Revisiting the Role of Islamic Bank on SDGs: Sharia Financing, Inequality, and Poverty

Abstract

This study aims to reassess the impact of Sharia financing provided by Islamic banks on the advancement of Sustainable Development Goals (SDGs), with a particular focus on reducing inequality and poverty. Given the uneven distribution of Sharia financing among regions in Indonesia, we adopt a clustering approach using the k-means clustering method. This approach considers two critical criteria: the nominal amount of Islamic financing and the proportion of Islamic financing. The clustering process resulted in the creation of two distinct clusters. The Lower cluster comprises regions characterized by a low market share and nominal Sharia financing, while the Upper cluster encompasses regions with a high market share and nominal Sharia financing. We utilized annual data from 33 provinces for the period spanning 2012 to 2020. Through the application of a fixed-effect panel regression with the Generalized Least Squares (GLS) approach, our analysis reveals that in the Upper cluster, the presence of Sharia financing plays a pivotal role in reducing financing inequality, inequality in job opportunities, and notably lowering the poverty rate. In contrast, only nominal Sharia financing appears to contribute to the reduction of poverty, with no discernible impact observed regarding financing inequality and disparities in employment opportunities.