Islamic banks play distinct roles in the short and long term, the estimated findings demonstrate that financial institutions are important and beneficial to economic growth. On the one hand, these results are consistent with the theory that the impacts of financial development on GDP are diminishing (Tinta, 2022; Wang et al., 2015). However, earlier studies that found financial institutions to be stronger
in the long-run (Anwar et al., 2020; Opoku et al., 2019) can be used to explain why financial development and institutions have little impact on economic growth. On the other hand, the financial institutions' major effects imply that the Indonesian economy needs to continue to integrate and strengthen its financial sector if it is to support economic growth. In addition, the analysis confirms several earlier empirical studies (Munir & Shahid, 2021; Nguyen et al., 2019) on a beneficial and important influence of law on economic growth. Even more intriguingly, the regulator supports financial development because the relationship between financial institutions and businesses and their use of banks as intermediaries is important and promotes economic expansion. This backs up earlier empirical research that emphasises the beneficial interplay between institutions and finance in the economy.
During the COVID-19 pandemic, financing has played a crucial role in economic growth through the transfer of capital from depositors and borrowers. It implies that Indonesian banks should promote deposits and investment to invite people to become banking consumers as borrowers and lenders in the long term. Based on the findings, the recent study has at least two implications. First, the result of this study shows that, in the short run, Indonesian banks in general (e. g., conventional and Islamic banks combined) have a positive role in enhancing economic growth; that is, the development of the banking industry contributes significantly to promoting higher economic growth towards accommodating savers and facilitating the financing of deposits. The increase in deposits and funds available directly stimulates financial intermediation through financial markets or the banking system.
Second, all of the variables that were validated had a positive and significant effect on economic growth. It proves the positive long-run correlation between financial development and economic growth. When public financing and investment enter a local economy, banking develops the domestic financial markets. The bank is most likely to open a branch office to manage their local accommodations and promote transactions. As these activities are beneficial for banks and their clients, funds are made available to the banking sector to boost its lending potential. These banks are also more likely to demand a higher quality of products and banking services. Therefore, the inflows of deposits and financing may facilitate ways to stimulate local banking sector development.
The implication of this study is shown by the causality relationship between the three indica-
tors for the Indonesian banking institution (i. e., TDep, TFin, and IBOff). However, the banks need to design and develop longer-term instruments for financial products and services. So far, the success of the Indonesian banks' development to enhance economic growth can be attributed to the conducive policy environment accorded by the Indonesian government. Besides, the government needs to pay attention to the financial and productive sectors to fight the economic downturn before and after the COVID-19 pandemic. Besides, this policy has the potential to improve not only economics but also poverty alleviation.
6. Limitations and Direction for Future Research
The research may be expanded to include the explanation of some banking aspects in more de-
tail by analysing specific variables in different economic segments and the sustainable development goals (SDGs) not only in economic sectors such as GDP and financial development but also in social fields such as examining the role of financial development in poverty alleviation. This would help in the identification of sectors that have to contribute to economic growth and poverty reduction.
Moreover, future studies should consider combining regions that have implemented dual banking systems to obtain sufficient data and examine the contribution of human and intellectual capital (e. g., education) to economic growth. There is also a need to use diverse and advanced approaches, such as the GMM framework, to validate the consistency of the results towards panel or time-series data. This could provide a more apparent viewpoint for the strategy references.
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About the authors
Aryati Aryati — Doctor of Economics, Lecturer of Economics, Indonesian Muslim University; https://orcid.org/0000-0001-8864-2224 (Makassar, South Sulawesi, 90222, Indonesia; e-mail: aryati.arfah@umi.ac.id).
Junaidi Junaidi — Doctor of Business Administration, Lecturer of Business and Accounting, Palopo Muhammadiyah University; https://orcid.org/0000-0003-1450-1933 (Palopo, South Sulawesi, 91911, Indonesia; e-mail: junaidi@umpa-lopo.ac.id).
Randy Ariyadita Putra — Master of Accounting, Lecturer of Accounting, State Islamic Institute of Kendari, https:// orcid.org/0000-0002-8663-7947 (Kendari, Southeast Sulawesi, 93117, Indonesia; e-mail: randy@iainkendari.ac.id).
Информация об авторах
Арьяти Арьяти — доктор экономических наук, преподаватель экономики, Мусульманский университет Индонезии; https://orcid.org/0000-0001-8864-2224 (Индонезия, 90222, Южный Сулавеси, г. Макассар; e-mail: aryati. arfah@umi.ac.id).
Джунаиди Джунаиди — доктор делового администрирования, преподаватель бизнеса и бухгалтерского учета, Университет Мухаммадия в Палопо; https://orcid.org/0000-0003-1450-1933 (Индонезия, 91911, Южный Сулавеси, г. Палопо; e-mail: junaidi@umpalopo.ac.id).
Путра Рэнди Ариядита — магистр бухгалтерского учета, преподаватель бухгалтерского учета, Государственный исламский институт Кендари; https://orcid.org/0000-0002-8663-7947 (Индонезия, 93117, Юго-Восточный Сулавеси, г. Кендари; e-mail: randy@iainkendari.ac.id).
Дата поступления рукописи: 23.08.2022. Прошла рецензирование: 09.11.2022. Принято решение о публикации: 19.09.2023.
Received: 23 Aug 2022. Reviewed: 09 Nov 2022. Accepted: 19 Sep 2023.
