THE ROLE OF INTEGRATED ISLAMIC COMMERCIAL AND SOCIAL FINANCE IN REDUCING INCOME INEQUALITY IN INDONESIA
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Abstract
Recent years saw the heated debates among prominent economists on the growing
inequality in advanced economies, and accordingly, many solutions to this serious
problem have been put forward. Among the practical-cum-workable solution is
progressive taxation for wealth and income, especially the top one percent. Such a
solution, however, has been implemented in Islamic perspective what so-called,
zakah which is now referred to as social finance. In this paper, using the Gini coefficient data
covering 34 provinces in Indonesia over a decade, we examine whether the role of
social finance in tandem with commercial finance can adequately solve the problem
of wealth distribution in Indonesia, one of the largest Democratic-Muslim countries
in the world. Using the Generalized Method of Moments (GMM) model, the results
demonstrated that Islamic commercial finance solely is proven statistically incapable of
tackling inequality while the social finance (zakah) is performing very well in this matter
over all specifications. Most importantly, when both are incorporated in a model, the
result showed a significant reduction in income inequality implying that the integrated
Islamic finance which can be implemented in both Islamic microfinance institution and
Islamic banking is more capable, as opposed to when both are separated, of helping
address the income inequality problem in Indonesia.
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