The Impact of Bank Development on Indonesian Districts’ Economic Growth and Poverty Alleviation

Abstract

This study investigates the conventional and Indonesian Islamic banks’intermediary role in enhancing economic growth and reducing poverty in 33 Indonesian districts during 2012–2020. Data panels were examined by fixed-effect analysis and cross-sectional effect. This study found that, compared to Islamic bank offices, the number of conventional bank offices has a greater effect on Indonesian GDP, while Islamic banks have an essential role in reducing poverty. Conventional bank financing positively affects economic growth and poverty alleviation. Islamic bank deposits have a strong correlation to Indonesian districts’ economic growth and poverty. Meanwhile, conventional bank deposits have a greater effect on reducing poverty than GDP. Therefore, conventional and Islamic banks have a crucial role in enhancing economic growth and solving income inequality in the domestic context. This study contributes to economic literature with a practical and local government decision-making process through developing and testing a model of economic growth and poverty determinants and offers new insights into the determinants of bank principles in a financial system.