This document summarizes a study on the role of Islamic banks in local development in Indonesia. The study analyzed financial data from Islamic banks in 8 Indonesian provinces from 2005 to 2013 and found that while Islamic banks have grown financially, this growth has not necessarily reduced poverty at the macroeconomic level. Other factors like infrastructure, education, agriculture, and technology also impact poverty reduction. The study concludes that Islamic banks' role in development is still emerging and more expansion is needed to better serve communities in poverty. It recommends the government take a larger role in regulation to promote further growth of Islamic financial institutions.

1. ISLAMIC BANKS AND LOCAL
DEVELOPMENT IN INDONESIA
Yuli Andriansyah

2. Introduction
 Finance and Growth
 The growth of financial institutions along with its intermediaries
function is believed to be important factor that impact total
productivity as well it is related to long-run economic growth (Beck,
Levine, & Loayza, 2000).
 For developed economies, Rioja & Valev (2004) confirm that
financial institutions have positive impact on productivity while in
less developed countries accumulation of capital is the way by
which finance contribute to growth.
 Hassan, Sanchez, & Yu (2011) suggest the importance of well-
functioning financial system to guarantee steady economic growth
in developing countries.
 The chain by which finance can contribute to growth can be traced
from saving which then channeled to investment (Pagano, 1993).

3. Introduction
 Finance and Growth in Indonesia
 Indonesia has pursued the development of financial institutions,
including Islamic financial institutions
 Islamic financial institutions (IFIs) have taken part in Indonesia
development in at least two decades since the introduction of
Islamic bank in Indonesia economy in the beginning of 1990s
 A new type of Islamic bank in local development in Indonesia =>
local development banks (or Bank Pembangunan Daerah
abbreviated BPD) opened a sharia business unit

4. Methods
 Data:
 assets, financing, and intermediaries function of Islamic banks
 Coverage:
 North Sumatera, South Sumatera, West Java, Central Java, East Java,
West Kalimantan, South Sulawesi, and West Nusa Tenggara.
 Range:
 2005 to 2013
 Macroeconomic indicators:
 economic growth and
 percentage of population living in poverty.

5. Methods: Provinces Profile
Province Area Population 2010 HD Index 2013 % of Muslim
North Sumatera 72,981.23 km2 12,982,204 75.55 64.50
South Sumatera 91,592.43 km2 7,450,394 74.36 86.00
West Java 35,377.76 km2 43,053,732 73.58 97.00
Central Java 32,800.69 km2 32,382,657 74.05 96.74
East Java 47,799.75 km2 37,476,757 73.54 96.36
West Kalimantan 147,307 km2 4,395,983 70.93 58.22
South Sulawesi 46,717.48 km2 8,034,776 73.28 89.62
West Nusa Tenggara 19,708.79 km2 4,500,212 67.73 96.00
Indonesia 1,904,569 km2 237,641,326 73.81 87.20

6. Results and Discussion
 North Sumatera

7. Results and Discussion
 South Sumatera

8. Results and Discussion
 West Java

9. Results and Discussion
 Central Java

10. Results and Discussion
 East Java

11. Results and Discussion
 West Kalimantan

12. Results and Discussion
 South Sulawesi

13. Results and Discussion
 West Nusa Tenggara

14. Results and Discussion
 Islamic banks perform well in financial performance
especially in financial intermediaries function
 Achievement in intermediaries function hasn’t reflected in
macroeconomic level as the growth of financing did not
followed simultaneously by the reduction of poverty
 stable growth in Islamic financial indicators but at the same time
economic indicators fluctuate
 Abu‐Bader & Abu‐Qarn’s (2008) research for Middle East and North
African countries => the weak support between financial
development and long-run economic growth.

15. Results and Discussion
 Islamic Banks Performance and Local
Development
 Limited market share of Islamic banks
 about 5% in national market share
 World Bank’s (2011) Financial Inclusion Data
 less than 20% of population are covered with financial institution
products

16. Results and Discussion
 Poverty reduction in Indonesia should not rely on economic
growth only but also has relation with many other factors,
i.e. infrastructure, human capital, agricultural price
incentives and access to technology (Balisacan, Pernia, &
Asra, 2003).
 From provincial level in Central Java for example, growth
not only alleviates poverty but impacts also in inequality
which implies the need of quality growth in local context
Hariadi (2009).

17. Conclusions, Implications and Significance
 Islamic banks in local development in Indonesian economy
is still a new emerging topic of research
 Islamic banks’ performance is financially well-developed but
still in need further expansion to reach the most needed
society member living in poverty.
 Suggestion to systematize endeavors from Islamic banks to
push wider opportunities in developing and expanding of
Islamic financial institutions
 Government can play significant role especially in creating
better regulatory quality to meet the challenge of
institutions growth.

18. Conclusions, Implications and Significance
 Limitations
 data availability in the context of local development
 preliminary research in the relation between Islamic finance and
local development particularly in a new emerging decentralized
economy
 Recommendations
 inclusion of other macroeconomic data,
 usage of statistical and econometrics tools, and
 coverage of more provinces in Indonesia and if possible other
countries.

19. ‫جزيال‬ ‫شكرا‬
Thank You Very Much