Revisiting the impact of Islamic finance on economic growth: a decomposition analysis using Indonesia as a testing ground

What is it about?

This study explores the impact of Sharia-compliant finance on economic growth by examining data from 33 provinces in Indonesia over 11 years. We decompose economic growth into two channels: demand and supply. Our findings show that Sharia-compliant financing stimulates growth through the demand channel by increasing consumption and investment. However, when the proportion of Sharia-compliant finance becomes too high, it can constrain growth on the supply side due to underdevelopment in the Sharia finance market, leading to inefficiencies. This research highlights the need for balanced development in the Islamic finance sector to optimize its positive effects on economic growth.

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