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ISLAMIC BANKING CONTRIBUTION IN SUSTAINABILITY OF

SOCIOECONOMIC DEVELOPMENT: AN EPISTIMOLOGICAL APPROACH
Ari Pratiwi
Doctoral student - IEF Trisakti Jakarta
Jl Taman Sari IV no 21 Penggilingan Cakung Jakarta Timur,
ari.pratiwi@yahoo.com, 0811 842750
Abstract
Islamic banking as one of the vital actors in achieving the sustainable socio-economic
development especially in rural areas has to be in line with their main objective. It is required
to set the objective accordingly time-to-time in order to continuously make a positive
contribution to the sustainable socio-economic development. Hence, the integration of the
external factors such as governments economic target (macro) into Islamic bankings
objectives (micro) is needed. 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.
The research clearly found that the existing Islamic bankings business and directions
had an uncorrelated connection with the Indonesias economic objective. Nevertheless, the
Islamic bankings Musharakah and Mudharabah contract for UMKM was showing the
positive correlation to their financial performance indicator. Hence, Islamic banking is
strongly suggested to be more focus into these two types partnership financing contract to
UMKM. Furthermore, its value and volume is needed to be expanded in order to build
Indonesias sustainable socio economic foundation. Then the positive GDP growth will be
achieved.
Perbankan syariah sebagai salah satu aktor penting dalam pencapaian sosioekonomi yang berkelanjutan, harus sejalan dengan tujuan utamanya. Diperlukan
penyesuaian tujuan dari waktu ke waktu agar dapat memberikan kontribusi positif terhadap
pencapaian sosio-ekonomi yang berkelanjutan. Faktor eksternal seperti target pertumbuhan
ekonomi pemerintah (makro) yang diintegrasikan ke dalam tujuan perbankan Islam (mikro)
diperlukan untuk menjaga konsistensi tujuan perbankan syariah dengan pemerintah.
Penelitian ini mencoba untuk mengidentifikasi faktor-faktor yang mungkin mencegah
kegiatan pembangunan ekonomi berkelanjutan dalam model yang saling mempengaruhi
antara mikro-makro sesuai dengan metodologi Tawhidi String Relation (TSR).
Dengan penelitian ini, ditemukan bahwa tujuan bisnis perbankan syariah yang ada
tidak menunjukan hubungan yang saling berkorelasi dengan tujuan ekonomi Indonesia.
Namun demikian, dalam penelitian ini ditemukan bahwa kontrak pembiayaan Musharakah
dan Mudharabah untuk UMKM oleh perbankan syariah, memberikan korelasi positif dengan
indikator kinerja keuangan perbankan syariah. Oleh karena itu, disarankan agar perbankan
syariah untuk dapat lebih fokus menggunakan dua jenis kontrak pembiayaan kemitraan ini.
Dengan meningkatkan nilai dan jumlah dana yang dipakai dalam pembiayaan untuk UMKM
dengan menggunakan kontrak kemitraan diharapkan akan membawa perbankan syariah
sebagai salah satu pemain penting dalam mendirikan fondasi pembangunan ekonomi sosial
yang berkelanjutan dan kemudian akan menyumbang kepada pertumbuhan PDB yang positif.
Keywords: Islamic banking, Sustainable development, Tawhidi String Relation, UMKM

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1

Introduction
In Indonesia, Islamic Financial Institutions consist of: (1). Banks, with their diverse
scopes and areas, including Islamic commercial banks (BUS), Islamic banks as the business
units of conventional banks (UUS), and Islamic rural banks (BPRS), (2). Non-Banks such as
multi-finance companies, Baitul Maal wa Tamlik (BMT), and Takaful. Ismal (2013) stated
that Islamic banking in Indonesia as part of Indonesias financial institutions, has already had
provided their own lending or financing services, and of course by complying with its Islamic
principles and values. Although it is strongly attached to the Islamic rules that restricting
some common practices of the conventional banking, the contribution of Islamic banking, as
the financial intermediary, toward Indonesias economic development has been positive so
far. However, Indonesias financial inclusion index was only recorded at less than 20%
(World Bank, 2011). It means that 80% of Indonesian people (age > 17 years old) yet to have
access to financial institutions, both for saving and financing. In overall, Indonesias Islamic
banking has only covered 4.6% of the national market shares (Ernst &Young, May 2013),
which only equals to serving less than 1% of Indonesias population.
Bank Indonesia acknowledged this condition by issuing Bank Indonesia Regulation
Number 14/22/PBI/2012. The regulation is concerning Credit Allocation or Financing by
Bank and Supporting Instruments in terms of developing Micro, Small and Medium
Enterprises (UMKM). It was a clear direction from Bank Indonesia that all banks, including
Islamic banks, are obliged to provide credit or financing services to UMKM at minimum
20% from the banks total credit or financing. It is in-line with Bank Indonesias vision is to
establish and develop the competences of Islamic banking to support activities in the real
sectors, and ultimately to realize the national development implementation that drives justice,
unity, and equitable development.
To accomplish the vision, Bank Indonesia set the mission to be translated into some
actions in strengthening and driving the positioning of Islamic banking as a credible,
efficient, and prudent financial institution which is also more than capable to support the
sustainable national development, to drive the stable financial system, and to bank the unbankable community. Therefore, to accelerate the development of Islamic banking in
Indonesia, Bank Indonesia has been focusing on some areas of strategic implementation,
including: increasing the Sharia Compliance, increasing the quality of prudential banking
operations, increasing the operational efficiency and competitiveness, increasing the stability
of the banking system, increasing the expertise and quality of human resources, and
optimizing the social roles of Islamic banking in developing Micro, Small and Medium
Enterprises (UMKM) (Bank Indonesia, 2006).
In order to support Indonesias economic development, one of the key highlights is
building the unique-shared pattern of sustainable development on the selected areas that is
applicable in targeted areas. The successful criteria of this pattern are the base to generate the
index. The existing index was generated typically based only on macro indicators. Only
taking macro view eliminated the household or organization preferences which led into
unmatched objectives between the household and government. In contrary with the existing
index, the Islamic sustainability index is generated to ensure the sustainable pattern focusing
on the mashlahah, which means focusing on the sustainable humans well-being. Hence,
identifying key factors (including the micro preferences) is deemed imperative to build the
sustainability index. Furthermore, the macro and micro index will be used during the
learning process to provide the performance result for all of the actors of the Sustainable
Development program, and also to notify them about actions required to achieve their
objective of realizing the well-being.
The other identified issue on the sustainable development is the inequitable economic
development. This inequitable economic development especially in the rural areas turns to be
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the biggest challenge for Islamic banking to enter the local market. Indonesia with its lack of
infrastructure supports and such circumstance will surely cost Islamic banking much in term
of the investment costs to enable it to access the areas. In fact, this is actually one of the
reasons behind Indonesias low financial inclusion index. Even though, Bank Indonesia has
set the objective of Islamic banking in supporting the real economy on the grassroots, but
unfortunately it seems the Islamic banking has covered the urban areas only.
Furthermore, the usage of Mudharabah and Musharakah financing was low. These 2
financing types are considered as the effective way to drive a more active participation of
Islamic banking for the further development of real economy. The partnership principles
provide the ability to enable the transfer of knowledge and technology supports to Small
Medium Enterprises (SME) or Micros, especially for those living in the rural areas. Thereby,
such supports for the SMEs and Micros are expected to be able to reinforce all of the efforts
to achieve the community well-being, and at the end will also contribute significantly in
increasing our national economic performance. However, the total values of both
Mudharabah and Musharakah was only around 30-35% (OJK, 2015), compared to the
Murabaha financing contract (2008-2014) that reached over 55% of the total financing
values. The Mudharabah and Musharakah actually offer more benefits for real economy, but
unfortunately the Islamic banking has not optimize them the most. Therefore, there should be
attempts to identify the causes and cope with them, and one of the feasible attempts is to
build a new model.
1.1

Islamic Banking in the Sustainable Socio-Economic Development

A story of Umar bin Khatab about how his policies1 run the economy during his
tenure (Ahmad, 2003) can be an important lesson. Umar set a good example that managing
sustainable economic development requires the inclusion of social considerations and
Tawhid. His policies proved that the realization of Islamic ecosystem successfully made
people and the Government take actions properly with respect to the future. And, as the
result, the human well-being during his tenure was also improving. This macro-point of view
by Umar is important to be included into the micro view of the Islamic banking in the present
time. By this approach, the Islamic banking is believed to might be able to contribute
actively toward the sustainable socio-economic development.
Other cases, like Bank Rakyat Indonesia and Grameen Bank in Bangladesh, also
assert the comparable insight, wherein the equitable and integrated development on numerous
areas is indeed one of the main cores in efforts to realize the sustainable national economic
development. Hadinoto (2007) shared his experiences as the CEO of Bank Rakyat Indonesia.
In his opinion, the rural communities actually need more than the capital distribution. They
also do need market enablement, advisory services regarding product packaging and
managerial issues, and also the realization of information technology. The business
management and accounting skills are deemed vital for any business for further growth, or
else it would not sustain in the long term. Not least important, the foregoing expertise should
also be supported by a good understanding on the social characters. Blending with local
people does help Islamic banking to obtain the acceptance and adoption from local
communities regarding its financial products for micro enterprises. Also, better product
1

Umar bin Khatab focused on four major areas: 1.managing the production site by only producing primary
products and services to support daily life, 2. managing the consumption by utilizing the products until the end
of its lifetime, 3. equal economic distribution to avoid poverty which would lead to human utilizing the natural
resources without thinking about the future, and 4. mashlahah is the main objective to define any government
economic rules (i.e. Taxes, products embargo).

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quality, better product packaging, better management, and higher market awareness will
inevitably boost the micro enterprises bargaining power in front the larger corporations.
Yunus (2003), as the founder of Grameen Bank and Nobel award winner, also
acknowledged that understanding the social conditions and needs (referring to poor women in
this case), helped him to identify and propose a new mechanism to distribute and maintain the
capital readiness to cope with the poverty reduction as the main objective. During the
process, the team provided the education program about technology utilization for the
product quality improvement. Besides, they also succeeded in appealing consumers by
establishing products display.
Stimulating the real sector, especially the microenterprise financing as the part of
Islamic bankings main agenda of the sustainable development, should covers social, ethical
and economic factors. Including these factors into the sustainable development agenda is
believed to be useful to generate the capabilities to achieve the long-term goal. Hence, the
sustainable development will eventually assist in creating a pathway to realize the sustainable
socio-economic development. For that reason, the reliable human resources as the agents of
change on the field are definitely crucial. The agents should be the ones understand the
business landscape within the coverage areas.
Deep understanding on the local
circumstances will help Islamic banks available resources to support the micro enterprises,
and become their preferred business partner.
In addition, ethical factors are also unquestionably important when interacting with
the Islamic banking and its agents of change. Ethics are derived from Tawhid, comprising
the Quran and the Sunnah. Therefore, the participation of local government and local
Ulamas is really required in order to maintain the knowledge development and
implementation of Tawhid for close people and other economic actors who support the
sustainable socio-economic development. Technology is used to help the day-to-day
operation by providing transparent information to the community and public. Supported with
the right SME (subject to the business industries owned in the respective area), technology
will able to optimize the natural resources efficiently while maintain the continuation of the
resources for the future usage as well.
In summary, to realize Indonesias sustainable economic development, it is imperative
to achieve and maintain the sustainable well-being of each individual; Better and more equal
distribution of wealth will be realized through the combination of good political wills, social
attitudes, ethics and well-defined economic goals. The Islamic banking should contribute
more on real economy development especially in the rural area, not only because it is the
main objectives of Islamic banking itself, but for it also bring more opportunities for Islamic
banking to grow better in the future. The social economic contribution for the real economy
has to be the soul that underlies how the Islamic banking is running its business, and it should
be included as the top measure in evaluating the bank performance, on top of the
conventional measures, such as ROA and NPL.
1.2

The Epistemological Model of Unity of Knowledge applied to Community (C) and

Micro enterprise (E) Unifying Linkages (Participation, Complementarities)

This model was constructed by Choudhury (2009a) and described the correlation
between communities and Microenterprises and how the communities helped
Microenterprises to grow and the other way around. This complementariness between
community and micro enterprises was modeled in diagram below (see Figure 1.1).

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Source: Choudhury, 2009a

Figure 1.1 Communities and Microenterprise
complementary model

Figure 1.2 Tawhidi String Relation

Some research have taken the Indonesian Islamic banking case in relation to
microenterprises and identify how Islamic banks with Islamic principles positively contribute
to the performance of micro enterprises. Taken into account the Tawhidi String
Relation(TSR) concept and previous researches on the roles of Indonesian Islamic banking in
micro enterprises, this research use some variables, which are:
1. Total financing (V1) = Mudarabah (M1) + Musharakah (M2) + Murabahah (M3)
+ Istisna (Ist)
Mudarabah, Musharakah and Murabahah are combined as MMM to denote an integrated
financing scheme with diversification on it as desired by shareholders and in the social
context.
2. Debt/asset ratio (V2). Values are represented by debt which is an inter-bank liability and
asset is the total investments.
3. Deposit/financing ratio (V3)
Those variables are to be reviewed to investigate whether poverty alleviation is
prioritized in Islamic financing among some choices in Islamic banks to manage and
distribute their assets. The MMM is selected to see how Islamic banking deeply focuses on
developing the Micro enterprises and actively participating in the community development.
Ideally, Islamic banking should gain more benefits if it runs Islamic investment rather than
inter banks placement. Hence, the financing choices are more favorable to sustain the Islamic
banking business leading to the selection of MMM to do Islamic investment including the
ethical and social aspects during the decision process.
However, variables used in this research will be used and needed to be enhanced by
field survey or taking more secondary macro variables data to give more views on how
Islamic banking incorporate its micro and macro view in addressing the sustainability of
socio economic development with the aspect from outside of Islamic banking such as people
who has been directly interacted with Islamic banks.
1.3

Research Objective and Significances

This research attempts to identify factors that might prevent the sustainable economic
development activities within the micro-macro circular causal model established by TSR. In
this regard, the main objective is to achieve the social economic development as the micromacro interfaced sustainability index. It is not only identifying the factors, but more on how
the socio-economic development supports both current and future goals. The conceptual and
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quantitative sustainability index will help the actors of sustainability system to act and set the
goals of each socio-economic development activities in reference to the main objective,
which is Social Well-Being (Mashlahah).
Islamic banking as one of the vital actors in achieving the sustainable socio-economic
especially in rural areas has to be in line with this main objective and set its own objective
accordingly time-to-time to contribute positively to the main objectives. The objectives have
to be drilled down to operational level activities to support the Islamic bankings objectives.
Identifying the obstacles on the operational activities and mitigate those with the right action
plans will keeps the Islamic banking runs on its right trail.
2

Methodology
The methodology used in this research is Tawhidi String Relations (TSR), seeFigure
1.2 above. Tawhidi epistemology clearly explains that all information and anything happened
in the world are coming from Allah as the one and only. TSR examines the overall view of
the system, how the agents or actors within the system always influence one and another
through interaction and integration process. These interaction and integration then lead the
system to evolve to be a new system that is based on the learning process taking place during
the previous (dynamic) interaction and integration.
TSR believes that each part of the learning process is already induced with ethics and
morals derived from the Quran and the Sunnah. These ethical and moral are based on the
guidance from Allah SWT namely Al Quran and Sunnah. Based on the Islamic point of
view, the social well-being is the objective of the interaction and integration process. For that
reason, the TSR interaction, integration and evolution process have the main objective to
achieve the social well-being, and it is translated into the Well-being function.
This research defines the inclusion of environmental treatment in the sustainable
development that results in the inter-systemic ideas. The inter-systemic ideas are the
complementarities between efficiency and equity, and also the complementarities between
economic, social, ethical and institutional interactions (Choudhury, 2007b). With this
interaction and integration among economic, social, ethical and institutional aspects as
complementary, actors or variables will then evolve the universe in the Unity of Knowledge
induced into the world system (Choudhury, 2014). This interaction and integration among
variables will be simulated and analyzed as the quantitative analysis using VAR/VECM.
Furthermore, the secondary data (see Table 2.1) were collected from Indonesia
statistical center (BPS), Financial Services Authority (OJK), and Indonesia Central Bank (BI.
The data used is a time series quarterly data with from 2005 to 2014 as a collection of data
from multiple sources above.
Table 2.1 Secondary Data collected for this research

Group of Data

Variables identified

Macro data
Islamic banking micro
data

Real GDP Growth

ROA, Operating Expense Ratio, Mudharabah and Musryarakah (MM) financing
Contract value for UMKM in percentage of total MM financing values

There are some critical terms used in this research related to TSR methodology. The
terms were applied into the case of Islamic banking and sustainable socio-economic
development, as elaborated below:
Sustainability; Sustainable development is the circumstance wherein the
development succeeds in meeting the needs of present time without risking the ability of
future generations to meet their own needs (Brundtland, 1987). Orientation on production
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and marginal consumption, environment consciousness, and also capital consciousness lead
to the issues of depreciation. A number of ethical aspects derived from Tawhid are invoked
in the decision-making process, regarding every activity related to the sustainable
development. The ethical aspects themselves include (but not limited to): environment,
justice, equality, and moral consideration. Hence, the SUSTAINABILITY requires both
interaction and integration among social, economic and ethical aspects, and this balance acts
as the complementarities of the well-being in order to ensure its sustainability.
Well-being; Sustainable development focuses on the continuity to support all
generations, both for present and future needs as well, which is commonly called as the
human or social well-being. WELL-BEING is the measure of complementarities existing
between ethical choices and social choices represented by their variables and relations
according to the TSRs objectives, namely the unity of knowledge and the unity of choices.
The continuity in addressing social well-being from time to time will generate a well-being
function in order to guarantee that it will be always in line with the goal of accomplishing a
sustainable socio-economic development.
Circular Causation; The decision-making process involving interaction and multiaspects consideration mentioned above creates a CIRCULAR CAUSATION among the
social, economic and Tawhid aspects of the unity of knowledge and the unification between
variables. In nature, it is considered more as the multi-causal relationship instead of the
mono causal one. Therefore, there should be a two-way interaction among variables to
enable them to establish the integration among the variables.
Unity of Knowledge; Every decision-making process retrieves knowledge from the
knowledge pool as the basis to help people in making decision about particular issues.
People will learn the impact of any decision they just made, and this learning process will
subsequently drive the emergence of a new knowledge. Thereby, the knowledge found
during the learning process will be stored back into the knowledge pool that is, based on
Tawhid, called as the UNITY OF KNOWLEDGE. The learning process itself will always
continue until the end of the world because of its epistemology of Oneness mentioned in the
Quran as pairing between the good things of life for well-being.
3
3.1

Result and Analysis

Islamic Social and Economy Structure View in the case of Islamic Banking

In the TSR methodology, the learning process, naturally, might result on either
negative or positive outputs, which is as the knowledge. Each of the knowledge is collected
and kept in the knowledge pool. And later, the whole knowledge pool will be used as the base
of any following interaction and integration, or the decision-making process as well. The pool
of knowledge itself is known as the Unity of Knowledge (Choudhury, 2014). Furthermore,
the comprehensive Islamic Socio-Economic Structure View (Pratiwi, 2015) which derived
from the TSRs concept is believed as the only way to maintain the sustainability of socioeconomic development (see Figure 3.1). The sustainability focuses on the capability to
sustain the social well-being. Each of the learning process is the form of circular causation of
good outputs from macro and micro views. Hence, the sustainability is shaped by outputs of
the learning process, and the sustainability itself is known as the well-being function
(Choudhury, 2014).
In the socio-economic development case, the Islamic banking as the financial
intermediary will definitely play crucial roles. Islamic banking ought to consider the MicroMacro point of view. It is necessary for the Islamic banking to adopt the Islamic SocioEconomic Structure view in the decision-making process. Thereby, both the objective of
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sustainability (social well-being) and the business objective of Islamic banking itself will
always stay on track. Hence, it is clear that the thoughts derived from complementarities and
ethics always become the basis for the Islamic banking thinking process.
Adopting the view also means there should be some interaction and integration
occurring between the Islamic banking and other sub systems (actors) within the system. The
process of accumulating and shaping the knowledge during the learning process itself occurs
simultaneously with the interaction and integration among the actors. Meanwhile, the
knowledge formed beforehand will be used as the basis for the subsequent learning process.
For comparison, in the Tawhidi String Relation, the initial knowledge is derived from the
Quran and the Sunnah (Choudhury, 2014), as the only set of knowledge revealed by Allah
for human being, and the knowledge pool explained above acts the similar function like that
set of divine knowledge. Hence, the knowledge derived from the Quran and the Sunnah also
becomes the thinking process basis in the Islamic banking.
Based on the foregoing details, this dissertation adopts the Tawhidi String Relation
(TSR) methodology. The Tawhidi epistemology clearly explains that all information and
even anything happen in this world are coming from Allah as the One and Only. TSR
examines the overall view of the system, how the agents or actors within the system always
influence one and another through interaction and integration process. The process of
interaction and integration drive the system to evolve to be a new system based on the
learning process taking place during the process. TSR believes that each part of the learning
process is already induced with ethics and morals derived from the Quran and the Sunnah.
Based on the Islamic point of view, the social well-being is the objective of the interaction
and integration process. For that reason, the TSR interaction, integration and evolution have
the main objective of achieving the social well-being, and it is translated into the Well-being
function (Choudhury, 2007b).
The sustainability of the system required an integration and interaction among the
variables from Macro Views (surrounding the system) and Micro Views (within the system).
Adopting such holistic view into Islamic banking system is believed that it brings a
sustainability development for the Islamic banking and well as the other systems surrounds,
such as SMEs/Micros, People, Government. It will then, bring a bigger impact if the same
view also adopted by the others system surrounds Islamic banking. Along with integrated
view on the daily operational decisions and business plans of economic players (Islamic
banking, SMEs/Micros), it will lead into more solid socio-economic foundation.
Furthermore, in the case of Indonesia, sustainability socio economic development of
Indonesia can be achieved.
The Islamic social and economic structure view for Islamic banking (see
Figure 3.1) has the Well-being as their sole objective. Specifically, the human wellbeing (W( )) is the main goal of the Maqasid as Shariah of the whole integrated systems. In
the TSR view, the Well-being objectives of the Islamic banking, is derived from all variables
of Macro and Micro Views as formulated in equation (4.1) below.
W ( ) = f (macro-variablei, micro-variablesj) ( ), where i = 1,2,..,n; j=1,2,...n;

(4.1)

Therefore, only focusing on one aspect may not produce the best objective result of the wellbeing itself.

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Figure 3.1 Islamic bankings Islamic Social & Economic Figure 3.2 Variables reviewed for the empirical analysis
Structure View

Besides well-being, the interaction and integration of all variables referred to (Xi ())
will also produce (knowledge) to be pulled in into the pot of knowledge (X(); {}).
The knowledge taken from the previous iteration is then taken into the consideration in the
next iteration. As part of the transformation, each of the iteration will generate a positive and
negative learning. Both of them will enrich system in its tenure to achieve the well-being.
The choices both bad-s and good-s are available for human to choose. Further the
available choices are consciously was selected and reviewed during the thinking and decision
making processes with the guide of Quran and Sunnah. It should leave the bad-s behind and
took the good-s accordingly. Consciously expanding the choices to address broader human
well-being target was the key. One example in the case of Islamic banking explained further
the correlation between government and Islamic banking.
One of the examples is zakah. Zakah collection and distribution are government
responsibilities. The more zakah funds collected by government shows the wealth of the
community was increases. The more effective zakah fund distributed by government shows
the increment on the number muzakki and/or reducing the number of mustahiq. Islamic
banking who consciously selected and reviewed zakah as one of its performance indicators,
was tend to have more preference and thoughts to any choices that related to the successful of
zakah programs in its operation decisions. Hence, Islamic banking as the financial
intermediary will put its preferences to finance on SMEs/Micros rather than corporate in
order to generate more muzakki. It shows that Islamic banking consciously took necessary
actions to make this zakah program run successfully.
At the other side, government as regulator then creates necessary policies and
incentives to support Islamic banking in order to run its zakah related programs. Policies
were made by the government as a result of governments preferences to ensure the Islamic
banking business remains and grow together with the growing of communitys wealth.
Government and Islamic banking then monitored the successful of the program and gain the
experiences as the knowledge and pull it back to knowledge pool. Necessary actions to put
aside the bad-s choices found during the learning will be define as part of the learning
process. Hence, the interaction and integration Islamic banking from and to government is
established. Both consciously work as a team to achieve the same objectives which is the
increasing of communitys wealth. Furthermore, communitys wealth is translated into the
better human wellbeing.
Zakah at the example above is considered as the macro variable. This variable is
needed to be included into the Islamic banking objectives together with its micro variables
(namely ROA, OER). This interaction and integration between selected choices (represented
by variables) by Islamic banking was represented as the Islamic Social Economic Structure
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view (see Figure 3.1). Furthermore, in this research, the following choices (marked as blackbox in Figure 3.2) were analyzed in empirical way.
3.2

Empirical data analysis

Quantitative Analysis was used in this research to analyze the secondary data
representing the above variables (see Table 2.1). TSR methodology focuses on the learning
process by doing the integration and interaction among reviewed variables. The learning
process presented by the changes of the dependent variables from the changes of independent
variables which is the same pattern with the linear model as the wellbeing function below.
= a+bx1+cx2+dx3+ex4
(3.1)
Where:
= AVERAGE_TETHA denotes sustainability Index, which is a monotonic
transformation of the Social Wellbeing Function as indicated TSR
methodology;
x1 = GDPg denotes growth of the real GDP (in percentage);
x2 = POBO denotes PO/BO: PO/BO = 1/ (BO/PO) = 1/OER, Operating Expense
Ratio (OER) is percentage value of the operating expense value against
gross operating income value (Ismail, 2010). Hence, 1/OER is the income
value generated from the each amount expenses spend.
x3 = ROA denotes ROA, Return on Asset(ROA) is a percentage value of profit
value against asset value (Bank Indonesia, 2007). This indicator is another
way to measure the business healthiness.
x4 = MMUMKM denotes percentage of Mudharabah and Musharakah (MM) for
UMKM financing contract value of total MM financing values (in
percentage);
The circular causations for x1 to x4 are estimated in the regression equations. These equations
are obtained as follows:
x1 = a1+ b1x2+ c1x3+ d1x4 +e1
(3.2)
x2 = a2+ b2x1+ c2x3+ d2x4+ e2
(3.3)
x3 = a3+ b3x1+ c3x2+ d3x4+ e3
(3.4)
x4 = a4+ b4x1+ c3x2+ d4x3+ e4
(3.5)
The expected correlation of each variable ( , x1 to x4) to the wellbeing function was noted in
the Table 3.1. Furthermore, the was constructed by the explanatory equation in the other
variables ( value data set). Firstly, the variable (xi) will be represented and measured as I
(see the Table 3.1). is the index value of each variable (Choudury, 2014). Secondly, the
(AVERAGE_TETHA) value was calculated from the average of all i values (see Figure 3.4
below).

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Table 3.1 values and each variable correlations to Wellbeing values

Correlation
between
x values and
W values
x1 positive

values

Based on the historical data, the best real GDP growth was selected based on the
highest GDP growth and lowest inflation rate (see Figure 3.3)

Figure 3.3 Best

x2 to x4 positive

positive

values

= 10 for the selected xs value (xt) based on Shuras decision,which is 0.0388

= 0 the highest difference between xs value to selected xs value (|xi-xt|)
The xs value within the highest |xi-xt| to xt, the value will be prorated
accordingly between 0 to 10
= 10 for the highest xs value,
= 0 for the lowest xs value in the range of observation.
The xs value within the highest to the lowest, the value will be prorated
accordingly between 10 to 0
is calculated as the average value of all values from each x1 to x4.

Figure 3.4 Average Tetha

In this research, linear modeling using VAR/VECM was generated for all circular
causations and well-being functions that represent the above equations (equation 3.1 to 3.5).
With the equation 3.1, the first form of values (sustainability index), were generated based
on the linear model generated by VAR/VECM. Furthermore, the second form of values
(sustainability index), were generated in the form of polynomial trend equation as the
ordinary linear differential model from the original data set values.
3.2.1 Estimated values as the Sustainable index
The
equation generated from VAR/VECM estimation process, was stated in
equation 3.6 below. Furthermore, the first form of estimated values ( E1), were generated
from this equation and pictured out in the Figure 3.6 as the black-dashed line. The second
form of the estimated values ( E2), were generated from the estimating polynomial equation
of log-linear2-of-original- -values (see Figure 3.5). Furthermore, the E2 were generated from
this poly-log-linear equation and pictured out in the Figure 3.6 as the black-dotted line
2

By using elasticity on the data, then the behavior of the system can be reviewed from the data changes from t i
to ti+1. Then the value examined will be transformed into natural logarithmic (Gujarati, 2011)

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Figure 3.5 Estimated and original values

Figure 3.6 Estimated -s and Original

3.2.2 Estimation of Vector Error Correction Model for Circular Causation

Summary of the coefficient value and correlation independent variables with its
dependent variable in the circular causation together summarized in Table 3.2 below.
Table 3.2 VECM result summary

Average_Tetha ( ) estimation
In overall, it shows that all variables significantly create impact to AverageTetha for
the long run. There is also significant stability adoption ( negative) of the AverageTetha for
the long run.
AVERAGE_TETHA(-1) = GDPg(-1) *52.200 + POBO(-1) * -3.299
+ ROA(-1)* - 1.476 + MMUMKM (-1) * 4.328 + 3.132
(3.6)
Table 3.3 Average Tetha estimation analysis

Correlate
with
GDPg

POBO

MMUMKM

ROA

Findings
Changes in GDPg / changes in AverageTetha = 52.200 % in GDPg. It
shows that any positive changes on GDPg then the AverageTetha will
changes positively. Both AverageTetha and GDP were in the same path of
learning.
Changes in POBO / changes in AverageTetha = - 3.299 % in POBO. It
shows that POBO was not positively contributing to the wellbeing indicator
by way of the knowledge variable, theta.
MM contract value in UMKM was negatively related with AverageTetha
with the value of 4.328%. It shows that MM contract to UMKM by
Islamic banking was negatively contributing to AverageTetha.
Changes in ROA / changes in AverageTetha = 0.00016 % in ROA. It
shows that change in ROA contributes positively to the rate of real GDP
growth.

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Table 3.4 VECM Estimation Result

GDPg estimation
In overall, it shows that all variables significantly create impact to GDPg for both in
the short run and long run. There is significant stability adoption ( negative) for the long run.
GDPg(-1) = ROA(-1) * -0.0283 + MMUMKM (-1) *-0.083 + POBO(-1) * -0.063
+ AVERAGE_TETHA(-1) * 0.019 + 0.060
(3.6)

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Table 3.5 Real GDP Growth Analysis

Correlate
with
Average
Tetha

Findings

Change in AverageTetha was positively correlated with real GDP growth

rate by a value of 0.019%, it shows that AverageTetha was in line with the
real GDP growth
Changes in GDPg / change in POBO = - 0.063 % in GDPg. It shows that
POBO
any positive changes on GDPg then the revenue generated by expenditure as
spending by Islamic banking will change negatively. This might mean that
Islamic banking did not put the expense to support revenue generation that
impactful to the GDP
MMUMKM A change in MM contract for UMKM was negatively correlated with GDP
growth by a value of -0.083%, it shows that MM contract to UMKM did not
really shows to support the real GDP growth.
Changes in GDPg / change in ROA = -0.0283 % in GDPg. Again, it shows
ROA
that Islamic banking did not contribute to the macroeconomic objective of
increasing the real GDP growth target.
POBO estimation
In overall, it shows that all variables significantly create impact to POBO in the long
run.
POBO(-1) = GDPg(-1) * -15.822 + ROA(-1)*0.447 + MMUMKM(-1)*1.312
+ AVERAGE_TETHA(-1) * -0.303 - 0.949
(3.7)
Table 3.6 POBO analysis

Correlate
with
Average
Tetha
GDPg

MMUMKM

ROA

Findings
AverageTetha was negatively correlated with POBO with the value of
-0.303 %. It shows that Islamic banking was not spent in the area which
positively contributing to AverageTetha
Growth of real GDP was not positively correlated with POBO with the
value of -15.822 %. It shows that Islamic banking might not spent in the
area which creates a positive GDP growth
Changes in POBO / changes in MMUKM = 1.312 % in POBO. It shows
that MM contract to UMKM by Islamic banking was positively
contributing to POBO.
ROA was positively correlated with POBO with the value of 0.447%. It
shows that ROA and POBO were at the same path of learning.

ROA estimation
In overall, it shows that all variables significantly create impact to ROA in the long
run. There is stability adoption ( negative) for the long run for ROA.
ROA(-1) = MMUMKM(-1) * 2.933 + AVERAGE_TETHA(-1) * -0.678
+ POBO(-1) * 2.236 + GDPg(-1) * -35.378 - 2.122

(3.8)

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Table 3.7 ROA analysis

Correlate
with
Average
Tetha
GDPg

POBO
MMUMKM

Findings
AverageTetha was negatively related to ROA with the value of -0.678%. It
shows that Islamic banking was needed to manage the expense efficiently
Changes in ROA / changes in real GDP growth= - 35.378% in ROA. It
shows that Islamic banking did not contribute positively to the changes of
GDP growth.
Every 1% changes of revenue generated from expenses spent, was
positively impacted to ROA with the value of 2.236%.
Changes in ROA/ changes in MMUMKM = 2.933% in ROA. It shows that
MM contract to UMKM by Islamic banking is positively contributing to
ROA. Hence, the focus to UMKM using Musharakah and Mudharabah
contract will then generate a positive improvement to ROA.

MMUMKM estimation
In overall, it shows that all variables significantly create impact to MM financing to
UMKM in the long run. There is stability adoption ( negative) for the long run for
MMUMKM.
MMUMKM(-1) = AVERAGE_TETHA(-1)* -0.231 + POBO(-1)* 0.762
+ GDPg(-1) * -12.061 + ROA(-1) * 0.341 - 0.724
(3.9)
Table 3.8 Musharakah and Mudharabah Financing to UMKM analysis

Correlate
with
Average
Tetha

GDPg

POBO

ROA

Findings
Changes in MMUMKM/ changes in AverageTetha = - 0.231% in
MMUMKM. It shows that, there were no integration activities on the
MMUMKM that contributed into positive learning. It might mean that
Islamic banking should back to earlier years on Islamic banking which more
focus on the UMKM financing
Every 1% change of GDPg was negatively correlated with the MM contract
to UMKM with the value of -12.061. It might means both UMKM and
Islamic Banking should perform better as the economic players to be in-line
with real GDP growth path of learning.
Changes in MMUMKM/ changes in POBO = 0.762% in MMUMM. It
shows that MM financing contracts used for UMKM positively generated
more revenue from each Islamic banking expense spent. Hence, it was
proved that applying MM financing contract did not lead into unefficiencies. Furthermore, with this finding, Islamic bank should go further
for MM financing contract to UMKM in order to generate more revenue.
Every 1% changes of ROA was positively correlated to financing distribute
to UMKM with MM contract with the value of 0.341%. It shows that Islamic
banking was on its track to focus on UMKM even though the existing size is
not that significant. Furthermore, Islamic banking should allocate more
financing in this area while preparing the necessary resources to support this.

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3.2.3 Wellbeing function analysis
is denoted as a sustainability Index, which is a monotonic transformation of the
Social Wellbeing Function as indicated TSR methodology. In general, Islamic bankings real
value was presented as a parabola opens down (negative quadratic equation) trend line (see
Figure 3.7). The second form (log linear) of estimated value was also have the same
negative quadratic equation trend line (see Figure 3.8). This estimated
value was derived
directly from original value ( E2). The trend line for the log linear was constructed in the
following equation:
lnTetha = a + b.t + c.t2
= 0.7074 + 0.0113x - 0.0003 x2
(3.10)
(R = 0.0931)
The changes of the (see Figure 3.8), was constructed as the first differential of the
quadratic equation of equation 3.10 as follows:
g = d(lnTetha)/dt
= b + 2.c.t
= 0.0113 0.0006x
(3.11)
It shows that the changes of the follows the negative slope (dg/dt = - 0.006) of the linear
equation 3.11, which means that the changes was running negative from time to time.

Figure 3.7 Average

Figure 3.8 Estimated (

E1)

Figure 3.9 lnTetha

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Furthermore, the polynomial trend line of lnTetha was calculated back with the following
equation below, to get the estimated value.
lnTetha
(3.12)
E2 = 10
The E2 was pictured out in the Figure 3.6 as the black-dotted line. The same learning pattern
of E2 is the same with the lnTetha.
The other form of estimated value, was pictured out in the Figure 3.6 as the blackdashed line( E1). E1 was constructed from the equation 3.6 (see Figure 3.8). The trend line
for this estimated was constructed in the following equation:
2
3
E1 = a + b.t + c.t + d.t
= 33.925- 7.5678x + 0.3934x2 - 0.0054x3
(3.13)
(R = 0.7598)
The changes of the (g), was constructed as the first differential of the equation 3.13 as
follows:
g = d( E1)/dt
= b + 2.c.t + 3.d.t2
= - 7.5678 + 0.7868x - 0.0162x2
(3.14)
It shows that the changes of the follows the parabola open downs pattern, which means that
the future value of d( E1)/dt will go lower, as the parabola (quadratic equations) already
reached its maximum value.
3.3

Propose actions to improve Islamic banking contribution to real economy

The integrated Islamic Socio Economic view is strongly suggested to Islamic banking
for them to apply. With this new view, Islamic banking has the option to measure their
contribution to the economic development. The sustainability index ( ) was generated from
both Islamic banking micro view and the governments objective as macro view. Hence, the
same view is needed to be applied for government (in this case OJK or BI) to construct new
policies that synchronize with the Islamic bankings preferences. Furthermore, with this
strong interaction and integration, the Indonesias socio economy will have a sustain
foundation for current and future needs.
The foregoing cases verify one fundamental lesson for further development of Islamic
banking that Islamic banking is definitely the best practice for the sustainable socio-economic
development in real economy, even compared to the conventional banks, regarding the
financing and loan. With the partnership financing contract such as Mudharabah and
Musharakah (MM), Islamic banking serves as the partner of its customers, either active or
semi-active participation, and therefore Islamic banking is much expected to be able to
understand the customers business well and become the crucial part of the business growth.
These two types of contract, as the first type of Islamic bankings products 3, are the
fundamental rules for Islamic economic transaction (Fiqh al-Muamalat). This was proved by
the empirical analysis explained in the previous section. The MM financing contract to
UMKM grew both the Islamic banking business and the UMKMs.
Although the correlation MMUMKM to the Average_Tetha and to the GDPg was
resulted as a negative, it is believed if the Islamic banking put back more value and volume of
MM financing contract to UMKM will turn it back into positive learning process. The
positive slope of the percentage MM financing contract to UMKM happened within 2005 to
2010. Look at the data trend on financing to UMKM and non-UMKM, it shows that Islamic
banking gradually reduce its financing composition from UMKM to non-UMKM started at
3

Primary method is based on Mudarabah and Musharakah, while Secondary one is based on Buying and
Selling (Chapra, 2000:234)

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Y2010. The direction was changed, and the impact of that change will happen in the long
run.
In addition, considering the effectiveness of MM financing contract to social and
economic contributions especially rural areas, in its capacity as the financial intermediary, the
Islamic banking is strongly encouraged to penetrate and expand a larger market in the rural
areas. The MM financing contracts are conducted based on the equity sharing or profit
sharing, involving the capital owner or investor (shahib al-mal) and the user of the investors
capital (mudharib) as one single entity. Subsequently, mudharib will not only invest the
capital flows to rural communities, but also bring along the skilled labors, technology, and
Governments policies in order to increase the success rate of the investment. Hence, the
more transparent the flow of information in this investment contract is carried out, the
smoother the Islamic banking operations in both maintaining the implementation of Islamic
principles and reducing the investment risks will be.
4

Summary

The integrated Islamic Socio Economic view was the alternative way to look Islamic
banking contribution in the real economy. The non-financial performance indicator is
generated by the index from this view. This indicator was called as the sustainability index
which it combine the macro and micro view of the Islamic banking. The MM financing for
UMKM was proven to have a positive correlation for both ROA and POBO. Furthermore, the
change of direction, from UMKM to non-UMKM was identified as one of the cause to
negative learning process in the sustainability index. Hence, Islamic banking has consciously
go to UMKM (with MM financing) as it has a positive impact to financial performance
indicator (ROA, POBO) as well as the sustainability index.
In addition, considering the effectiveness of MM financing contract to social and
economic contributions especially rural areas, in its capacity as the financial intermediary, the
Islamic banking is strongly encouraged to penetrate and expand a larger market in the rural
areas. Applying the MM financing contracts in the partnership investment especially for
rural people, as the form of current or new Micro Enterprises, require a significant number of
Islamic bankings frontline agents. Furthermore, the following research is required to
understand the working model of Islamic banking in addressing this.
Thank you notes
My special sincere gratitude to Prof. Masudul Alam Choudury and Dr Rifki Ismal for all the
endless supports and advises that lead me into to this point of my Islamic economy learning
journey.
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