Islamic banking contribution in sustainable socioeconomic development in Indonesia

Abstract

Purpose As a prominent actor in terms of achieving sustainable socioeconomic development, especially in rural areas, Islamic banks are urged to pursue their main objective. It is required to set the objective accordingly from time-to-time to continuously make a positive contribution to the sustainable socioeconomic development. Hence, the integration of the external factors such as government’s economic target (macro) into Islamic banking’s objectives (micro) is needed. Design/methodology/approach This research attempts to identify factors that might prevent the sustainable economic development activities within the micro–macro circular causal model established by Tawhidi String Relation (TSR) methodology. Findings The research clearly found that the existing Islamic banking’s business and directions had an uncorrelated connection with Indonesia’s economic objective. Nevertheless, the Islamic banking’s Musharakah and Mudharabah contract for Usaha Mikro Kecil Menengah [(UMKM) (Micro, Small Medium Enterprises)] was showing the positive correlation to their financial performance indicator. Hence, Islamic banking is strongly suggested to be more focused on these two types of partnership financing contract to UMKM. Furthermore, its value and volume is needed to be expanded to build Indonesia’s sustainable socioeconomic foundation. Then the positive gross domestic product (GDP) growth will be achieved. Originality/value The existing research covering the sustainability index is mainly only based on the macro perspective, while in this research, the integration between the micro and macro perspectives between government objectives and Islamic banking objectives is needed. This interaction and integration between the two are in line with the concept of the TSR methodology.

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