ISLAMIC FINANCIAL DEVELOPMENT, ECONOMIC GROWTH AND CO2 EMISSION IN INDONESIA
This study aims to investigate the dynamic relationship between Islamic financial development, economic growth, and CO2 emissions with Environmental Kuznets Curve (EKC) approach in Indonesia over the 2000-2018 period. This study employs the Auto Regressive Distributed Lag (ARDL) bound testing approach and the Error Correction Mechanism (ECM) to examine the existence of long-run and short-run relationship between variables. From the results of the model, we do not find any support for the existence of the EKC for Indonesia. Moreover, the results present that there is no dynamic relationship in the short run among growth, Islamic finance development and CO2 emission. Long-run findings suggest that CO2 emission from transport; other sectors, excluding residential buildings and commercial and public services; and residential buildings and commercial and public services sector are significantly associated to the Islamic finance development in Indonesia. The findings of this study shows that Islamic finance development can help the country to adjust its CO2 emissions and play its role in protecting the environment by encouraging environmental-friendly and energy-efficient projects. A strong and efficient financial sector would be helpful in facilitating the investment process by advancing loans for business in condition with curbing CO2 emissions.
Al-mulali, U., & Saboori, B. (2015). Investigating the environmental Kuznets curve hypothesis in Vietnam. Energy Policy, 76. https://doi.org/10.1016/j.enpol.2014.11.019
Bakar, O. (2007). Environmental Wisdom for Planet Earth: The Islamic Heritage. Malaysia: University Malaya.
Bekhet, H., Matar, A., & Yasmin, T. (2017). CO2 emissions, energy consumption, economic growth, and financial development in GCC countries: Dynamic simultaneous equation models. Renewable and Sustainable Energy Reviews, 70, 117–132. https://doi.org/10.1016/j.rser.2016.11.089.
Boutabba, M. A. (2014). The impact of financial development, income, energy and trade on carbon emissions: Evidence from the Indian economy. Economic Modelling, 40, 33–41. https://doi.org/10.1016/j.econmod.2014.03.005.
Clarke, G., Xu, L., & Zou, H. (2003). Finance and income inequality: test of alternative theories. Annals of Economics and Finance, 14. https://doi.org/10.2139/ssrn.364160.
Danish, Saud, S., Baloch, M. A., & Lodhi, R. (2018). The nexus between energy consumption and financial development: estimating the role of globalization in Next-11 countries. Environmental Science and Pollution Research, 25. https://doi.org/10.1007/s11356-018-2069-0.
Dickey, D., & Fuller, W. A. (1979). The likelihood ratio statistics for autoregressive time series with a unit root. Econometrica, 49, 1059–1072.
Frankel, J., & Romer, D. (2017). Does Trade Cause Growth? https://doi.org/10.4324/9781315254166-11.
Furuoka, F. (2015). Financial development and energy consumption: Evidence from a heterogeneous panel of Asian countries. Renewable and Sustainable Energy Reviews, 52, 430–444. https://doi.org/10.1016/j.rser.2015.07.120.
Grossman, G. M., & Krueger, A. B. (1995). Economic Growth and the Environment. The Quarterly Journal of Economics, 110(2), 353–377. https://doi.org/10.2307/2118443
Hidayat, Rachmad; Akhmad, Sabarudin; Mu’alim 2015,Effects of Environmental Factors on Corporate Strategy and Performance of Manufacturing Industries in Indonesia, Journal of Industrial Engineering and Management, 8(3): 763-782
Halicioglu, F. (2009). An econometric study of CO2 emissions, energy consumption, income and foreign trade in Turkey. Energy Policy, 37, 1156–1164. https://doi.org/10.1016/j.enpol.2008.11.012.
Iskandar, A. (2019). Economic growth and CO2 emissions in indonesia : investigating the environmental kuznets curve hypothesis existence. Jurnal BPPK, 12, 42–52.
Islam, F. (2011). Financial Development and Income Inequality in Pakistan: An Application of ARDL Approach. Journal of Economic Development, 36. https://doi.org/10.35866/caujed.2011.36.1.003.
Islam, F., Ahmed, A., & Alam, M. M. (2019). Financial Development and Energy Consumption Nexus in Malaysia: A Multivariate Time Series Analysis. https://doi.org/10.31219/osf.io/tdh8k.
Jalil, A., & Mahmud, S. (2009). Environment Kuznets Curve for CO2 Emissions: A Cointegration Analysis for China. Energy Policy, 37, 5167–5172. https://doi.org/10.1016/j.enpol.2009.07.044.
Jam, F., Bibi, S., & Loganathan, N. (2015). Multivariate Granger causality between CO2 emissions, energy intensity and economic growth in Portugal: evidence from cointegration and causality analysis. Technological and Economic Development, 22. https://doi.org/10.3846/20294913.2014.989932.
Johansen, S., & Juselius, K. (1990). Maximum Likelihood Estimation and Inference On Cointegration—with Applications to the Demand for Money. Oxford Bulletin of Economics and Statistics, 52, 169–210. https://doi.org/10.1111/j.1468-0084.1990.mp52002003.x.
Kahouli, B. (2017). The Short and Long run Causality Relationship among Economic Growth, Energy Consumption and Financial Development: Evidence from South Mediterranean Countries (SMCs). Energy Economics, 68. https://doi.org/10.1016/j.eneco.2017.09.013
Kamali, M. H. (2012). Environmental Care in Islamic Teaching. Islam and Civilisational Renewal, 3(261–83).
Khan, M. T. I., Yaseen, M. R., & Ali, Q. (2017). Dynamic relationship between financial development, energy consumption, trade and greenhouse gas: Comparison of upper middle income countries from Asia, Europe, Africa and America. Journal of Cleaner Production, 161. https://doi.org/10.1016/j.jclepro.2017.05.129.
Khan, S., Ali, D. A., & Bhattacharya, M. (2016). The impact of globalization on CO2 emissions in China. The Singapore Economic Review, 1740033. https://doi.org/10.1142/S0217590817400331.
Lau, L.-S., Choong, C.-K., & Kee, Y. (2014). Investigation of the environmental Kuznets curve for carbon emissions in Malaysia: Do foreign direct investment and trade matter? Energy Policy, 68, 490–497. https://doi.org/10.1016/j.enpol.2014.01.002.
Mahmood, N., & Masih, M. (2019). Dynamics between islamic banking performance and CO2 emissions: evidence from the OIC countries. https://doi.org/10.13140/RG.2.2.26131.02083.
Mallick, H., Mahalik, M., & Sadorsky, P. (2016). The role of globalization on the recent evolution of energy demand in India: Implications for sustainable development. Energy Economics, 55, 52–68. https://doi.org/10.1016/j.eneco.2016.01.013.
Nasreen, S., & Anwar, S. (2016). Financial stability,energy consumption and environmental quality: Evidence from South Asian economies. Renewable and Sustainable Energy Reviews, 67. https://doi.org/10.1016/j.rser.2016.09.021.
Omri, A., Saida, D., Rault, C., & Chaibi, A. (2015). Financial development, environmental quality, trade and economic growth: What causes what in MENA countries. Energy Economics.
Osabuohien, E., Efobi, U., & Gitau, C. (2014). Beyond the Environmental Kuznets Curve in Africa: Evidence from Panel Cointegration. Journal of Environmental Policy & Planning, 16. https://doi.org/10.1080/1523908X.2013.867802.
Pesaran, H. (1997). An autoregressive distributed lag modelling approach to cointegration analysis. Science, 7825, 371–413.
Pesaran, H., Smith, R., & Shin, Y. (2001). Bound Testing Approaches to the Analysis of Level Relationship. Journal of Applied Econometrics, 16, 289–326. https://doi.org/10.1002/jae.616.
Phillips, P., & Perron, P. (1986). Testing for a Unit Root in Time Series Regression. Cowles Foundation, Yale University, Cowles Foundation Discussion Papers, 75. https://doi.org/10.1093/biomet/75.2.335.
Qayyum Khan, A., Saleem, N., & Fatima, S. (2017). Financial development, income inequality, and CO2 emissions in Asian countries using STIRPAT model. Environmental Science and Pollution Research, 25. https://doi.org/10.1007/s11356-017-0719-2.
Rehman, I. (2014). Multivariate-based Granger causality between financial deepening and poverty: the case of Pakistan. Quality & Quantity, 48. https://doi.org/10.1007/s11135-013-9952-z.
Riti, J., Song, D., Shu, Y., & Kamah, M. (2017). The contribution of energy use and financial development by source in climate change mitigation process: A global empirical perspective. Journal of Cleaner Production, 148. https://doi.org/10.1016/j.jclepro.2017.02.037.
Saboori, B., Sulaiman, J., & Mohd, S. (2012). Economic Growth and CO2 Emissions in Malaysia: A Cointegration Analysis of the Environmental Kuznets Curve. Energy Policy, 51, 184–191. https://doi.org/10.1016/j.enpol.2012.08.065.
Sadorsky, P. (2011). Financial development and energy consumption in Central and Eastern European frontier economies. Energy Policy, 39, 999–1006. https://doi.org/10.1016/j.enpol.2010.11.034.
Salahuddin, M., Alam, K., & Sohag, K. (2017). The effects of electricity consumption, economic growth, financial development and foreign direct investment on CO 2 emissions in Kuwait. Renewable and Sustainable Energy Reviews. https://doi.org/10.1016/j.rser.2017.06.009.
Shafik, N., & Bandyopadhyay, S. (1992). Economic Growth and Environmental Quality: Time Series and Cross-Country Evidence.
Stern, D. (2004). The Rise and Fall of the Environmental Kuznets Curve. World Development, 32, 1419–1439. https://doi.org/10.1016/j.worlddev.2004.03.004.
Tamazian, A., Piñeiro, J., & Vadlamannati, K. (2009). Does higher economic and financial development lead to environmental degradation: Evidence from BRIC countries. Energy Policy, 37, 246–253. https://doi.org/10.1016/j.enpol.2008.08.025.
Tamazian, A., & Rao, B. (2010). Do economic, financial and institutional developments matter for environmental degradation? Evidence from transitional economies. Energy Economics, 32, 137–145. https://doi.org/10.1016/j.eneco.2009.04.004.
Tiwari, A., & Nasir, M. (2013). The Effects of Financial Development, Economic Growth, Coal Consumption and Trade Openness on Environment Performance in South Africa. Energy Policy, 61. https://doi.org/10.1016/j.enpol.2013.07.006.
Uddin, G., Arouri, M., & Teulon, F. (2014). Financial development and poverty reduction nexus: A cointegration and causality analysis in Bangladesh. Economic Modelling, 36, 405–412. https://doi.org/10.1016/j.econmod.2013.09.049.
Journal of Islamic Monetary Economics and Finance is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.