Presenters: Bandara Shofi Dana, Risdiana Himmati
Affiliation: Sayyid Ali Rahmatullah Tulungagung State Islamic University
Room: 4 (Online)
ICIES News- At the 4th International Conference on Islamic Economics Studies (ICIES) 2024, researchers Bandara Shofi Dana and Risdiana Himmati from Sayyid Ali Rahmatullah Tulungagung State Islamic University presented their study titled “Nexus Islamic Finance Development and Income Inequality in Indonesia: Testing Kuznets Curve Hypothesis”. The presentation took place online in Room 4 and delved into the intricate relationship between the development of Islamic finance and income inequality in Indonesia, the largest Muslim-majority country in Southeast Asia.
The study, grounded in the Kuznets Curve Hypothesis, explored how the growth of Islamic finance impacts income inequality in both the short and long term. The hypothesis suggests that inequality may initially rise as an economy develops, before eventually decreasing as it matures.
Key Findings:
- Short-Term Impact: The researchers found that in the short term, the development of Islamic finance in Indonesia might exacerbate income inequality. This is primarily due to weak infrastructure, limited access to financial services, and low levels of literacy concerning Islamic financial institutions. These challenges hinder public trust and inclusivity in the financial sector.
- Long-Term Impact: However, the study also indicated that in the long term, the growth of Islamic finance could play a significant role in reducing income inequality. This positive impact would be driven by improvements in infrastructure, easier access to financial services, diversification of financial products, and enhanced literacy in Islamic finance, all of which contribute to increased public trust.
- Islamic Social Finance: The researchers also examined Islamic social finance, noting that its development might initially increase inequality due to uneven distribution and a focus on consumption. Over time, however, equitable distribution and a focus on productive use of Islamic social finance were found to have the potential to reduce inequality.
- Human Development and Mosque Contributions: The study highlighted the role of human development in reducing inequality, emphasizing that a society with better quality education and healthcare could significantly improve welfare and decrease inequality. Additionally, the number of mosques, as centers for distributing zakat, infaq, and alms, was also identified as a factor that could help reduce inequality, provided these mosques are actively engaged in their communities.
This research contributes valuable insights into how Islamic finance can be harnessed to address income inequality in Indonesia, providing a nuanced understanding of the challenges and opportunities presented by this growing sector.