The Role of Islamic Banking Financing in Reducing Economic Inequality in Indonesia: Perspectives on Sustainable Development Goals

Abstract

Economic inequality remains a structural challenge in Indonesia’s development despite relatively stable economic growth over the past decade. This study analyses the effect of Islamic financial development on economic inequality in Indonesia within the framework of the Sustainable Development Goals (SDGs), particularly SDG 10 (Reduced Inequalities). It employs panel data covering 31 Indonesian provinces for the period 2018–2024 (217 observations), sourced from the Financial Services Authority (Islamic Banking Statistics) and Statistics Indonesia. Because provincial-level data on Islamic peer-to-peer fintech financing are not published, the main variable is proxied by financing disbursed by Islamic commercial banks and Islamic business units (BUS+UUS) per province, while the development of Islamic fintech is discussed as industry context. The dependent variable is the Gini ratio; the independent variables are the log of Islamic banking financing and the log of Islamic third-party funds per adult resident, with the log of GRDP per capita as a control variable. The panel model is estimated using the Fixed Effect Model (FEM) after the F-poolability (Chow) and Hausman tests both rejected the pooled and random effects specifications (p < 0.001). Estimation with clustered standard errors shows that Islamic banking financing is negatively and significantly associated with the Gini ratio (coefficient −0.026; p = 0.004), whereas the sign turns positive under pooled OLS, indicating bias from the concentration of Islamic bank head offices in a few provinces such as DKI Jakarta. A robustness check excluding DKI Jakarta confirms the main finding. Islamic third-party funds per adult resident and GRDP per capita are not significant in the final model. This study provides preliminary evidence that expanding Islamic financing may contribute to reducing inter-regional inequality, while underscoring the data limitations that warrant attention in future research on the specific role of Islamic fintech.