The role of Islamic Finance Development on Real Sector Output, Employment and Financial Stability in Indonesia
Eko Fajar Cahyono

School of Business and Economics
Universiti Putra Malaysia

Abstract

The development of Islamic finance in Indonesia should be expected to have a positive effect on economic development. However, it is still rarely discussed about the role of comprehensive Islamic finance (Islamic banks, Islamic microfinance institutions, Islamic capital markets and Sukuk) in the economic development of the agricultural and industrial sectors (the two real sectors that support the Indonesian economy). This research has hope to fill the void. This study has 3 objectives, namely, first, to assess how Islamic finance (Islamic Banking, Sharia Microfinance, and Sharia Capital Market) affects Indonesian domestic productivity in the agricultural and manufacturing sectors. Second, to estimate how Indonesia manufacturing and agricultural sectors will be impacted by Islamic Finance (Islamic Banking, Sharia Microfinance, and Sharia Capital Market). Third, Analyze how Islamic Finance (Islamic Banking, Sharia Microfinance, and Sharia Capital Market) influences Indonesiafinancial stability. The theory used in this research, among others, Endogenous Growth Model which consists of Harod Domar Modal and
Saving Investment Model. In the second part, this research refers to the Theory of Relationship Between Finance and Development proposed by (Lee and Stebunos and Boustanifar, 2014) as well as the company&#39-s decision model in opening job opportunities with financial constraints by Pagano and Pica (2016). In the third part, this study uses the theory of financial instability hypothesis that was born by Minsky. This research approach uses quantitative methods. To fulfill the objectives of the first and second research, this study uses the ARDL (Auto Regression Distribution Lag) estimation model and the Nonlinear ARDL estimation model, while to answer the research objective number three, this study uses the Toda Yamamoto estimation model and the macrov switching model.

Keywords: Islamic Finance, Real Sector Productivity, Employment, Financial Stability

Topic: PhD Colloquium