THE ROLE OF INTEGRATED ISLAMIC COMMERCIAL AND SOCIAL FINANCE IN REDUCING INCOME INEQUALITY IN INDONESIA

  • Arif Widodo
Keywords: Integrated Islamic Finance, Social Finance, Income Inequality, GMM

Abstract

Recent years saw the heated debates among prominent economists on the growinginequality in advanced economies, and accordingly, many solutions to this seriousproblem have been put forward. Among the practical-cum-workable solution isprogressive taxation for wealth and income, especially the top one percent. Such asolution, however, has been implemented in Islamic perspective what so-called, zakahwhich is now referred to as social finance. In this paper, using the Gini coefficient datacovering 34 provinces in Indonesia over a decade, we examine whether the role ofsocial finance in tandem with commercial finance can adequately solve the problemof wealth distribution in Indonesia, one of the largest Democratic-Muslim countriesin the world. Using the Generalized Method of Moments (GMM) model, the resultsdemonstrated that Islamic commercial finance solely is proven statistically incapable oftackling inequality while the social finance (zakah) is performing very well in this matterover all specifications. Most importantly, when both are incorporated in a model, theresult showed a significant reduction in income inequality implying that the integratedIslamic finance which can be implemented in both Islamic microfinance institution andIslamic banking is more capable, as opposed to when both are separated, of helpingaddress the income inequality problem in Indonesia.

References

Abdelbaki, H. H. (2013). The Impact of Zakat on Poverty and Income Inequality in

Bahrain. Review of Integrative Business & Economics, 2(1), 133-54.

Al-Qardawi, Yusuf. (1999). Fiqh az-Zakat. London: Dar Al Taqwa.

Arellano, M., and Bond, S. (1991). Some Tests of Specification for Panel Data: Monte

Carlo Evidence and an Application to Employment Equations. The Review of

Economic Studies, 58(2), 277-97.

Arellano, M., and Bover, O. (1995). Another Look at the Instrumental Variable

Estimation of Error Components Models. Journal of Econometrics, 68(1), 29-51.

Ascarya and Sakti, A. (2008). Comparing Monetary Policy Instruments Under

Dual Financial System: Interest System Vs Profit-and-Loss Sharing System.

Journal of Islamic and Economics, 2(1), 7-33.

Ascarya. (2016). Integration of Islamic Commercial and Social Finance in Micro-

Small Scale. Presented at International Seminar and 2nd JIMF Call for Papers,

Surabaya, October 27-28.

Ascarya. (2017). Implementing Integrated Islamic Commercial and Social Finance

in Islamic Financial Institutions. Presented at Stadium General on Islamic

Finance, organised by Department of Economics, Universitas Muhammadiyah

Yogyakarta, December, 5.

Atkinson, A. B. (1970). On the Measurement of Inequality. Journal of Economic

Theory, 2, 244-63.

Atkinson, A. B. (2014). After Piketty? The British Journal of Sociology, 65(4), 619-38.

Atkinson, A. B. (2015a). Can We Reduce Income Inequality in OECD Countries?

Empirica, 42, 211-23.

Atkinson, A. B. (2015b). Inequality: What Can Be Done? Cambridge, Massachusetts:

Harvard University Press.

Atkinson, A. B., Piketty, T., and Saez, E. (2011). Top Incomes in the Long Run of

History. Journal of Economic Literature, 49(1), 3-71.

Ayuniyyah , Q., Pramanik, A. H., Saad, N. M., and Ariffin, M. I. (2018). Zakat for

Poverty Alleviation and Income Inequality Reduction: West Java, Indonesia.

Journal of Islamic Monetary Economics and Finance, 4(1), 85-100.

Ayuniyyah , Q., Pramanik, A. H., Saad, N. M., and Ariffin, M. I. (2017). The

Comparison between Consumption and Production-based Zakat Distribution

Programs for Poverty Alleviation and Income Inequality. International Journal

of Zakat, 2(2), 11-28.

Baltagi, B. (2008). Econometric Analysis of Panel Data. John Wiley and Sons.

Baum, C. F, Schaffer, M. E, and Stillman, S. (2002). Instrumental Variables and

GMM: Estimation and Testing. Working Paper 545. Boston College Economics.

Beik, I. S. (2013). Economic Role of Zakat in Reducing Poverty and Income Inequality:

A Case Study in the Province of DKI Jakarta, Indonesia. LAP Lambert Academic

Publishing.

Beik, I. S., and Arsyianti, L.D. (2015). Construction of CIBEST Model as Measurement

of Poverty and Welfare Indices from Islamic Perspective. Al-Iqtishad: Journal of

Islamic Economics, 7(1), 87-104.

Beik, I. S., and Arsyianti, L.D. (2016). Measuring Zakat Impact on Poverty and

Welfare Using CIBEST Model. Journal of Islamic Monetary Economics and Finance,

(2), 141-60.

Beik, I. S., and Tsani, T. (2015). Role of Zakat Distribution in Reducing Poverty and

Income Inequality in Indonesia. In M. M Muh Yusop and N. Abdullah (eds.),

Zakat and Poverty Alleviation. Kuala Lumpur: IIUM Press, pp. 198-317.

Blundell, R., and Bond, S. (1998). Initial Condition and Moment Restrictions in

Dynamic Panel Data Model. Journal of Econometrics, 87(1), 115-43.

Bremer, Jennifer. (2013). Zakat and Economic Justice: Emerging International

Models and their Relevance for Egypt. Paper for Third Annual Conference on

Arab Philanthropy and Civic Engagement, Tunis, Tunisia, June 4-6.

Goldin, C and Katz, L. F. (2008). The Race Between Education and Technology.

Massachusetts: Harvard University Press.

Gujarati, Damodar N. (2003). Basic Econometrics. Fourth Edition. New York:

McGraw Hill.

Jehle, Geoffrey A. (1994). Zakat and Inequality: Some Evidence from Pakistan.

Review of Income and Wealth, 40(2), 205-16.

Jerzmanowski, M and Nabar, M. (2011). Financial Development and Wage

Inequality: Theory and Evidence. Economic Inquiry, 51, 211-34.

Johari, F., Ab Aziz, M. R., and Ali, A. F. M. (2014). The Role of Zakat in Reducing

Poverty and Income Inequality among New Convert (Muallaf) in Selangor,

Malaysia. Research in Islamic Studies, 1(3), 43-56.

Kuznets, Simon. (1955). Economic Growth and Income Inequality. American

Economic Review, 45(1), 1-28.

Latief, Hilman. (2014). Contesting Almsgiving in Post-New Order Indonesia. The

American Journal of Islamic Social Sciences, 31(1), 16-50.

Maghrebi, N and Mirakhor, A. (2015). Risk Sharing and Shared Prosperity in

Islamic Finance. Islamic Economic Studies, 23(2), 85-115.

Mahmud, M. W and Shah, S. S. (2009). The Use of Zakat Revenue in Islamic

Financing: Jurisprudential Debate and Practical Feasibility. Studies in Islam and

the Middle East, 6(1), 1-15.

Malik, B. A. (2016). Philanthropy in Practice: Role of Zakat in the Realization of

Justice and Economic Growth. International Journal of Zakat, 1(1), 64-77.

Mankiw, N. G. (2013). Defending the One Percent. Journal of Economic Perspectives,

(3), 21-34.

Mankiw, N. G. (2015). Yes, r > g. So What? American Economic Review: Papers &

Proceedings, 105(5), 43-47.

Nielsen, F and Alderson, A. S. (1995). Income Inequality, Development and

Dualism: Results from Unbalanced Cross-Sectional Panel. American Sociological

Review, 60(5), 674-701.

Piketty, T and Saez, E. (2013a). Optimal Labor Income Taxation. In A. J. Auerbach,

R. Chetty, M. Feldstein and E. Saez (Eds.). Handbook of Public Economics (5).

Oxford: North Holland, pp. 392-471.

Piketty, T and Saez, E. (2013b). Top Incomes and the Great Recession: Recent

Evolutions and Policy Implications. IMF Economic Review, 61(3), 456-78.

Piketty, T and Saez, E. (2014). Inequality in the Long Run. Scinece, 344(6186), 838-

Piketty, Thomas. (2014). Capital in the Twenty-First Century. Translated by Arthur

Goldhammer. Cambridge, Massachusetts: Harvard University Press.

Piketty, Thomas. (2015). About Capital in the Twenty-First Century. American

Economic Review: Papers & Proceedings, 105(5), 48-53.

Roberts, A and Kwon, R. (2017). Finance, Inequality and the Varieties of Capitalism

in Post-Industrial Democracies. Socio-Economic Review, 1-28, doi: 10.1093/ser/

mwx021

Sen, A and Foster, J. (1997). On Economic Inequality. Enlarged Edition. Oxford:

Oxford University Press.

Sen, Amartya. (1992). Inequality Reexamined. Oxford: Oxford University Press.

Stiglitz, Joseph E. (2012). The Price of Inequality: How Today’s Divided Society

Endangers Our Future. New York: W.W. Norton & Company.

Undang-Undang Republik Indonesia Nomor 21 Tahun 2008 Tentang Perbankan

Syariah [Republic of Indonesia Act No. 21 Year 2008 on Islamic Banking].

Volscho, T. W and Kelly, N. J. (2012). The Rise of the Super-Rich: Power Resources,

Financial Markets, and the Dynamics of the Top 1 Percent, 1949 to 2008.

American Sociological Review, 77(5), 679-99.

Yang, Y and Greaney, T. M. (2016). Economic Growth and Income Inequality in

the Asia-Pacific Region: A Comparative Study of China, Japan, South Korea

and the United States. Journal of Asian Economics, http://dx.doi.org/10.1016/j.

asieco.2016.10.008

Zalewski, D. A and Whalen, C. J. (2010). Financialization and Income Inequality: A

Post Keynesian Institutionalist Analysis. Journal of Economic Issues, 44(3), 757-

Published
2019-07-23
How to Cite
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). https://doi.org/10.21098/jimf.v5i2.1063
Section
Articles