Nexus Islamic Finance Development and Income Inequality in Indonesia: Testing Kuznets Curve Hypothesis
DOI:
https://doi.org/10.21580/economica.2025.16.2.26318Keywords:
Human Development Index, Income Inequality, Islamic Finance, Islamic Social Finance, Kuznets CurveAbstract
This study analyzes the applicability of the Kuznets curve hypothesis within the specific context of Islamic finance development in Indonesia and its resultant implications for income inequality. The novelty of this research lies in integrating Islamic finance, specifically from the banking sector, with Islamic social finance instruments, namely zakat, infaq, and sadaqah. Crucially, it interrogates whether the Kuznets curve hypothesis remains pertinent within this expanded framework. Utilizing secondary panel data encompassing 25 Indonesian provinces over the 2019–2020 period, the study employs panel data regression techniques, specifically common effect, fixed effect, and random effect models, which were systematically selected via the Chow, Hausman, and Lagrange multiplier tests. The empirical findings demonstrate unequivocally that the development of Islamic finance, spanning both the financial and social sectors, significantly influences income inequality. This substantiates the Kuznets curve hypothesis: inequality initially escalates but subsequently diminishes as development matures. Furthermore, the results underscore the role of the Human Development Index (HDI) and the prevalence of mosques in mitigating inequality, while population density exhibits a positive association with inequality. This study conclusively argues that strengthening financial inclusion and professionalizing the management of Islamic social finance constitute strategic approaches for mitigating income inequality in Indonesia.
Downloads
References
Afandi, M. F. M., Zubairi, M. I. N., Hashim, M. J., & Khamis, M. R. (2021). The Role of Zakat in Reducing Income Inequality Among Muslim Society in Selangor. Global Business and Management Research: An International Journal, 13(4), 1–12. https://www.gbmrjournal.com/pdf/v13n4/V13N4-1.pdf
Agustina, M., Majid, M. S. A., Faisal, F., & Musnadi, S. (2023). Does Islamic Banking Sector Matter for Income Disparity Reduction? Empirical Evidence from Indonesia. International Journal of Professional Business Review, 8(5), e01475. https://doi.org/10.26668/businessreview/2023.v8i5.1475
Amri, K., & Adi, A. R. (2021). Apakah Religiusitas Keislaman Mempengaruhi Ketimpangan Pendapatan? Bukti Data Panel dari Provinsi Aceh. Jurnal Ekonomi Dan Pembangunan, 29(2), 147–166. https://doi.org/10.14203/JEP.29.2.2021.147-166
Asimakopoulos, P., & Asimakopoulos, S. (2025). Financial intermediation and the role of human capital on inequality. In Encyclopedia of Monetary Policy, Financial Markets and Banking (pp. 228–232). Elsevier. https://doi.org/10.1016/B978-0-44-313776-1.00083-0
Azwar, A., Possumah, B. T., & Aqbar, K. (2022). Islamic Financial Development and Income Inequality in Indonesia. International Journal of Islamic Business Ethics, 7(2), 108. https://doi.org/10.30659/ijibe.7.2.108-124
Bathelt, H., Buchholz, M., & Storper, M. (2024). The nature, causes, and consequences of inter-regional inequality. Journal of Economic Geography, 24(3), 353–374. https://doi.org/10.1093/jeg/lbae005
Cetin, M., Demir, H., & Saygin, S. (2021). Financial Development, Technological Innovation and Income Inequality: Time Series Evidence from Turkey. Social Indicators Research, 156(1), 47–69. https://doi.org/10.1007/s11205-021-02641-7
Cörvers, F., & Mayhew, K. (2021). Regional inequalities: causes and cures. Oxford Review of Economic Policy, 37(1), 1–16. https://doi.org/10.1093/oxrep/graa067
Fadila, N. R. (2019). Correlation of Zakat Distribution With Gini Index: Maximizing the Potential of Zakat for Equitable Income Distribution in Indonesia. Airlangga International Journal of Islamic Economics and Finance, 2(1), 54–65. https://doi.org/10.20473/aijief.v2i1.21994
Gheeraert, L. (2014). Does Islamic finance spur banking sector development? Journal of Economic Behavior & Organization, 103, S4–S20. https://doi.org/10.1016/j.jebo.2014.02.013
Greenwood, J., & Jovanovic, B. (1990). Financial Development, Growth, and the Distribution of Income. Journal of Political Economy, 98(5, Part 1), 1076–1107. https://doi.org/10.1086/261720
He, Y. (2023). Does Religious Community Participation Matter for Shaking off Poverty? Religions, 14(3), 304. https://doi.org/10.3390/rel14030304
Kamal, A. H., Purbowisanti, R., Sani, A. A., & Setiorini, K. R. (2021). Do the Distribution of Zakat and Islamic Bank Financing Affect Income Inequality in Indonesia? Amwaluna: Jurnal Ekonomi Dan Keuangan Syariah, 5(1), 90–102. https://doi.org/10.29313/amwaluna.v5i1.5854
Kamalu, K., & Ibrahim, W. H. B. W. (2021). Islamic Banking Development and Financial Inclusion in Oic Member Countries: The Moderating Role of Institutions. Journal of Islamic Monetary Economics and Finance, 7(3), 527–544. https://doi.org/10.21098/jimf.v7i3.1364
Kamalu, K., & Ibrahim, W. H. B. W. (2023). The Effect of Islamic Financial Development and Human Development on Income Inequality: Does Islamic Finance Kuznets Curve Valid in the OIC Countries? Journal of Islamic Monetary Economics and Finance, 9(4), 661–684. https://doi.org/10.21098/jimf.v9i4.1903
Kasri, R. (2014). Islamic Banking in Indonesia: New Perspectives on Monetary and Financial Issues. Bulletin of Indonesian Economic Studies, 50(3), 500–502. https://doi.org/10.1080/00074918.2014.980391
Kazak, H., Uluyol, B., Akcan, A. T., & İyibildiren, M. (2023). The impacts of conventional and Islamic banking sectors on real sector growth: Evidence from time-varying causality analysis for Turkiye. Borsa Istanbul Review, 23, S15–S29. https://doi.org/10.1016/j.bir.2023.09.004
Lestari, N. P., & Auwalin, I. (2022). Zakat and Income Inequality in Indonesia: Panel Data Analysis in 34 Provinces. Jurnal Ekonomi Syariah Teori Dan Terapan, 9(6), 898–912. https://doi.org/10.20473/vol9iss20226pp898-912
Maulina, R., Dhewanto, W., & Faturohman, T. (2023). The integration of Islamic social and commercial finance (IISCF): Systematic literature review, bibliometric analysis, conceptual framework, and future research opportunities. Heliyon, 9(11), e21612. https://doi.org/10.1016/j.heliyon.2023.e21612
Maurya, N. K., & Kanaujiya, K. S. (2021). Inequality and human development: How inclusive the growth is in Uttar Pradesh? International Journal of Sociology and Social Policy, 41(7/8), 765–785. https://doi.org/10.1108/IJSSP-03-2020-0107
Mohamad, N. M., Masron, T. A., Widiyanti, R., & Jamil, M. M. (2020). Islamic Banking and Income Inequality: The Role of Corporate Social Responsibility. Jurnal Ekonomi Malaysia, 54(2), 77–90. https://doi.org/10.17576/JEM-2020-5402-7
Noor, M. S. (2014). Prospek Ekonomi Syariah di Tengah Persaingan Ekonomi Asean. ISLAMICONOMIC: Jurnal Ekonomi Islam, 5(2). https://doi.org/10.32678/ijei.v5i2.23
Putriani, D., & Prastowo, P. (2019). Financial inequality nexus and Islamic banking. Jurnal Ekonomi & Keuangan Islam, 5(2), 43–52. https://doi.org/10.20885/jeki.vol5.iss2.art1
Ridzuan, A. R., Zakaria, S., Fianto, B. A., Yusoff, N. Y. M., Sulaiman, N. F. C., Razak, M. I. M., Siswantini, S., & Lestari, A. (2021). Nexus Between Financial Development and Income Inequality Before Pandemic Covid-19: Does Financial Kuznets Curve Exist in Malaysia, Indonesia, Thailand and Philippines? International Journal of Energy Economics and Policy, 11(2), 260–271. https://doi.org/10.32479/ijeep.10616
Tok, E., Yesuf, A. J., & Mohamed, A. (2022). Sustainable Development Goals and Islamic Social Finance: From Policy Divide to Policy Coherence and Convergence. Sustainability, 14(11), 6875. https://doi.org/10.3390/su14116875
Ullah, A., Kui, Z., Ullah, S., Pinglu, C., & Khan, S. (2021). Sustainable Utilization of Financial and Institutional Resources in Reducing Income Inequality and Poverty. Sustainability, 13(3), 1038. https://doi.org/10.3390/su13031038
Wang, L.-M., Wu, X.-L., & Chu, N.-C. (2023). Financial development, technological innovation and urban-rural income gap: Time series evidence from China. PLOS ONE, 18(2), e0279246. https://doi.org/10.1371/journal.pone.0279246
Widodo, A. (2019). The Role of Integrated Islamic Commercial and Social Finance in Reducing Income Inequality in Indonesia. Journal of Islamic Monetary Economics and Finance, 5(2), 263–286. https://doi.org/10.21098/jimf.v5i2.1063
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2025 Economica: Jurnal Ekonomi Islam
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
Authors who publish with this journal agree to the following terms:
Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgment of the work's authorship and initial publication in this journal.
Authors can enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), acknowledging its initial publication in this journal.
Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) before and during the submission process, as it can lead to productive exchanges and earlier and greater citation of published work (See The Effect of Open Access).
