Long-Run Dynamics of Islamic Finance and Economic Growth in Indonesia: A Vector Error Correction Model Approach

Abstract

This study aims to analyze the impact of the implementation of Islamic economic principles on economic growth in Indonesia until 2024. Islamic economics, which is based on justice and the prohibition of usury, is considered capable of encouraging sustainable, inclusive economic development, and is oriented towards strengthening the real sector. This study uses a mixed methods approach, with a dominant quantitative approach for econometric analysis of macroeconomic data (GDP, inflation, Islamic financial inclusion) and a qualitative approach to explore policies and stakeholder perceptions. Quantitative data are sourced from official institutions (BPS, Bank Indonesia, OJK Syariah), while qualitative data are obtained through interviews and observations. Quantitative analysis uses econometric models such as the Error Correction Model (ECM) or Vector Error Correction Model (VECM) to test long-term relationships. The results show that the implementation of Islamic economic principles has had a real and significant positive impact on Indonesia's economic growth. The contribution of the Islamic economy to national GDP is projected to increase from 21.5% in 2019 to 25.9% in 2024. This growth is driven by the rapid development of the halal industry, increasing Islamic banking assets, and the increasing number of Sharia-compliant MSMEs. Empirically, Islamic financing has been proven to contribute significantly to national economic growth in the long term (elasticity of 0.18% per 1% increase in financing). Furthermore, the Islamic Financial Inclusion Index has also increased sharply from 9.1% (2019) to 14.8% (2023), contributing to economic equality and poverty reduction. Indonesia also successfully ranked third in the world in the Global Islamic Economy Indicator (GIEI) in 2023