• Masrizal Masrizal Islamic Economic Department, Faculty of Economics and Business, Universitas Airlangga, Indonesia
  • Budi Trianto Sekolah Tinggi Ekonomi Islam (STEI) Iqra Annisa Pekanbaru, Indonesia
Keywords: Islamic banking, PLS financing, Non-PLS financing, Economic growth, ARDL.


This paper investigates the role of PLS financing and non-PLS financing of Islamic banks in supporting the real sector for the case of Indonesia using monthly data from January 2009 to December 2018. Applying the ARDL approach to model their long-run and short-run relations, we find positive contribution of the PLS financing scheme to Indonesia's economic growth. Comparing the PLS and non-PLS financing, we note that the PLS financing has a larger impact on growth, both in the long run and short run. Accordingly, for Islamic finance to have larger growth impact, concrete steps and initiatives must be put in place to increase Islamic financing based on PLS arrangements. 


Abduh, M., & Azmi Omar, M. (2012). Islamic banking and economic growth: The Indonesian experience. International Journal of Islamic and Middle Eastern Finance and Management, 5(1), 35–47.

Abduh, M., & Chowdhury, N. (2012). Does Islamic banking matter for economic growth in Bangladesh? Journal of Islamic Economics, Banking and Finance, 8(3), 104–113.

Aggarwal, R. K., & Yousef, T. (2000). Islamic banks and investment financing. Journal of Money, Credit and Banking, 32(1), 93-120.

Aggarwal, R. K., & Yousef, T. (1996). Islamic banks and investment financing. SSRN Electronic Journal, March(1996), 1-49.

Ahmad, S. M. (1952). Economics of Islam. Institute of Islamic Culture, Lahore.

Ahmed, H. (2002). A microeconomic model of an Islamic bank. Occasional Papers No. 54. The Islamic Research and Teaching Institute (IRTI), Jeddah.

Bougatef, K., Nakhli, M. S., & Mnari, O. (2020). The Nexus between Islamic banking and industrial production, empirical evidence from Malaysia. ISRA International Journal of Islamic Finance, 12(1), 103-114.

Boukhatem, J., & Ben Moussa, F. (2018). The effect of Islamic banks on GDP growth: Some evidence from selected MENA countries. Borsa Istanbul Review, 18(3), 231–247.

Chowdhury, M. A. F., Akbar, C. S., & Shoyeb, M. (2018). Nexus between risk sharing vs non-risk sharing financing and economic growth of Bangladesh: ARDL bound testing and continuous wavelet transform (CWT) approach. Managerial Finance, 44(6), 739–758.

Durusu-Ciftci, D., Ispir, M. S., & Yetkiner, H. (2017). Financial development and economic growth: Some theory and more evidence. Journal of Policy Modeling, 39(2), 290–306.

Ekananda, M. (2016). Analisis ekonometrika time series. Jakarta: Mitra Wacana Media

El-Hawary, D., Grais, W., & Iqbal, Z. (2006). Diversity in the regulation of Islamic Financial Institutions. Quarterly Review of Economics and Finance, 46(5), 778–800.

Fianto, B. A. (2017). An empirical analysis of Islamic microfinance institutions’ performance in Indonesia (pp. 1–173). New Zealand: Lincoln University. [Ph.D Thesis].

Furqani, H., & Mulyany, R. (2009). Islamic banking and economic growth: Empirical evidence from Malaysia. Journal of Economic Cooperation and Development, 30(2), 59–74.

GIFR. (2019). Islamic Finance Country Index – IFCI 2019. Available at: Access Date: October 24th, 2020.

Goaied, M. & Sassi, S. (2011). Financial development, Islamic banking and economic growth evidence from MENA region. International Journal of Business Science and Applied Management, 4(2), 105 – 128.

Grassa, R., & Gazdar, K. (2014). Financial development and economic growth in GCC countries: A comparative study between Islamic and conventional finance. International Journal of Social Economics, 41(6), 493–514.

Hachicha, N., & Ben Amar, A. (2015). Does Islamic bank financing contribute to economic growth? The Malaysian case. International Journal of Islamic and Middle Eastern Finance and Management, 8(3), 349–368.

IFSB. (2019). Islamic Financial Services Industry Stability Report. Malaysia: Islamic Financial Service Boards

Imam, P., & Kpodar, K. (2016). Islamic banking: Good for growth? Economic Modelling, 59(December 2016), 387–401.

Iqbal, Z., & Mirakhor, A. (2007). An introduction to Islamic finance, theory and practice. Solaris South Tower, Singapore: John Wiley & Son (Asia) Pte Ltd.

Kahf, M., & Khan, T. (1992). Principles of Islamic financing; A survey. Research Paper No. 16. Islamic Research and Training Institute, Islamic Development Bank, Jeddah.

Kassim, S. (2016). Islamic finance and economic growth: The Malaysian experience. Global Finance Journal, 30(May 2016), 66–76.

Khan, M. A. (1983). Islamic economics - Annotated sources in English and Urdu (Vol. I). Leicester, UK: The Islamic Foundation.

Lebdaoui, H., & Wild, J. (2016). Islamic banking presence and economic growth in Southeast Asia. International Journal of Islamic and Middle Eastern Finance and Management, 9(4), 551–569.

Majid, M.S.A, & Kassim, S. (2015). Assessing the contribution of Islamic finance to economic growth: Empirical evidence from Malaysia. Journal of Islamic Accounting and Business Research, 6(2), 292–310.

Mohd Nor, A., & Ismail, S. (2020). Profit and loss sharing (PLS) and non-PLS financing in Malaysia: Which one should be the one? KnE Social Sciences, 4(6), 14–25.

Mohsen, A. S., Chua, S. Y., & Sab, C. N. C. (2015). Determinants of industrial output in Syria. Journal of Economic Structures, 4(1), 19-30.

Naz, A. A. & Gulzar, S. (2020). Impact of Islamic finance on economic growth: An empirical analysis of Muslim contries. The Singapore Economic Review, 1-12.

Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326.

Qureshi, A. I. (1946). Islam and theory of interest. Lahore: Syeikh M. Asyraf Publishing.

Schumpeter, J. A. (1934). Theory of economic development: An inquiry into profits, capital, credit and the business cycle. University of Illinois at Urbana-Champaign's Academy for Entrepreneurial Leadership Historical Research Reference in Entrepreneurship, Available at SSRN:

Siddiqi, M. N. (1983). Issue in Islamic banking. Leichester: The Islamic Foundation.

Toda, H. Y., & Yamamoto, T. (1995). Statistical inference in vector autoregression with possible integrated process. Journal of Econometrics, 66(1-2), 225-250.

Yusof, R. M, & Bahlous, M. (2013). Islamic banking and economic growth in GCC & East Asia countries: A panel cointegration analysis. Journal of Islamic Accounting and Business Research, 4(2), 151–172.

Zamil, N. A. M. (2014). An empirical investigation into the problems and challenges facing islamic banking in Malaysia. UK: Cardiff University. [Ph.D Thesis].

How to Cite
Masrizal, M., & Trianto, B. (2022). THE ROLE OF PLS FINANCING ON ECONOMIC GROWTH: INDONESIAN CASE. Journal of Islamic Monetary Economics and Finance, 8(1), 49 - 64.