international journal of islamic economics and finance (ijief) vol. 4(si), page 1-18, special issue: islamic banking determinant of indonesian banking profitability: case study dual banking system m. nur faaiz f. achsani international islamic university of malaysia, malaysia corresponding email: mnurfaaiz@gmail.com salina h. kassim international islamic university of malaysia, malaysia, ksalina@iium.edu.my article history received: november 29th, 2020 revised: january 23rd, 2021 accepted: march 6th, 2021 abstract islamic banking is considered as the perfect alternative of the current conventional financial system. however, there is still a huge amount of criticisms in terms of its practice, with many claims that islamic banking and finance simply replaces conventional banking terminology and offers near-identical services to its clients but at a higher cost. the objective of this study is to make a comparative empirical assessment on the determinants of profitability between the islamic and conventional banks in indonesia. the panel data regression is applied to analyze the relationship between profitability indicators and both industry and country level characteristics. as far as the author knows, only few studies compare the profitability of indonesian islamic banks and conventional banks, especially in using econometrics approach. from the empirical result in the combined model, it is known that conventional banks are more profitable than islamic banks. compared to the combined regression, there is no significant difference in terms of significance of the independent variables and its relationship with the dependent variable for the conventional bank regression. conventional banks are more familiar for the community due to the long operation compared to islamic banks. socialization needs to be done with some approach starting from mosques and islamic schools. the development of supporting industries such as halal industry and halal tourism are also important to increase the demand for islamic banking product. beside increasing the demand, efforts to increase the economics of scale is also important with various efforts such as merger or acquisition. jel classification: g18, g21, g28 keywords: conventional banks, islamic banks, panel data, profitability determinants type of paper: research paper @ ijief 2021 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.v4i0.10464 web: https://journal.umy.ac.id/index.php/ijief/article/view/10464 citation: achsani, m. n. f. f., & kassim, s. (2021). determinant of indonesian banking profitability: case study dual banking system. international journal of islamic economics and finance (ijief), 4(si), xx-xx. doi: https://doi.org/10.18196/ijief.v4i0.10464. mailto:mnurfaaiz@gmail.com https://doi.org/10.18196/ijief.v4i0.10464 https://doi.org/10.18196/ijief.v4i0.10464 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v4i0.10464&domain=pdf achsani & kassim │ determinant of indonesian banking profitability: case study dual banking system international journal of islamic economics and finance (ijief), 4(si), 1-18 │ 2 i. introduction 1.1. background the conventional system banking system caused some problems to the economy in general. it is evidenced by the number of financial crisis that happened in the past. the implication of a financial crisis can be felt worldwide. in the case of financial crisis 2007, even lehman brothers holding filed for bankruptcy which is not predicted by everyone since the huge asset they have. the system also creates inequality problem. majority of the growth of global wealth are also going to the rich people while poor got nothing (oxfam, 2018). while in the other side of the world, more than 820 million people are still hungry today. this stat remains virtually unchanged in the past three years (fao, ifad, unicef, wfp, & who, 2019). interest or usury is an overhead charge which does not form part of any factor of production. usury is a tool used by the rich to earn more wealth. (swartz, itumeleng, wankie, jeelabdeen, & kumar, 2013). the dominance of the conventional bank which are operating on the usurybased transactions has ruined the economy worldwide. initiatives has been taken by muslim scholars to empower the shariah rulings in order to overcome the problem. it can be seen from the establishment of the international standard-setting bodies, such as the islamic financial services board (ifsb), accounting and auditing organization for islamic financial institutions (aaoifi) and other organizations. this same spirit also spreads to indonesia in the early 1990s. this great momentum is reflected by the act of the republic of indonesia number 7 of 1992 as the legal statutory as the beginning of a new chapter from single banking system into dual banking system. the first islamic bank in indonesia starts to operate even before the dual banking act take effect. the signature of the establishment bank muamalat indonesia was held in 1991 as a formal recognition from the government relating the presence of the bank. the presence of islamic banking is expected to be accepted by the market easily. according to badan pusat statistik (2010), the amount of muslim in indonesia reached more than 207 million people or about 88% of the total population. the growth in islamic banking is heavily influenced by the number muslim population (imam & kpodar, 2010). achsani & kassim │ determinant of indonesian banking profitability: case study dual banking system international journal of islamic economics and finance (ijief), 4(si), 1-18 │ 3 figure 1. total asset of indonesian bank 2017 – 2019 source: (otoritas jasa keuangan, 2013-2019) however, the size of islamic bank in indonesia reveals the other way. the combination of all islamic banking asset is still lower than the biggest conventional bank in indonesia which can be seen in the figure 1. the asset position should influence the profit of the related bank. larger banks tend to be more successful (hassan, 2018). is conventional bank more profitable than islamic bank in indonesia? it is interesting to see the reason behind the stagnant capitalization of indonesian islamic banks by analyzing the determinants of profitability or some called it as a “5% trap”. numerous studies tried to analyze topic with different conclusions as the result. as far as the author knows, only few studies compare the profitability of islamic banks and conventional banks, especially in indonesia. this study will fill the research gap. it will enrich the literature by considering the uniqueness of islamic banks and compared it with conventional banks in terms of profitability determinants. 1.2. objective this study aims to analyze the impact of internal and macroeconomic variables on the performance of islamic and conventional bank in indonesia during the period from 2011 until 2018. the profitability of banks is examined by implementing bank size, debt ratio, and equity/asset as bank specific while gdp and inflation as macroeconomic conditions. return on asset represents the bank profitability as the dependent variables. the objectives of the study are as follows: 1. to identify the more profitable type of bank in indonesia 2. to analyze and compare the factors that determine the profitability level of conventional and islamic banks in indonesia during period 2011-2018 this study will benefit the management of the banks to maximize their profit. the related parties such as the depositors and borrowers of the bank could year achsani & kassim │ determinant of indonesian banking profitability: case study dual banking system international journal of islamic economics and finance (ijief), 4(si), 1-18 │ 4 gain benefits to understand the inside of the company where their money being utilized. for the government, in order to increase the market share of financial products which is compliant with the shariah principles, the comparison of the variables which drive the profitability of both banking will be important. by referring to this study, the authorities can arrange the proper policy to maximize the profitability of islamic banks. this study is also in line with the objective of national islamic finance committee, to promote the islamic economics. the central bank of indonesia could also benefit from this study due to the involvement of some macroeconomics factor such as gdp and inflation in the regression. the stability of the financial system as one of the objectives of bank indonesia can also be linked with this study because both types of banking, conventional banking and islamic banking is compared. the rest of the paper is organized as follows: section 2 shortly reviews the literature regarding the determinants of banks profitability, while section 3 presents the methodological approach adopted and section 4 the results obtained. finally, the conclusions are drawn in section 5. ii. literature review 2.1. previous studies there are empirical studies that have been studying the determinants of profitability in conventional banks. alexiou and vogiazas (2009) study the profitability determinants of conventional banks in greece. the empirical findings show that majority of the bank-specific determinants were significantly affecting bank performance. the result become even more ambiguous when the macroeconomic factors were considered. in the case of turkey, alper and anbar (2011) study the determinants performance of conventional banks. the empirical findings show that asset size and non-interest income have a significantly positive effect on bank profitability. however, size of credit portfolio and loans under follow-up have a significantly negative impact on bank performance. when it comes to macroeconomic variables, real interest rate is the only variable that affects the performance of the banks. in another study, nouaili, abaoub, and ochi (2015) study the profitability determinants of conventional banks in tunisia. the empirical findings show that quotation, capitalization and privatization effect the performance of the bank positively. meanwhile, bank size, concentration index and efficiency are affecting the performance of the bank negatively. when it comes to the macroeconomic variables, gdp affect the performance positively and inflation affect it negatively. achsani & kassim │ determinant of indonesian banking profitability: case study dual banking system international journal of islamic economics and finance (ijief), 4(si), 1-18 │ 5 there are also empirical studies that have been studying the determinants of profitability in islamic banks. in the case of bahrain islamic banking performance, hidayat and abduh (2012) study the profitability determinants of islamic banks in bahrain. the result shows that lta, leq, and lohe are significantly influence islamic bank’s performance in bahrain. in addition to that, in the case of bahrain islamic bank in selected countries, assets size, capital adequacy, loans to assets and assets management affect the bank performance positively (masood & ashraf, 2012). in addition to that, hasan and ahmed (2019) study the profitability determinants of islamic banks in bangladesh. the result finds that majority of the variables are significantly affect the bank performance. crar and cost-toincome affect the bank performance negatively while liquidity and bank size affect positively. moreover, npi is found affecting roa positively. in the case of bank in indonesia and hongkong, khediri and ben-khediri (2009) suggests that management efficiency and capitalization enhance the performance of the bank. inflation, economic growth and bank concentration is found affecting it positively. alongside studies focusing in the determinant variables of islamic and conventional banks separately, there are also some studies focusing on the determinants of profitability in islamic banks and conventional banks comparatively abduh, omar, and mesic (2013) study the profitability determinants of islamic and conventional banks in malaysia. the results show that only liquidity ratios and macroeconomic condition affect the profit of the bank. the final result under fem shows that types of bank and macroeconomic condition significantly affects bank profitability. this study did not separate islamic and conventional banks in a different model. therefore, the difference of profitability determinants cannot be identified. abduh and issa (2018) study the profitability determinants of islamic and conventional banks in kuwait. the result suggests that credit risk, liquidity and efficiency significantly affecting the profitability on both types. to illustrate the kuwait conventional banking sector, credit risk and operating expenses significantly affect the profitability in a negative relationship. on the contrary, efficient management significantly affects profitability in a positive relationship. when it comes to macroeconomic conditions, inflation has shown a significant and negative impact towards profitability. above all, the crisis represented by a dummy variable has a negative impact upon profitability. similarly, credit risk and liquidity risk has also shown a significant and negative impact upon profitability of kuwait islamic banking sector. moreover, size and capitalization affect the profitability positively. however, indicator of operating efficiency has shown a significant and negative relationship with the profitability. talking of macroeconomics conditions, gdp achsani & kassim │ determinant of indonesian banking profitability: case study dual banking system international journal of islamic economics and finance (ijief), 4(si), 1-18 │ 6 effect the performance of bank positively. in conclusion, the profitability of islamic bank and conventional bank are driven by a different force. ali (2018) study the profitability determinants of islamic and conventional banks in pakistan. the study suggests that liquidity affects the profitability of islamic and conventional bank in the same way. both type of banks did not have a significant relationship with liquidity. in terms of credit risk, either the profitability of islamic or conventional banks are affected significant and negatively. in terms of efficiency and bank size, both islamic and conventional bank are significantly affected the profitability positively. however, when it comes to macroeconomic conditions, both type of banks show a different pattern. for the case of inflation, islamic banks are affected positively while conventional banks are affected negatively. gdp did not affect islamic bank’s profitability but it got a negatively significant relationship with the conventional banks. this study suggests that islamic bank are driven by the same force in the case of internal variable but it is driven by a different force related to the external variables. there is a literature gap in evaluating the profitability of both type of bank in indonesia to be filled by this study. it is proofed by the non-existence of this topic by found by the author. the existing literatures suggest that there are various result relating to the determinant of profitability. the selection of the dependent and the independent variable is also various, enrich the explanation of this topic even further. in terms of comparison of islamic bank and conventional bank, majority of the previous literature suggest that islamic bank and conventional are generally driven by the different force. as far as the author knows, only two studies that suggest that islamic bank and conventional bank are driven by the same force. 2.2. conceptual framework in order to measure performance, there are three main methods used mainly; profitability, efficiency, and productivity. this research paper used profitability approach to measures operating bank performance in indonesia therefore, the research paper used several ratios in order to measure profitability. achsani & kassim │ determinant of indonesian banking profitability: case study dual banking system international journal of islamic economics and finance (ijief), 4(si), 1-18 │ 7 figure 2. conceptual framework of research model source: (abdu, 2015) as we can see in the figure 2, roa is used as the dependent variable in this study. it shows the percentage of profit to total assets. roa was treated as measure of financial performance in the research. numerous papers used roa as to assess the profitability performance such as alexiou and vogiazas (2009). the first internal variable is natural log of total asset. size is used as a proxy in order to capture the cost advantage associated with size. usually, the impact of bank size on profitability is expected to be positive. numerous papers used size ratio as to assess the profitability performance such as alper and anbar (2011). the next internal variable is liquidity ratio. it is calculated by total loans/total asset, a percentage of the bank’s asset attached to loans. higher percentage indicates lower liquidity. numerous papers used liquidity ratio as to assess the profitability performance such as abduh, omar, and mesic (2013). the ratio of capital strength, calculated by total equity/total asset, is a percentage of a bank’s risk weighted credit exposure. it also referred to sufficient amount of equity absorbed by any shocks that the bank might experience. numerous papers used capital strength as to assess the profitability performance such as (ali, 2018). in this research, capital strength is expected to have a positive impact on the bank’s profitability. when it comes to macroeconomic variables, gdp and inflation is used in this study. numerous papers used gdp as to assess the profitability performance such as masood and ashraf (2012) and tariq, usman, mir, aman. in terms of type of bank, the dummy variable suggests a statistically significant result at 1% with a negative relationship. in other word, islamic banks (dummy = 1) are less profitable compared to conventional banks (dummy = 0) in the period studied. achsani & kassim │ determinant of indonesian banking profitability: case study dual banking system international journal of islamic economics and finance (ijief), 4(si), 1-18 │ 8 iii. methodology 3.1. data the data consists of nine islamic banks and sixty conventional banks from 2011 until 2018 (see appendix a). the study excludes the rural banks despite the presence of islamic rural banks. in order to be included, there are two conditions; the bank must be operating in indonesia and should have complete data which will be used as the variables within the period of study from 2011 to 2018. the data for bank specific variable is mainly taken from the annual report in each bank and the data for the macroeconomic variables are taken from world bank. 3.2. method in econometrics, there are three types of data; cross section, time series, and panel data. panel data is a combination of time series data and cross section data. it can be said that panel data is the same parameters observed in the cross-section data but in certain period. this literature is using static panel data as the method to achieve the research objective. according to (gujarati, 2003), the difference of panel data regression can be seen in the double subscript in every variable. the equation of static panel data is written below: 𝒀𝒊𝒕 = 𝛽𝟏𝒊 + 𝛽𝟐𝑿𝟐𝒊𝒕 + 𝛽𝟑𝑿𝟑𝒊𝒕 + 𝒖𝒊𝒕 3.3. model development the main approaches to the fitting of model usually are the fixed effect model and the random effect model. this is because there is a problem in the assumption of pooled panel data regression. the intercept and slope of the regression are assumed constant among individuals and time that is not suitable with the purpose of the panel data regression usage. fixed effect model is used when the individual effect and the time effect is correlated or when the pattern is not random. according to this assumption, error component from individual effect and time effect can be a part of the intercept. in order to do the one-way error form. random effect model is used when the individual effect and the time effect is not correlated or when the pattern is random. with this condition, error component of the individual effect and the time effect is included as an error. achsani & kassim │ determinant of indonesian banking profitability: case study dual banking system international journal of islamic economics and finance (ijief), 4(si), 1-18 │ 9 table 1. data and variables variables description source dependent variables roa return on asset annual report/ojk independent (internal) size total asset annual report/ojk liq total loans/total asset annual report/ojk eqta total equity/total asset annual report/ojk dummy equal 1 if bank is islamic or 0 otherwise annual report/ojk independent (external) inf inflation rate world bank gdp gross domestic product world bank to reflect the variables described in the table 1, the regression is formulated as follows: 𝑅𝑂𝐴𝑗,𝑡 = β0 + β1𝑆𝑖𝑧𝑒𝑗,𝑡 + β2𝐿𝐼𝑄𝑗,𝑡 + β3eqta𝑗,𝑡 + β4gdp𝑗,𝑡 + β5𝐼𝑁𝐹𝑗,𝑡 + β6𝐷𝑢𝑚𝑚𝑦 + ԑ𝑗,𝑡……………………………………………………………………(1) 𝑅𝑂𝐴𝑗,𝑡 = β0 + β1𝑆𝑖𝑧𝑒𝑗,𝑡 + β2𝐿𝐼𝑄𝑗,𝑡 + β3eqta𝑗,𝑡 + β4gdp𝑗,𝑡 + β5𝐼𝑁𝐹𝑗,𝑡 + ԑ𝑗,𝑡…………………………………………………………...………………………(2) in the first equation known as the combined regression, relationship between the dependent variables, roaj,t (return on asset j the bank in period t derived) with the independent variables are tested in a combined model. size is the natural log of total asset. liqj,t is total loan divided by total asset which measure the liquidity j the bank in period i derived. eqtaj,t is equity divided by total asset which used as proxy for capital strength j the bank in period t derived. dummy is used to distinguish the islamic bank and conventional banks, where the dummy = 1 refers to islamic banks and dummy = 0 refers to conventional banks. furthermore, in order to isolate the effect of bank’s characteristic on profitability, growth of real gdp and inflation is included in the model as an external determinant. this model is generated to find out whether the type of the bank affects the probability of the bank, represented by the significance of the dummy variable. in the separated model, we are separating the data based on the type of the bank. there will be a model for islamic banks and one for conventional banks. these models are produced to see the effects of these determinants on profitability for both islamic banking as well as conventional banking sectors. in other word, we can analyze whether the profitability of conventional banks and islamic bank in indonesia are driven by the same force. due to the achsani & kassim │ determinant of indonesian banking profitability: case study dual banking system international journal of islamic economics and finance (ijief), 4(si), 1-18 │ 10 separated model, a dummy variable is no longer needed. the separated model refers to the model of abduh and issa (2018). iv. results and analysis 4.1. results the aim of this section is to give an overview analysis for the study in terms of the scope of the data and variables that have been used for assessments. table 2 summaries the descriptive statistics for variables. they are illustrated by its mean, median, minimum, maximum, and standard deviation values. in the table 2, the figures of the variables are expressed in forms of ratios, which will narrow the dispersion that could happen due to the huge difference in assets and loans (financing) banks. however, it can’t derive a concrete conclusion solely based on descriptive statistics. thus, in this case, factors such as credit risk is subject to many factors such as size, the bank’s risk strategy (adverse risk or otherwise). therefore, this part will be limited to describing the data by summarizing, organizing, and simplifying it. thus, it has to picture the data on the data used in this study clearly. the interesting part in this table is the high standard deviation for asset, even higher than its mean. we can interpret it as the deviation of the asset data is not really good.it indicates some outliers in the asset data. this pictures the conventional bank domination in the indonesian banking industry which can be seen in first chapter of this study. roa is one of profitability indicators. it shows how well the bank utilizes their assets to generate returns. table 2. shows average roa 0.7763% with a minimum of -10.77% and maximum 6.93%. in terms of size of the bank represented by asset, banks have an average of of rp. 71038.2 billion with minimum of rp. 334.22 billion and maximum of rp. 1236322.9 billion. in terms of capital strength represented by equity/asset ratio; the average is 0.16302, the minimum is -0.0004, and maximum is 0.7563408. table 2. descriptive statistics and analysis of variables mean median max min standard deviation roa (%) 0.7763 0.88 6.93 -10.77 1.84 asset (billion rp.) 71038.2 15158 1236322.9 334.22 164998.81 equity/asset 0.16302 0.1426 0.7563408 -0.0004 0.09 loan/asset 0.64195 0.6705 0.8518862 0.2026 0.11 gdp growth (%) 5.36398 5.1193 6.1697842 4.8763 0.46 inflation (%) 4.91738 4.8178 6.4125133 3.1983 1.28 achsani & kassim │ determinant of indonesian banking profitability: case study dual banking system international journal of islamic economics and finance (ijief), 4(si), 1-18 │ 11 in terms of liquidity represented by loan/asset ratio; the average is 0.64195, the minimum is 0.2026 and maximum is 0.8518862. in terms of gdp growth, banks have an average of 5.36398 % with minimum of 6.1697842 % and maximum of 4.8763 %. in terms of inflation, banks have an average of 4.91738 % with minimum of 3.1983% and maximum of 6.4125133 %. in the panel data regression, there are a few econometrics model such as pooled least square, fixed effect model, and random effect model. some tests need to be done to decide the best model used for the study. chow test is used to decide either pls or fem is used and hausman test is used to decide either fem or rem is used. on the table 3, we can see that the chi-square probability from chow test is less than 2.2e−16 and the information relating to the alternative hypothesis is showing significant effects. it means that the best model that needs to be chosen according to the chow test is fem. according to the hausmann test, model rem is better than the fem. because the value is 0.8658 or more than 0.05. the test to see the presence of multicollinearity is by looking at the pearson correlation matrix using eviews 9 software. it can be seen in table 4, the result of pearson correlation matrix shows that the correlation coefficients among independent variables are low with less than +0.8 or -0.8, suggesting that a serious collinearity problem is unlikely. table 3. result of best model choice for combined regression best model test chi-square probability decision chow test p-value < 2.2e-16 alternative hypothesis: significant effects fem hausman test p-value = 0.8658 alternative hypothesis: one model is inconsistent rem source: r studio table 4. pearson correlation matrix loan_per_ asset lnasset inflation gdp equity_per_ asset dummy loan_per_asset 1.000000 0.080549 0.059847 -0.069449 -0.117208 0.189085 lnasset 0.080549 1.000000 -0.074751 -0.160899 -0.266362 -0.093269 inflation 0.059847 -0.074751 1.000000 0.021979 -0.062680 8.17e-17 gdp -0.069449 -0.160899 0.021979 1.000000 -0.064375 7.70e-18 equity_per_asset -0.117208 -0.266362 -0.062680 -0.064375 1.000000 -0.172943 dummy 0.189085 -0.093269 8.17e-17 7.70e-18 -0.172943 1.000000 source: eviews 9 achsani & kassim │ determinant of indonesian banking profitability: case study dual banking system international journal of islamic economics and finance (ijief), 4(si), 1-18 │ 12 table 5. summary of random effect model regression for combined regression variable coefficient std. error t-statistics prob c -7.884481 1.134213 -6.951502 0.0000*** asset 0.378715 0.058865 6.433657 0.0000*** loan/asset -0.969539 0.646748 -1.499099 0.1344 equity/asset 4.116908 0.849638 4.845482 0.0000*** dummy -0.548319 0.312284 -1.755837 0.0797* gdp 0.973696 0.104760 9.294497 0.0000*** inflation 0.133337 0.035729 3.731932 0.0002*** r-squared 0.186602 adjusted r-squared 0.177647 f-statistic 20.83812 durbin-watson stat 1.602560 prob(fstatistic) 0.000000 note: * significant at 10%, ** significant at 5%, *** significant at 1% source: eviews 9 the size as represented by bank asset reveals a positive relationship in the model and is statistically significant at 1%. this result is in line with the previous study such as ali (2018). the result implies that when the size is large enough, banks will earn more through their equity and asset as well. a proxy of capital strength has shown a significantly positive relationship with the profitability at 1%, which explain that banks with stronger capital position is going to generate more profit compared to banks with weaker capital position. the liquidity ratio in the random effect model did not significantly affect the profitability. the same result can also be found in other studies such as abduh and issa (2018). in terms of the macroeconomic conditions, the result shows a positive relationship with significantly affecting profitability at 1% for either gdp or inflation. the same result can also be found in other studies, such as abduh, omar, and mesic (2013) and alexiou and vogiazas (2009). in terms of inflation, this could be ascribed to the ability of management to adequately, though not fully, forecast future inflation, which in turn implies an appropriate adjustment of interest rates to achieve higher profits. in terms of gdp, the stronger economic condition of a country, in this case indonesia, the more profitable the bank will be. in terms of type of bank, the dummy variable suggests a statistically significant result at 1% with a negative relationship. in other word, islamic banks (dummy = 1) are less profitable compared to conventional banks (dummy = 0) in the period studied. comparing with conventional banks that start its business before the independence of indonesia, islamic bank just started its business in 1991. that caused the advantage in capital position for conventional banks. achsani & kassim │ determinant of indonesian banking profitability: case study dual banking system international journal of islamic economics and finance (ijief), 4(si), 1-18 │ 13 due to the significance of the dummy variable in the combined model, it is necessary to run a separated regression in order to see the effects of these determinants on profitability for both islamic banking as well as conventional banking sectors. according to hausman test in table 6, either regression for islamic banks or regression for conventional banks preferred the random effect model approach. in this approach, it is assumed that nine islamic banks and 60 conventional have the same intercept. table 6. result of best model choice for separated model best model test chi-square probability decision chow test islamic banks p-value = 0.01424 fem conventional banks p-value < 2.2e-16 fem hausman test islamic banks p-value = 0.7333 rem conventional banks p-value = 0.209 rem table 7. summary of random effect model regression for islamic banks regression variable coefficient std. error z-value prob c -13.9289 3.93816 -3.5369 0.000405*** asset 0.70638 0.21442 3.2943 0.000987*** loan/asset -5.13619 2.43239 -2.1116 0.0 34722** equity/asset 15.54231 3.93592 3.9488 7.85e-05*** gdp 1.57843 0.40369 3.91 9.23e-05*** inflation 0.2849 0.14726 1.9346 0.053035* r-squared 0.36052 adjusted r-squared 0.31208 f-statistic 37.2094 durbin-watson stat 1.602560 prob(fstatistic) 5.4375e-07 table 8. summary of random effect model regression for conventional banks regression variable coefficient std. error z-value prob c -7.21612 1.154563 -6.2501 4.10e-10*** asset 0.360197 0.061953 5.814 6.10e-09*** loan/asset -0.08522 0.65375 -0.1304 0.896284 equity/asset 2.35668 0.825761 2.8539 0.004318*** gdp 0.850056 0.099729 8.5236 2.20e-16*** inflation 0.115496 0.033351 3.4631 0.000534*** r-squared 0.15307 adjusted r-squared 0.14413 f-statistic 85.6653 durbin-watson stat 1.602560 prob(fstatistic) 2.22e-16 note: * significant at 10%, ** significant at 5%, *** significant at 1% achsani & kassim │ determinant of indonesian banking profitability: case study dual banking system international journal of islamic economics and finance (ijief), 4(si), 1-18 │ 14 compared to combined regression, the difference relies on the effect of liquidity ratio for the islamic bank regression. according to table 7, the liquidity ratio affects the profitability significantly with a negative relationship. this result is in line with alper and anbar (2011) and indicates that credit portfolio volume and weak asset quality impact negatively to the profit. this can also be interpreted islamic banks in indonesia are too liquid. banks have much fund available to be disbursed but less demand by the customer. high liquidity will cause inefficiency because holding too much liquidity will increase the cost and soon decrease the profitability. for the conventional bank regression, there is no difference compared to the combined regression which can be seen in table 8. 4.3. analysis based on the result of dummy variable in the combined model, conventional banks are more profitable in indonesia. one of the reasons behind this is the presence of islamic bank in indonesia is still young compared to the conventional banks. this leads to a low level of awareness of shariah compliant product, especially financial product in the mind of indonesian people. despite being the country with the biggest amount of moslem in the world, some people are still uninterested to shift to islamic banks. the idea of conventional banking is more familiar than banking that derives the values of shariah. from the perspective of economic scale, islamic banks still lags behind conventional banks. it could be said that if all the asset of islamic banks are combined, it is still lower than the asset of the biggest conventional bank in indonesia. this leads to the low capability of expansion for islamic bank to widen their business. from the empirical result in the combined model, it is known that bank size affect profitability positively. when the size of the bank is big, banks will profit from equity and asset. a proxy of capital strength has shown a significantly positive relationship which explain that banks with stronger capital position is going to generate more profit compared to banks with weaker capital position. the liquidity ratio didn’t significantly affect the profitability. in terms of the macroeconomic conditions, the result shows a positive relationship with significantly affecting profitability for either gdp or inflation. in terms of inflation, the ability of the management to predictthe value of expected inflation increase the profit. in terms of gdp, the stronger economic condition of a country, in this case indonesia, the more profitable the bank will be. compared to combined regression, there is no difference in terms of significance of the independent variables and its relationship with the dependent variable for the conventional bank regression. the profitability of conventional banks and islamic bank in indonesia are driven by the same force. achsani & kassim │ determinant of indonesian banking profitability: case study dual banking system international journal of islamic economics and finance (ijief), 4(si), 1-18 │ 15 it can be seen by the similarity of the independent variables affecting the dependent variable. only liquidity in the islamic bank regression shows a different influence. one of the interesting part to be highlighted is that the liquidity ratio affects the profitability significantly with a negative relationship in the islamic bank regression. this can be interpreted islamic banks in indonesia are too liquid. banks have much fund available to be disbursed but less demand by the customer. high liquidity will cause inefficiency because holding too much liquidity will increase the cost and soon decrease the profitability. the similarity of profitability may be due to the contracts used by islamic banks are similar to the contracts used by conventional banks. debtbased contract are dominantly used by conventional banks. just like islamic banks in other countries, islamic banks in indonesia are also affected by “murabaha syndrome”, where financing are concentrated on mark up financing or debt like financing (miah and suzuki, 2019). ideally, islamic bank should practice profit-loss sharing based financing. this kind of contract is the opposite of debt-based contracts because of the risk sharing characteristic. however, islamic banks to treat the depositor’s money as a liability creates a dilemma to use the pls based financing due to the high risk. both types of banks are companies that competes one another to reach the same objective, profit maximization. v. conclusion and recommendation 5.1. conclusion the empirical result in the separated model, there is no difference in terms of the variables that affect the dependent variable for conventional bank regression compared to the combined regression. for the islamic bank regression, the difference only relies on the effect of liquidity ratio. in this regression, the liquidity ratio affects the profitability significantly with a negative relationship. based on the result of dummy variable in the combined model, conventional banks are more profitable in indonesia. the profitability of conventional banks and islamic bank in indonesia are driven by the same force. independent variables that affect islamic banking profitability behave similarly to independent variables that affect conventional banking profitability. only liquidity in the islamic bank regression shows a different influence. achsani & kassim │ determinant of indonesian banking profitability: case study dual banking system international journal of islamic economics and finance (ijief), 4(si), 1-18 │ 16 5.2. recommendation the findings generate relevant policy implications. relating to more profitable of conventional bank compared to islamic bank in indonesia, low literacy of islamic bank is the main problem. the idea of islamic bank is not familiar for people of indonesia. since islamic bank is still young, socialization about the idea of islamic banking needs to be optimized through various attempts; starting from islamic related institutions such as mosques and islamic universities. the socialization needs to be focused on the advantages, patriotic histories, and success stories related to islamic banking in indonesia. the low literacy of islamic banking cause low demands for their products and services. a top-down approach could be a solution for it by creating a law to make an obligation for the government to use islamic financial product in the region where islamic values are practiced in the daily life. the development of supporting industries such as halal industry and halal tourism are also important to generate the market. the synergy of halal industry and islamic banking is also needed in the curriculum in the educational system. halal industry with its the economic calculation in the future is proofed to attract the attention of millennials. the curriculum of islamic economic in universities also needs to attract the next generations. approaches in the curriculum such as halal-haram matters need to be replaced by approaches like financial technology and entrepreneurship. after increasing the demand of islamic banking services, the economic of scale needs to be supported by efforts like merger or acquisition of islamic banks to compete the conventional banks. a strong capital requirement is important for a great islamic economic ecosystem. relating to the similar explaining factors of the profitability in both type of banks, there are relevant policy implications as well. taking consideration of profit-loss sharing contracts, islamic banks should implement non-financing activities in another way to maximize their profit. relevant authorities should create the supportive platform for the industry, following the steps of malaysian ifsa 2013 where attentions are heavily focused on investment account rather than current account/saving account. for the further research, this topic can be done with another method such as dynamic panel to enrich the literature analysis. with a pandemic condition hitting the whole world in 2020, it is also recommended to include the pandemic crisis as an element to be analyzed in the future. achsani & kassim │ determinant of indonesian banking profitability: case study dual banking system international journal of islamic economics and finance (ijief), 4(si), 1-18 │ 17 references abdu, a. 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(2020, 2 11). gini index (world bank estimate) indonesia. retrieved from https://data.worldbank.org/indicator/si.pov.gini?end=2017&locat ions=id&start=1984&view=chart international journal of islamic economics and finance (ijief) vol. 4 (1), page 79-100, january 2021 factors determining the successful performance of baitul maal wat tamwil in wonosobo qosdan dawami international islamic university malaysia, malaysia corresponding email: qosdan.dawami@live.iium.edu.my dzuljastri abdul razak international islamic university malaysia, malaysia, dzuljastri@iium.edu.my hamdino hamdan international islamic university malaysia, malaysia, hamdino@iium.edu.my article history received: november 30th, 2020 revised: january 6th, 2021 accepted: january 21st, 2021 abstract notwithstanding baitul maal wat tamwil (bmt) has spread tremendously over the past three decades in indonesia, some of them faced various obstacles that hamper their effectiveness and sustainability. while some of others sustained and developed well, even in the economic crisis conditions. hence, this study aims to investigate the factors that determine the successful performance of bmt. this study is a field research with triangulation as a mixed method approach through semi-structured interviews and questionnaires. whereby the empirical data were collected by means of conducting semistructured interviews with 3 managers of the bmts and administering questionnaires to 285 employees of the bmts. this study examined five factors that influence the bmt performance, namely the capital structure of funding, the governance of the bmt, the human resource adequacy, the product innovation and the repayment of financing products. the results pointed that among the five selected factors, only three factors had positive and significant influence on the successful performance of the bmt, they are the capital structure of funding, the human resource adequacy and the product innovation. the result of this study will also assist policy makers and the bmt managers in further improving the effectiveness and sustainability of the bmt in indonesia. keywords: baitul maal wat tamwil, effectiveness, sustainability, triangulation and indonesia jel classification: a19, b23, c39, c51 type of paper: research paper @ ijief 2021 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.v4i1.10484 web: https://journal.umy.ac.id/index.php/ijief/article/view/10484 citation: dawami, q., razak, d. a., &hamdan, h. (2021) factors determining the successful performance of baitul maal wat tamwil in wonosobo. international journal of islamic economics and finance (ijief), 4(1), 79-100. doi: https://doi.org/10.18196/ijief.v4i1.10484 mailto:qosdan.dawami@live.iium.edu.my mailto:dzuljastri@iium.edu.my mailto:hamdino@iium.edu.my https://doi.org/10.18196/ijief.v4i1.10484 https://doi.org/10.18196/ijief.v4i1.10484 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v4i1.10484&domain=pdf dawami, razak, & hamdan │ factors determining the successful performance of baitul maal wat tamwil in wonosobo international journal of islamic economics and finance (ijief), 4(1), 79-100 │ 80 i. introduction 1.1 background currently, microfinance institutions (mfis) are experiencing an incredible growth worldwide. the key success story of microfinance is an innovative lending scheme which suits the condition of the poor and low income people such as flexible procedures, group-based model, collateral free along with a package of beneficial business skill development (obaidullah, 2008). those innovative loan schemes fill the gaps of traditional banking system which is unsuitable for illiterate poor and microentrepreneurs. moreover, financial innovation and flexibility are an essential element of loan schemes to achieve a triple bottom-line (visconti, 2016). despite this success story has been documented, some poor people and microentrepreneurs living in muslim-majority countries do not utilize financial products and services of conventional microfinance because of prohibited elements in them such as riba, gharar and maysir (rahman, al smady, & kazemian, 2015). hence, the emergence of islamic microfinance institutions is a great bounty for muslim microentrepreneurs to be able to obtain affordable financial products and services that comply shariah principles. accordingly, the success of islamic microfinance in responding to unmet affordable islamic financial products has to lead to the emergence of new market niches. bank of khartoum (2016) further emphasized that islamic microfinance has great potential to step higher level into a leading industry worldwide, whereby its annual growth further enhanced about 20% during the 2015 – 2018 or it records double-digit growth rate of development. in indonesia, the revival of islamic microfinance movement coincides with the development of islamic finance. the basic concept of cooperative-based islamic microfinance model was first implemented through the establishment of bmt teknosa in 1984. this concept developed and spread well with the establishment of the leading bmts such as bmt tamzis and bmt beringharjo in the early 1990s. it experienced tremendous development since 1995, whereby the total number of bmts accounts about 5500 units by the end of 2015 (yuniar, 2015). therefore, the bmts have has developed tremendously in the last three decades throughout indonesia. moreover, the number of microenterprises still dominates the entrepreneurship sector in indonesia. ascarya & rahmawati (2018) explained that despite microenterprises dominate the country’s entrepreneurship with a total amount of more than 90 percent of all businesses, they always face a lack of financial product and services access. then, the efforts that support dawami, razak, & hamdan │ factors determining the successful performance of baitul maal wat tamwil in wonosobo international journal of islamic economics and finance (ijief), 4(1), 79-100 │ 81 the sustainability and outreach of bmts are a crucial endeavour because the bmt is considered as the leading islamic microfinance model to further enhance and empower microenterprises in indonesia. however, some of bmts are facing several obstacles that hamper their effectiveness and sustainability. consequently, they were ended up or bankrupt due to their inability to overcome the issues that they are currently facing in the operation (hamzah, rusby, & hamzah, 2013). there were some major challenges that hampered the sustainability of the bmts, but the limited capital structure of funding and inadequate human resources were the most challenging problems faced (nasution & ahmed, 2015). besides, most of the bmts also deal with limited regulation and supervision as they are regulated and supervised under the ministry of cooperatives, small and medium enterprise. meanwhile, adnan, widarjono, & anto (2009) ascertained several bmts have more resilience and endurance toward the fluctuation of economic and political situations. those bmts are able to further enhance their sustainability and outreach throughout indonesia by establishing branches in different cities. in fact, they also run smoothly even if the country is hit by an economic crisis. moreover, they are able to resolve the social market failure, with a double-bottom mission, without relying on subsidized funds (knks, 2019). in this respect, they have greater outreach and self-sustainability by absorbing more employments and assisting more microentrepreneurs. notwithstanding, there is a huge gap between the performance of the failed bmts and the successful bmts, as well as the gap of the large demand of microenterprises and the limited capability of islamic microfinance in indonesia. pinz & helmig (2015) also further emphasized that the existing literature on the successful performance factors of microfinance remains relatively scarce. 1.2 objective the objective of this study is to examine the determinant of the successful performance of the bmts using triangulation research methods and analysis. the primary quantitative data were collected via distributing questionnaires and analyzed using spss version 24.0, whereas the primary qualitative data were collected via semi-structured interviews. moreover, the result of study also provided some recommendations to policy makers and the bmt managers in order to further improve the effectiveness and sustainability of the bmts in indonesia. dawami, razak, & hamdan │ factors determining the successful performance of baitul maal wat tamwil in wonosobo international journal of islamic economics and finance (ijief), 4(1), 79-100 │ 82 the paper is further organized as follows: section 2 elaborates and theoretical literature on the success factors of microfinance and the conceptual framework of the study. section 3 describes the research methodology of the study. section 4 exhibits the data analysis results from the both questionnaire and semi-structured interview data. section 5 presents the conclusion and recommendation of this study. ii. literature review 2.1 background of theory zeller & meyer (1995) explained that the main conceptual framework of microfinance’s successful performance was known as the triangle of microfinance, namely financial sustainability, outreach range and the welfare impact. ledgerwood (2000) also ascertained that financial sustainability and substantial outreach are the basic objectives of the microfinance since its establishment. whereby microfinance movement was initiated by a civil society movement in helping and empowering the poor and needy people. however, achieving the triangle of microfinance simultaneously is so far unmet and remaining troublesome since microfinance still faces the adverse effect issues (morduch, 1999). in addition, ascarya, rahmawati, & tanjung (2016) also emphasized that each pillar of the microfinance triangle raises the mission drift issue as it is mostly though for microfinance institutions to achieve all objectives at the same time. meanwhile, chaves & gonzalez-vega (1996) pointed that the concept of successful performance of mfis is characterized by good quality services, precise loan portfolios and deposit mobilization, reaching the bottom line of society and profitable institutions. adnan et al. (2009) further explained that the successful performance of microfinance is a complex conceptual framework and measured using diverse indicators growth, profitability, financial statement analysis, growth in total asset, number of depositors or total outstanding projects being financed. on the other hand, ascarya et al. (2016) emphasized that the concept of microfinance is not a new notion in islam, whereby islamic teachings pay great attention to poverty alleviation and social welfare improvement since fifteen centuries ago by obligating zakah and prohibiting the circulation of wealth only among the rich people. islamic microfinance offers a better alternative microfinance model which integrates social and financial inclusion, known as holistic financial inclusion (hfi). dawami, razak, & hamdan │ factors determining the successful performance of baitul maal wat tamwil in wonosobo international journal of islamic economics and finance (ijief), 4(1), 79-100 │ 83 furthermore, ascarya (2014) also ascertained that islamic microfinance applied hfi by establishing two main divisions, namely the baitul maal division that covers social-demographic programs and the baitul tamwil division that manages financing programs. hence, an islamic microfinance model provides not only islamic financial products and services, but also covers socialdevelopment products such as healthcare, social services and education. 2.2 previous studies generally, there are a number of studies on the problems and challenges that faced by both conventional and islamic microfinance. however, the number of existing literatures on the determinants of the successful performance of microfinance is relatively limited, especially in the context of islamic microfinance. some of those studies are, among others, adnan et al. (2009), ascarya ,(2014), ascarya et al. (2016), ismanto (2015), zubair (2016). the important determinants of the best bmts’ performance in indonesia, according to adnan et al. (2009) include the management salary rate, the staff qualifications, product attributes and the staff management skills. they also pointed that the number of products and working hours have a negative relationship with the successful performance of the bmt. meanwhile, ascarya (2014) emphasized that the main sustainability indicators of conventional and islamic microfinance are aid independence, coverage, savings program, profitability, risk mitigation, social services, pick-up services and average financing. this study further exhibited that those main sustainable indicators are embedded more in an islamic microfinance model than in a conventional microfinance model. moreover, ascarya et al. (2016) conducted the study regarding the objectives, aspects and elements of holistic financial inclusion on maqasid shariah through baitul maal wat tamwil. they mentioned that the most influencing hfi performance factors sequentially, namely funding independent, consumption smoothing, microfinancing, income increase, easy access, a mindset change, empowered, micro saving and basic needs fulfilment. on the other hand, ismanto (2015) investigated the factors influencing the sustainability of bmt in pekalongan by utilizing four independent factors, namely regulation, supervision, institutional capacity and macroeconomic conditions. however, the regression analysis exhibited that all four selected independent variables determined insignificantly the sustainability of the bmt. dawami, razak, & hamdan │ factors determining the successful performance of baitul maal wat tamwil in wonosobo international journal of islamic economics and finance (ijief), 4(1), 79-100 │ 84 in addition, zubair (2016) further conducted the study on factors determining sustainability of bmt in yogyakarta. the study mentioned that there are five factors determined significantly the sustainability of bmt, namely regulation, supervision, structure of institutions, quality of human resources and capital respectively. accordingly, the recent literatures focusing on the real determinants of the successful performance of bmt are relatively limited and scarce. indeed, the successful performance factors are relatively different from one study to another or a lack of consensus. thus, based on the above previous studies and the addition of product innovation and repayment of financing products, this study utilizes five selected independent factors in determining the successful performance of bmt, namely the capital structure of funding, the governance of the bmt, the human resource adequacy, the product innovation, the repayment of financing products. 2.3 conceptual framework the findings from the background of theory and previous studies stipulate the main elements for constructing the conceptual framework of this study. the conceptual framework refers to a model of how a theory relates various identified variables includes dependent and independent variables as a logical function (sekaran, 2003). with the help of this conceptual framework, the hypothesis of the study can be postulated and examined whether the concept developed is valid or invalid and significant or insignificant. the conceptual framework of this study can be seen in figure 1. figure 1. conceptual framework source: author’s own work (2020) the successful performance of the bmt the capital structure of funding the governance of the bmt the human resource adequacy the product innovation h1 h2 h3 h4 the repayment of financing products h5 dawami, razak, & hamdan │ factors determining the successful performance of baitul maal wat tamwil in wonosobo international journal of islamic economics and finance (ijief), 4(1), 79-100 │ 85 2.4 hypothesis development 2.4.1 capital structure of funding capital structure of funding is playing an important role in achieving the sustainability of a business entity’s performance including imfi performance. in fact, the most challenging issues faced islamic microfinance are inadequate capital structure and limited access to sources of funds (rahman et al., 2015). furthermore, zubair (2016) discovered from his study that the capital aspects has been proven to have a positive and significant effect on the sustainability of bmts. in addition, ahmed (2002) further ascertained that stability and sustainability of microfinance operations are determined significantly by adequate internal or external funds. besides, the main capital structure of bmt funds is the savings of the members which are relatively small, limited and high liquidity (nasution & ahmed, 2015). therefore, capital structure determines the success or failure performance of bmt. h1: capital structure of funding determines significantly the successful performance of the bmt 2.4.2 governance of the bmt governance of the bmt is also playing a significant role in determining the mfi performance (hartarska, 2005). this aspect protects the bmt members and the institution from bankruptcy that caused by capital structure mismanagement. in this respect, good governance provides and ensures principles, regulations and guidelines of microfinances are well executed (zubair, 2016). furthermore, ledgerwood (2000) also emphasized that good governance generates successful management characteristic such as integrity, good control mechanism, transparency and disclosure. hence, the good governance determines whether the bmt performance is good or not. h2: governance of the bmt determines significantly the successful performance of the bmt in indonesia 2.4.3 human resource adequacy an adequate human resource of an organization is pivotal element that ensures the effectiveness and sustainability of mfis. the adequacy of human resource is influenced by the qualification, working experience and training frequency of the employees (zubair, 2016). furthermore, adnan et al. (2009) dawami, razak, & hamdan │ factors determining the successful performance of baitul maal wat tamwil in wonosobo international journal of islamic economics and finance (ijief), 4(1), 79-100 │ 86 found in their study that education level, working experience and skill of employees determined significantly the best performance of the best bmt. according to haneef, pramanik, mohammed, amin, & muhammad (2015), the development and the sustainability of microfinance was disturbed and constrained by three main issues such as high cost of operation, high interest rate and inadequate human resources. besides, they also ascertained that there was a positive relationship between islamic microfinance and human resource development. therefore, the human resource adequacy greatly affects the performance of the bmt. h3: human resource adequacy determines significantly on the successful performance of the bmt in indonesia 2.4.4 product innovation product innovation determines the sustainability and outreach of the bmt. islamic products innovation attracts the attention of muslim microentrepreneurs to become clients of imfis (karim, tarazi, & reille, 2008). the reason is imfs not only provides affordable financial products and services, but also resolves the issue of riba, gharar and maysir to the poor and microentrepreneur muslims (obaidullah & khan, 2008). moreover, ledgerwood (2000) emphasized that the product innovation is very important for ensuring the financial stability of the microfinance as it generates higher financial liquidity and minimizes the adverse selection and moral hazard. besides, adnan et al. (2009) discovered that product innovation affects significantly the performance of the best bmt. therefore, the innovation of products contributed a role in ensuring the financial stability and sustainability of microfinance. h4: innovation of products and services determines significantly the successful performance of the bmt in indonesia 2.4.5 repayment of financing products repayment of financing products is the key determinant for transforming the poor and non-bankable microentrepreneurs into bankable ones. morduch (1999) ascertained that a new innovative repayment program of microfinance becomes the key of their successes, whereby innovation of products was able to cater the need of the poor such as group-lending mechanism. dawami, razak, & hamdan │ factors determining the successful performance of baitul maal wat tamwil in wonosobo international journal of islamic economics and finance (ijief), 4(1), 79-100 │ 87 furthermore, visconti (2016) found in his study that the most influencing factor of microfinance performance in competing with the banking industry is innovative installments which adjusts the poor and microentrepreneur merits such as flexible installments, peer pressure repayments, small and short repayment installments. hence, the repayment instalments mechanism plays an important role in determining the successful performance of the bmt. h5: repayment of financing mechanism determines significantly the successful performance of the bmt in indonesia iii. methodology 3.1 data this study only covers the research in all bmts in wonosobo due to several reasons such as covid-19 pandemic, budget and time constraints. thus, the population of the study is the entire bmts staffs in wonosobo which accounts between 900-1000 staffs. this study also uses slovin’s sampling method in determining the target sample size. the formula of slovin’s sampling methods can be written as follows: 𝑛 = 𝑁 1 + 𝑁(𝑒)2 where n, n and e refer to sample size, population size and sampling error or level of precision (5%) respectively. by using the above formula, this study ascertains that the sample size of the study is 285 respondents. out of 285 distributed questionnaires, there are only 205 questionnaires were returned and completed successfully. hence, the response rate of the data was about 72 percent. for data collection purposes, an administered questionnaire was organized into two sections. the first sections collected the demographic information of respondents such as gender, marital status, age, length of work, education level, specialization of education and job titles. the second section focused on the respondents’ assessment toward the factors determining the successful performance of the bmt. the factors are assessed using a five-point likert scale ranging from 1 (strongly disagree) to 5 (strongly agree). this section consists of 32 questions that adapted from the previous studies on the successful performance determinants of bmt (ismanto, 2015; zubair, 2016). the data collection was executed in indonesian language and conducted from march to july 2020. meanwhile, the primary qualitative data were collected through conducting semi-structured interview with 3 managers of different bmts, they are bmt dawami, razak, & hamdan │ factors determining the successful performance of baitul maal wat tamwil in wonosobo international journal of islamic economics and finance (ijief), 4(1), 79-100 │ 88 tamzis, bmt bina surya mandiri and bmt al-hikmah. the face-to-face interviews were conducted in indonesia language and performed from june to august 2020. hereinafter, the first analysis was a demographic analysis of the respondents using spss version 24.0, the analysis of the respondents’ demographic was elaborated as follows: firstly, gender information reflected that 107 respondents were male, and 98 respondents were female. secondly, marital status information indicated that 30 respondents were single, 168 respondents were married, 7 respondents were widow/widower. thirdly, age information showed that 1 respondent were below 20 years, 73 respondents were 20-30 years, 104 respondents were 31-40 years, 27 respondents were above 40 years. fourthly, education information exhibited that 71 respondents were having a college qualification, 10 respondents were having a diploma qualification, 122 respondents were having a degree qualification, and 2 respondents were having a postgraduate qualification. fifthly, job title information exhibited that 21 respondents were cashiers, 2 respondents were sharia supervisory board (dps), 15 respondents were managers, 84 respondents were marketing and 83 respondents were others. sixthly, length of working experience information indicated that 18 respondents were having less than 5 years of working experience, 53 respondents were having 1-5 years of working experience, 74 respondents were having 6-10 years of working experience, 60 respondents were having more than 10 years of working experience. seventhly, frequency of training information pointed that 59 respondents had training frequency at less than 5 times, 87 respondents had training frequency at 5-10 times, 26 respondents had training frequency at 10-15 times and 33 respondents had training frequency at more than 15 times (see table 1.) dawami, razak, & hamdan │ factors determining the successful performance of baitul maal wat tamwil in wonosobo international journal of islamic economics and finance (ijief), 4(1), 79-100 │ 89 table 1. demographic of the respondents variables category frequency percentage gender male 107 52.2 female 98 47.8 marital status single 30 14.6 married 168 82.0 widow/widower 7 3.4 age below 20 1 0.5 21-30 year 73 35.6 31-40 104 50.7 more than 40 27 13.2 education college 71 34.6 diploma 10 4.9 degree 122 59.5 postgraduate 2 1.0 job title cashier 21 10.2 dps 2 1.0 manager 15 7.3 marketing 84 41.0 others 83 40.5 length of working below 1 year 18 8.8 1-5 year 53 25.9 6-10 year 74 36.1 more than 10 60 29.3 frequency of training less than 5 59 28.8 5-10 times 87 42.4 10-15 times 26 12.7 more than 15 33 16.1 source: author’s analysis (2020) 3.3 method triangulation is an approach to the decision-making process that offers more efficient and comprehensive in conducting a broader case study analysis (saunders, lewis, & thornhill, 2009). this approach triangulates multiple sources of data within one study to ensure a coherent conclusion and to strengthen the validity of the study (creswell, 2009). thus, this study triangulates qualitative and quantitative data collection through semistructured interviews and questionnaires in ensuring a coherent conclusion and strengthening the validity of the study. to analyse the above data, this study utilized reliability, validity, factor analysis and multiple linear regression using spss version 24.0 to identify the dawami, razak, & hamdan │ factors determining the successful performance of baitul maal wat tamwil in wonosobo international journal of islamic economics and finance (ijief), 4(1), 79-100 │ 90 significance level of the successful performance determinants of the bmt. the reliability and validity test were applied to measure the consistency and appropriateness of the findings (saunders et al., 2009). this process was followed by the statistical analysis of the second part of questionnaires to investigate the respondents’ assessment toward the factors determining the successful performance of the bmt, namely factor analysis, multiple linear regression analysis, f-simultaneous test and t-partial test. meanwhile, to analyse the semi-structured interview data, the interview recording was converted into interview transcripts. then, those transcripts will be coded and classified into some sub-topics according to the related the successful performance determinants of the bmt. this analysis is mainly adopted to strengthen the statistical analysis and findings on the real determinants of the successful performance of the bmt. iv. results and analysis 4.1 result this study employed factor analysis for the purpose of verifying the interrelationship of five selected independent variables as a group of factors in this study that influence simultaneously the successful performance of the bmt. in this order, the study conducted the kaiser-mayer-olkin (kmo) and the bartlett’s sphericity tests to determine whether the data are compatible for factor analysis or not (bizri, 2014). if the kmo measure of sampling adequacy (kmo-msa) is greater than 0.05 and the bartlett’ sphericity significance is less than 0.05, it pointed that the data are compatible for further factor analysis. the results of this study exhibited that kmo-msa was 0.883 and the bartlett’ sphericity significance was 0.00 (see table 2.). hence, it is concluded that the data of this study are compatible for further factor analysis because the kmo-msa value of this research data was greater than 0.05 and its bartlett’ sphericity value was less than 0.05. accordingly, the factor analysis was conducted utilizing the principal component analysis. the communalities result exhibited that extraction values of all independent variables, namely the capital structure, the governance of the bmt, the human resource adequacy, the product innovation and the repayment of financing products, they are 0.714, 0.813, 0.746, 0.743 and 0.605 respectively (see table 3.). it indicated that all variables have communalities value greater than 0.05. then, it is concluded that those variables can be used to determine the factor. dawami, razak, & hamdan │ factors determining the successful performance of baitul maal wat tamwil in wonosobo international journal of islamic economics and finance (ijief), 4(1), 79-100 │ 91 table 2. kaiser-mayer-olkin and bartlett’s sphericity tests kaiser-meyer-olkin measure of sampling adequacy 0.883 bartlett’s test of sphericity approx. chi-square 631.758 df 10 sig. 0.000 source: author’s analysis (2020) table 3. communalities results variables initial extraction capital structure of funding 1.00 0.714 governance 1.00 0.813 human resource adequacy 1.00 0.746 product innovation 1.00 0.743 repayment of financing products 1.00 0.605 source: author’s analysis (2020) 4.2 multiple linear regression analysis multiple linear regression analysis was conducted to find out the relationship and coefficient of each factor that determine the successful performance of the bmt. the result of this study exhibited that the constant value or the intercept of this study was 1.373. it also depicted coefficients of five independent variables, namely the capital structure, the governance of the bmt, the human resource adequacy, the product innovation and the repayment of financing products, they were 0.319, -0.026, 0.373, 0.312, 0.013 respectively (see table 4.). the coefficients of four variables, namely the capital structure, the human resource adequacy, the product innovation and the repayment of financing products, were positive values. it indicated that those four variables have a positive relationship with the successful performance of the bmt. on the other hand, the coefficient of the governance of the bmt has negative value, this result pointed that the governance of the bmt has a negative relationship with the successful performance of the bmt. furthermore, the study further analysed the accuracy level of this regression model using the coefficient determination values. model summary r-square it pointed that r-square value of this multiple linear regression was 53.9 percent. it is concluded that this regression model predicts the determinants of the successful performance of the bmt at the 53.9 accuracy level and the other 46,1 percent were predicted by other factors (see table 5.). accordingly, this proposed multiple linear regression model has a good prediction accuracy level. dawami, razak, & hamdan │ factors determining the successful performance of baitul maal wat tamwil in wonosobo international journal of islamic economics and finance (ijief), 4(1), 79-100 │ 92 table 4. multiple linear regression result variables coefficients t-computed p-values constant 1.373 1.021 0.309 capital structure of funding 0.319 3.837 0.000 governance -.026 -.267 0.790 human resource adequacy 0.373 4.263 0.000 product innovation 0.312 2.898 0.004 repayment of financing products 0.013 0.176 0.860 source: author’s analysis (2020) table 5. model summary model r r square adjusted r square 1 0.734a 0.539 0.527 source: author’s analysis (2020) 4.3 hypothesis testing as elaborated in the literature review above, this study developed five proposed hypotheses in which all explanatory variables determine significantly the successful performance of the bmt. besides, the partial correlation analysis was conducted using t-test, the simultaneous correlation analysis also executed utilizing f-test. the simultaneous f-test results exhibited that significance value of this regression model was 0.000, so it was known that this significance value was less than 0.05 (see table 6.). hence, the study confirmed that all explanatory variables selected in this study, namely the capital structure, the governance of the bmt, the human resource adequacy, the product innovation and the repayment of financing products, determined simultaneously the successful performance of the bmt. furthermore, the multiple linear regression analysis exhibited also the pvalues of three explanatory variables, namely the capital structure of funding, human resource adequacy and the product innovations, were 0.00, 0.000 and 0.004 respectively. whereby all those p-values were less than 0.05 at the 5 percent significance level. in short, the study concluded that three explanatory variables above in this regression model are statistically significant in determining the successful performance of the bmt. on the other hand, the multiple linear regression analysis depicted that the p-values of two other variables, namely the governance of the bmt and the repayment of financing products, were 0.790 and 0.860 respectively (see table 4.). wherein all those p-values were greater than 0.05 at the 5 percent significance level. hence, it is decided that the governance of the bmt and the repayment of financing products are statistically insignificant in determining the successful performance of the bmt. dawami, razak, & hamdan │ factors determining the successful performance of baitul maal wat tamwil in wonosobo international journal of islamic economics and finance (ijief), 4(1), 79-100 │ 93 table 6. simultaneous f-test result model f-computed value sig. regression 46.462 0.000b source: author’s analysis (2020) on the other hand, semi-structured interview data analysis exhibited that they are three important factors that determine the successful performance of the bmt, namely the capital structure of funding, human resource adequacy and the product innovation. this can be concluded from the answers and explanations of the three informants about what factors are important for the sustainability of the bmt. for instance, the first informant ascertained: “if a bmt wants to be sustainable for a long time, it is necessary to manage the available capital properly and conscientiously by adopting a good capital management system. in addition, fighting spirit is an important factor for managing an institution. however, if it is not supported by a good management system, it can lead to fraud and mismanagement issues that caused the failure of the financial institution, especially an institution such as a bmt whose main sources of funds come from the relatively limited savings of members.” moreover, second informant emphasized that the quality of human resources can determine significantly the successful performance of the bmt, as he said: “it is clear that the first significant factor that determines the successful performance of the bmt is human resource adequacy. hence, how to make our staffs as qualified human resources becomes an important part because the recruitment of bmt staffs is not only devoted to whom has financial or islamic economics qualifications. on the other hand, bmt recruits diverse staffs with diverse mindsets and diverse educational background on the condition that they are ready to try and learn.” furthermore, the next important factor that determines the successful performance of bmt is product innovation. this factor has a significant contribution in maximizing the benefits of its liquidity, minimizing the risk of financing and fulfilling the dire need of microenterprises. this was emphasized by a third informant in his statement as below: “another important thing that needs to be maintained by bmt for its sustainability is variety and innovation of products, it has to adapt and keep abreast of the needs of society at all times. for example, bmt has to adapt the dawami, razak, & hamdan │ factors determining the successful performance of baitul maal wat tamwil in wonosobo international journal of islamic economics and finance (ijief), 4(1), 79-100 │ 94 digital platform model or financial technology, to provide financial products of tuition fees and hospital fees which are now becoming increasingly expensive.” 4.4 analysis pinz & helmig (2015) emphasized that determining the successful performance factors of microfinance was a challenging and endless endeavor. however, by combining and developing the previous studies in this field, the effort will solve this unsolved puzzle and reach the consensus findings with regard to the successful performance determinants of microfinance. the above results are consistent with the those discovered by ahmed (2002), nasution & ahmed (2015), zubair (2016) regarding the significance of the capital structure of funding in determining the successful performance of microfinance. in fact, the capital structure of funding contributes mainly to all microfinance, including bmt in attempting the triangle objectives of microfinance, namely financial sustainability, outreach range and the welfare impact. besides, this factor also further offers the higher liquidity and enhances the level of economic activity of an institution. the results are also in the line with the previous studies such as adnan et al. (2009), haneef et al. (2015), zubair (2016) concerning the importance of the human resource adequacy in influencing the successful performance of microfinance. it indicates that the bmt staffs perceive themselves to become a qualified and professional staff that help microfinance in improving the positive business culture and productivity. hence, financial institutions generally allocate a lot of funds to hold training and seminars with the aim of improving their human resource adequacy, as a part of the positive business and productivity enhancement schemes. meanwhile, concerning the product innovation, the results are consistent with those found by adnan et al. (2009), ledgerwood (2000), obaidullah & khan (2008) who found that the product innovation of microfinance has a significant positive effect on the successful performance of the microfinance. in particular, the main motive of islamic microfinance is providing the precise solution for the muslim poor and microentrepreneurs needs in obtaining affordable islamic financial products and services. besides, this element helps the microfinance in keeping up consistently with the changing needs of society, so that the schemes are on the right and efficient target. on the other hand, the results are contradicting with the those discovered by zubair (2016) regarding the governance of the bmt which was found to have an insignificant effect on the successful performance of the bmt. this dawami, razak, & hamdan │ factors determining the successful performance of baitul maal wat tamwil in wonosobo international journal of islamic economics and finance (ijief), 4(1), 79-100 │ 95 disagreement might be explained by the fact that bmt staffs perceive the bundle of governance mechanisms imposed by the ministry of cooperatives, small and medium enterprise as a big challenge that has positive and negative impacts. the bundle is able to strengthen the financial mechanism security at a side, but it becomes a burden and reduces the productivity of bmt staffs at the other side. finally, the results also contradict with the notion suggested by visconti (2016) concerning the repayment mechanism of financing which was discovered to have an insignificant effect on the successful performance of the bmt. this indicated that the respondents perceive the repayment mechanism as unprioritized consideration of clients engaging with the financial product and services of microfinance. v. conclusion and recommendation 5.1 conclusion summarily, the main objective of this study is to determine the successful performance factors of the bmts in wonosobo. the demographic analysis of respondents showed that bmts offers relatively equal job opportunities for both men and women as they hire the men and women staffs relatively at the same portion. this aspect indicated that bmt contribute to social welfare, equality and justice. besides, the results pointed that the bmts in wonosobo have qualified and professional staffs as they have regular training and undergraduate-majority staffs. furthermore, the overall results of analyses also exhibited that that all the five selected factors determined simultaneously the successful performance of bmt based on the above simultaneous f-test results. however, the study concluded, based on t-partial correlation analysis, that only three factors determined partially and significantly the successful performance of the bmt, they are the capital structure of funding, human resource adequacy and the product innovation. meanwhile, it is noteworthy that the conceptual framework in this study is a valuable addition to the current literature in the same topic. the above results of the analysis also contribute to empirical support to the conceptual framework of this topic and enrich the evidence of its applicability and compatibility. in addition, the results also offer precise instructions and guidelines to the practitioners and regulators on the real determinants of the successful performance of the bmt to be maintained and improved with the dawami, razak, & hamdan │ factors determining the successful performance of baitul maal wat tamwil in wonosobo international journal of islamic economics and finance (ijief), 4(1), 79-100 │ 96 aim of promoting the triangle objectives of microfinance includes financial sustainability, outreach to the poor and the social welfare impact. 5.2 recommendation at last, this study recommends the bmt managers to develop adequate and professional staffs, to further innovate new products and to adopt financial technology development in order to ensure the triangle objectives of microfinance achievement. it also recommends policy makers to provide regular seminar and training programs for the bmt staffs with the aim of improving human capital skills and proficiency. similarly, this study further recommends the future studies to extend this study into greater scope of the study includes the sample, population and methodology of the study in order to investigate the validity and reliability of the current conceptual framework of the study. dawami, razak, & hamdan │ factors determining the successful performance of baitul maal wat tamwil in wonosobo international journal of islamic economics and finance (ijief), 4(1), 79-100 │ 97 references adnan, m. a., widarjono, a., & anto, m. b. h. 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(2015). development of msmes (micro , small and medium dawami, razak, & hamdan │ factors determining the successful performance of baitul maal wat tamwil in wonosobo international journal of islamic economics and finance (ijief), 4(1), 79-100 │ 99 enterprises) by baitul maal wat tamwil ( bmt ) as an instrument for poverty reduction. advances in economics and business, 3(2), 41– 44. https://doi.org/10.13189/aeb.2015.030201 zeller, m., & meyer, r. l. (1995). the triangle of microfinance: financial sustainability, outreach and impact. in the jons hopkins university press, baltimore and london. https://doi.org/10.2307/1149305 zubair, m. k. (2016). analisis faktor-faktor sustainabilitas lembaga keuangan mikro syariah. iqtishadia jurnal kajian ekonomi dan bisnis islam, 9(2), 201. https://doi.org/10.21043/iqtishadia.v9i2.1728 dawami, razak, & hamdan │ factors determining the successful performance of baitul maal wat tamwil in wonosobo international journal of islamic economics and finance (ijief), 4(1), 79-100 │ 100 this page is intentionally left blank. international journal of islamic economics and finance (ijief) vol. 4(si), page 19-40, special issue: islamic banking comparison of islamic and conventional banking financial performance during the covid-19 period ulumuddin nurul fakhri mahad aly an-nuaimy, indonesia corresponding email: unf_16@yahoo.com angga darmawan bni syariah, indonesia article history received: october 28th, 2020 revised: january 6th, 2021 accepted: march 8th, 2021 abstract the covid-19 pandemic that is spreading in indonesia has affected economic growth, likewise banks sector. this study aims to determine the financial performance factors that are affected by the covid-19 pandemic, both in islamic and conventional banking which are included in the cbgb 2 category so that banks in indonesia can anticipate it. this study uses the artificial neural network (ann) method with 6 financial performance variables in the period of january 2020 september 2020, namely capital adequacy ratio (%), operating expenses / operating income (%), net operation margin (%), landing on deposits. ratio (%), short term mismatch (%) which are used as the independent variable, as well as return on assets which is used as the dependent variable. the results showed that the covid-19 pandemic affected financial performance factors in the form of a funding to deposit ratio of 35.21%; short term mismatch of 26.92% and net operation margin of 26.92% in islamic banking. whereas in conventional banking, operating expenses to operating income was 72.87% and the capital adequacy ratio was 17.31%. this result is also in line with previous research where islamic banking is more vulnerable than conventional banking in facing financial crises. keywords: covid-19, artificial neural network, banking financial performance. jel classification: g01, g21, l25 type of paper: research paper @ ijief 2021 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.v4i0.10080 web: https://journal.umy.ac.id/index.php/ijief/article/view/10080 citation: fakhri, u. n., & darmawan, a. (2021) comparison of islamic and conventional banking financial performance during the covid-19 period. international journal of islamic economics and finance (ijief), 1(2),19-40. doi: https://doi.org/10.18196/ijief.v4i0.10080. https://doi.org/10.18196/ijief.v4i0.10080 https://doi.org/10.18196/ijief.v4i0.10080 fakhri & darmawan │ comparison of islamic and conventional banking financial performance during the covid-19 period international journal of islamic economics and finance (ijief), 3(si), 19-40│ 20 -15 -10 -5 0 5 10 q2/19 q1/20 q1/20 e co n o m ic g ro w th country i. introduction 1.1. background corona virus disease (covid-19) is a new virus whose spread has created uproar all around the world. the closure of business centers has become a sign of a financial crisis in many countries. economic growth in several countries in the world experienced a significant decline, including china in q1 2020 experiencing an economic decline of -6.8% (yoy), although in q2 2020 it experienced an increase to 3.2% (yoy). the united states, singapore, south korea, hong kong and the european union saw significant decreases. for america, economic growth in q2 in 2020 reached -9.5% (yoy), singapore in q2 in 2020 was -12.6% (yoy), south korea reached -2.9% (yoy), hong kong reached -9.0% (yoy), and the european union reached -14.3% (yoy). the figure can be seen in figure 1. figure 1. economic growth development in the world source: badan pusat statistik [bps], 2020 indonesia is no exception, the impact of the spread of covid-19 has caused indonesia's economy to experience a slowdown. according to bank indonesia, economic growth in the first quarter of 2020 experienced a slowdown, namely 2.97% (yoy) compared to economic growth in 2019 of 4.97% (yoy). meanwhile, in the second quarter of 2020, it became -5.32% from 2019. the slowdown in indonesia's economic growth due to covid-19 has caused domestic demand to decline (bank indonesia, 2020). the economic slowdown in indonesia also had an impact on the financial performance of banks in indonesia. the impact of this slowdown can be seen in the table below. fakhri & darmawan │ comparison of islamic and conventional banking financial performance during the covid-19 period international journal of islamic economics and finance (ijief), 3(si), 19-40│ 21 figure 2. financial performance of conventional commercial banks in 2020 source: otoritas jasa keuangan [ojk], 2020 the data in figure 2 shows a decline in the performance of indonesian banking during the covid-19 period. where, the nim (net interest margin) in the picture above always decreases from january to september 2020 even though the decline is not significant. the decline in nim (net interest margin) was 4.98% in january to 4.41% in september 2020. likewise, roa (return on asset) experienced a significant decrease from 2.70% in january to 1, 76% in september 2020 (statisik perbankan indonesia [spi], 2020). from the data above, it can be concluded that bank in indonesia experienced a decline in financial performance during the covid-19 pandemic spreading in indonesia (nugroho, utami, & doktoralina, 2020). therefore, this study wants to find out and compare what factors affect the decline in financial performance in islamic banking and conventional banking which is specifically for the category cbgb 2 (commercial bank – group of business) during the covid-19 pandemic. in previous research (fakhri et al., 2019) (ali, 2020) stated that the factor of decline in financial performance in islamic banking was influenced by external factors. this research focuses on the internal factors of islamic and conventional banking during the covid-19 pandemic. these internal factors are car (capital adequacy ratio), fdr (financing to deposit ratio), npf (net performing financing, savings, bopo (operational costs and operational costs), and nom (net operational margin) by using profitability as a reference. murthy and sree, 2003; alexandru et al., 2008 in their research said that in measuring profitability, several ratios can be used such as return on assets (roa), return on equity (roe), and net interest margin, while khawish ( 2011) states that roa can observe a bank's ability to generate profits by utilizing assets (equity and debt) owned by the company. thus, roa shows how much efficiency of banking resources can be used to generate profits. 2,70 2,49 2,57 2,34 2,06 1,94 1,90 1,90 1,76 4,96 4,81 4,31 4,57 4,50 4,46 4,44 4,43 4,41 1,00 2,00 3,00 4,00 5,00 6,00 jan feb mar apr may jun jul aug sep roa nim f in a n ci a l p e rf o rm e n ce month fakhri & darmawan │ comparison of islamic and conventional banking financial performance during the covid-19 period international journal of islamic economics and finance (ijief), 3(si), 19-40│ 22 this is a reference for roa in seeing the influence of other performance factors. in a previous study, fakhri et al. (2020) stated that the bankruptcy rate of islamic banking in cbgb 2 is in the gray zone and is ranked 3. this means that it is very vulnerable to external conditions, such as inflation. meanwhile, conventional banking is in a safe zone and is ranked 1 which indicates that the financial performance of conventional banks in cbgb2 is classified as safe. this research was conducted in a stable state economy. the purpose of this study was to determine the effects of financial performance during the covid-19 period. by knowing the results of this study, it is hoped that banks in indonesia can quickly make decisions so that the financial condition of banks in indonesia becomes stable. in addition, by knowing the financial performance of indonesian banking based on result of this research, the public can help to save indonesian banking, especially islamic banking, from the financial crisis due to the covid 19 pandemic. one of the ways is saving their idle funds in indonesian banks, especially islamic banks. ii. literature review 2.1. background theory 2.1.1. banking financial performance banking financial performance is regulated in the financial services authority (pojk) no. 32 / pojk.03 / 2016 concerning transparency and publication of bank reports. in this regulation, there is a variable financial performance. the variables of indonesian banking financial performance can be explained as follows: a. return on asset (roa) return on asset (roa) can determine the relationship between organizational structure and financial performance of retail banks, so that it can formulate organizational strategies in dealing with financial distress. roa focuses on the company's ability to generate profits in company activities (mawardi, w. 2004: 85). in a circular letter of the financial services authority (seojk) explains that return on assets (roa) is a comparison between profit before tax and the average total assets in one period (surat edaran otoritas jasa keuangan [seojk], 2019). fakhri & darmawan │ comparison of islamic and conventional banking financial performance during the covid-19 period international journal of islamic economics and finance (ijief), 3(si), 19-40│ 23 in this study, return on assets (roa) is one of the variables that can affect the bankruptcy of islamic banks because the return on assets can be used to measure how much a islamic banking makes a profit by utilizing its assets. with the greater the return on assets, the performance of islamic banking is getting better. when the return on assets has increased, it will increase the profits that will be enjoyed by investors (husnan, 1998). the roa formula according to the financial services authority circular letter (seojk) is: (1) b. capital adequacy ratio (car). capital adequacy ratio is a ratio that shows how much capital capacity in banks can absorb the risk of credit failure that will occur so that the higher the level of the capital ratio, the bank is healthier, and vice versa (muljono, 1999). the formula for obtaining the capital adequacy ratio has been described by ojk in an ojk circular letter, namely: capital adequacy ratio (car) = equity x 100% (2) risk weighted assets c. operational costs and operating income puspitasari's research (2015: 261) states that there are 3 (three) measures towards efficiency including 1. the same input produces a larger output, 2. smaller inputs produce the same output, and 3. large inputs will produce output the greater one. to achieve the bank's efficiency level, it can be measured through the ratio of operational costs to operating income (bopo) (pojk no. 06 / pojk.03 / 2016). the bopo ratio in the research of setiawan (2008), surahman (2007), susanto and njit (2012) includes this ratio in influencing banking performance. the formula for the bopo ratio is: operational costs to = operational cost x 100% operating income operating income (3) d. net operational margin (nom) net operation margin (nom) in a islamic bank means the same as net interest margin (nim) in conventional banks because in the regulation of the financial services authority (pojk) no. 6 / pojk.03 / 2016 explains that to achieve the level of efficiency of the bank is measured by the ratio of net interest margin (nim) or net operating margin (nom). aviliani's research, et al. (2015) includes nim or nom as a factor that is considered to affect profitability. the nom ratio is used by banks to measure the ability of management to manage their capital to obtain profits from the provision of funds to the public to generate net profits. net profit is obtained from the entire distribution of funds after deducting profit sharing and deducting return on assets (roa) = earning before tax x 100% total assets fakhri & darmawan │ comparison of islamic and conventional banking financial performance during the covid-19 period international journal of islamic economics and finance (ijief), 3(si), 19-40│ 24 operating expenses. the nom formula following the provisions of the financial services authority (seojk) circular letter is: net operational margin (nom) = (income after revenue sharing-oper cost) x 100% average of earning assets e. financing to deposit ratio (fdr) financing to deposit ratio (fdr) in islamic banks is the same as the ldr loan to deposit ratio in conventional banks in its meaning, where in bank indonesia regulation no. 17/11 / pbi / 2015 that the ratio of loans to third parties in rupiah and foreign currencies, excluding loans to other banks. the formula for the loan to deposit ratio according to bank indonesia regulations is: financing to deposit ratio (fdr) = total financing x 100% (5) total third party funds f. short term mismatch ratio (stmr) this ratio calculates the number of short-term assets compared to shortterm liabilities so that the ability of islamic banks to meet their short-term liquidity needs is known. financial services authority circular letter (seojk) short term mismatch ratio is included in the assessment of bank financial performance. in the research of cahyani and saepudin (2015), it is explained that the short term mismatch ratio is an indicator of the quality of banking performance in indonesia. the short term mismatch ratio formula is: short term mismatch ratio (stmr) = short term-assets x 100% (6) short termliabilities 2.1.2. artificial neural network model (ann) the artificial neural network (ann) model is a problem-solving model by imitating the intelligence of the human brain, especially in analyzing classification and pattern recognition. biological neurons in humans are imitated by the artificial neural network model (ann) using a computational model. al-osaimy's research (1998: 34) says that in decision making, new classification and prediction. artificial neural networks construct "neouron" systems to model previously solved results, just as humans apply knowledge gained from past experiences to new problems or situations. in addition, the artificial neural network (ann) consists of neurons that form interconnected groups. by using algorithmic functions, each neuron processes information (receives input and provides output) from data (anwar and watanabe, 2011). fakhri & darmawan │ comparison of islamic and conventional banking financial performance during the covid-19 period international journal of islamic economics and finance (ijief), 3(si), 19-40│ 25 2.2. previous studies there are so many previous studies that discuss the financial performance of islamic and conventional banking, including research by ika and abdullah (2011) which deals with a comparative study of the financial performance of islamic and conventional banking in indonesia. this research shows that islamic banks are more liquid than conventional banking. in another study, tho'in (2019) examine the comparison of financial performance between islamic and conventional banking in indonesia before and after the formation of the asean economic community (aec). this study shows that out of the five variables being compared, only roa and roe showed a difference between before and after mea, while for the other three variables before and after the implementation of mea was fixed. meanwhile, there is another similar research by fakhri et al. (2019) which deals with the comparison of the financial performance of islamic and conventional banking in indonesia to achieve sustainable growth. this study also uses an artificial neural network (ann) and results that islamic banking is significantly affected by external factors (inflation), namely 70.3%, while conventional banks are also influenced by external factors (inflation) but only 24.3%. this research shows that islamic banking is more vulnerable to external factors, namely inflation. this research wants to continue the research of fakhri et al. (2019) during the covid-19 pandemic, where external factors (inflation) are very influential at this situation. so this research wants to find out the internal factors that are very influential with the conditions during the covid-19 pandemic using artificial neural network (ann) model. iii. methodology 3.1. data riono (2020), who is an epidemiology and biostatistics expert from faculty of public health of the university of indonesia said that covid-19 has been circulating in indonesia since january 2020. even though, the government announced that covid-19 entered indonesia in march 2020. so this research takes data from january 2020 to september 2020. the data set consists of 6 financial performance variables for the period january 2020 – september 2020, namely capital adequacy ratio (%), operating expenses / operating income (%), net operation margin (%), landing to deposit ratio (%), short term mismatch (%) in islamic banking fakhri & darmawan │ comparison of islamic and conventional banking financial performance during the covid-19 period international journal of islamic economics and finance (ijief), 3(si), 19-40│ 26 and conventional cbgb 2 (commercial bank – group of business) which are used as independent variables. cbgb 2 (commercial bank – group of business) is a category of commercial banks, both conventional and islamic, which have core capital between idr 1 trillion idr 5 trillion. this classification is based on financial services authority regulation (pojk) no. 6 / pojk.03 / 2016 about business activities and office networks based on bank core capital. judging from the core capital, the business activities of each cbgb category are different. meanwhile, the growth variable return on assets (roa) in that period was used as the dependent variable. all data used is obtained from the website of the financial services authority (ojk). this study uses an artificial neural network (ann) model with a quantitative approach. furthermore, the data will be processed using an artificial neural network to obtain the factors that affect the financial performance of islamic and conventional banking. finally, the results of the factors that influence the financial performance of islamic banking will be compared with the factors that affect conventional financial performance by confirming the results of previous studies, namely the research of fakhri et al. (2020). 3.2. model development there are three reasons for processing all data in order to change the incoming data to the new version. (1) the level of importance in determining the output is reflected in the data size, (2) before training the network, by facilitating the initialization of random weights, (3) to avoid different measurements due to different input units, data normalization is carried out. furthermore, alyuda provides a complete search feature for designing neural network architectures. this research needs to combine several neurons into a multilayer structure called a neural network to have the power to solve problems of pattern classification and recognition. therefore, this study uses a feed-forward multi-layer network, which is the type of neural network most commonly used today. the feed-forward multi-layer network consists of an input layer, a hidden layer. and an output layer. specifically, the input layer is the layer directly connected to outside information. all data in the input layer will be passed to the hidden layer as the next layer. meanwhile, the hidden layer functions as a detection feature for the input signal and releases it to the output layer. finally, the output layer is considered to be the aggregator of detected features and the generator of responses. in the network, the output from the output layer is fakhri & darmawan │ comparison of islamic and conventional banking financial performance during the covid-19 period international journal of islamic economics and finance (ijief), 3(si), 19-40│ 27 a function of the linear combination of hidden unit activations; the hidden unit activation function is a non-linear function of the weighted input sum. mathematically, the model can be written as follows (anwar and watanabe, 2011): (8) where : χ = the vector of explanatory variables = weights vector (parameters) ε = the random error component then, equation (8) is an unknown function for estimating and predicting from the available data. thus, the model can be formulated as: (9) where: y = network output f = output layer activation function v0 = output bias m = number of hidden units h = hidden layer activation function λj = hidden unit biases (j = 1,. . . ,m) n = number of input units xi = inputs vector (i = 1,. . . ,n) wij = weight from input unit i to hidden unit j vj = weights from hidden unit j to output (j = 1,. . . ,m) the model of the artificial neural network (ann) is described in figure 3. figure 3. artificial neural network model (source: anwar and watanabe, 2011) x1j x2j x3j xij x1j x2j x3j xij sigmodial u neuron j with threshold value tj yj fakhri & darmawan │ comparison of islamic and conventional banking financial performance during the covid-19 period international journal of islamic economics and finance (ijief), 3(si), 19-40│ 28 from figure 3, the configuration used for the learning process is as follows: (1) the logistic function is selected for all neurons. (2) the sum of the squared errors is chosen to minimize the output error. this is the sum of the squared difference between the model's actual and output values. (3) the network output is set between 1 and -1 because the logistic activation function is used where 1 is for growth in financial performance levels and -1 for decreasing levels of financial performance. then, to train ann requires special conditions to avoid over fitting, such as; using batch back propagation in order to learn, the speed and momentum of learning is set at 0.1 and for completeness, the process must end when the mean squared error decreases by less than 0.000001 or the model completes 20,000 iterations, whichever occurs first. the results of the data exercise formed a mean of 20.6 and a standard deviation of 2.17 for conventional banking and the results for islamic banking are a mean of 25.39 and a standard deviation of 0.8. in addition, from training using batch back propagation, the crr (correct classification rate) value in conventional banking was 71.4% while in islamic banking the ccr value was 57.1 %. finally, this study uses the same logarithm between conventional banks and islamic banks, namely the n logarithm (5-1-1) in the learning and testing process that will be carried out later. this happens because of limitations in data processing using ann. 3.3. method artificial neural network (ann) is a method that resembles the way humans think. this research uses ann (artificial neural network) to determine the factors that affect the decline in financial performance. research in the field of economics, especially in the fields of business and financial management, banking and corporate failures, stock price prediction, and bond rating has developed research especially for prediction using the artificial neural network (ann) method. research on the performance of banks, especially islamic banks using a neural network was studied by al-osaimy (1998), alshayea and el-refae (2012), the failure of conventional banks using the neural network was studied by tam (1991), tam and king (1992) and boyacioglu et al (2009). meanwhile, oodom and sharda (1990), altman et al. (1994), almilia and kritijadi (2003), hamdi (2012), and bredart (2014) examined company bankruptcy using a neural network. in addition setiawan (2008) uses artificial neural networks in researching stock price predictions. in all of these studies, the artificial neural network model outperformed traditional statistical methods such as discriminant analysis and logistic regression. in addition, the most commonly used approach above and in other fakhri & darmawan │ comparison of islamic and conventional banking financial performance during the covid-19 period international journal of islamic economics and finance (ijief), 3(si), 19-40│ 29 studies is the backpropagation neural network model (al-osaimy, 1998) (anwar and watanbe, 2011). anwar and hasan (2016) in their research used the ann method to predict a decline in the financial performance of islamic banks where the prediction results obtained 85%. these results indicate that the ann method is very relevant to use in this study. likewise, with the research of fakhri et al (2020) where the results of this study prove that the artificial neural network (ann) is very relevant in determining factors that affect the financial performance of islamic and conventional banking. iv. results and analysis 4.1. results the results of data analysis will be presented in 2 stages. the first stage will present the results of the factors that affect the decline in the financial performance of islamic banking. second, the results of the factors that influence the decline in the performance of conventional banking will be presented. 4.1.1. islamic banking cbgb 2 figure 4 shows that the factors affecting the financial performance of islamic banking during the covid-19 pandemic are: 1. funding to deposit ratio of 35.21% 2. net operation margin of 27.83% 3. short term mismatch of 26.92% 4. operating expenses / operating income of 7.32% 5. capital adequacy ratio of 2.72% figure 4. factors that affect the decline in the financial performance of islamic banking cbcg 2 fakhri & darmawan │ comparison of islamic and conventional banking financial performance during the covid-19 period international journal of islamic economics and finance (ijief), 3(si), 19-40│ 30 the first and third biggest influence from the above results on liquidity performance with a total of 62.13%, namely funding to deposit ratio (fdr) of 35.21% and short term mismatch of 26.92%. meanwhile, the factor that has an effect on the second order is the performance of profitability or net operation margin (nom) of 26.92%. thus covid-19 greatly affects the liquidity factor where this factor is very important in the ability of a company to pay its short-term obligations and debts. although the profitability factor is not too significant, however this factor can affect the ability of a company to generate profits within a certain period. these results prove that islamic banking is still vulnerable in facing external factors. these results are also in accordance with research (fakhri, 2020) where islamic banking is in third place. according to the financial services authority regulation no. 8 / pojk.03 / 2014 which refers to bank indonesia regulation no. 9/1 / pbi / 2007 regarding the assessment of the soundness level of islamic commercial banks and islamic business units, rating 3 indicates that asset quality is quite good but is expected to decline if improvements are not made. policies and procedures for providing financing and risk management from financing have been implemented fairly well and in accordance with the scale of the bank's business, however, there are still insignificant weaknesses and / or are well documented and administered. 4.1.2. conventional banking cbgb 2 from figure 5, we can see the factors that affect financial performance due to the impact of the covid-19 pandemic, as follows: 1. operating expenses to operations revenue of 72.87%. 2. capital adequacy ratio of 17.31% 3. liquid asset ratio of 5.35% 4. landing to deposit ratio 3.51% 5. net interest margin of 0.95% figure 5. factors affecting the financial performance of conventional banking cbgb 2 fakhri & darmawan │ comparison of islamic and conventional banking financial performance during the covid-19 period international journal of islamic economics and finance (ijief), 3(si), 19-40│ 31 the results above prove that cbgb 2 conventional banking is more stable in facing crises due to the covid-19 pandemic. this is because the most dominant influence is operating expenses to operations revenue of 72.87%, although operating expenditures on operating income are included in the profitability factor, the handling of this factor is quite simple, which is by efficiency. the profitability factor does not have a significant effect, and the capital adequacy ratio (car) also has no significant effect, which is only 17.31%. these results prove that conventional banking is still highly ready to face external factors. this result is also in accordance with research (fakhri, 2020) where conventional banking is in the first rank. according to the financial services authority regulation no. 8 / pojk.03 / 2014 which refers to bank indonesia regulation no. 9/1 / pbi / 2007 regarding soundness level products for islamic commercial banks and islamic business units, rating 1 reflects that the financial condition of the bank or uus is classified as very good in supporting business development and anticipating changes in economic conditions and the financial industry. the bank has a strong financial capacity to support development plans and the risks of significant changes in the banking industry. 4.2. robustness test 4.2.1. islamic bank cbgb 2 the results of the financial performance factors (figure 6) are formed from the logarithm of n(5-1-1), where the logarithm produces an roc (receiver operating characteristics) curve of 66,7%. roc curves display network performances across various possible accept/reject limits. the larger the area under the curve, the better the network is formed. like any other test chart, the roc curve can be plotted separately for training, testing and validation sets or for all of them. below are the logarithm of n (5-1-1) and the resulting kop curve for the logarithm of n (5-1-1). fakhri & darmawan │ comparison of islamic and conventional banking financial performance during the covid-19 period international journal of islamic economics and finance (ijief), 3(si), 19-40│ 32 figure 6. logarithm of islamic banking cbgb 2 figure 7. results of the roc curve for islamic banking cbgb 2 the results of the roc curve (figure 7) confirm that the results of this study have high validity by obtaining a result of 66.7%, although the data used is very limited, only 9 months. thus the ann method is very effective in obtaining the results of this study. 4.2.2. conventional banking cbgb 2 likewise, the results obtained from the n logarithm (5-1-1) in conventional banking buku 2, namely the value of the roc (receiver operating characteristics) curve of 95%. this result strongly strengthens the findings of fakhri & darmawan │ comparison of islamic and conventional banking financial performance during the covid-19 period international journal of islamic economics and finance (ijief), 3(si), 19-40│ 33 financial performance factors in conventional banking. figure 8 is described the result of the n logarithm (6-1-1), namely the roc (receiver operating characteristics) curve. figure 8. logarithm of conventional banking cbgb 2 figure 9. roc curve for conventional banking cbgb 2 the curve on figure 9 shows a very significant result, even with limited data. the results of the roc curve show that the ann (artificial neural network) model is very good for use with limited data. 4.3. analysis this section discusses the comparison of factors affecting financial performance between islamic banking cbgb 2 and conventional banking cbgb 2. table 1 below explains the differences between the two. fakhri & darmawan │ comparison of islamic and conventional banking financial performance during the covid-19 period international journal of islamic economics and finance (ijief), 3(si), 19-40│ 34 table 1. comparison of the financial performance of islamic banking and conventional cbgb 2. information result islamic conventional logarithm 5-1-1 5-1-1 ccr 57.1% 71.4% roc curve 66.7% 95% financial performance factors 1. funding to deposit ratio of 35.21% 1. operating expenses to operations revenue of 72.87%. 2. net operation margin of 27.83% 2. core capital ratio of 17.31% 3. short term mismatch of 26.92% 3. liquid asset ratio of 5.35% table 1 shows that the modeling process using ann is relatively the same. the artificial neural network logarithm resulting from the ccr (correct classification rate) is the same between islamic banking and conventional cbgb 2 banking, although the values generated by the ccr (correct classification rate) and the roc (receiver operating characteristics) curve are very different. thus, this value can indicate the results obtained in the form of factors affecting financial performance between islamic and conventional banks having the same validity. so, the results can be compared between islamic and conventional banking. the difference in factors that affect the performance of islamic banking and conventional cbgb 2 is very significant due to the covid-19 pandemic. this condition is a test for both islamic and conventional banking in overcoming the company's financial crisis. the results of the above research prove that cbgb 2 islamic banking is very vulnerable to external conditions. meanwhile, conventional banking is still relatively safe with externals (covid-19 pandemic). the difference in financial performance between islamic and conventional banking is in the first place, where islamic banking has a significant influence on the fdr (funding to deposit ratio) factor or liquidity factor of 35.21%, when combined with the third order, namely short term mismatch (stm) of 26.92%, the liquidity factor has a very significant effect with a total of 62.13%. meanwhile, conventional banking has a very significant effect is the profitability factor or operating expenses to operations revenue of 72.87%. these results identify that islamic banking is very difficult to pay off its debt and short-term obligations, due to islamic banking prudence in channeling funds during the covid-19 pandemic. unlike islamic banking, conventional banking has an effect on operational costs. the second and third ranks of conventional banking are the capital adequacy ratio of 17.31% and the liquid asset ratio of 5.35%. this result affects capital adequacy and liquidity fakhri & darmawan │ comparison of islamic and conventional banking financial performance during the covid-19 period international journal of islamic economics and finance (ijief), 3(si), 19-40│ 35 insignificantly. meanwhile, islamic banking in the second place affects the net operation margin (nom) of 27.83%. this result affects the factor of profitability or the ability of banks to earn profits. the results above indicate that this study is in accordance with previous research, namely research by fakhri et al. (2019), where islamic banking is more vulnerable to the impact of the covid-19 pandemic than conventional banking. the vulnerability of islamic banking was evident at the time of the covid-19 pandemic, where the pandemic affected very fundamental factors for islamic banking, such as the liquidity factor which shows the ability of islamic banking to meet short-term obligations, and profitability factors, such as the ability of islamic banking to benefit. whereas in conventional banking, the pandemic has a dominant influence on the operating expenses to operations revenue, which is the ability of conventional banks to manage company expenses and revenues. these obstacles can be overcome by making efficiency in company expenses. v. conclusion and recommendation 5.1. conclusion the covid-19 pandemic that has spread in indonesia has affected economic growth. likewise with banking which has greatly influenced the spread of covid-19. in islamic banking, it has a significant influence on the fdr (funding to deposit ratio) factor or the liquidity factor of 35.21%, when combined with the third order, namely short term mismatch (stm) of 26.92%. the liquidity factor has a very significant effect with a total of 62.13%. meanwhile, conventional banking which has a very significant influence is the profitability factor or operating expenses on operating income of 72.87%. these results identify that islamic banking is very difficult to pay off its short-term debt and obligations, due to the prudence of islamic banks in channeling funds during the covid-19 pandemic. in contrast to islamic banking, conventional banking affects operational costs. these obstacles can be overcome by making efficiency in company expenses. this result is strengthened by the similarity between the logarithms between conventional and islamic banks, which is the result of the ccr (correct classification rate) curve, so that it can be compared with one another. from the results of this study, it is known that cbgb 2 islamic banking is more vulnerable to external conditions, so it is hoped that islamic banking can improve its financial liquidity as one of the financial performance factors that are affected by external conditions (covid-19) so that in the future islamic banking will more resistant to external conditions. whereas in conventional fakhri & darmawan │ comparison of islamic and conventional banking financial performance during the covid-19 period international journal of islamic economics and finance (ijief), 3(si), 19-40│ 36 banking, the pandemic has a dominant influence on the operating expenses to operations revenue, which is the ability of conventional banks to manage company expenses and revenues. these obstacles can be overcome by making efficiency in company expenses. 5.2. recommendation based on the results of the above research, islamic banks need to make several improvements in order to be more resilient to external conditions, including strengthening liquidity management, carrying out efficiency and managing the quality of financing. ismal (2010) in his research stated that the strategy of islamic banking is to strengthen liquidity management by restructuring liquidity management in terms of both assets and liabilities. restructuring in terms of assets is by channeling equity-based financing, intensively distributing funds in a syndicated manner, participating in funding companies that receive state development projects, strictly adjusting the funding and financing period. meanwhile, in terms of liabilities, by innovating more varied fund collection products, collecting funds with a longer term, managing government funds / priority customers. islamic banks need to make efficiency by saving ineffective operational costs while improving the performance of financing distribution and placement of funds so as to increase operating income more optimally. islamic banks are also required to absorb funds and channel financing optimally so that they can carry out the financial intermediation function more efficiently. apart from strengthening liquidity management and carrying out efficiency, islamic banks also need to manage the quality of financing more optimally because the main source of income for islamic banks comes from distribution of financing. several things that need to be done by sharia commercial banks in channeling financing are paying attention to the principle of prudence in every channel of funds to customers, conducting proper financing analysis and mitigating risks on each fund channel, monitoring financing customers more closely to avoid side streaming of the use of funds starting from disbursement of financing, distribution of funds to relatively safe industrial sectors, distribution of financing using a sharia commercial banks syndication scheme to companies that handle government infrastructure projects, distribution of financing to customers who have a good reputation. in the current covid-19 pandemic, conventional banks are still able to carry out the banking intermediary function by channeling them to industrial fakhri & darmawan │ comparison of islamic and conventional banking financial performance during the covid-19 period international journal of islamic economics and finance (ijief), 3(si), 19-40│ 37 sectors that are not or slightly affected by covid19. referring to the official report of the central statistics agency for the second quarter of 2020, there are several business sectors that can still grow year on year (yoy) in the second quarter, namely the agricultural sector, information and communication, financial services, education, services, real estate, services, health and water supply. meanwhile, the business sectors that can still grow quarterly or from quarter i to quarter ii of 2020 are agriculture, information and communication as well as the provision of clean water. fakhri & darmawan │ comparison of islamic and conventional banking financial performance during 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(2020). statistik perbankan indonesia. retrieved from https://www.ojk.go.id/id/kanal/perbankan/data-danstatistik/statistik-perbankan-indonesia/pages/statistik-perbankanindonesia---desember-2020.aspx. tam, k .y, (1991), neural network models and the prediction of bank bankruptcy, science direct journal, volume 19, issue 5, pages 429-445 fakhri & darmawan │ comparison of islamic and conventional banking financial performance during the covid-19 period international journal of islamic economics and finance (ijief), 3(si), 19-40│ 40 tam, k. y. dan kiang, m.y, (1992), managerial applications of neural networks: the case of bank failure predictions, management science in inform publication, 38, 926-947. tho’in, m., (2019). the comparison of islamic banking financial performance in indonesia. international journal of scientific research and education, 7(5). international journal of islamic economics and finance (ijief) vol. x(x), page 101-120, january 2021 investigating e-servicescape influence to customer response in digital islamic banking prima andriani universitas gadjah mada, indonesia, primaandriani@mail.ugm.ac.id noni setyorini universitas pgri semarang, indonesia corresponding email: nonisetyorini@upgris.ac.id ahmad hafiyyan shibghatalloh universitas diponegoro, indonesia, ahmadhafiyyan@students.undip.ac.id article history received: november 11th, 2020 revised: january 7th, 2021 accepted: january 18th, 2021 abstract the mobile banking application is developed using the e-servicescape concept to create positive response in customers as application users. the objective of study is investigating the relationship between e-servicescape, trust, virtual word of mouth customer in islamic banking. this study is quantitative approach that used structural equation modelling (sem). we collected data using an online questionnaire adapted from previous research, then distributed to all islamic banking customers in indonesia. the sampling technique used purposive random sampling involving 158 respondents with criteria such as islamic bank customers in indonesia who use mobile application services. the results of the study that all hypotheses are accepted. all dimensions of e-servicescape has a positive and significat effect on e-servicescape, e-servicescape has a positive and significat effect on trust, and trust has a positive and significant effect on customer virtual word-of-mouth. this research provides theoretical and practical contributions which will also be discussed further in this paper. keywords: e-servicescape, islamic banking, trust, virtual word of mouth jel classification : l3.12; m3.13; o3.15 type of paper: research paper @ ijief 2021 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.v4i1.10299 web: https://journal.umy.ac.id/index.php/ijief/article/view/10299 citation: andriani, p., setyorini, n., & shibghatalloh, a. h. (2021) investigating e-servicescape influence to customer response in digital islamic banking. international journal of islamic economics and finance (ijief), 4(1), 101-. doi: https://doi.org/10.18196/ijief.v4i1.10299. https://doi.org/10.18196/ijief.v4i1.10299 https://doi.org/10.18196/ijief.v4i1.10299 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v4i1.10299&domain=pdf andriani, setyorini, & shibghatalloh │investigating e-servicescape influence to customer response in digital islamic banking international journal of islamic economics and finance (ijief), 4(1), 101-120 │ 102 i. introduction 1.1. background the development of banking services via the internet has become increasingly prevalent in line with the growth of increasingly sophisticated information technology. product innovation factors and technological developments are an integral part of the development of the banking industry to improve service quality so that it becomes more accessible and efficient. this is driven by a shift in customer behavior that has begun to involve the role of technology in various activities including financial activities. the presence of technology removes space and time restrictions on the relationship between banks and customers so that banks can reach customers more closely, quickly, and easily. this change requires companies to integrate several business functions and even reach out to external partners in creating and providing positive experiences for customers (baidhowi, 2018). nowdays, as a bank's effort to reach and serve customers in a more concrete manner, internet-based service innovation is a breakthrough that continues to be developed in the banking sector. one that has been developed a lot is electronic channel services. this service is provided by various banks that have physical official offices, but also create an internet-based website and provide services through applications that can be accessed using cell phones. in addition, the electronic channel is used as a strategic and differentiation channel to offer low-cost financial service products such as credit cards. one form of electronic services currently being intensified by banks is the development of mobile banking applications. mobile banking is part of the top priority of online banking services as a modern banking strategy (tam & oliveira, 2016). cellular banking is a form of electronic transactions that makes it easy for customers to transact via mobile personal platforms (wessels & drennan, 2010). transaction mode using mobile banking is becoming common among the public because it makes easier for customers to check account balances and transaction history, transfer money, pay bills, trade securities, manage portfolios, pay insurance and others (baptista & oliveira, 2016). the development of mobile application-based digital services in academia has been widely researched. one of the topics discussed and developed by academics and practitioners in the field of marketing is e-servicescape. servicescape was developed by (bitner, 1992) which describes the ambient conditions, layout and functionality, as well as signs, symbols, and artifacts from the service delivery process of a company. the previous servicescape concept was intended for offline processes, but over time this concept was andriani, setyorini, & shibghatalloh │investigating e-servicescape influence to customer response in digital islamic banking international journal of islamic economics and finance (ijief), 4(1), 101-120 │ 103 updated to e-servicescape by harris and goode (2010) to reach the online service delivery process. the concept of e-servicescape is not only relevant to be developed as an online marketing strategy such as an online shopping application, but also relevant to be developed for mobile banking applications, as research conducted by sahoo and pillai (2017). mobile banking application development should indeed pay attention to the three dimensions contained in the e-servicescape concept to create value that can be felt by customers as application users. value creation has become a popular field in marketing and industrial research related to consumer behavior so it is an important concern for practitioners and academics (heinonen, 2004). all kinds of digital service development in islamic banking should pay attention to the value developed for later transfer to customers. if a service is considered valuable by a customer, the customer's response to the bank will be even more positive. one of the values that is important to develop is customer trust. the response shown by the user is an important indicator as an evaluation material and service development which should be continuously improved by the company. user responses will usually be manifested in the form of attitudes and implemented in the form of behavior. if users feel that they are benefited, then they will show a favorable attitude for the company. this is a big concern for the company to satisfy users. this phenomenon can be described in the theory of stimulus-organismresponse (sor) developed by russell and mehrebian in 1974. sor theory has provided a model for studying customer transaction processes (turley & milliman, 2000). based on previous research, sor theory has supported research using the e-servicescape dimension (kawaf & tagg, 2012). the sor theory is a theory that can be used to evaluate the development of electronic channel services to improve the experience of sharia banking customers. therefore, this study will examine the process of using the electronic channel of banking customers using this theory. objective the objectives of this study was to determine perceived of customer related to e-servicescape, trust, and virtual word of mouth. our motivation in this study is expanding research related to financial technology in the islamic banking sector and provide advice to practitioners to improve digital innovation in banking services to compete in an increasingly touchless industrial era. andriani, setyorini, & shibghatalloh │investigating e-servicescape influence to customer response in digital islamic banking international journal of islamic economics and finance (ijief), 4(1), 101-120 │ 104 this paper begins with a review of the phenomena of the development of digital innovation in the banking sector, especially islamic banking in indonesia. furthermore, simplification of the digital islamic banking phenomenon into a model that is explained using sor theory to make it easier to understand customer perceptions regarding the role of banking applications. the constructs used in this study are derived from previous studies as in the literature study. this study analyzes a conceptual model that has been developed using the sem pls method which is tested using the smart pls tool. the discussion of results and discussion is presented further in this paper. this research is closed with the conclusion of the research results along with the limitations and future research agenda. ii. literature review 2.1. background theory 2.1.1. stimulus-organism-response the stimulus organism response (sor) theory is a theory used to explain that the environment is a stimulus (s) which consists of a set of signs. after getting the stimulus (s) from this sign, a person's internal evaluation (o) appears. if evaluation (o) has been carried out then humans will generate a response (r) (mehrabian & russell, 1974). the sor model shows that the user's emotions are an important part of responding to stimuli from the environment (brown, mowen, donavan, & licata, 1996). this model also shows that conscious and unconscious perceptions and environmental interpretations affect what a person feels (donovan & rossiter, 1982). based on the sor theory, in previous studies the reputation and quality of electronic channel applications function as environmental stimuli, after which cognition and emotions function as organisms, and purchase intention functions as a response. 2.1.2. e-servicescape dailey (2004) defines e-servicescape as an internet-based web environment design to create a positive influence on users to increase favorable responses. harris and goode (2010) developed the e-servicescape concept by dividing it into three dimensions, namely layout and functionality, aesthetic appeal, and financial security. in online applications, aesthetic appeal refers to the ambient conditions of the application and the extent to which the user packs the servicescape concept as attractive (harris & goode, 2010). online layout refers to the arrangement of colors and designs, the organization of functions, structure, and adaptability of internet-based pages, while functionality refers to the extent to which something can accommodate services according to the andriani, setyorini, & shibghatalloh │investigating e-servicescape influence to customer response in digital islamic banking international journal of islamic economics and finance (ijief), 4(1), 101-120 │ 105 purpose of creating an application (bitner, 1992). online financial security is intended to facilitate a secure payment process in accordance with applicable policies (harris & goode, 2010). the internet site as an e-servicescape is evidence of a change in the business world which is expected to be a strategy to increase the success of a business (lai, chong, ismail, & tong, 2014). previous research has proven that consumer page trust and purchase intentions are influenced by eservicescape (harris & goode, 2010), trust (papadopoulou, andreou, kanellis, & martakos, 2001) , as well as customer cognitive and affective responses during transactions (eroglu, machleit, & davis, 2003). 2.1.3. trust perceived of trust in m-banking is defined as consumer trust that electronic payment transactions will be processed according to their expectations (tsiakis & sthephanides, 2005). consumers can make rational decisions based on knowledge and analysis based on feelings of trust and distrust. trust is the perception of consumers because they expect higher profits by using a product, while consumer distrust is their effort to reduce potential losses (kousaridas, parissis, & apostolopoulos, 2008). the trust issues required for electronic payment systems to be used as a general medium of financial transactions are: identification, authentication, accountability, authorization, and availability (tsiakis & sthephanides, 2005). some payment systems such as those on mobile phones can provide independence in time and place, remote payments, availability, and queue avoidance. 2.1.4. virtual word of mouth word of mouth is a tradition where this mode of communication was carried out at the earliest times (mayzlin, dover, & chevalier, 2014).katz and lazarsfeld provided the earliest explanation in the late 1960s, describing it as an important means of exchanging product-related information among consumers (katz & lazarsfeld, 1966). trusov, bucklin, and pauwels (2008) explain that word of mouth has the potential to shape consumer behavior towards a product or service, this is powerful tool for marketing. the advancement of information technology has made the use of the internet and social media very widespread, thus affecting the mode of communication preferred by people (chan & ngai, 2011). electronic word of mouth (e-wom) or virtual word of mouth has become the most common medium used to share opinions and reviews about various products and services available in the market (cheung & thadani, 2012). e-wom is in the form of statements made by potential customers, actual customers, or former customers about a product or company that is available to many people and institutions via the internet which contains positive or negative sentences. andriani, setyorini, & shibghatalloh │investigating e-servicescape influence to customer response in digital islamic banking international journal of islamic economics and finance (ijief), 4(1), 101-120 │ 106 2.2. previous studies the e-servicescape research conducted by (harris & goode, 2010) examined the dimensions of e-servicescape consisting of aesthetic attractiveness, layout and functionality, and financial security on trust on websites, then tested the relationship of trust in the website to purchase intention. (harris & goode, 2010) examined e-servicescape in the e-commerce context using an online survey method for data collection. the data processing method used a quantitative approach with sem. the results of their study stated that all hypotheses are accepted where the e-servicescape dimensions have positive effect on trust in the website and trust in the website has a positive effect on purchase intention. e-servicescape research is not only researched using an empirical research approach but also a literature research approach, as was done by (mari & poggesi, 2013) who researched with a qualitative approach. the research aims to fill the gap with a systematic literature review. their study reviewed 188 papers indexed in sixteen journals, the majority of which were indexed in q1. the results of their literature study contribute to deep understanding of the relationship between customer behavior and interpreting servicescapes more specifically. empirical research on e-servicescape in the context of banking has been conducted by (sahoo & pillai, 2017). their research examines the context of conventional banking only. the purpose of their research is to examine the effect of servicescape in the context of mobile banking on attitudes and customer engagement as mobile banking users. (sahoo & pillai, 2017) use online survey techniques for data collection methods. (sahoo & pillai, 2017) use sem to analyze conceptual models and test their hypotheses. their research results indicate that e-servicescape is a strong predictor of customer attitudes towards the use of mobile banking, which in turn affects customer engagement. in addition, other findings indicate that customer attitudes mediate e-servicescape on customer engagement. empirical research on e-servicescape in the field of e-commerce has been conducted by (tankovic & benazic, 2018). the research objective of them is to examine the relationship between e-servicescape dimensions on perceived value and to examine perceived value on customer loyalty. data collection used online surveys with criteria such as customers who made online purchases at least in the last six months. data processing using sem. their research results state that customer perceptions of e-servicescape positively affect the perceived value and loyalty of e-shopping. specifically, this study finds that the dimensions of e-servicescape are layout and functionality and financial security as the most prominent attributes in determining the perceived value of e-shopping that affects loyalty. andriani, setyorini, & shibghatalloh │investigating e-servicescape influence to customer response in digital islamic banking international journal of islamic economics and finance (ijief), 4(1), 101-120 │ 107 the latest e-servicescape research was carried out by (tran & strutton, 2020) in the field of e-commerce. their research objectives are to examine the dimensions of e-servicescape on trust, to examine trust on e-wom intention and customer loyalty. in addition, they compared the results of the influence test between consumers who receive messages via social media posts with email recipients. their research used an online survey then processed using sem. their results showed that customer reviews play an integral role in eservicescape construction, that e-servicescape has a positive impact on trust and then trust positively affects e-wom and customer loyalty. two groups of consumers are compared, and the results show the difference between consumers who receive messages via social media posts and recipients of email. 2.3. conceptual framework based on the sor theory, the stimulus is an organism's external environment that will influence the internal reactions of consumers. these reactions, in turn, drive external behavioral responses among organisms (mehrabian & russell, 1974). the response of these internal organisms includes both affective and cognitive elements and acts as stimulation. sor theory has supported the investigation of the dimensions of the e-servicescape atmosphere (specifically, website and service factors) on consumer behavior in the e-tailer environment (ha & lennon, 2010) and co-creation in forming online brand communities (kamboj, sarmah, gupta, & dwivedi, 2018). website reputation and quality serve as environmental stimuli. therefore, the characteristics of the application of islamic banking electronic channels (aesthetic appeal, design originality, entertainment value, usability, information relevance, interactivity, ease of transaction and application security) can stimulate and influence consumers to make transactions (tran & strutton, 2020). based on these theoretical reasons and previous reviews, the hypothesis we propose is as follows: hypothesis 1: (a) e-servicescape has a positive effect on aesthetic appeal (b) e-servicescape has a positive effect on design originality (c) e-servicescape has a positive effect on entertainment value (d) e-servicescape has a positive effect on usability (e) e-servicescape has a positive effect on the relevance of information (f) e-servicescape has a positive effect on interactivity (g) e-servicescape has a positive effect on ease of transactions (h) e-servicescape has a positive effect on application security andriani, setyorini, & shibghatalloh │investigating e-servicescape influence to customer response in digital islamic banking international journal of islamic economics and finance (ijief), 4(1), 101-120 │ 108 in sor theory, cognition and emotions function as organisms (tran & strutton, 2020). organisms are a form of response based on the stimuli that have been given. the message (stimulus) given by the communicator to the communicant (organism) can be accepted or rejected by the communicant. if the communicant refuses a given stimulus, it means that the stimulus is less effective. however, if the stimulus is received, it will give rise to a cognition and emotion. e-servicescape serves as a stimulus for trust in mobile banking customers. the concept of e-servicescape that is adapted to the development of digital media can be used to increase customer trust so that it will create positive responses. if the better the concept of e-servicescape in fulfilling customer desires, the higher customer trust in e-servicescape will be. based on these theoretical reasons and previous reviews, the hypothesis we propose is as follows: hypothesis 2: e-servicescape has a positive effect on trust based on the sor theory after consumers receive stimuli and process the stimulus they receive, this will lead to attitudes and actions to be taken by consumers (effendy, 2003). if based on the stimuli provided through eservicescape it is successful, it will raise a perception of trust in the minds of consumers. if consumers already have the trust, they will make an evaluation based on their experience using e-servicescape. evaluation can be in the form of customer reviews themselves (e-wom communication). recipients perceive customer reviews as more credible than messages conveyed through traditional marketing media. this is because 85% of consumers trust online reviews as well as personal recommendations (nazlan, tanford, & montgomery, 2018). the usefulness of information and the credibility of sources both have a positive influence on online opinion adoption (cheung, lee, & rabjohn, 2008; ismagilova, slade, rana, & dwivedi, 2020). based on these theoretical reasons and previous reviews, the hypothesis we propose is as follows: hypothesis 3: trust has a positive effect on virtual word of mouth iii. methodology 3.1. data the type of data used in this study is cross-sectional in which the type of data is used to capture a phenomenon at a certain time (couper & schindler, 2014). the sample collection technique used was purposive random sampling by determining certain criteria as respondents. the criteria for respondents determined by the research team are customers of islamic banks in indonesia who use mobile banking application services. the data was collected using an andriani, setyorini, & shibghatalloh │investigating e-servicescape influence to customer response in digital islamic banking international journal of islamic economics and finance (ijief), 4(1), 101-120 │ 109 online survey involving 158 respondents who are customers of islamic banks in indonesia. if the sample size is <250 then pls-sem has no problem in the process of identifying the relationship between theoretical constructs (reinartz et al., 2009) and has no special requirements tied to the distribution of manifest variables because it is a non-parameter method so we are using 158 respondents who are customers of islamic banks in indonesia as respondent. the format of the questionnaire chosen was a closed questionnaire by providing answers so that respondents were asked to choose between a series of answers given by the researcher (neuman, 2016). the measurement scale used in the questionnaire is a likert scale of 1 (strongly disagree) to 5 (strongly agree). the measurement indicators for the e-servicescape construct were adapted from harris and goode (2010) as research conducted by tankovic and benazic, (2018); tran and strutton (2020). e-servicescape is a construct with a reflective type. one example of an indicator for the e-servicescape construct used is "the appearance of the mobile banking application is visually attractive". the e-servicescape construct is a construct with several dimensions, namely visual appeal, entertainment value, design originality, usability, information relevance, customization, interactivity, application security, and ease of payment. however, in this study, we did not use the customization dimension because the mobile banking application was not custom created for individual. the measurement indicator for the trust construct is the consumer's belief that electronic payment transactions will be processed according to their expectations (mallat, 2007). an example of an indicator used to test the trust variable is "i believe making transactions via the mobile banking application is safe". the measurement indicators for the virtual word-of-mouth construct were adapted from (hennig-thurau, gwinner, walsh, & gremler, 2004; hung & li, 2007) as research conducted by tsao and hsieh (2012). one example of an indicator for the virtual word-of-mouth construct used is "i am willing to tell other internet users that i am a customer of a company's mobile banking application". 3.2. model development this study is explained more comprehensively using sor theory as previous studies that examined e-servicescape such as those conducted by (sahoo & pillai, 2017). in this research, e-servicescape functions as an environmental stimulus; trust as an organism; and virtual word of mouth as a response. a reflective model is used in this study to explain e-servicescape. the reflective indicator model is a condition in which indicators that can reflect latent andriani, setyorini, & shibghatalloh │investigating e-servicescape influence to customer response in digital islamic banking international journal of islamic economics and finance (ijief), 4(1), 101-120 │ 110 figure 1. research model variables, or in other words, latent variables is a reflection of the indicators. in the reflective indicator model mathematically places the indicator as if it is influenced by latent variables, but the independent variables do not have data. the use of a reflective model in this study is based on research proposed by harris and goode (2010) which formulated the concept of e-servicescape with a reflective model consisting of dimensions that reflect e-servicescape (usability, original design, entertainment value, aestethic appeal, etc). this study proposes a model as described in figure 1 research model. 3.3. method the collected data were processed using the partial least squares (pls) to analyze structural equations (sem). smartpls 3 software was used for data analysis (ringle et al., 2015). this research will use the second order confirmatory factor analysis method. so, data were analyzed in two steps. first, make a second order modeling then test the goodness of fit model. the goodness of fit test is done by using validity and reliability tests to identify the feasibility of the questionnaire used for data collection. especially in testing the servicescape variable is measured based on the dimensions that reflect it. the validity test refers to the truth or accuracy which informs that the indicator is the right fit with the operational definition of a construct that can be measured by the indicator (neuman, 2016). the validity test is seen from the average variance extracted (ave) value where the construct is said to be valid if the ave value is > 0.5. the reliability test reflects the internal consistency of the measuring instrument (hair et al., 2014). the reliability test andriani, setyorini, & shibghatalloh │investigating e-servicescape influence to customer response in digital islamic banking international journal of islamic economics and finance (ijief), 4(1), 101-120 │ 111 is viewed from the cronbach alpha (ca) or composite reliability (cr) value, which constructs are reliable if the ca or cr value is ≥ 0.7. second, test the hypothesis according to the proposed model. parameters in pls sem hypothesis testing are the result of t-statistic> 1.96 to support the hypothesis. meanwhile, if the results of t-statistics <1.96 then the hypothesis is not supported. meanwhile, the effect size and direction of the effect can be seen from the path estimate value (hair et al, 2014). iv. results and analysis 4.1. results this study uses validity and reliability tests to measures the feasibility of the instrument. the validity test consists of the convergent validity test. the discriminant validity test is declared good when the indicator of the construct has the highest loading value in its group or column (hair et al., 2014). based on the results of the validity test above, all the results of the convergent validity test showed the ave value> 0.5 so that all constructs in the study were declared valid. the results of the validity test are presented in table 1 result of validity testing. this study will compare the cr and ca values to choose which one has the highest value, then it will be used as the result of the reliability test. based on the reliability test results above, all reliability test results show that the cronbach alpha value exceeds 0.6 so that all constructs in the study are valid and can be used to carry out further testing. the results of the reliability test are presented in table 2 result of reliability testing. table 1. result of validity testing constructs ave value result aesthetic appeal 0.752 valid entertainment value 0.645 valid originality design 0.810 valid usability 0.677 valid relevance information 0.838 valid interactivity 0.690 valid perceived security 0.773 valid easy of payment 0.748 valid trust 0.842 valid virtual word of mouth 0.797 valid source: processed data, 2020 andriani, setyorini, & shibghatalloh │investigating e-servicescape influence to customer response in digital islamic banking international journal of islamic economics and finance (ijief), 4(1), 101-120 │ 112 table 2. result of reliability testing constructs cronbach alpha composite reliability result aesthetic appeal 0.890 0.924 reliable entertainment value 0.816 0.878 reliable originality design 0.768 0.895 reliable usability 0.903 0.926 reliable relevance information 0.961 0.969 reliable interactivity 0.775 0.869 reliable perceived security 0.901 0.931 reliable easy of payment 0.887 0.922 reliable trust 0.906 0.941 reliable virtual word of mouth 0.916 0.940 reliable source: processed data, 2020 hypothesis 1 (a-h) was tested using path analysis. in this test the research team used sem with a second order. based on hypothesis 1 (a-c) it is known that the effect of visual attractiveness on e-servicescape is accepted with path estimate = 0.842, t-value = 11.585, and p-value <0.05. meanwhile, based on hypothesis 1 (d) and (e) usefulness it is known that the effect of usability on e-servicescape is accepted with path estimate = 0.884, t-value = 23.787, and p-value <0.05. furthermore, for hypothesis 1 (f) which represents interactivity it is known that interactivity has an effect on e-servicescape is accepted with path estimate = 0.817, t-value = 20.932, and p-value <0.05, while application security is known that the effect of security on e-servicescape is accepted with path estimate = 0.700, t-value = 9,684, and p-value <0.05. hypothesis 2 states that e-servicescape has an effect on trust is accepted with path estimate = 0.780, t-value = 11.083, and p-value <0.05. hypothesis 3 states that trust influencing e-wom is accepted with path estimate = 0.533, t-value = 6.475, and p-value <0.05. the smart pls output display in figure 2 hypothesis testing results and the hypothesis test result summary in table 3 resume of the result. andriani, setyorini, & shibghatalloh │investigating e-servicescape influence to customer response in digital islamic banking international journal of islamic economics and finance (ijief), 4(1), 101-120 │ 113 figure 2. hypothesis testing results source: processed data, 2020 table 3. resume of the result hypothesis path estimate p-value t-value result e-servicescape 🡪 aesthetic appeal 0.842 <0.05 18.585 supported e-servicescape 🡪 entertainment value 0.799 <0.05 17.686 supported e-servicescape 🡪 originality design 0.794 <0.05 15.892 supported e-servicescape 🡪 relevance of information 0.844 <0.05 8.780 supported e-servicescape 🡪 usability 0.881 <0.05 23.787 supported e-servicescape 🡪 interactivity 0.817 <0.05 20.932 supported e-servicescape 🡪 easy of payment 0.824 <0.05 14.771 supported e-sercivescape 🡪 perceived security 0.700 <0.05 9.684 supported e-servicescape 🡪 trust 0.784 <0.05 12.235 supported trust 🡪 virtual word of mouth 0.533 <0.05 6.435 supported e-servicescape -> virtual word of mouth 0.418 <0.05 5.491 supported source: processed data, 2020 4.3. analysis electronic channels are an innovation in banking services where there are multi-faceted, intangible services and innovative service delivery media (rao & troshani, 2007). researchers have agreed that among various electronicbased self-services, mobile banking applications are a useful platform for digital banking and other financial services (moser, 2015; wessels & drennan, 2010). given the importance of e-servicescape, previous studies on eservicescape have analyzed the role of content and features of mobile banking applications in customer responses (akturan & tezcan, 2012). andriani, setyorini, & shibghatalloh │investigating e-servicescape influence to customer response in digital islamic banking international journal of islamic economics and finance (ijief), 4(1), 101-120 │ 114 the results of this study support harris and goode (2010) that aesthetics, usability, and financial security play an important role in determining customer behavior and can affect customer customer experience. this is in line with the stimulus-organism-response theory which states that the environment is a stimulus (s) consisting of a set of signs that causes a person's internal evaluation (o) and then produces a response (r) (mehrabian & russell, 1974). this study reveals that there is a combination that is a determining factor in islamic banking services or e-servicescape. this determining factor is a stimulus according to the s-o-r theory, namely visual attractiveness, application security, entertainment value, originality of design, relevance of information, interactivity, ease of transaction and usability. based on the e-servicescape dimension, we can see that this is something that can improve the customer experience of banking customers. additionally, previous research has examined s-o-r frameworks in other electronic environments, such as online banking. online applications usually use emotional experiences as states of organisms that lead to individual responses. however, eroglu et al., (2003) show that emotional schemas do not capture many of the effects of atmospheric cues. therefore, this study argues that the overall customer attitude towards the mobile banking application can be seen as a fluctuating cognitive and affective state with guidance from the mobile banking application environment. supported by eroglu et al. (2003), the study found that customer trust in e-servicescape serves as a strong mechanism that shapes customer perceptions of eservicescape into engagement behavior. therefore, this study suggests that future research should consider the overall attitude of consumers as elements of organisms in the so-r research framework. the assessment that consumers like about e-servicescape will shape the evaluation of the preferred e-servicescape. this evaluation served as the main intermediary to shape their engagement with e-servicescape. therefore, strong customer involvement in e-servicescape requires the development of good customer perceptions of their overall environment and associated evaluations. the results of this study reveal that after banking customers have good confidence in e-servicescape, then this will have an impact on customers' virtual word of mouth behavior in using islamic banking eservicescape. andriani, setyorini, & shibghatalloh │investigating e-servicescape influence to customer response in digital islamic banking international journal of islamic economics and finance (ijief), 4(1), 101-120 │ 115 iv. conclusion and recommendation 5.1. conclusion based on the results of hypothesis testing, the results show that all dimensions of e-servicescape have a positive significant effect on eservicescape, e-servicescape has a positive significant effect on trust, and trust has a positive significant effect on customer virtual word-of-mouth. as the existing literature application-based internet development must pay attention to all dimensions contained in e-servicescape. this shows that all dimensions of e-servicescape play an important role in influencing customer responses are trust and virtual electronic word of mouth. 5.2. recommendation this research contributes both theoretically and practically. this study contributes theoretically in adding to the variety of research objects in the eservicescape concept, which is usually e-servicescape is more often used in online shopping research, but this research tries to apply the e-servicescape concept in the field of digital banking, especially in islamic banking. in addition, expanding the use of sor theory in the context of digital banking. the practical contribution that can be given from this research is that first, service providers should pay attention to visuals that are good, entertaining, informative, easy to read, and provide clear instructions for each menu. second, implementing layered security to anticipate virtual crimes against the internet banking system to maintain customer confidence in transactions and provide clear information about the security and confidentiality guarantees provided by customers. this study also have several limitation, the number of samples is too small so that future studies are expected to be able to increase the number of samples to get better geeralization results. this study only examines e-servicescape in the context of islamic banking, so it is suggested that future studies also examine the context of conventional banking and then compare the both. this study only captures at customer responses in terms of virtual word-of-mouth, so it is suggested that future research can add other constructs as dependent constructs that can capture customer responses in other forms such as customer engagement. in addition, future research is suggested to test eservicescape in other financial technology contexts such as electronic money application services to increase the variety of findings related to eservicescape in the context of digital finance. andriani, setyorini, & shibghatalloh │investigating e-servicescape influence to customer response in digital islamic banking international journal of islamic economics and finance (ijief), 4(1), 101-120 │ 116 references akturan, u., & tezcan, n. 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(2010). an investigation of consumer acceptance of m-banking. international journal of bank marketing, 28(7), 547–568. https://doi.org/10.1108/02652321011085194 andriani, setyorini, & shibghatalloh │investigating e-servicescape influence to customer response in digital islamic banking international journal of islamic economics and finance (ijief), 4(1), 101-120 │ 120 this page is intentionally left blank. international journal of islamic economics and finance (ijief) vol. 4(1), page 31-50, january 2021 the determinant of fdi inflows in oic countries tania megasari universitas gadjah mada, indonesia corresponding email: taniamegasari02@gmail.com samsubar saleh universitas gadjah mada, indonesia, ssamsubar@yahoo.com article history received: july 29th, 2020 revised: january 15th, 2021 accepted: january 21st, 2021 abstract this study aims to analyze the determinants of foreign direct investments (fdi) incountry members of the organization of islamic cooperation (oic) from 2005 to 2018. the determinant variables of fdis are corruption, political stability, and macroeconomic variables, such as inflation, exchange rates, economic growth, and trade openness. the analysis used in the study is the fixed effect model (fem) of the oic data panel. the results showed that economic growth and trade openness significantly influenced foreign direct investment (fdi), while the effects of corruption, political stability, inflation, and the exchange rate had none. the results imply that governments need to increase the degree of economic openness by reducing trade barriers (exports and imports), both in the form of rates and non-rates. keywords: corruption, political stability, macroeconomic variables, fdi, oic jel classification : f21; f50; o50 type of paper: research paper @ ijief 2021 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.v4i1.9473 web: https://journal.umy.ac.id/index.php/ijief/article/view/9473 citation: megasari, t & saleh, s. (2021) the determinant of fdi inflows in oic countries. international journal of islamic economics and finance (ijief), 4(1), 31-50. doi: https://doi.org/10.18196/ijief.v4i1.9473. mailto:taniamegasari02@gmail.com https://doi.org/10.18196/ijief.v4i1.9473 https://doi.org/10.18196/ijief.v4i1.9473 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v4i1.9473&domain=pdf megasari & saleh │ the determinant of fdi inflows in oic countries international journal of islamic economics and finance (ijief), 4(1), 31-50 │ 32 i. introduction oic is an organization consisting of 57 islamic countries as a forum for cooperation in various fields, not only in politics but also in the economic field and many more. the level of development in member countries of the oic is very diverse. they are separated into groups that are considered low, low to middle, upper-middle, and high. according to the world bank (2018), only 12.29% of oic member countries are included in high-income countries. therefore, most oic countries’ economies are still lagging behind non-oic member countries. one of the ways to increase economic growth is through investments. according to harrord (1939) and dhomar (1946) theory, advancing economic growth can be done through investments because it would raise a country's productivity. foreign and local investors could make investments. foreign direct investment (fdi) is an investment from a foreign country, which means external financing. however, developing countries' external funding to achieve sustainable goals tends to be large and is generally unfulfilled due to investor speculation. based on a survey from global investment competitiveness (2017), one of the essential factors in investor decision making is political stability, security, and the bureaucratic environment. to create political stability is to eradicate corruption. with the eradication of corruption, political stability will positively impact macroeconomic stability. variables that affect fdi include inflation, exchange rates, economic growth, and trade openness. so that foreign investors are interested in investing in the political economy, some researches have been conducted using nonoic countries. ghairabeh has done the first research in 2015 that examines the determinants of fdi in bahrain—followed by (boateng, hua, nisar, & wu, 2015) that examines fdi determinants in norway. canare (2017) examined the effects of corruption on fdi. third, (karim, karim, & nasharuddin, 2018) reviewed the influence of corruption and fdi in 5 asean member countries. fourth, (asamoah, adjasi, & alhassan, 2016) examined macroeconomic uncertainty, fdi, and institutional quality in sub-saharan african countries. these studies examine only one country or countries in a development level group. therefore, the researcher was interested in oic countries due to their varying developments and income leveling from low to high. it will determine which fdi has the most decisive influence in each country based on their national income, allowing for grand policies that positively impact the countries. megasari & saleh │ the determinant of fdi inflows in oic countries international journal of islamic economics and finance (ijief), 4(1), 31-50 │ 33 1.1. objective this research has two objectives, to analyze the relationship between corruption, political stability, macroeconomic variables, and fdi in oic countries and discuss what policies should be made by oic countries' members. fdi is influenced by various factors, including corruption, political stability, and macroeconomic variables. macroeconomic variables that affect fdi include inflation, exchange rates, economic growth, and trade openness. research on the factors that influence fdi is interesting to discuss because each country has its policies and will affect the flow of fdi in the country. the paper comprises five sections. the next section provides the literature review. the methodology is discussed in the third section, followed by; and the results and analysis in the fourth section. the final section presents the conclusion and recommendations. ii. literature review 2.1. background theory foreign direct investment (fdi) is an international capital flow when companies from one country open their branch into other countries. fdi is not only a capital; investors are also in control of the company, so that subsidiary companies have the same organizational structure as the parent company. there are two reasons for firms to go international, to serve foreign markets, and to reduce production cost. fdi has two types, namely vertical fdi and horizontal fdi. vertical fdi is an investment where the business activities are different from their parent company because it has a different geographic location where the production cost is cheaper. hence, it becomes profitable to split the production chain. horizontal fdi is an investment where the business activities are similar to the parent company. it happens because it’s cheaper to duplicate the same products in different countries (krugman, obstfeld , & melitz, 2012). fdi has positive and negative effects on the host country. the positive results are, 1) increasing output product, 2) raising wages, 3) lowering unemployment rate, 4) raising exports, 5) raising tax revenues, 6) giving technical and managerial skills and acquiring new technologies, 8) decreasing the power of domestic monopoly. while the adverse impact is 1) bringing losses to the commodity terms of trade, 2) deepening the pricing transfer, 3) deepening the domestic investment, 5) growing instability in the balance of payment and exchange rate, 6) removing the control of domestic policy, 7) megasari & saleh │ the determinant of fdi inflows in oic countries international journal of islamic economics and finance (ijief), 4(1), 31-50 │ 34 raising the number of unemployment, 8) creating local monopolies, 9) local education and skills are underpaid (appleyard, field, & cobb, 2014). moosa (2004) claims five theories describe the foreign direct investment: 1) the differential return rate that the current capital from one country to another with a low return rate would move to a faster return rate. fdi decided on two considerations: marginal return and marginal cost. 2) the diversification fluctuations mean the investment decision in a project is not only calculated by the rate of return but also by the magnitude of the potential risks. in this theory, there are three levels of investors. the first is risk-averse. at this level, the investor has the nature of avoiding risk to choose a low-risk group project. however, sometimes it has a low-risk rate. the second is an average risk. at the average level, the investor has a proportionate nature of viewing risk by investing in a moderate risk project. the last is the risk-taker. at this rate, the investor has the bold nature of taking significant risks because it has a high return rate. 3) the output and market size suggest that its small size fdi flows into a country depending on the size of the output from multinational corporations on the country or the size of the market size of the country's goals is based on gdp. 4) the currency areas hypothesis is a theory that states that a corporation in a country that has a substantial currency value compared with others will generally invest in another country. 5) the product life cycle hypothesis is a theory which states that the first released product in the land of origin is an innovation, but over time it will be standardized. fdi has emerged due to corporate reactions to overseas expansion, which is at risk of losing the market as its products continue to grow. corruption is a behavior that deviates from formal duties and public roles (nye, 1967). this deviation occurs because of personal interests in obtaining a certain amount of money or status that violates the rules or abuses authority. according to (othman, shafie, & hamid, 2014), there are three main reasons why a person commits corruption, power, opportunity, and low moral impurity. when a country has a high level of corruption, the business environment will be affected, causing foreign investors to be more likely to lose assets or have fewer profit margins. hence, foreign investors, in choosing their destination country, would consider the extent of the corruption of the target country. foreign investors would select countries with adequate capabilities to protect assets and profit margins. political stability, according to ake (1975), is an orderly flow of changes in political rules. if the flow of political exchange is more organized, politics will be stable. political stability and security are absolute conditions for economic development. political policies, events, or conditions in the less stable and megasari & saleh │ the determinant of fdi inflows in oic countries international journal of islamic economics and finance (ijief), 4(1), 31-50 │ 35 poor host countries will affect the business environment, so foreign investors tend to lose assets or have fewer profit margins (howell & chaddick, 1994) the exchange rate is the unit price of a currency in another currency (samuelson, 2001). the exchange rate presents exchange rates from one currency to another, allowing for various international transactions such as trade between countries, tourism, global investment, and other international transactions. goldbreg & kolstad (1995) states that when a country's currency depreciates, the price of goods and services from foreign currencies becomes cheaper. so, it would attract foreign investors to invest in the country because it would get more profit. inflation is a monetary phenomenon that occurs because of a decline in the value of the economic calculation unit of a product. according to mishkin (2008), inflation is a continuous increase in the price of both goods and services in general, so that it affects various groups from individuals to the government. foreign investors will find it challenging to set fees and prices from products when they are high. when high inflation rates persist over a long period, foreign investors will tend to reduce the power invested in the country (asamoah et al., 2016). a high inflation rate will reduce the inflow of fdi into the host country. economic growth is an indicator used to show economic activity changes within a certain period. economic growth is generally calculated using the gross domestic product (gdp). the concept of measuring economic growth has shortcomings because it only shows economic value, so it cannot measure the community's welfare as a whole. according to the (harrord, 1939) and (dhomar, 1946) theory, when economic growth becomes higher and it will attract to invest. a country that has a high level of trade openness may mean it can be interpreted that the government has an international economic activity that can attract foreign investors. so, if trade openness is high, that means the country is in good condition to receive foreign investment. 2.2. previous studies until now, the topic of fdi’s determinants still attracts the attention of researchers, as can be seen from the large number of studies examining a specific country (boeateng et al., 2015; ghairabeh, 2015) and in a group of countries (gangi & abdulrazak. 2012; asamoah et al., 2016; canare. 2017; kumari & sharma. 2017; karim et al., 2018) gangi & abdulrazak (2012) examined the impact of government indicators on fdi in africa between 1966 and 2010. the results obtained are that three of the six indicators have a significant effect. the indicators were voice and megasari & saleh │ the determinant of fdi inflows in oic countries international journal of islamic economics and finance (ijief), 4(1), 31-50 │ 36 accountability, government effectiveness, and law rule. these results indicate that countries in africa need to improve their government conditions, to improve the investment climate and fdi. boetang et al. (2015) examined the determinants of norway’s fdi between 1986 and 2009. the results obtained are that economic growth, exchange rates, and trade openness have significant positive effects on fdi. in contrast, money supply, inflation, unemployment, and interest rates have significant adverse effects on fdi. so, it can be concluded that to promote a competitive advantage in the country of origin, the government needs to pay attention to macroeconomic policies. between 1980 until 2013 in bahrain, general government consumption expenditure, inflation rate, and economic stability were represented by annual interest rates, labor force, trade openness, public education, and population. it has a statistically significant relationship with fdi inflows (ghairabeh, 2015). therefore, these factors are considered the main aspects of bahrain’s fdi entry. asamoah et al. (2016) examined the macroeconomic variables, fdi, and institutional quality in sub-saharan african countries between 1996 and 2011. the results obtained were that the quality of institutions, economic growth, and exchange rates significantly affected fdi. so that it can be concluded that sub-saharan countries need methods to improve the quality of institutions, one of which is by planning government policies that can attract foreign investors to invest. canare (2017) discusses the effects of corruption on 46 countries in the asia pacific. this study indicates that corruption has a significant impact on fdi in high-income countries. however, in low and middle-low-income countries, it can be understood that foreign investors see other factors such as the quality of the regulator. kumari & sharma (2017) researched the determinants of fdi in twenty developing countries in asia from 1990 to 2012 with seven variables. the research found that four variables, namely market size, trade openness, interest rate, and human capital yield, significantly affect fdi. as policymakers, it is necessary to make more friendly foreign investors' regulations and further improve human capital. karim et al. (2018) examined corruption and its effect on fdi in asean-5 countries. the results obtained were that corruption and economic growth significantly affected fdi. therefore, governments need to cooperate and continue to improve the integrity and credibility of their administration and megasari & saleh │ the determinant of fdi inflows in oic countries international journal of islamic economics and finance (ijief), 4(1), 31-50 │ 37 transactions. besides, maintaining sustainable economic growth is also a significant factor in attracting more fdi inflows in the future. iii. methodology 3.1. data the study used a dataset of selected oic member states. data were collected from the world governance indicator, world bank, and the statistical, economic, and social research and training centre for islamic countries (sesric). the data used is annual data covering 2005 to 2018. period range selection is limited by adequate data availability for all variables. based on the consideration of data availability, this study uses a sample of 47 countries from 57 oic member countries or represents 82.45% of all oic countries. the unavailability of data caused the explanation of the ten countries not included in the study. 3.2. model development in this study, the author used a panel data model because it combines crosssection data and time-series data. the panel data model has advantages over cross-section and time-series data in using all the evidence obtained, which are allow us to test more complicated than pure cross-section or time-series data (baltagi, 2005). this study aims to determine fdi and use independent variables from macroeconomic factors such as economic growth, inflation, exchange rate, trade openness, and institutional factors such as corruption and political stability. this relationship can model as: fdi = f(cc, psav, inf, gdpgr, to, er) (1) fdi here represents foreign direct investment inflow in oic countries; cc represents corruption control. this index is an indicator that captures perceptions of the extent to which public power is exercised for private gain, including minor and major forms of corruption by rulers and private interests. the control of the corruption index gives scores ranging from -2.5 to 2.5 for each country. a higher index value indicates that the level of corruption in a country is relatively low. on the other hand, if it is close to -2.5, the level of corruption in that country is high. psav represents political stability and the absence of violence. the political stability index is when a government is megasari & saleh │ the determinant of fdi inflows in oic countries international journal of islamic economics and finance (ijief), 4(1), 31-50 │ 38 elected, monitored, and replaced. the political stability index provides scores ranging from -2.5 to 2.5 for each country. a higher index value indicates that the level of political stability in a country is relatively stable; on the other hand, if it approaches -2.5, the level of political conditions in that country is unstable. inf is defined as inflation. inflation used in this study is a consumer price index that describes the percentage of annual change in the average consumer's cost of obtaining goods and services. gdpgr represents gross domestic product growth, and to is defined as trade openness. the trade openness variable is obtained from the calculation between the number of exports and imports of goods and services, which are measured as part of gdp. so, when a country in higher exports and imports percentage of gdp, the chance of open trade is high. er represents the exchange rate. the exchange rate used in this study is the official exchange rate (lcu per us$, period average). in this study, the exchange rate converted into logarithmic to reduce the chance of heteroskedasticity in this study, we used panel data of 47 oic countries from 2005 to 2018 and used fixed effects within group model. this model approach reduces unobserved error by assuming each period's characteristics are the same. the errors can be classified into two classifications: time-variant error (v) and idiosyncratic error (μ). because the time-variant error value does not change for each individual, it can be eliminated by reducing the time-variant error by the time-variant error rate itself. the impact is that all variables and idiosyncratic errors are less than their mean. besides, to increase efficiency in the model, a robust standard error is possibly used. (woolridge, 2012). the analytical model in this study can be formulated as follows: fdiit = β0 + β1ccit + 𝛽2𝑃𝑆𝐴𝑉𝑖𝑡 + 𝛽3𝐼𝑁𝐹𝑖𝑡 + 𝛽4𝐸𝑅𝑖𝑡 + 𝛽5𝐺𝐷𝑃𝑔𝑟𝑖𝑡 + 𝛽6𝑇𝑂𝑖𝑡 + 𝜀𝑖𝑡 (2) where: fdi : foreign direct investment β0 : intercept cc : control of corruption psav : political stability and the absence of violence inf : inflation er : exchange rate gdpgr : gross domestic product growth to : trade openness 𝜀 : error term megasari & saleh │ the determinant of fdi inflows in oic countries international journal of islamic economics and finance (ijief), 4(1), 31-50 │ 39 3.3. method this study uses panel data analysis techniques. panel data analysis technique is a combination of cross-section data, which is symbolized by n, and timeseries data, illustrated by t (hsiao, 2007). panel data analysis has advantages over several other analytical techniques, including panel data with more diverse sample data than cross data and time series so that degrees of freedom will be higher and thus produce more efficient econometric estimates. (hsiao, 2007) according to hsiao (2007), there are three approaches in the static panel regression model, which is, 1) common effect model (cem). cem is the most straightforward modeling technique for estimating the parameters. cem is done by combining cross-section and time-series data without paying attention to the differences between the individual and the time. 2) fixed effect model (fem). in the regression panel, there is a possibility of unobserved error being present because there’s a repeat of identity all the time. therefore, the unobserved error must be eliminated to ensure that the model estimate capabilities are improved. in fem, the unobserved error is assumed in time-invariant. 3) random effect model (rem). this modeling technique takes that disorder variable maybe interrelates between time and between individuals. so, it does not correlate with the oft-examined definitional variable. classic assumption tests were made before regression testing the static data panel. there are three definitive assumption tests: multicollinearity test, heteroscedasticity test, and autocorrelation test. after that, three tests to choose the most precise model to manage the data panel, which is, 1) chow test, is a test to determine whether fem or cem is best used in estimating static panel data, 2) hausman test is a test to determine whether fem or rem is best used to estimate static panel data, and 3) lagrange multiplier test determines whether rem or cem is best used in evaluating static panel data. this study uses fem with robust regression. its means that the test was conducted on models with heteroscedasticity and autocorrelation problems (wooldridge, 2002). the usage of fem will minimize the error and resolve heteroscedasticity and autocorrelation issues in the model. megasari & saleh │ the determinant of fdi inflows in oic countries international journal of islamic economics and finance (ijief), 4(1), 31-50 │ 40 iv. results and analysis 4.1. results table 4.1. descriptive statistics of determinant fdi variable obs mean std. dev min max fdi 658 4.231056 5.118182 -4.852285 39.4562 cc 658 -0.5872222 0.6127743 -1.638287 1.567186 psav 658 -0.6382845 0.9193312 -2.82731 1.387627 inf 658 5.462609 6.361138 -10.06749 63.29 er 658 1.685307 1.234287 -0.5705249 4.153417 gdpgr 658 4.680932 4.207697 -20.59877 34.46621 to 658 79.43852 34.9056 19.1008 203.8546 * foreign direct investment net inflows (fdi) as the dependent variable source: primary data processed (2010) the descriptive statistical analysis aims to describe the data used by compiling and arranging data based on specific sizes without intending to conclude. the statistical measures commonly used for descriptive statistical analysis are mean, maximum, minimum, and standard deviation (table 4.1.) the fdi variable has a maximum value of 39.4562, a minimum value of 4.852285, and a mean value of 4.231056. in table 4.1, it can be seen that the standard deviation of fdi has a value that is greater than the mean, so it can be concluded that there is a data imbalance. the highest fdi value was 39.4562, and the lowest was -4.852285 percent of its contribution to gdp. the highest was in the country of mozambique in 2013 and the lowest in chad in 2014. the lowest score experienced by the government of chad illustrates that there was considerable disinvestment that year. the score shows the imbalance of foreign investment in oic member countries. the mean value of 4.231056 shows that the fdi level in oic countries has a positive growth of 4.23%. the control of corruption variable has a maximum value of 1.567186 achieved by the qatar state in 2009, while the lowest control of corruption value is the afghan state in 2008, which reached -1.638287. the mean value is 0.5872222, and the standard deviation is 0.6127743. it can be concluded that the oic member countries are still weak to eradicate existing corruption. the situation also happens to the political stability of oic member countries. in the range of 2005 to 2018, the mean value of political stability was 0.6382845, and the standard deviation value was 0.9193312. the maximum value of political stability was 1.387627 in brunei darussalam in 2009, and the lowest minimum value of -2.82731 in the country of iraq in 2006. the leading megasari & saleh │ the determinant of fdi inflows in oic countries international journal of islamic economics and finance (ijief), 4(1), 31-50 │ 41 cause of the low level of political stability in oic member countries is that there are still rampant civil conflicts between oic member states. the inflation variable has a mean value that is smaller than the standard deviation of 5.462609, while the standard deviation is 6.361138, so that it can be seen that there is an imbalance in oic member countries. the minimum value of -10.06749 in iraq in 2007, the maximum value of 63.29 in the government of sudan in 2018. with a massive ratio of minimum and maximum values, it can be seen that there is quite a difference in the inflation rate between oic member countries, especially in developing countries. or less developing countries. meanwhile, the exchange rate variable has a maximum value of 4.153417, a minimum value of -0.5705249, a standard deviation of 1.234287, and a mean of 1.685307. the exchange rate variable has a standard deviation value smaller than the mean value, so it can be concluded that there is no data imbalance. the highest exchange rate, namely 4.153417, occurred in indonesia in 2018, while the lowest exchange rate was -0.5705249 in kuwait in 2008. the gdp growth variable has a maximum value of 34.46621, a minimum value of -20.59877. the gdp growth variable has a standard deviation value smaller than the mean value, which is 4.207697, while the mean value is 4.680932, so it can be concluded that there is no data inequality. the highest gdp growth value was 34.46621 achieved by azerbaijan in 2006, and the lowest was 20.59877 in sierra leone in 2015. the mean value is 4.680932, which means that oic member countries have a positive economic growth rate of 4.68% the exchange trade openness (to) variable has a maximum value of 203.8546 in malaysia in 2005. a minimum value of 19,1008 occurred in sudan in 2015, a standard deviation of 34,90564 and a mean of 79.43852. the trade openness variable has a standard deviation value smaller than the mean value, so it can be concluded that there is no data imbalance. table 4.2. the results of chow test, hausman test, and lagrange multiplier test model* model prob. result decision predictors: control of corruption (cc), political stability and absence of violence (psav), inflation (inf), growth gdp per capita (gdpgr), exchange rate (er), trade openness (to) chow (cem: fem) 0,000 fixed effect model fixed effect model hausman (rem: fem) 0.0037 fixed effect model lagrange multiplier (cem: rem) 0.0000 random effect model source: secondary data processed (2020) megasari & saleh │ the determinant of fdi inflows in oic countries international journal of islamic economics and finance (ijief), 4(1), 31-50 │ 42 based on table 4.2, it can be decided that the fixed effect model (fem) is better than the expected effect (cem) and the random effect (rem) model. in the chow test and the hausman test, the fixed effect model was chosen because the probility value is smaller than the significance value α = 0.05. in the langrange multipler test, random effect model (rem) is better than the expected effect (cem) because the probility value is smaller than the significance value α = 0.05 the conclusion is that the fixed effect model is the best model for this study, among other models because in the chow test and the hausman test has a same results. the multicollinearity test detects whether the correlation relationship exists between independent variables. table 4.3. shows that the overall value of the correlation coefficient is less than 0.8, where if the value of the correlation coefficient is less than 0.8, then there exists no multicollinearity between independent variables. the heteroscedasticity test detects whether there is a constant error variance. the wald test did the test in this study. table 4.4. shows that the value (prob> chi2) is 0.0000, which means the value (prob> chi2) is smaller than the significance value α = 0.05. the number means that there is a heteroscedasticity problem in the model. the autocorrelation test detects whether there exist residual correlations between observation units. table 4.4 shows that the value (prob> f) is smaller than α = 0.05, which means that the autocorrelation test results have autocorrelation problems. table 4.3. multicollinearity test variable fdi cc psav inf er gdp gr to fdi 1.000 cc -0.0186 1.0000 psav 0.1268 0.6645 1.0000 inf 0.0922 -0.2797 -0.3279 1.0000 er -0.0154 -0.5753 -0.3193 0.0511 1.0000 gdp gr 0.2221 -0.0497 -0.0269 0.0890 0.0162 1.0000 to 0.3152 0.4265 0.3639 -0.1614 -0.4086 0.0440 1.0000 source: secondary data processed (2020) table 4.4. result of heteroscedasticity & autocorrelation test heteroscedasticity test autocorrelation test prob>chi2 prob > f 0.0000 0.0000 source: secondary data processed (2020) megasari & saleh │ the determinant of fdi inflows in oic countries international journal of islamic economics and finance (ijief), 4(1), 31-50 │ 43 table 4.5 the empirical results variable coefficient cc 1.480789 (0.118) psav -0.0588752 (0.918) inf 0.0378151 (0.290) er 0.6398378 (0.538) gdp gr 0.1877152* (0.008) to 0.0972672* (0.001) c -4.831105 r2 0.1793 adjustedr2 0.1169 prob>f 0.0001 * significant source: secondary data processed (2020) the fixed-effect model in this paper encountered heteroscedasticity and autocorrelation problems. this problem can be solved by the robust standard error method. the full standard error can correct standard errors in models with heteroscedasticity and autocorrelation problems (wooldridge, 2002). table 4.5 shows the value smaller than 0.05, which meant that economic growth and trade openness significantly affect foreign direct investment. meanwhile, the other variables, such as corruption, political stability, inflation, and exchange rate, has no significant effect on foreign direct investment because of their significance value more significant than 0.05, and the panel data regression estimation showing the influence of the independent variables on the dependent variables. based on table 4.6, the rsquares value is 0.1169. the value of 0.1169 indicates that the independent variable can explain 11.69% of the dependent variable's variation. 4.2. analysis first, the corruption variable shows a significance value of 0.118 (p > 0.05), which means that it has no significant effect on foreign direct investment. this result is impressive because oic countries' majorities contain low and middlelow countries, whereas corruption is worse among developing countries. the result can be explained by how foreign investors see other institutional megasari & saleh │ the determinant of fdi inflows in oic countries international journal of islamic economics and finance (ijief), 4(1), 31-50 │ 44 variables. the results of this study are consistent with the results of research conducted by gangi & abdulrazak (2012), jadhav (2012), udenze (2014), and canare (2017). second, political stability shows a significance value of 0.918 (p > 0.05), which means that it has no significant effect on foreign direct investment. the regression coefficient value of political stability (psav) is -0.0588752. the result happens because there are differences in each investor in assessing the political risk. each foreign investor also has its preferences for investing in a country, one of which is the natural resources that are profitable for the country. each country has its characteristics that attract investors. investors themselves have several ways to reduce the effects of political risk by using political risk insurance so that political stability does not affect investors to invest in a country. the results of this study are consistent with research conducted by jaspersen (2000), hausman and fernandez (2000), gangi & abdulrazak (2012), jadhav (2012), kurul and yalta (2017), which state that political stability does not affect foreign direct investment (fdi). third, inflation shows a significance value of 0.290 (p > 0.05), which means that it has no significant effect on foreign direct investment. inflation does not have a significant impact because, for investors, a price increase is still more substantial than an increase in the entire production that must be issued. therefore, investors still have a profit. thus, inflation does not affect. these results are consistent with the results of research conducted by udenze (2014), gharaibeh (2015), and alshamsi, hussin & azam (2015). fourth, the exchange rate shows a significance value of 0.538 (p > 0.05), which means that it has no significant effect on foreign direct investment. the results are consistent with the theory of "the currency areas hypothesis," which is a theory which states that if a country whose exchange rate strengthened compared with an investment destination will provide investment in the country in hopes of getting a higher return rate. however, the exchange rate did not significantly affect the foreign direct investment (fdi) of this result following the research of gharaibeh (2015) and xaypanya, rangkakulnuwat, & paweenawat (2015) because investors generally see the condition of infrastructure and economic growth. the amount of value is not too calculated by foreign investors, and foreign direct investment (fdi) is longterm. simultaneously, the exchange rate tends to fluctuate in a short time (seasonal). fifth, economic growth shows a significance value of 0.008 (p > 0.05), which significantly affects foreign direct investment. the regression coefficient value of exchange rate variables (gdp gr) is 0.1877152, which means that when the economic growth increases by one scale, foreign direct investment (fdi) will megasari & saleh │ the determinant of fdi inflows in oic countries international journal of islamic economics and finance (ijief), 4(1), 31-50 │ 45 increase by 0.1877152. the results of this study are following the hypothesis, which states that economic growth has a positive and significant effect on foreign direct investment (fdi). these results are consistent with the results of research by jadhav (2012), asideu (2013), tintin (2013), alshamsi, hussin, & azam (2015), asamoah (2016), ulah and khan (2016), and karim et al. (2018). increased economic growth in a country shows an increase in market size (market size). a larger market will increase commodity demand. the increase in sales in a country's market reflects that the government can already compete. investors who enter the market will benefit, so foreign investors are interested in investing in that country. sixth, trade openness shows a significance value of 0.001 (p > 0.05), which significantly affects foreign direct investment. the regression coefficient value of trade openness (to) is 0.0972672, which means that when the trade openness increases by one scale, foreign direct investment (fdi) will increase by 0.0972672. these results are following research by jadhav (2012), asideu (2013), tintin (2013), asamoah (2016), ullah and khan (2017). trade openness is created from the presence of an open economy. the open economy itself is an economy that can interact freely with other economies in various parts of the world (mankiw, 2006). the impact of trade openness will open up economic paths between countries so that it will open up opportunities for foreign investors to enter into a nation; therefore, foreign investors prefer to invest in countries that have a high level of trade openness. . v. conclusion and recommendation 5.1. conclusion this paper aims to determine the determinants of foreign direct investment (fdi) in oic countries from 2005 to 2018. these determinants include corruption, political stability, inflation, exchange rates, economic growth, and trade openness. the results of this paper are the variables of corruption, political stability, inflation, and the exchange rate does not affect foreign direct investment (fdi). in contrast, the variables of economic growth and trade openness affect foreign direct investment (fdi). although these study results are the same as previous studies, some are not the same. it is hoped that in the future, research can find answers to why the results are inconsistent. like other studies, this study also has limitations. there are still some determinants of fdi that are not included, such as interest rate, unemployment rate, the rule of law, government effectiveness, and megasari & saleh │ the determinant of fdi inflows in oic countries international journal of islamic economics and finance (ijief), 4(1), 31-50 │ 46 regulatory quality in this model. it is hoped that further researchers can add these variables and increase the period. 5.2. recommendation the recommendations based on the study results can be summarized as follows. first, governments need to issue a policy so that foreign investors are interested in investing their capital. one way is to increase economic growth to encourage the flow of fdi. second, governments need to increase the degree of economic openness by reducing trade barriers (exports and imports), both in the form of rates and non-rates. megasari & saleh │ the determinant of fdi inflows in oic countries international journal of islamic economics and finance (ijief), 4(1), 31-50 │ 47 references alshamsi, k., hussin, m., & azam, m. 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(2015). the determinants of foreign direct investment in asean. international journal of social economics, 239-250. retrieved may 5, 2020, from https://www.emerald.com/insight/content/doi/10.1108/ijse-102013-0238/full/html international journal of islamic economics and finance (ijief) vol. 6(1), january 2023, pages 1-20 the cyclical behavior of capital buffer of indonesian islamic and conventional banks nur atikah1, akhmad akbar susamto2, samsubar saleh3, ficrat abdic4 corresponding email: tikanasaa@gmail.com article history received: november 18th, 2021 revised: june 13th, 2022 june 16th, 2022 july 2nd, 2022 december 1st, 2022 december 12nd, 2022 december 29th, 2022 accepted: january 3rd, 2023 abstract this paper is aimed at analyzing the cyclical behavior of capital buffer of islamic and conventional banks in indonesia. more specifically, this paper has three objectives. first, to test whether capital buffer in indonesian banking industry as a whole is countercyclical or procyclical. second, to test whether there is a difference in the level of capital buffer of islamic banks as compared to the level of capital buffer of conventional banks. third, to test whether there is a difference in the cyclicality of capital buffer of islamic and conventional banks. the analysis in this paper is conducted using the standard dynamic system generalized method of moments (system gmm) regressions and includes a panel of 108 banks over the period between 2004 and 2019. from the results, it can be concluded that the capital buffer of islamic and conventional banks in indonesia is procyclical. from the results, it can also be concluded that no difference exists in the level of capital buffer of islamic banks as compared to conventional banks and in the cyclicality of capital buffer in islamic and conventional banking. if the countercyclical capital buffer is achieved, a policy measure to alter the cyclical behavior of capital buffer of islamic and conventional banks in indonesia therefore is a must. such policy measure needs not to be specified for islamic or conventional banking industry. keywords: basel iii; capital buffer; cyclicality; bank; indonesia jel classification : g21; g28 type of paper: research paper @ ijief 2023 published by universitas muhammadiyah yogyakarta, indonesia doi: https://doi.org/10.18196/ijief.v6i1.13154 web: https://journal.umy.ac.id/index.php/ijief/article/view/13154 citation: atikah, n., susamto, a. a., saleh, s., & abdic, f. (2023). the cyclical behavior of capital buffer of indonesian islamic and conventional banks. international journal of islamic economics and finance (ijief), 6(1), 1-20. doi: https://doi.org/10.18196/ijief.v6i1.13154. 1,2,3,4 universitas gadjah mada, indonesia mailto:tikanasaa@gmail.com https://doi.org/10.18196/ijief.v6i1.13 https://doi.org/10.18196/ijief.v6i1. https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v6i1.13154&domain=pdf atikah, susamto, saleh, & abdic | the cyclical behavior of capital buffer of indonesian islamic and conventional banks internasional journal of islamic economics and finance (ijief), 4(1), 1-20│ 2 i. introduction drawing attentions on the global financial crisis that took place in 2007–2009, the basel committee on banking supervision (bcbs) has introduced a regulatory framework which emphasizes the need for countercyclical capital buffer in addition to the minimum capital requirements. the framework, called basel iii, seeks to increase the ability of banks to endure unexpected shocks and to maintain banking stability. capital buffer concerns the holding of capital above the regulatory threshold. in the basel iii framework, it consists of two components, namely capital conservation buffer (ccob) which amounts 2.5 percent of total risk-weighted assets and countercyclical capital buffer (ccyb) which can vary from countries to countries. the capital conservation buffer is designed to guarantee that banks will raise their capital buffer over non-recession periods. meanwhile, the countercyclical capital buffer is designed to guarantee that the ups-anddowns movement of capital buffer is proper along the business cycle (bcsb, 2010). countercyclical capital buffer exists when the relationship between capital buffer and the business cycle is positive. that is, banks increase capital buffer during economic expansions and consume the buffer to cover losses during economic downturns. by contrast, capital buffer is said to be procyclical when its relationship to the business cycle is negative. in this regard, banks lower capital buffer at the time of economic upturns and increase capital buffer at the time of economic recessions. the question of whether capital buffer in conventional banking industry is countercyclical or procyclical has been subject to many studies. these include studies published before the release of the basel iii framework, such as ayuso et al. (2004), lindquist (2004), bikker & metzemakers (2005), marcucci & quagliariello (2008), and jokipii & milne (2008). studies that were published after the release of the basel iii framework include stolz & wedow (2011), prasetyantoko & soedarmono (2010), deriantino (2011), coffinet et al. (2012), guidara et al. (2013) shim (2013), carvallo et al. (2015) and huang & xiong (2015). the number of studies examining the cyclical behavior of capital buffer in islamic banking industry is relatively limited (maatoug et al., 2019; maharani & setiyono, 2018). maharani & setiyono (2018) conduct an analysis investigating the determinants of capital buffer of islamic and conventional banks in the southeast asian (asean) and middle-east and north african (mena) countries. focusing on the case of mena countries, maatoug et al. (2019) investigate whether the capital buffer of islamic and conventional banks is countercyclical or procyclical. other studies (bougatef & korbi, 2018; atikah, susamto, saleh, & abdic | the cyclical behavior of capital buffer of indonesian islamic and conventional banks internasional journal of islamic economics and finance (ijief), 4(1), 1-20│ 3 daher et al., 2015), while examining capital buffer in islamic as compared to conventional banking industry, focus more on the role of risk exposure rather than the effect of the business cycle. this paper aims to analyze the cyclical behavior of capital buffer of islamic and conventional banks in indonesia. more specifically, the objectives of this paper are as follows. first, to test whether capital buffer in indonesian banking industry is countercyclical or procyclical. second, to test whether there is a difference in the level of capital buffer of islamic banks as compared to the level of capital buffer of conventional banks. third, to test whether there is a difference in the cyclicality of capital buffer of islamic and conventional banks. this paper contributes to literature in several ways. first, this paper expands on the previous work by prasetyantoko & soedarmono (2010) that examines capital buffer in indonesia –one of the largest economies in the world whose capital buffer cyclical behavior remains understudied. this paper is, however, different in that it includes islamic and conventional banks in the sample. second, this paper adds to the previous works by maharani & setiyono (2018) and maatoug et al. (2019). however, rather than limiting itself to the analysis of capital buffer determinants or to the relationship between capital buffer and the business cycle, this paper compares the level of capital buffer of islamic and conventional banks and looks at the possible difference between islamic and conventional banks in term of capital buffer cyclicality. the remainder of this paper is organized as follows. section ii discusses the theoretical framework of capital buffer cyclical behavior and earlier empirical findings. section iii describes the data, regression models and estimation methods. section iv summarizes and discusses the results of the analysis. section v concludes and proposes recommendations. ii. literature review 2.1 background theory holding a higher level of capital can be costly for a bank. the most notable costs stem from the fact that it reduces the bank’s assets growth and lowers the bank’s profitability, particularly in a market that is relatively competitive. other costs stem from the fact that many investors prefer investments that are liquid and safe with moderate returns such as providing debt to a bank rather than investments that, despite offering potential high returns, are illiquid and risky such as buying a bank’s equity. from the bank’s point of view, it is therefore easier and cheaper to obtain debt than equity financing. moreover, in many countries, debt has been given a more favorable tax atikah, susamto, saleh, & abdic | the cyclical behavior of capital buffer of indonesian islamic and conventional banks internasional journal of islamic economics and finance (ijief), 4(1), 1-20│ 4 treatment than equity (de mooij, 2011). debt in the form of third-party deposits has also been benefitted from deposit insurance schemes, connoting the disadvantage of holding a higher level of capital (kane, 1989). however, there could be different reasons why a bank may hold a higher level of capital and maintain its capital ratio above the regulatory threshold. for example, as presented by huang & xiong (2015), there are three reasons for a bank to maintain its capital buffer. first, to minimize potential asymmetric information between the bank and its depositors. having a higher level of capital will signal the bank's financial health and build up the depositors' confidence in the bank's ability to absorb unexpected shocks (jackson et al., 1999). second, a bank may hold a higher level of capital to be precautionary against the risk of failure. having a higher level of capital will allow a bank to put on guard against unexpected shocks and reduce the probability of bankruptcy, particularly by increasing its ability to cover losses during economic downturns (nier & baumann, 2006). having a higher level of capital will also allow a bank to avoid the costs of failure, which include among others, the loss of charter value, the loss of the bank's reputation and goodwill, and the loss of resources during the bankruptcy process (see, for instance, acharya (1996)) third, to follow ayuso et al. (2004), milne (2004), and milne & whalley (2011), a bank may hold a higher level of capital to reduce the probability of violating the minimum capital requirements. by having a capital buffer, a bank protects itself against pricey adjustment costs that may arise due to regulatory threshold violations. for example, in the presence of information asymmetries, capital level adjustment via sudden equity issues may convey a negative signal to the market that the bank's stock prices are above the actual share values. thus, in addition to the adjustment costs, pure transaction costs may include significant drops in the importance of the bank's stocks (see, for instance, myers & majluf (1984), winter (1994), and mcnally (1999)). meanwhile, capital level adjustment via asset reductions may force a bank to sell profitable assets at prices far below their values or renounce potential projects that would otherwise have been financed. formally, the costs of capital level adjustment and the effect that the business cycle has on capital buffer can be modeled within a partial adjustment framework. to follow ayuso et al. (2004), jokipii & milne (2008), carvalho & castro (2015) and maatoug et al. (2019), the framework is represented by ∆buf𝑖,𝑡 = β(buf𝑖,𝑡 ∗ − buf𝑖,𝑡−1) (1) where ∆ denotes the difference or the change operator, buf𝑖,𝑡 and buf𝑖,𝑡−1 denote the actual capital buffer of bank 𝑖 at time 𝑡 and time 𝑡 − 1 respectively, atikah, susamto, saleh, & abdic | the cyclical behavior of capital buffer of indonesian islamic and conventional banks internasional journal of islamic economics and finance (ijief), 4(1), 1-20│ 5 buf𝑖,𝑡 ∗ denotes the optimum capital buffer of the same bank and β denotes the speed of adjustment of the bank’s actual capital buffer towards its optimum level. by adding buf𝑖,𝑡−1 to both sides, the previous equation can be rewritten as buf𝑖,𝑡 = βbuf𝑖,𝑡 ∗ + (1 − β)buf𝑖,𝑡−1 (2) the optimum capital buffer level (buf∗i,t) is not observable. however, it may depend on the business cycle. here, the relationship between capital buffer and the business cycle can be explained using at least two different approaches. first, as suggested by stolz & wedow (2011), the choice between loan portfolio and capital buffer changes along with the business cycle. in upturn economic conditions, loan risk is relatively low. this induces a bank to increase its loan disbursements at the expense of capital buffer. by the same token, in downturn economic conditions, as loan risk increases, a bank will reduce its loan disbursements and increase capital buffer. second, as stated by amato & furfine (2004), the choice between loan portfolio and capital buffer changes along with loan quality. in upturn economic conditions, loan quality is relatively good and the possibility of default on payments is low. this induces a bank to increase its loan disbursements at the expense of capital buffer. by the same token, in downturn economic conditions, as loan quality decreases, a bank will reduce its loan disbursements and increase capital buffer. similar to its conventional counterpart, an islamic bank may hold a high level of capital to reduce the probability of violating the minimum capital requirements. while an islamic bank is not allowed to pay or to charge interest and instead performs intermediation function using islamic financial contracts (askari et al., 2015; habib, 2018), its optimum capital buffer may remain dependent on the business cycle. in brief, the islamic financial contracts used by an islamic bank consists of mudarabah, musharakah, murabahah and ijarah. mudarabah is a business partnership contract, which one partner as an investor provides capital to its partner through a profit-sharing arrangement agreed before. profits will be shared between the investor and its partner according to the agreed arrangement, while losses will be borne by the investor. mudarabah can be applied for both funding and financing operations. mudarabah that is applied for an islamic bank’s funding operation does not guarantee the funds deposited by depositors. profits obtained will be shared between the bank and the depositors, while losses will be assumed by the depositors. from the bank’s perspective, this theoretically implies no risk. meanwhile, mudarabah that is applied for financing operation is risky and may lead to an increase in the probability of a bank violating the minimum capital requirements. the risk atikah, susamto, saleh, & abdic | the cyclical behavior of capital buffer of indonesian islamic and conventional banks internasional journal of islamic economics and finance (ijief), 4(1), 1-20│ 6 to the bank arises from the potential of failure payments from its partners due to business losses. the risk is low in upturn economic conditions, inducing a bank to increase its financing disbursements and reduce capital buffer. congruently, the risk is high in downturn economic conditions, inducing the bank to reduce its financing disbursements and increase capital buffer. musharakah, murabahah and ijarah are applied mostly for financing operations. musharakah is a business partnership contract in which two or more parties provide both capital and managerial ability in a pre-agreed agreement. all partners will share the profits according to the agreement, while losses will be borne to all partners according to the level of the capital provided. murabahah is a selling contract in which a bank buys a spesific investment goods and sells it to the costumers with a payments arrangement and agreed margin at a future date. lastly, ijarah is a rent contract in which a bank provide a services of product on leases to its customers and the customers pay for rent over a specified period. similar to mudarabah that is applied for financing operation, musharakah contract bears risk that arises from the possobility of the failure payments from its partners due to business losses. murabahah and ijarah bring about risk, particularly from the possibility of the failure payments from bank’s customers to pay the installments rents according to the agreed arrangements. the risk is, once again, low in upturn economic conditions and high in downturn economic conditions. this induces the bank to adjust its financing disbursements to the detriment of capital buffer. theoretically, the risk to an islamic bank in mudarabah and musharakah contracts can be higher than the risk to a conventional bank that performs intermediation function using an interest-based loan contract. this is particularly true in the presence of both asymmetric information and adverse selection (khan, 2010). the risk in murabahah dan ijarah, while not exactly the same, is quite close to the risk in an interest-based loan contract. a priori, there is thus a likelihood that the level of capital buffer of an islamic bank is higher than the level of capital buffer of a conventional bank (maatoug et al., 2019). 2.2 previous findings previous empirical findings on the cyclicality of capital buffer tend to be ambiguous. huang & xiong (2015) find a positive co-movement between capital buffer and the business cycle in china, connoting the presence of capital buffer countercyclicality in the chinese banking industry. this study also find that state-owned bank have a weaker countercyclicality than others banks. by contrast, the study conducted by lindquist (2004), ayuso et al. (2004), coffinet et al. (2012), marcucci & quagliariello (2008) and jokipii & milne (2008) respectively find a negative co-movement between capital buffer atikah, susamto, saleh, & abdic | the cyclical behavior of capital buffer of indonesian islamic and conventional banks internasional journal of islamic economics and finance (ijief), 4(1), 1-20│ 7 and the business cycle in norwegia, spain, france, italy and europe in general, connoting the presence of capital buffer procyclicality in these countries. using data from the united states and 29 oecd countries respectively, shim (2013) and bikker & metzemakers (2005) also find that the relationship between capital buffer and the business cycle is negative, implying the existence of capital buffer procyclicality. from indonesia (prasetyantoko & soedarmono, 2010) and southeast asian countries in general (deriantino, 2011), evidence has been presented that the effect on capital buffer of the business cycle is negative and that capital buffer is procyclical. in a study covering sample from 171 developed and developing countries, chen et al. (2014) report that capital buffer tends to be procyclical in both developed and developing countries. this is true particularly in the cases of bank holding companies and commercial banks. in the case of savings banks and cooperative banks, the effect on capital buffer of the business cycle is subject to the composition of the sample. meanwhile, carvallo et al. (2015) based on their study covering 13 latin american and caribbean economies report that the cyclical pattern of capital buffer differs across countries. capital buffer tends to be more procyclical in countries where costs of adjustment are lower and where capital regulation is less stringent. with respect to islamic banks, empirical findings are also ambiguous. examining the determinants of islamic and conventional banks’ capital buffer in the southeast asian (asean) and mena countries over the period 20112015, maharani & setiyono (2018) conclude that the relationship between capital buffer and the business cycle is negative. islamic and conventional banks’ capital buffer is, thus, procyclical. by contrast, in a study that examines the relationship between capital buffer and the business cycle in the mena countries over the period 2000–2014, it has been found that islamic and conventional banks’ capital buffers are both countercyclical (maatoug et al., 2019). it has also been found that the speed of adjustment cost is low for islamic banks and high for conventional banks. iii. data and research methods 3.1 data. this paper uses secondary panel data that are derived mostly from the endof-year financial reports of conventional and islamic banks in indonesia and from regular reports published by badan pusat statistik (bps – statistics indonesia). the data set is unbalanced and spreads over the period 2004-2019. atikah, susamto, saleh, & abdic | the cyclical behavior of capital buffer of indonesian islamic and conventional banks internasional journal of islamic economics and finance (ijief), 4(1), 1-20│ 8 the sample in this study consists of a total 108 banks, of which 11 are islamic banks and 97 are conventional banks. the sample is selected based on the availability of data. banks that ceased to exist, or experienced recent conversion, or underwent a recent merger from conventional to islamic status before the end of the period of analysis are left out of the sample. 3.2 regression model the analysis in this paper is conducted using dynamic panel regressions. the regression equations in this paper are provided by model 1: 𝐶𝐴𝑃𝐵𝑖𝑡 = 𝛽0𝐶𝐴𝑃𝐵𝑖𝑡−1 + 𝛽1𝐶𝑌𝐶𝐿𝐸𝑡 + 𝛽2𝑆𝐼𝑍𝐸𝑖𝑡 + 𝛽3𝐼𝐷𝐼𝑉𝑖𝑡 + 𝛽4𝑃𝑅𝑂𝐹𝑖𝑡 + 𝛽5𝑅𝐼𝑆𝐾𝑖𝑡 + 𝛽6𝑂𝑊𝑁𝐸𝑅𝑖𝑡 + 𝛽7𝑇𝐼𝑀𝐸𝑡 + 𝜀𝑖𝑡 (3) model 2: 𝐶𝐴𝑃𝐵𝑖𝑡 = 𝛽0𝐶𝐴𝑃𝐵𝑖𝑡−1 + 𝛽1𝐶𝑌𝐶𝐿𝐸𝑡 + 𝛽2𝑆𝐼𝑍𝐸𝑖𝑡 + 𝛽3𝐼𝐷𝐼𝑉𝑖𝑡 + 𝛽4𝑃𝑅𝑂𝐹𝑖𝑡 + 𝛽5𝑅𝐼𝑆𝐾𝑖𝑡 + 𝛽6𝑂𝑊𝑁𝐸𝑅𝑖𝑡 + 𝛽7𝑇𝐼𝑀𝐸𝑡 + 𝛽8𝐼𝑆𝐿𝐴𝑖 + 𝜀𝑖𝑡 (4) model 3: 𝐶𝐴𝑃𝐵𝑖𝑡 = 𝛽0𝐶𝐴𝑃𝐵𝑖𝑡−1 + 𝛽1𝐶𝑌𝐶𝐿𝐸𝑡 + 𝛽2𝑆𝐼𝑍𝐸𝑖𝑡 + 𝛽3𝐼𝐷𝐼𝑉𝑖𝑡 + 𝛽4𝑃𝑅𝑂𝐹𝑖𝑡 + 𝛽5𝑅𝐼𝑆𝐾𝑖𝑡 + 𝛽6𝑂𝑊𝑁𝐸𝑅𝑖𝑡 + 𝛽7𝑇𝐼𝑀𝐸𝑡 + 𝛽8𝐼𝑆𝐿𝐴𝑖 + 𝛽9𝐼𝑁𝑇𝐸𝑅𝑖𝑡 + 𝜀𝑖𝑡 (5) where 𝐶𝐴𝑃𝐵𝑖𝑡 denotes the capital buffer of bank 𝑖 at time 𝑡, 𝐶𝑌𝐶𝐿𝐸𝑡 denotes the business cycle in the economy, 𝐼𝑆𝐿𝐴 denotes a dummy variable for islamic banks and 𝐼𝑁𝑇𝐸𝑅 denotes an interaction term between the business cycle and islamic bank dummy. the dependent variable, capital buffer, is measured as the difference between a bank’s capital adequacy ratio (car) and the minimum capital requirement that is imposed on the bank according to its risk profile. business cycle as the key independent variable is measured as the percentage growth of real gross domestic product (gdp). the other key independent variable, i.e. the dummy for islamic banks, is given the value 1 for banks that operate according to the interpretation of islamic laws and 0 otherwise. 𝑆𝐼𝑍𝐸 denotes bank size, 𝐼𝐷𝐼𝑉 denotes income diversification, 𝑃𝑅𝑂𝐹 denotes profitability and 𝑅𝐼𝑆𝐾 denotes credit risk. 𝑂𝑊𝑁𝐸𝑅 denotes a vector of ownership dummy variables, 𝑇𝐼𝑀𝐸 denotes a time variable dummy, 𝛽 denotes the parameters to be estimated and 𝜀 denotes the error term. bank size, credit risk, profitability and income diversification serve as bank specific control variables. bank size, which is measured as the natural atikah, susamto, saleh, & abdic | the cyclical behavior of capital buffer of indonesian islamic and conventional banks internasional journal of islamic economics and finance (ijief), 4(1), 1-20│ 9 logarithm of total assets, is expected to have a negative sign based on the “too big to be fail” theory. this theory suggests that larger banks dare to take greater risks and are less worry about their financial condition, so that they tend to have lower level of capital buffer (chen et al., 2014). credit risk, which is measured as the ratio of non-performing loans to total loans, is expected to have a positive effect on capital buffer. higher credit risk increases the probability of failure and, hence, increases the level of capital buffer (maharani & setiyono, 2018). profitability, which is measured as the return on equity, is expected to have a positive relationship to capital buffer. in order to meet the minimum capital requirements, banks prefer to use retained earnings rather than external finance (shim, 2013). income diversification, which is measured as herfindahl-hirschman index (hhi) of bank’s operating income, is expected to have a negative coefficient. income diversification reduces the volatility of bank profits and results in less risk. this allows a bank to maintain lower level of capital buffer (chen et al., 2014). the vector of ownership dummy variables serves as other bank-specific control variables. it comprises a dummy for banks that are belong to the central government, a dummy for banks that are belong to provincial governments and a dummy for foreign banks. further, the vector of ownership dummy variables also comprises a dummy for ownership concentration, which is given the value 1 for banks whose largest shareholder owns 50 percent or more of shareholdings. ownership has been reported to have a significant effect on capital buffer (jiang et al., 2019; klein et al., 2021). by controlling for these variables, concerns about omitted variable bias can be minimized. the time dummy variable is included to control for time-specific fixed effects. instead of dummies for years which suffer from collinearity issues, the dummy included is one that represents the period after the basel iii framework is effectively implemented. its value 1 for the years 2015 onward and 0 otherwise. 3.3 estimation method to implement the dynamic panel regressions, this paper employs the popular system generalized method of moments (system gmm) estimators (arellano & bover, 1995; blundell & bond, 1998). these estimators account for potential endogeneity that takes place when there is a correlation between the independent variables and error terms in the model. these estimators also account for any remaining omitted variable bias and unobserved panel heterogeneity. the business cycle, the dummy for islamic banks and the interaction term between the business cycle and the islamic bank dummy are regarded as atikah, susamto, saleh, & abdic | the cyclical behavior of capital buffer of indonesian islamic and conventional banks internasional journal of islamic economics and finance (ijief), 4(1), 1-20│ 10 strictly exogenous in the regressions. similarly, all dummy control variables are regarded as strictly exogenous. bank-specific control variables that are nondummies are regarded as predetermined. the system gmm estimators are valid only if the instruments included in the regressions are valid and not correlated with the residuals. to ensure that such condition is met, this paper applies the standard test of overidentifying restrictions developed by hansen (1982). besides, to ensure that no secondorder serial correlation exists in the error terms, this paper applies the arellano-bond tests for zero autocorrelation. iv. resultsaand analysis) 4.1 results.i table 1 presents the descriptive statistics of the sample. the level of capital buffer in the sample ranges from -2.98 to 155.31 percent, with a mean that is equal to 15.91 percent. the level of capital buffer of islamic banks is less diverged than the level of capital buffer of conventional banks. the average level of capital buffer of islamic banks is also lower than that of the level of capital buffer of conventional banks. table 2 presents the coefficients of correlation between independent variables. for brevity reason, only the correlation coefficients between business cycle and non-dummy bank-specific control variables are displayed. overall, the correlation coefficients are relatively small, confirming the absence of any multicollinearity issue. table 3 reports the regression results. in column 1, the regression includes lagged dependent variable, business cycle as the key independent variable, bank size, income diversification, profitability, and credit risk. in column 2, a dummy for islamic banks is added into the regression. in column 3, an interaction term between the business cycle and the islamic bank dummy is also added into the regression. the p-values presented at the bottom of the table indicate that the hansen test failed to reject the null hypothesis of overidentifying restrictions. similarly, the arellano-bond test for zero autocorrelation fails to reject the null hypothesis of the nonexistence of a second-order serial correlation in the error terms. it is thus confirmed that the system gmm estimators being employed are valid. atikah, susamto, saleh, & abdic | the cyclical behavior of capital buffer of indonesian islamic and conventional banks internasional journal of islamic economics and finance (ijief), 4(1), 1-20│ 11 table 1. descriptive statistics n obs. mean st. dev. min. max bank-specific variables: con. and islamic banks capital buffer 1543 15.913 16.848 -2.980 155.310 bank size 1543 15.942 1.798 10.953 21.018 income diversification 1543 0.187 0.127 0.004 0.500 profitability 1543 2.023 2.451 -15.820 41.900 credit risk 1543 2.941 3.053 0.000 50.960 bank-specific variables: conventional banks only capital buffer 1431 16.411 17.252 -2.980 155.310 bank size 1431 15.929 1.837 10.953 21.018 income diversification 1431 0.187 0.129 0.006 0.500 profitability 1431 2.087 2.415 -15.820 41.900 credit risk 1431 2.872 3.042 0.000 50.960 bank-specific variables: islamic banks only capital buffer 112 9.549 8.071 0.300 53.980 bank size 112 16.101 1.198 12.901 18.537 income diversification 112 0.182 0.100 0.004 0.468 profitability 112 1.200 2.749 -10.770 13.580 credit risk 112 3.828 3.060 0.100 22.040 business cycle and other variables business cycle 1543 5.445 0.527 4.630 6.350 islamic bank dummy 1543 0 1 d. ownership types 1543 0 1 d. ownership concentration 1543 0 1 d. global financial crisis 1543 0 1 d. basel implementation 1543 0 1 table 2. correlation matrix business c. bank size income div. profitability credit risk business cycle 1.000 bank size -0.160 1.000 income div. -0.021 0.425 1.000 profitability 0.109 0.072 0.022 1.000 credit risk -0.061 -0.002 0.050 -0.323 1.000 the coefficient of the business cycle is always negative in columns 1-3 and statistically significant at the 10 percent level. in column 2, the coefficient of the dummy for islamic banks is not statistically significant. in column 3, the coefficients of the dummy for islamic banks and its interaction term with the business cycle are both not statistically significant. atikah, susamto, saleh, & abdic | the cyclical behavior of capital buffer of indonesian islamic and conventional banks internasional journal of islamic economics and finance (ijief), 4(1), 1-20│ 12 table 3. results from the regressions model 1 model 2 model 3 (1) (2) (3) lagged capital buffer 0.738** 0.738** 0.738** (0.284) (0.297) (0.297) business cycle -1.411* -1.392* -1.376* (0.763) (0.771) (0.778) bank size -4.967** -5.025** -5.028** (2.076) (2.108) (2.107) income diversification 32.428* 31.836* 31.940* (16.647) (16.428) (16.538) profitability -2.651 -2.705 -2.682 (2.499) (2.594) (2.603) credit risk -0.455 -0.490 -0.503 (0.971) (0.964) (0.974) islamic bank dummy -0.599 0.804 (2.675) (13.753) business cycle*islamic bank d. -0.255 (2.313) ownership type dummies yes yes yes d. global financial crisis yes yes yes d. basel iii framework yes yes yes constant 88.401** 89.549** 89.474** (37.476) (38.093) (38.138) n observations 1,543 1,543 1,543 n banks 108 108 108 n instruments 17 18 19 hansen test (p-value) 0.644 0.640 0.645 ar(2) test (p-value) 0.570 0.575 0.576 f-stats (p-value) 0.000 0.000 0.000 note: the dependent variable is capital buffer. the values reported for each variable are coefficients and heteroscedasticity-autocorrelation-robust standard errors. *, ** and *** indicates significance at the 10, 5 and 1 percent level. 4.2 robustness test the regressions reported in table 3 do not take into account the difference between preand post-basel iii economic and regulatory environments. this may bias the results particularly if the effect of this difference correlates with one or more of the existing independent variables. to cope with such a concern, a dummy for basel iii framework is added into the regressions. atikah, susamto, saleh, & abdic | the cyclical behavior of capital buffer of indonesian islamic and conventional banks internasional journal of islamic economics and finance (ijief), 4(1), 1-20│ 13 table 4. results from the regressions model 1 model 2 model 3 lagged capital buffer 0.671*** 0.669*** 0.670*** (0.222) (0.222) (0.223) business cycle -1.402* -1.398* -1.371* (0.731) (0.732) (0.751) bank size -4.727* -4.765* -4.780* (2.621) (2.680) (2.690) income diversification 30.630* 30.427* 30.598* (15.839) (15.565) (15.693) profitability -2.256 -2.260 -2.250 (1.904) (1.955) (1.954) credit risk -0.752 -0.784 -0.794 (0.826) (0.802) (0.808) level of intermediation -4.411 -4.796 -4.584 (21.259) (21.405) (21.538) islamic bank dummy -0.083 2.301 (1.885) (10.901) business cycle*islamic bank d. -0.442 (1.965) ownership type dummies yes yes yes d. ownership concentration yes yes yes d. global financial crisis yes yes yes d. basel iii framework yes yes yes constant 89.391** 90.317** 90.233** (35.477) (36.406) (36.357) n observations 1,543 1,543 1,543 n banks 108 108 108 n instruments 20 21 22 hansen test (p-value) 0.744 0.743 0.746 ar(2) test (p-value) 0.569 0.571 0.571 f-stats (p-value) 0.000 0.000 0.000 note: the dependent variable is capital buffer. the values reported for each variable are coefficients and heteroscedasticity-autocorrelation-robust standard errors. *, ** and *** indicates significance at the 10, 5 and 1 percent level. table 4 reports the results. the coefficient of the business cycle remains negative and significant at the 10 percent level. the coefficient of the dummy for islamic banks remains not statistically significant and so is the coefficient of the interaction term between the business cycle and the dummy for islamic banks. preliminary check indicates the presence of some outliers in the upper side of the dependent variable. therefore, in addition to the regressions using original data, regressions involving an upper 99th percentile winsorization technique are implemented as a robustness test. evidence from these regressions suggests that the results above are robust. atikah, susamto, saleh, & abdic | the cyclical behavior of capital buffer of indonesian islamic and conventional banks internasional journal of islamic economics and finance (ijief), 4(1), 1-20│ 14 4.3 discussions the results above consistently show that the relationship between capital buffer and the business cycle in indonesia is significant negative. the capital buffer of islamic and conventional banks falls during economic upturns and rises during economic downturns. there is thus evidence for the presence of capital buffer procyclicality in this country. the results above are in line with the findings by prasetyantoko & soedarmono (2010) and deriantino (2011). the results above are also in line with the previous findings by lindquist (2004), ayuso et al. (2004), bikker & metzemakers (2005), marcucci & quagliariello (2008), jokipii & milne (2008), coffinet et al. (2012), shim (2013) that there is a negative co-movement between capital buffer and the business cycle. the results above further lend a support to the findings by chen et al. (2014) that capital buffer tends to be more procyclical in developed and developing countries regardless of their level of economic development. the results reported in table 3 and 4 suggest that capital buffer in indonesia –a developing country– is procyclical. in relation to islamic banks, the results above are in agreement with the findings by maharani & setiyono (2018) and against the ones by maatoug et al. (2019). the fact that none of the coefficients of the dummy for islamic banks and of the interaction term between this variable and the business cycle are significant implies that no difference exists in the level of capital buffer of islamic banks as compared to conventional banks. similarly, the fact that none of the coefficients of the dummy for islamic banks and of the interaction term between this variable and the business cycle are significant implies that no difference exists in the cyclicality of capital buffer in islamic and conventional banking. thus, despite their uniqueness for not paying or charging interest and instead performing intermediation function using islamic financial contracts (askari et al., 2015; habib, 2018), islamic banks have a relatively similar capital buffer behavior to conventional banks. this echoes some previous findings that there tends to be no significant difference in the behavior of islamic and conventional banks. for example, in term of bank margin (susamto et al., 2021), efficiency (el-gamal & inanoglu, 2005; hassan et al., 2009) and stability (kasri & azzahra, 2020). v. concluding remarks 5.1 conclusions this paper has analyzed the cyclical behavior of capital buffer of islamic and conventional banks in indonesia using dynamic panel regressions. in line with atikah, susamto, saleh, & abdic | the cyclical behavior of capital buffer of indonesian islamic and conventional banks internasional journal of islamic economics and finance (ijief), 4(1), 1-20│ 15 theoretical predictions, the results provide evidence that the capital buffer of indonesian banking industry is significantly affected by the business cycle. the capital buffer of indonesian islamic and conventional banks as a whole is procyclical. the results however fail to provide evidence for the presence of a difference in the level of capital buffer of islamic banks as compared to conventional banks. the results also fail to provide evidence that there is a difference in the cyclicality of capital buffer of islamic and conventional banks. thus, different from theoretical predictions that the level of capital buffer of islamic banks is higher than the level of capital buffer of conventional banks, islamic banks have a relatively similar capital buffer behavior to conventional banks. 5.2 recommendation the results in this paper suggest a deviation from the basel iii regulations. therefore, if the countercyclical capital buffer as determined by the basel iii framework is to be achieved, a policy measure aimed to alter the cyclical behavior of capital buffer of islamic and conventional banks in indonesia is a must. the results in this paper also suggest that such policy measure needs not to be specified for islamic or conventional banking industry. aside from islamic banks’ distinct characteristics, the level and the cyclicality of capital buffer in islamic banking industry are not significantly different from the level and the cyclicality of capital buffer in conventional banking industry. this paper relies on annual growth of real gdp to measure business cycle. this may not fully capture the effect of the business cycle. future research should attempt to examine the cyclical behavior of capital buffer using more frequent dataset. future research should also attempt to look deeper into the details of the cyclical behavior of capital buffer before and after the basel iii framework is implemented. references acharya, s. 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(1994). the dynamics of competitive insurance markets. in journal of financial intermediation (vol. 3, issue 4, pp. 379–415). https://doi.org/10.1006/jfin.1994.1011 atikah, susamto, saleh, & abdic | the cyclical behavior of capital buffer of indonesian islamic and conventional banks internasional journal of islamic economics and finance (ijief), 4(1), 1-20│ 20 this page is intentionally left blank international journal of islamic economics and finance (ijief) vol. 3(2), page 227-250, july 2020 do google trends and shariah compliant stocks co-integrated? an evidence from india mohammad irfan school of business, auro university, surat, gujarat, india. corresponding email: mohammad.irfan@aurouniversity.edu.in article history received: june 4 th , 2020 revised: july 27 th , 2020 accepted: july 27 th , 2020 abstract the objective of the study is to understand the dynamic relationship between shariah-compliant stocks and the google search value index (gsvi). the search strength is identified by the search volume of shariah-compliant stocks on google. the sample for the study consists of shariah-compliant stocks commonly available in all the three shariah indices in india, sample stock data has been extracted on a weekly basis from sept 2014 to sept 2019. the results of the study are based on the diagnostic analysis suggests that there is no serial correlation as demonstrated by lm residual test, cusum test shows stability in data, coefficient wald test is showing there is no short-run causality running between selected shariah-compliant stocks and gsvi. the outcome suggests that there is a long-run equilibrium relationship existing between shariah-compliant stocks and the google search value index. trace statistics has five co-integration equations and max-eigen statistics has one cointegration. the vector error correction model (vecm) suggests the acceptability of the model. there are many potential investment opportunities for investors in the islamic stock market of india. the motive of shariah is to provide an avenue for ethical and viable investment to the investors. this study will not only be advantageous for the muslim investors but also the other investors, industrialist, shariah-compliant advisor as well. keywords: nifty shariah indices, google trends, co-integration, granger causality. jel classification: g10, g17. @ ijief 2020 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.3228 web: https://journal.umy.ac.id/index.php/ijief/article/view/8958 citation: irfan, m. (2020). do google trends and shariah compliant stocks co-integrated? an evidence from india. international journal of islamic economics and finance (ijief), 3(2), 227-250. doi: https://doi.org/10.18196/ijief.3228 mailto:mohammad.irfan@aurouniversity.edu.in https://doi.org/10.18196/ijief.3225 https://doi.org/10.18196/ijief.3225 irfan│ do google trends and shariah compliant stocks co-integrated? an evidence from india international journal of islamic economics and finance (ijief), 3(2), 227-250│228 i. introduction 1.1. background google trends is tool which is provided by google, represents in graphs and numbers on the behalf of the popularity of special search on google. psychology of people now changed before buying and investing they will google things knows that fact about the thing. this google trends help them to identify the frequency of the item, the range of frequency in between 1100, higher the frequency higher will be the demand of product & services, industry, company, item, etc. nowadays, with the help of advancement in technology like the internet, the use of google search has increased. internet has become the core source of information for people across the world. google trends collects the data of the user’s behavior, most recent search terms, etc. in the search items some of the data are publicly available on google trends. in terms of global scale this data tells very important aspects about human information gathering activities. its open new opportunities to identify collective decision making (curme, stanley, moat, & preis, 2014). in the past, it was very difficult to predict stock market trends. the stock market is definitely affected by the macro-micro condition of the countries and for this historical data was used in forecasting stock market movements. in the present context, google search value index (gsvi) becomes more popular term, people are tend to seek data or information from the internet and express opinions on social networks (the invest, 28). google trends permit researchers to analyze terms which are frequently searched. it helps in explaining search volume terms like bullish and bearish. it helps in drawing the sentiment index of the investors. in investment research google trends data are play an important role and open exciting frontiers of the research in the stock market return. it are starts with a google search which stock gives highest return or stable. google trends also explore the how many new investors enter into the market in most recent years (seeking alpha, 2018). google is not limited to the search engine. many of researchers have proved that, it is like a barometer of public opinion and the voice of the world at any given point of time. google trends track the frequency of search terms entered in google. analytics revealed that google trends track the seasonal pattern, it also helps in the making strategy for investing in the stock market (stromberg, 2013). google is the well-known search engine all over the world. it maintains records of search statistic for items or terms and reflects them in google trends. in previous years google searches have been used as a proxy for investor attention and also used to measure the sentiment of the investors and customer attention (laurens, glenn, & eirik, 2015). the sentiment of the irfan│ do google trends and shariah compliant stocks co-integrated? an evidence from india international journal of islamic economics and finance (ijief), 3(2), 227-250│229 investors is the good sign for other investors for trading in the stock market. with the invention of internet technology, it becomes easy to find availability of information also the recently observed sentiment of the market, all this information people can get easily with the help of online search invention. investor sentiments are studied based on the search keywords about companies (dimpfl & kleiman, 2017). the term buy, most of them used with respective company name, when people search for this type of data it indicates the investor interest in that particular company. google trends are such an amazing tool for gathering vast data. most of the decisions of the investors are also made up by this type of search (krishnan, v, & sureshkumar, 2018). google search value index (gsvi) is the combination of the actual search and average search over the period of time. gsvi = actual number of search /average number of search to control overall increased in the number of internet search over period of time (latoeiro, ramos, & veiga, 2013). the current study focuses upon examining the relationship between the google search queries of the sariah compliant stocks and their volatility by investigating the causality and the extent of responsiveness of islamic stocks and gsvi. this relationship is important for two reasons viz, for investors to know the impact of google trends on the islamic stock market in india and for governments to take precautionary action to avoid the possible financial downturn in their respective countries due to investor perception based on google trends. shariah compliant indices in india shariah indices consist of socially responsible investment (sri) products in india. the sri offer the product to those who wants to invest in shariah compliant stocks. shariah compliant stocks are not only attractive to muslim investors but also non-muslim investors, these instruments are based on the islamic faith to invest without violating their religious principles of the islam (nse indices, 2018). irfan│ do google trends and shariah compliant stocks co-integrated? an evidence from india international journal of islamic economics and finance (ijief), 3(2), 227-250│230 nifty500 shariah index sources: (nifty500 shariah index, 2019) the nifty500 shariah index covers more than 90% of the total market capitalization and 80% of total traded volume on the nses. shariah indices are screened by shariah principles (nse indices, 2018). nifty50 shariah index this index is based on the principle of shariah compliant and also screened by shariah compliance. nifty50 shariah track the performance of parent index (nse indices, 2018). sources: (nifty50 shariah index, 2019) nify25 shariah index nifty25 shariah index is independent and have fixed number of scripts in it. this index is different from the nifty500 shariah and nifty50 shariah index. it does not give the open platforms to the all constituents (nse indices, 2018). sources: (nifty shariah 25, 2019) irfan│ do google trends and shariah compliant stocks co-integrated? an evidence from india international journal of islamic economics and finance (ijief), 3(2), 227-250│231 1.2. objectives of the research basically, this paper focused inter-linkage between on the google trends (keywords of web search) and the company trends line. whether, these are correlated or not, study also know about the short term and long-term relation association between google trends and shariah complaint stocks. to check the robustness of the data in term of efficiency and stability. the objective of study is to understand the dynamic relationship between shariah compliant stocks and google trend (gsvi). this paper have selected shariah complaints which were continuously working in the shariah index series of india from sept 2014 to sept 2019 namely viz, infosys ltd., tata consultancy services ltd., hindustan unilever ltd., asian paints ltd., hcl technologies ltd., titan company ltd., tech mahindra ltd., oil & natural gas corporation ltd., hero motor corporations ltd., britannia industries ltd. ii. literature review 2.1. background theory there are a number of studies discussed about the google search queries (gsvi). the objective of the study is to examine the relationship between shariah compliant stocks and google search index value (gsvi). in the past, it works as assets pricing model on the basis of efficient market hypothesis. efficient market covers the market price which reflects all the available information (fama 1976). in the real-world investors do not have the access of all the information, but now-a-days, anyhow they have collected the week information, semi-strong information and strong information. but important thing is, which information is directly associated with your problem and solution, as this intention is called cognitive activity (kahneman 1973). this reality may determine the efficient market hypothesis, and then invite the question to the investors, and what extent market prices are reflects according to the interest of the investors. according to merton (1987), investors intention is directly associated with the stock prices and its liquidity. it is really difficult to measure the degree of investor’s intention. here, google trends provide the online services to measure the investor’s intention. takeda and wakao (2014), analyzes the relationship between intensity of online search and behavior of stock-trading. data were gathered from 189 japanese stocks, period ranging from 2008 to 2011. the result of the study revealed that there is strongly positive correlation between weakly positive irfan│ do google trends and shariah compliant stocks co-integrated? an evidence from india international journal of islamic economics and finance (ijief), 3(2), 227-250│232 stock returns and trading volume. it also suggested that increases of trading activity associated with the increase of search actively. this study also stated that online search intensity and stock trading behavior have positively strong correlation, and trading volume and weekly returns have positive correction. bijl, kringhaug, molnár, and sandvik (2016) this study explored the search index value and stock returns have high co-relation. in the year range 200813 found the google search value has negative impact on the stock returns. dimpfl and kleiman, (2017) study focused on the co-moment stock market and internet search. this study found the strong co-moment in between realized volatility of market index and search value index. granger test identified the bi-directional relationship in between the indices. 2.2. previous studies aouadi, arouri, & teulon (2013) found that the influence of investor attention to stock market volatility. the french stock market data were used for the study. on the basis of investors' online search behavior, researcher constructs a non-standard proxy of investor attention. result of the study shows that there is strong correlation between trading volume and investor attention. smet (2015) identified profitable trading strategy using internet search engine data. author also tried to construct a profitable trading model by using search volume data. the study found that there is correlation between market index returns and search volumes changes. it is also revealed that degree of financial relevance and performance of a word is positively correlated with each other. tower (2015) predict stock movements within the tech sector using google search volume index. the study used weekly data from april 2004 to march 2015. within this, three different time periods correlations were established. result of the study shows that there is strong positive correlation between weekly trading volume and google svi. laurens, glenn, and eirik (2015) forecast stock returns of different time period by using google search statistic and also identify trading strategies by using their models. they used google search data of daily, weekly and quarterly. the data were collected from the period ranging from 2010 to 2014. the result of the study found that there is short-term positive relationship between daily searches and excess stock returns. irfan│ do google trends and shariah compliant stocks co-integrated? an evidence from india international journal of islamic economics and finance (ijief), 3(2), 227-250│233 dimpfl and kleiman (2017), identify relationship between german stock market and sentiment of retail investors. authors analyzed the sentiment captured by the ipis of weekly changes in the predictive power. study found that an increase in retail investor pessimism is accompanied by decreasing contemporaneous market returns and an increase in volatility and trading volume. future returns tend to increase while future volatility and trading volume decrease. khan and ahmad (2019), identify lead–lag relationship between returns of the market and sentiment of the investors. data were gathered from stock market of pakistan, from the period of 2006 to 2016. the study reveals nine indirect proxies and other direct proxy on google search volume index. it finds sufficient evidence of irrational behavior of investors in the thin market of pakistan. curme, stanley, moat, and preis (2014) analyze stock market moves with search value index. data were collected from 2004 to 2012 yearly. research reveals that there is a relationship between stock market moves and internet search. which is related to business and politics. it also found that stock market falls because of increase in search volume by general people. dimp and jank (2011) identify stock market volatility and retail investor’s attention by queries of internet search. the researcher found that search queries are useful to predict volatility. it also improves the different forecasting horizons in-sample and out-of-sample as well. search queries contain additional information about market volatility. latoeiro, ramos, and veiga (2013) predict stock market activity using web search queries. researcher used the data from european stock market. study found that an increase for web search queries for the market index leads to a decrease in the returns of the index as well as of the stock index futures and an increase in implied volatility. curme, stanley, moat, and preis (2014) explore search terms related with finance by using google query volumes. result of the study found patterns that may be interpreted as ‘‘early warning signs’’ of stock market moves. it further explains that for better understanding of collective human behavior this behavioral set is very useful. bijl, et al (2016) explored the volatility of stock returns can be identified by using trends on google. they further analyze trading strategy based on selling stocks with high google search volumes and buying stocks with infrequent google searches. the data were collected from the period 2008 irfan│ do google trends and shariah compliant stocks co-integrated? an evidence from india international journal of islamic economics and finance (ijief), 3(2), 227-250│234 to 2013. result of the study declared that it leads negative return when there is high search on google. research further finds that when transaction cost is not including this strategy becomes useful. nasir, huynh, nguyen, and duong (2019) used search values on google trends to predict returns and volume of bitcoin. data were gathered from the period 2013 to 2017. the study revealed that the when there is increase in frequency of google search tend to give positive result and it increase trading volume of bitcoin. oliveira, cortez, and areal (2013) analyzes the six major stocks. they developed several indicators and also identify value of three markets variables. basically, they are returns, volatility and trading volume. data from stock twist were used in this study. research found that there is no evidence of return predictability using sentiment indicators, and of information content of posting volume for forecasting volatility. it also suggested that posting volume can improve the forecasts of trading volume. huang, rojas, and convery (2019) investigate the different terms for s&p 500, researcher used the relative volume of google searches. kaplanmeier test used for analyses. study declared that there is high persistence relationship between search trend data and the stock market series. selene (2018) predict weekly changes in stock price using data from google trend website and the yahoo finance website. it used the conventional time series analysis technique. data were collected events related to a selected stock and news. the result of the study shows the significant correlation between important news/events computed from the google trend website and the changes in weekly stock prices. iii. methodology 3.1. data present study shows that the online search value intensity to measure the degree of investors’ interest on the particular item. data were collected from the google trends (https://trends.google.com/trends/) (bank et al. 2011). google trends provided time series data is called gsvi (google search value index) on the behalf of frequency of searches of a specific keywords viz., companies, industries, indices, stock market at a time and location specified irfan│ do google trends and shariah compliant stocks co-integrated? an evidence from india international journal of islamic economics and finance (ijief), 3(2), 227-250│235 by the user (joseph et al. 2011). gsvi has given time series data in numbers, which is in the scale of 0 and 100 (takeda & wakao, 2014). solely secondary data has been used for the study pertaining to the shariah compliant stocks from the shariah indices of india respectively nifty500 shariah, nifty50 shariah and nifty25 shariah index. shariah indices were working since 2007 in india. the aim of study is to examine the relationship between google search index value and shariah compliant stocks movements in india. the sample of study consists of 10 shariah compliant stocks, which are commonly available in the all the three shariah indices in india. because these shariah compliant have filter criteria to select the stock on quarterly basis. these selected shariah compliant stocks were filtered and continuously working in the shariah indices since sept 2014. the data is spread over the six years from sept 2014 to sept 2019 with 261 weekly data points of the observations. the weekly price information on shariah indices including shariah compliant stocks data collected from yahoo finance and google search value index collected from google trends. 3.2. model development the data extracted of selected shariah compliant stocks from the premier source for global media property i.e. yahoo! network special from the yahoo! finance. google trends: analyses the popularity of top search queries (da et al. 2011). more recent studies have used aggregate the search value frequency in google trends. investors search intention world wide data have been collected from google trends (joseph et al. 2011). table:1, shows that the search keywords on google finance and yahoo! finance. table 1. search keywords on google finance and yahoo! finance indices shariah compliant stocks yahoo finance google trends nifty shariah25, nifty50 shariah, nifty500 shariah infosys ltd. infy.ns information technology consulting co. tata consultancy services ltd. tcs.ns tata communication services hindustan unilever ltd. hindunilvr.ns hindustan unilever company asian paints ltd. asianpaint.ns asian paints company hcl technologies ltd. hcltech.ns information technology company titan company ltd. titan.ns titan company tech mahindra ltd. techm.ns information technology company oil & natural gas corporation ltd. ongc.ns oil & natural gas corporation co. hero motocorp ltd. heromotoco.ns auto maker company britannia industries ltd. britannia.ns food company irfan│ do google trends and shariah compliant stocks co-integrated? an evidence from india international journal of islamic economics and finance (ijief), 3(2), 227-250│236 as per the direction of objective, this study is based on time series data. there is requirement of smooth showing the data, first, researcher required to calculate the summary of statistics. the diagnostic analysis is based on three different tests i.e., the residual test, stability test and coefficient test. residual test is demonstrated by lm test, which shows that serial correlation. cusum test following the stability in the data and coefficient test depends upon the wald test, which shows that the short run causality in the data (gujarati, 2004). to check the stationarity of data, then just go to used adf test (augmented dickey–fuller test statistic), significance of adf test, standardized that t-test statistic is more than the critical value and pvalue is less than 5% (irfan, 2017). 3.3. method as per the direction of objective, this study is based on time series data. there is requirement of smooth showing the data, first, researcher required to calculate the summary of statistics. the diagnostic analysis is based on three different tests i.e., the residual test, stability test and coefficient test. residual test is demonstrated by lm test, which shows that serial correlation. cusum test following the stability in the data and coefficient test depends upon the wald test, which shows that the short run causality in the data (gujarati, 2004). to check the stationarity of data, then just go to used adf test (augmented dickey–fuller test statistic), significance of adf test, standardized that t-test statistic is more than the critical value and pvalue is less than 5% (irfan, 2017). ∑ (1) where y_t is being tested series and γ_(t-i) is the 1st difference in the series. therefore, ho: γ=0 and h1: γ<0, these hypotheses are respectively used as null and alternative that the series has a unit root, meaning that it is non-stationary when the adf test vale is less that critical value (enders, 2014). to measure the indication of co-integration equations between the shariah compliant stocks and google trends (gsvi), adopted the johansen co-integration test. it shows that the long run relationship between the variables, where trace statistics and max -eigen statistic irfan│ do google trends and shariah compliant stocks co-integrated? an evidence from india international journal of islamic economics and finance (ijief), 3(2), 227-250│237 value are significant at the level of 5 percent (medeiros, van doornik, & oliveira, 2011), (irfan, 2016). ( ) ∑ ( ) (2) ( ) ( ) (3) here, null hypothesis shows that the r is number of the co-integrated vectors in the series, t is usually shown that the number of the observation and λt is estimated the nth eigenvalue. trace statistic set the where null hypothesis, identify the number of co-integrated vector in the series, which is less than, equal to r and opposite the alternative hypothesis (johansen & juselius, 1990). to identify the casual relationship between selected shariah compliance stocks (scs) and google trends (gsvi), researcher run the vector error correction model (vecm) to know the acceptability of model (sims, 1980). a vecm model can be represented in the following way: ∏ ( ) (4) here, π (∑ ) ∑ ) is a vector of difference with n variables, ʃ is the matrix of variance, g indicates variables of the vecm model, which is the left side variables in the equation and k-1 is the dependent variable lags on the right side of equation, both the side associated with a coefficient matrix ( ) co-integration relationships in the system require that a vector of error correction model (vecm) be used instead of a var model. the vecm models as developed by engle and granger (1987) have as their aim the insertion of short-term adjustments due to the presence of cointegration (medeiros, van doornik, & oliveira, 2011). further explanation of vecm model according to the cluster of the shariah compliance stocks (scs) and google trends (gsvi). ∑ ∑ (5) ∑ ∑ (6) irfan│ do google trends and shariah compliant stocks co-integrated? an evidence from india international journal of islamic economics and finance (ijief), 3(2), 227-250│238 where scst and gsvit are shariah compliance stocks and google trends series respectively. αscs0 is the intercept for shariah compliant stocks series and αgsvi0 is the intercept for google trends series. αgsvii, αscsi, βgsvii, and βscsi are short term coefficients for shariah compliance stocks and google trends series. zt-1 is the error correction term for respective equations. iv. results and analysis 4.1. result time series data analysis will carry the explained empirical finding, which will be follow the in the policy, implication and amendments are suggested. which will be also unlock the new opportunities in broad area of shariah compliance stocks and google trends (gsvi). table 2. descriptive statistics of shariah compliant stocks parameters infosys tcs hul asian paints hcl titan tech mahi. ongc hero moto britannia mean 575.33 1472.44 1168.33 1079.15 905.90 614.23 578.40 157.60 3070.73 1963.90 std. dev. 94.50 353.21 378.39 238.20 99.58 289.25 117.73 23.08 440.00 737.51 kurtosis -0.37 -0.64 -1.28 -0.96 -0.77 -0.99 -1.10 -0.27 -1.11 -1.19 skewness 0.81 0.99 0.58 0.13 0.29 0.68 0.24 0.25 0.24 0.26 min. 442.15 1050.57 720.35 628.70 717.50 303.30 380.00 110.73 2292.55 665.90 max. 840.15 2259.60 1881.90 1615.20 1143.05 1334.70 831.80 219.66 4047.30 3386.73 parameters loginfosys log-tcs log-hul logasian paints log-hcl logtitan logtech mahi. logongc log-hero motor logbritannia mean 0.27 0.23 0.39 0.37 0.15 0.46 0.12 -0.14 0.03 0.58 std. dev. 3.05 3.20 2.89 3.04 3.34 3.72 3.67 3.75 3.54 3.47 kurtosis 0.36 0.44 1.63 0.55 2.02 3.72 1.78 1.82 0.41 1.20 skewness -0.17 -0.13 0.43 -0.08 -0.54 0.67 -0.15 -0.16 0.36 0.02 min. -8.48 -9.84 -7.94 -8.07 -13.35 -13.84 -16.89 -17.01 -9.17 -10.42 max. 8.56 8.59 14.37 11.45 9.14 18.54 12.62 13.47 10.90 13.88 table 2, in the outcomes of shariah compliant stocks std. dev. are more than 3 in the all selected stocks meaning that all are highly risky stocks. in the case of skewness all are positive means all the stocks have high value more in comparison to the low values in time series. summarizes the data in significant ways of the shariah compliant stocks log. the standard deviation shows the volatility, which is more than 3 percent, meaning that 9 selected shariah stocks are high volatile, but only hul has 2.89 std. dev. which is less volatile. skewness of the distribution of infosys, tcs, asian paints, hcl, tech mahi, ongc data are negative left skewed that means no. of low values are more in comparison high values in the data. irfan│ do google trends and shariah compliant stocks co-integrated? an evidence from india international journal of islamic economics and finance (ijief), 3(2), 227-250│239 table 3. descriptive statistics of google search value index (gsvi) parameters infosys tcs hul asian paints hcl titan tech mahi. ongc hero moto britannia mean 25.12 52.71 50.95 48.75 65.62 62.20 58.01 33.14 38.38 37.56 std. dev. 8.25 11.39 11.39 10.87 11.70 13.22 10.63 10.98 9.47 16.73 kurtosis 28.00 1.55 2.25 2.04 0.30 -0.32 0.30 7.07 7.38 1.06 skewness 3.90 1.15 1.36 1.01 0.82 0.77 0.58 2.19 1.93 1.34 min. 14.00 33.00 33.00 31.00 39.00 41.00 34.00 18.00 26.00 17.00 max. 100 100 100 100 100 100 100 100 100 100 parameters loginfosys logtcs loghul logasian paints loghcl logtitan logtech mahi. logongc loghero motor logbritannia mean 2.41 1.04 0.94 0.56 0.34 0.56 1.27 1.44 0.87 1.68 std. dev. 26.38 15.50 13.70 9.87 10.44 8.41 17.08 19.42 13.98 16.51 kurtosis 27.94 2.46 1.37 3.47 2.24 0.91 4.47 1.81 100.79 1.15 skewness 4.05 0.42 0.65 -0.69 0.83 0.60 1.18 0.75 7.48 0.68 min. -47.06 -37.93 -31.91 -41.51 -28.33 -20.90 -40.35 -48.65 -63.00 -38.36 max. 226.32 75.44 53.19 29.87 49.09 34.72 100.00 93.10 177.78 61.40 table 3 summarizes the data in significant ways of the selected shariah compliant of gsiv. skewness of the distribution of gsiv and gsvilog is positive right skewed that means no. of high values are more in comparison low values in the time series data. the standard deviation shows the volatility of gsvi selected shariah stocks, which is more than 3 percent, meaning that all selected shariah stocks are highly volatile. in log series of gsvi summary reflection of row data. table 4. unit root test on shariah compliant stocks and gsvi augmented dickey-fuller test statistic null hypothesis: 1% level 5% level 10% level t-statistic prob.* shariah compliant stocks has a unit root -3.455 -2.872 -2.573 -0.643 0.857 asian_paintsg has a unit root -3.457 -2.873 -2.573 -9.592 0.115 britanniag has a unit root -3.455 -2.872 -2.573 -2.433 0.134 hclg has a unit root -3.456 -2.873 -2.573 -2.728 0.171 hero_motog has a unit root -3.456 -2.873 -2.573 -3.426 0.111 hulg has a unit root -3.456 -2.873 -2.573 -1.467 0.549 infosysg has a unit root -3.455 -2.872 -2.573 -7.643 0.146 ongcg has a unit root -3.456 -2.873 -2.573 -8.600 0.113 tcsg has a unit root -3.456 -2.873 -2.573 -7.335 0.254 tech_mahindrag has a unit root -3.456 -2.873 -2.573 -3.912 0.233 titang has a unit root -3.456 -2.873 -2.573 -1.003 0.753 table 4 the results of augmented dickey-fuller (adf) test for selected shariah compliant stock benchmark. as shown, the null hypothesis of nonstationarity for the adf tests is accept, indicating that shariah compliant stocks data are non-stationary in level. p-value is more than 5%. meaning that all-time series data become non stationary after applying the coefficient should be negative and p-value should be less than 5%. although researcher can run the further test of co-integration. irfan│ do google trends and shariah compliant stocks co-integrated? an evidence from india international journal of islamic economics and finance (ijief), 3(2), 227-250│240 robustness test of shariah compliant stocks and gsvi table 5. breusch-godfrey serial correlation lm test asian paints f-statistic 8.857 prob. f(2,256) 0.200 obs*r-squared 16.827 prob. chi-square(2) 0.300 britannia f-statistic 0.190 prob. f(2,256) 0.828 obs*r-squared 0.384 prob. chi-square(2) 0.825 hcl f-statistic 0.749 prob. f(2,256) 0.474 obs*r-squared 1.512 prob. chi-square(2) 0.470 hero motor f-statistic 1.308 prob. f(2,256) 0.272 obs*r-squared 2.629 prob. chi-square(2) 0.269 hul f-statistic 0.719 prob. f(2,256) 0.488 obs*r-squared 1.452 prob. chi-square(2) 0.484 infosys f-statistic 0.984 prob. f(2,256) 0.375 obs*r-squared 1.984 prob. chi-square(2) 0.371 ongc f-statistic 2.659 prob. f(2,256) 0.072 obs*r-squared 5.291 prob. chi-square(2) 0.071 tcs f-statistic 0.667 prob. f(2,256) 0.514 obs*r-squared 1.348 prob. chi-square(2) 0.510 tech mahindra f-statistic 1.853 prob. f(2,256) 0.159 obs*r-squared 3.710 prob. chi-square(2) 0.156 titan f-statistic 0.540 prob. f(2,256) 0.583 obs*r-squared 1.093 prob. chi-square(2) 0.579 table 5, shown that the residual diagnostic, first check the serial correlation in the data. here, observed r-squared and p-value is more than 5% in selected shariah compliant stocks and gsvi, researcher cannot reject the null hypothesis rather accept the null hypothesis meaning that there is no serial correlation exist between the gsvi and shariah compliant stocks. stability diagnostic pattern chart represent the stability diagnostic analysis by recursive estimation of cusum test and cusum of squares test, we can see the middle line of individual shariah stocks in between the resistance and support line, meaning that there is stability in selected shariah compliant stocks in with benchmark and gsvi. brittannia, hcl, hul and titan data have stable in cusum test, in the other side asian paints, hero motors, ongc, infosys, tcs and tech mahindra have also shown stable in nature when we run the cusum of squares test. irfan│ do google trends and shariah compliant stocks co-integrated? an evidence from india international journal of islamic economics and finance (ijief), 3(2), 227-250│241 figures 1. recursive estimation of cusum and cusum of squares test. irfan│ do google trends and shariah compliant stocks co-integrated? an evidence from india international journal of islamic economics and finance (ijief), 3(2), 227-250│242 table 6. wald test coefficient diagnostic shariah compliant stocks test statistic value df probability asian paints f-statistic 1.048 (2, 258) 0.352 chi-square 2.097 2 0.351 britannia f-statistic 5.725 (2, 258) 0.004 chi-square 11.449 2 0.003 hcl f-statistic 0.513 (2, 258) 0.599 chi-square 1.026 2 0.599 hero motor f-statistic 0.243 (2, 258) 0.784 chi-square 0.486 2 0.784 hul f-statistic 3.280 (2, 258) 0.039 chi-square 6.561 2 0.038 infosys f-statistic 1.732 (2, 258) 0.179 chi-square 3.464 2 0.177 ongc f-statistic 1.644 (2, 258) 0.195 chi-square 3.288 2 0.193 tcs f-statistic 0.769 (2, 258) 0.465 chi-square 1.538 2 0.463 tech mahindra f-statistic 0.233 (2, 258) 0.792 chi-square 0.467 2 0.792 titan f-statistic 6.093 (2, 258) 0.003 chi-square 12.185 2 0.002 table 6, coefficient diagnostic i.e., wald test: coefficient restrictions, here null hypothesis is c(1)=c(2)=0 jointly. results are shown that accept the null hypothesis, there is no short run causality running between selected shariah compliant stocks and gsvi. table 7. lag selection of optimal order lag logl lr fpe aic sc hq 0 -10118.24 0.000 3.9e+22 80.383 80.53 80.44 1 -9971.48 280.699 2.7e+22 80.012 81.552 80.632 2 -9851.461 220.036 2.7e+22* 79.86* 82.794* 81.036* 3 -9766.775 148.536 2.6e+22 79.974 84.316 81.721 4 -9687.641 132.519 3.1e+22 80.140 85.882 82.451 5 -9614.957 115.948 4.0e+22 80.357 87.500 83.231 6 -9543.033 109.027 5.2e+22 80.580 89.123 84.017 7 -9462.665 115.450 6.4e+22 80.735 90.679 84.737 8 -9368.131 128.2963* 7.2e+22 80.779 92.123 85.344 table 7, here * indicate lag order selected by criteria. in the first case of lr * indicate on the 8 lag, meaning that 8 lag should be chosen. second criteria is fpe * indicate on the 2 lag, in the case of aic, selection criteria is lower the value better the model meaning that lag 2 is chosen. same criteria followed sc and hq, lower the values better the model. according to the sc and hq lag 2 should be selected. now actually all criteria are good, but here majority of criteria recommended that 2. the optimum lag would be 2, researchers shall be using the 2 lag for the johnson test and vector auto regression. irfan│ do google trends and shariah compliant stocks co-integrated? an evidence from india international journal of islamic economics and finance (ijief), 3(2), 227-250│243 table 8. johansen test of co-integration of shariah compliant stocks and gsvi hypothesized eigenvalue trace statistic critical value 0.05 prob.** no. of ce(s) none * 0.274 371.705 285.143 0.000 at most 1 * 0.215 289.749 239.235 0.000 at most 2 * 0.203 227.845 197.371 0.001 at most 3 * 0.155 169.856 159.530 0.012 at most 4 * 0.123 126.783 125.615 0.042 at most 5 0.098 93.152 95.754 0.075 at most 6 0.090 66.885 69.819 0.084 at most 7 0.070 42.637 47.856 0.142 at most 8 0.047 24.184 29.797 0.193 at most 9 0.043 11.787 15.495 0.167 at most 10 0.002 0.428 3.841 0.513 trace test is indicates 5 co-integrating equation(s) at the 0.05 level, * denotes rejection of the hypothesis at the 0.05 level, **mackinnon-haugmichelis (1999) p-values. the outcomes of table 8 shown that there are 5 cointegration equation exist between shariah compliant stocks gsvi. meaning that there is long run relationship with in two cluster. table 9. johansen test, of co-integration of shariah compliant stocks and gsvi hypothesized eigenvalue max eigenvalue critical value 0.05 prob.** no. of ce(s) none * 0.274 81.955 70.535 0.003 at most 1 0.215 61.904 64.505 0.087 at most 2 0.203 57.990 58.434 0.055 at most 3 0.155 43.073 52.363 0.321 at most 4 0.123 33.631 46.231 0.549 at most 5 0.098 26.267 40.078 0.684 at most 6 0.090 24.248 33.877 0.438 at most 7 0.070 18.453 27.584 0.458 at most 8 0.047 12.397 21.132 0.509 at most 9 0.043 11.359 14.265 0.137 at most 10 0.002 0.428 3.841 0.513 max eigen value test statistics is indicates 1 co-integrating equation(s) at the 0.05 level, * denotes rejection of the hypothesis at the 0.05 level, **mackinnon-haug-michelis (1999) p-values. the outcomes of the johansen’s max eigen-value tests are shown in table 9 where it is found that there is 1 co-integration equation among shariah compliant stocks and gsvi. therefore, it can be concluded that there is long-run or equilibrium relationship between selected shariah compliant stocks and gsvi. irfan│ do google trends and shariah compliant stocks co-integrated? an evidence from india international journal of islamic economics and finance (ijief), 3(2), 227-250│244 table 10. vector error correction model (vecm) of shariah compliant stocks and gsvi parameters coefficient std. error t-statistic prob. c(1) -0.004 0.004 -0.925 0.026 c(2) -0.031 0.067 -0.470 0.064 c(3) -0.002 0.067 -0.031 0.075 c(4) -0.335 0.358 -0.936 0.035 c(5) -0.165 0.335 -0.492 0.052 c(6) -0.238 0.245 -0.969 0.033 c(7) -0.126 0.250 -0.502 0.062 c(8) -0.428 0.281 -1.527 0.013 c(9) -0.363 0.281 -1.290 0.020 c(10) -0.180 0.284 -0.634 0.053 c(11) -0.198 0.243 -0.814 0.042 c(12) -0.375 0.274 -1.366 0.017 c(13) -0.096 0.239 -0.401 0.069 c(14) -0.100 0.218 -0.457 0.065 c(15) -0.035 0.216 -0.163 0.071 c(16) 0.178 0.203 0.874 0.138 c(17) -0.159 0.200 -0.794 0.043 c(18) 0.176 0.176 1.002 0.172 c(19) -0.014 0.175 -0.081 0.036 c(20) -0.322 0.198 -1.626 0.011 c(21) 0.006 0.194 0.033 0.073 c(22) -0.060 0.275 -0.217 0.053 c(23) -0.172 0.286 -0.601 0.055 c(24) 2.320 1.417 1.637 0.100 r-squared 0.582 mean dependent var 2.227542 adjt r-squared 0.571 s.d. dependent var 22.12054 s.e. of regression 22.378 akaike info criterion 9.142467 sum squared resid 117184 schwarz criterion 9.472975 log likelihood -1358.2 hannan-quinn criter. 9.275366 f-statistic 0.744 durbin-watson stat 2.004435 prob(f-statistic) 0.045 table 10, after the analyzing the results co-integration, researcher found that there is co-integration equations in between shariah compliant stocks and gsvi. now researcher identify the error correction term i.e., vecm model. the outcome of error correction term found that c(1) to c(24) coefficient are negative in sign and significant. meaning that there is long run causality running in between shariah compliant stocks and gsvi. in this model value of r square is 58 percent which near to 60 percent so model is fit. f-statistic of p-value it is significant 0.045 which is less 5 than percent so accept the model. 4.2. analysis the objective of this paper is to examine the relationship among selected shariah compliant stocks and gsvi. diagnostic analysis using by the coefficient, residual and stability for judge the short run causality in the data. this paper found that there is no serial correlation, no short run causality, data are stable in the nature. adf test shown that there is non-stationarity in two set of data i.e., selected shariah compliant stocks and gsvi. there is cointegration relationship (long term equilibrium) within shariah compliant irfan│ do google trends and shariah compliant stocks co-integrated? an evidence from india international journal of islamic economics and finance (ijief), 3(2), 227-250│245 stocks and gsvi, and also have 5 co-integration equation between the cluster of shariah compliant stocks and cluster of gsvi. there is no short run relationship exist between the shariah complaint stocks and gsvi, but have long run relationship between the clusters. (takeda & wakao, 2014) study focused on the japanese stocks and search intensity have positive relationship, even though somewhat weak relationship between japanese stocks and trading volume. (khan & ahmad, 2019) stated that google search index value has uni-directional relationship with the sentiments of pakistani people. it also shows the positive relationship. it have the bi-directional relationship between the market returns and investors sentiments. this study creates scope for both local and international investors to diversify their islamic investment portfolios, which will put shariah compliant stocks in india as one of their investment destinations. vecm shows that model is fit. v. conclusions and recommendations 5.1. conclusions the results of the study, leads to the conclusion that the returns of shariah compliant stocks are more volatile in comparison of gsvi. skewness measure the distribution of infosys, tcs, asian paints, hcl, tech mahi, ongc data are negative left skewed that means no. of low values are more in comparison high values in shariah compliant stocks. skewness of gsiv and gsvi-log is positive right skewed that means no. of high values are more in comparison low values in the time series data. robustness test shows that there is no serial correlation between shariah compliant stocks and gsvi. shariah compliant stocks and gsvi have stability in the time series data. there is no short run relationship, but it influenced the long run relationship. vector error correction model shows that the model is fit. to conclude, there are many potential investment opportunities in islamic stock markets for the investors. small investors can invest separately in different shariah compliant stocks, because policy and implications do not have an impact on it. the motive of shariah is to provide an avenue for ethical and viable investment to the investors. as it is found that shariah stocks are homogeneous in nature, in the sense of selection criteria only otherwise individual shariah stock has its own justification of returns and sustainable growth. irfan│ do google trends and shariah compliant stocks co-integrated? an evidence from india international journal of islamic economics and finance (ijief), 3(2), 227-250│246 5.2. recommendations future direction for research: the present research work has been undertaken by considering the selected shariah compliant stocks of and gsvi. the data extracted from the yahoo finance database on a weekly basis. the researchers in the future can take data for the different time period of the shariah stocks can study the relation. additionally, they chosen sariah indices of the different countries like malaysia, indonesia, and analyze the volatility, var (vector autoregressive model), granger causality test. social implications: the motive of shariah compliant stock is to provide an avenue for ethical and viable investment to the investors. the perception of the investors about the google trends (gsvi) analyses the popularity of top searching queries in the google over a time. basically, google trends have high more values in comparison to the lower value, meaning that people are given importance to google search queries. the investors are suggested to make the investment decision in any of the three (nifty500 shariah, nifty50 shariah, nifty25 shariah) shariah indices by studying them individually. this important information enables the investors to adjust their financial portfolio and also helps the respective market regulator. google trends is a new platform for the seek the intention of the investor perception. india is socio-economic country where individual investors are believed invest in the small rather than the large group of complaints. this study helps to those investors who wants in individual stock. but google search index value does not reflect the individual investors is relatively small in india, where google search index value most popular search engine to know about the investor sentiments. “price pressure hypothesis” may applies to predict the shocks will have the temporary effect on the prices, which will be need to identify by the circumstance and conditions. practitioner would also invest in this portfolio as well as individual stock because of these stocks have financially sound with receivable account. this study will not only be advantageous for the muslim investors, but also the other investors, shariah practitioners, advisor, legal-regulatory firm and industrialist as well. irfan│ do google trends and shariah compliant stocks co-integrated? an evidence from india international journal of islamic economics and finance (ijief), 3(2), 227-250│247 references aouadi, a., arouri, m., & teulon, f. 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(28, feb 2019). tips for using google trends data to predict market movement. retrieved from the invest: http://www.theinvestblog.com/tips-for-using-google-trends-data-topredict-market-movement/ tower, p.e. (2015). google search volume index:predicting returns, volatility and trading volumeof tech stocks. economics honors thesis, 32. https://www.niftyindices.com/indices/equity/thematic-indices/nifty-500-shariah https://www.niftyindices.com/indices/equity/thematic-indices/nifty-500-shariah irfan│ do google trends and shariah compliant stocks co-integrated? an evidence from india international journal of islamic economics and finance (ijief), 3(2), 227-250│250 this page is intentionally left blank international journal of islamic economics and finance (ijief) vol. 5(1), january 2022, pages 151-176 dual banking system stability index in the shadow of covid-19 pandemic1 patria yunita2 corresponding email: patria.yunita@gmail.com article history: received: may 30th, 2021 revised: september 21st, 2021 november 25th, 2021 january 3rd, 2022 january 12th, 2022 accepted: january 18th, 2022 abstract the financial system is categorized as stable if there is no excessive volatility from financial pressures or crises. the imf indicates that the crisis is not only related to one element but more than two or three elements of the crisis. the banking system's stability is measured by the banking stability index, gauging the effectiveness of monetary policy and financial risk. this study aims to measure the stability of the indonesian banking system in the dual banking system model. the indicator to measure banking stability used the z-score statistic based on fluctuations of return on assets for each type of bank. the markov switching vector autoregressive (msvar) model method was used to analyze the volatility of banking stability. independent variables used included credit risk (npl), loan to deposit ratio, liquidity risk, net interest margin, capital adequacy ratio, money market rate, inflation, gross domestic product, federal reserve rate, and exchange rate. the results of the regime switch analysis concluded that indonesia's banking stability experienced a structural break due to the effects of the pandemic in april 2020. based on the average z-score value, the islamic banking stability index was higher than conventional banking. in other words, islamic banking was more stable than the conventional banking system. the islamic banking stability index (izscore) was significantly influenced by the level of net operating margin, financing to deposit ratio, potential loss profit sharing, islamic money market rate, and exchange rate. however, non-performing financing did not affect islamic banking stability since the profit-sharing system implemented by islamic banking stability was more influenced by the ratio of potential loss and profit-sharing system. keywords: dual banking system, z-score, markov switching jel classification: g01; g21; g32; g33 type of paper: research paper @ijief 2022 published by universitas muhammadiyah yogyakarta, indonesia doi: https://doi.org/10.18196/ijief.v5i1.11837 web: https://journal.umy.ac.id/index.php/ijief/article/view/11837 citation: yunita, p. (2022). dual banking system stability index in the shadow of covid-19 pandemic. international journal of islamic economics and finance (ijief), 5(1). 151-176. doi: https://doi.org/10.18196/ijief.v5i1.11837. 1 this paper has been presented on the 7th indonesia finance association (ifa) international conference “finance, capital market, and corporate governance in the digital transformation era” on october 6 & 7, 2021. idx, ksei, ifa. 2 sekolah tinggi ekonomi dan perbankan islam mr. sjafruddin prawiranegara mailto:patria.yunita@gmail.com https://doi.org/10.18196/ijief.v5i1.11837 https://doi.org/10.18196/ijief.v5i1.11837 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v5i1.11837&domain=pdf yunita│stability measurement of indonesia dual banking system in the shadow of covid 19 outbreak international journal of islamic economics and finance (ijief), 5(1), 151-176 │ 152 i. introduction 1.1. background successful economic development is measured by the effectiveness and performance of financial institutions, especially the banking industry. the financial systems have gone through several significant changes throughout southeast asia due to the banking crisis. banking performance can affect the efficiency and stability of the banking industry and the overall effectiveness of the financial system because the banking system is still a priority for intermediary institutions in southeast asian countries. banks are also the main institutions that mobilize domestic deposits as a major payment system player and external corporate capital source (kočišová, 2011). unstable economic conditions are indicated by the high volatility of macroeconomic indicators and impact the banking sector. the researchers used various statistical indicators to describe the characteristics of financial system resilience, evaluating the dimensions of financial stability related to risk as to the main indicators of micro and macroprudential. on the other hand, one of the consequences of the global financial crisis is the growth of credit risk and increased non-performing loans (kočišová, 2011). the most critical financial crisis in asian economies, including indonesia, was the financial crisis that occurred in mid-1997 and affected currency exchange rates, stock markets, and asset prices (zahra, ascarya & huda, 2018). several indicators that affect the banking system's stability are credit risk, liquidity risk, capital adequacy, exchange rate risk, interest rate risk, and other risks inherent to the banking system. mishkin (2011) mentions that the banking sector will be bankrupt if total assets are lower than the total loan. moreover, the imf indicates that the crisis is not only related to one element but more than two or three elements of the crisis. in 1997, there were 148 banking crises and 218 cases of exchange rate crises (laevan and valencia, 2012). banking crises usually begin with skyrocketing asset prices, high capital income, and credit booms (reinhart and rogoff, 2013). four factors influence financial system stability: a) a stable economic environment, b) well-managed financial institutions, c) effective oversight of financial institutions, and d) secure and reliable payment systems. if an interruption occurs in one subsector, it will affect other sub-sectors (gadanecsz & kaushik, 2008). the prolonged pandemic since november 2019 has had a very significant impact on the global economy. according to (elnahass et al., 2021), the world began to realize the serious impact of the pandemic since the end of february 2020, following the development in china, europe, and the united states. imf (international monetary fund [imf], 2020) pointed out a 3% contraction of yunita│stability measurement of indonesia dual banking system in the shadow of covid 19 outbreak international journal of islamic economics and finance (ijief), 5(1), 151-176 │ 153 the global economy starting in april 2020, where financial institutions, especially the banking sector, have suffered an immediate exogenous shock that required them to be prepared for difficulties of future challenges. meanwhile, besides these challenges, there are high expectations that banks should be an active part of the wide economic solution and support government efforts against recessive factors through pandemic risks since banks remain the main source of liquidity for economies (barattieri, eden & stevanovic, 2020). many researchers have analyzed banking stability using the financial stability indicator or z-score. international monetary fund using zscore to measure banking stability index. meanwhile, schaeck & cihak (2014) used inzscore generated from expected return on average assets. besides the conventional banking system, the islamic banking system operates globally to avoid the dangers of usury. several countries have begun to implement an islamic banking model. the islamic banking model is a banking component with a unique and different management pattern. according to data published by the world bank, the main issue related to banking studies is that the dual banking system has been adopted by more than 50 countries and has achieved significant growth, so it impacts the level of stability. the stability of the banking system is measured by the banking stability index. the banking stability index can describe the effectiveness of monetary policy and includes the financial risk of monetary policy decisions. the financial system is categorized as stable if there is no excessive volatility from financial pressures or crises. most previous researchers used z-score to analyze the banking stability index. some of them used neural networks and camels indicators. studies successfully applied the banking stability index measurement but did not calculate the switching process from stable to unstable. therefore, this paper analyzes the banking stability measurement of the dual banking system to have an earlier warning of indonesia's banking crises through pandemic using z-score, calculated based on accounting ratio of the asset performance rather than market data. the researchers analyzed the switching process from stable to unstable conditions and compared banking stability between islamic and conventional banking systems in pandemic conditions. then, the purpose of this paper is to present a quantitative examination of what occurred during the pandemic in different banking business models (i.e., islamic and conventional banks). before, the imf (2020) projected that the substantial economic recovery from pandemic effects is a subject of the current extraordinary policy and the adequate renegotiation of bank loans to preserve the financial system's stability actively. the non-performing loans measure loan risks, known as the yunita│stability measurement of indonesia dual banking system in the shadow of covid 19 outbreak international journal of islamic economics and finance (ijief), 5(1), 151-176 │ 154 lagging indicators of banking soundness (schaeck & cihak, 2014). in indonesia, from january 2015 to february 2021, the loan to deposit ratio of conventional and islamic banking showed a very sharp decline. likewise, conventional banks' net interest margin ratio showed a sharp decline. it affected the distribution of corporate credit in the indonesian economy. thus, the study of the impact of the pandemic on global banking stability is an important part of assessing the potential for signs of economic recovery. in february 2020, the global world began to realize the serious impact of the global economy due to the pandemic. global capital markets were heavily affected during the first weekend of march 2020. the outbreak has also forced international institutions and large banks to cut their growth (donthu & gustafson, 2020; sharma, leung, kongshott, davcik & cardinali, 2020). in indonesia, following the regulation from imf, the banking stability regulator issued a policy of tightening liquidity. (a) conventional (b) islamic (a) conventional (b) islamic figure 1. level of bank non-performing loan and loan to deposit ratio, indonesia banking industry, january 2015 to february 2021 source: statistic of indonesia banking industry, the financial services authorities. 2021. as a consequence of this regulation, the number of conventional and islamic banking lending has decreased drastically. figure 1 illustrates the fluctuations of the loan to deposit ratio and non-performing loans of indonesia conventional and islamic banking from october 2015 to january 2021. although the npl ratio impacts economic growth, the risk of bad loans can be controlled through the pandemic condition. elnahass et al. (2021) mentioned that the covid-19 outbreak had had a very detrimental impact on financial yunita│stability measurement of indonesia dual banking system in the shadow of covid 19 outbreak international journal of islamic economics and finance (ijief), 5(1), 151-176 │ 155 performance (i.e., accounting-based and market-based performance measures) and in various financial stability indicators (default risks, liquidity risks, and assets risks). meanwhile, indonesia banking bad debts are quite controlled in a pandemic situation. 1.2. research objectives this study aims to measure the stability of indonesia's dual banking system through pandemic diseases using a z-score index based on accounting ratio rather than market data to present a quantitative examination of what occurred during the pandemic in different banking business models (i.e., islamic and conventional banks). the pandemic conditions have been impacted the southeast asia financial sector, including indonesia, and have been impacted the islamic and conventional banking industry differently. the remaining organization of the paper discusses literature review related to theory and past studies related to the topic in chapter two, followed by methodology in chapter three, discussing methodology, including the data, proposed stability model and regression method used. chapter four discusses results and analysis, followed by chapter five, discussing the study's conclusion and recommendations for various stakeholders. ii. literature review 2.1. banking system stability financial system stability is indicated by the fluctuation of the money market, stock market, and banking sector. gorton & winton (2003) argues that banks are liquidity providers. banks have an important role that can affect the sensitivity of financial markets and economic stability. evaluation of bank stability and soundness is a complex task and involves a large number of multidimensional criteria (kosicova, 2011). the financial system can be said to be stable if there is no excessive volatility and crisis. financial stability is a condition in which banking institutions, capital markets, and money markets, including financial infrastructure, can withstand shocks and break down financial imbalances, thereby reducing the possibility of disruption in the intermediary financial process (gadanecsz & kaushik, 2008). the international monetary fund (2020) has developed financial stability indicators to measure the level of banking stability based on the international balance system (kocisova, 2011). the measurement of banking stability also uses z-score analysis. the imf uses the z-score to evaluate the level of banking stability. z-score is a popular analysis method to measure banking stability performance among many yunita│stability measurement of indonesia dual banking system in the shadow of covid 19 outbreak international journal of islamic economics and finance (ijief), 5(1), 151-176 │ 156 researchers. the z-score calculation is based on historical accounting data on banking financial statements (imf, 2015). 𝑍 𝑠𝑐𝑜𝑟𝑒 = (𝑘 + 𝜇) 𝜎𝑅𝑂𝐴 the greater the result of the z-score, the more stable the conditions (martin & hesse, 2010) a higher z-score indicates lower insolvency risk (albuquerque & rahji, 2019). there are modifications of the z-score from previous research. rajhi&hassan (2013) used a z-score, calculated by the expected return of average assets. meanwhile, abedifar et al. (2012) used z-score for insolvency risk by the formula: 𝑍 𝑠𝑐𝑜𝑟𝑒 = 𝐸(𝑅𝑂𝐴) + 𝐶𝐴𝑅 𝜎 𝑅𝑂𝐴 2.2. previous studies several studies of financial system stability have been carried out by alqahtani & mayes (2018), nurfalah et al. (2018), zahra, ascarya & huda (2018), nurfalah & rusydiana (2020), and many other researchers. elnahass et al. (2021) assessed 1090 banks from 116 countries throughout 2019 – 2020, and the results provide strong empirical evidence that in the global banking sector, the covid-19 outbreak has had a very detrimental impact on financial performance (i.e., accounting-based and market-based performance measures) and in various financial stability indicators (default risks, liquidity risks and assets risks). the results are consistently observed in the us, china, and others, in different countries' bank levels and income levels. ryu & yu (2020) identified the effect of subordinated loans on bank performance using several variables. their research concluded that the loan's size would affect the bank's performance; the high level of the loan would result in a low level of bank solvency. besides, nurfalah & rusydiana (2020) researched indonesia, malaysia, and pakistan's banking instability. their research denoted that banking instability in indonesia is largely influenced by fluctuations of the inflation rate, while banking instability in malaysia and pakistan is influenced by the financing to deposit ratio and fluctuations in world oil prices. albuquerque & rajhi (2019) evaluated the effects of natural disasters in developing economic countries, using inzscore to represent financial stability. the results concluded that shocks from natural disasters affected nonperforming loans temporarily, while shocks from state fragility created yunita│stability measurement of indonesia dual banking system in the shadow of covid 19 outbreak international journal of islamic economics and finance (ijief), 5(1), 151-176 │ 157 detrimental economic. meanwhile, lee & lee (2019) predicted the effect of world oil prices on banking performance in china. the results of their research concluded that an increase in oil prices resulted in lower banking liquidity, profitability, capital and management efficiency. ozili (2018) research on the determinants of islamic banking in africa concluded that indicators affecting banking stability in africa included efficiency, political stability, corruption control, regulatory control, bank size, and unemployment rate. in addition, sanchez et al. (2016) analyzed credit risk and corporate failure of bankruptcy prediction using the hybrid associative memory method. the method is an alternative technique to predict financial systems through a neural network. also, kocisova (2011) measured the banking stability index across european countries. the index is categorized into four items: capital adequacy, asset quality, earnings and profitability, and liquidity. the aggregate banking stability is calculated as the sum of weighted values of four categories. kabir et al. (2015) conducted a study to consider the levels of credit risk in islamic and conventional banks. their study evaluated 156 conventional and 37 islamic banks across 13 countries between 2000 – 2012, using marketbased credit risk measure, merton’s distance to default (dd) model. the study concluded that islamic banks had significantly lower credit risks. rajhi & hassairi (2013) investigated the stability of islamic banks and conventional banks in 16 countries of the middle east, north africa, and southeast asian countries over 2000-2008 using z-score. their model was generated using panel regression of z-score, calculated by the expected return of average assets. the study found that islamic banks indicated higher stability than conventional banks. abedifar et al. (2012) researched islamic banking risk using 553 banks from 24 countries in 1999 – 2009. abedifar et al. (2012) used z-score for insolvency risk analysis; z-score formula in their research is as follows: 𝑧𝑠𝑐𝑜𝑟𝑒 = 𝐸(𝑅𝑂𝐴)+𝐶𝐴𝑅 𝜎 𝑅𝑂𝐴 ., where e(roa) is the expected return on assets, and 𝜎 𝑅𝑂𝐴 is the standar deviation of roa. their results concluded that islamic banks had lower credit risk than conventional banks, and the loan quality of islamic banks was less responsive to the domestic interest rate. ghosh (2011) measured the stability of 28 banks in the 1997-2007 period using regression analysis. the results of his study indicated that the addition of branches opened up risk diversity and positively affected banking stability. meanwhile, cihak et al. (2008) measured banking stability using data from 2003-2004 using regression analysis of the banking z-score value. yunita│stability measurement of indonesia dual banking system in the shadow of covid 19 outbreak international journal of islamic economics and finance (ijief), 5(1), 151-176 │ 158 (martin & hesse, 2010) identified a significant impact of islamic banks' market share on financial risk system using the ratio of total loans to total assets, but this research did not analyze interest rates risks. their model used panel regression of z-score from 19 countries to calculate banking stability. z-score was generated from return on assets as a proxy of return volatility of banks. it can be seen that most previous researchers used z-score to analyze the banking stability index. some of them used neural networks and camels indicators. the studies successfully applied the banking stability index measurement but did not calculate the switching process from stable to unstable. for this reason, this research employed a z-score, calculated by the fluctuation of roa and markovswitch var, to analyze the regime switch from stable to unstable conditions. this research follows the study conducted by nurfalah et al. (2018), zahra, ascarya & huda (2018), and nurfalah & rusydiana (2021). nurfalah et al. (2018); nurfalah & rusydiana (2021) conducted banking stability and regime-switching model for the islamic banking system in indonesia, malaysia, and pakistan. their study mentioned that indonesia's banking stability index was affected by inflation, while malaysia and pakistan were affected by the financing to deposit ratio and the fluctuation of global oil. following the previous research regarding the banking stability index, we conducted our analysis by dividing our model into two models. the first model is the conventional banking stability index, and the second model is the islamic banking stability index. the banking stability index denoted by z-score was calculated based on the accounting ratio of the asset performance rather than the market data. then, we analyzed the switching process from stable to unstable conditions and compared banking stability between islamic and conventional banking systems. next, we divided our variables into independent and control variables. the independent variable is internal banking performances, while control variables are generated by the external macroeconomic indicators. in this regard, elnahass et al. (2021) mentioned that the covid-19 outbreak had had a very detrimental impact on financial performance (i.e., accounting-based and market-based performance measures) and in various financial stability indicators (default risks, liquidity risks and assets risks), while indonesia banking bad debts are quite controlled in the pandemic situation due to government regulations. yunita│stability measurement of indonesia dual banking system in the shadow of covid 19 outbreak international journal of islamic economics and finance (ijief), 5(1), 151-176 │ 159 iii. methodology 3.1. data table 1. research variables for conventional banking variable proxy notation data sources dependent variable z-score 𝑍 𝑠𝑐𝑜𝑟𝑒 = (𝑘 + 𝜇) 𝜎𝑅𝑂𝐴 z score bank indonesia statistics financial services authority independent variables capital adequacy ratio net interest margin loan to deposit ratio liquid assets money market rate car nim ldr la mm car nim ldr la mm indonesian economic and financial statistics, bank indonesia indonesian financial stability review, bank indonesia control variables inflation gross domestic product federal reserve exchange rate inf gdp fed exc inf gdp fed exc indonesian economic and financial statistics, bank indonesia indonesian financial stability review, bi table 2. research variables for islamic banking variable proxy notation data sources dependent variable z-score 𝑍 𝑠𝑐𝑜𝑟𝑒 = (𝑘 + 𝜇) 𝜎𝑅𝑂𝐴 z score bank indonesia statistics financial services authority independent variables non-performing financing net operational margin financing to deposit ratio profit &loss sharing financing islamic money market rate npf nom fdr pls imm npf nom fdr pls imm indonesian economic and financial statistics, bank indonesia indonesian financial stability review, bank indonesia control variables inflation gross domestic product federal reserve exchange rate inf gdp fed exc inf gdp fed exc indonesian economic and financial statistics, bank indonesia indonesian financial stability review, bi the data used in this study were indonesian banking statistics data and indonesian economic and financial statistics reported monthly by bank indonesia and the financial services authority in the research period october 2015 to january 2021. ten variables were used in this study, including z-score (indicators of banking stability) as the dependent variable is described in table 1 for conventional banking and table 2 for islamic banking. the independent variables were capital adequacy ratio, non-performing loan, net interest margin, loan to deposit ratio, liquid assets, and money market rate. yunita│stability measurement of indonesia dual banking system in the shadow of covid 19 outbreak international journal of islamic economics and finance (ijief), 5(1), 151-176 │ 160 meanwhile, the control variables were inflation, gross domestic product, federal reserve, and exchange rate. 3.2. model development we used two z-score equation models to analyze the stability measurement of the dual banking system in indonesia. the z-score equation is a stability measurement used by the international monetary fund to calculate banking stability (imf, 2015). many researchers have also used z-score to calculate banking stability measurement (cihak & hesse, 2010; rajhi & hassairi,2013). in this paper, we used two general equation models. model 1 is the equation of conventional banking stability, and model 2 is the islamic banking stability. our models refer to studies conducted by nurfalah et al. (2018), zahra, ascarya & huda (2018), and nurfalah & rusydiana (2021). 3.2.1. general equation of research model model 1 (conventional banking stability) z − score kt = β0 + β1 cart−j + β2 nimt−1 + β3ldrt−m + β4 lat−n + β5mmt−0 +β6exct−p + β7inft−p + β8gdpt−p + β9fedt−p + 𝜀𝑡 (1) z-score : stability index car : capital adequacy of conventional banks npl : credit risk nim : net interest margin ldr : loan to deposit ratio la : liquidity assets mm : interbank money market rate inf : inflation rate gdp : gross domestic product fed : federal reserve exc : exchange rate model 2 (islamic banking stability) 𝑖zscore kt = β0 + β1 nomt−j + β2 npft−k + β3 liqt−1 + β4fdrt−m + β5 plst−n + β6immt−0 + β7inft−p + β8gdpt−p + β9fedt−p + β10exct−p + 𝜀𝑡 (2) izscore : islamic banking stability index nom : net operating margin npf : non-performing loan liq : liquidity rate fdr : financing to deposit ratio pls : potential loss profit sharing imm : islamic interbank money market rate inf : inflation rate yunita│stability measurement of indonesia dual banking system in the shadow of covid 19 outbreak international journal of islamic economics and finance (ijief), 5(1), 151-176 │ 161 gdp : gross domestic product fed : federal reserve exc : exchange rate 3.3. method 3.3.1. the markov switching model the imf uses the z-score as an indicator to measure banking stability. referring to the imf’s calculation of banking stability, this study used a banking stability index with z-score. after calculating the z-score value, the ms-var (markov switching – vector autoregressive models) switch method was employed. the markov switching model was developed by hamilton in 1989 to analyze the dynamics of the business cycle econometrically. this method accommodates multivariate variables and linear time series data with constant parameters (krolzig, 1997). the markov switching model combines the linear autoregressive model with the markov chain model, known as the autoregressive markov switching model. it is because the dynamics of the business cycle are influenced by several macroeconomic factors. markov switching model is also used to analyze time-series data in the economic and financial fields that experience changes in conditions due to a structural break. the markov switching model is a dynamic regression model that shows different dynamics across the observed states using parameters that accommodate structural breaks or other state phenomena. this model is a transition between an unobserved state and a markov chain. there are two markov switching models: the markov switching dynamic regression (msdr) model, which allows quick adjustments after the change process, and the markov switching autoregression (mvar) model, which allows gradual adjustments. markov switching vector autoregressive (msvar) model is a non-linear model that combines the autoregressive linear vector model with the markov chain model (krolzig, 1997). the assumption that must be met for markov switching modeling is the assumption of stationarity. if a time series is stationary, the data variance is not affected by changes in time, so it is in statistical equilibrium (gujarati, 2003). in this study, to measure stationarity in time series data, the augmented dickey-fuller method was used. the augmented dickey-fuller test is a unit root test to test data stationery, with the following hypothesis: ho: data contains unit root or non-stationary data. h1: data does not contain unit-roots, or data is stationary. 𝑡 = �́� − 1 𝜎(�́�) yunita│stability measurement of indonesia dual banking system in the shadow of covid 19 outbreak international journal of islamic economics and finance (ijief), 5(1), 151-176 │ 162 3.3.2. optimal lag determination by using the swatch criterion, the optimal lag determination was carried out using the following formula: 𝑆𝐶 = −2 λ 𝑇 + ln (𝑇) 𝑇 𝐾 where t is the number of data, k is the number of variables, and λ is the loglikelihood function. the markov switching vector autoregression model was used in this study because of the multivariate model. there are two markov switching vector autoregressive components: var and markov chain. krolzig (2000) stated that the general form of the markov switching vector autoregressive model of order p or ms(m) – var(p) is as follows: 𝑦𝑡 = 𝑐(𝑆𝑡 ) + 𝐴1(𝑆𝑡 )𝑦𝑡−1 + ⋯ + 𝐴𝑝(𝑆𝑡 )𝑦𝑡−𝑝 +𝜀𝑡 the msvar model assumes that the condition variable is an unobservable random variable, called the hidden markov model, probability of the transition from the initial state to the next state. the main idea of this model is that the time series parameter of the k (yt) dimension vector depends on the unobserved variable, with the following formula: 𝑆𝑡 p(yt|yt−1, xt st) = { f(yt|yt−1, xt ; θt) f(yt|yt−1, xt ; θm) } if st = 1 if st = m with 𝑌𝑡−1 = {𝑦𝑡−𝑖 } = ∞ 𝑖 𝑦𝑡 𝑋𝑡 is the historical value of 𝑦𝑡 , which 𝑋𝑡 is an exogenous variable, and the vector parameter at the time of regime m. the markov switching regression model can be defined as follows: 𝑦𝑡 = { f(yt|yt−1, xt ; θt) f(yt|yt−1, xt ; θm) } if st = 1 if st = m there are several specifications of the msvar model in the time series model. the notation commonly used for model specifications is for variable changes to regime changes as follows: m (mean (µ)); i (intercept); a (autoregression parameter (at), and h (heteroscedasticity) (untoro et al., 2014). this study used a latent variable following the first derivative of markov’s two-state, i.e., st = 1 is the crisis state, and st = 0 is a tranquil state. in the markov switching model (hamilton, 1989), the transition from one regime to another is governed by an unobserved markov chain. in the structural change model (chow 1960, bai and perron 2003), the transition from one regime to another is governed by time. meanwhile, in the autoregressive threshold model (tong & lim, 1980, van dijk et al., 2002), the shift from one regime to another is yunita│stability measurement of indonesia dual banking system in the shadow of covid 19 outbreak international journal of islamic economics and finance (ijief), 5(1), 151-176 │ 163 governed by the dependent variable compared to the threshold variable. parameter estimation used the maximum likelihood estimation (mle) method. the best model is the one with the smallest aic. diagnostic tests were then conducted to test the feasibility of the model. the test consisted of a parameter significance test, residual normality, and residual independence. 3.3.3. research stages our research stages are as follows: iv. results and analysis 4.1. results 4.1.1 descriptive statistics: dependent variable this research model uses z-score analysis as the dependent variable to represent the indonesian banking stability index. we used z-score extensively applied in the banking literature to measure the bank stability index. the international monetary fund also uses z-score to measure banking stability. the z-score measures the standard deviation that the bank’s return has to diminish to deplete equity. a higher value of the z-score means a lower pandemic disaster conventional banking islamic banking model 1 z-score capital adequacy ratio net interest margin loan to deposit ratio liquid assets money market rate inflation gross domestic product federal reserve exchange rate model 2 izscore non-performing financing net operational margin financing to deposit ratio profit &loss sharing financing islamic money market rate inflation gross domestic product federal reserve exchange rate conventional banking stability comparison of z-scores markov switching autoreression model islamic banking stability yunita│stability measurement of indonesia dual banking system in the shadow of covid 19 outbreak international journal of islamic economics and finance (ijief), 5(1), 151-176 │ 164 probability of insolvency risk and, therefore, better bank stability (risfandy, tarazi, & trinugorho., 2018). in this study, z-score was calculated based on return on assets performance. table 3 is a summary of roa fluctuations in conventional and islamic banking. table 3 shows that the average profitability performance of conventional banks was higher than islamic banks. however, based on figure 2, it can be seen that the level of conventional banking profitability during the pandemic decreased, whereas islamic banks tended to increase. table 3. summary of roa variable obs mean std. dev min max skewness kurtosis islamic conventional 64 64 1.156357 2.955323 0.4241084 0.3757294 0.1621272 1.841875 1.875145 3.534403 -0.304562 -1.581913 2.13875 4.990583 conventional banking islamic banking figure 2. roa fluctuations table 4. descriptive statistics of islamic and conventional stability index by z-score variable obs mean std. dev min max skewness kurtosis islamic conventional 64 64 5.69e-16 -1.53e-15 1 1 -2.344282 -2.963429 1.694821 1.541217 -0.304562 -1.581913 2.13875 4.990583 conventional banking islamic banking figure 3. fluctuations of the indonesian banking stability index (z-score) table 4 describes the analysis of the islamic banking stability index, represented by the z-score value. the greater the result of the z-score is, the yunita│stability measurement of indonesia dual banking system in the shadow of covid 19 outbreak international journal of islamic economics and finance (ijief), 5(1), 151-176 │ 165 more stable the conditions (cihak and hesse, 2008). in table 4, it can be concluded that the z-score of conventional banking was negative, while the zscore of indonesian islamic banking was positive. based on (cihak and hesse, 2008), islamic banking is more stable than conventional banks. figure 3 depicts the fluctuation of indonesia's banking stability index. the zscore value of islamic banking decreased, while the z-score of islamic banks increased. 4.1.2 descriptive statistics: independent variable table 5 describes the descriptive statistics for islamic banking model. meanwhile, the descriptive statistics of conventional banking is describes in table 6. table 5. descriptive statistics of islamic banking model variable obs mean std. dev min max number icar npf fdr pl imm gold inf gdp fed exc 64 64 64 64 64 64 64 64 64 64 64 1.256761 18.42291 4.220886 81.54512 3.224995 4.222188 1381.59 3.160469 3.621559 1.207031 13926 0.4489206 2.337843 0.8429688 3.986583 0.4819118 1.505536 227.2797 0.8872312 3.20823 0.80617 605.2054 0.1687105 14.72363 3.128563 76.36069 2.369912 0.84 1068.3 1.32 -5.32 0.25 13042 1.928098 21.80282 6.168241 90.67393 4.458928 6.73 1968.63 6.25 5.27 2.5 16310 table 6. descriptive statistics of conventional banking model variable obs mean std. dev min max nim car ldr la mm gold inf exc 64 64 64 64 64 64 64 64 5.095403 22.89055 90.69831 17.00381 4972344 1381.59 3.160469 13926 0.380995 0.6955486 3.208027 1.35003 0.9420423 227.2797 0.8872312 605.2054 4.311298 21.04509 82.32749 14,63836 3.12 1068.3 1.32 13042 5.650547 24.50239 96.18617 19.80454 7.96 1968.63 6.25 16310 4.1.3 analysis of correlation statistics for correlations between variables are illustrated in table 7. correlation analyses between dependent and independent variables were carried out to identify the strength of the direction of the relationship between dependent and independent variables. yunita│stability measurement of indonesia dual banking system in the shadow of covid 19 outbreak international journal of islamic economics and finance (ijief), 5(1), 151-176 │ 166 table 7. correlations between variables – islamic banking model obs = 64 izscore icar npf fdr pl imm gold inf gdp fed exc izscore 1.0000 icar 0.8423 1.0000 npf -0.8596 -0.8942 1.0000 fdr -0.7206 -0.8458 0.7371 1.0000 pl -0.2690 0.0428 0.2226 -0.1648 1.0000 imm -0.3429 -0.3008 0.3050 0.3332 0.1584 1.0000 gold inf gdp fed exc 0.5275 -0.4686 -0.3367 0.4178 0.6395 0.6054 -0.6643 -0.4707 0.4140 0.7520 -0.6449 0.6459 0.5080 -0.3235 0.6779 -0.5350 0.5978 0.3431 -0.4650 -0.5357 -0.2400 -0.0352 0.2145 0.1886 -0.0274 -0.6723 0.3992 0.5125 0.3344 -0.1873 1.0000 -0.8010 -0.8687 -0.3207 0.4560 1.0000 0.7355 0.0905 -0.4933 1.0000 0.5132 -0.4337 1.0000 0.1797 1.0000 table 8. correlations between variables – the conventional banking model obs = 64 z-score nim car ldr la mm gold inf exc z-score 1.0000 nim 0.4939 1.0000 car -0.2345 -0.3030 1.0000 ldr 0.7465 0.1776 -0.3003 1.0000 la -0.5909 -0.0181 0.1750 -0.8718 1.0000 mm 0.5326 0.4027 -0.4712 0.7405 -0.6864 1.0000 gold inf exc -0.7070 0.5687 -0.1798 -0.8325 0.7222 -0.7518 0.4380 -0.5211 -0.0241 -0.5061 0.2898 0.1673 0.3247 -0.1533 -0.2840 -0.6845 0.4702 -0.0410 1.0000 -0.8010 0.4560 1.0000 -0.4933 1.0000 yunita│stability measurement of indonesia dual banking system in the shadow of covid 19 outbreak international journal of islamic economics and finance (ijief), 5(1), 151-176 │ 167 from the data presented in table 7, variables of icar and npf of islamic banking had multicollinearity, known from a correlation score of more than 0.8000. to anticipate spurious regression in the islamic banking model, we dropped the icar variable. then, we used npf, fdr, pl, and imm as independent variables of the islamic banking stability model and inf, gdp, fed, and exc as control variables to anticipate unobserved heterogeneity. from the data presented in table 8, the correlation score was lower than 0.8000, and it can be seen in general that there was no multicollinearity among conventional banking variables. it can be assumed that the regression model of islamic and conventional stability models was considered good to predict correlations among variables. table 9. variable coefficient of islamic banking model variable coefficient t-value significance izscore nom npf liq fdr lps potential imm inf gdp fed exc -2.432778 1.930962 -0.017677 -0.001838 -0.012866 -0.134906 -0.036985 0.000294 -0.011791 -0.046418 0.000134 -3.82 39.39 -0.60 -0.34 -1.96 -4.71 -2.13 0.01 -0.96 -0.89 -3.30 significant significant not significant not significant significant significant significant not significant not significant not significant significant table 10. variable coefficient of conventional banking model variable coefficient t-value significance z-score car npl nim ldr la mm inf gdp fed exc -21.86102 0.151206 -210.5472 1.124699 0.095508 -0.042645 0.005687 0.085509 0.041595 -0.161970 0.000504 -3.35 1.49 -4.75 4.63 2.71 -0.66 0.05 0.89 1.02 -1.49 3.10 significant not significant significant significant significant not significant not significant not significant not significant not significant significant next, we performed a z-score regression of the islamic banking model with independent and control variables. the islamic banking stability index (izscore) was significantly influenced by the level of net operating margin, financing to deposit ratio, potential loss profit sharing, islamic money market rate, and exchange rate. however, non-performing financing did not affect yunita│stability measurement of indonesia dual banking system in the shadow of covid 19 outbreak international journal of islamic economics and finance (ijief), 5(1), 151-176 │ 168 stability because the profit-sharing system implemented by islamic banking stability was more influenced by potential loss and profit-sharing ratio. meanwhile, the conventional banking stability index was significantly influenced by the level of non performing loans, net interest margin, loan to deposit ratio, and exchange rates. figure 4. banking stability by z-score (a) conventional (b) islamic (a) conventional (b) islamic figure 5. z-score fluctuation and structural break -4 -3 -2 -1 0 1 2 3 1-oct-15 1-oct-16 1-oct-17 1-oct-18 1-oct-19 1-oct-20 z-score zscore izscore yunita│stability measurement of indonesia dual banking system in the shadow of covid 19 outbreak international journal of islamic economics and finance (ijief), 5(1), 151-176 │ 169 both conventional and islamic banking stability indexes by z-score experienced a structural break in april 2020, while the pandemic covid-19 struck all over indonesia and influenced the indonesian financial sector. these findings align with the imf research paper (imf, 2020). table 11. conventional bank stability conventional bank freq. percent cum stable, z-score > 0.0 45 70.31 29.69 unstable, z-score < 0.0 19 29.69 100.00 total 64 100.00 table 12. islamic bank stability islamic bank freq. percent cum stable, z-score > 0.0 35 54.69 45.31 unstable, z-score < 0.0 29 45.31 100.00 total 64 100.00 next, we analyzed the conventional and islamic banking stability indexes. based on the structural break of indonesia's banking industry through a pandemic, the switching process of banking stability fluctuation occurred in april 2020. thus, we divided regime 1 as stable and regime 2 as unstable conditions. conventional banking stability index had 45 times in stable condition and 19 times in unstable condition. meanwhile, the islamic banking stability index had 35 times stable and 29 times unstable. the conventional and islamic banking stability index fluctuation is depicted in figure 4. 4.1.4. stationery test table 13. stationery test – augmented dickey-fuller test dickey-fuller test level z(t) 1st difference z-score izsore car nim ldr mm nom npf liq fdr pls imm inf gdp fed exc 0.3731 0.3644 0.1351 0.3799 0.6616 0.3900 0.2564 0.5996 0.4697 0.2888 0.1041 0.0080 0.0156 0.8062 0.7189 0.0727 0.0000 0.0000 0.0000 0.0000 0.0543 0.2417 0.0000 0.0074 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 yunita│stability measurement of indonesia dual banking system in the shadow of covid 19 outbreak international journal of islamic economics and finance (ijief), 5(1), 151-176 │ 170 after that, we conducted the stationery test using the augmented dickeyfuller test for all variables. if a time series is stationary, the data variance is not affected by changes in time, so it is in statistical equilibrium (gujarati, 2003). from the stationery test, all variables except money market rate were stationary at first differencing. 4.1.5. optimum lag tabel 14. optimum lag conventional lag logl lr fpe aic sc hq 0 -652.6221 na 0.021315 21.69253 22.00397* 21.81459* 1 -546.3125 177.7636* 0.009549* 20.86271* 23.97711 22.08327 2 -488.2526 79.95140 0.023911 21.61484 27.53221 23.93391 * indicates lag order selected by the criterion tabel 15. optimum lag islamic banking lag logl lr fpe aic sc hq 0 -711.0579 na 0.000530 23.67403 24.05468* 23.82321* 1 -586.8409 199.5617* 0.000505* 23.56856* 28.13635 25.35872 2 -480.5841 132.3856 0.001189 24.05194 32.80687 27.48308 * indicates lag order selected by the criterion the optimum lag test results found that if the smallest aic is at lag 1, it means that the z-score is influenced by the volatility of independent variables in one month before. the islamic and conventional banking stability index are influenced by the observed independent variables ranging from one month. form stability test, it is concluded that conventional dan islamic banking stability models were stable in lag 1. the probability of regime 1 (stable condition) for z-score islamic banking was 0.9832801, and regime 2 (unstable condition) was 0.0152959. it was very persistent, and it was not easy to go back to the previous state. it means that the probability of islamic banking in stable condition (regime 1) was 98.32%, bigger than the probability of unstable condition (regime 2), equal 1.53%. meanwhile, the probability regime 1 (stable condition) of conventional banking z-score was 0.9550105 and regime 2 (stable condition) of conventional banking z-score was 0.013941. it indicates that the probability of conventional banking in stable condition (state 1) was 95.50%, while the probability of unstable condition (state 2) was 1.39%. this study resulted in the izscore of islamic banking higher than conventional banking z-score. meanwhile, conventional banking's stable condition was 22.5% longer than islamic banks. yunita│stability measurement of indonesia dual banking system in the shadow of covid 19 outbreak international journal of islamic economics and finance (ijief), 5(1), 151-176 │ 171 tabel 16. stability test conventional root modulus -0.381866 0.301580i 0.486592 -0.381866 + 0.301580i 0.486592 0.391863 0.108585i 0.406629 0.391863 + 0.108585i 0.406629 0.071011 0.348622i 0.355781 0.071011 + 0.348622i 0.355781 -0.292764 0.292764 -0.049810 0.134631i 0.143550 -0.049810 + 0.134631i 0.143550 no root lies outside the unit circle. var satisfies the stability condition. tabel 17. stability test islamic banking root modulus -0.394496 0.222001i 0.452671 -0.394496 + 0.222001i 0.452671 0.290742 0.261753i 0.391210 0.290742 + 0.261753i 0.391210 -0.143258 0.294509i 0.327503 -0.143258 + 0.294509i 0.327503 -0.294813 0.098056i 0.310692 -0.294813 + 0.098056i 0.310692 0.093868 0.195347i 0.216730 0.093868 + 0.195347i 0.216730 .011891 0.011891 no root lies outside the unit circle. var satisfies the stability condition. conventional banking islamic banking figure 6. var stability condition yunita│stability measurement of indonesia dual banking system in the shadow of covid 19 outbreak international journal of islamic economics and finance (ijief), 5(1), 151-176 │ 172 table 18. probability and duration transition of z-score structural break islamic z-score conventional z-score probability duration probability duration regime 1: stable 0.9832801 35 0.9550105 45 regime 2: unstable 0.0152959 29 0.013941 19 source: stata analytical tools v. conclusion and recommendation 5.1 conclusion this study measured the level of stability of the dual banking system in indonesia from january 2015 to february 2021 using the z-score measurement model. based on calculations from banking data, it showed that the level of stability of islamic and conventional banking in indonesia was different. by calculating the z-score, the islamic banking system had a higher level of stability than the conventional banking system. based on the results of markov switching through the estimation of the probability and duration of switching in stable conditions, in general, islamic banking is considered more stable than conventional banking (hasan, 1995). the probability of regime 1 (stable condition) for z-score islamic banking was 0.9832801, and regime 2 (unstable condition) was 0.0152959; it was very persistent, and it was not easy to go back to the previous state. meanwhile, the probability regime 1 (stable condition) of conventional banking z-score was 0.9550105, and regime 2 (stable condition) of conventional banking zscore was 0.013941. this study resulted in an izscore of islamic banking higher than conventional banking z-score, while conventional banking's stable condition was 22.5% longer than islamic banks. based on the model 1 regression result, the conventional banking stability index was significantly influenced by the level of non-performing loans, net interest margin, loan to deposit ratio, and exchange rates. meanwhile, from model 2, the islamic banking stability index (izscore) was significantly influenced by the level of net operating margin, financing to deposit ratio, potential loss profit sharing, islamic money market rate, and exchange rate. however, non-performing financing did not affect islamic banking stability because the profit-sharing system implemented by islamic banking stability was more influenced by the ratio of potential loss and profit-sharing system. yunita│stability measurement of indonesia dual banking system in the shadow of covid 19 outbreak international journal of islamic economics and finance (ijief), 5(1), 151-176 │ 173 5.2 recommendation 5.2.1. for practitioners since islamic banking and conventional banking models are different, we recommend for islamic banking practitioners to maintain the potential profit and loss sharing ratio, while the conventional banking practitioners should maintain the non-performing loan or bad debt ratio in shock condition. 5.2.2. for regulators from data analysis and conclusion, our recommendations for regulators are to maintain the banking system's stability through the pandemic condition, maintain non-performing loans of bad debts, and tighten liquidity in shock conditions. regulators should consider the differentiation between islamic and conventional banking models. from our analysis, the stability index of the islamic banking model (izscore) was influenced by the potential of profit and loss sharing, while the conventional banking stability index was influenced by non-performing loans (bad debt ratio). this research discusses the stability of the banking system and improving strategies in dealing with uncertain financial conditions. since the stability of islamic banking is better than conventional banking, we recommend that the government support the increase of the market share of islamic banking to stabilize indonesia's banking industry. 5.2.3. for further research we also provide recommendations to further researchers to research for a longer period to obtain maximum dual banking system stability results. 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(2018). stability measurement of dual banking system in indonesia : markov switching approach. 10(1), 25–52. international journal of islamic economics and finance (ijief) vol. 5(1), january 2022, page 107-128 analysis of mustahik empowerment program in indonesia: the case of non-state zakat organization mawardi1*, budi trianto2, masrizal3 *) corresponding email: mawardi@uin-suska.ac.id article history received: october 11th, 2021 revised: november 25th, 2021 december 11th, 2021 december 20th, 2021 accepted: january 9th, 2022 abstract the mustahik (the poor and the needy) empowerment program is one of the priority activities carried out by the zakat institution. this study aims to determine whether organizational support and entrepreneurial characteristics possessed by mustahik affect the success of the mustahik empowerment program. this study also aims to determine whether the mustahik empowerment program can alleviate poverty. this research was conducted utilizing partial least square-structural equation modelling (pls-sem) method. the population in this study was the mustahiks who received empowerment programs from non-governmental zakat organizations in pekanbaru city, with a total sample of 60 mustahiks. the results of this study found that there was a positive and significant relationship between organizational support and the mustahik empowerment program. this study also uncovered a significant positive relationship between entrepreneurial characteristics and the mustahik empowerment program. it was also unveiled that the mustahik empowerment program had a positive and significant relationship with the success of poverty alleviation. these results imply that organizational support and entrepreneurial characteristics are important variables in the mustahik empowerment program. therefore, zakat institutions must pay more attention to these variables to get maximum results in poverty alleviation. keywords: organizational support; mustahik empowerment program; entrepreneurs characteristic; poverty alleviation; non-state zakat organization jel classification: d64; i32; l31 type of paper: research paper @ ijief 2022 published by universitas muhammadiyah yogyakarta, indonesia doi: https://doi.org/10.18196/ijief.v5i1.12900 web: https://journal.umy.ac.id/index.php/ijief/article/view/12900 citation: mawardi., trianto, b., & masrizal. (2022). analysis of mustahik empowerment program in indonesia: the case of non-state zakat organization. international journal of islamic economics and finance (ijief), 5(1), 107-128, doi: https://doi.org/10.18196/ijief.v5i1.12900. 1 universitas islam negeri sultan syarif kasim riau, indonesia 2 sekolah tinggi ekonomi islam iqra annisa, indonesia 3 universitas airlangga, indonesia mailto:mawardi@uin-suska.ac.id https://doi.org/10.18196/ijief.v5i1.12900 https://doi.org/10.18196/ijief.v5i1.12900 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v5i1.12900&domain=pdf mawardi, trianto, & masrizal │ analysis of mustahik empowerment program in indonesia: the case of non-state zakat organization international journal of islamic economics and finance (ijief), 5(1), 107-128 │ 108 i. introduction 1.1. background broadly speaking, the problems faced by muslim countries are chronic absolute poverty, high unemployment, inequality in income distribution, low levels of primary sector productivity, increased inequality in living standards, less than optimal fulfillment of public facilities (education and health), and worsening balance of payment sheets; also, the worst case is foreign affairs and the weakening of the institutional structure and a system of values and customs that have faded due to external influences (affandi & astuti, 2014). shaikh (2017) also noted that most poverty occurs in africa and asia, and most muslim-majority countries are on these continents. half of the poverty accounts for a quarter of the total global population. in their study in pakistan, naveed & ali (2012) concluded that 58.7 million people lived in multidimensional poverty, with 46% of the rural population and 18% of the urban population. furthermore, raimi et al. (2014) identified double-digit poverty rates in nine predominantly muslim countries, including pakistan (24%), afghanistan (53%), indonesia (18%), iran (18%), bangladesh (45%), sudan (40%), yaman (45%), aljazair (23%), mesir (20%), and nigeria (70%). the total number of people suffering from poverty in these countries is over 335 million. the causes of poverty in these countries are linked to ineffective government policies leading to increased income inequality and unfulfilled citizen expectations. affandi & astuti (2014), in their paper, stated that the poverty rate gap that occurs between muslim-majority countries and muslim minorities is very reasonable because the majority of muslim countries are former colonies of western colonial countries. during the colonial period, human resources were underestimated, resulting in a sluggish national economy. specifically, indonesia is the largest muslim country globally, and poverty is a major issue that is always being discussed from year to year. poverty seems to be a scourge that has always haunted the government. why not? many people live below the poverty line in a country rich in natural resources, as described in table 1. the community has not optimally felt all the government's programs. various efforts and policies have been made to reduce poverty. for this reason, as the largest community state, it is fitting to create a policy of its own to get out of poverty. mawardi, trianto, & masrizal │ analysis of mustahik empowerment program in indonesia: the case of non-state zakat organization international journal of islamic economics and finance (ijief), 5(1), 107-128 │ 109 table 1. number of poor people in indonesia no yea r number of poor population (people) city village 1 2010 232 989.00 192 354.00 2 2011 263 594.00 223 181.00 3 2012 277 382.00 240 441.00 4 2013 326 853.00 296 681.00 5 2014 308 826.00 275 779.00 6 2015 356 378.00 333 034.00 7 2016 372 114.00 350 420.00 8 2017 425 770.00 392 154.00 9 2018 400 995.00 370 910.00 10 2019 458 380.00 418 515.00 11 2020 475 477.00 437 902.00 source: central bureau of statistics (bps), 2020 . from an islamic perspective (al-qur'an and sunnah), poverty should be eliminated from society. therefore, islam hates and prohibits begging but encourages entrepreneurship (abdul-majeed alaro & alalubosa, 2018). however, there is a condition where a person is at such a disadvantage that he cannot make ends meet. in fact, islam has established a social support mechanism to overcome the problem of poverty, namely by encouraging every muslim to help his brother who needs it. islam has many institutions capable of overcoming poverty in society. one such instrument is the zakat. azam et al., (2014) stated that zakat significantly improves household welfare and alleviates poverty. as an instrument of poverty alleviation, zakat is currently collected by the governments of several muslim countries. libya, malaysia (different sultanates), pakistan, saudi arabia, sudan, and yemen collect zakat through government initiatives. although bahrain, bangladesh, egypt, iran, iraq, jordan, kuwait, qatar, indonesia, and oman have established special public institutions, the payment of zakat to government agencies in these countries is voluntary. as the largest muslim population, indonesia certainly has great potential in zakat. a study conducted by puskas baznas in 2019 showed that the potential for zakat in indonesia 2019 reached 233.8 trillion (idr). in this case, the income zakat indicator became the sector with the highest zakat value of 139.07 trillion (idr), then in the form of money of 58.76 trillion (idr), agricultural zakat of 19.79 trillion (idr) and farm zakat of 9.51 trillion (idr). according to data from the islamic financial report (2014: 35), the estimated potential for collecting zakat in indonesia contributed to a gdp of 3.89% or 217 trillion (idr). moreover, the poverty level in indonesia is almost evenly distributed in every province, but the severity of poverty in each province is different. different mawardi, trianto, & masrizal │ analysis of mustahik empowerment program in indonesia: the case of non-state zakat organization international journal of islamic economics and finance (ijief), 5(1), 107-128 │ 110 levels of poverty in each province are caused by many things, such as the rate of economic growth, the rate of inflation, openness to investment, and others. riau province, for example, has 12 districts/cities with the center of government being pekanbaru city, which is the largest city in riau province and is a trade and service city, including cities with high growth, migration, and urbanization, and the largest muslim population of 85.94% (bps). in this regard, one of the patterns used to alleviate poverty is to empower the duafa (the poor). the empowerment program can be carried out to help the duafa to be able to pursue their own life properly and independently. qardhawi (2015) explained that the role of zakat is not only limited to poverty alleviation. however, empowering zakat can solve other problems. in overcoming these community problems, zakat management can be carried out in a productive direction by empowering people entitled to receive zakat. in pekanbaru, the poor community empowerment program mostly uses this concept. in empowering the poor, two patterns are used, namely group empowerment and individual empowerment. the group empowerment model is where the coaching is carried out in groups, and the business carried out is also a group business or joint venture. meanwhile, the individual empowerment model is where the coaching is carried out jointly, but they run their respective businesses. to make the program successful, zakat institutions provide technical and non-technical support. technical support provides business capital, training or courses, mentoring teams, and business equipment. on the other hand, the non-technical assistance provided is in the form of motivation and entrepreneurship training. technical support aims to make running a business easier for mustahik (the poor and the needy), while non-technical support intends to strengthen and give enthusiasm in doing business. in carrying out the mustahik empowerment program through micro-business development, of course, zakat institutions experience various obstacles. the obstacle faced during the empowerment program implementation is the lack of assistants to assist and evaluate the planned program; as a result, the mustahik walk alone without maximum assistance. some zakat organizations, such as swadaya ummah and dompet duafa, explained that they did not have the human resource to monitor and evaluate the program intensively. the employees of the zakat organization were also limited, so they had difficulty in running the program even though mentoring, in this case, is vital in every empowerment program. the problem of assistant personnel is also inseparable from the budget provided, where the budget for economic programs is not too much so that its use must also be as efficient as possible. consequently, the amount of business capital assistance for mustahik was relatively small, and the operational costs for the mentoring team were also limited. mawardi, trianto, & masrizal │ analysis of mustahik empowerment program in indonesia: the case of non-state zakat organization international journal of islamic economics and finance (ijief), 5(1), 107-128 │ 111 apart from the above problems, another problem related to mustahik empowerment in the economic field is the mustahik's endurance in running a business. mustahiks sometimes have difficulty marketing their business results, which makes them frustrated, affecting the mustahiks' endurance in running a business. as a result, their business is not what they want. the endurance of these mustahiks is, of course, related to entrepreneurial characteristics. entrepreneurial characteristics are an attitude that an entrepreneur must have so that in any condition, he will always survive and innovate to find solutions to the problems faced so that the business carried out will be successful ( nair & pandey, 2006; lumpkin & dess, 1996). some researchers have been interested in studying mustahik empowerment programs, such as taufiq et al., (2018), furqani et al., (2018), nurzaman (2016), trianto et al., (2020), muhamat et al. (2013), and lessy (2013). however, there is still a space that previous researchers have not studied, for example, examining the theory of organizational support developed by rhoades & eisenberger(2002) and the theory of entrepreneurial characteristics put forward by dingee et al. (1997) in the mustahik empowerment program, especially in non-governmental zakat organizations in pekanbaru. this research was conducted to fill this gap, and it is important to do this research to see the contribution of the zakat institution's organizational support in empowering mustahik. the results of this study are expected to help the zakat institution evaluate the mustahik empowerment program, both evaluating the form of assistance provided and assessing the mustahik selection. the results of this study can also be used as a consideration for the government in alleviating poverty. 1.2. objectives therefore, the purpose of this study is to determine whether the support provided by zakat institutions to mustahik and entrepreneurial characteristics influences the success of empowerment programs in the economic sector and how the impact on poverty alleviation of the mustahik. for this reason, the structure of this paper consists of five parts. the first part discusses the background of the research, covering the phenomenon of the mustahik empowerment program and the research gap. the second part reviews organizational support theory, mustahik empowerment theory, and poverty alleviation theory. the third section explains the analytical techniques utilized in this study. the fourth section discusses the study results, and the fifth section presents the study conclusions and recommendations. mawardi, trianto, & masrizal │ analysis of mustahik empowerment program in indonesia: the case of non-state zakat organization international journal of islamic economics and finance (ijief), 5(1), 107-128 │ 112 ii. literature review 2.1. theoretical framework and hypothesis development 2.1.1. zakat and poverty alleviation poverty is a complex phenomenon and includes various aspects of life, from economic, social, and even policy conditions. many experts and academics have developed the poverty concept. according to the islamic development bank, by referring to the international labor organization (ilo) definition, poverty is the limitation in contributing effectively to society. furthermore, people in poverty lack food and clothing for their families and lack sufficient education and health insurance. neither do they have land to produce food nor have jobs and access to loans. poverty also means insecurity, incapacity, and being wasted in the community. in addition, poverty is also very vulnerable to violence, and it is not uncommon to live in precarious conditions with a lack of access to clean water and sanitation (muljawan et al., 2016). according to the united national development program (undp), poverty is measured using the education index, health index, and the standard of daily living. several studies used the cost of basic necessities, food energy intake, and subjective evaluation to measure poverty. researchers at the 10th african economic conference discussed new gaps in poverty measurement. they believe that measuring poverty based on national average income does not accurately reveal the distribution of wealth to eradicate the threat of poverty (ahmed, johari, wahab. 2017). poverty also generally indicates a level of income below a certain poverty line. people are called poor if they have an average expenditure per capita per month below the poverty line. the higher the poverty line, the more the population is classified as poor. however, the poverty limit used by each country varies. it is due to differences in location and living standards. in the case of indonesia, the central bureau of statistics (bps) uses the poverty limit of the number of rupiahs spent per capita per month to meet the minimum needs for food and non-food. the standard 2,100 calories per day are used for the minimum dietary requirement. meanwhile, spending on nonfood minimum needs includes expenses for housing, clothing, and various goods and services. in other words, bps uses the basic needs approach as an inability to meet basic needs. the basic needs approach is one of the main approaches to measuring absolute poverty in developing countries. it attempts to determine the absolute minimum resources necessary for longterm well-being, usually in the form of consumer goods (atkinson, 2003). mawardi, trianto, & masrizal │ analysis of mustahik empowerment program in indonesia: the case of non-state zakat organization international journal of islamic economics and finance (ijief), 5(1), 107-128 │ 113 from the islamic perspective, poverty includes two aspects, namely material aspects and non-material aspects. a person said to be poor in terms of the world (material) is not necessarily poor in the spiritual aspect (afterlife). materially poor people cannot meet basic needs properly, such as food, housing, clothing, health, and educational facilities. meanwhile, spiritually poor people are those who do not have the minimum spiritual wealth, such as religious knowledge (ukhrawi) and general (worldly) knowledge, which is required in republication and taqarrub to allah swt by prioritizing moral values (madjid, 2011). in this case, zakat is an instrument to overcome social problems in developing countries, especially poverty and income inequality problems. mahuyudin and abdullah (2011) saw zakat as a tool of the islamic economic system to eradicate poverty among muslims and fulfill the social welfare of muslims. they argued that zakat receipt, especially the poor and needy, must achieve the minimum quality of life that they receive. beik (2010) emphasized that the basic purpose of zakat is to solve social problems, such as poverty, unemployment, natural disasters, forests, unfair income distribution, and others. therefore, the zakat distribution system is a solution to the problem of poverty and assistance for poor people regardless of race, color, and ethnicity. sadeq (2002), in his research, found that zakat institutions can help eradicate poverty, which brings untold suffering. in addition, poverty will encourage someone to beg as islam condemns it. thus, the poverty problem is not expected to become a serious problem in islamic economics. likewise, there is a consensus among scholars that a higher priority for zakat is eradicating poverty. the same thing was also stated by abdullah, derus, and malkawi (2015) that zakat is a very effective way to help poor people get rid of poverty so that the collection and disbursement of zakat must be made effective. the main objective of zakat is to achieve socio-economic justice. concerning the economic dimension of zakat, it aims to achieve beneficial effects on several dimensions, such as aggregate consumption, saving and investment, the aggregate supply of labor and capital, poverty alleviation, and economic growth (wahab & rahman, 2011). 2.1.2. organizational support organizational support is perceived as an effort made by the organization to improve the performance of its employees. according to rhoades & eisenberger (2002), organizational support can be from policies, norms, culture, legal, moral, and financial. organizational support is also a global belief by employees as a form of company appreciation for employee performance. organizational support theory emphasizes three aspects. firstly, based on acceptance norms, perceived organization support (pos) mawardi, trianto, & masrizal │ analysis of mustahik empowerment program in indonesia: the case of non-state zakat organization international journal of islamic economics and finance (ijief), 5(1), 107-128 │ 114 must provide assurance and attention to organizational welfare to achieve organizational goals. second, attention, approval, and respect connote fulfilling social-emotional needs, leading workers to join organizations and transform status into social identities. all three pos must reinforce employees' belief that reward and organizational recognition will improve their performance (rhoades & eisenberger, 2002). in the context of empowering the poor, organizational support can be in the form of financial and non-financial assistance. in financial terms, it can be providing funds to purchase various purposes and business capital. providing assistance in the form of funds can be carried out by non-profit organizations such as zakat organizations and other ngos concerned with social problems and the government. support made by the government can be in the form of pro-poor policies. empirical studies have shown that organizational support had a significant impact on the success of a program, such as research conducted by lee et al., (2010), where organizational support had a positive and significant impact on enterprise resources planning. the same thing was found by afzali et al. (2014) that organizational support significantly affected empowerment. moreover, organizational support will also provide comfort to employees in accordance with the company's wishes (paillé et al., 2010). meanwhile, research conducted by muhamat et al., (2013) uncovered that the success of asnaf's business in malaysia was influenced by capital and knowledge. capital, in this case, is important in starting a new business (startup business); this is one of the biggest obstacles for the needy and poor in building their business (hadisumarto & b.ismail, 2010). what is no less important in the findings is knowledge, where the knowledge of the asnaf related to the business they run is more important than the training they take part in (ghosh et al., 2011). however, different findings were conveyed by voegtlin & boehm (2013) that training has a relationship with empowerment. from the description above, the following research hypothesis could be formulated: h1 = organizational support provided to empowerment program participants positively affects empowerment programs for the poor in the economic field. 2.1.3. entrepreneur characteristics one of the empowerment principles is the ability to empower agents to develop an entrepreneurial spirit. it is crucial since it is related to independence in running a business. moreover, this empowerment focuses on the economic field. the target of empowerment in the economic sector is mawardi, trianto, & masrizal │ analysis of mustahik empowerment program in indonesia: the case of non-state zakat organization international journal of islamic economics and finance (ijief), 5(1), 107-128 │ 115 how clients can increase family income through business. dowling & schmude, and fritsch & muller said that entrepreneurship is essential in personal and economic development (cubico et al., 2010). the same thing was expressed by brannback and carsrud (2015) that entrepreneurship is a significant factor in creating national wealth, not only creating individual wealth. entrepreneurs themselves do not have a single definition because they are complex and interrelated with various phenomena. however, to give an idea of what entrepreneurship is, there are several definitions, including those presented by brannback and carsrud, that an entrepreneur is defined as someone who tries to exploit opportunities to create wealth in the economic field. meanwhile, the european commission defines an entrepreneur as a mindset and process for creating and developing economic activities by combining decision making on risk, creativity, and/or innovation with management through new and existing organizations (cubico et al., 2010). besides, drucker (1984) emphasized economic entrepreneurship associated with innovation, so entrepreneurship is defined as an opportunity sought and exploited to satisfy one's wants and needs. a simpler definition is conveyed by o'brien et al. (2017) that an entrepreneur organizes and manages risk in running a business. to become a successful entrepreneur, several characteristics must be possessed, including drive and energy level, self-confidence, setting challenging but realistic goals, long-term involvement, using money as a performance measure, persistent problem solving, taking a moderate risk, taking the initiative and seeking personal responsibility, and making good use of resources (dingee et al., 1970). meanwhile, lumpkin & dess (1996) stated that the keys to an entrepreneur's success are autonomy, innovation, risktaking, proactiveness, and competitive aggressiveness. the same thing was stated by tagraf and akin (2009), where an entrepreneur today has characteristics in risk-taking, autonomy, control of his own, and success confidence despite each kind of ambiguity. in a study, it is explained that the entrepreneurial spirit is a factor that makes a pretty good contribution in running his business, such as a study conducted by ahmad (2010), which compared the courage to take risks of an entrepreneurial ceo with a company ceo, where the level of courage to take risks of an entrepreneurial ceo was better than that of a company ceo. this finding is supported by the findings of sarwoko et al., (2013) that the characteristics of an entrepreneur influence the success of the business he is running as well as findings from leutner et al. (2014) and abdulwahab & aldamen (2015). based on the description above, the development of the next hypothesis could be described as follows: mawardi, trianto, & masrizal │ analysis of mustahik empowerment program in indonesia: the case of non-state zakat organization international journal of islamic economics and finance (ijief), 5(1), 107-128 │ 116 h2 = entrepreneurial characteristics possessed by mustahik have a positive influence on the success of empowerment programs in the economic field. 2.1.4. mustahik empowerment empowerment is one of the efforts to alleviate poverty by giving efforts to less fortunate people to improve their standard of living. in the big indonesian dictionary, there are several meanings of empowerment. first, empowerment is defined as the ability to do something or the ability to act. second, empowerment also means strength or energy (which causes a move). third, empowerment is reason or effort. in terms of empowerment, it can be interpreted as an effort to provide power to the weak (powerless) and reduce power (disempowered) to those who are too powerful so that there is a balance (djohani, cited by anwas, 2013). empowerment can also be understood as to how people, organizations, and communities are directed to control or rule over their lives (rappaport, 1984). meanwhile, world bank (2002) defines that empowerment as an expansion of the assets and abilities of the poor to participate in, negotiate with, influence, control, and hold the responsibility of institutions that affect their lives. poverty includes multidimensional life, and poor people need assets and abilities at the individual level, such as health, education, and housing and at the collectivity level in the form of the ability to organize and mobilize collectively to solve problems. empowerment of the poor can be carried out by the government or community. through pnpm mandiri, the indonesian government has empowered the poor by facilitating various activities, including mentoring, training, and direct grants. besides being held by the government, the empowerment of the poor (mustahik) can also be carried out by zakat institutions through the mustahik empowerment program by way of economic activities. the level of success of the empowerment program can be seen from several aspects. the first is the impact aspect. the impact aspect arising from empowerment is the indicator of increasing family income. at the business level, the indicator can be seen from the business's net income, while at the household and individual levels, there is a change in annual income. second, it is seen from the outcome aspect, where the indicator can be seen from how much wages the community gets. third, seen from the aspect of outputs, the indicator is how much community participation in empowerment, how many other parties use alumni training, and how many products are produced. the four aspects of the activity are the manager's commitment to the empowerment program (merkel, 2014). mawardi, trianto, & masrizal │ analysis of mustahik empowerment program in indonesia: the case of non-state zakat organization international journal of islamic economics and finance (ijief), 5(1), 107-128 │ 117 further, the ultimate goal of empowerment is the creation of economic independence for the mustahik, which in turn has implications for their escape from poverty. empirical studies have shown that economic empowerment could help overcome family financial problems, as in research conducted by lessy (2013) that, in general, economic empowerment in collaboration with one bumn as a provider of funds has succeeded in improving the family economy. other researchers have also revealed that empowering the poor through productive zakat has led low-income families to fulfill their basic needs on their own (trianto, 2018). nurzaman (2016) used the human development index (hdi) approach; one of the topics discussed was the income index. even though the results were still below the average expectation, they have provided hope for a better life. using a logistic regression approach, azzam et al., (2014) found that household expenditure after receiving zakat allocation increased, meaning there was an economic impact resulting from zakat. beik (2013), in his study, unveiled that the contribution of zakat funds in alleviating poverty was not as expected. from 1,195 samples, zakat funds could only increase family monthly income by 8.94%. even so, the existence of zakat has contributed to reducing poverty up to 16.79%. based on the explanation above, the research hypothesis could be formulated as follows: h3 = empowerment of the poor through economic activities has a positive effect in alleviating poverty for mustahik. iii. methodology 3.1. data this research was conducted in pekanbaru, where the samples involved in this study were mustahiks who received empowerment programs from three zakat institutions in pekanbaru, namely dompet dhuafa riau, rumah zakat riau, and swadaya ummah pekanbaru. the three zakat institutions were chosen because they had experience implementing mustahik empowerment programs in pekanbaru. non-probability sampling was applied with a total sample of 60 mustahik. data were collected directly from mustahik using the likert scale 1 5. table 1 described the distribution of samples based on zakat institutions. table 1. distribution of samples no zakat organization total sample percentage 1 dompet duafa 15 25.00 2 rumah zakat 29 48.33 3 swadaya ummah 16 26.67 total 60 100.00 mawardi, trianto, & masrizal │ analysis of mustahik empowerment program in indonesia: the case of non-state zakat organization international journal of islamic economics and finance (ijief), 5(1), 107-128 │ 118 3.2. model development the variables involved in this study consisted of four latent variables: organizational support, entrepreneurial characteristics, mustahik empowerment programs, and poverty alleviation (see figure 1). the organizational support variable used the roadess and eissenberger theory, with four manifest variables: capital support, technical support, mentoring, and training. meanwhile, the entrepreneurial characteristics variable employed the concept offered by dingee et al. (1997), where nine manifest variables were involved: drive and energy level, self-confidence, setting challenging but realistic goals, long-term involvement, using money as a performance measure, persistent problem solving, taking a moderate risk, taking the initiative and seeking personal responsibility, and making good use of resources. then, the level of success of the empowerment program can be seen from several aspects (merkel, 2014), namely the impact aspect, outcome aspect, and output aspect. moreover, the poverty alleviation variable utilized the concept of m. shabri abdul madjid with two manifest variables: financial and non-financial. figure 1 is describe the empirical model. figure 1. empirical model 3.3. method the structural equation model (sem) method was used to test the model proposed in this study. sem is a statistical methodology that takes a confirmatory approach to structural theory analysis related to several phenomena (jamshidi & hussin, 2018). the statistical analysis follows structural equation modeling techniques to link measured observations with conceptual constructs (majchrzak et al., 2005). among the various sem methods, the partial least squares (pls)-sem method has been chosen for mawardi, trianto, & masrizal │ analysis of mustahik empowerment program in indonesia: the case of non-state zakat organization international journal of islamic economics and finance (ijief), 5(1), 107-128 │ 119 various reasons. first, the pls-sem method avoids the study's small sample size problems. second, the pls-sem method provides a simultaneous evaluation of a model's structural and measurement components; in fact, this capability ensures that construct measures are reliable and valid before attempting to draw conclusions. finally, pls-sem requires less stringent assumptions regarding the distribution of variables and error terms and ensures that multicollinearity problems are not a problem (jamshidi & hussin, 2016). this analysis tool was chosen to analyze complex models (hair et al., 2013). therefore, the analysis in the study was carried out by the smartpls 3.0 software. iv. results and analysis 4.1 results 4.1.1. mustahik demographic the results of this study indicated that the empowerment program carried out by non-governmental zakat organizations was dominated by female mustahik who reached 50 people, as many as 83.33%. meanwhile, male mustahik only reached ten people or 16.67%. it denotes that non-governmental zakat organizations prioritized female mustahik. moreover, the education level of mustahik was mostly dominated by those with education up to a high school of 32 mustahik or reaching 53.33%. on the other hand, the mustahik who had a low level of education (elementary and junior high school) reached 25 people or 41.67%. in table 2, it is also shown that rumah zakat had the greatest number of mustahik empowered, reaching 29 people or 48.33%, followed by swadaya ummah at 26.67% and dompet duafa at 25.00%. table 2. mustahik demographic no description total percentage 1 gender male 10 16.67 female 50 83.33 2 education elementary school 6 10.00 junior high school 19 31.67 senior high school 32 53.33 university 3 05.00 3 age 18 – 30 years old 3 05.00 30 – 40 years old 17 28.33 40 – 50 years old 31 51.67 above 50 years old 9 15.00 mawardi, trianto, & masrizal │ analysis of mustahik empowerment program in indonesia: the case of non-state zakat organization international journal of islamic economics and finance (ijief), 5(1), 107-128 │ 120 4.1.2. measurement model evaluation the first step in conducting sem-pls analysis is to conduct a measurement model evaluation (shown in figure 2), consisting of loading estimate, average variance extracted (ave), and composite reliability (cr). hair et al. (2011) suggest that the recommended loading estimate value is> 0.50; the ave value is at least 0.5 and a cr of 0.7. in this study, the researchers found that x1, x6, x7, and x13 were not valid because the loading factor values were below 0.5. therefore, the researchers removed them from the analysis. table 3 displays that all loading estimate values were above 0.50, meaning that all indicator variables used in the study truly reflected the variable construct. the values of ave and cr were also above the provisions so that the data used was valid and reliable. table 3. measurement model evaluation laten variables items loading estimate ave cr organizational support x2 0.859 0.746 0.898 x3 0.901 x4 0.830 entrepreneurial characteristic x5 0.750 0.577 0.891 x8 0.855 x9 0.726 x10 0.780 x11 0.731 x12 0.706 mustahik empowerment x14 0.856 0.672 0.859 x15 0.749 x16 0.850 poverty alleviation x17 0.928 0.621 0.759 x18 0.617 figure 2. measurement model mawardi, trianto, & masrizal │ analysis of mustahik empowerment program in indonesia: the case of non-state zakat organization international journal of islamic economics and finance (ijief), 5(1), 107-128 │ 121 4.1.3. structural model evaluation the structural model evaluation model is the last step in the sem analysis. this stage is to see the relationship between exogenous and endogenous variables. the results of this study indicated that the success of the mustahik empowerment program carried out by non-governmental zakat institutions was influenced by organizational support. the influence could be shown from the resulting coefficient value of 0.412, with a p-value of 0.006. therefore, the hypothesis proposed in this study could be accepted or supported as h1. it shown in table 4. meanwhile, mustahik's entrepreneurial characteristics had a positive and significant effect. it could be seen from the p-value of 0.035, with the estimated path coefficient of 0.332. therefore, the hypothesis proposed (h2) in this study was accepted. another result in this study is that the empowerment program carried out by non-governmental zakat organizations could alleviate poverty, with a magnitude of influence of 0.482. for this reason, the hypothesis proposed in this study could be accepted (h3 was accepted). table 4. inner model evaluation relationship estimate t-statistics p-value remarks organizational support->mustahik empowerment 0.412 2.778 0.006* supported entrepeneur characteristic->mustahik empowerment 0.332 2.109 0.035* supported mustahik empowerment->poverty alleviation 0.482 4.357 0.000* supported 4.2. analysis the mustahik empowerment program carried out by the zakat institution aims to alleviate poverty. the results of this study indicated that the support provided by the zakat institution in the form of capital assistance, mentoring, and training had a positive and significant effect. the results of this study are consistent with research conducted by lee et al. (2010), afzali et al. (2014), and paillé et al. (2010). in research conducted by lee et al. (2010), the support provided by the company to employees had a good impact on doing work. likewise, in a study carried out by afzali et al. (2014), the support provided by the company to employees had an impact on employee performance. even though this research was conducted on non-profit-oriented organizations, the results were the same; namely, organizational support could make a real contribution to the empowerment of mustahik. it signifies that the organizational support theory developed by rhoades & eisenberger (2002) mawardi, trianto, & masrizal │ analysis of mustahik empowerment program in indonesia: the case of non-state zakat organization international journal of islamic economics and finance (ijief), 5(1), 107-128 │ 122 can also be applied to non-profit organizations such as zakat. paillé et al. (2010) argued that organizational support would also provide a sense of comfort to employees in accordance with the company's wishes. in the context of mustahik empowerment, the support provided by the zakat institution to mustahik provided a sense of comfort. they got attention from zakat institutions in various forms, and of course, this motivated mustahik to run this empowerment program seriously. this empirical fact found provides the direction that the mustahik empowerment program through microbusiness activities is a program that must be maintained and developed more broadly by the zakat institution. zakat institutions also need to pay attention and increase the support provided to mustahik, especially in terms of assistance, training, and technical support, such as business equipment assistance. entrepreneurial characteristics possessed by mustahik also had a positive impact and were significant on the success of the empowerment program. the results of this study are in line with sarwoko et al., (2013), leutner et al. (2014), abdulwahab & al-damen (2015), and trianto et al. (2020). for this reason, serious consideration is needed from zakat management organizations that have empowerment programs to pay attention to the problem of mustahik characteristics in carrying out empowerment programs. meanwhile, the mustahik empowerment program carried out by nongovernment zakat institutions has succeeded in eradicating poverty. the results of this study corroborate with research conducted by trianto et al. (2018) and taufiq et al., (2018). this result implies that non-governmental zakat institutions can play a crucial role in helping alleviate poverty. therefore, the government must provide maximum support to zakat institutions managed independently by the community, both technical and regulatory supports. v. conclusion and recommendation 5.1. conclusion the main objective of this study is to develop a theoretical model to predict and explain the success factors of mustahik empowerment in poverty reduction using the concept of organizational support and mustahik characteristics. the results of this study showed that organizational support had an essential role in empowering mustahik. therefore, organizational support in the form of capital assistance, mentoring, training, and technical support must be a serious concern for zakat institutions. the more intense the support provided, the greater the mustahik's chance to succeed. in addition to organizational support, the entrepreneurial characteristics possessed by mawardi, trianto, & masrizal │ analysis of mustahik empowerment program in indonesia: the case of non-state zakat organization international journal of islamic economics and finance (ijief), 5(1), 107-128 │ 123 mustahik made a major contribution to the mustahik empowerment program in this study. mustahiks with entrepreneurial characteristics, such as longterm involvement, taking a moderate risk, or taking the initiative, will give them a strong mentality in running their business. a strong mentality in doing business will certainly impact the sustainability and success of the business. the success of this mustahik empowerment program then has implications for poverty alleviation. those who successfully run their business will certainly impact increasing income. this increase in income will impact increasing their welfare and, in turn, will push them out of poverty. however, this study has some limitations. first, this study only used mustahik from non-government zakat institutions in pekanbaru, and it is possible that the results only applied to poverty alleviation in pekanbaru. second, the researchers only involved three non-governmental zakat institutions, and third, a small sample was used. 5.2 recommendation this study provides several important recommendations for zakat institution practitioners, regulators, and further research. for zakat institutions, the researchers recommend that the mustahik empowerment program get top priority since it can provide multiple impacts for mustahik, especially in improving welfare and poverty alleviation. one of the impacts from this program is mustahik getting income from their business. if the business is successfully developed even larger, it will be able to hire new employees. thus, it will increase the income and welfare of the mustahik family. they also have the opportunity to get out of the poverty line. therefore, this empowerment program is important to be developed and made a priority program by the zakat institution. in this case, zakat institutions can provide a larger portion of capital assistance, more intensive business assistance, and expansion of mustahik empowerment programs. we recommend zakat institutions to pay attention for criteria of mustahik who want to be given assistance such as passion in entrepreneurship, entrepreneurial experience and family work culture. this is done to minimize the risk of failure in running a business. for regulators, the researchers recommend providing convenience for people who want to establish a zakat institution. the increase in zakat institutions managed by the community will increase the opportunities for alleviating poverty. the government also needs to encourage the government-owned zakat institution, namely baznas, to synergize and collaborate in managing mustahik empowerment programs with non-government zakat institutions. the government can also provide assistance in the form of facilities for the development of micro-enterprises carried out by mustahik such as additional business capital (interest-free). finally, the researchers recommend further mawardi, trianto, & masrizal │ analysis of mustahik empowerment program in indonesia: the case of non-state zakat organization international journal of islamic economics and finance (ijief), 5(1), 107-128 │ 124 research to test organizational support theory on government zakat organizations and increase the number of samples. mawardi, trianto, & masrizal │ analysis of mustahik empowerment program in indonesia: the case of non-state zakat organization international journal of islamic economics and finance (ijief), 5(1), 107-128 │ 125 references abdullah, n., mat derus, a. & al-malkawi, h.-a.n. 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(2011). a framework to analyse the efficiency and governance of zakat institutions. journal of islamic accounting and business research, 2(1), 43-63. international journal of islamic economics and finance (ijief) vol. 3(2), page 95-118, special issue: islamic social finance and ethics crowdfunding as an alternative mode of financing micro and small enterprises: a proposed qard-al-hasan contract abdulmajeed m.r. aderemi universiti sultan zainal abidin, malaysia corresponding email: majeedity@gmail.com muhammad shahrul ifwat bin ishak universiti sultan zainal abidin, malaysia article history received: june 6 th , 2020 revised: august 8 th , 2020 accepted: august 30 th , 2020 abstract the global financial crisis that occurred in 2008, coupled with the evolution and globalization of social media and technology has made the evolvement of crowdfunding easy to use as a means of financing. however, the concept of crowdfunding is correlated with spiritual and religious responsibility which can increase the economic growth of micro and small enterprises. in light of this, this paper aims to investigate the capacity of crowdfunding and proposes a crowdfunding model that adheres to the principle of shari’ah by adopting a legitimate contract known as qard-al-hasan. in this regard, the study adopts a qualitative research using secondary data with descriptive, and inductive approaches in analysis. the result shows that qard-al-hasan based crowdfunding is great for pioneering business people to get access to financing their small and micro enterprises in compliance with shariah. however, the findings of this paper will provide a new mechanism for financing micro and small enterprises in line with shariah. keywords: crowdfunding, qard-al-hasan, micro and small enterprises. jel classifications: p43, o36, d64, l25. @ ijief 2020 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.3235 web: https://journal.umy.ac.id/index.php/ijief/article/view/8968 citation: aderemi, a. m. r., & ishak, m. s. i. (2020). crowdfunding as an alternative mode of financing micro and small enterprises: a proposed qard-al-hasan contract. international journal of islamic economics and finance (ijief), 3(2). 95-118. doi: https://doi.org/10.18196/ijief.3235 mailto:majeedity@gmail.com https://doi.org/10.18196/ijief.3225 https://doi.org/10.18196/ijief.3225 aderemi & ishak │ crowdfunding as an alternative mode of financing micro and small enterprises: a proposed qard-al-hasan contract international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │96 i. introduction 1.1 background one of the fundamental part of economic segment are small and medium enterprises, it contributes greatlyas a driven forceto the nationwide economy, it also helps to mitigate poverty as well as it serves as a resistant to the catastrophes. if smes is well managed by a country it can creates jobs, increase revenue, lessen vulnerability and escalate investment in human resources (hendratmi, sukmaningrum, ryandono & ratnasari, 2019). according to the report from world bank (2018) not less down 90% of businesses worldwide are represented by smes as well as about 50% of employment are created universally. additionally, in developing economies countries 40% of national income (gdp) are contributed by formal smes. figure 1. total credit gap source: (world bank, 2018) ironically, even though this sector has significantly influenced the economy, a substantial sum of empirical studies show that smes still going through financial constraints to establish, nurture and sustain their businesses as shown in the figure above, this financial constriction remains one of the greatest significant problem for their existence, development, and productivity (owens & wilhelm, 2017). it was reported that in the world’s aderemi & ishak │ crowdfunding as an alternative mode of financing micro and small enterprises: a proposed qard-al-hasan contract international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │97 emerging markets, out of 400 million approximated smes, 180 to 220 million smes, still going through unmet credit needs adding up between us$2.1 to us$2.6 trillion as shown in figure 1 above. the 2008 global financial crises cause extra challenges for smes to obtain a loan from bank by raising loan requirement, limiting loan and increasing interest rates. however, the unapproachability to financial services can therefore make the economy to undergo a sequence of negative significances inclusive of restriction of economics and social opportunities (hendratmi, sukmaningrum, ryandono, & ratnasari, 2019). apparently, for the smes to completely unleash their potential in other to contribute inclusively to the growth of economy, access to a variety of financial mechanism is compulsory. in spite of these funding difficulties, or for the reason of these difficulties, a new method for obtaining capital has arisen in response to the present ineffective institutionalized capital markets known as crowdfunding, crowdfunding emerged and got attention of entrepreneurs as a result of the evolution and globalization of social media and technology (boylan, nesson & philipps, 2018), the idea of crowdfunding implicates utilizing the internet together with the power of the mass to accumulate capital in an open and transparent way (beaulieu, sarker & sarker, 2015). as a consequence, for the purpose of aiding the growth of business, entrepreneurs are on the go to exploit crowdfunding for capitals assembling worldwide and it has become an alternative to banks and financial institutions (lambert & schwienbacher, 2010), therefore, it has developed a vast potential to reduce the tiresome procedure of bank loan request from smes (rahim, kasmon & taslim, 2018). most of the platform of islamic crowdfunding are currently using mudarabah(silent partnership) and murabahah (cost-plus financing) contracts (hendratmi et al., 2019), however, study has shown that there is an increment in sales productivity, assets and the efficiency of micro, small and medium enterprises (msmes) and startup businesses that received finance through these platforms (hendratmi et al., 2019), hence more platforms and models is needed in order to fill these gaps. islamic crowdfunding should be considered as the next financial innovation in islamic finance, with various shari’ah based models can be suggested. these include zakat-based model, infaq-sadaqa-waqf-based model, qard alhasan-based model, and shrikah-based model. as for lending–based model, murabahah, ijarah, and istishna’ can be developed as its instrument. nevertheless, islamic crowdfunding mechanisms are still facing some aderemi & ishak │ crowdfunding as an alternative mode of financing micro and small enterprises: a proposed qard-al-hasan contract international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │98 problems, including to develop relevant crowdfunding models for smes (hassan, 2017). also, there is still no a clear theoretical framework that can guide islamic crowdfunding start up (hanim, zurina & muhammad, 2018). thus, it can be concluded that the current islamic crowdfunding practices need to be improved, particularly by exploring various shari’ah contracts that can strengthen its framework. in this regard, this research considers other structure of which is qard-alhasan contract. qard-al-hasan is a virtuous loan giving out with the clause of returning the principal sum to the owner in the same condition without any increase in the stipulated time (ariffin & adnan, 2012). this qard-al-hasan based crowdfunding is proposed in order to improve the economic life of the financing participants. therefore, the theme of this study is to endorse qardal-hasan as the income generation through business financing as it applies interest-free contract. meanwhile, crowdfunding is employed as the mechanism for fundraising, merging both qard-al-hasan and crowdfunding which complies with shariah may become an alternative solution to the financial challenges facing by micro and small enterprises. the scope of this study is to explore the application of qard-al-hasan on crowdfunding in filling the financial gap facing the micro and small enterprises, therefore, the researcher will focus on applicability of islamic crowdfunding using qard-alhasan contract as a better and ethical alternative for mitigating the financial constraint facing the micro and small enterprises. 1.2 objective this study aims to explore the potential of islamic crowdfunding as an alternative financing for micro and small enterprises, as a regard this study attempt to propose a crowdfunding model using qard-al-hasan contract as a viable alternative funding source for micro and small enterprises which is free from usury contract and equally reachable to numerous groups of people. the discussion of this paper is organized into five sections, firstly it presents a general introduction which comprises background and objective of the study, secondly it presents literature review where background theory, previous studies and conceptual framework were elaborated, thirdly it discusses the methodology of the study. fourthly it presents the results and analysis, and the last section concludes the paper with limitation and some recommendations. aderemi & ishak │ crowdfunding as an alternative mode of financing micro and small enterprises: a proposed qard-al-hasan contract international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │99 ii. literature review 2.1 background theory 2.1.1. theory of charitable giving a theory of charitable giving, is a theory that concentrates most on the factors influencing the decision of donors either it is pure or impure humanitarianism. andreoni (2006) asserted that the economic theory of charitable giving, differentiates between impure altruism and pure altruism. according to ly & mason (2012) pure altruism is the practice of unselfish concern for the welfare of others and it is about human being’s devotion to make contribution to the benefit of the public and placing the outcome of charity on a high value, such as making the welfare of less privileged beneficiaries more better, on the other hand, personal contribution of the donors may be also what they care about, for the reason that utility will be derived for them from donating, which simply indicates that donations may be for both private and public goods. additionally, ly & mason (2012) argue that donors may not care only about their own contribution or the overall outcome, but rather care about how the outcome is been achieved. furthermore, while discussing people’s support to development groups or organizations, the fact that donors may be inspired by a general poverty-eradication cause and some pleasure of benevolent is not enough to comprehend their desire. similarly to this, bilodeau & slivinski (1997) argue that among what donors may take into consideration is the way donations funds is allocate across different ventures, which may lead to a tendency of donations to specialize. based on this, like charitable giving, lending via qard al-hasan crowdfunding platforms may reflect a mix of pure and impure altruism, then if poverty eradication, contributing to the betterment of the society and enhancing the welfare of less-privileged beneficiaries by funding their micro and small businesses is an important objective for lenders, they may pursue to make a change by aiming borrowers they observe at the underprivileged and most helpless, to get the best out of the impact of their involvement. the choices of donors may disclose significant aspects of their inclination. foremost, so far there is no interest to be offered in return, it is rational to conclude that individuals who donate on this platform to a certain campaign express benevolent preferences. aderemi & ishak │ crowdfunding as an alternative mode of financing micro and small enterprises: a proposed qard-al-hasan contract international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │100 2.2 previous studies among the earliest studies achsien & purnamasari ( 2012) in their study they manifested crowdfunding into five models based on shari’ah contract: (1) zakat-based model (2) infaq-sadaqa-waqf-based model, (3) qard-al-hasanbased model, (4) shrikah-based model (mudarabah and musharakah) and (5) lending –based model (murabahah, ijarah, istishna, etc.), he concluded that islamic crowdfunding, still in the starting point of its maturity and therefor adequate awareness and proper understanding concerning islamic crowdfunding still poor, hence regulation must be put in place in the nearest future. however, most closely related study conducted by marzban et al. (2014) who in their study proposed a shari’ah-compliant crowdfunding based on convectional crowdfunding models as well as potential beneficiary for each proposed model. as for donation-based crowdfunding they proposed three possible instrument that could be of perfect islamic charity to use which are hiba, qard-al-hasan, and finally murabahah, sale instrument would be suitable for reward-based model, murabahah and ijarah could be more appropriate instrument to be employed for lending-based model while diminishing musharakah and musharakah are prefer for equity-based model, he concluded that the combination of main principles of shariah, crowdfunding, globalization, and developments the technology signify an opportunity to significantly contribute to the improvement of the business ecosystem in islamic countries. subsequently, wahjono et al. (2015) in their research stressed that musharakah and qard are the most islamic crowdfunding appropriate models in the sense that islamic crowdfunding musharakah-based are designed for the purpose of investment whereas islamic crowdfunding qardbased is meant to finance a projects with a loan which has to be refund at given time. additionally, lutfi & ismail (2016) conducted their study and proposed sadaqah based crowdfunding for microfinancing and health care, they come to conclusion that the proposed model will serve as a platform to finance entrepreneurial projects through the concept of microfinance and also help create a relief fund for health care treatment. the model proposed uses shari’ah contracts, namely sadaqah and qard al-hasan. however, qard al-hasan was not fully explained in this study. contextually, hanim et al. (2018) in their study declared that in islamic crowdfunding startup there is still no theoretical framework that can guide it. he further emphasis that islamic crowdfunding are also under-exploration of study on what type of aderemi & ishak │ crowdfunding as an alternative mode of financing micro and small enterprises: a proposed qard-al-hasan contract international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │101 crowdfunding features would be in favor of the potential contributor and the behavior of the contributor. similarly, saiti et al. (2018) proposed two different islamic p2p models, namely mudarabah (equity-based) and murabahah (sale-based) based crowdfunding models. he suggested that future research should explore islamic crowdfunding further and in greater depth since the resources of these particular issues are limited whereas its potential is significant. thaker, (2018) categorized islamic crowdfunding into four models in accordance to mainstream models: sadaqa-based crowdfunding for donation-based convectional crowdfunding, murabahah-based crowdfunding stand for peerto-peer convectional crowdfunding, mudarabah-based crowdfunding as equity-based convectional crowdfunding and lastly hiba-based crowdfunding represent reward-based conventional crowdfunding. the success of qard al-hasan has been proven in a study conducted by febianto & ashany (2012) that qard al-hasan financing can improve the business of msmes successfully and can be potentially advanced further to develop the society’s economy especially the poor. however, this study aims to explore the applicability of qard al-hasan on crowdfunding as a viable alternative to fund micro and small scale enterprises, to the best knowledge of researcher and based on the reviewed literature, most of the previous studies focused majorly on suggesting the islamic contracts that could suit crowdfunding and little research has been carried out on exploring qard alhasan crowdfunding. 2.3 conceptual framework 2.3.1. crowdfunding definition one of the first definition of crowdfunding was that of ordanini et al. (2011) they defined it as an activity attempted to raise fund for a new proposed project by gathering little to medium-size speculation from a few other individual. nonetheless, schwienbacher & larralde (2012) give the definition based on its characteristic he defined it “as an internet mode of funding by public to the capital or entrepreneurs who are seeking for investment for the motive of expecting reward or pure charity. this definition indicates and add another point which is the form of crowdfunding, it stresses that the motive aderemi & ishak │ crowdfunding as an alternative mode of financing micro and small enterprises: a proposed qard-al-hasan contract international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │102 behind investing in crowdfunding could not only be for the monetary reward, but also could be for the pleasure or fun of doing the particular task i.e. investing”. models of crowdfunding based on founders, backers, outcome and benefit, crowdfunding can be categorized into four types/models namely: (1) donation based crowdfunding; (2) reward based crowdfunding; (3) lending based crowdfunding; and (4) equity based crowdfunding (massolution, 2015). donation-based crowdfunding is a mechanism in which the collection of funds occurs for philanthropic or social or other motive without expecting any compensation in return (monetary or not) (marzban, asutay & boseli, 2014). while reward-based crowdfundng is a crowdfunding model where investors or backers receive an appreciation for financing an initiative as a token reward such as receiving aknowledgement, gift, or being provided with the products he supported (thaker, thaker & pitchay, 2018). on the hand, lending-based crowdfunding is an internet-enabled platform where lenders or investors choose to lend money to the borrowers or founders in exchange for lower interest which is set by the platform (thaker, mohammed, duasa & abdullah, 2016). while equity-based crowdfunding is an online platform in which funders obtain reward (financial return) in the form of fundraiser’s equity-based income or profit-share arrangements (wilson & testoni, 2014). equity-based crowdfunding is developing as an progressively important source of entrepreneurial financing (kshetri, 2018). 2.3.2. micro, small and medium enterprises (msmes) and its role in economy the meaning or classification of micro small and medium enterprises varies from country to country. universally, there is no definition or classification of msmes that is agreed on. different writers, researchers and institutes have various thoughts as to differences in terms of principal expenses, sales, the number of employees’ turnover , available plant and machinery , fixed capital investment, the share of market as well as the level of progress (dar, ahmed & raziq, 2017). in a developed country like the u.s.a, britain and other european countries, small and medium scale enterprises are defined with regard to income and number of workers. the european commission classifies msmes as any businesses who have what not less than 250 aderemi & ishak │ crowdfunding as an alternative mode of financing micro and small enterprises: a proposed qard-al-hasan contract international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │103 workers, self-governing (with 25% shareholding at maximum) and with an annual income of at most £50 million or annual budget of £43 million (oyedepo, duan, bentley, & he, 2016). in asia, descriptions of msmes are dissimilar from one country to another. the gauge for the classification of msmes in some countries is capital, while in another it is has to do with the number of workers, and other states use diverse criteria such as japan, and it varies in each business (yoshino, 2016). in malaysia for example msmes is divided into three core sectors like manufacturing, common business, and agriculture. in malaysia, in accordance with small and medium enterprises corporation malaysia (smecorp, 2008), any business that hire full time workers within the range of 50-150 are treated as medium whereas those that hire full time workers within the range of 5-50 are considered as small and anything less than 5 workers are categorized to be micro enterprises ( khalique, isa, nassir shaari & ageel 2009). subsequently, in sub-saharan africa the classification of smes is based on capital employed, income and number of workers (gbandi & amissah, 2014). in nigeria according to gbandi & amissah (2014), any business that has an asset base (exclusive of land) within the range of n5 million to n500 million and labor force within the range of 11 and 300 said to be small and medium enterprises. micro, small and medium enterprises (msmes) are said to be the most significant pillar for the growing and development of all economics across the globe (bagh, arif, liaqat, & razzaq, 2017). in accordance to the world bank (2018) not less down 90% of businesses worldwide are represented by smes as well as about 50% of employment are created universally. additionally, in developing economies countries 40% of national income (gdp) are contributed by formal smes. it contributes greatlyas a driven forceto the nationwide economy, it also helps to mitigate poverty as well as it serves as a resistant to the catastrophes. if smes is well managed by a country it can creates jobs, increase revenue, lessen vulnerability and escalate investment in human resources.(hendratmi et al., 2019). in fact, smes contribute greatly to the growth of growth and poverty reduction (ayandibu & houghton, 2017). furthermore, smes are also significant for the formation of social capital in repairing the shattered social fabric in societies after disaster. in a wider context, strong smes can endorse national resilience to shocks by diversifying and expanding the local economy (mavrodieva, budiarti, yu, pasha, & shaw, 2019). aderemi & ishak │ crowdfunding as an alternative mode of financing micro and small enterprises: a proposed qard-al-hasan contract international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │104 2.3.3. qard al-hasan as a means of financing qard al-hasan is made of two arabic words: qard and hasan. as for qard, literally, it means “to cut something off”, referring a cut off from lender’s assets by doling out the credit to the debtor. as for hasan, it is originated from ihsan which simply means benevolence or beautiful (ariffin & adnan, 2012). as for technical meaning, qard al-hasan can be defined as a virtuous loan giving out with the clause of returning the principal sum to the owner in the same condition without any increase in the stipulated (ariffin & adnan, 2012). in other words, it is the act in which the owner of an asset or money transfers his money or asset to with the clause of given it back to the owner in the same state and value as when it was initially received by the borrower from the owner (abdul rahman 2006). therefore, it is understood that qard al-hasan is purely a non-profit loan which is aimed at helping the needy n the society. however, abdullah (2015) stressed that arguably, from the prism of shari’ah, qard-al-hasan is neither certainly a transaction nor a gift, nonetheless, it occur within the two, which implies that qard al-hasan merge the two features together; the features of being a transaction and that of a gift. in terms of its legitimacy, qard al-hasan has legal basis from qur’an, hadith and ijma’ (consensus of scholars). as for the qur’an, it is encouraged for humankind to do qard al-hasan (2:245,5:12, and 73:20). as for the hadith, it was narrated by that prophet (pbuh) said: “there is no muslim who lend something to another muslim twice, but it will be like giving charity once.” (ibn majah, hadith no 2430). as for ijma, all scholars have confirmed the permission of qard al-hasan practice, based on human nature that cannot live without helping each other (kudamah, 1997). in terms of its role as a financial instrument, qard-al-hassan has the potential to serve as a mechanism to assist the progress social and financial inclusion in the community. in the process of giving out credit to the poor, it can be introduced into the proper and standard monetary division as they are alleviated from poverty, thereby integrating them into the society. in light of this, qard-al-hassan tends to be a mechanism that aids in accomplishing social and economic justice as envisaged by islamic economics. in fact, this can be comprehending with the aims of qard-alhassan in terms of helping those who are in need, mobilizing treasure between societies, practicing a good deed, enabling the poor to come up with new occupations market and trade venture by utilizing their skills, expertise and merits and removing economic and social bias in the society aderemi & ishak │ crowdfunding as an alternative mode of financing micro and small enterprises: a proposed qard-al-hasan contract international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │105 (junaidi, lutfiah & adnan, 2017). however, there are some risk in qard alhassan including risk of non-payment, risk of poor management, inflation risk and low risk of revenue (khidher, 2014). since interest is highly prohibited in islam, qard-al-hassan is given a preference and flexibility ( abidin, alwi & ariffin, 2011). moreover, qard-alhassan usually involves a simple procedure due to its nature which is small in size. hence, this loan has easy access to capital contributors and borrowers due to its local standard (iqbal & shafiq, 2015). at the same time, the creditor is encouraged to forego the payment if the borrower’s effort to repay prove abortive due to economic difficulties. the qur’an categorical state in numerous verses on the rate of return for qard-al-hassan (57:11, 18), (64:17), (2:245), providing believers with utmost certainty that they shall be rewarded in multitude in the present life and the hereafter. therefore, the incentive for believers to initiate qard-al-hassan thus requires an attention for the reward promised in the hereafter as part of their long-term return. consequently, qard al-hassan is regarded as a risk-free asset having perceived certain return in the believers’ wealth portfolio (sadr, 2014). iii. methodology in order to achieve the research objective, qualitative research was adopted by utilizing descriptive and inductive approach. qualitative research methods are methods serving to demonstrate and intend to provide a profundity of knowledge, it centered around words, feelings, viewpoint and so on and they include interviews, focus groups, experiment (creswell, 2012). to gather information this study utilized secondary data. according to saunders & lewis (2012) the secondary data can be classified into three categories: documentary, multiple source and surveys, the researcher will review documentary secondary data such as books particularly shariah sources; alqur’an, hadith and fiq’h, published and journal as well as seminar proceeding, document, thesis and internet sources which are related to the scope of study. aderemi & ishak │ crowdfunding as an alternative mode of financing micro and small enterprises: a proposed qard-al-hasan contract international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │106 iv. results and analysis 4.1 results 4.1.1. the proposed qard al-hasan-based crowdfunding model as the current strategy of funding are not capable to fulfil the monetary need of micro and small enterprises, there is a necessity to look out for an additional dynamic and well-organized model of financing to help micro and small enterprises. a qard al-hasan crowdfunding model is proposed with the aim to be a viable alternative choice for the current micro and small enterprises strategy of financing as shown below. in this study, the researcher propose the qard-al-hasan based crowdfunding model. this model merges the concept of crowdfunding for entrepreneurs using shari’ah contract known as qard-al-hasan as an instrument. one of the characteristics of qard-al-hasan is that it flexible to assist the progress of any idea for the benefit of its assets without any pre-specified restrictions by the shariah. from the prism of shari’ah, a qard-al-hasan is neither certainly a transaction nor a gift, nonetheless, it occur within the two, which implies that qard al-hasan merge the two features together; the features of being a transaction and that of a gift (abdullah, 2015). subsequently qard-al-hasan is suitable and applicable to all purposes, its capital cost is very low and the borrower will face a very low risk, while the lender will face moderate risk (widiyanto, mutamimah, & hendar, 2011). the contract will be benevolent loan or qard-al-hasan which no interest shall be included. the management costs will be covered by donors and the cost will be charged with fixed amount instead of being in percentage rate. next, in other for this model to be implemented, a platform is needed. qard-al-hasan-based crowdfunding platform is created to endorse and support small and medium enterprises ventures that is in compliance with shariah. as muslims, its forbidden to engage in any transactions that contain elements of gharar (uncertainty), riba (interest) and maysir (gambling). as it is also illegal for them to take part in any transaction that consist of outlawed activities in islam. for instance, any venture or trade that comprises pornography or alcohol must be avoided. in this case there is a need for shariah compliant crowdfunding platform that will offer loan without engaging in riba or any prohibited activities. thus, the proposed qard-al-hasan-based crowdfunding platform offers and endorses projects and contracts that are in compliance with shari’ah. aderemi & ishak │ crowdfunding as an alternative mode of financing micro and small enterprises: a proposed qard-al-hasan contract international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │107 in this proposed qard al-hasan-based crowdfunding there are four parties, namely: 1. initiator of project which may consist of: individuals, association, and business; 2. potential funders; 3. qard al-hasan crowdfunding platform (qcfp); and 4. sharia advisory. 4.1.2. explanation of the four parties i. project initiator (entrepreneurs) the entrepreneurs are the first actors as well as the initiators in crowdfunding mechanism. this are set of people who are financially les capable, but they possess skills of entrepreneurial and the group of people who are in need of capital to nurture their businesses. the participants of qard-al-hasan based crowdfunding would be the entrepreneurs who did not the viability to acquire the funds from other types of islamic crowdfunding (such as mudarabah, musharakah, murabahah based crowdfunding) so they need to be assisted by using qard-al-hasan based crowdfunding. ii. potential funders (crowd) crowd is the last actor and the most important actor among three actors. the crowd is a large group of ordinary people, who can take out some petty donations from their wealth to support the concepts they find promising. there are several names for the crowd: funders, investors, backers, or donors. the crowd will donate to fund the project within a certain time of period. the contract between the crowd and the platform is pure charity for the purpose of funding the entrepreneurs. the crowd will give a portion of the charity to pay the fee to the platforms under wakalah contract. in this model, the crowd also represents those who are less fortunate financially. iii. qard al-hasan-based crowdfunding platform the platform provides an intermediate facility to act as an intermediary between a businessperson and potential crowdfunders. in this study, the proposed platform is also acting as a manager. the platform is based on shariah, in which one of its duties is to ensure that the business idea presented or pitched to them is shariah compliant. any idea which passes aderemi & ishak │ crowdfunding as an alternative mode of financing micro and small enterprises: a proposed qard-al-hasan contract international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │108 the screening or due diligence process will be promoted to the crowd or the public. iv. board of shariah the board of shariah are the shariah advisor provided by the proposed platform. the shari’ah advisor have their responsibilities and objectives. they are to ensure that the idea posted by the entrepreneurs is complies with shariah law (no alcohol, gambling, usury activities, speculation, gharar, illegal items, etc.). a due diligence group ensures business owners are eligible for the service. illustration of qard al-hasanbased crowdfunding platform: figure 2. qard al-hasan-based crowdfunding framework flow of the figure 1. the entrepreneurs pose or pitch their business ideas to the platform. in this stage, shariah advisor appointed by the platform will ensure the idea complies with shariah law (no alcohol, gambling, usury activities, speculation, gharar, illegal items, etc.). a due diligence group ensures business owners are eligible for the service. 2. the platform promotes the selected ideas to the crowd or public as an agent for the entrepreneurs. because of the agency contract (wakalah), the platform will get paid. it is known as the wakalah contract that involves a fee (wakalah bil ujrah). the fee is paid using funds donated by the donor. entrepreneurs qard al-hasan based crowdfunding platform crowd/backers board of shariah shariah advisor 1 2 3 4 aderemi & ishak │ crowdfunding as an alternative mode of financing micro and small enterprises: a proposed qard-al-hasan contract international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │109 3. the crowd or investors give donation or sadaqah to the project via platform. after the funding period expired, the fund collected will be given to the entrepreneurs under the contract qard al-hasan between the entrepreneurs and the platform. 4. the entrepreneurs are obliged under wa’ad contract, to repay the loan without imposing any interest to the platform within a certain time frame. the contract will be incorporated with kafalah to ensure that the entrepreneurs repay the loan at the given time. the amount of every repayment is small and affordable to the platform. during the project operation, shariah advisor of the platform will monitor the project to always abide to the shariah laws. 5. this proposed model will include a number of extra islamic contracts such as wakalah (agency), kafalah (guarantee) and wa’ad (promise). wakalah is an agency contract between the funders and the platform. in this study, the proposed platform acts as a manager. as a shariahcompliant platform, one of its duties is to ensure that the business idea presented or pitched to them is in compliance with shariah. since the platform aims to offer an islamic product, it is recommending for the platform to employ a shari’ah advisor in order to ensure that the proposed activities comply with shariah laws. as well, the shariah advisor ensures that to be approved ventures run in accordance with shariah laws, in a way that any business ideas which transcend the screening or fair diligence procedure will then be publicized to the public or the crowd. 6. thus, wa’ad contract will take place between the platform and ventures on compliance with the conditions specified and in line with shariah. wa’ad is considered as a monitoring tool on business or an ongoing project. any misconduct committed by ventures will be penalized by the platform. a significant difference between this proposed model to the existing ones is that this qard-al-hasan-based model is purely meant for small scale business and with no any interest involved. through the qard al-hasan-based crowdfunding model, entrepreneurs can do business while increasing their quality of life. in return, their businesses will help the community in creating jobs and facilities. aderemi & ishak │ crowdfunding as an alternative mode of financing micro and small enterprises: a proposed qard-al-hasan contract international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │110 4.2 analysis convectional lending-based crowdfunding is based primarily on interest which is not in compliance with shariah principle. however, in other to make a shariah compliant crowd lending available, the platform has to depend on islamic financial product and procedures to offer an alternative which will be interest free such the use of qard al-hasan which is currently being offered by the pakistani-based seed-out platform. from the islamic finance standpoint, lending-based crowdfunding signify a substantial chance to provide the necessary opportunities from islamic finance by linking the investment opportunities and benefits of social growth together in lieu of an extensive range of investors and entrepreneurs. qard al-hasan is a virtuous loan without interest, in which it should be clear that the loan here is a good deed that does not have any benefit other than deepening the individual's spiritual standards and to realize the internal compatibility of the individual as well as to accomplish compatibility between individual and his community. muslims are encouraged to borrow out their money to another muslim brother or sister. it is clear that islam is a religion that provides space and a solution to the difficulties faced by mankind, it is in line with the main principles underlying the contract of qard al-hasan which is ta’awun (helping each other) to ease the burden of those who are in distress and need (zada & saba, 2013). however, utomo et al. (2015) emphasized that qard al-hasan is very versatile in nature and can be used for financing for all sorts of consumption, production, services and debt activities, unlike the other products that may only suit certain types of contract. therefore, qard al-hasan is suitable and applicable to all purposes in micro enterprises especially for the start-up, in which its capital cost is very low and its flexibility can support the progress of any idea for the benefit of its assets without any pre-specified restrictions by the shari’ah. the success of qard al-hasan as a means of msmes financing has been explained by febianto & ashany (2012). therefore, to adapt with modern means of channeling fund which is crowdfunding, qard al-hassan should be categorized under donation based crowdfunding, instead of lending crowdfunding because its motive is more to a charitable support for entrepreneurs. wahjono et al. (2015) asserted that islamic crowdfunding qard-based is meant to finance a micro business with a loan which has to be refund at a given time. interestingly, implication of qard al-hasan based crowdfunding model can be seen that the qard al-hasan and micro and small enterprises (mses) can incoherent with each other. mses are destined aderemi & ishak │ crowdfunding as an alternative mode of financing micro and small enterprises: a proposed qard-al-hasan contract international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │111 to boost the economy, and qard al-hasan can offer monetary support for mses. the significant purpose of qard-al-hassan-based crowdfunding is to assist the needy to be integrated into the economic system in a simplified and costeffective approach. in so far as the needy do not have any form of substantial material collateral, social capital tends to be the only collateral for issuing such credit. this equally creates an incentive for the needy to gain access to such credit for future sake. the implementation of qard-al-hassan-based crowdfunding is also associated to facilitating a harmonious life between the wealthy and the poor class in the society which result to a more cooperative, collaborative and generous society. in terms of society and economy, this model lay emphasis mostly on financing, it creates an atmosphere of improvement and divergence of economic motion. also, it supports the stimulation of private ownership amongst micro and small enterprises. qard al-hasan crowdfunding model would be of great help to micro entrepreneurs in reaching out to financial services within their means. this model will provide seed funds in other to nurture micro and small enterprises sector and provide an access to funding for them. additionally, this model will certainly mitigate unemployment by generating employment hopes and assist the poor micro and small entrepreneurs to acquire revenue and lastly the introduction of qard-al-hassan-based crowdfunding can effectively be used to alleviate poverty thereby facilitating an avenue of opportunities for the poor in order to create new labor market and business enterprise by utilizing such an advantage, potentials and expertise. subsequently, a significant different between this proposed crowdfunding model and previous one is this qard al-hasan-based crowdfunding model emphasis solely on micro and small enterprises as it is one of the core sectors to be focused on in eradicating unemployment within the society. thus, this proposed crowdfunding model adopted qard al-hasan which is usually involves a simple procedure due to its nature which is small in size. this in essence will facilitate the process and period of approval rapidly and disbursement swiftly. hence, the loan has easy access to capital contributors and borrowers due to its local standard. lastly, being a new phenomenon, there is a very little study on crowdfunding from islamic perspective generally. however, this study enhances the present literature in the areas of crowdfunding and qard al-hasan. it makes a first-hand literature on the avenue available for a productive exploitation of qard al-hasan for socioeconomic improvement. owing to the newness of this field this study would be of great significance to the islamic financial industry. aderemi & ishak │ crowdfunding as an alternative mode of financing micro and small enterprises: a proposed qard-al-hasan contract international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │112 v. conclusion and recommendation 5.1 conclusion this study has revealed that micro, small and medium enterprises signify the core component of economy. however, these sectors are facing financial constraint in gaining access to capital from both government and private sources. as they are seen to be a risky sector in the market, and hence they imposed strict loan conditions on them such as raising loan requirement, limiting loan and increasing interest rates. unluckily, most of this sector cannot survive these conditions, and therefore problem of financing remain unchanged. thus, the present study proposes an idea of qard al-hasan based crowdfunding as to address this financial problem and improve their growth and role to the national revenue. qard al-hasan based crowdfunding can be an alternative mode for financing micro and small scale enterprises. it can potentially yield higher return since it has no fixed interest return. however, several rules are embedded in islamic crowdfunding in addition to the legal elements to ensure that all prohibited speculative intention and risks are ascertained. this is not only to protect the investors, but also to exercise social objectives. this model could be an alternative shari’ah financing to traditional islamic financial institutions as well as conventional crowdfunding for entrepreneurs so in return they can support socio economic development in the country. however, this model is associating with several risks including risk of non-payment, risk of miss management, and inflation risk. nonetheless, these risks can be mitigated through proper reviewing by crowdfunding platforms as well as closely monitoring by them. finally, this study is dissimilar from previous studies for the reason that it provides useful insight on qard al-hasan-based crowdfunding based on the actual events. other studies only suggest the concept or idea of qard alhasan-based crowdfunding, but this study proves that the establishment and the implementation of the qard al-hasan-based crowdfunding as a means of financing micro and medium enterprises is possible and can be achieved while the risk associated to it can be mitigated. aderemi & ishak │ crowdfunding as an alternative mode of financing micro and small enterprises: a proposed qard-al-hasan contract international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │113 5.2 limitations and recommendation in the light of the previous discussions, there are some recommendations for islamic financial institution (ifi) and regulators. islamic finance industry should put more focus on islamic financial products and how they can be adopted using crowdfunding so that better and inexpensive islamic financial product and services can be provided to customer and much more crowdfunding is where the future belongs in terms of financing small businesses. in addition to that funding micro and small enterprises with crowdfunding could symbolizes a strong chance for islamic finance in maximizing the elevation of its fundamental values concerning the development of its economic and social aspect. also, islamic financial institution should think of a way to manage and tackle the challenges and risks that are part of this means of financing, like cyber security, fraud and legal risk etc. as for the regulators the platforms that are shari’ah compliance are need to be firmly regulated, so policy maker has to make sure to reduce the license fee and also simplify the procedure of getting a license by crowdfunding platforms. conjoining the fundamental principle of shariah the concept of crowdfunding, together with the globalization and technology expansions, can signify a chance to contribute meaningfully to the enrichment of the business ecosystem in islamic states. finally, this paper is conceptual paper where there is no empirical analysis conducted. hence in other to improve this study in the future, there are some suggestions for further researches in the following sentences: the developed model should be authenticated using interview and investigations to measure the intentions of the investor in using this model. theories such as theory of philanthropy, theory of social influence and social capital theory can be very useful in this regard. aderemi & ishak │ crowdfunding as an alternative mode of financing micro and small enterprises: a proposed qard-al-hasan 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(2013). the potential use of qard hasan in islamic microfinance. isra international journal of islamic finance, 5(2), 153–163. aderemi & ishak │ crowdfunding as an alternative mode of financing micro and small enterprises: a proposed qard-al-hasan contract international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │118 this page is intentionally left blank international journal of islamic economics and finance (ijief) vol. 3(2), page 33-62, special issue: islamic social finance and ethics islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria sagir muhammad sulaiman international institute of islamic banking and finance (iiibf), bayero university kano, nigeria corresponding email: sageeerala@gmail.com aliyu dahiru muhammad bayero university kano, nigeria, alttahir797@gmail.com tasiu tijjani sabiu northwest university kano, nigeria, ttsabiu.economics@nwu.edu.ng article history received: june 14 th , 2020 revised: july 17 th , 2020 accepted: july 25 th , 2020 abstract there are persistent increasing number of scenarios in singer and dawanau markets of kano metropolis which are seen as unethical among which includes deception, inappropriate weight and measures, hoarding and price manipulation as well as false-swearing to support a sale. this study therefore assesses the determinants of islamic business ethics practices among muslim entrepreneurs in kano metropolis, nigeria. structural equation modelling (sem) technique is employed in analysing the hypothesized model of the study. the results indicate that entrepreneurs fairly adhere to islamic business ethics practice while legal and organizational factors significantly affect islamic business ethics, but individual factors do not. the study recommends the need for kano state ministry of commerce and industry in collaboration with market organizational leaders to engage in public enlightenment on the importance of business as an act of worship (ibadat). it was suggested that organization leaders i.e. market leaders (trade union leaders) should liaise with kano state shariah commission to set standard for islamic business ethics whereas hisbah board to enforce compliance. the study further suggests that the concept of ethics should be incorporated in teaching and learning curriculum. keywords: islamic business ethics, legal factors, organizational factor, individual factor, structural equation modelling. jel classification: c31; m19; z12 @ ijief 2020 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.3233 web: https://journal.umy.ac.id/index.php/ijief/article/view/9033 citation: sulaiman, s. m., muhammad, a. d., & sabiu, t. t. (2020) islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria. international journal of islamic economics and finance (ijief), 3(2), 33-62. doi: https://doi.org/10.18196/ijief.3233. i. introduction mailto:sageeerala@gmail.com mailto:ttsabiu.economics@nwu.edu.ng sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │34 1.1. background muslim business entrepreneurs should possess unique standard qualities distinct from non-muslim business entrepreneurs. muslim business entrepreneurs are obliged to have faith in the oneness of allah and nothing worthy of worship except allah (ismail, 2006). this tawheedic approach in islam is the ultimate guiding principle of entrepreneurship. ethics in islamic context is view in two different categories; in the first stage ethics toward the oneness of the creator allah, a muslim should worship allah and believe in his oneness, secondly a person should be ethically sound toward others in term of maintaining good relationship i.e. as a brother or sister keeper. the character of prophet muhammad (pbuh) is a good example in which if implemented by business entrepreneurs would discourage self-serving and individualistic tendencies (beekun, 2012). dawanau and singer markets are located in kano state of nigeria which are predominantly occupied by muslim entrepreneurs (abdu, 2018; umar, 2018). most of the entrepreneurs in these markets share different things in common among which is selling and buying of consumable goods. while dawanau is an international market for solely grains, entrepreneurs in singer market specialized in buying and selling of foods stuffs and soft drinks. burji (2018) remark that unethical business practices such as selling of expired commodities, selling low quality standard goods in the name of high standard or generally selling out goods with already known defects without the consent of buyers and inappropriate weight and measures among others are rampant in both singer and dawanau markets of kano state. therefore, it is pertinent to assess if muslims entrepreneurs in these markets adheres to islamic business ethics in carrying out day to day business activities. it is appealing to know the extent to which muslim entrepreneurs in these market either engages or otherwise in unethical practices such as deception, inappropriate weight and measures, hoarding, fraud, deliberate purchase of stolen goods, false-swearing to support a sale, middleman ship and usurious practices. it is in the light of the foregoing that this study assesses the determinant of islamic business ethics among entrepreneurs in kano metropolis with a view to determining how entrepreneurial activities can be made to conform to the teaching of the sharia’ah and enhance the islamic moral uprightness of the entrepreneurs for enhanced allah’s blessings. the justification for selecting kano as area of interest is due to the facts that: it’s a muslims majority state accounting for 99% of the indigenous population. secondly it’s a shariah compliant state with the presence of sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │35 institutions like shariah commission and hisbah board among others. thirdly kano state is the second largest commercial state in nigeria. most of the researches on islamic business ethics are conceptual rather than empirical studies. empirical work in this context are largely conducted in muslims countries such as malaysia, syria, indonesia and bangladesh. equally, some are carried out in sub saharan african countries such as ghana. due to the fact that some of these countries share common socioreligious but different economic values with nigeria and kano state in particular, hence, the need to replicate the study in nigerian context. moreover, the literature in this area focus on formal sectors i.e. islamic financial institution (husin & kerain 2019; nizam, binti, safizal & osman, 2015; imam, sattar & muneer 2013). however, studies with the focus in informal sectors i.e. market places are rare. yeboah-assiamah (2014) represent the first attempt in investigating islamic business ethics in market place. the study employed one-on-one in-depth interview to (12) muslims women traders, (5) regular customers of the traders and (2) muslim religious leaders in kumasi central market, ghana. this raises the need to carry similar study in nigerian context using different methodological approach i.e. structural equation modelling. in this regard this study gives both empirical and methodological contribution 1.2. objective the aim of this study is to assess the application of islamic business ethics by muslim entrepreneurs in dawanau and singer markets. the specific objectives of the study are; (i) to assess whether legal factors have significant effect on islamic business ethics in dawanau and singer markets. (ii) to examine whether organizational factors have significant effect on islamic business ethics in dawanau and singer market; and (iii) to explore whether individual factors have significant effect on islamic business ethics in dawanau and singer markets. this paper comprises of five sections. section one is introduction, section two dwells on both empirical and theoretical literatures. section three focuses on methodology. section four consists of data presentation and analysis. lastly section five is the conclusion, recommendation and frontier for further studies. ii. literature review sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │36 2.1. background theory the theoretical framework employed in this study is divine command theory using tauhidiq paradigm approach which source its origin from both primary and secondary islamic sources of knowledge. divine command theory opined that what should be good or bad, permitted or prohibited is subjected to religion belief, this theory signifies that what is right or wrong is determine by god. in other words, ethics and religion always go together (rachels & rachels, 1993). religious people commonly believe that ethics can be understood only in the context of religion i.e. jewish and christian religions. according to rachels and rachels (1993) god is seen as a lawgiver who has created the universe and all other things. according to mohammed (2005) in contrast to jewish and christian religions, islam reveals the sole purpose of existence of humankind in this world clearly as worshipping the one god through the engagement in good things and avoidance from engaging in wrong things. tauhidiq paradigm is an islamic approach to divine command theory that focus on tauhid (unity of allah) or the islamic monotheism that provides harmonious linkages between the worldly affairs (al’dunya) and the hereafter (al’akhirah) in the context of business processes, actions and decisions (rahman, 1995; hamid, 1999). tauhidiq paradigm approach of divine command theory is adopted and serve as a basis for assessing the determinants of the application of islamic business ethics among entrepreneurs in kano metropolis nigeria. 2.2. previous studies there is scanty empirical literature on islamic business ethics, this is evident in the work of husin and kerain (2019), nizam et al., (2015), yeboahassiamah (2014), manan, kamaluddin and puteh salin (2013) as well as imam, sattar and muneer (2013). given limited empirical literature this study contributes to the literature on islamic business ethics practice specifically in market place. in addition, most of the study empirically tested islamic ethics model in works places using either individual or organizational factors as determinants of islamic ethics. this study therefore incorporates three determinants of islamic ethics as conceptually suggested by beekun (1996) that include individual, organizational and legal factors. the scanty literatures are hereby discussed below. husin and kernain (2019) conducted an empirical assessment of the influences of individual behaviour and organizational commitment towards the enhancement of islamic work ethics (iwe) at the royal malaysian air force and the data was analyzed using both descriptive analyses and structural equation modelling (sem) to conduct confirmatory factor analysis only and the findings reveals that both individual behaviour and sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │37 organizational commitment have significantly correlated with the enhancement of iwe. meanwhile, same variables can be further empirically tested in another case study. nizam et al, (2015) identify islamic work ethics as a concept of ethics that is based on islamic teaching and principle which rely on faith. a structural model was constructed to test the effects of islamic work ethics on organizational commitment. 156 respondents from randomly selected (smes) were given six-point likert scale questionnaire. the study found that the structural model is acceptable in term of validity and reliability thus can be used to measure the relationship between two variables. the study also found that islamic work ethics affects organizational commitment and its three dimensions; affective, normative and continuance commitment. however, there is need to consider the effect of other exogenous variables among which are (economic, political and social). yeboah-assiamah (2014) analyses muslim women traders understanding of islamic business ethics in kumasi central market ghana, one-on-one in-depth interview was conducted and purposive sampling technique was adopted to select 19 respondents consist of (12) islam women traders, (5) regular customers of the traders and (2) muslim religious leaders, the study found out that the main teachings of islam to traders include sincerity, honesty, humility, fairness in pricing, truthfulness, love for customers and fellow traders. the study concludes that islamic women traders in the kumasi central market do have fair understanding of islamic work ethics; further studies should assess the impact of knowledge of these ethical principles on the trading behaviours of islamic women traders in the kumasi central market using quantitative approach. manan et al., (2013) examine the influence of organizational commitment on islamic work ethics among employee of banking institutions in malaysia, study employs a survey method whereby primary data is collected via a distribution of questionnaires, simple random sampling is used to draw a total of 500 samples and a spearman correlation was used to test for the relationship between variables of the study. the findings of this study indicate that all islamic work ethics (iwe) variables namely, effort, teamwork, honesty and accountability are positively and significantly related to organizational commitment, similar studies can be carry out in informal sector i.e. market places by employing a robust technique of analysis i.e. sem multivariate technique. imam et al., (2013) examine the relationship between islamic work ethics (iwe), mediating role of manager bad personality i.e. personality x, manager good personality i.e. personality y, and employee performance, 400 questionnaires through simple random sampling technique was distributed sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │38 to phd faculty members of universities of pakistan, the structural equation modelling (sem) was performed using spss 19 and amos 19.0. and the result revealed that islamic work ethics can improve the performance of employees with various personalities, i.e. either by personality x or personality y, it is important to mention that this model is significant and provides empirically and theoretically consistent findings, researchers also need to realize that the external environment (economic, political, social and technological) also affects the performance of an organization and employees. therefore, there is need to consider environmental factor as moderating variable. based on the literature review, the conceptual framework was developed to support this study, and it is presented in figure 1. 2.3. conceptual framework source: adopted from beekun (1966). figure 1. research framework. figure 1 shows that all the four variables are in oval shape which signifies that, they are all lantern construct/variables, whereas islamic business ethics is the endogenous variable, the exogenous variables of the study are legal factors, organizational factors and individual factors which are also the determinant of islamic business ethics practice. iii. methodology islamic business ethics legal factors organizational factors individual factor sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │39 the aim of this study is to assess the influence of legal factors, organizational factors and individual factors on application of islamic business ethics by muslim entrepreneurs in dawanau and singer markets of kano metropolis, nigeria. 3.1. data the study uses cross-sectional survey design. the number of entrepreneurs in singer market comprises of 25,355 registered and 35,000 unregistered, this constitutes the population of entrepreneurs in singer to be 60,355 (yakasai, 2018). on the other hand, the number of registered entrepreneurs in dawanau market is 26,850 while the estimated unregistered amount to 3,610, this constitutes the population of business entrepreneurs in dawanau market to be 30,460 (famis, 2017). therefore, the total population of the study areas is 90,815. the study used bertlett, kottrlik and higgins (2001) sample size formula as adopted in mensah (2016) and arrived at 383 sample size, but for the purpose of this study; 400 respondents would be questioned so as to improve the response rate and also to reduce the sampling error. the use of self-administered questionnaire is adopted. in this study, aside the demographic attributes or variables, which were obtained at the nominal scale all other variables, were in ordinal and interval scaling using the likertscale. the original rensis likert was maintained in this study by using fivepoint likert-scale format. purposive sampling technique is adopted to capture the target respondents and distribution of questionnaires is proportionally based on the target population in each of the selected case study namely singer and dawanau markets. table i. summary of sample size proportion distribution market sample frame proportion of sample size singer 26,850 205.727 ≈ 206 dawanau 25,355 194.273 ≈ 194 total 52,205 400 source: famis (2017) and yakasai (2018) and computed by author. 3.2. model development sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │40 the following models are used in explaining the relationships between (legal factors, organizational factors and individual factors) and islamic business ethics construct. three independent variables (legal factors, organizational factors and individual factors) are adopted from previous conceptual studies such as beekun, (1996) ahmad, (2009) ngurah, kaderi, sufiati and toha, (2014) as well as iqbal and islam, (2015). islamic business ethics: this is endogenous variable which is defined as overall ethical behaviour of individuals in a business. it is measured by seven measurements instruments or dimensions namely; god fearing (taqwa), trust, justice, equity, benevolence, sincerity and responsibility. the questions are based on these seven dimensions or measurements. it is based on these seven items that questions are raised. legal factors: this is exogenous variable defined as shariah and fiqh rulings in business transaction and is measured by seven dimensions namely mutual agreement between parties involved, both parties must be qualified to engage in transactions, ownership of goods being traded, permissibility of goods, dispensability, absence of anonymity as well as forbidden of bribery. it is based on these seven items that questions are raised. organizational factors: as exogenous variable in this study signifies degree of commitment of organization’s leaders to ethical conduct. this construct is measured based on six dimensions namely, code of ethics among entrepreneurs, code of ethics between entrepreneurs and customers, code of ethics between entrepreneurs and suppliers/distributors, code of ethics between entrepreneurs and employees, code of ethics between entrepreneurs and community and lastly code of ethics that establish a body that is in-charge of supervising and ensuring ethical conduct among entrepreneurs and other stakeholders for example al-hisbah. it is based on these six items that questions are raised. individual factor: as exogenous variable is as seen the specific factors that may affect individual attitude which measured using seven dimensions that consist of stages of moral development, personal values, family influences, peer influences, life experiences, situational factors and culture. it is based on these seven items that questions are raised. the functional relationship of the model is given 𝑖3) (1) the multi-variate form of the regression model is given by 𝑖 (2) sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │41 𝑖 (3) = islamic business ethics variable at a given point in time. = legal factor at a given point in time. 𝑖= organizational factor at a given point in time. = individual factor at a given point in time. = intercepts/ autonomous variable. 1, and = are parameter estimates or coefficients of independent constructs, it depicts the degree of islamic business ethics by applying the independent constructs (lf, of and if). 𝑖 = the error term or the amount which account for other possible factors that could influence that are not captured in the model. 2 and > 0. 3.3. method data analysis for this study employed the structural equation modelling (sem) technique using the maximum likelihood estimation (mle) (chin 1998; gefen, straub & boudreau, 2000). structural equation modelling (sem) is a robust statistical data analysis technique that is used for multivariate analysis with latent variables. sem is a set of linear equations for testing the hypothesis about the relationship between observed and latent variables and uses a confirmatory approach (hair et al., 2006; emmoglu, 2011). observed variables are indicators of the constructs in the questionnaires and latent or unobserved variables are constructs in the theoretical model. this technique is used because the researcher is trying to examine the impact of certain exogenous constructs (legal factor, organizational factor and individual factor) on another endogenous construct: islamic business ethics. the data was analysed using the statistical package for social sciences (spss) software, version 22.0 and amos software version 21. iv. result and analysis 4.1. descriptive analysis sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │42 the descriptive analysis section begins with the demographic features of the respondents. the survey questionnaire requires respondents to answer five demographic questions reflecting their gender, age group, level of education, number of years being in business, and registration with market association. in terms of gender, table 2 revealed that 386 (97%) of the subjects are males while only11 (3%) are females. the justification for presence of high number of male respondents across the markets is due to religious and cultural norms. accordingly, 191 (48%) of the respondents fall under 18-29 age group, while 30-59 age bracket consist of 159 (40%) of the respondents whereas 47(12%) falls within the age group of 60-above. this signifies that majority of the respondents are young entrepreneurs within the age bracket of 18-29 and then follow by 30-59 age group. table 2. respondents profile gender frequency percent valid percent cumulative percent female 11 2.8 2.8 2.8 male 386 97.2 97.2 100.0 total 397 100.0 100.0 age 18-29 191 48.1 48.1 48.1 30-59 159 40.1 40.1 88.2 60-above 47 11.8 11.8 100.0 total 397 100.0 100.0 education primary 172 43.3 43.3 43.3 secondary 52 13.1 13.1 56.4 tertiary 17 4.3 4.3 60.7 others 156 39.3 39.3 100.0 total 397 100.0 100.0 years in business 0-5 133 33.5 33.5 33.5 6-10 195 49.1 49.1 82.6 11-15 59 14.9 14.9 97.5 16-above 10 2.5 2.5 100.0 total 397 100.0 100.0 registration with market association no 8 2.0 2.0 2.0 yes 389 98.0 98.0 100.0 total 397 100.0 100.0 source: computed from field survey data (2018). table 2 also reveals that 172 (43%) of the respondents obtained primary certificate, while 52 (13%) of the respondents held secondary certificate, whereas 17(4%) of the subjects obtained tertiary certificate but 156 (39%) of the respondents obtained other certificates. this clearly shows that majority sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │43 of the subjects obtained the minimum of primary certificate and follows by others i.e. islamiyya school, but few respondents obtained secondary and tertiary certificates with 13% and 4% respectively. table ii further reveals that 133(33%) of the respondents had 0-5 years in the business, while 195(49%) of the subject had 6-10 years in business, while 59(15%) of the subjects acquired 11-15 years in business and only 10(3%) of the respondents spent 16-above years. it is also indicated that 389 (98%) of the respondents registered with market association while only 8 (2%) of the subjects do not registered with the market association. 4.2. result of exploratory factor analysis in this section, discussions on the results of the exploratory factor analysis (efa) are outlined below. table 3. kmo and bartlett’s test islamic business ethics kaiser-meyer-olkin measure of sampling adequacy 0.855 bartlett’s test of sphericity approx.chi-square 4727.249 df 21 sig 0.000 legal factor kaiser-meyer-olkin measure of sampling adequacy 0.909 bartlett’s test of sphericity approx.chi-square 5090.952 df 21 sig 0.000 organization factor kaiser-meyer-olkin measure of sampling adequacy 0.891 bartlett’s test of sphericity approx.chi-square 3200.246 df 15 sig 0.000 individual factor kaiser-meyer-olkin measure of sampling adequacy 0.921 bartlett’s test of sphericity approx.chi-square 4078.217 df 21 sig 0.000 source: computed from field survey data (2018). from table 3, the results of islamic business ethics exploratory factor analysis (efa) show a high value of 0.855 for the kaiser-meyer-olkin measure (kmo) and the significance of the bartlett's test of sphericity tests (χ2: 4727.249, df: 21, sig.: 0.000), the legal factors bartlett’s test of sphericity was significant (chi square =5090.952, p-value < 0.000). the sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │44 measure of sampling adequacy by kaiser-meyer-olkin, (kmo) is 0.909, in case of the organizational factors kmo value of 0.891 is good as it exceeds the recommended value of 0.6 and the bartlett’s test significance value is (chi-square =3200.246, p-value < 0.000), the individual factors results indicate that the bartlett’s test of sphercity was significant (chi-square =4078.217, p-value < 0.000). the measure of sampling adequacy by kmo is 0.921, thus, this indicate the suitability of the research data for structure detection hair, black, babin, anderson & tatham (2006). this is confirmed by the kmo values close to 1.0 and the significance value bartlett’s tests close to 0.000, hence this indicate that the data at hand is adequate to proceed into confirmatory factor analysis (hair et al, 2006; zainudin, 2014). 4.3. result of confirmatory factor analysis the main objective of this study is to utilise structural equation modelling (sem) to examine the effect of the legal factors, organizational factors and individual factors on islamic business ethics practice. before proceeding with the sem analysis, the exploratory data analysis was conducted to ensure that the data fulfilled the requirements for sem analysis. the tested measurement model is presented in figure 2. source: field survey data (2018) and computed using amos 22. figure 2. confirmatory factor analyses (measurement model). table 4. items description and items deletion item label factor loading r 2 ibe1 0.96 0.93 sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │45 ibe2 0.98 0.97 ibe3 0.84 0.71 ibe4 0.99 0.99 ibe5 0.85 0.73 ibe6 0.52 0.27 ibe7 0.64 0.41 lf1 0.98 0.96 lf2 0.92 0.84 lf3 0.82 0.67 lf4 0.99 0.98 lf5 0.89 0.96 lf6 0.95 0.90 lf7 0.76 0.58 of1 0.93 0.86 of2 0.91 0.82 of3 0.91 0.83 of4 0.98 0.96 of5 0.97 0.93 of6 0.52 0.27 if1 0.95 0.91 if2 0.95 0.90 if3 0.90 0.81 if4 0.95 0.90 if5 0.84 0.71 if6 0.92 0.84 if7 0.82 0.68 source: computed from field survey data (2018). the confirmatory factor analyses (cfa) results in table iv and figure ii shows the four constructs consisting of legal factors, organizational factors, individual factors and islamic business ethics show that the factor loading for each item together with its r 2 . all of the factor loading are above the recommended value of 0.60, except ibe6 with a value of 0.52 and of6 with a value of 0.52 which all need to be deleted before proceeding to the next analysis i.e. structural modelling. the cfa result confirms that the model was not fit and ready for further analysis. the values indicate that all the fitness indexes i.e. (rmsea, gfi, cfi and chisq/df) for the constructs do not achieve the required level and the proposed model does not adequately fit the data. in general, the result of the assessment of the measurement model did not show a solid evidence of sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │46 unidimensionality, convergent validity, and discriminant validity. therefore, to achieve the fitness indexes of the measurement model, a modification need to be carried out in the model where any factor loading with less than 0.60 will be deleted. the new modified model is presented in figure 3 below. source: field survey data (2018) and computed using amos 22. figure 3. the new factor loading after two items with low factor loading were deleted (the new measurement model). table 5. items description after deletion item label factor loading r 2 ibe1 0.96 0.93 ibe2 0.98 0.97 sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │47 ibe3 0.83 0.70 ibe4 1.00 0.99 ibe5 0.84 0.71 ibe7 0.63 0.40 lf1 0.98 0.95 lf2 0.92 0.84 lf3 0.81 0.66 lf4 0.99 0.98 lf5 0.98 0.95 lf6 0.95 0.90 lf7 0.76 0.57 of1 0.93 0.87 of2 0.88 0.78 of3 0.91 0.82 of4 0.99 0.98 of5 0.95 0.91 if1 0.97 0.93 if2 0.97 0.93 if3 0.85 0.72 if4 0.92 0.84 if5 0.84 0.71 if6 0.93 0.87 if7 0.76 0.57 source: computed from field survey data (2018). note: all items have met the recommended value. according to figure 3 the cfa results shows that the rmsea = 0.074, gfi = 0.901. cfi = 0.968, and chisq/df = 3.154. the fitness indexes indicate that the measurement model signifies a satisfactory fit of the data and the result of all the fit indexes yielded adequate fit. in general, the result of the assessment of the measurement model shows solid evidence of unidimensional, construct validity and discriminant validity. certainly, the model is fit and hence can proceed with further analysis. table 6. the measurement model results for each construct (after modification) construct items factor loading cronbach’s alpha c.r. (above0.60) ave (above0.50) sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │48 (above 0.70) islamic business ethics ibe1 0.96 0.960 0.923 0.669 ibe2 0.98 ibe3 0.83 ibe4 1.00 ibe5 0.84 ibe7 0.64 legal factors lf1 0.98 0.973 0.973 0.841 lf2 0.92 lf3 0.81 lf4 0.99 lf5 0.98 lf6 0.95 lf7 0.76 organizational factors of1 0.93 0.972 0.891 0.621 of2 0.88 of3 0.91 of4 0.99 of5 0.95 individual factors if1 0.97 0.969 0.965 0.800 if2 0.97 if3 0.85 if4 0.92 if5 0.84 if6 0.93 if7 0.76 source: computed from field survey data (2018). from table 6 the model has sufficient measurement properties on each single factor model based on its cronbach’s alpha, composite reliability, and average variance extracted. therefore, with the above result, the model is adequately fit for further analysis. and the missing items were deleted as a result of low factor loading and redundant items are set as pre-parameter estimate as shown in figure 3. 4.4. the assessment of normality for the data after the fitness indexes have been achieved, there is a need to examine the normality assessment for the data at hand before proceeding to modelling the structural model. table 9 presents the normality assessment for every item involved in the measurement model (table 9). table 7. the assessment of normality distribution for items in the construct variable min max skew c.r. kurtosis c.r. sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │49 if1 1 5 -0.994 -8.086 1.255 5.104 if2 1 5 -0.982 -7.987 0.835 3.396 if3 1 5 -1.083 -8.81 0.902 3.668 if4 1 5 -1.059 -8.616 1.16 4.716 if5 1 5 -0.945 -7.684 0.57 2.318 if6 1 5 -0.903 -7.344 0.656 2.666 if7 1 5 -1.107 -9.006 1.112 4.523 of1 1 5 -0.938 -7.627 0.901 3.663 of2 1 5 -0.863 -7.021 0.715 2.908 of3 1 5 -0.904 -7.352 0.838 3.409 of4 1 5 -0.592 -4.812 0.173 0.705 of5 1 5 -0.672 -5.467 0.365 1.485 ibe1 1 5 -0.858 -6.979 0.177 0.721 ibe2 1 5 -1.079 -8.779 0.800 3.253 ibe3 1 5 -1.019 -8.288 0.699 2.844 ibe4 1 5 -1.077 -8.764 0.838 3.408 ibe5 1 5 -1.042 -8.478 0.818 3.329 ibe7 1 5 -1.283 -10.438 1.416 5.76 lf1 1 5 -1.186 -9.651 1.339 5.445 lf2 1 5 -1.285 -10.454 1.448 5.889 lf3 1 5 -1.127 -9.168 1.055 4.291 lf4 1 5 -1.234 -10.037 1.545 6.284 lf5 1 5 -1.201 -9.771 1.394 5.671 lf6 1 5 -1.24 -10.083 1.368 5.564 lf7 1 5 -1.156 -9.401 0.972 3.953 multivariate 147.081 47.958 source: computed from field survey data (2018). from table 7 the result indicates that the skewness and kurtosis meet the recommended value of -1 to +1 (skewness) and -2 to +2 (kurtosis). this result clearly shows that the data used in this study was normally distributed and also the normality is achieved. with this, the data is suitable to proceed with further analysis that is the structural equation modelling (sem)/structural model. sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │50 source: field survey data (2018) and computed using amos 22. figure 4. the standardized estimate for every path in the structural model. table 8. the standardized path coefficients for the model dependent construct path independent constructs estimate islamic business ethics <--legal factors 0.51 islamic business ethics <--organizational factors 0.18 islamic business ethics <--individual factors 0.07 source: computed from field survey data (2018). the result in table 8 indicates that when legal factor goes up by 1 standard deviation, islamic business ethics goes up by 0.51 standard deviation. when organizational factor increases by 1 standard deviation, islamic business ethics increases by 0.18 standard deviation and also when individual factor goes up by 1 standard deviation, islamic business ethics goes up by 0.06 standard deviation. the result of islamic business practice shows that all the seven indicators have enough explanatory power in explaining islamic business ethics i.e. all factor loadings are greater than 0.6. the result in table 9 indicates that 0.56 is the estimated correlation that exists between legal factors and organizational factors. 0.04 is the estimated correlation between organizational factors and individual factors, while -0.01 is the estimated correlation between individual factors and legal factors. the result in table 9 shows an acceptable correlation between the constructs which is below 0.85. sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │51 table 9. the correlation estimate for each pair of exogenous construct constructs path constructs estimate correlation legal factor <--> organizational factors 0.56 organizational factor <--> individual factors 0.04 individual factor <--> legal factors -0.01 source: computed from field survey data (2018). table 10. the squared multiple correlation (r 2 ) variable estimate (r 2 ) islamic business ethics practice 0.40 source: computed from field survey data (2018). the result in table 10 of the squared multiple correlations indicate that the predictors of the islamic business ethics practice explain 40 percent of its variance. in other words, the error variance of islamic business ethics practice is approximately 60 percent of the variance of the islamic business ethics practice itself. the regression weight indicates the beta coefficient that measures the effects of every exogenous construct on the endogenous construct. source: field survey data (2018) and computed using amos 22. figure 5. (the unstandardized estimate) regression weights for the model. sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │52 table 11. the regression weights for every path estimate and it’s significant hypothesized path beta coefficients c.r. p-value result islamic business ethics <--legal factors 0.376 8.56 *** significant islamic business ethics <--organizational factors 0.121 3.583 *** significant islamic business ethics <--individual factors 0.041 1.628 0.104 not significant source: computed from field survey data (2018). notes: ***p<0.001; **p<0.01; *p<0.05. in table xi the path (arrow) and its coefficient are presented which indicate the effects of every exogenous construct on the respective endogenous construct and to achieve the objective of these study three hypotheses are developed, analysed and interpreted below: 4.5. testing of hypothesis 4.5.1. legal factors and islamic business ethics the hypothesis of this study was formulated as: legal factors have no significant influence on islamic business ethics in dawanau and singer markets. the result in table xi shows that the influence of legal factors on islamic business ethics is positive (0.376 i.e. 38%) and statistically significant (p<0.001), hence this signifies the extent to which adherence to sharia’ah and fiqh rulings by business entrepreneurs influence their islamic business ethics practice in dawanau and singer market of kano metropolis, nigeria therefore, the alternative hypothesis is accepted, hence legal factor significantly influence islamic business ethics practice in dawanau and singer markets. this finding is consistent with previous results by imam et al., (2013) which found that legal factors significantly affect islamic business ethics. 4.5.2. organizational factors and islamic business ethics the hypothesis of this study was formulated as: organizational factors have no significant influence on islamic business ethics practice in dawanau and singer markets. the result in table xi shows that the influence of organizational factors on islamic business ethics is positive (0.121) and statistically significant (p<0.001). therefore, the beta coefficient for the effect of organizational factors on islamic business ethics was (0.121 i.e. 12%), and hence this signifies the extent in which organizational leaders i.e. trade union shows commitments toward adherence to islamic business sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │53 ethics in dawanau and singer markets therefore, the alternative hypothesis was accepted. hence, organizational factors significantly influence islamic business ethics practice in dawanau and singer markets of kano metropolis, nigeria. this finding is consistent with by husin and kerain (2019), nizam et al., (2015) as well as manan et al., (2013) which found that organizational factors significantly affect islamic business ethics. 4.5.3. individual factors and islamic business ethics the hypothesis of this study is formulated as: individual factors have no significant influence on islamic business ethics in dawanau and singer markets. the result in table xi shows that the influence of individual factor on islamic business ethics is positive (0.041) and statistically significant (p<0.104). therefore, the beta coefficient for the effect of individual factor on islamic business ethics was (0.041 i.e. 4%), hence the coefficient is very weak and the p-value is greater than 0.05. therefore, we fail to reject the null hypothesis, hence individual factors do not significantly influence islamic business ethics practice in dawanau and singer markets signifying that pressure from relatives and families, tradition norms and value, life experience, situational factors, as well as stage of moral development less significantly influence the islamic business ethics of entrepreneurs in dawanau and singer markets of kano metropolis nigeria. this finding tally with characteristics of the respondent educational level were the majority of them have acquired a minimum of islamiyya school education which equip them with skills and knowledge to be more adhered to legal factor/rulings in business than allowing family and relatives pressure to influence their ethical conduct in business. this finding is inconsistent with previous results by husin and kerain (2019) as well as nizam et al., (2015), which found that individual factors significantly affect islamic business ethics. v. conclusions and conclusion 5.1. conclusions the primary aim of this study is to assess the application of islamic business ethics by muslim entrepreneurs in dawanau and singer markets. the specific objectives of the study are to assess whether legal factors, organizational factors and individual factors have significant effects on islamic business ethics in dawanau and singer markets. to address this, relevant data is collected and analyzed and from the analysis, results are obtained and sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │54 discussed. from the discussion of the results, the following conclusions were drawn: this study concludes that entrepreneurs in dawanau and singer market fairly adheres to islamic business ethics practice, whereas legal and organizational factor significantly influence islamic business ethics practice in dawanau and singer market but individual factor does not significantly influence islamic business ethics practice of entrepreneurs in dawanau and singer market of kano metropolis. 5.2. recommendations based on the findings the following recommendations are suggested. the study recommends the need for kano state ministry of commerce and industry in collaboration with market organizational leaders to engage in public enlightenment on the importance of business as an act of worship (ibadat). the study also recommends that organization leaders i.e. market leaders (trade union leaders) should liaise with kano state shariah commission to set standard for islamic business ethics whereas hisbah board to enforce compliance. the study further suggests that the concept of ethics should be incorporated in teaching and learning curriculum. 5.3. recommendation for further research there is need to replicate this study in different informal sector i.e. markets places within kano state metropolis and in other jurisdictions with significance population of muslim entrepreneurs. there is also need to conduct similar research in formal sector i.e. islamic financial institutions in kano metropolis and beyond such as islamic commercial bank, islamic insurance 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(2015). the effect of islamic work ethics on organizational commitment. 7th international economics & business management conference, 5th & 6th october 2015. rachels, j., & rachels, s. (1993). the elements of moral philosophy. new york: mcgraw. rahman, a. (1995). islam: ideology and the way of life. kuala lumpur: a.s. noordeen. umar, s. r. (2018). the commender hisbah board commission fagge local government kano state, official report. yakasai, u. z. (2018). the chairman amalgamated traders association zone 2, singer market, kano. yeboah-assiamah, e. (2014). business ethics in islam: assessing traders’ understanding of islamic work ethics; perspectives of muslim market women in kumasi central, ghana. journal of business and economy, 9(1), 1. zainudin, a. (2014). a handbook on structural equation modelling, bandar bangi, selangor, mpws rich resources. sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │57 appendix appendex i: regression weights regression weights: (group number 1 – default model) estimate s.e. c.r. p label ibe <--lf 0.376 0.044 8.56 *** par_22 ibe <--of 0.121 0.034 3.583 *** par_23 ibe <--if 0.041 0.025 1.628 0.104 par_34 ibe1 <--ibe 1.54 0.098 15.71 *** par_1 ibe2 <--ibe 1.653 0.104 15.919 *** par_2 ibe3 <--ibe 1.232 0.087 14.194 *** par_3 ibe4 <--ibe 1.652 0.103 16.064 *** par_4 ibe5 <--ibe 1.234 0.086 14.329 *** par_5 ibe7 <--ibe 1.000 of3 <--of 1.029 0.037 28.178 *** par_6 of2 <--of 1.000 of1 <--of 1.057 0.035 30.144 *** par_7 of4 <--of 1.000 0.028 36.037 *** par_8 of5 <--of 0.996 0.022 46.077 *** par_9 lf7 <--lf 0.985 0.024 40.948 *** par_10 lf6 <--lf 1.135 0.045 24.994 *** par_11 lf5 <--lf 1.114 0.042 26.427 *** par_12 lf4 <--lf 1.12 0.041 27.008 *** par_13 lf3 <--lf 1.000 lf2 <--lf 1.118 0.048 23.513 *** par_14 lf1 <--lf 1.117 0.042 26.282 *** par_15 if7 <--if 0.849 0.041 20.734 *** par_16 if6 <--if 1.000 if5 <--if 0.961 0.037 26.042 *** par_17 if4 <--if 0.994 0.03 33.471 *** par_18 if3 <--if 0.988 0.037 26.802 *** par_19 if2 <--if 1.058 0.026 41.126 *** par_20 if1 <--if 0.993 0.024 41.29 *** par_21 sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │58 appendix ii: standardized regression weights standardized regression weights: (group number 1 default model) estimate ibe <--lf 0.515 ibe <--of 0.175 ibe <--if 0.065 ibe1 <--ibe 0.963 ibe2 <--ibe 0.982 ibe3 <--ibe 0.834 ibe4 <--ibe 0.997 ibe5 <--ibe 0.845 ibe7 <--ibe 0.63 of3 <--of 0.908 of2 <--of 0.883 of1 <--of 0.932 of4 <--of 0.99 of5 <--of 0.953 lf7 <--lf 0.756 lf6 <--lf 0.95 lf5 <--lf 0.977 lf4 <--lf 0.991 lf3 <--lf 0.811 lf2 <--lf 0.917 lf1 <--lf 0.977 if7 <--if 0.757 if6 <--if 0.932 if5 <--if 0.84 if4 <--if 0.916 if3 <--if 0.85 if2 <--if 0.965 if1 <--if 0.966 sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │59 if1 if2 if3 if4 if5 if6 if7 lf1 lf2 lf3 lf4 lf5 lf6 lf7 of5 of4 of1 of2 of3 ibe7 ibe5 ibe4 ibe3 ibe2 ibe1 if1 0.919 appendex iii: sample covariance (group number 1) sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │60 if2 0.913 1.04 5 if3 0.853 0.90 9 1.17 4 if4 0.858 0.91 4 1.01 1.023 if5 0.829 0.88 4 0.82 5 0.83 1.13 7 if6 0.863 0.92 0.85 9 0.864 0.83 5 1 if7 0.733 0.78 1 1.02 4 0.893 0.70 9 0.73 8 1.09 3 lf1 -0.01 0.011 -0.01 -0.01 -0.01 -0.01 0.009 0.85 6 lf2 -0.01 0.011 -0.01 -0.01 -0.01 0.011 0.009 0.81 7 0.97 4 lf3 0.009 -0.01 0.009 -0.009 0.009 0.009 0.008 0.73 1 0.73 2 0.995 lf4 -0.01 0.011 -0.01 -0.01 -0.01 0.011 0.009 0.81 9 0.82 0.733 0.83 6 lf5 -0.01 0.011 -0.01 -0.01 -0.01 -0.01 0.009 0.81 5 0.81 6 0.73 0.81 7 0.85 2 lf6 0.011 0.011 0.011 -0.011 -0.01 0.011 0.009 0.83 0.83 0.743 0.83 2 0.82 8 0.93 5 lf7 0.009 -0.01 0.009 -0.009 0.009 0.009 0.008 0.72 0.72 1 0.979 0.72 2 0.71 9 0.73 2 1.11 3 of5 0.034 0.03 6 0.03 3 0.034 0.03 3 0.03 4 0.02 9 0.43 1 0.43 1 0.386 0.43 2 0.43 0.43 8 0.38 0.80 5 of4 0.034 0.03 6 0.03 4 0.034 0.03 3 0.03 4 0.02 9 0.43 3 0.43 3 0.388 0.43 4 0.45 0.44 0.38 2 0.73 4 0.75 1 of1 0.036 0.03 8 0.03 5 0.036 0.03 5 0.03 6 0.03 1 0.45 8 0.45 8 0.41 0.45 9 0.45 7 0.46 5 0.40 4 0.77 6 0.77 9 0.94 8 of2 0.034 0.03 6 0.03 4 0.034 0.03 3 0.03 4 0.02 9 0.43 3 0.43 3 0.388 0.43 4 0.43 2 0.44 0.38 2 0.80 7 0.73 7 0.78 0.94 5 of3 0.035 0.03 7 0.03 5 0.035 0.03 4 0.03 5 0.03 0.44 6 0.44 6 0.399 0.44 7 0.44 5 0.45 3 0.39 3 0.75 5 0.75 9 0.80 2 0.75 9 0.94 7 ibe 7 0.036 0.03 8 0.03 6 0.036 0.03 5 0.03 6 0.03 1 0.32 6 0.32 7 0.292 0.32 7 0.32 6 0.33 2 0.28 8 0.23 5 0.23 6 0.25 0.23 6 0.24 3 0.87 7 ibe 5 0.045 0.04 7 0.04 4 0.045 0.04 3 0.04 5 0.03 8 0.40 3 0.40 3 0.361 0.40 4 0.40 2 0.40 9 0.35 5 0.29 0.29 1 0.30 8 0.29 1 0.3 0.43 0.743 ibe 4 0.06 0.06 4 0.05 9 0.06 0.05 8 0.06 0.05 1 0.53 9 0.54 0.483 0.54 1 0.53 8 0.54 8 0.47 6 0.38 8 0.39 0.41 2 0.39 0.40 1 0.57 6 0.71 0.95 7 ibe 3 0.044 0.04 7 0.04 4 0.045 0.04 3 0.04 5 0.03 8 0.40 2 0.40 3 0.36 0.40 3 0.40 1 0.40 9 0.35 5 0.29 0.29 1 0.30 7 0.29 1 0.29 9 0.42 9 0.744 0.70 9 0.76 ibe 2 0.06 0.06 4 0.05 9 0.06 0.05 8 0.06 0.05 1 0.54 0.54 0.483 0.54 1 0.53 9 0.54 9 0.47 6 0.38 8 0.39 0.41 3 0.39 0.40 2 0.57 6 0.711 0.95 2 0.71 0.98 7 ibe 1 0.056 0.05 9 0.05 5 0.056 0.05 4 0.05 6 0.04 8 0.50 3 0.50 3 0.45 0.50 4 0.50 2 0.51 1 0.44 4 0.36 2 0.36 3 0.38 4 0.36 3 0.37 4 0.53 7 0.662 0.88 6 0.66 1 0.88 7 0.89 1 if1 if2 if3 if4 if5 if6 if7 lf1 lf2 lf3 lf4 lf5 lf6 lf7 of5 of4 of1 of2 of3 ibe7 ibe5 ibe4 ibe3 ibe2 be1 sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │61 if1 1 if2 0.932 1 if3 0.821 0.82 1 if4 0.885 0.884 0.922 1 if5 0.811 0.811 0.714 0.77 1 if6 0.901 0.9 0.792 0.854 0.783 1 if7 0.731 0.731 0.904 0.845 0.636 0.706 1 lf1 -0.012 -0.012 0.01 0.011 -0.01 0.011 -0.009 1 lf2 -0.011 -0.011 0.01 0.01 -0.01 0.011 -0.009 0.895 1 lf3 -0.01 -0.01 0.009 0.009 -0.008 0.009 -0.008 0.792 0.744 1 lf4 -0.012 -0.012 0.01 0.011 -0.01 0.012 -0.009 0.968 0.908 0.804 1 lf5 -0.012 -0.012 0.01 0.011 -0.01 0.011 -0.009 0.954 0.895 0.793 0.968 1 lf6 -0.011 -0.011 0.01 0.011 -0.01 0.011 -0.009 0.927 0.87 0.77 0.941 0.928 1 lf7 -0.009 -0.009 0.008 0.009 -0.008 0.009 -0.007 0.738 0.693 0.931 0.749 0.738 0.718 1 of5 0.039 0.039 0.034 0.037 0.034 0.038 0.031 0.519 0.487 0.431 0.527 0.52 0.505 0.402 1 of4 0.041 0.041 0.036 0.039 0.035 0.039 0.032 0.54 0.506 0.448 0.548 0.562 0.525 0.418 0.944 1 of1 0.038 0.038 0.034 0.036 0.033 0.037 0.03 0.508 0.477 0.422 0.516 0.508 0.494 0.393 0.889 0.923 1 of2 0.036 0.036 0.032 0.034 0.031 0.035 0.028 0.481 0.452 0.4 0.488 0.482 0.468 0.372 0.925 0.875 0.824 1 of3 0.037 0.037 0.033 0.035 0.032 0.036 0.029 0.495 0.464 0.411 0.502 0.495 0.481 0.383 0.866 0.899 0.847 0.802 1 ibe7 0.04 0.04 0.035 0.038 0.035 0.039 0.032 0.377 0.354 0.313 0.382 0.377 0.366 0.291 0.28 0.291 0.274 0.259 0.266 1 ibe5 0.054 0.054 0.047 0.051 0.047 0.052 0.042 0.505 0.474 0.42 0.513 0.505 0.491 0.391 0.375 0.39 0.367 0.348 0.357 0.533 1 ibe4 0.064 0.064 0.056 0.06 0.055 0.061 0.05 0.596 0.559 0.495 0.604 0.596 0.579 0.461 0.442 0.459 0.433 0.41 0.421 0.628 0.842 1 ibe3 0.053 0.053 0.047 0.05 0.046 0.051 0.042 0.499 0.468 0.414 0.506 0.499 0.485 0.386 0.37 0.385 0.362 0.343 0.353 0.526 0.99 0.831 1 ibe2 0.063 0.063 0.055 0.059 0.054 0.06 0.049 0.587 0.551 0.488 0.596 0.587 0.571 0.454 0.436 0.453 0.426 0.404 0.415 0.619 0.83 0.979 0.819 1 ibe1 0.061 0.061 0.054 0.058 0.053 0.059 0.048 0.576 0.54 0.478 0.584 0.576 0.56 0.445 0.427 0.444 0.418 0.396 0.407 0.607 0.814 0.96 0.803 0.946 1 1 appendex iv: sample correlation (group number 1) sulaiman & muhammad │ islamic business ethics practice among muslim entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 3(2), si, 33-62 │62 this page is intentionally left blank international journal of islamic economics and finance (ijief) vol. 3(2), page 199-226, july 2020 the future of indonesia islamic banking industry: bankruptcy analyzing the second wave of global financial crisis patria yunita university of indonesia, indonesia, patria.yunita01@ui.ac.id corresponding email: patria.yunita@gmail.com article history received: june 7 th , 2020 revised: june 30 th , 2020 accepted: july 20 th , 2020 : abstract this study aims to analyze the resilience of the indonesia islamic banking industry from bankruptcy risk in times of financial crisis. this study use binary regression as dependent variable. the islamic banking industry bankruptcy risk generated from capital buffering changes in accordance with pojk no. 11 / pojk.03 / 2016. economic growth, bi rate, inflation rate and islamic money market o/n rate as independent variables. to anticipate the unobserved heterogeneity, bank profitability, usd exchange rate, federal reserves interest rate and money supply (m2) are used as control variables. data analysis to predict bankruptcy uses logistic regression model of the global financial crisis in indonesia. data obtained from monthly statistics report of bank indonesia and the financial services authority from januari 2008 until december 2019 by the structural break which impacted the islamic banking capital on december 2012. our analysis divide indonesia financial condition into two difference time, before and after the structural break. by probit logit regression model, it was concluded that usd exchange rate is independent variable which is consistently influence the probability of islamic banking bankruptcy risks in all period. bi rate not significantly affected the probability of islamic banking bankruptcy because profit and loss sharing method applied in islamic banking. before the structural break the probability of bankruptcy significantly affected by money supply, usd exchange rate and economic growth. but after the structural break, the probability of bankruptcy significantly affected by bank profitability, usd exchange rate, bi rate and islamic money market rate. this model precisely predicted by count r squared of 75.81% 86.67%. keywords: covid-19 pandemic, bankruptcy risk, islamic banking industry, probit logit. jel classification: g01; g21; g32; g33 @ ijief 2020 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.3227 web: https://journal.umy.ac.id/index.php/ijief/article/view/9018 citation: yunita, p. (2020). the future of indonesia islamic banking industry: bankruptcy analysis of second wave of financial crisis. international journal of islamic economics and finance (ijief), 3(2). 199-226. doi: https://doi.org/10.18196/ijief.3227 https://doi.org/10.18196/ijief.3225 https://doi.org/10.18196/ijief.3225 yunita│the future of indonesia islamic banking industry: bankruptcy analyzing the second wave of global financial crisis international journal of islamic economics and finance (ijief), 3(2), 199-226│200 i. introduction 1.1. background financial system stability is a condition where the money market, capital market and banking system risks are minimized. in indonesia, 80% of financial system is dominated by transactions in the banking sector. the turmoil in the banking sector affects the stability of the financial system. the covid-19 pandemic that has occurred in china since november 2019 has an impact on the international financial system which in the end has given a certain impact to the banking sector and the stability of indonesia financial system. the researchers predict that there will be global economic stagnation and the financial crisis that hit the international financial system. stock prices on global and national stock exchanges have experienced a sharp correction. the banking system experiences higher credit risk due to the cessation of trade and business transactions. with the condition of financial system instability, the recovery of the banking system becomes the main agenda that must be addressed by policy makers in developing countries and emerging markets. (beek et al., 2009) in the context of the banking system, indonesia is undergoing a dual banking system mechanism where there is a conventional banking system and an islamic banking system in the indonesian banking architecture. in the covid 19 pandemic, the financial services authority issued pojk regulation no.11/pojk.03/2020 concerning the stimulus of the national economy as a countercyclical policy. this regulation was issued in line with the development of the global spread of corona virus which has a direct and indirect impact on the performance and capacity of debtors in fulfilling credit or financing obligations, thereby increasing credit risk which has the potential to disrupt banking performance and financial system stability. stimulus provided in the face of higher credit risk includes an asset quality determination policy, a loan and financing restructuring policy and the provision of new funds. this regulation applies to debtors impacted by covid, debtors affected by the closure of transportation and tourism routes, debtors affected by the decline in the volume of import and export, and debtors affected by obstruction of infrastructure development projects. since november 2019 when the who annouced covid 19 pandemic, indonesia's economic growth on a monthly basis has declined from 4.97% in november 2019 to 2.97% in february 2020. this is also in line with the yunita│the future of indonesia islamic banking industry: bankruptcy analyzing the second wave of global financial crisis international journal of islamic economics and finance (ijief), 3(2), 199-226│201 exchange rate of the rupiah against the us dollar which weakened to the value of rp. 14,234 per 1 usd. based on monthly data of benchmark, interest rate the federal reserves fell by 0.25 basis points in october 2019. the policy regarding the direction of interest rates was taken in order to provide liquidity to the financial industry sector. similar to the policies adopted by the federal reserves, bank indonesia's policy towards reducing the benchmark interest rate has an impact on the performance of the indonesian islamic banking industry throughout the period of the spread of the pandemic. based on the financial services authority report on islamic banking statistics monthly data, the ratio of the islamic banking industry throughout november 2019 to february 2020 shows a variety of fluctuations, especially a decrease in performance seen between december 2019 and january to february 2020. this is thought to be the impact of the condition of the national financial sector and the international financial sector during the pandemic in the first quarter of 2020. the capital adequacy ratio of the islamic banking industry was recorded at 20.48% in november 2019, down to 20.29% in january 2020. however, the non-performing financing (npf) ratio decreased from 3.47 in november 2019 to 3.38 % in february 2020. the fdr ratio decreased, which was originally in november 80.06%, down to 77.02% in february 2020. this illustrates the amount of reserves held by islamic banking in the pandemic covid-19 was greater in order to strengthen capital, so that the amount of funds disbursed to finance decreased significantly. in terms of asset quality, the islamic banking industry experienced a decline in november 2019 of 3.11% to 2.66% in february 2020. however, the liquidity of the islamic banking industry increased from 29.28% to 31.17 % in february 2020. this is an effort of regulators and islamic banking industry players in mitigating the impact of the spread of the corona virus, so that islamic banking assets have decreased between december 2019 and january to february 2020. between january 2008 until december 2019 before the pandemic, the financial crisis in the financial sector occurred several times. it was noted that in 2008 as a global financial crisis that had a major impact on the stability of the indonesian financial sector. in this study we analyzed the capital resilience of the islamic banking industry during the second wave of global financial crisis affecting indonesia’s islamic bank in 2013 to 2017. monthly statistic data of islamic banking capital adequacy ratio and return of assets ratio shown a fluctuations through the years. in 2008 to 2019, structural yunita│the future of indonesia islamic banking industry: bankruptcy analyzing the second wave of global financial crisis international journal of islamic economics and finance (ijief), 3(2), 199-226│202 break in financial sector have been occured, which affected the probability of bankruptcy of islamic banking. figure 1. level of capital adequacy ratio (car) and bank proitability (roa) islamic banking industry , 2008-2019 source: monthly statistic report. the financial services authority and bank indonesia.(2020) this study uses the banking system instability model of aleksi & holyst (2001) to see the ability of islamic banking in dealing with the financial crisis. by using economic variables as control variables include the rupiah exchange rate against the us dollar, federal reserves interest rates, bank indonesia certificate interest rates, inflation rates, economic growth rates, money supply (m2), bank profitability and islamic money market o/n rate. indicators of the second wave of financial turmoil is the decline of capital adequacy ratio of the islamic banking industry after the first global financial crisis in 2008, which occurred on december 2012. other analysis is to use capital buffering, which is the difference between the ratio of bank capital adequacy to the capital adequacy ratio determined by the basel index set out in pojk no. 11 / pojk.03 / 2016 concerning banking capital in accordance with basel iii. some studies predict that islamic banking is more resilience to financial turmoil. this is a question among researchers and regulators regarding financial stability of the entire banking system. there is a difference of opinion among researchers regarding the islamic bank's resistance in facing the financial crisis. islamic banks should be said to be more stable in conditions of financial crisis due to the adoption of profit and loss sharing system contracts (bourkhis and nabi, 2013; cihak & hesse, 2010). however alqahtani & mayes (2018) believes that islamic banks have a higher risk than conventional banks. alqahtani & mayes (2018) used market-based financial stability measures to measure the performance of islamic banks during the 2000-2013 financial yunita│the future of indonesia islamic banking industry: bankruptcy analyzing the second wave of global financial crisis international journal of islamic economics and finance (ijief), 3(2), 199-226│203 crisis turmoil. his research took samples in 76 banks of the gcc countries. his findings say that during the islamic crisis the bank did not have much impact on financial turmoil, but when the financial turmoil had an impact on the real sector the islamic banks with large sizes experienced financial instability compared to conventional banks. however, islamic banks with smaller sizes are more stable and able to withstand financial instability. although the islamic bank survives in a state of crisis of financial instruments that is quite high, but is affected by fluctuations that occur in the real sector. in the islamic economic system, especially islamic banks there is a prohibition in al-quran to trade currencies as a commodity. however, allow trading that is not accompanied by interest using the profit and loss sharing system. in islamic economics, basically there will be no inflation or turmoil in the financial system when a profit and loss sharing system is implemented. that is combined with the use of the gold standard in the monetary system. the use of the gold standard will trigger a balance in the real sector and the monetary sector. however, the operation of the islamic banking system in the midst of a dual banking system is dominated by conventional banking systems that still use interest rate instruments as the main variable. so that in this case islamic banking operating in a dual banking system is affected by the financial crisis caused by changes in interest rates and other macroeconomic variables. several studies examining the resilience of the islamic banking system and conventional banking system amid the financial crisis have produced different conclusions. beck, et.al (2013) use z-scores to measure the efficiency and stability of islamic banks, whether islamic banks are significantly more volatile than conventional banks. the results of his study concluded that there were no differences related to liquidity risk during the global financial crisis. bourish & nabi (2013) use z-scores to measure islamic banks in 16 countries, with 68 banks of which 34 are islamic banks, the results of his analysis conclude overall, islamic banks are more stable than conventional banks. but there is no difference between islamic banks and conventional banks in terms of the effects of the global financial crisis. rajhi & hassairi (2013) examined the stability of islamic banks using z-scores in 16 countries, with a sample of 557 banks of which 90 were islamic banks. the results of his research concluded that the islamic bank is very much more stable than conventional banks. credit risk and income diversification are determinants of insolvency in the islamic bank. kabir et.al (2015) using accounting based and market based measures of credit risk. his research sampled 13 countries with 193 banks (37 islamic banks). his findings conclude that islamic banks have lower credit risk when measured using yunita│the future of indonesia islamic banking industry: bankruptcy analyzing the second wave of global financial crisis international journal of islamic economics and finance (ijief), 3(2), 199-226│204 market-based stability measures. however, it has a higher credit risk if measured by accounting based credit risk measures. the global financial crisis has a very detrimental impact on the banking system. (rughoo & sarantis, 2014). the resilience of a country's financial system is related to economic power and economic growth. significant changes in capital, assets and liabilities of banks heighten the risk of bank instability. the researchers confirmed that in general, the two factors that caused the failure of the banking system were bad loans and the massive withdrawal of funds meant the need to maintain liquidity during the financial crisis. the very fast withdrawal rate of deposit funds heightens the risk of instability as a result of insolvency experienced by banks. on one hand, instability in the banking system has a domino effect where instability in one bank impacts the risk of other bank instability. previous studies used the z-score method to measure the level of instability of islamic banking and the predictions using probit logit regression. alqahtani & mayes (2018) kabir et.al (2015), beck et.al (2013), bourish and nabi (2013), rajhi & hassairi (2013). in this research, capital buffering ratio is used as an indicator of instability which affecting the islamic banking bankruptcy level. the capital adequacy ratio of islamic banking has decreased and impacted the ability of banks in mitigating a systemic risks. higher credit risk during the financial crisis and the covid-19 pandemic turn triggered instability and the risk of possible bankruptcy. 1.2. research objective the objectives in this study are two folds. first, analyzing the islamic banking industry capital resilience during the second wave of financial crisis, and second, predicting the islamic banking industry capital resilience during the covid 19 pandemic period. the remaining organization of the paper will discuss literature review related to theory and past studies related to the topic in chapter two, followed by methodology in chapter three discussing methodology, including the data, proposed bankruptcy model and logistic regression method used. chapter four will discuss results and analysis, followed by chapter five discussing conclusion of the study and recommendations for various stakeholders. yunita│the future of indonesia islamic banking industry: bankruptcy analyzing the second wave of global financial crisis international journal of islamic economics and finance (ijief), 3(2), 199-226│205 ii. literature review 2.1. banking system bankruptcy model bankruptcy can be interpreted as the inability of an entity to generate revenue and cover operational costs or it can be said as negative economic value. bankruptcy in a corporate entity can be caused by financial distress. (vives, 2019) the bankruptcy bargain theory theory of bankruptcy was introduced by jackson (1982) then developed by jackson and scott (1989). in this theory, bankruptcy is more emphasized due to failure from the aspect of credit. so in this theory it is said that creditors and debtors can rationally negotiate and determine agreements. both parties can determine positions and strategies to reduce costs and maximize profits. one weakness of this theory is the inability to distribute wealth evenly due to the lack of collaboration or collaboration. this theory is criticized by warren (1993) because bankruptcy assessments are considered unrealistic. from another perspective, risk sharing theory emerged. risk sharing theory is a bankruptcy theory developed from creditors bargain theory. miles (2011) developed this theory by including risk variables that caused bankruptcy, that is, risks originating from exogenous variables that cannot be controlled by management. these risks are related to the risk of a decline in economic capacity due to the global recession (economic wide global downturn), industry-specific problems and government policies. another risk originating from within a company entity is endogenous risk caused by mismanagement in governance. another theory that talks about bankruptcy is value based theory which was introduced by korobkin (1991) explains that bankruptcy is a system that is associated with broad aspects and variations in the magnitude of risk. korobkin believes that bankruptcy is an effect of financial distress. this issue is related to multidimensional, social political and moral aspects. there are various kinds of bankruptcy theories that develop by including risk and financial pressure variables and their ability to pragmatically predict bankruptcy. predictions about the bankruptcy of an entity to be interesting to study. beaver (1966) predicts the bankruptcy of an entity by using the t test on several accounting ratios. in 1968, altman developed an analysis of multiple discriminant samples by using z-scores to predict bankruptcy. another bankruptcy prediction model is carried out by ohlson (1980) using the logit regression model whereas, back and hensher (1973) use the probit regression model in predicting the onset of bankruptcy of an entity. yunita│the future of indonesia islamic banking industry: bankruptcy analyzing the second wave of global financial crisis international journal of islamic economics and finance (ijief), 3(2), 199-226│206 other more complex prediction models formulate factors related to the probability of failure of a business entity by including network variables, prices and contingency analysis of claims. lensberg et.al (2006) used genetic programming techniques to predict bankruptcy using 28 variables. the results of his analysis concluded that company size reduces the risk of bankruptcy if profits are positive. pervan et al. (2011) predicts bankruptcy by using financial ratios and published financial statements. hauser and booth (2011) predict bankruptcy using the maximum likelihood logistic regression estimator with robust standard predictive error results. zhang et al. (2013) and jackson and wood (2013) predict bankruptcy risk with market data based models, historical accounting and stock market option valuation methodology. the bankruptcy model of the banking system was introduced by aleksi conditioned & holyst (2001). in this model, banks are represented in every corner. directional connections that are randomly distributed between banks simulate the flow of money. where the flow of money in banks comes from assets and liabilities. the arrows in the corner represent liabilities or deposits with other banks. the arrows that contradict obligations or deposits in other banks describe banking assets, namely investment and bank credit / financing. so, on average the number of arrows going to the corner and the exit angle are the same. this illustrates that a withdrawal of funds or a bad credit will encourage banking instability. the failure of one bank will cause failure in other banks. in dealing with the risk of bankruptcy, some countries have different methods of recovery due to instability that triggers bankruptcy risk. steve & dinelis (2019) created a bankruptcy index table for various countries. in the table, indonesia is included in the pro-liquidity category in overcoming bankruptcy conditions due to financial system instability with an index value = 1. this means that the policies taken by the central bank tend to expand the liquidity of the financial market sector during the financial crisis. figure 2. mechanism of systemic bankruptcy risk in the banking system network source: aleik holyst (2001). yunita│the future of indonesia islamic banking industry: bankruptcy analyzing the second wave of global financial crisis international journal of islamic economics and finance (ijief), 3(2), 199-226│207 2.2. previous studies some studies predict that islamic banking is more resistant to financial turmoil. there is a difference of opinion among researchers regarding the islamic bank's resistance in facing the financial crisis. islamic banks should be more stable in conditions of financial crisis due to the adoption of profit and loss sharing system contracts (bourkhis and nabi, 2013; cihak & hesse, 2010). however alqahtani & mayes (2018) believes that islamic banks have a higher risk than conventional banks. alqahtani & mayes (2018) analyze financial stability of the gcc banking using market-based financial stability to measure the performance of islamic banks during the turmoil of the financial crisis in 2000-2013. the results conclude that during the crisis the islamic bank did not have much impact on the financial turmoil, but when the financial turmoil had an impact on the real sector, the islamic bank with a large size experienced financial instability compared to conventional banks. however, islamic banks with smaller sizes are more stable and able to withstand financial turmoil. although the islamic banks hold on to funds, the condition of shocks in financial instruments is quite high, but they are affected by the turmoil in the real sector beck, et.al (2013) analyze 510 banks in 22 countries at 1995-2009. by using a z-score, islamic bank is significantly more unstable than conventional banks. however, there is no difference in relation to liquidity risk. during the global financial crisis there were no significant differences. while bourish and nabi (2013) analyze the stability of islamic bank in 16 countries using zscore. the results conclude, islamic banks are more stable than conventional banks. but there is no difference between islamic banks and conventional banks in terms of the effects of the global financial crisis. rajhi & hassairi, (2013) analyze 557 banks in 16 countries in the period of 2000-2008. the results concluded that islamic bank is very much more stable than conventional banks. credit risk and income diversification are determinants of insolvency in the islamic bank. kabir et.al (2015) uses accounting based credit risk and market based measures to analyze the stability of islamic banking in 13 countries in 2000-2012. the results conclude, islamic banks have lower credit risk if calculated using marketbased stability measures. however, it has a higher credit risk if measured by accounting based credit risk measures. during the global financial crisis there were no differences in credit risk between islamic banks and conventional banks. most studies about islamic banking using z-score method from atlhman to predict bankruptcy level or to predict islamic banking instability.. the results concluded that during the financial crisis, the islamic bank did not have much yunita│the future of indonesia islamic banking industry: bankruptcy analyzing the second wave of global financial crisis international journal of islamic economics and finance (ijief), 3(2), 199-226│208 impact on the financial turmoil, but when the financial turmoil had an impact on the real sector it was affected. in this study our analysis using capital buffering rasio to predict probability of islamic banking bankruptcy risk. our analysis using islamic money market overnigth rate as independent variable, which is never been used in previous studies. iii. methodology 3.1. data the data used as the dependent variable is the capital buffering of the islamic banking industry. calculation of capital buffering refers to pojk regulation no.11/pojk.03/2016 concerning banking capital in accordance with basel iii. in this regulation, capital buffering is divided into 3 types, namely capital conversation buffer, capital surcharge and countercyclical buffer. capital conversation buffer is additional capital that functions as a buffer if there is a loss in a financial crisis period. tabel 1. capital buffering of banking industry capital buffering type rate 1. capital conversation buffer 2. capital surcharge 3. capital countercyclical buffer 2.5% from risk weighted asset 1-2.5% from risk weighted asset 0-2.5% from risk weighted asset source: pojk regulation no.11/pojk.03/2016. the financial services authority. according to pojk no.11 article 3 the amount of capital conservation buffer is 2.5% of risk weighted assets (rwa). the required countercyclical buffer is between 0-2.5% of the risk weighted assets (rwa). meanwhile, capital surcharge is in the range of 1-2.5% of rwa. capital conversation buffer for banks books iii and iv, countercyclical buffer for all banks, while capital surcharge for banks determined has a systemic impact. so that in total in terms of bank capital resilience, the amount of capital buffering is 7.5% of the capital adequacy ratio determined by basel iii. in this study the amount of capital buffering used was car 8%. in this study we use economic growth, bi interest rate, inflation rate and islamic money market overnight rate as independent variables. to anticipate unobserved heterogeinity we use usd exchange rate, total money supply (m2) and the federal reserves interest rate as the control variables. data obtained from indonesian economic and financial statistics bank indonesia, indonesian financial stability review bank indonesia, and islamic banking statistic report published by the financial services authority from january 2008 until december 2019. yunita│the future of indonesia islamic banking industry: bankruptcy analyzing the second wave of global financial crisis international journal of islamic economics and finance (ijief), 3(2), 199-226│209 table 2. research variables variable proxy notation data source dependent variable prob y = 1 prob y = 0 capital buffering <= 7.5. capital buffering> 7.5 cb cb bank indonesia statistics financial fervices authority independent variable economic growth sbi interest rates inflation islamic money market o/n rate control variable usd exchange rates total money supply the fed interest rate gdp sbi inf imm usd exchange rate m2 the fed gdp sbi inf imm usd m2 fed indonesian economic and financial statistics, bank indonesia indonesian financial stability review, bank indonesia indonesian economic and financial statistics, bank indonesia indonesian financial stability review, bi 3.2. model development our model using maximum likelihood logistic regression predictive results. the dependent variable are the probability of bankruptcy using capital buffering. we develop the capital buffering from car – 8%. 8% is the minimum capital requirement from basel iii for banking industry. the dependent variable is binary, y = 1 and y = 0. y = 1 is generated if capital buffering are less than 7.5, while y=0 is generated if capital buffering are more than 7.5. { , where 0 did not happen bankruptcy and 1 occurred bankruptcy yunita│the future of indonesia islamic banking industry: bankruptcy analyzing the second wave of global financial crisis international journal of islamic economics and finance (ijief), 3(2), 199-226│210 the logit equation method is as follows: = where: y : probability of bankruptcy; y = 1,if capital buffering 7.5; y = 0 if capital buffering> 7.5 gdp : economic growth rate sbi : bank indonesia certificate interest rates inf : inflation rate imm : islamic money market o/n rate usd : rupiah exchange rate against dollar fed : the federal reserves interest rate m2 : total money supply roa : return on assets βk : each coefficient is independent probit model probit anaysis is alternative of logit method. the main difference is that assume normal distribution of random variables (independent variables in model). the value of probability | is the z value of a normal distribution. higher value of | means the event is more likely to happen. probit regression models the probability that y=1 using the cumulative standard normal distribution function, φ (z). the probit regression model is, | φ is the cumulative normal distribution function and z = β0 + β1x is the “zvalue” or “z-index” of the model. marginal effect probit regression , so that, yunita│the future of indonesia islamic banking industry: bankruptcy analyzing the second wave of global financial crisis international journal of islamic economics and finance (ijief), 3(2), 199-226│211 3.3. method because the y compatibility must be between 0 and 1, there is a limit. the goal of logistic regression is the same as linear regression, which is looking for a relationship of regret with the independent variable. in logistic regression do not use linear relationships. the relationship between dependent and independent variables is explained by the maximum likelihood curve where | . logit model the aim of logistic regression is similar to the linier regression is expressed dependence of magnitude y on the variable independents. observed data are interleaved by logistic curve instead of line. (ciski & kliestik, 2013). logistic regression model model selection model selection between logit dan probit usually selected by cross validation or using information standards such as akaike information criteria (aic) or bayesian information criterion (bic). in this reseach we compare the prediction accuracy of models using either aic and bic. aic provide an effective tool for model selection clements et.al (2015) and dimitriou et al. (2013). the number of parameters in the model is the log likelihood function. the preferred model is the one with the minimum bic and aic value. model fit the estimation parameter uses the maximum likelihood estimator (mle) which describes the best distribution of the studied data. one measure of goodness of fit reported is the percent correctly predicted. (wooldridge, 2010) lr chi2 prob> chi2 the probability of obtaining the chi-squates statistic given that the null hypothesis is true. or the probability of obtaiing the chi-squares statistical if there is in fact no effect of the independent variables, taken together on the dependent variable. pseudo r 2 logistic regression does not have an equivalent to the r-squared that is found in ols regression. pseudo r2 = model l 2 /-2llo. -2llo pertains to the model with intercept only. measures the improvement in the value of the log likelihood relative to having no x’s. yunita│the future of indonesia islamic banking industry: bankruptcy analyzing the second wave of global financial crisis international journal of islamic economics and finance (ijief), 3(2), 199-226│212 count r 2 calculate the fraction correctly predicted = fraction of y’s for which the predicted probability is > 50% when yi=1 or is < 50% when yi = 0. 3.3.1. structural break analysis structural breaks can be occured in time series data or cross sectional data, when there is a sudden change in the relatioship being examined. in this study we examine structural break from islamic banking capital due to global financial crisis. in the structural break analysis it need to decide which is a more efficient then a single regression. our analysis using the wald test to detect the structural breaks. sample priod : t=1,....,n breakdate : t1 (date of change) pre-break sample : t=1 ,....t1 or t1 observations post break sample : t = t1 + 1,....,n; n t1 observations wald test statistic: ( ́ ) ( ) ( ́ ) where and are standar asymototic variance estimators for and on the split sample (hansen, 2012). 3.4. steps of research this study strated by establishing the value of capital buffering of islamic banking industry. the probability of bankruptcy occured (y=1) generated if capital buffering is less than 7.5% while probability of no bankruptcy (y=0) if capital buffering more than 7.5% . to measure the global financial crisis, our analysis using structural break analysis to decribe the capital resilience of islamic banking industry as affected by the global financial condition. in accordance pojk no.11 /pojk.03/2016 concerning banking capital in accordance with basel iii. capital conversation buffer or additional capital that functions as a buffer if there is a loss in a crisis period is 2.5% of rwa. contercyclical buffer is 0 2.5% of rwa and capital surcharge for d-sib in the range of 1 2.5% of rwa. capital conversation buffer for banks books iii and iv, contercyclical buffer for all banks while, capital surcharge for banks determined to have a systemic impact. so that the average capital buffering of the islamic banking industry in the period under this study was 7.59%. yunita│the future of indonesia islamic banking industry: bankruptcy analyzing the second wave of global financial crisis international journal of islamic economics and finance (ijief), 3(2), 199-226│213 figure 3. research stage to predict bankruptcy level we use the structural break of islamic banking capital resilience, we divide our analysis of probabilty of islamic banking bankruptcy level before and after december 2012. to predict y hat of binary regression our analysis using linier probability model (lpm). because of the binary regression resulting non linier of error and the probability of y, so we perform probit logit regression model to determine the maximum likelihood logistic regression predictice results. establish the value of capital buffering in the islamic banking industry. capital buffering = 1 if <= 7.5. capital buffering = 0 if> 7.5 . predict the y hat variable performing a probit logit regression with the y variable is the probability of failure, the y variable is the dichotomous variable where prob yhat = 1 and prob y hat = 0. determine the maximum likelihood logistic regression predictive results perform linear probability model regression with variable y probability of bankruptcy using capital buffering and the independent variable is the value of the sbi interest rate, the federal reserves interest rate, the money supply (m2), inflation, gdp with robust standard error yunita│the future of indonesia islamic banking industry: bankruptcy analyzing the second wave of global financial crisis international journal of islamic economics and finance (ijief), 3(2), 199-226│214 iv. results and discussion 4.1. results 4.1.1. structural break analysis on januari 2008 until december 2019, indonesia financial sector influenced by global financial crisis that impacted islamic banking profitability and capital resilience. from our analysis bank profitability impacted by structural break on january 2014. while, capital resilience ratio impacted by structural break of global financial crisis on december 2012. capital adequacy ratio of islamic banking industry breakout on december 2012, as the impact on global financial crisis of household debt in us. figure 4. stata analysis structural break of islamic banking profitability and capital resilience january 2008 december 2019 table 3. structural break analysis test for a structural break: unknown break date number of observation : 144 full sample 1-144 trimned sampe 23-123 estimate break date december 2012 ho : no structural break test swald statistic 60.6700 p-value 0.0000 exogenous variables : time yunita│the future of indonesia islamic banking industry: bankruptcy analyzing the second wave of global financial crisis international journal of islamic economics and finance (ijief), 3(2), 199-226│215 4.1.2. descriptive statistics: dependent variable descriptive statistics of the dependent variable, probability of bankruptcy generated from capital buffering and capital adequacy ratio of indonesia islamic banking industry are presented in table 4 and 5. table 4. summary statistics of capital adequacy ratio before structural break dec 2012 after structural break dec 2012 (1) variable (2) obs (3) mean (4) std. dev (5) min (6) max (7) obs (8) mean (9) std. dev (10) min (11) max car 59 13.85 2.48 10.51 20.23 85 16.64 2.35 12.23 21.39 table 5. summary statistics of capital buffering of islamic banking industry before structural break dec 2012 after structural break dec 2012 (1) variable (2) obs (3) mean (4) std. dev (5) min (6) max (7) obs (8) mean (9) std. dev (10) min (11) max cb 59 5.85 2.58 2.51 12.23 85 8.64 2.35 4.23 13.39 as shown in table 4 and 5, the mean score of car dan capital buffering islamic banking industry were higher after the structural break. it can be described that indonesia islamic banking industry manage capital buffering quiet weel in period after the structural break. the probability of islamic banking bankruptcy as shown in table 6. table 6. probability of islamic banking bankruptcy risk all period jan 2008-dec 2019 before structural break dec 2012 after structural break dec 2012 y=1 82 56.94% 42 71,19% 40 47.06% y=0 62 43.06% 17 28.18% 45 52.94% the highest probability of bankruptcy risk of islamic banking industry was before the structural break. while, after the sructural break on december 2012 islamic banking industry managed capital buffering better to kept excessive credit growth in global financial crisis. this illustrates the strength of the capital of the islamic banking industry quite well in dealing with the potential increase in risk of the financial sector in period of december 2012 december 2019. 4.1.3. descriptive statistics: independent variables in this study, the independent variables and control variables were analyzed, which are economic growth rate (gdp), usd exchange rate, money supply (m2), fed interest rates, sbi interest rate, inflation rate, bank profitability and islamic money market overnight rate. yunita│the future of indonesia islamic banking industry: bankruptcy analyzing the second wave of global financial crisis international journal of islamic economics and finance (ijief), 3(2), 199-226│216 table 7. descriptive statistics of independent variables variable (1) obs (2) mean all years (3) std. dev (4) min (5) max (6) changes in mean score before structural break (7) after structural break (8) car 144 15.50 2.76 10.51 21.39 13.85 16.64 cb 144 7.50 2.76 2.51 13.39 5.85 8.64 gdp 144 5.44 0.68 4 6.9 5.87 5.15 sbi 144 6.46 1.22 4.25 9.5 6.95 6.11 inf 144 5.27 2.34 2.41 12.14 6.02 4.75 imm 144 4.59 2.06 0 9.85 5.72 3.81 fed 144 0.84 0.83 0.25 3.5 0.69 0.94 usd 144 11484.91 2247.29 1060 15227 9352.97 12965 m2 144 3710205 1383162 1594390 6074377 2285719 4698966 roa 144 1.45 0.57 0.08 2.52 1.86 1.16 from table 7 it was shown that after structural break in december 2012 until december 2019 the mean score of gdp, sbi, imm, fed and roa were declined. but in other side, car and usd exchange rate and money supply were increased. the fluctuation of independent variable influencing capital buffering of islamic banking industry due to the risks of global financial crisis. 4.1.4. analysis of correlations statistics for the correlation between variables are illustrated in table 8. correlation analysis between the dependent variable and the independent variable was carried out to identify the strength and the direction of relationship between the dependent variable and the independent variables. furthermore, an analysis of correlation between independent variables was conducted to describe multicollinearity problems among the independent variables. multicollinearity is a problem in the regression model where there is a relationship between independent variables (the correlation score in general is above 0.8). yunita│the future of indonesia islamic banking industry: bankruptcy analyzing the second wave of global financial crisis international journal of islamic economics and finance (ijief), 3(2), 199-226│217 table 8. correlations between dependent independent variables variables (1) all period jan 2008-dec 2019 (2) before structural break dec 2012 (3) after structural break dec 2012 (4) obs 144 59 85 gdp -0.1165 -0.4146 -0.1612 sbi -0.5706 -0.4780 -0.5032 inf -0.4775 -0.2294 -0.6171 imm -0.1084 0.0186 0.2513 fed 0.3169 -0.5514 0.9213 usd 0.5621 -0.0927 0.6188 m2 0.7587 0.6945 0.8196 roa -0.2146 0.1301 0.1268 as shown in the table 8, it was changes of relationship between dependent and independent variables during the period of the study. islamic money market o/n rate, fed, usd and roa are independent variables were not consistently influenced the probability of bankruptcy of islamic banking industry before and after the structural break. while gdp, sbi and inflation were consistent. from the data presented in table 8 it can be seen that in general there is no multicollinearity on all dependent variables and independent variables in all period (january 2008-december 2019), and before the structural break (january 2008-november 2012). multicollinearity occured in period after structural break, december 2012 – december 2019. the independent variable of the federal reserves interest rate and money supply consist of multicollinierity and strongly correlated with dependent variables. so, our analysis dropped the two variables the fed and m2 to analyze the bankruptcy risk after the structural break. 4.1.5. logitic regession model in predicting the capital resistance of the islamic banking industry, the probability of bankruptcy of the islamic banking industry during the second wave of the financial crisis was analyzed using the linear programing model (lpm). the results of the linear programming model (lpm) regression indicate the presence of multicollinearity and heteroscedasticity, so that a robust standard error is performed with α = 5%. the results of the lpm model analysis concluded that the sbi, the fed interest rates, money supply (m2) and gdp significantly influence the risk of bankruptcy in the indonesian yunita│the future of indonesia islamic banking industry: bankruptcy analyzing the second wave of global financial crisis international journal of islamic economics and finance (ijief), 3(2), 199-226│218 islamic banking industry. next predict y hat and residuals over regression. graphical analysis shows patterned residuals where there are values of y hat <0 and y hat> 1, so predictions are made using probit logit regression model. stratistic results of the logistic regression model in the period january 2008december 2019, january 2008-november 2012 and december 2012december 2019 as shown in table 9. i figure 4. residual and y hat linier probability model tabel 9. probit logit estimates for probability of islamic banking bankruptcy risk dependent variable: probability of islamic banking bankruptcy all period jan 2008-dec2019 before structural break jan 2008-nov 2012 after structural break dec 2012-dec 2019 independent variables logit model probit model probit model inf -0.554** 0.03 -0.11 sbi 0.638 -0.19 1.21*** fed -1.351*** omitted omitted m2 -562*** -326* omitted usd 0.0019*** 0.00068* -0.0011*** gdp -5.3*** -2.31** 0.36 roa 3.04*** 0.77 -0.95* imm 0.42** -0.52 0.69** number of observations 144 59 85 lr chi2 lr chi2 (8) 101.54 lr chi2 (7) 35.80 lr chi2 (6) 69.59 prob > chi2 0.0000 0.0000 0.0000 pseudo r-squared 0.5158 0.5053 0.5920 log likelihood value -47.65 -17.52 -23.98 percent correctly predicted 82.64% 79.66% 85.88% sensitivity 87.80% 80.95% 85.00% specificity 75.81% 76.475 86.67% notes : *, **, ***indicate statistical significance at the 0.10, 0.05, 0.01 level respectively. yunita│the future of indonesia islamic banking industry: bankruptcy analyzing the second wave of global financial crisis international journal of islamic economics and finance (ijief), 3(2), 199-226│219 4.2. discussion 4.2.1. period januari 2008-desember 2019 on january 2008 – december 2019 probability of islamic banking bankruptcy influenced significantly by inflation rate, the federal reserves rate, money supply, usd exchange rate, economic growth and islamic money market rate. this model accurately predicted by count r squared 82.64%. in this period inflation rate, the federal reserves interest rate, money supply and economic growth negatively significant affected the probability of islamic banking bankruptcy. while, bank profitability and islamic money market rate positively significant affected probability of islamic banking bankruptcy. in this period, an improvement of inflation rate, the federal reserves interest rate, money supply and economic growth decreased the probability of islamic banking bankruptcy risks. an increased of inflation rate decreased the probability of islamic banking bankruptcy because in time of inflation, the islamic banking industry thighten the liquidity by lower financing ratio and save more to capital buffering. in a long period, sbi rate not significantly affected the probability of islamic banking bankruptcy risks. because islamic banking industry use the sharia based liquidity instruments to manage liquidity. profit and loss sharing method and islamic money market instruments are used in the islamic interbank money market in order to manage the islamic banking liquidity risks in the period of crisis. 4.2.2. periode january 2008 – november 2012 based on our analysis shown in table 5, the highest probability of islamic banking bankruptcy was in this period, before the structural break. from the data published by bank indonesia, in january 2008-july 2009 was phase of subprime mortgage crisis in the us. the recession was not felt equally around the world including in indonesia at this period, several aggresive policies have been adopted to promote economic recovery. in indonesia, the fallout from the crisis began in q4 of 2008. the global financial turbulence began to bear down on the indonesian economy. the government and bank indonesia took actions in fiscal policy, monetary and real sector to contain the impact of the global crisis during 2009. before the structural break, probability of islamic banking bankruptcy risk influenced by money supply, usd exchanges rate and economic growth. at this period, money supply and economic growth negatively significant affecting capital buffering level of islamic banking industry. by significant statistic level of 95%, economic growth affected the probability of islamic yunita│the future of indonesia islamic banking industry: bankruptcy analyzing the second wave of global financial crisis international journal of islamic economics and finance (ijief), 3(2), 199-226│220 banking industry. an improvement of the economic growth decreased the probability of islamic banking bankruptcy risk due to the higher capital buffering. economic growth indicate the higher performance of real sector. as we analyze that, islamic banking industry distributed financing through the real sector in mudharaba or musharaka contracts. increasing economic growth affecting lower credit risk or non performing financing of islamic banking industry. based on imf reported (2012) household debt soared in the years leading up to the downturn. the concurrent boom in both house prices and the stock market impacted the structural break of indonesia islamic banking industry on december 2012. 4.2.3. period december 2012-december 2019 on january december 2012 – december 2019, probability of islamic banking bankruptcy level was influenced by sbi, usd, roa and islamic money market. this model predicted by count r squared 85.88% bankuptcy of islamic banking industry not occured due to the capital resistance of islamic banking industry. from our analysis on january 2014, the islamic banking profitability was in line with structural break. but,at this moment islamic banking capital was able to manage the financial crisis systemic risks. indonesia islamic banking industry have manage countercyclical buffer to anticipate excessive credit growth. v. conclusion and recommendation 5.1. conclusion there are changes of correlation between independent and dependent variable over the period of this study. usd exchange rate is independent variable which is consistently influence the probability of islamic banking bankruptcy in all period of the study. in period of january 2008 through december 2019, shown that usd exchange rate has positive coefficcient statistically significant at a 99% level. before the structural break the usd exchange rate positively significant at 10% level statistic. while it changes and negatively significant affected the probability of islamic banking bankruptcy after the structural break. this is in line with the action of islamic banking practioners in hedgeing usd exchanges rate in period after the structural break. yunita│the future of indonesia islamic banking industry: bankruptcy analyzing the second wave of global financial crisis international journal of islamic economics and finance (ijief), 3(2), 199-226│221 the federal reserves interest rate was omitted before and after the structural break, but it is significant at 99% level in all period of study (january 2008-december 2019). in january 2008-july 2009 was phase of subprime mortgage crisis in the us. the recession was not felt equally around the world including in indonesia. at this period, several aggresive policies have been adopted to promote economic recovery. in indonesia, the fallout from the crisis began in q4 of 2008. the global financial turbulence began to bear down on the indonesian economy. the government and bank indonesia took actions in fiscal policy, monetary and real sector to contain the impact of the global crisis during 2009. economic growth is independent variable which is mostly impact the probability of islamic banking bankruptcy risk, by significant statistical level 95%. it means that islamic banking industry influenced by the economic growth and real sector. this is in line with research conducted by alqahtani, f & mayes, dg (2018) by using market-based financial stability measures to measure the performance of islamic banks during the turmoil of the financial crisis in 2000-2013. his findings say that during the islamic crisis the bank did not have much impact on financial turmoil, but when the financial turmoil had an impact on the real sector the islamic banks with large sizes experienced financial instability. as a whole, sbi rate not significantly affected the probability of islamic banking bankruptcy risks. because islamic banking industry use the sharia based liquidity instruments to manage liquidity. profit and loss sharing method and islamic money market instruments are used in the interbank money market in order to manage the islamic banking liquidity risk. 5.2. recommendations 5.2.1. recommendation for regulator in line with research conducted by alqahtani, f & mayes, dg (2018), our study concluded that islamic banking industry was mostly affected by real sector. islamic banking financing by mudharaba or musharaka principles primarily distributed to real sector, so the changes of economic growth will influenced islamic banking financing performances. the decline of real sector resulting a higher potential of bad credit risk. in the other hands, sbi rate did not significantly affect the probability of islamic banking bankruptcy risk. islamic banking capital resilience infuenced by islamic money market instrument rate return. in order to manage islamic banking capital resistance of global financial crisis, regulator needs to create a variety of islamic money market facilities according to sharia based principles and jurisdictions. yunita│the future of indonesia islamic banking industry: bankruptcy analyzing the second wave of global financial crisis international journal of islamic economics and finance (ijief), 3(2), 199-226│222 the usd exchanges rate is the independent variable which is significantly consistent affecting the probability of islamic banking bakruptcy risk before and after the structural break. the financial services authority and bank indonesia should be very careful by the changes of exchanges rate in order to manage islamic banking industry. 5.2.2. recommendation for islamic banking practitioners the capital resilience of islamic banking industry was influenced by the usd exchanges rate before and after the structural break. in order to manage risks because of the financial crisis, islamic banking needs to be very careful of usd exchanges rate changes. beside the exchanges rate, islamic banking practitioners should also manage financing to real sector. economic growth will indicate the bad credit risk performance. 5.2.3. recommendation for further research this research using probit logit regression predictive model to analyze the probability of islamic banking bankruptcy risk in period 2008-2019. our suggestion for the next research is to improve our model by using panel logistic regression model and analyze laten variables in logistic regression model. yunita│the future of indonesia islamic banking industry: bankruptcy analyzing the second wave of global 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(2013). islamic banks and financial stability: a comparative empirical analysis between mena and southeast asian countries. productivité etcapital humain dans les pays du sud de la méditerranée: région et développement no. 37. pp. 149. veganzones. d., & severin, e. (2018). an investigation of bankruptcy prediction in imbalanced datasets. decsup. vives, x. (2019). competition and stability in modern banking: a post-crisis perspective. international journal of industrial organization.www.elsevier.com/locate/ijio. warren, e. (1993), bankruptcy policymaking in an imperfect world. michigan law review, 92 (2), 336-356. yin, s., & xiaoni, l. (2019). a bibliometric study on intelligent techniques of bankruptcy prediction for corporate firms. heliyon journal. www.cell.com/heliyon zhang, y., shuihua, w., & genlin, j. (2013). a rule-based model for bankruptcy prediction based on an improved genetic ant colony algorithm. mathematical problems in engineering, 1-10. http://www.elsevier.com/locate/ijio yunita│the future of indonesia islamic banking industry: bankruptcy analyzing the second wave of global financial crisis international journal of islamic economics and finance (ijief), 3(2), 199-226│226 this page is intentionally left blank international journal of islamic economics and finance (ijief) vol. 4(si), page 153-180, special issue: islamic banking dispute resolutions mechanisms for islamic banks in indonesia atharyanshah puneri international islamic university malaysia, malaysia pt bank muamalat indonesia tbk, indonesia corresponding email: athpun@gmail.com article history received: october 29th, 2020 revised: january 7th, 2021 accepted: march 11th, 2021 abstract the rapid growth of islamic banking and finance industry demanded an improvement in terms of standards, frameworks, policies, technologies, resources, and guidelines in order to go beyond without compromising the core values of islam itself. in the context of legal framework of islamic banking and finance, it is most likely that this industry needs to be highly regulated in order to avoid manipulation and abuse by irresponsible parties. one of the crucial issues in the area of islamic banks in indonesia is regarding the dispute resolution mechanism for islamic banks. based on indonesian positive law, there are two alternative dispute resolution mechanisms that can be exercised to settle disputes in the cases involving islamic financial institutions (ifis) namely through litigation or non-litigation. litigation comes under the jurisdiction of the religious court. the researcher in this study is looking deeper into the dispute resolution mechanism for islamic banks in indonesia and going through several decided cases. and based on the study done, it was found that alternative dispute resolution mechanism is more effective to resolve islamic bank disputes rather than litigation. in the future, researchers may conduct more researches to examine deeper about the dispute resolution mechanism for the whole islamic economics and finance in indonesia. moreover, researchers need to look at the regulators’ and legislators’ perception towards dispute resolution and legal environment. keywords: islamic banks, litigation, alternative dispute resolutions jel classification: k410 type of paper: research paper @ ijief 2021 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.v4i0.10084 web: https://journal.umy.ac.id/index.php/ijief/article/view/10084 citation: puneri, a., (2021) dispute resolutions mechanisms for islamic banks in indonesia. international journal of islamic economics and finance (ijief), 4(si), 153-180. doi: https://doi.org/10.18196/ijief.v4i0.10084 https://doi.org/10.18196/ijief.v4i0.10084 https://doi.org/10.18196/ijief.v4i0.10084 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v4i0.10084&domain=pdf puneri │ dispute resolutions mechanisms for islamic banks in indonesia international journal of islamic economics and finance (ijief), 4(si), 153-180│ 154 i. introduction 1.1. background indonesia, as the country with the largest muslim population in the world is witnessing the growth of islamic banks. initially, the indonesian banking act no. 14 of 1967 did not provide any provision for the establishment of islamic banks in indonesia. however, in 1992 the act was amended by the indonesian banking act no. 7 of 1992. islamic banks were formally established in indonesia under the enactment of the same act. the first islamic bank in indonesia was bank muamalat indonesia, which was established on 1 may 1992. although the amendment allowed islamic banks to be established, there were still no detailed rules in terms of shariah principles for banking, for example, the amendment recognized that banks operate under the “profitsharing principle” (masykur, 2017). according to the indonesian government regulation number 72 of 1992, profit sharing is in accordance with shariah principles which are used by the bank to: 1. stipulate the compensation to be given to the community in connection with the use / utilization of public funds entrusted to them; 2. stipulate the compensation to be received in connection with the provision of funds to the public in the form of financing for both investment and working capital purposes; and 3. determine the remuneration in connection with other business activities commonly conducted by banks on a profit-sharing basis. further impetus and support for islamic banks were via the amendments of banking act no. 10 of 1998. finally, in 2008, the indonesian government established a dedicated law for islamic banking, the islamic banking act no. 21 of 2008. according to article 4 paragraph 1 of the act, indonesia has a dual banking system. this means that the country has two banking systems running, the conventional and islamic banking systems. it is interesting to note that in indonesian context, the term used to refer to islamic banking is shariah banking. however, for the ease of discussion in this paper, the general terminology used is islamic banking. islamic banking have been growing rapidly in indonesia since the first ib was established in 1992. as of october 2020, there are 14 shariah commercial banks, 20 shariah business units and 163 shariah rural banks established as per data from otoritas jasa keuangan (ojk). in terms of assets, as of october 2020, islamic banks’ assets in indonesia stood at rp 571.177 trillion, an increase of rp 71.196 trillion from sept 2018. in term of structure, shariah commercial banks still dominate in term of share of asset by 66.85%, followed by shariah business units with 33.14%. (otoritas jasa keuangan, 2020) puneri │ dispute resolutions mechanisms for islamic banks in indonesia international journal of islamic economics and finance (ijief), 4(si), 153-180│ 155 for the growth of islamic banks in indonesia, the indonesian government has set up a target for islamic banks to reach 10.9% market shares in 2019 (national development planning agency, 2015). however, as of sept 2019, islamic banks in indonesia only managed to reach 6.01% market shares (nordiansyah, 2019). the current growth of islamic banks in indonesia poses legal challenges to the current legal system. this includes laws governing both islamic banks and dispute resolution for islamic banks. disputes can happen between islamic banks and their customers such as defaults in payments or in terms of financing facilities. dispute resolution in islamic banks is regulated under chapter ix article 55 of the islamic banking act no. 21 of 2008. that act provides that: 1. settlement of disputes of sharia (islamic) banking is conducted by a trial in the religious court. 2. in the case that the parties have already agreed with the settlement of disputes besides as considered in paragraph (1), the dispute settlement shall be according to the content of akad (contract). 3. settlement of disputes as considered in paragraph (2) may not be contrary to the shariah principles. article 55 provides two ways to settle disputes in islamic banks, through the religious court or through other alternative dispute resolution mechanisms as long as they are not contrary to the shariah principles. the alternative dispute resolution mechanisms that can be chosen are mutual understanding, mediation, and arbitration. this study contributes to a better understanding of dispute resolution for islamic banks in indonesia. this study examines not only the laws and regulations on dispute resolution for islamic banks in indonesia, but also the issues and challenges faced by islamic bank practitioners in this regard. furthermore, this study will also analyze the trends in dispute resolution by the courts and through alternative dispute resolution for islamic banks. 1.2. objectives of study this study aims to discuss and explore dispute resolution for ibs according to indonesian law. specifically, it attempts to: 1. examine the dispute resolution mechanisms for islamic banks (ibs) in indonesia 2. identify issues faced by the religious court being the main platform for dispute resolution 3. provide recommendation for effective implementation of dispute resolution puneri │ dispute resolutions mechanisms for islamic banks in indonesia international journal of islamic economics and finance (ijief), 4(si), 153-180│ 156 1.3. significance of the study this study can benefit regulators, academics and also the public. regulators can use the findings to help them make informed decision and formulate regulations that can further enhance dispute resolution for islamic banks in indonesia. academics can use the findings to benchmark, explore and add to literature on dispute resolution for islamic banks in indonesia. the public such as islamic bank practitioners, stakeholders as well as customers can use this study to understand and protect their rights and obligation in disputes. meanwhile, islamic banks can use the findings as a source of information to provide better customer protection. through this, they can build customer loyalty, instill customer trust and grow their business further. 1.4. organization of study this study consists of five chapters. chapter 1 introduces the study and consists of introduction, background, problem statements, research objective, research questions, significance of the study, the organization of study. chapter ii covers the literature review of the study. it provides an overview of disputes faced by indonesian islamic banks, dispute resolution from the islamic perspective as well as dispute resolution for ibs in indonesia. chapter iii covers the research methodology of the study. this chapter discusses about the research method applied for the study. it also provides the description of the data and the method of analysis. chapter iv discusses the findings of the study. the findings are from library research, interviews on dispute resolution for islamic banks in indonesia. chapter v provides overall conclusion and recommendation of the study on dispute resolution for islamic banks in indonesia. ii. literature review 2.1. islamic banking disputes a dispute refers to a conflict between a party and another that has something to do with a valuable right, such as money or venture (kolopaking, 2013). furthermore, ali (2004) stated that a dispute or conflict is a situation where there are two or more parties fighting for their own position, each of the party puneri │ dispute resolutions mechanisms for islamic banks in indonesia international journal of islamic economics and finance (ijief), 4(si), 153-180│ 157 pressuring the other party and each of them failing to come to a consensus but still fighting for their own goals. meanwhile, in the context of islamic banks, suadi (2018) defined that islamic banks dispute as a business dispute. islamic banks disputes can happen before or after the akad is agreed to by the parties. for example, the dispute could be due to the price of the goods in the contract, or because of the object of the akad in the respective contract being used. 2.1.1. types of islamic banking disputes in indonesia in the previous section, suadi (2018) defined that islamic banks dispute is a business dispute and the dispute can happen before or after the akad are agreed to by the parties. furthermore, he identified there are five types of disputes or conflicts involving islamic banks namely: 1. data conflict this conflict could happen because there is lack of information, or misinformation, or differences in interpreting the information. 2. interest conflict this conflict could happen because of several issues, such as: i. there exist competitive feelings ii. there is substantial interest involving the parties iii. there is procedural interest iv. there is psychological interest 3. relationship conflict this conflict could happen because there is strong emotion, poor communication, miscommunication and repeated negative behavior. 4. structural conflict this conflict could be happen because there is a pattern that destroys the behavior or interaction, unequal control, unequal distribution of resources or any other factors from the environment that could hinder cooperation. 5. value conflict this conflict could happen because one party judges using their own values without considering the values of the other party. puneri │ dispute resolutions mechanisms for islamic banks in indonesia international journal of islamic economics and finance (ijief), 4(si), 153-180│ 158 2.1.2. factors that cause islamic banking disputes suadi (2018) mentioned that there are two main factors that often cause disputes involving ibs. the two factors are: 1. the process of akad formation is based on a misunderstanding in the business process because the business is driven is driven purely by profit 2. the akad is hard to implement, because: i. parties were careless during negotiations ii. both parties lack expertise in coming up with the terms of the akad iii. not expecting risks that could arise in the future iv. both of parties weren’t honest during the negotiation of the akad furthermore, there are some akads that can potentially lead to disputes in the future such as: 1. one of the party discovering a fact that there is a requirement in the akad that cannot be fulfilled by the party 2. one of the party terminating the contract without the consent of the other party 3. one of the party not getting rewarded as already agreed 4. there is act against the law 5. there is force majeure when making the akad other examples of disputes involving ibs are: 1. banks neglected to return customers’ funds in wadiah contract 2. bank unilaterally decreased customers’ share of profit in mudharabah contract 3. customers commit fraud by failure to disclose truthfully their business when they request for financing from ibs. for example, telling the bank that they are running a coffee shop, although they are actually operating a brewery. perwanataatmadja (1992) stated that there are four factors that could lead to disputes in murabahah contracts like: 1. customer’s negligent or customer’s default 2. most courts cases are caused by customers defaulting or unable to pay back their financing to ibs. these may arise due to various factors, e.g. customers can default in their payments because their business has failed because of natural disasters. customers fail to understand the murabahah contract some customers do not understand the murabahah contract that they sign up for. ibs may have failed to explain the contract clearly and in detail prior to customers taking up the facilities. 3. murabahah contract is fasid puneri │ dispute resolutions mechanisms for islamic banks in indonesia international journal of islamic economics and finance (ijief), 4(si), 153-180│ 159 disputes in murabahah can also arise due the contract or akad being made based on fraud or trickery resulting in the contract being considered fasid. a fasid contract is null and void, meaning the contract is illegal from the beginning and there is no contract. 2.2. dispute resolutions for islamic banks in indonesia sufiarina (2013) stated that dispute resolution is a way, method or mechanism selected by the disputing parties to obtain a solution to settle disputes. dispute resolution involving islamic banks is regulated under chapter ix article 55 of the islamic banking act no. 21 of 2008. it states that: 1. settlement of disputes of shariah (islamic) banking is conducted by a trial in the religious court. 2. in the case that the parties have already agreed with the settlement of disputes besides as considered in paragraph (1), the dispute settlement shall be according to the content of akad (contract). 3. settlement of disputes as considered in paragraph (2) may not be contrary to the shariah principles. according to article 55, there are generally two ways to resolve islamic bank disputes in indonesia, through litigation on non-litigation (alternative dispute resolution). for litigation, the jurisdiction is with the religious court. meanwhile, for alternative dispute resolution, the act states that islamic banks can resort to the following alternative dispute resolution mechanisms: a. mutual understanding antonio (2001) stated that the first choice to settle dispute in islamic banks is through mutual understanding. this process can occur when the disputing parties sit in the same forum to resolve the dispute and agree to choose the best solution for settling the dispute. in mutual understanding, there is no third-party involvement in the dispute. the session only involves the islamic bank and the party that has the dispute with the bank. mutual understanding is only effective when both parties act in good faith to settle the dispute. b. mediation another type of alternative dispute resolution that can be taken to settle islamic bank disputes is via mediation. c. the national sharia arbitration board (basyarnas) or other arbitration institution basyarnas is an institution established to examine islamic bank disputes via arbitration. initially, it was meant to facilitate bank muamalat indonesia to settle its disputes. puneri │ dispute resolutions mechanisms for islamic banks in indonesia international journal of islamic economics and finance (ijief), 4(si), 153-180│ 160 d. a commercial court one of the options of alternative dispute resolution above is considered contentious i.e. the possibility of choosing a commercial court to settle islamic bank disputes. this contradicts article 55 paragraph (1) that places dispute resolution for islamic banks under the jurisdiction of the religious court. to resolve this issue, on 19 october 2012, dadang achmad (director of cv. benua enginering consultant) filed a case in the constitutional court of indonesia to conduct a judicial review about this matter. the judicial review conducted by the constitutional court held that commercial courts does not have the jurisdiction to handle any islamic bank disputes (constitutional court proceedings, case no.93/puu-x/2012). iii. methodology 3.1. type of study this study is mainly based on qualitative research. this approach describes a phenomenon in which data is usually gathered through open-ended questions, focus groups, or more commonly by conducting interviews. qualitative research usually involves a small number of participants due to limited time and resources (oloyo, 2001). small number of participants usually consists of non-representative cases where the respondents are chosen to achieve a pre-set quota (mertens, 2008). for data analysis, qualitative approaches do not involve statistics, while statistics is vital for the analysis of data collected using the qualitative approach, since findings are descriptive in nature (weber, 1990). 3.2. data collection since this study is a qualitative research, it is primarily a library research where data is collected from both primary and secondary sources. according to kothar (2004), library research includes analysis of recorded notes, content analysis, tape and film reviews and analysis. library research also includes analysis of documents such as statistical compilations and manipulations, references and abstract guides. in this study, primary sources of data are gathered from statutes, especially all statutes related to islamic banks and dispute resolution mechanisms in indonesia and case laws, such as the proceedings of the constitutional court no. 93/puu-x/2012. books and articles are used as secondary sources of data. the study also tries to empirically find out and confirm several aspects related to ib and dispute resolution mechanisms that could not be attained from puneri │ dispute resolutions mechanisms for islamic banks in indonesia international journal of islamic economics and finance (ijief), 4(si), 153-180│ 161 literature, regulations and documentaries. interviews were conducted to collect data from experts like judges, lawyers and arbitrators involved in the resolution of islamic banks related disputes in indonesia. 3.3. data analysis the method of data analysis applied in this study was analytical and/or interpretative analysis. the collected data were classified proportionally into theories and framework related to islamic banks in indonesia as well as data related to dispute resolution mechanisms in indonesia. having classified these, the data were legally interpreted and analyzed. 3.4. justification for the methodology this study investigates and examines the legal framework for dispute resolution for ibs in indonesia in order to ascertain a comprehensive position on its advantages and disadvantages. a deep understanding of the legal framework related to dispute resolution involving ibs in indonesia enables the researcher to assess and draw the proper conclusions for the study. 4. analysis 4.1. dispute resolution for islamic banks through litigation 4.1.1. jurisdiction dispute resolution through litigation is a mechanism to solve a dispute through a court proceeding (fuady, 2005). article 55 paragraph (1) of the islamic banking act no. 21 of 2008 recognized the jurisdiction of the religious court to examine and decide islamic bank disputes. in response to this, the government then amended the religious court act in 2006 by act no. 3 of 2006 to strengthen the authority of the religious court to handle islamic bank cases. the same act was amended again for the second time in 2009 by act no. 50 of 2009. article 49 of religious court act no. 3 of 2006 stated that the religious court has the competence to check, decide and resolve any disputes in the matter of: 1. marriage 2. inheritance 3. will 4. hibah 5. waqf 6. zakat 7. infaq puneri │ dispute resolutions mechanisms for islamic banks in indonesia international journal of islamic economics and finance (ijief), 4(si), 153-180│ 162 8. shadaqah 9. shariah economics three new competencies were added for the aforementioned amendment compared to the previous religious court act no. 7 of 1989 in the areas of zakat, infaq and shariah economics. the religious court act stated that shariah economics covers: 1. islamic banking 2. islamic microfinance 3. islamic insurance 4. islamic reinsurance 5. islamic mutual funds 6. islamic bond or sukuk 7. islamic medium-term securities 8. islamic securities 9. islamic funding 10. islamic pawn 11. islamic pension fund 12. islamic business undoubtedly, this provision has clarified and expanded the jurisdiction of the religious court which now covers the resolution of disputes in islamic economics, including islamic banks (masykur, 2017). the amendments give the religious court more authority and legal certainty to handle islamic bank disputes. 4.1.2. processes involved in examining islamic banking disputes by the religious court even though islamic bank disputes are being examined in the religious court, the processes in the court are still subject to indonesian civil procedural law (latief, 2015). interestingly, it is observed that the provisions in the civil procedural law do not contravene too much against shariah principles. there are some grey areas such as the issue of penalty deemed as riba in the shariah, but generally it is still in line with it. the processes involved in the religious court to examine islamic bank disputes are as follows: 1. hearing of the plaintiff’s claim. 2. answering process. the defendant responses to the plaintiff’s claim. 3. plaintiff’s replication. 4. defendant’s rejoinder. 5. submission of proof. both the plaintiff and defendant submit their evidences to support their claims. 6. conclusion. the case proceeds to conclusion from both the plaintiff and defendant. 7. judge’s decision. the judges will do their duty to decide. 8. judge’s verdict. the judges give their verdict about the case. puneri │ dispute resolutions mechanisms for islamic banks in indonesia international journal of islamic economics and finance (ijief), 4(si), 153-180│ 163 the illustrative explanation of the process is provided in the figure 1. figure 1. process in the religious court the responsibility to determine a proper law to be applied to a case being examined in a trial remains a difficult task. manan (2005) stated that a judge is expected to understand all the laws available (ius curia novit). however, in reality, a judge cannot be expected to understand all the laws available because laws come in many forms and types. this can also happen to judges in the religious court. some judges may not properly understand islamic banking, for example about the details of types of akad that are used in islamic bank facilities or agreements. nonetheless, the law provides a solution to this since judges are allowed to refer to dsnmui to get better insight and understanding about islamic banking. they may invite a member of dsn-mui to come to the court as an expert witness. dsnmui is responsible to help judges by giving their expert opinion. this responsibility is mentioned in their establishment, act no. kep754/mui/ii/1999. dsn-mui has also actively trained judges based on a collaboration program between dsn-mui and ministry of justice and human rights. konradus (2016) stated that the whole testimony from the expert witness in the court will help a judge to understand more about the case and these testimonies are not binding on them. this means that a judge is not bound to deliver a verdict according to the testimony from the experts. 4.1.3. advantages and disadvantages of litigation hasan (2010) stated that there are at least five advantages of empowering the religious court in indonesia to handle islamic banks cases, which are: 1. the judges in the religious court are able to understand shariah disputes. 2. the religious court has adequate substantive law, especially in the case of shariah economics. 3. the religious court has branches all over indonesia. 4. the religious court has the peoples’ support, especially from muslims who make up the majority in indonesia. plaintiff' s claim answering replication rejoin der proof conclusion judge's decision verdict puneri │ dispute resolutions mechanisms for islamic banks in indonesia international journal of islamic economics and finance (ijief), 4(si), 153-180│ 164 5. the religious court has full political support from the government proven by the enactment of the religious court act no. 3 of 2006. 6. the religious court has support from the central bank and also from ifis in indonesia. in terms of disadvantages, hasan (2010) mentioned two things that affect the ability of the religious court to handle islamic bank cases, i.e.: (i) there is no clear regulation or act that regulates shariah economics in indonesia. supriyatni (2010) stated that in such absence, the religious court is dependent on books in fiqh muamalat in deciding cases. (ii) judges in the religious court may have good understanding pertaining to shariah disputes, but they lack understanding and knowledge of economics, especially about islamic bank activities. besides the disadvantages above, arto (2015) cited five juridical constraints, namely: (i) limitation of laws and regulations, which especially govern the competency of the religious court and the availability of procedural law. (ii) laws and regulations that conflicts with each other. (iii) incomplete laws and regulations that are difficult to implement. (iv) a gap between the competencies provided by the law to the religious courts and the competencies that are required by a developing society. (v) absence of legislation that governs certain issues being brought to the court. based on those disadvantages, fariana (2015) and manan (2012) found that the religious court faces two further issues in handling islamic bank cases, which include: (i) because of the absence of procedural law for the religious court, it still uses the same civil procedural law applicable in the general court. (ii) there is no strong awareness amongst the judges in the religious court that they act as the organ in the court of law. 4.2. dispute resolution for islamic banks through arbitration 4.2.1. jurisdiction according to article 55 paragraph (2) of the islamic banking act no. 21 of 2008, arbitration can be utilized to resolve any islamic bank disputes. these disputes can be handled by the national shariah arbitration board (basyarnas) or any other arbitration body as long as it does not go against the shariah principles. all islamic bank disputes can go to arbitration as long as the parties in the contract allow for its use in case of disputes (ka'bah, 2013). puneri │ dispute resolutions mechanisms for islamic banks in indonesia international journal of islamic economics and finance (ijief), 4(si), 153-180│ 165 the main reason behind the establishment of basyarnas is to handle all disputes between the first islamic bank in indonesia, bank muamalat, and its customers. basyarnas was established on 21 october 1993 under the name of indonesian muamalat arbitration board (badan arbitrase muamalat indonesia – bamui). the name has changed into basyarnas since 24 december 2003. the change was meant to accommodate other islamic banks besides bank muamalat due to the industry’s rapid growth. the renamed body is called the national shariah arbitration board. 4.2.2. the process of arbitration in examining islamic banking disputes the process of arbitration is regulated under the arbitration rules and procedures issued by badan arbitrase nasional indonesia (bani) or indonesian national arbitration center (badan arbitrase nasional indonesia, 2018). the process consists of the following steps: 1. registration after receiving the request for arbitration and documents as well as the registration fee required, the secretariat shall register the petition in the bani register. 2. arbitration review the board of bani shall review the request for arbitration to determine whether or not the arbitration agreement or arbitration clause in the contract is adequate to provide a basis of authority for bani to examine the dispute. a. response of respondent i. if the board determines that bani is authorized to examine the dispute, then after registration of the request for arbitration, one or more secretaries of the tribunal shall be designated to assist in the administration of the arbitration case. ii. the secretariat shall give a copy of the request for arbitration and the attached documents to the respondent, and request the respondent to submit his written response within a period of no longer than thirty days. iii. within a period of no longer than thirty days after receiving the submission of petition for arbitration, the respondent shall be obliged to submit its reply. in the reply, the respondent may designate an arbitrator or hand over the designation to the bani chairman. if, in the reply, the respondent does not designate an arbitrator, then it shall be considered that the designation has absolutely been handed over to the bani chairman. iv. the bani chairman shall be authorized, at the request of the respondent, to extend the period for submission of reply and or the puneri │ dispute resolutions mechanisms for islamic banks in indonesia international journal of islamic economics and finance (ijief), 4(si), 153-180│ 166 designation of an arbitrator by the respondent with legitimate grounds on the condition that the extension of period may not exceed fourteen days. the bani chairman shall be authorized at the request of the respondent, to extend the time limit of the reply of the respondent at the latest by the first arbitration hearing. b. arbitration proceedings i. authority of tribunal after the formation or designation, the arbitration tribunal shall examine and rule on the dispute between the parties on behalf of bani and therefore, may exercise all of the authority possessed by bani in connection with the examination and passing of resolutions on the dispute in question. before and during the proceeding period, the tribunal may make a legitimate effort to encourage amicable resolution of dispute between the parties. the effort to achieve amicable resolution shall not affect the deadline of examination in the proceeding. ii. confidentiality all proceedings shall be conducted closed to the public, and all matters related to the arbitral reference, including documents, reports/notes on sessions, testimonies of witnesses and awards, shall be kept in strict confidence among the parties, the arbitrators and bani, except to the extent required by law or otherwise as may be agreed by all parties in the dispute. iii. natural justice subject to these rules and applicable law, the arbitration tribunal or the sole arbitrator may conduct the arbitration in any manner as it considers appropriate provided that the parties are treated equally and that at any stage of the proceedings, each party is given a fair and equal opportunity of presenting its case. iv. place of hearings hearings shall be conducted at a place determined by bani and the agreement of the parties but may also be at another place if the tribunal deems necessary with the agreement of the parties. the arbitration tribunal may request that meetings be held to examine assets, other goods, or documents at any time and at the required place, with notice as required to the parties, to allow them to be able to attend the examination. internal meetings and sessions of the tribunal may be held at any time and place, including over the internet, if the tribunal deems appropriate. puneri │ dispute resolutions mechanisms for islamic banks in indonesia international journal of islamic economics and finance (ijief), 4(si), 153-180│ 167 c. execution of arbitration award execution of arbitration award must be conducted according to the command of the chairman of the court. since the dispute involves islamic banks, according to the religious court act no. 3 of 2006, it falls under the jurisdiction of the religious court. therefore, any arbitration award in any islamic bank dispute must get the approval from the chairman of religious court if the parties want to execute the arbitration award. similar to the religious court, if the arbitrators in the arbitration do not have adequate knowledge regarding shariah matters in islamic banking, they can refer to dsn-mui and may invite a member of the dsn-mui to become an expert witness. the expert witness must ensure that confidentiality of the dispute must be observed. this is based on article 49 of the arbitration act no. 30 of 1999 which stated that the arbitrators are allowed to get an expert witness to give testimony about the case, based on the request of the parties. 4.2.3. advantages and disadvantages of choosing arbitration umar and kardono (1995) and suadi (2017) stated that arbitration is advantageous for both parties as: 1. arbitration provides predictability and certainty in dispute resolution. 2. if the arbitrator is competent enough in handling the case, then the parties can have trust in arbitration to settle their dispute. 3. both parties can have privacy in settling disputes through arbitration. privacy is the most important reason for parties to choose arbitration. 4. any result of arbitration is final and binding on both parties and the results must be executed. 5. arbitration can be cheaper and faster than litigation when settling disputes. 6. both parties can freely choose their “choice of law”, the process and the place to settle their dispute. in term of disadvantages, prakoso (2017) stated that one of the main problems of arbitration in indonesia is that any outcome of an arbitration cannot be legally enforced, and if an agreement is to be legally enforced, it must be registered first with the court. the court may disagree with the agreement rendering it null and void. nonetheless, the religious court cannot be just freely canceling any of arbitration outcomes. widjaja and yani (2003) stated that the religious court can cancel the decision made in the arbitration if it does not satisfy the following requirements: 1. the arbitrators who are examining and deciding the dispute are opted and agreed upon the will and wishes of the parties. puneri │ dispute resolutions mechanisms for islamic banks in indonesia international journal of islamic economics and finance (ijief), 4(si), 153-180│ 168 2. the disputes which are settled by the arbitration are legally allowed to be examined and decided by the way of arbitration. 3. any outcome that comes out of the arbitration process is according to the law and not against the public order. based on the analysis above, arbitration process is considered simpler and more effective than litigation. the most important advantage of arbitration that is preferred by islamic banks is that arbitration process is carried out confidentially. therefore, islamic banks still can protect their reputation from the risks that arise by having a dispute. 4.3. dispute resolutions for islamic banks through mediation 4.3.1. jurisdiction mediation is a mechanism to solve disputes through a third party from a neutral standpoint. the third party is called a mediator. according to spencer & brogan (2006), there are five principles of mediation namely: 1. confidentiality everything that occurs in mediation must remain confidential between the parties and mediators. mediators must preserve the confidentiality of the mediation. hence, they cannot share any of its results with the media, and/or anyone not involved in the mediation. 2. volunteer all the parties in the dispute must voluntarily choose to settle their dispute through mediation. mediation will not work if there is force or coercion from/on any party. 3. empowerment this principle assumes that anyone seeking mediation has the ability to settle the dispute and reaches an agreement independently and as desired. the parties must be empowered to settle and accept any solutions pertaining to the dispute. 4. neutrality the mediators should only act as facilitators for the parties in the dispute. the mediators must be neutral and cannot side with any party in the dispute. mediators cannot act like judges in litigation because they cannot decide whether a party is right or wrong. therefore, the parties in the dispute remain responsible to obtain the solutions and settle the dispute. 5. a unique solution solution for a dispute from mediation need not be according to the rulebook or a legal standard, and it can be a creative solution. consequently, a solution from mediation will generally be more suitable with the desires of the parties in the dispute. puneri │ dispute resolutions mechanisms for islamic banks in indonesia international journal of islamic economics and finance (ijief), 4(si), 153-180│ 169 in addition to the five principles above, rahmadi (2010) stated that there are three essential elements of mediation namely: 1) mediation is a way to settle a dispute by the way of negotiation in order to find a win-win solution for all the parties in the dispute. 2) all the parties in the dispute are asking for help from a neutral third-party as a mediator. 3) mediators do not have the authority to decide. their authority is only to assist all the parties in the dispute to find solution/s to settle their dispute. in indonesia, mediation is governed under the supreme court regulation no. 1 of 2008 concerning mediation. according to the regulation, mediation can be utilized inside court proceedings or outside court proceedings. the regulation stipulates that every judge must order all parties to go through mediation before court proceedings start. however, basir (2009) stated that there are 3 disputes that cannot be resolved through mediation namely inheritance disputes, hibah disputes and disputes over someone’s status. based on that supreme court regulation, it was stated that the requirements to be a mediator are: 1) if a judge wants to be a mediator, then he cannot be the judge who is handling the case. 2) a mediator must be an advocate or law practitioner. 3) non-legal practitioners must have the expertise in the area of the dispute. 4) it can be a mixture of the above. all of the parties above can become mediators as long as they are able to obtain a mediator certificate from training hosted by the supreme court. the responsibilities of a mediator include: 1) arranging the date for the mediation process to begin; 2) advising the parties to be active during the mediation; 3) advising the parties to explore more about their dispute and find the most effective ways to settle their dispute; 4) facilitating the parties to prepare an agreement to settle their dispute.; and 5) making a written report to the judge if the mediation process fails. as for banking mediation, it is regulated under the central bank circular letter no. 10/1/pbi/2008 dated 30 january 2008. the letter states that mediation for islamic bank disputes can be carried out inside or outside the court. mediation can be chosen as the way to settle disputes only if the dispute involves financial loss with the maximum value of rp 500,000,000 (five hundred million rupiah). puneri │ dispute resolutions mechanisms for islamic banks in indonesia international journal of islamic economics and finance (ijief), 4(si), 153-180│ 170 after the induction of the financial services authorities (ojk) in january 2014, banking mediation implements the circular letter no. 1/pojk.07/2014 on alternative dispute resolution in financial sector. this letter does not cancel the previous letter from the central bank (the circular letter no. 10/1/pbi/2008 dated 30 january 2008), and the rules about mediation from the letter are still relevant. by virtue of this letter, an institution called lembaga alternative penyelesaian sengketa perbankan indonesia (institution of alternative dispute resolution for banking) was established. any mediation for islamic banks outside the court is examined by this institution. 4.3.2. the process of mediation in examining islamic banking dispute mediation can be conducted inside or outside the court. if the mediation is done inside the court, it means that the case has already been examined in the court and the mediator is usually the same judge. on the contrary, if the mediation is carried out outside the court, it means that the parties do not bring their case to the court and chose mediation to solve it. 4.3.2.1. process of mediation inside the court figure 2 will show the process of mediation inside the court. figure 2. process of mediation inside the court in examining islamic banking disputes source: makarim, 2018 1) pre-mediation parties in the dispute register their case with the court. the head of the religious court chooses the judges to handle the case. on the first day at the court, the judges will command that the case go through mediation. in this pre-mediation, the parties will choose a mediator. usually, the court already has a list of names of persons who can mediate. if in two days the parties cannot choose the mediator, the judges will select one for them. 2) making of a forum in five days after the parties choose the mediator, the mediator will choose a date to invite the parties to make a forum. in the forum, the mediator and the parties will sit together and discuss the case. the mediator commands that the parties come without their lawyers. this forum is held in order for the mediator handling the case to gain the trust from the parties. premediation making of a forum investigation of the dispute agreement outside the court end of mediation puneri │ dispute resolutions mechanisms for islamic banks in indonesia international journal of islamic economics and finance (ijief), 4(si), 153-180│ 171 3) investigation of the dispute a caucus can be used by a mediator to investigate the case. caucus means that a mediator holds a meeting with one of the parties in the dispute. in the meeting, each party in the dispute will reveal everything about the case which cannot be revealed in the forum. after that meeting, the mediator will process any facts and data, develop information, explore the parties, and make a judgement about the case as well as finally try to solve the dispute. 4) final completion in this phase, the parties in the dispute will state their interests in an agreement. the mediator will accommodate all the interests from both parties and put them inside the agreement. according to article 23 verse (3) of the supreme court regulation about mediation, the things provided inside the agreement must: a) accommodate all the parties’ interest; b) be in accordance with the law and regulation; c) not be harmful to the third party; d) be able to be executed; and e) be with good consent. 5) agreement outside the court any agreement reached through mediation can be registered with the court for the purpose of legitimizing the agreement. if they reach a mediation agreement, they will not continue with the court proceedings. 6) end of mediation the mediation can be declared as completed once it reaches either one of the two situations namely: a) the parties reach an agreement to settle their dispute; or b) the mediation process fails and the parties continue with the court proceedings. 4.3.2.2. the process of mediation outside the court harun (2010) stated that mediation outside the court begins with the mediator asking for the parties in the dispute to explain all the facts pertaining to their dispute. this can be carried out in writing or orally. if the parties in the dispute agree with all the terms and conditions explained by the mediator, they will have to sign an agreement of mediation. this agreement of mediation contains statement from the parties to obey all the terms and conditions of the mediation and to obey all the results coming from the mediation. all the results from the mediation will be written in the form of deed of agreement. puneri │ dispute resolutions mechanisms for islamic banks in indonesia international journal of islamic economics and finance (ijief), 4(si), 153-180│ 172 this process will take a maximum of thirty days. this period starts when the parties sign the agreement of mediation until they sign the deed of agreement. this period can be extended for maximum another thirty days as long as all the parties agree to extend the mediation period. 4.3.3. advantages and disadvantages of mediation lestari (2013) and korah (2013) stated that mediation has the following advantages: 1. mediation is private and confidential; 2. mediation is cheaper than settling the dispute in the court; 3. mediation is faster and easier compared to the court proceedings; and 4. the solution will be fair to both parties because the mediator will facilitate the parties in the dispute to find a “win-win solution” for both. harahap, runtung, azwar, and barus (2014) stated that there are two main disadvantages for choosing mediation namely (i) the parties need not be properly equipped with procedural laws; and (ii) people still do not believe in mediation. until now, there is no specific law in indonesia which governs mediation for general cases. for settling islamic bank disputes, mediation is governed by the supreme court regulation no. 1 of 2008. a lot of people still believe that mediation will not effectively settle a dispute. people still believe that mediation is costly and they cannot enforce the resolution because it does not have a legal standing like a court ruling. this could be due to the fact that there are not enough mediation experts in islamic banks and lack of publicity and information regarding mediation. public in indonesia are still not accustomed to mediation (ichsan, 2015). in view of this, more resources and active publication are necessitated to support mediation in light of the rapid development of islamic banks in indonesia. v. conclusion and recommendation 5.1. conclusion according to article 55 of the islamic banking act no. 21 of 2008, disputes can be resolved by way of litigation conducted in the religious court. if the akad allows the parties to settle their dispute through alternative dispute resolution, it must not go against any shariah principles. alternative dispute resolution mechanisms that are allowed to be employed by islamic banks are through: puneri │ dispute resolutions mechanisms for islamic banks in indonesia international journal of islamic economics and finance (ijief), 4(si), 153-180│ 173 a. mutual understanding; b. banking mediation; c. the national sharia arbitration board (basyarnas) or other arbitration institution. based on the result of this study, alternative dispute resolution mechanisms, especially arbitration and mediation, are better and more efficient compared to litigation in handling islamic bank disputes. alternative dispute resolution can expedite cases compared to litigation whilst maintaining privacy and confidentiality. however, people in indonesia still prefer litigation over alternative dispute resolution because people still trust litigation more than alternative dispute resolution. most of the disputes involving islamic banks are cases of default by customers in their payments to islamic banks. after the default, islamic banks will issue three warnings to a debtor. if the debtor fails to respond at all, then the islamic banks will realize the debtor’s collateral through an auction. disputes can arise if the debtor feels that the auction by the islamic banks is unfair and unlawful. table 1, table 2, and table 3, shows the differences between litigation, arbitration and mediation in handling islamic bank disputes: puneri │ dispute resolutions mechanisms for islamic banks in indonesia international journal of islamic economics and finance (ijief), 4(si), 153-180│ 174 table 1. differences between litigation, arbitration and mediation in handling islamic bank disputes (definition, process, regulation) litigation arbitration mediation definition the process of settling a dispute by taking the case to a court of law so that judgement can be made in order to settle the dispute. the way of settling a dispute by an impartial person (called arbitrator) without resorting to the court. the attempt to settle a legal dispute through active participation of a third party (mediator) who works to find points of agreement and make those in conflict agree on a fair result. process a. hearing of the plaintiff’s claims. b. answering process. the defendant responses to the plaintiff’s claim. c. plaintiff’s replication. d. defendant’s rejoinder. e. submission of proof. both the plaintiff and defendant submit their evidence to support their claims. f. conclusion. the case proceeds to conclusion from both plaintiff and defendant. g. judge’s decision. the judges will do their duty to decide h. judge’s verdict. the judges give their verdict about the case. a. registration b. response of respondent c. arbitration proceedings d. execution of arbitration award a. pre-mediation b. making of a forum c. investigation of the dispute d. final completion e. agreement outside the court f. end of mediation regulation a. article 55 paragraph (1) of the islamic banking act b. the religious court act in 2006 (act no. 3 of 2006). c. the religious court act (act no. 50 of 2009). a. article 55 paragraph (2) of the islamic banking (act no. 21 of 2008) b. the arbitration and alternative dispute resolution act (act no. 30 of 1999) c. the circular letter no. 1/pojk.07/2014 regarding alternative dispute resolution in financial sector a. article 55 paragraph (2) of the islamic banking act no. 21 of 2008 b. the arbitration and alternative dispute resolution act no. 30 of 1999 c. the supreme court regulation no. 1 of 2008 concerning mediation d. the circular letter no. 1/pojk.07/2014 regarding alternative dispute resolution in financial sector puneri │ dispute resolutions mechanisms for islamic banks in indonesia international journal of islamic economics and finance (ijief), 4(si), 153-180│ 175 table 2. differences between litigation, arbitration and mediation in handling islamic bank disputes (advantages & disadvantage) litigation arbitration mediation advantages & disadvantage advantages: (i) the judges in the religious court are able to understand shariah disputes. (ii) the religious court has adequate substantive law, especially in the case of shariah economics. (iii) the religious court has branches all over indonesia. (iv) the religious court has the peoples’ support, especially from muslims who make up the majority in indonesia. (v) the religious court has full political support from the government proven by the enactment of the religious court act no. 3 of 2006. (vi) the religious court has the support from the central bank and also from ifis in indonesia. disadvantages: (i) there is no clear regulation or act that clearly regulates shariah economics in indonesia. (ii) judges in the religious court may have good understanding pertaining to shariah disputes, but they lack understanding and knowledge of economics, especially about islamic bank activities. advantages: (i) arbitration provides predictability and certainty in dispute resolution. (ii) if the arbitrator is competent enough in handling the case, then the parties can have trust in arbitration to settle their dispute. (iii) both parties can have privacy in settling disputes through arbitration. privacy is the most important reason for parties to choose arbitration. (iv) any result of arbitration is final and binding on both parties and the results must be executed. (v) arbitration can be cheaper and faster than litigation when settling disputes. (vi) both parties can freely choose their “choice of law”, the process and the place to settle their dispute. disadvantages: (i) any outcome of an arbitration cannot be legally enforced, and if an agreement is to be legally enforced, it must be registered first with the court. advantages: (i) mediation process is private and confidential. (ii) mediation is cheaper than settling in the court. (iii) mediation is faster and easier compared to the court proceedings. (iv) solution will be fair to both parties because the mediator will facilitate the parties in the dispute to find a “win-win solution” for both. disadvantages: (i) there are not enough experts in islamic banks. hence, more resources are required to support mediation in light of the rapid development of islamic banks in indonesia. (ii) there is lack of publicity and information regarding mediation. in addition, people in indonesia are still not accustomed to mediation. puneri │ dispute resolutions mechanisms for islamic banks in indonesia international journal of islamic economics and finance (ijief), 4(si), 153-180│ 176 table 3. differences between litigation, arbitration and mediation in handling islamic bank disputes (outcomes) litigation arbitration mediation outcomes the judgment comes with the power to execute. the judgment is made by judges in the religious court. only one party wins. all of the outcomes are final and legally binding to all parties in the dispute. the judgment needs to be endorsed by chief of the religious court to be legally executable. the judgment is made by an arbitrator selected by the parties. the outcome is a “win-win” solution. the solution for settling a dispute is agreed by the parties with the assistance from a mediator. all the outcomes from mediation are more like suggestions to both parties and are not legally binding them. the outcomes must be a “win-win” solution for all the parties in the dispute. 5.2. recommendation based on the result of this study, there are some recommendations that can improve dispute resolution involving islamic banks in indonesia such as: 1. for both litigation and alternative dispute resolution, more resources should be allocated, especially for judges, arbitrators and mediators through better training in islamic bank matters. 2. for alternative dispute resolution, especially for basyarnas in arbitration and/or any other mediation form, they should do more public awareness and training programs for both the people and legal practitioners, so that they will be able to understand more and get used to alternative dispute resolution to settle disputes 3. for litigation, based on the interviews with mr. amran suadi (saudi, 2019), the author of the book entitled litigation as a method to settling islamic bank dispute, published in 2019, there are various efforts needed to enhance the capability of the religious court to handle islamic bank disputes better such as: a. improving judges’ capability in islamic economics, especially their islamic bank knowledge through: i. holding certification training for the judges in islamic economics in partnership with the central bank, islamic banks, ministry of finance and the otoritas jasa keuangan; ii. sending judges for short courses, especially to middle eastern countries with more developed islamic finance industry; iii. holding regular legal and academic discussions with well-known islamic banks and islamic finance scholars, stakeholders and practitioners; and iv. providing technical guidance to the religious court in handling islamic bank issues. puneri │ dispute resolutions mechanisms for islamic banks in indonesia international journal of islamic economics and finance (ijief), 4(si), 153-180│ 177 b. setting up formal and material legal rules for islamic banks. v. in terms of material legal rules, the supreme court issues the “kompilasi hukum ekonomi syariah” as a guidance for religious court judges to help them decide islamic bank disputes; vi. in terms of practical guidance, the supreme court on 22 december 2016 introduced the supreme court regulation no. 14 covering the procedures in handling islamic economics disputes; vii. the decided cases are compiled to serve as a guidance or reference for judges in handling islamic bank disputes; and viii. all fatwa, guidelines and regulations from dsn-mui, the central bank and ojk pertaining to islamic bank are collected. puneri │ dispute resolutions mechanisms for islamic banks in indonesia international journal of islamic economics and finance (ijief), 4(si), 153-180│ 178 reference ali, a. 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(2016). membedah hukum acara perdata indonesia. jakarta, indonesia: bangka adinatha mulia. http://www.baniarbitraseindonesia/ https://www.baniarbitration.org/ puneri │ dispute resolutions mechanisms for islamic banks in indonesia international journal of islamic economics and finance (ijief), 4(si), 153-180│ 179 korah, r. s. (2013). mediasi merupakan salah satu alternatif penyelesaian masalah dalam sengketa perdagangan internasional. jurnal hukum unsrat, 33-42. latief, m. n. (2015, may). reaktualisasi hukum acara peradilan agama dalam sengketa perbankan syariah. majalah peradilan agama. lestari, r. (2013). perbandingan hukum penyelesaian sengketa secara mediasi di pengadilan dan di luar pengadilan di indonesia. jurnal ilmu hukum, 217-237. makarim, a. (2018). penyelesaian sengketa perbankan syariah lewat mediasi di lembaga litigasi dan non litigasi. jakarta, indonesia: universitas islam negeri syarif hidayatullah. manan, a. 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(2010, november). penerapan fiqih muamalat sebagai dasar kewenangan. syiar hukum, 12(3), 189-206. umar, m. h., & kardono, a. s. (1995). hukum dan lembaga arbitrase di indonesia. jakarta, indonesia: elips project. weber, r. p. (1990). basic content analysis. newbury park, usa: sage publications. widjaja, g. & yani, a. (2003). hukum arbitrase. jakarta, indonesia: pt raja grafindo persada. copyright transfer agreement form (please sign and attach this form in the supplementary file when you make a new submission) i, the undersigned: full name : sulaeman, s.e., m.sei. affiliation : universitas airlangga and r-square research consulting active email : sulaeman.sunda@gmail.com address : kp. salabenda rt 002 rw 004, parakanjaya, kemang, kab. bogor phone number : 081216194511 title of submitted article : impact of green banking implementation, financial performance, and covid-19 crisis on islamic bank profitability in indonesia list of authors : (1) ramdani, (2) imron mawardi, (3)sulaeman declare that the article above that: 1. the submission has not been previously published, nor is it before another journal for consideration or currently not in the process of other journal publications. 2. there is no conflict of interest between the authors. 3. the submission is original, not translated. 4. i am willing to be responsible if there are parties who feel disadvantaged privately and/or based on a lawsuit in the future by the publication of this article. i also declare that any and all rights in and to the article including, without limitation, all copyrights are transferred to international journal of islamic economics and finance (ijief). therefore, the copyright transfer hands it the power and authority to edit, reproduce, distribute copies, and to publish the article partly or fully. bogor, 12 november 12, 2022 sulaeman, s.e., m.sei. full name & signature mailto:sulaeman.sunda@gmail.com international journal of islamic economics and finance (ijief) vol. 4(si), page 63-86, special issue: islamic banking shariah disclosure practices in malaysian islamic banks using the shariah disclosure index nur afiqah md amin international islamic university malaysia, malaysia, afiqahamin@gmail.com noraini mohd ariffin international islamic university malaysia, malaysia corresponding email: norainima@iium.edu.my a.h. fatima international islamic university malaysia, malaysia, afatima@iium.edu.my article history received: october 5th, 2020 revised: january 23rd, 2021 accepted: march 6th, 2021 abstract islamic banks are required to ensure their operations and activities comply with the shariah principles. according to islamic financial services act (2013) in malaysia, all operations and activities of islamic financial institutions including islamic banks have to comply with decisions made by the shariah advisory council (sac) of bank negara malaysia (bnm) and the shariah committee (sc) of the islamic financial institution to ensure shariah compliance. in practice, shariah compliance is considered a crucial factor by bank stakeholders, especially muslim customers in their decision to use islamic financial products. thus, one of the ways for islamic banks to convey their shariah-compliance to their stakeholders is through annual reports. this study examines the level of compliance on shariah disclosure in the annual reports of malaysian islamic banks. a shariah disclosure index, comprising mandatory and voluntary items, was developed from bank negara malaysia (bnm) guidelines and accounting and auditing organization for islamic financial institutions (aaoifi) standards. shariah disclosure data were collected from the annual reports for the year 2016 of the 16 islamic banks in malaysia. based on institutional theory, this study hypothesised high compliance, however the results revealed that none of the banks had full compliance to the mandatory items. nevertheless, some of these banks disclosed voluntary items. the findings provide useful insights to the regulators and stakeholders on islamic banks’ compliance on shariah disclosure. the study also reveals the importance of disclosing additional items in the annual reports of islamic banks. keywords: shariah disclosure, islamic banks, malaysia jel classification: m40, g21, e58 type of paper: research paper @ ijief 2021 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.v4i0.9953 web: https://journal.umy.ac.id/index.php/ijief/article/view/9953 citation: amin, n. a. m., ariffin, n. m., & fatima, a. h. (2021). shariah disclosure practices in malaysian islamic banks using the shariah disclosure index. international journal of islamic economics and finance (ijief), 4(si), 63-86. doi: https://doi.org/10.18196/ijief.v4i0.9953. mailto:afiqahamin@gmail.com mailto:norainima@iium.edu.my https://doi.org/10.18196/ijief.v4i0.9953 https://doi.org/10.18196/ijief.v4i0.9953 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v4i0.9953&domain=pdf amin, ariffin, & fatima │ shariah disclosure practices in malaysian islamic banks using the shariah disclosure index international journal of islamic economics and finance (ijief), 4(si), 63-86│64 i. introduction islamic banks are required to ensure that their operations and activities comply with the shariah principles. however, in some cases, islamic banks may inadvertently digress from the shariah due to the lack of rules and regulations on contemporary transactions (ullah, 2014). in order to alleviate this problem, bank negara malaysia (bnm) issued the shariah governance framework guidelines in 2010, which has been superseded by shariah governance policy document (2019). in 2013, the islamic financial services act (ifsa) was enacted to regulate islamic financial institutions (ifis) in malaysia. this act reinforced the importance of shariah compliance, i.e. all operations of the ifis and contracts offered by the ifis must comply with the shariah. specifically, the islamic banks must ensure that they are free from any form of interest (riba), uncertainty (gharar) and any activities that involve gambling (maysir), and also activities that cause harm to the society. shariah compliance is deemed crucial, especially for muslim customers, in deciding to use islamic banks’ services (ashraf & lahsasna, 2017). therefore, it is vital for islamic banks to communicate their shariah compliance to stakeholders. a channel of communication between islamic banks and their stakeholders is annual reports. as the foundation of an islamic bank is closely tied to religion (haniffa and hudaib 2007), transparent disclosure on shariah compliance in its annual reports enhances the credibility of its business operations, promotes the bank’s accountability and reputation, consequently increasing customers’ confidence. disclosure practices of listed companies are usually regulated. similarly, bnm regulates financial institutions in malaysia; hence it issued “financial reporting for islamic banking institutions” in 2016 (revision issued in 2019). although issued as guidelines, the reporting requirements are considered mandatory for islamic banks because bnm is their regulatory authority. therefore, islamic banks in malaysia must disclose the items required by these guidelines. it must be noted that since malaysia has adopted the financial reporting standards (frs) issued by the international accounting standards board (iasb), bnm supports compliance with these standards. therefore, bnm’s reporting requirements for islamic banks are conceptually in line with the frs. consequently, the general basis of these guidelines is to provide information that is useful to stakeholders, particularly investors and creditors of islamic banks, as recommended by the “conceptual framework for financial reporting” (iasb, 2018). however, as the guidelines were revised in 2019, the extent of disclosure based on mandatory guidelines by bnm has not been examined. moreover, in line with providing useful information, islamic banks are recommended to make voluntary disclosure, in addition to mandatory disclosure. amin, ariffin, & fatima │ shariah disclosure practices in malaysian islamic banks using the shariah disclosure index international journal of islamic economics and finance (ijief), 4(si), 63-86│65 this study attempts to examine the level of compliance on shariah disclosure in islamic banks’ annual reports, which includes both mandatory and voluntary disclosure. shariah disclosure is important to convince stakeholders of islamic banks that these banks are indeed shariah compliant in all aspects of their activities. shariah disclosure would strengthen the credibility of the products and services offered by the islamic banks and substantiate that they are indeed different from conventional banks. the identity of banks as being “islamic” is encapsulated in the fact of their being shariah complaint. islamic banks have to constantly reassure their stakeholders, especially their depositors and customers of the fact that they are indeed islamic in order to attract and keep these customers. this is because the banking sector is extremely competitive and being islamic is a niche that attracts the muslim customers to these banks. should these banks fail to adequately convince their customers, there are several other competing islamic banks to choose from. one of the ways to validate their shariah compliance is to provide such details through disclosure in their annual reports. these reports would be referred to by informed customers and they in turn would relay interesting and important information to their relatives and friends. therefore, the importance of conveying the fact that they are shariah compliant to their stakeholders, should not be underestimated by islamic banks. due to shariah compliance being the fundamental aspect of these banks, bnm has issued guidelines to assure stakeholders of this fact. consequently, disclosure of such information has become mandatory, hence noncompliance could result in penalties on these banks. however, a recent study that specifically focuses on shariah disclosure by islamic banks in malaysia, in reference to bnm guidelines and aaoifi standards, in particular has been lacking. thus, in addition to helping islamic banks to provide assurance of their identity, retain customers, and generate findings beneficial to regulators, this study attempts to extend the literature on shariah disclosure. the organization of the paper is as follows: section 2 comprises the background, development and relevant regulations in relation to islamic banking in malaysia. relevant prior studies are also reviewed in this section. furthermore, there is a discussion on institutional theory, which is referred to in framing the hypothesis of this study. section 3 covers the method and data used in this study. section 4 discusses the analysis of results and findings of this research. lastly, section 5 concludes this study with a summary of the findings, recommendations and limitations of the research. amin, ariffin, & fatima │ shariah disclosure practices in malaysian islamic banks using the shariah disclosure index international journal of islamic economics and finance (ijief), 4(si), 63-86│66 ii. literature review 2.1 history and concepts of islamic banking historically, the first islamic financial institution in malaysia was the muslim pilgrimage saving corporation (lembaga tabung haji), which was established in 1963. in 1969, this corporation transitioned into tabung haji, which primarily is a savings for muslims to perform their pilgrimage. tabung haji makes shariah compliant investments with the funds, i.e. free of riba (interest). the success of tabung haji led to the establishment of bank islam malaysia berhad (bimb) by the malaysian government, in 1983. bimb was the first full-fledged islamic commercial bank in malaysia (ariff, 1988). next, bank muamalat malaysia berhad was established in 1999. since then, conventional banks started offering islamic products and services through islamic windows, and foreign full-fledged islamic banks started operations in malaysia. the islamic windows later became subsidiaries of conventional banks. from humble beginnings, islamic banking has grown to become an important component in the malaysian financial system, contributing significantly to the malaysian economy (islam, ahmed & abdul razak, 2015). five features distinguish islamic banks from conventional banks (haniffa and hudaib, 2007). the first feature is the underlying philosophy of islamic banks being shariah compliant. as islamic banks are entrusted with investing depositors’ and shareholders’ funds in line with the shariah, they are accountable to communicate their compliance to stakeholders in their annual reports. secondly, to avoid interest-based products, islamic banks provide profit and loss-based products, such as mudharabah and musharakah. therefore, transparency on these products’ details is crucial to the stakeholders. moreover, islamic banks inadvertent involvement in nonpermissible activities, for example activities with uncertainty (gharar) should be fully disclosed to stakeholders through annual reports. in addition, islam emphasises social justice, therefore, islamic banks are expected to be socially accountable by providing zakat (alms), charity and qard (benevolent loan). as zakat is compulsory in islam, details on zakat, such as the amount of zakat distributed, zakat payable, and the beneficiaries are crucial to be reported to stakeholders. furthermore, details on islamic banks’ social contributions such as charity and qard, specifically sources and the usage of qard fund would be warranted by stakeholders. thus, information on zakat, charity and qard should be reported by islamic banks in their annual reports. amin, ariffin, & fatima │ shariah disclosure practices in malaysian islamic banks using the shariah disclosure index international journal of islamic economics and finance (ijief), 4(si), 63-86│67 the final difference between islamic and conventional banks is the former has a shariah supervisory board, or shariah committee in the case of malaysia. this committee is an internal control mechanism that ensures all operations and business transactions are in line with the shariah. therefore, islamic banks should disclose details regarding the competence of their shariah committee to boost public confidence on the shariah compliance of their operations. after providing a brief narrative on the history and nature of operations of islamic banking, the next section proceeds with relevant islamic banking regulation. 2.2 islamic banking regulation in malaysia, a new legislation was introduced in 2013 that governs and strengthens the regulations on shariah compliance in islamic financial institutions. this legislation is the islamic financial services act (ifsa) 2013. before that, the islamic banks were governed by the islamic banking act 1983. ifsa 2013 replaced the prior act by imposing more stringent regulation in which more penalties will be charged on the islamic banks including takaful1 institutions that do not comply with the shariah requirements. generally, this act provides regulatory requirements in terms of supervision of islamic financial institutions, payment systems, and other relevant activities to enhance the financial stability and compliance with the shariah (ifsa, 2013). it is mandatory for islamic banks to adhere to ifsa 2013, thus compliance with this regulation provides added assurance of islamic banks’ shariah compliance. however, islamic banks should not only comply with the shariah, but report this compliance to their stakeholders. thus, in relation to financial reporting, the guidelines on financial reporting for licensed islamic banks (gp8-i) is the first reporting guideline issued by bnm for islamic banking institutions. this guideline was issued in august 2003 for islamic banks’ annual accounts commencing in 2004. the latest revised guidelines on financial reporting for islamic banks were issued on 27 september 2019, namely the “financial reporting for islamic banking institutions”. it clarifies and sets the specific requirements on the application of malaysian financial reporting standards (mfrs). this guideline focuses on providing the basis for presentation and disclosure of islamic banks’ financial statements on financial performance of the banks, as well as their shariah and mfrs compliance (bnm, 2019). this guideline aims to ensure consistency and comparability of financial statements of islamic banks in complying with the provisions of the companies act 2016, approved accounting standards and shariah requirements. 1 takaful can be likened to islamic insurance. amin, ariffin, & fatima │ shariah disclosure practices in malaysian islamic banks using the shariah disclosure index international journal of islamic economics and finance (ijief), 4(si), 63-86│68 2.3 previous studies 2.3.1 islamic banks’ compliance with accounting standards iqbal, ahmad and khan (1998) listed the complex institutional aspects and structural requirements for islamic banks to be competitive as well as to prosper within the banking sector. one of the major challenges is to develop uniform regulations among islamic banks around the world. this is because the banks might have different theories and practices (siddiqi, 2006) in addition to different countries adhering to different accounting standards or guidelines. according to sole (2007), two institutions were established to achieve international consistency; the first institution is the accounting and auditing organization for islamic financial institutions (aaoifi), which was established in 1991 and based in bahrain. aaoifi is primarily responsible for the development and issuance of standards for the global islamic finance industry. it issues the shariah, accounting, auditing, ethics, and governance standards for islamic financial institutions. the second institution is the islamic financial services board (ifsb). it is an international standard setter that promotes the stability of islamic financial services industry by issuing standards and guidelines for banking, capital market, and insurance industry. a number of prior studies examined islamic banks’ compliance with aaoifi standards in the middle east. sarea and hanefah (2013) distributed questionnaires to 312 accountants of islamic banks in bahrain. similarly, shatnawi and al-bataineh (2013) distributed questionnaires to the accountant, chief accountant, financial manager, division manager, auditor, and vice president of jordan islamic bank branches located in irbid, madaba, and mafraq. both studies found commitment to compliance with aaoifi standards. specifically, sarea and hanefah’s (2013) results indicated that the islamic banks in bahrain were in full convergence to aaoifi accounting standards. since aaoifi accounting standards are mandatory in bahrain, findings of high level of compliance with these standards was expected. shatnawi and al-bataineh’s (2013) findings also revealed that the jordan islamic bank was committed to compliance with aaoifi standards. later, ahmad and daw (2015) examined compliance of fashlowm islamic branch of the gumhouria bank (the biggest bank in libya) with aaoifi’s guidelines. in addition to questionnaires, the study used content analysis of annual reports from 2010 to 2013. the results of this study indicated that the compliance level was low during the early years at 30.4 %, which was amin, ariffin, & fatima │ shariah disclosure practices in malaysian islamic banks using the shariah disclosure index international journal of islamic economics and finance (ijief), 4(si), 63-86│69 inconsistent with the results in sarea and hanefah (2013). however, the level of compliance increased over the period of study, reaching 47.4 % in 2013. unlike the studies before, ajili and bouri (2017) compared the level of compliance of 39 islamic banks in gulf cooperation council (gcc) states with the disclosure requirements of aaoifi and international financial reporting standards (ifrs). their findings showed that although 23 banks complied with aaoifi and 16 banks complied with the ifrs, the level of compliance with ifrs was higher than the level of compliance with aaoifi. subsequent to a brief review of relevant literature on compliance of islamic banks to accounting standards, the next section discusses the importance of disclosure, in general, in the banking sector and particularly in islamic banks. then, the following section proceeds to the literature on shariah disclosure in islamic banks. 2.3.2 the importance of reporting in islamic banking sector reporting through disclosures is the means to communicate with stakeholders, hence information disclosure is needed to ensure the effective allocation of resources in a society (adina & ion, 2008) and reduce the problem of information asymmetry between the managers and external users (verrecchia, 2001; healy & palepu, 2001). huang (2006) justified the importance of disclosure in the banking sector. firstly, the usefulness of accounting reports in stakeholders assessing the performance of banks. secondly, as risks and cash are paramount in banks, their performance cannot be solely evaluated by earnings. lastly, stakeholders need to know the breakdown of items as aggregated figures are less informative. moreover, the increasing complexity of the financial environment and diversity of information required by users (frolov, 2007) have driven more quantitative and qualitative disclosures, including in banks. islam could influence accounting measures and disclosure of islamic banks (baydoun and willet, 2000). specifically, two important criteria for disclosure in islamic accounting are social accountability and full disclosure (haniffa & hudaib, 2002; baydoun & willet, 2000). as a khalifah, accountability to allah ultimately, encompasses accountability to other creations. therefore, accountants and managers are also accountable to the society and will be judged in the hereafter (maali, casson & napier, 2006). the qur’an states: “god takes careful account of everything” (qur’an, 4:86). this short phrase from the qur’an is a reminder that each human being, including preparers of islamic banks’ annual reports, will be answerable for their deeds on earth on the day of judgement. therefore, based on haniffa and hudaib (2002), amin, ariffin, & fatima │ shariah disclosure practices in malaysian islamic banks using the shariah disclosure index international journal of islamic economics and finance (ijief), 4(si), 63-86│70 disclosing useful information is one of the ways for these preparers to discharge their accountability to their stakeholders. baydoun and willet (2000) explained that full disclosure means disclosing useful information to the public in accordance with the principles of shariah, instead of disclosing everything. similarly, according to haniffa and hudaib (2002), social responsibility and full disclosure emphasise on the disclosure of relevant and faithfully represented information that will assist users in making both economic and religious decisions, simultaneously enable management and accountants in fulfilling their obligations to allah and ummah. 2.3.3 shariah related disclosure although there are several disclosure studies on islamic banks, literature specifically related to shariah disclosure is limited, albeit growing. for example, other than paino, bahari, and bakar (2011) who studied shariah reporting in islamic banks in malaysia, wan abdullah, percy, and stewart (2013) examined the extent of disclosure on shariah supervisory boards (ssb) in malaysian and indonesian islamic banks. as ssb oversees shariah compliance, the disclosure on ssb is deemed as shariah related. later, ramli et al. (2015) broadens their study’s scope to shariah governance. paino et al. (2011) developed a shariah disclosure index based on the guidelines issued by bnm. their index items include performance overview and statement of corporate governance, role and responsibilities of shariah advisory council (sac), zakat obligations and zakat amount. they performed a content analysis of the 2009 and 2010 annual reports for 17 islamic banks in malaysia. they found that, overall, the score of compliance was 94.7% on average. only 7 items scored 100%. the chi-square test indicated that there was no significant difference in the level of shariah disclosure among islamic banks in malaysia. as mentioned above, wan abdullah et al. (2013) focused only on disclosure in relation to ssb. they analysed the content of annual reports for 2009 of 19 and 6 islamic banks in malaysia and indonesia, respectively. an ssb index was developed by reviewing ssb disclosure practices literature, aaoifi governance standards, ifsb’s corporate governance guidelines, and local malaysian and indonesian guidelines and regulations. the items in the index encompass ssb members’ background, ssb’s duties, responsibilities and activities, ssb report and ssb remuneration. the results indicate that there was still limited disclosure on ssb as only 4 banks disclosed more that 50% of the ssb index items. their findings suggest a need for higher level of disclosure on ssb in order to demonstrate greater accountability. amin, ariffin, & fatima │ shariah disclosure practices in malaysian islamic banks using the shariah disclosure index international journal of islamic economics and finance (ijief), 4(si), 63-86│71 ramli et al. (2015) developed a shariah governance index from the bnm guidelines. the index contained governance items on board of directors, shariah supervisory board, internal shariah review, shariah audit, shariah risk management, shariah research, management and shariah secretariat. data were collected using content analysis of 2012 annual reports of 7 islamic financial institutions which were randomly picked from the list of licensed islamic banks from bnm website. their results indicated that maybank islamic berhad (mib), bank islam malaysia berhad (bimb), and bank muamalat malaysia berhad (bmmb) had the most shariah governance disclosure, respectively. furthermore, there was higher disclosure on items related to board of directors and ssb, whereas disclosure related to shariah research was low. based on the review of the literature above, it is evident that literature on shariah related disclosure exists. however, since then, there have been new regulatory requirements in relation to shariah disclosure. hence, due to these requirements, failure to disclose would be tantamount to non-compliance, which could result in certain penalties for the islamic banks. thus, this study determines the extent of shariah disclosure by islamic banks in malaysia subsequent to updated regulatory requirements. 2.4 institutional theory and hypothesis in relation to the islamic banks’ context, islamic banks face pressures from bnm because there are many regulations that they need to comply with. these regulations are the shariah governance framework (2010), which has been superseded by shariah governance policy document (2019) islamic financial services act (2013), and financial reporting for islamic banking institutions (revised in 2019). in addition, islamic banks need to deal with indirect pressures from society’s expectations. in terms of reporting, if islamic banks comply with authority imposed shariah reporting rules, they will have no problems with authorities. this should validate the legality of their operations, thus differentiate them from conventional banks, consequently attracting customers. this study specifically uses coercive isomorphism of institutional theory to develop the hypothesis. prior literature found that coercive pressures, for example from the world bank, enhances environmental disclosure (rahaman, lawrence, & roper, 2004). moreover, institutional pressure improves the quality of circular economy accounting information disclosure by chinese listed companies (wang et al., 2014). in addition, prior studies found that regulation would coerce management to strictly follow rules leading to homogeneity among firms (carpenter and feroz, 2001). this is supported by amin, ariffin, & fatima │ shariah disclosure practices in malaysian islamic banks using the shariah disclosure index international journal of islamic economics and finance (ijief), 4(si), 63-86│72 paino et al. (2011) who found that there was no significant difference in the level of shariah disclosure among islamic banks in malaysia. in the context of this study, based on institutional theory, bnm regulations would coerce islamic banks to comply with the reporting requirements; hence compliance level on shariah disclosure is expected to be high among islamic banks in malaysia. the pressure is more severe as enforcement action may be taken if the banks fail to disclose. furthermore, extending prior literature, there should be minimal variation of shariah disclosure in the annual reports of islamic banks. therefore, the hypothesis of this study is: the compliance level of shariah disclosure is high among islamic banks in malaysia. iii. methodology 3.1 data this study uses secondary data from the annual reports for the year 2016 of all 16 commercial islamic banks in malaysia, which are listed by bnm. there are various islamic financial institutions in malaysia, including commercial islamic banks, development financial institutions, investment banks, and takaful operators. however, this study only focuses on the population of commercial islamic banks. the 2016 annual reports were the latest available annual reports at the time of data collection. these annual reports were accessible from each bank’s website. the shariah disclosure in the annual reports were measured using an index, thus its development is discussed next. 3.2 model development of shariah disclosure index a shariah disclosure index was developed to measure the level of compliance. a disclosure index is a checklist of items that companies would potentially disclose (paino et al., 2011) as it comprises either mandatory or voluntary items, or both. therefore, this study’s 31 mandatory items were a compilation of shariah disclosure requirements from bnm’s financial reporting for islamic banking institutions guideline, whereas the 5 voluntary items were added from the aaoifi standards. thus, the index has 36 shariah disclosure items in total, grouped into 5 categories as shown in table 1. amin, ariffin, & fatima │ shariah disclosure practices in malaysian islamic banks using the shariah disclosure index international journal of islamic economics and finance (ijief), 4(si), 63-86│73 table 1. number of items in each category category mandatory item no. voluntary item no. financing, deposit & investment 1–6 and 9 7,8,10,11 zakat and charity 13–20 12 shariah non-compliance activity 21–26 shariah committee 27–33 qard 34–36 the shariah disclosure index was calculated using the following formula: 𝑆ℎ𝑎𝑟𝑖𝑎ℎ 𝐷𝑖𝑠𝑐𝑙𝑜𝑠𝑢𝑟𝑒 𝐼𝑛𝑑𝑒𝑥 = ∑ 𝐴𝑐𝑡𝑢𝑎𝑙 𝑑𝑖𝑠𝑐𝑙𝑜𝑠𝑢𝑟𝑒 × 100 𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑟𝑒𝑙𝑒𝑣𝑎𝑛𝑡 𝑖𝑡𝑒𝑚𝑠 based on the formula, the actual disclosure is the total number of shariah items disclosed by a bank in its annual report, whereas the total number of relevant items is the total number of items on the index that are relevant to that specific bank. for example, for those banks that pay zakat, item no. 18, which is the reason for not paying zakat is not relevant to them. therefore, the total relevant items is 35 (i.e. 36 items minus 1), as both mandatory and voluntary items are deemed relevant. this is because all categories listed above (table 1) are relevant to islamic banks, thus other than item no. 18, the remaining items are considered to be items that should be disclosed by the banks. nevertheless, there has been a distinction between mandatory and voluntary items in the analyses of shariah disclosure. two types of analyses were performed by this study: (i) each bank’s extent of shariah disclosure, which is based on overall disclosure and (ii) the extent of shariah disclosure for each item. 3.3 method watson (2015) considered quantitative research as a way of thinking about the world which involves deductive approach, measurement, analysis as well as conclusion. rasinger (2013) outlined the flow of quantitative deductive approach, which is first based on theory and developing hypotheses, which are then either proven or disproven by the empirical results. similarly, holton and burnett (2015) specified that the quantitative approach normally starts with a specific theory, which leads to hypotheses that are then measured quantitatively and evaluated according to established research procedures. therefore, it can be concluded that this study employs quantitative research as it framed a hypothesis based on institutional theory. furthermore, in order amin, ariffin, & fatima │ shariah disclosure practices in malaysian islamic banks using the shariah disclosure index international journal of islamic economics and finance (ijief), 4(si), 63-86│74 to test this hypothesis, secondary data were collected from the annual reports using content analysis, specifically to determine the extent of shariah disclosure of islamic banks using the disclosure index that was developed, as explained above. then, the study used rudimentary statistical analysis, in particular ratios and percentages as the measure of extent of shariah disclosure. iv. results and analysis 4.1 results table 2 presents the extent of mandatory and voluntary shariah disclosure for each of the islamic banks. the banks are ranked according to those that have the highest percentage of mandatory disclosure, followed by the highest percentage of voluntary disclosure. the total relevant items (tri) are clearly indicated as the denominator under the column mts/tri (table 2). therefore, the percentage of disclosure is more accurate as it is based on a variable denominator, which is the total items specifically relevant to each islamic bank. as these are mandatory items, they are deemed to be the minimum required disclosure. table 2. extent of mandatory and voluntary shariah disclosure bank description mts/tri md (%) vts vd (%) a domestic full-fledged islamic 26/27 96.3 3 60.0 b subsidiary of domestic bank 26/27 96.3 3 60.0 c subsidiary of domestic bank 26/27 96.3 1 20.0 d foreign full-fledged islamic 25/26 96.2 2 40.0 e subsidiary of foreign bank 25/27 92.6 3 60.0 f subsidiary of domestic bank 25/27 92.6 0 0.0 g subsidiary of foreign bank 21/23 91.3 3 60.0 h subsidiary of domestic bank 24/27 88.9 2 40.0 i subsidiary of domestic bank 26/30 86.7 0 0.0 j subsidiary of domestic bank 23/27 85.2 3 60.0 k subsidiary of domestic bank 25/30 83.3 2 40.0 l subsidiary of domestic bank 22/27 81.5 0 0.0 m domestic full-fledged islamic 23/30 76.7 0 0.0 n subsidiary of foreign bank 17/23 73.9 1 20.0 o foreign full-fledged islamic 16/23 69.6 0 0.0 p foreign full-fledged islamic 15/23 65.2 0 0.0 total mandatory items=31; total voluntary items=5 as all items are deemed to apply to all islamic banks mts = total score of mandatory items tri = total relevant items md (%) = percentage of mandatory disclosure vts = total score of voluntary items vd (%) = percentage of voluntary items amin, ariffin, & fatima │ shariah disclosure practices in malaysian islamic banks using the shariah disclosure index international journal of islamic economics and finance (ijief), 4(si), 63-86│75 overall, based on the average, shariah disclosure of mandatory and voluntary items are approximately 86 percent and 29 percent, respectively. in table 2, although the total mandatory items are 31, the maximum tri is 30 items for banks i, k and m. as explained above, since bank i is paying zakat, the “reason of not paying zakat” is not relevant to them. banks a, b, c and d have the highest percentage of mandatory disclosure at 96%. banks a and b also rank high in terms of voluntary disclosure as they disclose 3 of the 5 voluntary items. upon further analysis, 7 banks have mandatory shariah disclosure of above 90%. the top 3, based on mandatory disclosure are domestic banks (banks a, b and c). this finding is conceivable as domestic banks are more likely to recognise the authority of bnm and comply with its guidelines. as for the foreign banks, they may also have to consider the disclosure requirements set by the parent and their home country. nevertheless, 3 of the 7 banks that have above 90% disclosure of mandatory items, are foreign banks (banks d, e and g). therefore, foreign banks also comply with the guidelines set by bnm. furthermore, 3 of these banks are subsidiaries of domestic banks (banks b, c and f) and 2 are subsidiaries of foreign banks (banks e and g). thus, it is not only the full-fledged islamic banks that consider shariah disclosure to be important to their stakeholders. however, although these banks seem to be relatively high in terms of disclosing mandatory items, there are still banks, bank f in particular, that did not voluntarily disclose shariah information. it is interesting to find that the banks that have percentage of mandatory shariah disclosure in the 80% range are all subsidiaries of domestic banks (banks h – l). however, although quite high in terms of complying with bnm guidelines on shariah disclosure, banks i and l did not seem to have any voluntary shariah disclosure. unfortunately, bank m, which is one of the domestic full-fledged islamic banks only has a percentage of about 77% in terms of mandatory shariah disclosure. moreover, banks o and p, which have the lowest compliance in terms of mandatory shariah disclosure, are both full-fledged islamic banks. furthermore, all 3 of these banks do not seem to have any voluntary shariah disclosure. hence, it could be of concern as these islamic banks seem to be in need of much improvement in terms of shariah disclosure. overall, based on the findings, 12 out of 16 islamic banks have more than 80% shariah disclosure. even though 80% of disclosure seems high, mandatory items should have 100% compliance. this is because based on the institutional theory, coercive isomorphism highlighted that the pressure from bnm should have resulted in islamic banks disclosing all relevant mandatory items. for amin, ariffin, & fatima │ shariah disclosure practices in malaysian islamic banks using the shariah disclosure index international journal of islamic economics and finance (ijief), 4(si), 63-86│76 example, bank a has 27 relevant mandatory items that should be disclosed. however, they only disclosed 26 items which is about 96.3% disclosure. the item that is not met by the bank is on gharamah (penalty) charges. in fact, all islamic banks should disclose all mandatory items due to regulatory pressure under the institutional theory. moreover, among the 16 islamic banks, 10 of them have disclosed at least one of the voluntary shariah disclosure items as recommended by the aaoifi standards. hence, the results reveal that there are islamic banks that disclose more than the mandatory shariah disclosure items, as these disclosures are made voluntarily. since transparency is promoted in islam, customers may perceive these banks favourably for providing more useful information. however, one-third of the islamic banks do not have voluntary shariah disclosure at all. therefore, similar to the disclosure of mandatory items, the disclosure of voluntary shariah information could be improved. in analysing each shariah disclosure category, the financing, deposit, and investment category, totalling 11 items, is in table 3. the first 2 items on the types and classification of financing into main shariah are disclosed by all 16 islamic banks. the next two items on compensation (ta’widh) and penalty (gharamah) charges are disclosed by two and six islamic banks, respectively. even though, it may be that only these banks have this charge, as this is a mandatory disclosure required by bnm, the other islamic banks should at least include a statement that they have no ta’widh and gharamah charges instead of remaining silent on the matter. for example, bank b clearly states that “the bank does not charge gharamah for its financial facilities”. therefore, it is made transparent to the stakeholders that gharamah is not charged by bank b, hence further disclosure would be irrelevant. if such a disclosure is not made, the stakeholders are left guessing as to whether an item is not relevant or it is case of non-disclosure. the last 4 items listed in the table are basically on the restricted and unrestricted investments. out of 4 items, one item (item 9) is a mandatory bnm requirement; the other 3 items are aaoifi guidelines, thus voluntary disclosure in malaysia. in relation to item 9, 75% of islamic banks classified the unrestricted investment account into the main shariah contract. in terms of voluntary items, half of the banks disclosed the statement of opening and closing balance of restricted investment and disclosed the distribution of unrestricted investment account, whereas 7 banks disclosed the sources of unrestricted investment account; however, none disclosed the method used to allocate the investment profit. nevertheless, the voluntary amin, ariffin, & fatima │ shariah disclosure practices in malaysian islamic banks using the shariah disclosure index international journal of islamic economics and finance (ijief), 4(si), 63-86│77 disclosure indicates that there are islamic banks which disclosed more than expected by bnm. table 4 lists the zakat and charity category. the findings show that none of the islamic banks disclosed the opening and closing balance of zakat. this might be because this requirement is from aaoifi guideline, thereby voluntary. hence, islamic banks are not pressured by bnm to disclose this information. in addition, out of 16 islamic banks, only 11 islamic banks pay zakat. these 11 banks disclose their zakat amount and responsibility of paying zakat, however, only 10 islamic banks disclose the method applied in determining the zakat base. however, only 6 of these 11 islamic banks reveal the amount of their zakat distribution to beneficiaries. table 3. financing, deposit, and investment no shariah disclosure item number of islamic banks with disclosures total (%) financing 1. types of financing (home, personal financing, etc.) offered by the bank 16 100 2. classification of financing into main shariah contracts (bba, murabahah, etc.) 16 100 3. ta’widh (compensation) charges for late payment financing 2 13 4. gharamah (penalty) charges for late payment financing 6 38 deposit 5. type of islamic deposit (saving, demand, etc.) 16 100 6. classification of islamic deposits into main shariah contract (wadi’ah, tawarruq) 16 100 investment 7. opening and closing balance of restricted investment 8 50 8. sources of unrestricted investment account 7 44 9. classification of unrestricted investment account into main shariah contract 12 75 10. profit sharing ratio of unrestricted investment account 8 50 11. method used to allocate investment profit (separate vs. pooling) 0 0 items 1–11: relevant to all islamic banks (n=16) amin, ariffin, & fatima │ shariah disclosure practices in malaysian islamic banks using the shariah disclosure index international journal of islamic economics and finance (ijief), 4(si), 63-86│78 table 4. zakat and charity no shariah disclosure item number of islamic banks with disclosures total (%) 1. opening and closing balance of zakat fund 0 0 2. amount of zakat payable 11 100 3. amount of zakat distributed 6 45 4. bank’s responsibility to pay zakat 11 100 5. method applied in determining zakat base 10 91 6. beneficiaries of zakat fund 7 64 7. reason for islamic bank for not paying zakat 4 80 8. sources of donations / charities fund 13 81 9. usage of donations /charities fund 13 81 items 1–6: relevant to 11 islamic banks that pay zakat (n=11) item 7: relevant to 5 islamic banks that do not pay zakat (n=5) items 8–9: relevant to all islamic banks (n=16) as for the 5 islamic banks that do not pay zakat, only 4 islamic banks disclose that it is not the banks’ responsibility to pay zakat as it is deemed to be the responsibility of individual depositors. one of the islamic banks did not make any statement and was silent about zakat. moreover, from the analysis, only 10 islamic banks disclosed the sources and usage of donation funds. this information should be disclosed by the islamic banks as stakeholders would want to know the source of charities fund, the amount collected and its usage. since all islamic banks should operate within the boundaries of the shariah, it is essential to be transparent if there is any income from non-shariah compliant activity. table 5 reveals that the majority of islamic banks do disclose items related to non-shariah compliance, i.e. the nature and amount of shariah non-compliance income, as well as rectification process and control measures to avoid recurrence of the activity. the relatively high disclosure may be because these items are mandatorily required by bnm. the islamic banks should at least include a statement which negates shariah noncompliance activities during the year. amin, ariffin, & fatima │ shariah disclosure practices in malaysian islamic banks using the shariah disclosure index international journal of islamic economics and finance (ijief), 4(si), 63-86│79 table 5. non-shariah compliant activities shariah disclosure item number of islamic banks with disclosures total (%) 1. nature of shariah non-compliance activity 13 81 2. amount of shar’ah non-compliance income 14 88 3. number of shariah non-compliance activities which occurred during the year 13 81 4. rectification process to avoid recurrence 13 81 5. control measure to avoid recurrence 13 81 6. disposal of prohibited earnings to charitable causes 16 100 item1–6: relevant to all islamic banks (n=16) table 6. shariah committee no shariah disclosure item number of islamic banks with disclosures total (%) 1. shariah committee member’s signature on shariah committee report 16 100 2. purpose of shariah committee engagement 16 100 3. nature of work performed by shariah committee 16 100 4. management responsibility in ensuring shariah compliance 16 100 5. shariah committee endorsement on shariah compliance in contract and document 16 100 6. shariah committee member’s remuneration 16 100 7. shariah committee member’s qualification 16 100 items 1–7: relevant to all islamic banks (n=16) table 6 lists items disclosed in the shariah committee report related to shariah governance framework. the findings show that all islamic banks disclosed the shariah committee member’s signature, statement on the purpose of shariah committee engagement, nature of work performed by the shariah committee, management responsibility in ensuring shariah compliance, and shariah committee endorsement on shariah compliance in contract and document. all banks also disclosed the remuneration and qualification of their shariah committee members. qard is an interest-free loan. table 7 lists the shariah disclosure items related to qard. after analysing the annual reports, only 4 out of the 16 islamic banks disclosed the details on qard funds as only these banks offer qard. all 4 banks disclosed the usage of qard fund, but only one of them did not disclose the opening balance, closing balance and sources of qard fund. amin, ariffin, & fatima │ shariah disclosure practices in malaysian islamic banks using the shariah disclosure index international journal of islamic economics and finance (ijief), 4(si), 63-86│80 table 7. qard no shariah disclosure item number of islamic bank with disclosures total (%) 1. opening and closing balance of qard 3 75 2. sources of qard fund 3 75 3. usage of qard fund 4 100 items 1–3: relevant to 4 islamic banks (n=4) 4.2 analysis based on the overall analysis, the majority of items are disclosed by all islamic banks. however, none of the banks had 100% compliance, even on mandatory items. therefore, the hypothesis that there would be high disclosure amongst islamic banks due to coercive isomorphism and greater accountability, is rejected. these findings are generally in line with prior studies (wan abdullah et al., 2013; ramli et al., 2015), which concluded that islamic banks in malaysia could improve on their shariah disclosure. specifically, prior studies such as wan abdullah et al. (2013) and ramli et al. (2014) found that there is lack of disclosure on shariah items among islamic banks in malaysia. none of them had 100% compliance. the study suggested for higher disclosure to demonstrate greater accountability. in fact, all islamic banks should disclose all mandatory items due to regulatory pressure under the institutional theory. furthermore, paino et al. (2011) found no significant difference in the level of shariah disclosure among islamic banks in malaysia, due to the items being required by bnm. however, this study found differences in percentages of mandatory and voluntary disclosure amongst the islamic banks, hence inconsistent with paino et al.’s (2011) findings. nevertheless, the islamic banks were all consistent on disclosing all the items on shariah committee, thus attaining 100% disclosure. in fact, islamic banks should ensure that all mandatory disclosure items required by bnm are disclosed, if not, these banks may face hefty penalties. based on the entire analysis for each item, it shows that most of the items were disclosed by all islamic banks. the obvious findings on the category of shariah committee was that all items in that category amin, ariffin, & fatima │ shariah disclosure practices in malaysian islamic banks using the shariah disclosure index international journal of islamic economics and finance (ijief), 4(si), 63-86│81 showed 100% score which means that all islamic banks disclosed those items related to shariah committee. this finding shows that there is no variation in the extent of disclosure made by the islamic banks in relation to this category. this finding is consistent with the findings of paino et al. (2011) that there is no significant difference in the level of shariah disclosure among islamic banks in malaysia. v. conclusion and recommendation 5.1 conclussion this study measured the compliance level of shariah disclosure using a disclosure index developed from bnm and aaoifi guidelines for mandatory and voluntary disclosure, respectively. as mentioned above, the findings contradict institutional theory as none of the islamic banks had 100% disclosure, even on the mandatory items, although there should be coercive pressure from bnm. in fact, on average, the disclosure of mandatory items was about 86 percent, hence could be further improved by 14 percent. naturally, disclosure of the voluntary items was much lower at 29 percent. specifically, there was lack of disclosure on gharamah and ta’widh charges. according to “guidelines on late payment charges for islamic financial institutions”, the shariah does not allow gharamah to be recognised as a source of income for the islamic banks, therefore all gharamah amounts must be channelled to charitable organisations. therefore, islamic banks are required to disclose the use of gharamah amount in the notes to the accounts for ‘sources and usage of donations or charities fund’. in addition, muslim stakeholders would deem ta’widh charges as important. thus, banks that do not charge gharamah or ta’widh charges should clearly mention this to their stakeholders. moreover, stakeholders may be interested in the beneficiaries of zakat funds, hence this information should be disclosed in the annual reports. this will lead to these islamic banks discharging their accountability to their stakeholders, and society whilst upholding shariah principles. other findings show that there are some banks which disclose the voluntary items as highlighted by the aaoifi standards. amin, ariffin, & fatima │ shariah disclosure practices in malaysian islamic banks using the shariah disclosure index international journal of islamic economics and finance (ijief), 4(si), 63-86│82 5.2 recommendation the study suggests that bnm as a regulator should put an effort in determining the reasons behind the non-compliance of shariah mandatory disclosure requirements by islamic banks. regulators should be apprehensive that none of the islamic banks had 100% compliance, even on mandatory items. thus, further investigation is warranted. in fact, it is of concern that a few full-fledged islamic banks ranked relatively low in terms of mandatory compliance. on the contrary, some banks are voluntarily disclosing items recommended by aaoifi. these banks may perceive the information to be useful to their stakeholders; therefore, bnm may consider including these items in their financial reporting guidelines for islamic banking institutions, in future. 5.3 limitations of the study and suggestions for future research although this study meets its objectives and provides useful findings, there are some limitations that could be considered by future studies. firstly, since this study’s sample is the population of islamic banks in malaysia, the findings is not generalisable to other islamic financial institutions (ifis) in malaysia. therefore, future research could conduct a similar study on other ifis, and in other countries. moreover, this study has relied on content analysis of secondary data. hence, future studies could conduct interviews to obtain clarification and gain deeper insight on shariah disclosure in ifis. p amin, ariffin, & fatima │ shariah disclosure practices in malaysian islamic banks using the shariah disclosure index international journal of islamic economics and finance (ijief), 4(si), 63-86│83 references accounting and auditing organization for islamic financial institutions (aaoifi) (1991). shariah standard. adina, p. & ion, p. 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(2014). ownership governance, institutional pressures and circular economy accounting information disclosure: an institutional theory and corporate governance theory perspective. chinese management studies, 8(3), 487-501. amin, ariffin, & fatima │ shariah disclosure practices in malaysian islamic banks using the shariah disclosure index international journal of islamic economics and finance (ijief), 4(si), 63-86│86 this page is intentionally left blank. international journal of islamic economics and finance (ijief) vol. 4(1), page 121-148, january 2021 impact of covid-19 on islamic stock markets: an investigation using threshold volatility and event study models mohammad irfan auro university, india corresponding email: mohammad.irfan@aurouniversity.edu.in salina kassim international islamic university malaysia, malaysia, ksalina@iium.edu.my sonali dhimmar auro university, india, sonalidhimmar007@gmail.com article history received: november 30th, 2020 revised: december 25th, 2020 accepted: january 19th, 2021 abstract the covid-19 is an unexpected event in the world history with substantial socioeconomic impact on the global economy. the global financial market was also badly affected as reflected by the extreme volatility as well as weak performances in the stock markets all over the world. how do the islamic stock markets in various parts of the world behave during the covid-19 shock? the objective of this study is to identify the impact of the covid-19 pandemic as declared by the world health organization on the islamic stock markets. using the threshold volatility and event study models, the study analyses the impact of the covid-19 announcement on the islamic stock indices in the indian stock exchange (represented by the bombay stock exchange bse shariah index) and indonesian stock exchange (represented by the jakarta islamic indices jii). with the date of event identified as 11th march 2020, the event window consists of 60, 30, and 20 days. the results show that the bse shariah and jii have positive coefficients, with the bse shariah index shows negative response to the announcement of covid-19 as global pandemic. on the other hand, the jii reacted positively to the event. the study shows the reaction of a stock exchange is dependent on other economic factors unique to the country, resulting in the events impact of the covid-19 to vary from one country to another. keywords: covid-19, stock market, volatility, event study, tarch model jel classifications: c13, c22, c53, g15 type of paper: research paper @ ijief 2021 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.v4i1.10480 web: https://journal.umy.ac.id/index.php/ijief/article/view/10480 citation: irfan, m., kassim, s., & dhimmar, s. (2020) impact of covid-19 on islamic stock markets: an investigation using threshold volatility and event study models. international journal of islamic economics and finance (ijief), 4(1), 121-148. doi: https://doi.org/10.18196/ijief.v4i1.10480 mailto:ksalina@iium.edu.my https://doi.org/10.18196/ijief.v4i1.10480 https://doi.org/10.18196/ijief.v4i1.10480 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v4i1.10480&domain=pdf irfan, kassim, & dhimmar │ impact of covid-19 on islamic stock markets: an investigation using threshold volatility and event study models . international journal of islamic economics and finance (ijief), 4(1), 121-148 │ 122 i. introduction 1.1. background the year 2020 started with an unprecedented event with the global economy being affected badly by the novel coronavirus (henceforth covid-19) that disrupted whole economic activity. first identified in wuhan, china in december 2019, the covid-19 spread very fast and uncontrollably around the globe. the covid-19 outbreak was termed as a ‘black swan’ because it was creating an unexpected economic difficulties and had a widespread effect on the whole world (alali, 2020). on 30th january 2020, the world health organization (who) announced the covid-19 outbreak a public health emergency of international concern (pheic) (panyagometh, 2020). on 11th february 2020, the who named coronavirus disease covid-19 , and subsequently on 11th march 2020, announced it as a global pandemic (asia, 2020). the managing director of the international monetary fund, kristalina georgieva stated that “we anticipate the worst economic fallout since the great depression” (toi, 2020). the covid-19 is also classified as zoonotic as it can be transferred between people and animals (kulal, 2020). the epidemic rapidly spread around the world. as of 13th august 2020, there were greater than 20.6 million confirmed covid-19 cases in 188 countries and more than 749,000 deaths reported (panyagometh, 2020). india was not spared from the impact of the covid-19 pandemic. as the country with the second-largest population in the world, india has 176 million poor people, with the lowest rank in sanitation and medical amenities (alam & chavali, 2020). the first covid-19 case in india was identified on 30th january 2020 and spreading very rapidly with the current number of confirmed cases estimated at (world health organisation (who), 2020). therefore, covid-19 pandemic became an important concern for the government of india. prime minister narendra modi declared 21 days countrywide lockdown on 24th march 2020, and further extended the lockdown period until 3rd may 2020 as the situation further worsened. similarly, the covid-19 situation in indonesia was also very bad. indonesia reported its first two confirmed cases on 2nd march 2020 (alam & chavali, 2020). as the situation did not show any sign of receding, the president of indonesia declared covid-19 as national disaster on 13th april 2020. by 1st may 2020, indonesia reported cases of more than 23,000 (chong et al., 2020). from a serious health crisis, the covid-19 pandemic has resulted in an economic crisis that affected the world economic growth and societies as a whole (panyagometh, 2020). the epidemic undoubtedly creates one of the biggest challenges ever confronted by humanitarian organization and global development as it gives indirect impact on political, economic & social system (oecd, 2020). the outbreak of the covid-19 pandemic has resulted in irfan, kassim, & dhimmar │ impact of covid-19 on islamic stock markets: an investigation using threshold volatility and event study models . international journal of islamic economics and finance (ijief), 4(1), 121-148 │ 123 significant economic fallout to the global economy, especially because china is the main exporter to many countries. many countries depend on raw materials from china, thus this dependency has tremendously affected the global economic activity (kulal, 2020). economic disruptions due to the covid19 have led to industrial output losses as well as job losses in many sectors. according to the international monetary fund (imf) forecast, global growth is expected to decline by 6.3% in 2020. likewise, the organisation for economic cooperation and development (oced) expects a downturn in global economic growth by 1.5%, while the asian development bank (adb) estimates the us $4.1 trillion global costs of the covid-19 pandemic, which is estimated to be more than forty times compared to the sars pandemic cost in 2003. moreover, the international labour organization predicts a 25 million increase in global unemployment (khatatbeh et al., 2020). previous researches have shown that there exists strong relationship between key events including political events, geopolitical events, terrorist occurrences, environmental events, and disease outbreaks such as animal diseases, ebola and sars, with the financial markets, particularly the stock market returns (bash, 2020). with the current large-scale nature of the covid19 as shown by the total number of infected cases of 60,074,174 and 1,416,292 deaths till 26th november 2020 (who, november 2020), the global stock market shows a sound response to the world events. in the past when unexpected events occur share market investors are encouraged to exit from an unbalanced market. they are a move towards balanced and secure financial investment. therefore, the purpose of the study is to identify the impact of the covid-19 event on the islamic stock indices in the indian and indonesian stock market returns. specifically, this study aims to achieve the following objectives: • to conduct an event study of pre and post covid-19 on the islamic stock indices in the indian stock exchange and indonesian stock exchange; • to measure the asymmetric threshold of covid-19 new cases, and covid-19 death cases on the islamic stock indices in the indian stock exchange and indonesian stock exchange. the paper is organized into five sections, consisting of the first introductory section. the second section starting with the background theory of the research and focus on the previous studies related to the topic. the second part describes the past studies that include previous events' impact on the selected stock market. the third section includes the research methodology applied in the study. the fourth section is concerned with the results and analyses of the study. it involves the findings of the research. the final section irfan, kassim, & dhimmar │ impact of covid-19 on islamic stock markets: an investigation using threshold volatility and event study models . international journal of islamic economics and finance (ijief), 4(1), 121-148 │ 124 presents the conclusion and future recommendations. it defines a summary of the study and areas for further research. ii. literature review 1.1. background theory in the stock market, new events frequently impacted on stockholders behaviour that directly affects stock prices. the previous event study-based research presented by fama in 1969 was helpful in understanding of market reaction on selected particular events (fama et al., 1969). "a market in which prices always "fully reflect" available information is called efficient." [fama (1970)] the concept of efficient market hypothesis presents three forms of the market. the weak form efficiency, semi-strong form efficiency and strong from efficiency. the weak form of emh suggest that past performance of returns can’t predict future price. it assumes that securities price reflects all public information of market but not shows new information which not yet available publicly. the semi-strong form assumes that price of securities adjusts rapidly to any new information which publicly available. the strong from of emh recommended prices reflect both public & private information (jonsson & radeschnig, 2014). the past scenarios show many literatures based on event study impact on stock market prices. the event study is widely used by researcher in the area of finance. it is become the common in business studies. the previous study includes the past events like covid-19, global financial crisis, terrorist attack, elections, data breach disclosure, ban on the sale of restricted shares, stock market index composition changes, monetary policy execution, demonetization etc. 2.2. previous studies in determining the impact of first recorded coronavirus case on indian stock market, bash (2020) analyses the cumulative average abnormal return (caar) of 30 countries. the results show that there is negative impact of covid-19 on the stock market returns. the stock markets in these countries reacted negatively after first case if the covid-19 was reported. (khatatbeh et al., 2020) try to find covid-19 impact on immediate response to infected countries. results revealed that there was significant negative impact on 11 global share market indices. alali (2020) examines the announcement of who regarding covid-19 as a global pandemic and its impact on five biggest stock exchange. the study concludes that declaration of world health organization shows significant negative impact on returns of largest asian share markets. irfan, kassim, & dhimmar │ impact of covid-19 on islamic stock markets: an investigation using threshold volatility and event study models . international journal of islamic economics and finance (ijief), 4(1), 121-148 │ 125 kulal (2020) empirically identifies covid-19 impact on indian stock exchange using data from january 2, 2020 to january 22, 2020 of the nse (national stock exchange). the result showed short-term downturn in stock market returns, and that there is significant effect of covid-19 on the indian stock market. similarly, alam & chavali (2020) describe the effect of covid-19 lockdown period on the indian stock market by applying the event study on 31 listed company in bse.. the analyses on the 35 days event window consist of pre 20 days & post 15 days data show significant positive response in event window period, with the stock market responded significantly during the lockdown period. chavali et al. (2020) identified event of elections impact on the share market. the election event of 2014 was studied. the period of the study consists of 2014 to 2019. sample includes 31 listed companies of bse. the 82 days event window defined result that market react positively on election event. it was drawn from the analyses that efficient market hypothesis semi-strong from is true for emerging country like india. tahir et al. (2020) elaborate event of terrorist attack on stock market of pakistan. the data taken in the research was 1st june 2014 to 31st may 2017. the analyses of the research show significant long-term impact on stock market of pakistan. atsu & prasad (2020) examine data breach disclosure event on share market volatility. the data of s&p 500 index of 96 companies revealed that there is significant difference in after and before breach disclosure. it stat that breach disclosure event has significant impact on equity market volatility. another important event that potentially affecting the global financial market is the us trade war with china. setiawan et al. (2020) explore the impact of the us trade war with china on the asian stock market returns. while the study showed that the market has positive returns before event, it recorded negative returns in the short-term event window. finally, the study provides empirical evidence that market is efficient and stock prices reacts on information quickly. alam & chavali (2020) investigates the indian stock market and how it impacted in lockdown period due to covid-19. the sample consist of 31 listed companies in bse. the period of study is 24th february 2020 to 17th april 2020. the data revealed that there is significant positive response seen in the market. the stock market of india reacted well in lockdown period. market & jung (2020) examine korean exchange performance in long-term horizon with empirical power and specification of test. the result found greatest empirical power in korean exchange. the simulation method gave result of best testing technique is mixture of wilcoxon signed rank test with a book to market test. liu (2020) investigate breaking news impact on stock market. in the short-term abnormal returns shows impact of hot news. it was also suggested from study that breaking news can help in pace with market performance. (chaudhary et al., 2020) explore share market volatility in irfan, kassim, & dhimmar │ impact of covid-19 on islamic stock markets: an investigation using threshold volatility and event study models . international journal of islamic economics and finance (ijief), 4(1), 121-148 │ 126 covid-19 situation. the indices of top 10 nations analysed by using garch model. the data period of the study consists of january 2019 to june 2020. the research concludes negative returns during covid-19 period. the garch model shows significant positive impact for selected market indices. meher et al. (2020) identify effect of covid-19 on price variation in natural gas & crude oil. the data collected from the period 1st may 2017 to 30th april 2020. the result suggests that there is significant effect of coronavirus pandemic on variation in natural gas & crude oil prices. shehzad et al. (2020) analyse stock market returns of us & japan and impact due to covid-19. the result of garch model shows the impact for the s&p 500, nasdaq composite index, dax 30, nikkei 225, ftse mib, and ssec. zhikun (2019) explores the impact on china’s share market due to the ban on the sale of restricted shares. the outcomes recommend that the pressure formed by the announcement of the restricted stock has negative influence on the whole share market. (skrinjaric, 2019) analysed the stock market index composition changes event on zagreb stock market (zsm) returns. the period of data is 2nd january 2015 to 21st march 2018. the research concludes negative impact of stock exclusion on zagreb stock market returns. additionally, it was also mentioned that stock market index composition changes impacted on zsm retunes. šafár & sini (2019) evaluate the announcement of qe federal reserve on the starting phase of market response. the result revealed that on the other day of declaration noted profits, the market shows positive response of announcement. the study by gok & dayi (2018) identified the association between share market returns with general elections of turkish. the election period taken in the study was 1st february 2020 to 31st december 2017. the data analysed by garch model. the analyses declared that june 2015 election has a major negative effect on share market of turkish. nisar & yeung (2018) aims to analyse association between variation in ftse 100 with uk political sentiment. the results conclude that there is short-term relation between variations in stock market with public sentiment. it gives evidence that there is relationship exist between public mood and investors behaviour. case (2018) empirically analyses association between share markets with monetary policy executed by central bank of brazil. the study declared that there is significant impact of implementation of monetary policy on stock market. in terms of industry, financial sector is mostly affected. chauhan (2017) described the impact of demonetization on the indian stock market. the data of s & p bombay stock exchange 100 companies was studied. the result found no significant effect of demonetization on stock exchange. it shows the short-term market fall because of some other reasons. gunawardana (2017) observe the thaifex influence to share market in thailand. focusing on the food and beverage industry, the study finds that irfan, kassim, & dhimmar │ impact of covid-19 on islamic stock markets: an investigation using threshold volatility and event study models . international journal of islamic economics and finance (ijief), 4(1), 121-148 │ 127 semi-strong form of efficient market hypothesis does not hold true in terms of marketing event of exhibition. jin et al. (2017) focused on financial market trends on significant returns of stock market. using the delta naïve bayes approach, the study finds that multisource predictions consistently outperform the single source predictions. katsikides et al. (2016) attempt to explore the association between stock market reaction and corporate social responsibility. the event used in the study is bp and exxon oil spills, hsbc – money laundering; barclays and royal bank of scotland – libor scandal. the analyses revealed that only hsbc event does not affect share market performance. in other four events stock market reacted significantly. pérez-rodríguez & lópez-valcárcel (2012) studied impact of public info like process of research & development in pharma on the valuation of the subsidizing company. specifically, sanofi-aventis and its competitors abbott and roche were studied. the study revealed that there is no significant effect in the starting phase of news of r&d process. it identified that news regarding safety warning had gave negative reaction on valuation of respective firm. iii. methodology 3.1. data to reiterate, this study aims to analyse the impact of the covid-19 global pandemic event on the performance of indian stock exchange and indonesian stock exchange. the research is empirical in nature and relies on secondary data sources. the bombay stock exchange and jakarta stock exchange selected for the study. the stock market data collected from bse & jse official website. the data analysed by using event study methodology of research. the ms excel tool used by the researcher. the event day is 11th march 2020 because on that day who declared covid-19 as global pandemic. this day is taken as t0. the analyses conducted for three event windows. table 1. abbreviation of indices symbols indices bse bombay stock exchange bse shariah bse shariah 500 index jse jakarta stock exchange jii jakarta islamic index cov-nc covid19-new cases cov-dc covid19-new death cases sources: by author’s estimated irfan, kassim, & dhimmar │ impact of covid-19 on islamic stock markets: an investigation using threshold volatility and event study models . international journal of islamic economics and finance (ijief), 4(1), 121-148 │ 128 the three different event window is selected because the author wants to identify the variation in result in different time period. after that period the lockdown was also declared in many places and virus spread very rapidly which panic humans’ mind. that is the reason behind choosing three different event windows. the 1st event window consists of 60 days. it includes 30 days pre & 30 days post event data of bse and jse. the 2nd event window has total 40 days. it means 20 days before and after event date data is collected. the 3rd event window comprises 20 days. it contains pre & post 10 days data from the event day. the short-term impact will easily be found from selected window & the data collected. to investigate forecasting volatility for bse, bse shariah, jse, jii indices, cov-nc and cov-dc. the study period covers from jan 30, 2020, to nov 3, 2020 long with all the time series daily data, because first covid19 case fallen on this date. the coronavirus new cases and death cases series of india and indonesia collected from the oxford martin programme on global development, which is a collaborative database of the university of oxford researchers and global change data lab (our world in data organization, 2020). 3.2. model development 3.2.1. event study methodology the event study methodology is very useful & popular methods to identify effect of event on stock market returns. the event study method provides prediction of indices reaction on declaration of an event. the method is also fruitful to establish relationship between particular event with response of selected stock market. however, the previous study recommended the event study methodology as most suitable technique to evaluate cumulative average abnormal returns of pre & post the declaration of an event. according to the data event window is made. the graphical representation of event window is presented in figure 1. irfan, kassim, & dhimmar │ impact of covid-19 on islamic stock markets: an investigation using threshold volatility and event study models . international journal of islamic economics and finance (ijief), 4(1), 121-148 │ 129 figure 1. event study timeline 1st -50 -30 -30 t0 +30 2nd -50 -20 -20 t0 +20 3rd -50 -10 -10 t0 +10 according to the event, window data is gathered from bse & jse website. the estimation period of 50 days and observation period 30, 20 and 10 days of pre & post event data is clearly mention in the above chart. further data is analysed by ms excel using formulas of event methodology. 3.2.2. method in the every study focused on the methodology, because it will give clear picture on the objectives, the event study methodology describe below (research, 2003) (methodology et al., 2020). first identify the returns of bse & jse from respective data set. the formula for returns is: “rt = p1 – p0/ p0” (1) second step includes the computation of intercept, slop, r-square and standard error using excel formulas. then expected returns is computed. the formula for er is: “er = intercept + slop * mkt. return” (2) estimation period observation period event date 11th march 2020 irfan, kassim, & dhimmar │ impact of covid-19 on islamic stock markets: an investigation using threshold volatility and event study models . international journal of islamic economics and finance (ijief), 4(1), 121-148 │ 130 then average return, average abnormal return and cumulative average abnormal return is calculated. the formula is: “art = rt er” (3) where, rt = stock return on given day er = expected return on given day based on average return average abnormal return and cumulative average abnormal return is computed. further t-test in apply on caar to identify significant impact of event on respective stocks. the formula of t-test is: “caar-t = cumulative average abnormal return / standard error” (4) the significant value of t is 1.96. the result of caar-t is comparing with significant t-value. if the value is greater than 1.96 then result is significant and if it is less than 1.96 then it is insignificant. adf test adf test has been used for the check the stationarity in the data, when adftest is significant (irfan, 2020), p-value is less than 5% and t-test is more than the critical value, after check the stationarity, we go to the run arch test (enders, 1995). after adf-test is doing arch family model (ibrahim, 2019). "∆𝑦𝑡 = 𝛼 + 𝛾𝑦𝑡−1 + ∑ ∆𝑦𝑡−𝑖 + 𝑃 𝑖=1 𝜀𝑡" (5) where 𝑦𝑡 data series is tested and 𝛾𝑡−𝑖 is the 1st difference in the tested series. therefore, ho: 𝛾 = 0, is the null hypothesis to test the data series and h1: 𝛾 < 0, is alternative hypothesis used to check the unit root test, meaning that it is non-stationary when the adf test vale is less that critical value (irfan, 2017), tarch model arch family model has various different method to check the volatility in data from the different concept. threshold-garch method is extended version of garch family model. it checked the leverage effect of bad and good news in the data series. t-garch is also used for the asymmetric check (brooks, 2008). t-garch model finds the negative news will be influence more than the good news, zakoian (1990) and glosten et al (1993). t-garch have divided into two parts, mean variance and conditional variance, meaning that asymmetric response arrival of bad and good news (p.p. & deo, 2013). irfan, kassim, & dhimmar │ impact of covid-19 on islamic stock markets: an investigation using threshold volatility and event study models . international journal of islamic economics and finance (ijief), 4(1), 121-148 │ 131 the conditional variance is now given by: “σt2 = ω + σjp=1 βj σ2t-j + σiq=1 αi u2t-i + σrk=1ϒk u2t-k it-k” (6) iv. results and analysis the data analysis is a crucial part of the research. here, the author interprets charts and tables that help in analyzing data. this part includes bse and jii performance in the covid-19 situation. the cumulative average abnormal returns and t-test justify the results. the presented graph shows movements in the indian & indonesian stock prices. further, adf & tarch model represents its respective findings. it would give a clear explanation of market reaction in the pre-covid event & post-covid event. 4.1. results 4.1.1. bse shariah index results & interpretation of event study table 2, describes the cumulative average abnormal returns for 60 days. it includes 30-day pre event market returns and 30-day post event market returns. the pre event window shows negative returns and post event window also found negative returns. the one thing noted from the table is that before the event the market is already showing downturn values and after the event the negative returns is increased tremendously. overall, the table shows all the caar value in negative terms and t-stat also found negative. the data concludes that returns is significant in pre-post event period. it gives clear idea that covid-19 event has gave some negative impact on bse sariah indices. irfan, kassim, & dhimmar │ impact of covid-19 on islamic stock markets: an investigation using threshold volatility and event study models . international journal of islamic economics and finance (ijief), 4(1), 121-148 │ 132 table 2. calculation of cumulative average abnormal return & ttest (30 day) pre-event data post-event data day caar caar-t caar -t, sig day caar caar-t caar -t, sig 30 -1.171715712 -398.8164025 yes 1 -1.62439 -552.894 yes 29 -1.173354808 -399.3743009 yes 2 -1.6807 -572.059 yes 28 -1.180239247 -401.7175547 yes 3 -1.7274 -587.954 yes 27 -1.193010736 -406.0645812 yes 4 -1.78044 -606.007 yes 26 -1.192188862 -405.7848402 yes 5 -1.85465 -631.266 yes 25 -1.193952506 -406.3851309 yes 6 -1.90362 -647.933 yes 24 -1.198874947 -408.0605802 yes 7 -1.96804 -669.862 yes 23 -1.207833783 -411.1098957 yes 8 -2.01799 -686.864 yes 22 -1.210080046 -411.8744552 yes 9 -2.086 -710.01 yes 21 -1.215098513 -413.5825889 yes 10 -2.15828 -734.613 yes 20 -1.224105262 -416.6482124 yes 11 -2.21057 -752.411 yes 19 -1.23308683 -419.705265 yes 12 -2.25534 -767.65 yes 18 -1.237767852 -421.2985427 yes 13 -2.30353 -784.051 yes 17 -1.246145765 -424.1501296 yes 14 -2.35069 -800.102 yes 16 -1.256484818 -427.6692288 yes 15 -2.38355 -811.289 yes 15 -1.267454741 -431.4030569 yes 16 -2.40728 -819.366 yes 14 -1.275735491 -434.2215725 yes 17 -2.43265 -827.999 yes 13 -1.286660609 -437.9401506 yes 18 -2.453 -834.927 yes 12 -1.302053371 -443.1793788 yes 19 -2.45474 -835.52 yes 11 -1.318840267 -448.8931277 yes 20 -2.46007 -837.334 yes 10 -1.339880824 -456.0546935 yes 21 -2.47929 -843.877 yes 9 -1.362306235 -463.6876217 yes 22 -2.49975 -850.838 yes 8 -1.395117134 -474.8554539 yes 23 -2.51744 -856.859 yes 7 -1.427329245 -485.8194771 yes 24 -2.53537 -862.963 yes 6 -1.450929247 -493.8522004 yes 25 -2.5537 -869.201 yes 5 -1.469551349 -500.1905976 yes 26 -2.57382 -876.051 yes 4 -1.485084423 -505.4775839 yes 27 -2.58868 -881.109 yes 3 -1.49607024 -509.2168218 yes 28 -2.61629 -890.505 yes 2 -1.510282828 -514.0543545 yes 29 -2.65138 -902.449 yes 1 -1.532697743 -521.6837103 yes 30 -2.68365 -913.433 yes source: author’s projected by excel irfan, kassim, & dhimmar │ impact of covid-19 on islamic stock markets: an investigation using threshold volatility and event study models . international journal of islamic economics and finance (ijief), 4(1), 121-148 │ 133 table 3. calculation of cumulative average abnormal return & ttest (20 day) pre-event data post-event data day caar caar-t caar -t, sig day caar caar-t caar -t, sig 20 -0.31093 -89.7576 yes 1 -0.84899 -245.082 yes 19 -0.31398 -90.6388 yes 2 -0.94145 -271.775 yes 18 -0.31347 -90.4908 yes 3 -1.02791 -296.733 yes 17 -0.31767 -91.7046 yes 4 -1.128 -325.628 yes 16 -0.32486 -93.7799 yes 5 -1.25217 -361.47 yes 15 -0.33359 -96.2985 yes 6 -1.34443 -388.104 yes 14 -0.33876 -97.7904 yes 7 -1.46875 -423.993 yes 13 -0.34744 -100.299 yes 8 -1.57573 -454.877 yes 12 -0.36343 -104.914 yes 9 -1.68611 -486.738 yes 11 -0.38148 -110.125 yes 10 -1.80172 -520.112 yes 10 -0.40541 -117.032 yes 11 -1.90343 -549.474 yes 9 -0.43158 -124.588 yes 12 -1.9936 -575.503 yes 8 -0.47304 -136.556 yes 13 -2.09262 -604.09 yes 7 -0.51482 -148.616 yes 14 -2.19397 -633.347 yes 6 -0.54686 -157.865 yes 15 -2.27042 -655.416 yes 5 -0.57502 -165.995 yes 16 -2.33886 -675.173 yes 4 -0.60032 -173.299 yes 17 -2.40415 -694.02 yes 3 -0.62436 -180.236 yes 18 -2.4667 -712.077 yes 2 -0.65839 -190.061 yes 19 -2.51231 -725.242 yes 1 -0.70083 -202.313 yes 20 -2.56102 -739.304 yes source: author’s projected by excel table 3, shows the t-test description as well as caar value. the data shows total 40 days analyses. the pre 20 days of event and post 20 days event data declares negative values. the before 20days of event returns is in minus term. after the event the market is became more volatile and the returns is decreased. the table shows the significant tvalues for all 40 days. the caar-t value describes yes that indicates the result is significant in 40days event window. the analyses revealed significant impact on returns of bse. it suggests that the declaration by who gave negative impact on bse sariah index. table 4. calculation of cumulative average abnormal return & ttest (10 day) pre-event data post event data day caar caar-t caar-t, sig day caar caar-t caar -t, sig 10 0.457105 131.1576 yes 1 0.244834 70.25035 yes 9 0.449495 128.9741 yes 2 0.178683 51.26976 yes 8 0.427818 122.7542 yes 3 0.119422 34.26579 yes 7 0.405995 116.4925 yes 4 0.048376 13.88058 yes 6 0.39354 112.9188 yes 5 -0.04605 -13.2125 yes 5 0.385179 110.5197 yes 6 -0.1104 -31.6769 yes 4 0.379668 108.9385 yes 7 -0.2025 -58.1042 yes 3 0.376218 107.9486 yes 8 -0.2781 -79.7945 yes 2 0.364481 104.5809 yes 9 -0.36102 -103.587 yes 1 0.344318 98.79551 yes 10 -0.449 -128.831 yes source: author’s projected by excel irfan, kassim, & dhimmar │ impact of covid-19 on islamic stock markets: an investigation using threshold volatility and event study models . international journal of islamic economics and finance (ijief), 4(1), 121-148 │ 134 table 4, revealed significant t-test value of cumulative average abnormal returns. the pre and post event data of 20 days presented above. the table describes pre vent caar returns in positive way but in decreasing terms. however, post event data shows downturn but positive returns for four days. on the 5th day from the announcement table specifies negative returns. day by day it is showing an increasing negative caar values. inclusively the table conclude that in the 20 days of event window returns move towards positive to negative. the caar t-test value in “yes” terms. it indicates that there is significant impact of covid-19 event on indian stock market. 4.1.2. jakarta islamic indexresults & interpretation of event study table 5. calculation of cumulative average abnormal return & ttest (30 day) pre-event data post event data day caar caar-t caar -t, sig day caar caar-t caar -t, sig 30 0.105532 30.21174 yes 1 0.249719 71.48955 yes 29 0.108374 31.02541 yes 2 0.288288 82.53085 yes 28 0.109744 31.41746 yes 3 0.327738 93.82464 yes 27 0.113813 32.58244 yes 4 0.365205 104.5509 yes 26 0.120097 34.38124 yes 5 0.405981 116.2242 yes 25 0.124003 35.49944 yes 6 0.479688 137.3249 yes 24 0.12841 36.76111 yes 7 0.550834 157.6927 yes 23 0.126421 36.19171 yes 8 0.617619 176.8116 yes 22 0.122604 35.09903 yes 9 0.681227 195.0216 yes 21 0.11886 34.02722 yes 10 0.735795 210.6431 yes 20 0.114556 32.79495 yes 11 0.79043 226.284 yes 19 0.104667 29.96392 yes 12 0.868081 248.5138 yes 18 0.087711 25.10992 yes 13 0.948922 271.6571 yes 17 0.076238 21.82535 yes 14 1.041864 298.2645 yes 16 0.063435 18.16016 yes 15 1.125065 322.0833 yes 15 0.055147 15.78751 yes 16 1.210518 346.5466 yes 14 0.046851 13.41249 yes 17 1.3047 373.509 yes 13 0.042971 12.30173 yes 18 1.401868 401.3261 yes 12 0.038943 11.14862 yes 19 1.500203 429.4777 yes 11 0.031446 9.002469 yes 20 1.599077 457.7831 yes 10 0.020137 5.764684 yes 21 1.697393 485.9291 yes 9 0.020726 5.933406 yes 22 1.796728 514.3668 yes 8 0.015783 4.518333 yes 23 1.901358 544.32 yes 7 0.027675 7.92282 yes 24 2.02136 578.6743 yes 6 0.03944 11.29093 yes 25 2.150164 615.5482 yes 5 0.057751 16.53291 yes 26 2.292459 656.2844 yes 4 0.077416 22.16258 yes 27 2.438797 698.1778 yes 3 0.103132 29.5247 yes 28 2.605082 745.782 yes 2 0.135956 38.92157 yes 29 2.784277 797.0818 yes 1 0.166549 47.67968 yes 30 2.952376 845.2051 yes source: author’s projected by excel irfan, kassim, & dhimmar │ impact of covid-19 on islamic stock markets: an investigation using threshold volatility and event study models . international journal of islamic economics and finance (ijief), 4(1), 121-148 │ 135 table 6. calculation of cumulative average abnormal return & ttest (20 day) pre-event data post event data day caar caar-t caar -t, sig day caar caar-t caar -t, sig 20 0.307085 91.37815 yes 1 0.455159 135.4399 yes 19 0.300693 89.47613 yes 2 0.484064 144.041 yes 18 0.286862 85.36053 yes 3 0.510573 151.9294 yes 17 0.278554 82.88831 yes 4 0.533284 158.6873 yes 16 0.269021 80.05171 yes 5 0.55588 165.4111 yes 15 0.264326 78.65459 yes 6 0.612981 182.4024 yes 14 0.260202 77.4274 yes 7 0.664305 197.6747 yes 13 0.260749 77.59009 yes 8 0.710485 211.4163 yes 12 0.259703 77.27891 yes 9 0.760486 226.295 yes 11 0.255055 75.89572 yes 10 0.804769 239.4721 yes 10 0.245543 73.06525 yes 11 0.847266 252.1176 yes 9 0.246205 73.26227 yes 12 0.914784 272.2089 yes 8 0.240418 71.54032 yes 13 0.984505 292.9554 yes 7 0.250429 74.51931 yes 14 1.06881 318.0418 yes 6 0.262399 78.08109 yes 15 1.145745 340.9351 yes 5 0.282626 84.09989 yes 16 1.222878 363.8871 yes 4 0.304161 90.50812 yes 17 1.309165 389.5634 yes 3 0.330171 98.24763 yes 18 1.39817 416.0483 yes 2 0.358932 106.8061 yes 19 1.488471 442.9188 yes 1 0.385789 114.7978 yes 20 1.577282 469.3458 yes source: author’s projected by excel table 5, explains the value of cumulative average abnormal return with t-test result of jakarta stock exchange. the event window of 60 days period is analysed. it includes 30 days both before & after data. the caar value around the selected window shows positive returns. here, the pre event caar value is positive but volatile in nature. here it is shown that after the declaration the jii returns is increased & indicates positive upward movement in the market. the ttest caar value is suggest that returns is significant. it is described from data that jakarta stock market impacted by covid-19 event. table 6, analyses t-test value of cumulative average abnormal value. it shows 40 days event window. the table indicates pre 20 days and post 20 days analyses. the table indicates that market was already gave positive returns before the announcement but there is some variation in the returns. after the declaration by who the returns are noted upward market movement & reacted positively. the result declares the significant impact on the jii index. it mentions clear idea about covid-19 impact on indonesian stock market. irfan, kassim, & dhimmar │ impact of covid-19 on islamic stock markets: an investigation using threshold volatility and event study models . international journal of islamic economics and finance (ijief), 4(1), 121-148 │ 136 table 7. calculation of cumulative average abnormal return & ttest (10 day) pre-event data post event data day caar caar-t caar -t, sig day caar caar-t caar -t, sig 10 -0.05909 -16.7121 yes 1 0.298656 84.46866 yes 9 -0.0492 -13.9151 yes 2 0.35408 100.1444 yes 8 -0.04414 -12.4848 yes 3 0.412096 116.5529 yes 7 -0.0215 -6.08023 yes 4 0.469213 132.7074 yes 6 0.000438 0.123833 no 5 0.53141 150.2985 yes 5 0.028497 8.059852 yes 6 0.626174 177.1004 yes 4 0.058239 16.47177 yes 7 0.72006 203.6543 yes 3 0.095016 26.87321 yes 8 0.810227 229.1562 yes 2 0.141068 39.8983 yes 9 0.89454 253.0023 yes 1 0.18506 52.34032 yes 10 0.968701 273.9773 yes source: author’s projected by excel table 7, explore the caar value as well as t-test for jakarta stock market of 20 days event window. the before and after 10 days impact of covid-19 is analysed. in the pre event window the returns are negative for few days. after it shows positive upgrading. after the event date the caar value is constantly improved or showing positive upward movement in the market. the t-test of caar identify significant impact of covid-19 event. it shows that jakarta stock market positively responded after the event declaration date. figure 2, presented pattern of behaviour of bombay stock market and jakarta stock exchange. the figure explains the market reaction in both before and after event day. the figure covered 60 days performance. it describes that bse sariah index & jii index reacted differently on covid-19 event. the indian stock market shows downward sloping and indonesian stock market describe upward sloping graph. it is stated from the pattern that the bse sariah’s returns impacted negatively on covid-19 event. furthermore, the jii index has significant positive reaction of covid-19 announcement. figure 2. cumulative average abnormal return of bse & jakarta (30 day) source: author’s projected by excel 0 1 2 3 4 -30 -27 -24 -21 -18 -15 -12 -9 -6 -3 1 4 7 10 13 16 19 22 25 28 c a a r pre & post event 30 days jakarta islamic index jakarta -3 -2,5 -2 -1,5 -1 -0,5 0 -30 -27 -24 -21 -18 -15 -12 -9 -6 -3 1 4 7 10 13 16 19 22 25 28 c a a r pre & post event 30 days bse shariah index bse irfan, kassim, & dhimmar │ impact of covid-19 on islamic stock markets: an investigation using threshold volatility and event study models . international journal of islamic economics and finance (ijief), 4(1), 121-148 │ 137 figure 3. cumulative average abnormal return of bse & jakarta (20 day) source: author’s projected by excel figure 3, plotted reaction of indian & indonesian stock market returns. the 40 days event window show the bse sariah and jii reaction on covid-19 event. it is describing that covid-19 event give negative impact on bombay stock market. the jakarta stock exchange shows positive response to covid-19 event. the stock market of both the country gave opposite reaction to the covid-19 event. finally, it is declared that the announcement by who lead to different impact for different countries stock market. figure 4, explains the event window of pre & post 10 days reaction of bse sariah index and jii index. the plot itself told the stock market reaction for both the countries. the indian stock exchange index shows downward sloping after the covid-19 event take place. the indonesian stock exchange display upward sloping post covid-19 event date. it clearly gives picture about bse and jii response during pre & post who announcement regarding covid-19. figure 4. cumulative average abnormal return of bse & jakarta (10 day) source: author’s projected by excel 0 0,5 1 1,5 2 -20 -17 -14 -11 -8 -5 -2 2 5 8 11 14 17 20 c a a r pre & post event 20 days jakarta islamic index jakar… -0,5 0 0,5 1 1,5 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 1 2 3 4 5 6 7 8 9 10 c a a r pre & post event 10 days jakarta islmaic index jakarta -3 -2 -1 0 -2 0 -1 7 -1 4 -1 1 -8 -5 -2 2 5 8 1 1 1 4 1 7 2 0 c a a r pre & post event 20 days bse shariah index bse -0,5 0 0,5 1 -1 0 -9 -8 -7 -6 -5 -4 -3 -2 -1 1 2 3 4 5 6 7 8 9 1 0 c a a r pre & post event 10 days bse shariah index bse irfan, kassim, & dhimmar │ impact of covid-19 on islamic stock markets: an investigation using threshold volatility and event study models . international journal of islamic economics and finance (ijief), 4(1), 121-148 │ 138 figure 5. line diagram of indices and variables 24,000 28,000 32,000 36,000 40,000 44,000 m2 m3 m4 m5 m6 m7 m8 m9 m10 2020 bse 3,000 3,250 3,500 3,750 4,000 4,250 4,500 4,750 5,000 m2 m3 m4 m5 m6 m7 m8 m9 m10 2020 bse shariah 0 400 800 1,200 1,600 2,000 2,400 m2 m3 m4 m5 m6 m7 m8 m9 m10 2020 ind-cov-dc 0 20,000 40,000 60,000 80,000 100,000 m2 m3 m4 m5 m6 m7 m8 m9 m10 2020 ind-cov-nc 0 1,000 2,000 3,000 4,000 5,000 m2 m3 m4 m5 m6 m7 m8 m9 m10 2020 indo-cov-nc 3,600 4,000 4,400 4,800 5,200 5,600 6,000 6,400 m2 m3 m4 m5 m6 m7 m8 m9 m10 2020 jkse 350 400 450 500 550 600 650 700 m2 m3 m4 m5 m6 m7 m8 m9 m10 2020 jii 0 1,000 2,000 3,000 4,000 5,000 m2 m3 m4 m5 m6 m7 m8 m9 m10 2020 indo-cov-nc irfan, kassim, & dhimmar │ impact of covid-19 on islamic stock markets: an investigation using threshold volatility and event study models . international journal of islamic economics and finance (ijief), 4(1), 121-148 │ 139 figure 5, shows the line diagram of indices and variables. it shows upward & downturn movements in the respective market. through the graph, we can easily identify variability in the selected time. table 8, interpreted that the values of adf test, -14.125, which is less than its critical value, -1.215, at 5%, level of significance which implies that the all variables are stationary after the 1st difference (irfan, 2016). the results of adf test confirms that the other all the shariah indices and cov-nc, cov-dc are also stationary, because the values of adf test statistic is less than its test critical value. table 9, an outcome of the tarch model represent that the terms, c, are statistically significant in all the indices in conditionally mean equations. the variance equation describes that the resid (-1)^2, which are statistically significant in bse and jkse indices, which imply that past volatility of bse and jkse indices are significantly not influencing current volatility. t-garch model is also confirming the coefficient positive significant at the 5% level. the analysis shows that there is a negative leverage effect of bad news has more than impact on conditional variance than good news. here, covidnew cases, covid death cases are impacted due to coronavirus news spread in the market. another diagnostic analysis is based on the different criteria like akaike info criterion (aic), schwarz criterion (sic), and hannan-quinn criteria (hqc), all these criteria have lower the value better will be results meaning that bse shariah, jakarta islamic index are lower values in comparison to the higher values of bse and jkse. at-last t-garch model is more suitable for bse shariah and jakarta islamic indices. table 8. adf test of indices and covid-19 variables countries name of variables level t-test p-value coefficient 1% level 5% level 10% level india bombay stock exchange after 1st difference -14.125 0.000 -1.215 -3.454 -2.872 -2.572 bse sharaih index -14.851 0.000 -1.253 -3.454 -2.872 -2.572 india-covid-new cases -14.596 0.000 -10.074 -3.455 -2.872 -2.572 india-covid-new death cases -11.522 0.000 -3.797 -3.454 -2.872 -2.572 indonesia jakarta stock exchange after 1st difference -12.096 0.000 -1.253 -3.454 -2.872 -2.572 jakarta islamic index -13.178 0.000 -1.071 -3.454 -2.872 -2.572 india-covid-new cases -7.421 0.000 -2.329 -3.454 -2.872 -2.572 india-covid-new death cases -12.066 0.000 -3.408 -3.454 -2.872 -2.572 table 9. tarch of indices and covid-19 variables bse sensex bse shariah jakarta stock exchange jakarta islamic index variable coef z-stat prob. coef z-stat prob. coef z-stat prob. coef z-stat prob. conditional mean equation: c 38456 188.90 0.00 4327 595.33 0.00 5050 329.42 0.00 549 372.04 0.00 conditional variance equation: c 1567362 6.631 0.000 764 2.164 0.031 170625 9.789 0.000 1440 14.925 0.000 resid(-1)^2 0.580 1.467 0.142 1.143 3.005 0.003 0.360 1.236 0.216 0.549 3.531 0.000 covid-new cases -143 -2.398 0.017 2.779 4.520 0.000 -30.740 -5.176 0.000 -0.240 -12.136 0.000 covid-new death cases -1371 -0.476 0.634 -91.657 -2.303 0.021 -205.201 -0.853 0.394 -3.319 -2.199 0.028 diagnostic statistics: log likelihood -2633 -2017 -2002 -1359 akaike info criterion 18.910 14.500 14.388 9.779 schwarz criterion 18.976 14.565 14.453 9.844 hannan-quinn criter. 18.937 14.526 14.414 9.805 figure 6. residuals of stock exchange & its index residuals of bse sensex residuals of bse shariah index residuals of jakarta stock exchange residuals of jakarta islamic index 4.2. analysis the present study evaluates the impact of the who declaration of "covid-19 as a global pandemic" on the stock market of india (bse sariah) & indonesia (jii). the market model method of event study shows different direction result of indian stock market & indonesian stock market. the results of bse sariah indices describe that the returns were already negative before the announcement. after the day of declaration, the indian stock market returns move more downturns. all the three-event window60days, 40days & 20days results show a negative impact on the stock market of india. the outcomes of jii indices demonstrate upward positive movements for the indonesian stock market. the declaration by who shows positive returns in all the three-event window of 60days, 40days & 20days. the research found negative caar for bse sariah and positive caar for jii. further, bse sariah & jii indices results identify significant variance between market returns pre and post the announcement. the evolution and progress of any stock exchange depend on the robust economy of the country. that’s why the result might vary for both -15,000 -10,000 -5,000 0 5,000 24,000 28,000 32,000 36,000 40,000 44,000 m2 m3 m4 m5 m6 m7 m8 m9 m10 2020 residual actual fitted -1,500 -1,000 -500 0 500 1,000 3,000 3,500 4,000 4,500 5,000 m2 m3 m4 m5 m6 m7 m8 m9 m10 2020 residual actual fitted -1,200 -800 -400 0 400 800 1,200 3,500 4,000 4,500 5,000 5,500 6,000 6,500 m2 m3 m4 m5 m6 m7 m8 m9 m10 2020 residual actual fitted -200 -150 -100 -50 0 50 100 150 350 400 450 500 550 600 650 700 m2 m3 m4 m5 m6 m7 m8 m9 m10 2020 residual actual fitted irfan, kassim, & dhimmar │ impact of covid-19 on islamic stock markets: an investigation using threshold volatility and event study models . international journal of islamic economics and finance (ijief), 4(1), 121-148 │ 142 the country. in terms of india, investors take the who declaration negatively that was shown in the market reaction. the investors of indonesia reacted positively to the who announcement that reflected on the stock market indices. however, the analyses of the present study cannot be generalized for other countries' stock exchange. it is also varying in different market environments or different periods in the future. v. conclusion and recommendation 5.1. conclusion the coronavirus outbreak is impacted on whole world. india has major threat of coronavirus because it is the second largest country in terms of population. likewise, other country face covid-19 outbreak indonesia too. the government of both the country take precautionary steps to deal with covid19 situation. on 11th march 2020 who announce covid-19 as global pandemic. the main purpose of this study is to identify impact of declaration of world health organization “covid-19 as global pandemic” is impacted on stock market of india and indonesia. the analyses of both the country shows different direction movement. it is drawn from the data analyses part that the reaction of stock market is varies for different countries. like, indian stock market shows downward sloping after the who declaration and jakarta stock exchange shows upward sloping. the downturn graph of indian stock exchange revealed that indian stock market negatively reacted on who announcement. the upward graph of jakarta stock exchange declares positive response to world health organization statement. the study concludes that semi-strong from of efficient market hypothesis is true because market is efficient in processing its information and reacted on different economic situation. tarch model is more suitable in bse shariah, jakarta islamic indices. meaning that more clearly effect of the bad news on the current market volatility. 5.2. recommendations the event study approach is very important in its own way. like, in this study author analysed who declaration for covid-19. the future research might be on different selected event window of covid-19. further, recent event like presidential election of usa with coronavirus pandemic can also be analyse. the study is only conducted for two countriesindia & indonesia. therefore, upcoming research of other countries on same event can give more prediction of covid-19 impact globally. the countries may be g8, e7, and n11 or any country based on authors’ research. it would recommend conducting a comparison study by taking additional worldwide samples. there is also the irfan, kassim, & dhimmar │ impact of covid-19 on islamic stock markets: an investigation using threshold volatility and event study models . international journal of islamic economics and finance (ijief), 4(1), 121-148 │ 143 possibility of a comparative study of a different pandemic. in the future, a longitudinal study may be fruitful to identify long-term impact. further, demographic variables like gender, age, education, etc., will be studied in the stock market with the respective event. the variable corona death & confirmed cases used in the present study in future other variables also incorporated to have a more valuable result. irfan, kassim, & dhimmar │ impact of covid-19 on islamic stock markets: an investigation using threshold volatility and event study models . international journal of islamic economics and finance (ijief), 4(1), 121-148 │ 144 references alali, m. s. 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(2019). event study on lifting ban of restricted shares in chinese stock markets. international conference on economic management and cultural industry (icemci), 861–867. irfan, kassim, & dhimmar │ impact of covid-19 on islamic stock markets: an investigation using threshold volatility and event study models . international journal of islamic economics and finance (ijief), 4(1), 121-148 │ 148 this page is intentionally left blank. international journal of islamic economics and finance (ijief) vol. 5(2), july 2022, pages 259-286 patronage factors of motor vehicle takaful in kano state, nigeria alhassan yahaya1, sagir muhammad sulaiman2*, habu abdu aminu3 *) corresponding email: sageeerala@gmail.com article history received: june 6th, 2022 revised: july 19th, 2022 july 22nd, 2022 july 30th, 2022 accepted: july 31st, 2022 abstract the nigerian insurance industry has been associated with low patronage, thus contributing less than 1% to gross domestic product (gdp). the marketing and distribution segment of the nigerian oil and gas industry also faces multiple challenges, including difficulties in transporting products by pipelines, which necessitates the use of alternative means of transportation by road (trucks). therefore, the main objective of this study is to empirically examine the determinants of motor vehicle takaful patronage by members of the national association of road transport owners-petroleum tanker drivers (narto-ptd) in kano state. the study population was 320 registered members of narto-ptd. using the taro yamane sample size formula, the study arrived at a sample of 178 respondents who were selected using a simple random sampling technique. then, partial least square-structural equation modeling (pls-sem) method was employed to test the study's hypotheses. the results revealed that while awareness was insignificant, perception and religiosity significantly affected motor vehicle takaful patronage by narto-ptd members in kano state. the study recommends that takaful companies develop policies that will further encourage highly religious and attract those not highly religious by organizing educative programs in mosques and other religious avenues. lastly, the study recommends developing policies that strengthen takaful (narto-ptd) members’ perceptions. keywords: patronage, motor vehicle, takaful, structural equation modelling (sem) jel classification: m31; r49; z12; m39 @ ijief 2022 published by universitas muhammadiyah yogyakarta, indonesia doi: https://doi.org/10.18196/ijief.v52.14970 web: https://journal.umy.ac.id/index.php/ijief/article/view/14970 citation: yahaya, a., sulaiman, s. m., & aminu, h. a. (2022). patronage factors of motor vehicle takaful in kano state, nigeria. international journal of islamic economics and finance (ijief), 5(2), 259-286. doi: https://doi.org/10.18196/ijief.v5i2.14970. 1, 2 international institute of islamic banking and finance (iiibf), bayero university kano, nigeria 3 department of banking and finance, school of management studies, kano state polytechnic, nigeria mailto:sageeerala@gmail.com https://doi.org/10.18196/ijief.v52.14970 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v5i2.14970&domain=pdf yahaya, sulaiman, & aminu │ patronage factors of motor vehicle takaful in kano state, nigeria international journal of islamic economics and finance (ijief), 5(2), 259-286│260 i. introduction 1.1. background insurance is regarded as a supportive service to trading and commercial activities in every economy and provides mitigation roles against possible losses or risks that may befall business activities. the link between the economic and insurance sectors is deemed as a symbiotic and mutual relationship, where each requires the other. outreville (1997) believes that the insurance segment of the economy is the only sector that comes into existence to ensure the survival of the other sectors through reviving individual and corporate bodies to their status positions whenever they suffer losses through claims settlements. in other words, insurance plays an integral role in the economy's sustainability and growth by providing an extensive cover against loss and damages and enhancing all economic players' confidence in eventualities and unforeseen contingencies. according to thenational bureau of statisticsthe contribution of the insurance industry in nigeria to the gross domestic product (gdp) was below 1%. it was, however, a result of the low performance of conventional insurance in nigeria (national bureau of statistics [nbs], 2017). the national bureau of statistics (nbs,2017) has also shown positive growth in the insurance industry even though its contribution to the nigerian economy's growth was lesser than the other sectors. meanwhile, records from national insurance commission indicated a rise in gdp from 0.11% in 2007 to 0.225% in 2016. despite the growth, the industry recorded a minimal contribution below that of other developing countries (national insurance commissio [naicom], 2016) . moreover, the idea for the implementation of islamic insurance (takaful) in nigeria by the national insurance commission (naicom) is to enhance financial inclusion and ensure the participation of individuals who need ethical financing (yaqub & dandago, 2015). takaful is an innovative and modern form of islamic insurance permitted to operate in nigeria as an alternative to conventional insurance. despite the experience in many countries where takaful was established after the introduction of islamic banking, the case is different in nigeria, where takaful preceded islamic banking almost a decade ahead (ado, 2014). in nigeria, a mandatory third-party insurance cover is required for all vehicle owners to compensate for the loss of other parties only but not the interest of the insured vehicle, which requires an additional insurance policy to cover loss or damages in the interest of the insured party. the initiation of the takaful scheme as an alternative to conventional insurance is regarded as an additional base for enhancing patronage on insurance, mainly as a policy plan toward attaining the financial inclusiveness of all parties involved in the yahaya, sulaiman, & aminu │ patronage factors of motor vehicle takaful in kano state, nigeria international journal of islamic economics and finance (ijief), 5(2), 259-286│261 insurance business. despite the mandatory policy requirement and the voluntary insurance policy, the scheme of insurance has yet to be accomplished the desired anticipated results (darazo, 2011) due to the inability of conventional insurance to meet the religious and economic demands of the populace, takaful insurance holds great potential in nigeria. a large number of the business community is excluded based on rules of engagement that contradict the principles of islam, and potential holders with the other participating holders may undoubtedly seem dissatisfied based on the erroneous relationship between them and the insurance company in settlement of claims and liabilities (ardo & saiti, 2017). furthermore, nigeria missed out on a massive contribution to its economy because there were only about 800,000 policyholders in a population of over 198 million (saleh, 2016), although the takaful scheme has existed for more than a decade in nigeria (yaqub, 2016). for this reason, this study intends to unravel the factors behind the dismal patronage of motor vehicle insurance and enhance the acceptance of the alternative takaful insurance to mitigate risks in petroleum transportation. in this regard, the nigerian insurance industry has been associated with low patronage, thus contributing less than 1% to the gross domestic product (gdp). the total gross premium contribution was $1.64 billion, ranked 62nd in the world with a 0.3% contribution to the country's gdp as of 2018 (nigerian stock exchange [nse], 2019). darazo (2011) pointed out other reasons for low patronage in the insurance industry, including lack of awareness, negative perception, and delay in claim settlements. similarly, research has been conducted on the alternative means of insurance (takaful) in nigeria, including by yakubu & dandago (2015), bello & ayuba (2015), maiyaki & ayuba (2015), ardo & saiti (2015), dandago (2012), yusuf (2012), and darazo (2011). however, no research was carried out on petroleum trucks and their haulage. it is vital to consider the associated risk level and the volume of capital deployed to the business. therefore, this study examined the determinants of motor vehicle takaful patronage by members of the national association of road transports owners (petroleum tanker division) in kano state. 1.2. objectives the main objective of this study is to examine the determinants of motor vehicle takaful patronage by members of the national association of road transport owners (ptd) in kano state. meanwhile, the specific objectives of the study are to (i) determine the effect of awareness of members of the national association of road transport owners (ptd) on the patronage of yahaya, sulaiman, & aminu │ patronage factors of motor vehicle takaful in kano state, nigeria international journal of islamic economics and finance (ijief), 5(2), 259-286│262 motor vehicle takaful in kano state, (ii) to assess the impact of perception of members of national association of road transport owners (ptd) on the patronage of motor vehicle takaful in kano state, and (iii) to examine the effect of religiosity of members of national association of road transport owners (ptd) on the patronage of motor vehicle takaful in kano state. ii. literature review 2.1. background theory the theory of planned behavior (tpb) is one of the most influential and popular conceptual frameworks for studying human action (ajzen, 2001). basically, tpb is an extension of the tra (fishbein & ajzen, 1975; ajzen & fishbein, 1980; husin & abrahman, 2016). tpb was developed with the inclusion of perceived behavioral control as a function of control beliefs and represented the perceived ease or difficulty of performing the behavior. it is a belief regarding possessing requisite resources and opportunities for performing a given behavior. for example, when people are not equipped with sufficient resources or information to initiate the behavior, their intention to perform the behavior may be lowered even if they have favorable attitudes or subjective norms to perform it (madden, ellen & ajzen, 1992). in other words, individuals are likely to engage in certain behavior if they believe they have the required resources and confidence to perform the behavior. behavioral control is also believed to directly influence intention and reflect the actual behavior (madden, ellen & ajzen, 1992). a significant relationship between perceived behavioral control and intention has been found in many studies, such as bhattacherjee (2000), armitage & conner (2001), fukukawa (2002), armitage (2005), and syed & nazura (2011). tpb also signifies that attitude toward the behavior, subjective norm, and perceived behavioral control lead to the formation of a behavioral intention and, in turn, reflect the actual behavior. however, it should be noted that to predict individual intention to patronize motor vehicle takaful, tpb was adopted with some modifications, in which attitude was substituted with awareness, the subjective norm was replaced with perception, and perceived behavioral control was replaced with religiosity. therefore, tpb in predicting consumer intention to participate in motor vehicle takaful is deemed appropriate. in addition, tpb was adapted in this study following a similar study (yaqub, 2016). 2.2. previous studies ardo and saiti (2017) analyzed takaful practice in nigeria: history, present, and future. they provided the basic explanation of the nature and concept of takaful with an overview of the current status of takaful in nigeria and hindrances and legal flaws in the takaful regulation in nigeria. they adopted yahaya, sulaiman, & aminu │ patronage factors of motor vehicle takaful in kano state, nigeria international journal of islamic economics and finance (ijief), 5(2), 259-286│263 a qualitative library research method to achieve the non-needed revitalization of the nigerian financial systems. they identified six cardinal problems hindering rapid development of takaful in nigeria, including legal/regulatory flaws, inadequate manpower, acceptability by non-muslims, low customer awareness, limited shariah compliance investment avenues, and inadequate re-takaful capacity, despite the slow growth experience in the takaful sector that holds the great prospect for takaful sector in nigeria in the future. aziz, husin, and husin (2017) studied the conceptual framework of factors determining intentions towards adopting family takaful. the study developed a theoretical framework based on decomposed theory of planned behavior (dtpb). dtpb was used in many disciplines to explain the intention-behavior relationship. the original construct of the theory is based on attitude, subjective norms, and perceived behavioral control. the research then provided the antecedents of these constructs, which were adopted according to the attributes of family takaful. their study adopted the existing model of dtpb from the family takaful perspective. saleh, balan, and ruslan (2016) examined the attributes of learning from the malaysian experience: overcoming the regulatory challenges in the nascent takaful practice in nigeria. the authors revealed that islamic insurance (takaful), introduced in march 2013, was specifically meant to bridge the endemic insurance gap in nigeria by engendering deepening insurance penetration and financial inclusion of the hitherto underserved and uninsured huge muslim client. however, the legal effect is a huge regulatory vacuum bound to negatively impact the capital investment climate, breed mistrust and uncertainty, and discourage participation in the nascent takaful industry. the study used both doctrinal and qualitative while employing a non-random sampling technique. the study also employed primary and secondary sources of information and interviews where appropriate. the study uncovered the need for a review and harmonization of all the enabling insurance instruments in nigeria, transforming the current business models and improving practices in the insurance sector to enhance the application of takaful. the authors recommend that nigeria draw from malaysia's vast experiences to overcome these challenges. in this case, nigeria and malaysia are former british colonies with diverse ethnic and socio-cultural backgrounds. they both practice divergent legal systems in a secular setting. both also have sizeable numbers of the muslim population. while malaysia is considered the hub of takaful practice globally, nigeria is only an emerging market in the trending islamic financial revolution. saleh (2016) investigated the challenges in takaful application within the conventional insurance framework in nigeria and the imperative for legislative harmonization of regulatory instruments. the study examined the provisions yahaya, sulaiman, & aminu │ patronage factors of motor vehicle takaful in kano state, nigeria international journal of islamic economics and finance (ijief), 5(2), 259-286│264 of the insurance act, especially the section delineating and conferring supremacy of the act, among others, as those inimical to the efficient and effective application of takaful within the conventional insurance practice in nigeria using doctrinal, qualitative, and based purely on library study covering books, statutes, law reports, and internet sources from renowned databases and websites. in addition, interviews were intercepted, structured, semistructured, and purposive to collect empirical data from targeted participants. analyses of responses from interviews conducted suggested that ignorance, mistrust, and apathy were largely responsible for the lack of participation and stunted growth of conventional insurance. some respondents also believed takaful would boost insurance penetration if an adequate regulatory framework and enforcement processes were implemented. while acknowledging the need for further empirical analysis in a future study, the study found, among numerous other findings, the need for wholesome takaful legislation that will harmonize all the regulatory discrepancies, establish regulatory certainty, and build trust in the struggling insurance industry. then, the study concludes that enacting a wholesome takaful act like malaysia's current islamic financial services act (ifsa) 2013 will engender regulatory certainty that will positively influence the revival of trust in the insurance industry. it will further encourage patronage, product design, and innovation, which will deepen insurance penetration and financial inclusion of the greater majority of the nigerian underserved insurance populace. yaqub and dandago (2015) studied the determinants of motor takaful patronage among commercial vehicle operators in nigeria. the empirical research found that product, features, promotion, benefit, and service quality were the major factors/determinants influencing the patronage of motor takaful by commercial vehicle operators across the globe. however, their study was limited in its application as it focused more on the empirical than the experimental aspect. it may have been more illustrative to broaden the scope by subjecting the variables to data testing and analysis. maiyaki and ayuba (2015) investigated consumers’ attitudes toward the patronage of islamic insurance services (takaful) in kano state, nigeria. the study examined the extent to which consumers’ awareness, perception of takaful services, and the trust and confidence they reposed in takaful operators had a significant relationship with their attitude toward takaful services patronage. the data were analyzed using multipleregression with ssps version 17. they employed an explanatory survey design as a structured questionnaire was administered to 384 regarded as the sample selected on judgmental sampling technique. the researchers uncovered that awareness, perception, trust, and confidence were significantly related to the consumers’ attitude toward takaful services patronage. the study recommends that an attitudinal change campaign is required, and a rigorous marketing campaign yahaya, sulaiman, & aminu │ patronage factors of motor vehicle takaful in kano state, nigeria international journal of islamic economics and finance (ijief), 5(2), 259-286│265 should be embarked upon to create awareness of takaful service and its operators. with the empirical findings of this study, people's trust and confidence should be won and built-in favor of takaful services if the study model has been well specified. further, they attest to the need to replicate the study in other areas that share similarities with kano to establish and generalize the findings. iii. methodology the main objective of this study is to examine the determinants of motor vehicle takaful patronage by members of the national association of road transport owners (ptd) in kano state. 3.1. data this research intended to use the primary data collection method using a questionnaire to collect data from the respondents. this data collection method was deemed appropriate because the study dealt with the behavioral attitude of the respondents. then, the study population was the registered members of the national association of road transport owners (ptd) in kano state. according to the statistics available at the head office of (narto-ptd, 2021) there were 320 members of the association in kano state. thus, the research adopted the taro (1967) method of determining sample size and arrived at 178 sample sizes, which is sufficient for pls-sem with 24 indicators, according to hair et al. (2014). figure 1. stratification of the population and selection of sample size source: awang (2012) with modification this research also adopted a stratified random sampling technique. since the population was heterogeneous regarding truck ownership, such owners would total number of registered members (320) total number of trucks (1253) population in each stratum trucks 21 above (25) 16 to 20 (51) 11-15 (54) 6-10 (69) 1-5 (121) sample from each stratum (176 ) stratum a (14) stratum b (21) stratum c (28) stratum d (34) stratum e (81) total=178 whole population yahaya, sulaiman, & aminu │ patronage factors of motor vehicle takaful in kano state, nigeria international journal of islamic economics and finance (ijief), 5(2), 259-286│266 be segmented into categories to obtain a sample from each category, it can be seen on figure 1. the number of samples from each stratum would be proportionate to the number of truck’s percentage in the population, i.e., association members who owned 20 trucks and above were 8% of the total population, which invariably represented 14 members in the sample having 100 trucks. 3.2. model development this study empirically examined the proposed research model containing three latent variables (i.e., patronage determinants), whereas awareness, perception, and religiosity were the independent variables, and patronage was the only dependent variable. all scales and measures used in this research were adapted from the studies (aziz, husin and husin, 2017; saleh, balan and ruslan, 2016; maiyaki & ayuba, 2015; yaqub and dandago, 2015). 3.2.1. patronage consumers have diverse motivational tastes and preferences. they constantly seek a solution to the various need or their state of deprivation (need) through product offerings, promotional activities, and other means of communication readily available to them. 3.2.2. determinants of patronage researchers identified several factors influencing the patronage of a commodity or service, such as awareness, perception, religiosity, self-efficacy, and customer behavior, just to mention a few. however, this research would only duel on the selected independent variables on patronage. 3.2.3. awareness surprisingly, despite its notable vision, it was found that many people were not aware of the takaful concept. in this respect, consumer awareness refers to the combination of the knowledge of the product purchased by the consumers in terms of its quality (ishak and zabil, 2012). for example, the consumer should know whether the product is good for health, whether the product is free of creating any environmental hazards, and others. it is also the education about the various types of hazards and problems associated with the marketing of a product. for instance, one way to market a product is through advertisements in newspapers, television, and others. thus, consumers should have proper education about the bad effects of advertisements. they must also verify the advertisement contents. lateh, ismail, and arrifin (2009) and khan, hassan, and syahid (2008) had similar study results. lateh, ismail & arrifin (2009) asserted that awareness is referred to the knowledge about ‘consumer rights.’ it means the consumer yahaya, sulaiman, & aminu │ patronage factors of motor vehicle takaful in kano state, nigeria international journal of islamic economics and finance (ijief), 5(2), 259-286│267 must know they have the right to get the right product or service. also, if the product or service is found to be faulty in some manner, the consumer should know to claim compensation as per the law of the land. the last is the knowledge about consumers’ responsibilities. it implies that consumers should not indulge in wasteful and unnecessary consumption. it could be said that takaful products and services are unpopular among consumers in nigeria; therefore, industries offering takaful should develop strategies that will enlighten consumers on takaful products and services to enhance their patronage of takaful (yaqub, 2016). h01: the awareness level of members of the national association of road transport owners (ptd) does not significantly determine their patronage of motor vehicle takaful in kano state. 3.2.4. perception the perceptions of non-muslims towards islamic insurance varied among themselves. according to haque, osman & ismail (2009), religious perspectives in malaysia also significantly influenced the perception of islamic insurance. it means religious factors would influence malaysians' awareness, understanding, and perceptions of islamic insurance products and services. according to amin (2007), in borneo, income will also affect the awareness and usage of islamic financing. perception or reasons behind dealing with islamic insurance also vary among the different income groups as there is a significant difference in almost all reasons for accepted services charges and confidentiality. in addition, most of the islamic insurance customers are of the middle-income level. h02: perception of the members of the national association of road transport owners (ptd) does not have a significant impact on their patronage of motor vehicle takaful in kano state. 3.2.5. religiosity religiosity is defined as the degree to which a person adheres to the religious values, beliefs, and practices used in their daily life (worthington jr. et al., 2003). islam is a religion that urges its followers to do good and noble deeds; it guides the acts of every follower or believer in all cases, including good relations not only with god but also with other human beings. mcdaniel and burnett (1990) defined religion as a belief in god accompanied by a commitment to follow principles believed to be set forth by god. osman et al. (2014) found that religiosity significantly influenced young intellectuals' behavioral intention in contributing to waqf. meanwhile, this study looks into individual religiosity regardless of age classification in determining attitudes towards patronage of motor vehicle takaful. yahaya, sulaiman, & aminu │ patronage factors of motor vehicle takaful in kano state, nigeria international journal of islamic economics and finance (ijief), 5(2), 259-286│268 h03: the religiosity of the members of the national association of road transport owners (ptd) does not have a significant effect on their patronage of motor vehicle takaful in kano state. exogenous variables endogenous variable figure 2. research model source: adapted from ajzen (1985) from figure 2 patronage of motor vehicle takaful is the exogenous variable while awreness, perception as well religiosity are the exogenous variables. the functional relationship of the model is given: υ𝑖 = (𝑋𝑖1, 𝑋𝑖2, 𝑋𝑖3, ) (1) 𝑌𝑖 = 𝜛𝑜 + 𝜛𝑖 𝑋𝑖1 + 𝜛𝑖 𝑋𝑖2 + 𝜛𝑖 𝑋𝑖3+𝜀𝑖 (2) 𝑃𝑇𝑅𝑖 =𝜛𝑜 + 𝜛1𝐴𝑊𝑅𝑖 + 𝜛2𝑃𝐸𝑅𝑖 + 𝜛3𝑅𝐿𝐺𝑖 + 𝜀𝑖 (3) 𝑃𝑇𝑅𝑖 = patronage 𝐴𝑊𝑅𝑖 = awareness 𝑃𝐸𝑅𝑖 = perception 𝑅𝐿𝐺𝑖 = religiosity 𝜛𝑜= intercept 𝜛1, 𝜛2 and 𝜛3= parameter estimates 𝜀𝑖 = the error term 3.3. method the present study used structural equation modeling (sem), divided into two main categories: covariance-based (cb-sem) using amos software and variance based, i.e., partial least square using smart-pls (chin, 1998; chin & newsted, 1999; hair et al., 2010 & hair et al., 2014,). thus, pls path modeling yahaya, sulaiman, & aminu │ patronage factors of motor vehicle takaful in kano state, nigeria international journal of islamic economics and finance (ijief), 5(2), 259-286│269 using smart-pls version 3.0 was used to test the study's proposed theoretical model. in addition, researchers refer to variance as a second-generation statistical tool because it allows for concurrent analysis of multiple variables. smart-pls has become a major analytical tool in major research disciplines, such as management finance (hair, sarstedt, ringle & mena, 2012) and marketing operations (hair et al., 2012). as such, it was considered in this study because of the following reasons: pls is part of regression techniques that enables the estimation of the relationship between measurement model (indicators) and structural model (construct) possible at the same time (duarte & roposo, 2010). iv. results and analysis 4.1. descriptive analysis the demographic characteristics examined in this study included gender, age, years of experience in business, qualification, number of trucks, and income level. in terms of gender, table 1 reveals that 171 subjects (99.9%) were males, while only two (0.1%) were females. the larger men sample was because transport business is a large-scale business, while the major problem hindering women from engaging in large-scale business is access to capital (odoemene, 2013). from table 1, six (3.5%) respondents fell in the 19-29 age group, while the 3059 age group comprised 34 (19.7%) respondents. then, 22 (12.7%) were within the age group of 40-49, and 62 (35.8%) respondents were within the 50-59 age group. lastly, 49 (28.3%) respondents fell within the 60-above age group. it signifies that most respondents were older within the age group of 50-59 with 35.8%, followed by the 60-above age group with 28.3%. the analysis of the years of experience in business in table 1 uncovers that two (1.2%) respondents had 1-5 years in the business, while 17 (9.8%) respondents had 6-10 years in business. then, 19 (11%) subjects acquired 1115 years in business, and 77 (44.5%) respondents spent 16-20 years in the business. lastly, 58 (33.5%) respondents spent 21-above in the business. in other words, most respondents spent many years in the business, i.e., 50-59 followed by 60-above. it denotes that the respondents had enough knowledge of the business and fit enough to provide the information needed to achieve the research objectives. in addition, table 1 presents that 101 (58.4%) respondents obtained the olevel certificate, while 62 (35.8%) respondents held a diploma certificate. yahaya, sulaiman, & aminu │ patronage factors of motor vehicle takaful in kano state, nigeria international journal of islamic economics and finance (ijief), 5(2), 259-286│270 meanwhile, six (3.5%) respondents were graduates, and four (2.3%) respondents obtained their postgraduate certificates. it clearly shows that most subjects obtained the minimum primary certificate, followed by a diploma. table 1. demographic characteristics of the respondents frequency percentage (%) gender male 171 99.9 female 2 0.1 total 173 100.0 age 19-29 6 3.5 30-39 34 19.7 40-49 22 12.7 50-59 62 35.8 60-above 49 28.3 total 173 100.0 years of experience in business 1-5 2 1.2 6-10 17 9.8 11-15 19 11.0 16-20 77 44.5 21-above 58 33.5 total 173 100.0 qualification o-level 101 58.4 diploma 62 35.8 graduate 6 3.5 postgraduate 4 2.3 total 173 100.0 number of trucks 1-5 13 7.5 6-10 4 2.3 11-15 30 17.3 16-20 51 29.5 21-above 75 43.4 total 173 100.0 income level (per month) below one million 4 2.3 1-10 million 8 4.6 11-20 million 27 15.6 21-30 million 97 56.1 31 million above 37 21.4 total 173 100.0 yahaya, sulaiman, & aminu │ patronage factors of motor vehicle takaful in kano state, nigeria international journal of islamic economics and finance (ijief), 5(2), 259-286│271 table 1 also indicates that 13 (7.5%) respondents had 1-5 trucks, four (2.3%) respondents had 6-10 trucks, 30 (17.3%) respondents owned 11-15 trucks, 51 (29.5%) had 16-20 trucks, and 75 (43.4%) respondents owned 21-above number of trucks. it demonstrates that the majority of the respondents owned 21-above trucks, followed by those having 16-20 trucks. moreover, table 1 shows that four (2.3%) respondents had income level below one million (per month), eight (4.6) respondents earned 1-10 million (per month), 27 (15.6%) respondents earned 11-20 million (per million), 97 (56.1%) respondents had 21-30 million (per month), 37 (21.4%) respondents had 31 million above (per month). it suggests that most respondents had 21-30 million (per month), followed by those having 31 million and above for the monthly income level. 4.2. descriptive analysis of the latent constructs after the overall data cleaning and screening, descriptive statistics of the study latent variables were also evaluated, presented, and discussed. specifically, four latent variables were analyzed to determine their mean, standard deviation, minimum, and maximum values. table 2 provides a summary of the descriptive statistics of the study. table 2. descriptive statistics for latent variables descriptive statistics lantern construct no items statistic minimum maximum mean std. deviation awareness 6 1.00 5.00 3.4412 .88260 perception 5 1.00 5.00 4.3561 .49969 religiosity 6 1.00 5.00 3.3382 1.05109 patronage 8 1.00 5.00 4.2038 .53258 table 2 shows that the mean and standard deviation for the awareness were 3.4412 and 0.88260, respectively. it suggests that respondents tended to have a moderate level of awareness. table 2 also indicates that the mean for the perception was 4.3561, with a standard deviation of 0.49969, suggesting that the respondents’ perception level of outcomes was high. further, the results showed a moderate score for religiosity (mean = 3.3382, standard deviation = 1.051) but a high score for patronage with a mean and standard deviation of 4.2038 and 0.53258, respectively. 4.3. assessment of pls-sem path model results this study presents a two-step process to evaluate and report the pls-sem path results, as suggested by henseler, ringle, and sinkovics (2009). this twostep process adopted in the present study comprised (1) the assessment of a yahaya, sulaiman, & aminu │ patronage factors of motor vehicle takaful in kano state, nigeria international journal of islamic economics and finance (ijief), 5(2), 259-286│272 measurement model and (2) the assessment of a structural model, as depicted in figures 3 and 4 (hair et al., 2014; hair et al., 2012; henseler et al., 2009). 4.3.1. assessment of measurement model an assessment of a measurement model involves determining individual item reliability, internal consistency reliability, content validity, convergent validity, and discriminant validity (hair et al., 2014; hair et al., 2011; henseler et al., 2009). figure 3. measurement model 4.3.1.1. individual item reliability from figure 3, individual item reliability was assessed by examining the outer loadings of each construct’s measure (duarte & raposo, 2010; hair et al., 2014). following the rule of thumb for retaining items with loadings of 0.50 and above (hair, ringle, & sarstedt, 2011; hair et al., 2014), it was discovered that out of 24 indicators, none were deleted because they presented loadings above the threshold of 0.50, except ptng1 and ptng3. since the ave of patronage was 0.5311, greater than 0.50, ptng1 and ptng3 were still included in the model. 4.3.1.2. internal consistency reliability internal consistency reliability refers to the extent to which all items on a particular (sub) scale measure the same concept. cronbach’s alpha coefficient and composite reliability coefficient are the most commonly used estimators of the internal consistency reliability of an instrument. hence, this study used yahaya, sulaiman, & aminu │ patronage factors of motor vehicle takaful in kano state, nigeria international journal of islamic economics and finance (ijief), 5(2), 259-286│273 composite reliability and cronbach’s alpha coefficient to ascertain the internal consistency reliability. it is clearly depicted in table 3 as both values exceeded the yardstick of 0.6 and 0.5, respectively. 4.3.1.3. convergent validity according to hulland (1999), individual reliability assesses the loading of the multiple items concerning their respective study construct. the items of a particular construct are expected to be consistent in measuring the proposed construct (hair et al., 2013). in this study, achieving reliability and validity explained that the items were free from random and systematic errors. the individual item reliability was assessed using their individual loadings obtained from the pls algorithm result. table 3. loadings, composite reliability, and average variance extracted factor loadings composite reliability (pc) average variance extracted cronbach alpha awareness 0.8198 0.6121 0.7892 awn1 0.8088 awn2 0.8862 awn3 0.6201 awn4 0.5577 awn5 0.5358 awn6 0.5087 perception 0.7825 0.5431 0.6961 per1 0.5898 per2 0.6263 per3 0.4079 per4 0.7695 per5 0.8078 patronage 0.7977 0.5311 0.7136 ptng1 0.4032 ptng2 0.5395 ptng3 0.4925 ptng4 0.6181 ptng5 0.6843 ptng6 0.6704 ptng7 0.5926 ptng8 0.5782 religiosity 0.8177 0.6431 0.7408 rlg1 0.6335 rlg2 0.7584 rlg3 0.7488 rlg4 0.5726 rlg5 0.7160 yahaya, sulaiman, & aminu │ patronage factors of motor vehicle takaful in kano state, nigeria international journal of islamic economics and finance (ijief), 5(2), 259-286│274 the researchers argued that latent variables should explain at least 50% of the variance in the observed variable shared with the construct (henseler et al., 2009). related to that, several kinds of literature exist (churchill & iacobucci, 2004; hulland, 1999) on the threshold or rule of thumb regarding individual item reliability. however, most scholars agreed on loadings between 0.4 and 0.7 (hair et al., 2013). following this suggestion, all items in this study were above 0.4, as shown in table 4. table 4 cross loadings awareness patronage perception religiosity awn1 0.8088 0.2125 -0.0076 0.2915 awn2 0.8862 0.3394 0.0440 0.3107 awn3 0.6201 0.0922 0.0464 0.2043 awn4 0.5577 0.1673 -0.0060 0.1577 awn5 0.5358 0.0603 -0.0930 0.1785 awn6 0.4887 0.0116 -0.0194 0.2648 per1 0.0188 0.0611 0.5898 0.0717 per2 -0.0424 0.1680 0.6263 -0.0079 per3 0.0089 0.0678 0.4079 0.0859 per4 0.0746 0.3125 0.7695 0.0543 per5 -0.0227 0.3144 0.8078 -0.0307 ptng1 -0.1868 0.4032 0.3565 0.1080 ptng2 0.1095 0.5395 0.1782 0.0967 ptng3 0.1056 0.4925 0.1009 0.2233 ptng4 0.0935 0.6181 0.3048 0.1674 ptng5 0.2382 0.6843 0.2399 0.1537 ptng6 0.0742 0.6704 0.2395 0.1218 ptng7 0.3767 0.5926 0.1036 0.1950 ptng8 0.3756 0.5782 0.1441 0.1933 rlg1 0.2693 0.0578 -0.0360 0.6335 rlg2 0.2934 0.1971 0.0145 0.7584 rlg3 0.2184 0.2643 0.0219 0.7488 rlg4 0.2282 0.1354 0.0592 0.5726 rlg5 0.2234 0.1798 -0.0009 0.7160 4.3.1.4. discriminant validity from table 4, discriminant validity refers to the extent to which a particular latent construct differs from another latent variable (duarte & raposo, 2010). the present study determined discriminant validity following chin’s (1998) criterion by comparing the indicator loadings with other reflective indicators in the cross-loadings. in table 4, the correlations among the latent variable were compared with the square root of the average variances extracted (values in boldface). table 4 also shows that the square root of the average variances extracted were all greater than the correlations among latent constructs, suggesting adequate discriminant validity (fornell & larcker, 1981). yahaya, sulaiman, & aminu │ patronage factors of motor vehicle takaful in kano state, nigeria international journal of islamic economics and finance (ijief), 5(2), 259-286│275 4.4. structural model assessment the validity of the outer model (measurement model) gives room for evaluating the inner (structural) model (henseler et al., 2009). the structural model concerns r2, coefficient, p-value, and bootstrapping (hair et al., 2013). additionally, the structural model explained the predictive relevance (q2) and the effect size (f2) of each variable. meanwhile, the inner model evaluates the significance of loadings and path coefficient between variables (barclay et al., 1995). specifically, the structural model is aimed at model evaluation and the regression and correlation assumption examination between the study variables. figure 4. structural model 4.4.1. direct relationship figure 4 provides the graphical display of the standardized path coefficient (β) and p-values of the hypothesis in this study. table 5 provides standardized path coefficient (β), p-values, and confidence intervals as suggested by cho and abe (2013). it can be deduced that all direct relationship between variables (perception and patronage) was accepted. also, the relationship between the two variables (religiosity and patronage) was accepted. however, the relationship between awareness and patronage was rejected. in essence, two alternative hypotheses were accepted, and one alternative was rejected. yahaya, sulaiman, & aminu │ patronage factors of motor vehicle takaful in kano state, nigeria international journal of islamic economics and finance (ijief), 5(2), 259-286│276 4.4.2. test of hypothesis hypothesis 1 postulates that the awareness level of the national association of road transport owners (ptd) members does not significantly affect the patronage of motor vehicle takaful in kano state. the results revealed an insignificant relationship between awareness and patronage (β = 0.234, p> 0.079). hence, the null hypothesis was accepted, and this finding is inconsistent with the findings of aziz, husin & husin (2017), yaqub & dandago (2015), and saleh (2016). hypothesis 2 proposes that the perception of the national association of road transport owners (ptd) members does not significantly impact the patronage of motor vehicle takaful in kano state. however, since β = 0.343, p< 0.00, the alternative hypothesis was accepted, and this result is synonymous with the findings of ardo & saiti (2017), aziz, husin & husin (2017), yaqub & dandago (2015), and saleh (2016). hypothesis 3 suggests that national association of road transport owners (ptd) religiosity members do not significantly affect the patronage of motor vehicle takaful in kano state. because β = 0.187, p< 0.013, the alternative hypothesis was accepted. this finding is similar to the work of ardo & saiti (2017), aziz, husin & husin (2017), yaqub & dandago (2015), and saleh (2016). table 5 results of direct hypotheses note: ***significant at 0.01 (two-tailed) table 5 reveals that the null hypothesis between awareness and patronage was accepted. also, the null hypothesis showed a result of β = .234, p = .079. meanwhile, perception predicted to have a positive effect on patronage was confirmed and supported with an estimated β= .343, p-value=.000. this result had the strongest result of any other alternative hypothesis in the study, thus providing a substantial beta value. lastly, the prediction of a positive relationship between religiosity and patronage was also significant and supported (β= .187, p-value= .013). 4.4.3. assessment of variance explained in the dependent latent variables another important criterion for assessing the structural model in pls-sem is the r-squared value, also known as the coefficient of determination (hair et al., 2012). the r-squared value represents the proportion of variation in the dependent variable(s) that can be explained by one or more independent relationship beta t-statistics p-value findings awn->ptng 0.234 1.759 0.079 not supported per->ptng 0.343 4.202 0.000 supported rlg->ptng 0.187 2.488 0.013 supported yahaya, sulaiman, & aminu │ patronage factors of motor vehicle takaful in kano state, nigeria international journal of islamic economics and finance (ijief), 5(2), 259-286│277 variables (hair et al., 2010). although the acceptable level of r2 value depends on the research context (hair et al., 2010), an r-squared value of 0.10 is a minimum acceptable level. meanwhile, chin (1998) suggests that the rsquared values of 0.67, 0.33, and 0.19 in pls-sem can be considered substantial, moderate, and weak, respectively. table 6 presents the r-squared values. table 6. variance explained in the dependent variables variable variance explained (r2) patronage 24% the results in table 6 of the r squared indicate that it is estimated that the predictors of the patronage of motor vehicle takaful explained 0.24 = 24% of its variance. in other words, the error variance of patronage of motor vehicle takaful was approximately 0.76= 76%. it signifies that awareness, perception, and religiosity influenced the patronage of motor vehicle takaful by 24%, while the other 76% changes in the patronage of motor vehicle takaful were by other variables not stated in the model, represented by error term. 4.4.4. assessment of effect size (f2) effect size indicates the relative effect of a particular independent variable on a dependent variable using changes in the r-squared (chin, 1998). it is calculated as the changes in the r-squared of the variable to which the path is connected (chin, 1998). cohen (1988) describes f2 values of 0.02, 0.15, and 0.35 as having weak, moderate, and strong effects. table 7 shows the respective effect sizes of the independent latent variables of the structural model. table 7. effect sizes of the independent latent variables on cohen’s (1988) recommendation independent variable dependent variable f2 effect size awareness patronage 0.0637 weak perception patronage 0.1553 moderate religiosity patronage 0.0409 weak from the result in table 7, it could be deduced that all the variables had some exploratory power towards the dependents variable. specifically, awareness and religiosity had a weak effect on patronage, while perception had a moderate effect on patronage. 4.4.5. assessment of predictive relevance the present study also applied the stone-geisser test of predictive relevance of the research model using blindfolding procedures (geisser, 1974; stone, 1974). hence, because the present study's dependent variable was reflective, a blindfolding procedure was applied mainly to these dependent variables. in yahaya, sulaiman, & aminu │ patronage factors of motor vehicle takaful in kano state, nigeria international journal of islamic economics and finance (ijief), 5(2), 259-286│278 particular, a cross-validated redundancy measure (q²) was applied to assess the predictive relevance of the research model (chin, 2010; geisser, 1974; hair et al., 2013). according to henseler et al. (2009), a research model with q2 statistic (s) greater than zero is considered to have predictive relevance. additionally, a research model with higher positive q2 values suggests more predictive relevance. table 8 presents the results of the cross-validated redundancy q2 test. as shown in table 8, the cross-validation redundancy measure q² for the dependent variable was above zero, suggesting the predictive relevance of the model. table 8. construct cross-validated redundancy total sso sse q2(=1-sse/sso) patronage 1384 1303.1490 0.0584 4.5. analysis the major findings of this study are as follows. firstly, awareness did not influence patronage because the p-value was greater than 0.05, i.e., insignificant effect (β= .234, p =.079), signifying that awareness was not strong enough to predict patronage. this finding is inconsistence with the findings of aziz, husin & husin (2017), yaqub & dandago (2015), and saleh (2016). secondly, perception predicted to have a positive effect on patronage was confirmed and supported with an estimated β= .343, p-value=.000. this result showed the strongest result in the model, thus providing a substantial beta value, and the p-value was 0.000. this result is synonymous with the findings of ardo & saiti (2017), aziz, husin & husin (2017), yaqub & dandago (2015), and saleh (2016). lastly, the prediction of a positive relationship between religiosity and patronage was also significant, with a p-value of less than 0.005 (β= .187, p-value= .013). this result was the second strongest relationship in the mode; this outcome of the findings is similar to the work of ardo & saiti (2017), aziz, husin & husin (2017), yaqub & dandago (2015), and saleh (2016). the effect of each independent variable on the dependent variable revealed that awareness and religiosity had a weak effect on patronage, while perception had a moderate effect on patronage. furthermore, the overall model of the study had a predictive relevance. v. conclusion and recommendation 5.1. conclusion this study's primary aim is to assess motor vehicle takaful's patronage by members of the national association of road transports owners-petroleum tankers division (narto-ptd) in kano state. meanwhile, the study's specific yahaya, sulaiman, & aminu │ patronage factors of motor vehicle takaful in kano state, nigeria international journal of islamic economics and finance (ijief), 5(2), 259-286│279 objectives are to assess whether awareness, perception, and religion influence the patronage of motor vehicle takaful among members of the national association of road transports owners-petroleum tankers division (nartoptd) in kano state. to address this, relevant data were collected and analyzed, and the following conclusions were drawn: the result of this study revealed that awareness did not influence patronage of motor vehicle takaful among members (narto-ptd) in kano state. therefore, this study concludes that awareness did not improve the level of patronage of motor vehicle takaful among members (narto-ptd) in kano state. this finding is inconsistence with the findings of aziz, husin & husin (2017), yaqub & dandago (2015), and saleh (2016). on the other hand, the result of this study showed a significant positive effect between the perception and patronage of motor vehicle takaful among members of the national association of road transports owners-petroleum tankers division (narto-ptd) in kano state. the result of this study indicates that perception positively influenced patronage of motor vehicle takaful among members (narto-ptd) in kano state. therefore, this study concludes that perception improved the patronage of motor vehicle takaful among members (narto-ptd) in kano state. this result is synonymous with the findings of ardo & saiti (2017), aziz, husin & husin (2017), yaqub & dandago (2015), and saleh (2016). the result of this study also revealed that religiosity positively influenced patronage of motor vehicle takaful among members (narto-ptd) in kano state. hence, this study concludes that religiosity improved the patronage of motor vehicle takaful among members (narto-ptd) in kano state. this outcome is similar to the work of ardo & saiti (2017), aziz, husin & husin (2017), yaqub & dandago (2015), and saleh (2016). 5.2. recommendation based on the findings from both conceptual literature and empirical, i.e., the results from the data analysis, the following recommendations are made to provide an adequate measure to complement the assessment of the patronage of motor vehicle takaful by members of the national association of road transports owners-petroleum tankers division (narto-ptd) in kano state. the study recommends that takaful companies develop policies that will further enhance marketing channels with different strategic forms of advertisement, i.e., face-to-face or using print and electronic media to improve the patronage among (narto-ptd) members in kano state. the study also recommends that takaful companies develop policies that will further encourage highly religious and attract those not highly religious through organizing educative programs in mosques and other religious yahaya, sulaiman, & aminu │ patronage factors of motor vehicle takaful in kano state, nigeria international journal of islamic economics and finance (ijief), 5(2), 259-286│280 avenues. it will consequently improve patronage of takaful among (nartoptd) members in kano state and hence mitigate the risk associated with the business. lastly, the study recommends developing policies to strengthen the perception of members of the national association of road transport ownerspetroleum tankers division (narto-ptd) in kano state. this study could assess the patronage of takaful among (narto-ptd) members in kano state; 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(2016). the awareness, perception and self-efficacy of commercial vehicle owners towards motor takaful in kano state. an unpublished yahaya, sulaiman, & aminu │ patronage factors of motor vehicle takaful in kano state, nigeria international journal of islamic economics and finance (ijief), 5(2), 259-286│285 m.sc thesis, international institute of islamic banking and finance, bayero university kano, nigeria yaqub, h. a. & dandago, k.i. (2015). determinants of motor takaful patronage among commercial vehicle operators: a conceptual review. 1st academic conference of the institute of chartered accountants of nigeria. yusuf, t.o. (2012). prospects of takaful's (islamic insurance) contributions to the nigerian economy. journal of finance and investment analysis, 217230. yahaya, sulaiman, & aminu │ patronage factors of motor vehicle takaful in kano state, nigeria international journal of islamic economics and finance (ijief), 5(2), 259-286│286 this page is intentionally left blank. international journal of islamic economics and finance (ijief) vol. 4(1), page 149-176, january 2021 modeling islamic economics and finance research: a bibliometric analysis1 aam slamet rusydiana sharia economics applied research & training (smart), indonesia corresponding email: aamsmart@gmail.com yulizar djamaluddin sanrego university of darussalam gontor, indonesia, senapatie@gmail.com solihah sari rahayu uin bandung, indonesia, solihah.sr@gmail.com. article history received: june 6th, 2020 revised: 15th july, 2020 accepted: january 21st, 2021 abstract this study aims to determine the development map of mathematic model in islamic economics and finance research that is indexed by scopus and other reputable journal with the keyword "mathematic model in islamic economics and finance". the data analyzed were 100 selected publications. the development map of mathematic model in islamic economics and finance research analyzed using the vosviewer application program to find out the bibliometric map. the results showed that the number of publications on the development of mathematic model in islamic economics and finance research indexed scopus from 19832019 experienced a significant increase and the most were published in journal of king abdulaziz university: islamic economics. network visualization showed that the map of the development of mathematic model in islamic economics and finance research was divided into 3 clusters. the majority of research is related to modeling of profit loss sharing (pls) schemes. however, despite the development of using mathematical model in those researches, the approach tends to be adaptive (inductive) from conventional models that already exist. a challenge to review the mainstream model need to be further critically reviewed. hence, it is necessary for researcher to formulate a mathematical model with a deductive approach that is reduced from islamic norms or ethics derived from the alquran and sunnah. keywords : mathematical model; islamic economics; islamic finance; bibliometric jel classification: c02; c18 type of paper: research paper @ ijief 2021 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.v4i1.8966 web: https://journal.umy.ac.id/index.php/ijief/article/view/8966 citation: rusydiana, a. s., sanrego, y, d., & rahayu, s. s. (2021) modeling islamic economics and finance research: a bibliometric analysis. international journal of islamic economics and finance (ijief), 4(1), 149-176. doi: https://doi.org/10.18196/ijief.v4i1.8966. 1 the authors thank to widya syafitri from ipb university for the collection and analysis of data. mailto:aamsmart@gmail.com mailto:senapatie@gmail.com mailto:solihah.sr@gmail.com https://doi.org/10.18196/ijief.v4i1.8966 https://doi.org/10.18196/ijief.v4i1.8966 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v4i1.8966&domain=pdf rusydiana, sanrego, & rahayu │ modeling islamic economics and finance research: a bibliometric analysis international journal of islamic economics and finance (ijief), 4(1), 149-176│150 i. introduction 1.1. background currently the islamic financial economy is experiencing euphoria, both in developing countries, or even in developed countries. the financial industry and other forms of islamic economic institutions are growing throughout the universe, from the middle east, the asian region to western countries such as the united kingdom. the growth of the islamic finance industry must be supported by economic development and islamic finance in theory. the practice and theory of islamic economics and finance must go hand in hand so that a practical-implementative manifests itself from the application of science at the theoretical-level. based on this argument, researches on the development of islamic economic knowledge are very important. in terms of islamic economic and financial development that is academictheoretical, islam has its own paradigm, namely an approach through islamic economic experiences (behavior) in the past to study the current hot issues that are happening in the field. then the problem is analyzed with a contemporary economic approach with modern analytical tools that will produce postulates, axioms and islamic economic theory as a result of empirical experience. theory testing is done to find the deficiencies of the theory so that it can be evaluated so that the islamic economic theory model obtained can be better and relatively applicable in many places and times. among these processes there is the role of mathematical modeling that can be used for testing calculations and describing economic assumptions. mathematical modeling in islamic economics and finance is a mathematical application consisting of real or complex numbers, vectors, matrices, symbols, mathematical operations, and others that form a model that can explain the conditions of an islamic economic and financial problem (mirakhor & krinchene, 2014). then in the perspective of islamic economics and finance, students or professionals need the ability to calculate mathematics and statistics used to complete tasks both in financial institutions and nonfinancial institutions. without calculation skills, students and professionals will not be able to manipulate economic and financial data. financial institutions such as pension fund institutions, securities companies, insurance companies, and asset management companies that require actuarial knowledge, investment modeling, and risk management. professionals may be quite satisfied with the standards provided by their company and the software used to process data and complete calculation tasks plus the availability of the internet which makes it easy to obtain calculation results quickly and easily. however, it is very important to understand the theory underlying mathematical calculation procedures. then the development of mathematics and modeling has progressed and even rusydiana, sanrego, & rahayu │ modeling islamic economics and finance research: a bibliometric analysis international journal of islamic economics and finance (ijief), 4(1), 149-176│151 training on the application of mathematical models has been done, but unfortunately not many applications of mathematical modeling on topics relevant to islamic economics and finance. from this background, the authors are interested in discussing the development of the application of mathematical models in islamic economic and financial research that has been indexed by scopus and other reputable journal since 1983 with 100 publications. so far, there is still very little or even no research that maps research and studies related to the use of mathematical models in research on islamic economics and finance. therefore, this study becomes important to do to fill the research gap. 1.2. objectives this study aims to determine the map of research developments related to the application of mathematical models in islamic economic and financial research that are indexed by scopus using the help of vosviewer software. this analysis is called bibliometric analysis. in addition, prior to bibliometric analysis, publications related to mathematical models in islamic economic and financial research that were indexed by scopus were analyzed based on text mining, namely meta analysis. matters presented in the meta-analysis are related to publication, year of publication, country case studies, number of article authors, research topics, citations, and methodological approaches used by each scopus indexed publication paper related to the application of mathematical models in islamic economic and financial research. ii. literature review in general, the notion of a model is an attempt to create a replica or imitation of a social phenomenon or natural event. there are three types of models namely physical models, anological models and mathematical models. physical modeling is used to simulate the space or domain in which the phenomenon occurs while anological modeling is carried out by analogizing phenomena with other phenomena to then construct the physical model. the replica of mathematical model is implemented by describing phenomena in a set of equations. the suitability of the model for the phenomenon depends on the accuracy of the formulation of mathematical equations in describing the phenomena that are imitated (luknanto, 2003). mikrakhor and krinchene (2014) explain a model that presents a theory and simplifies the situation that occurs in the field by describing it into an equation. it is written in the form of formulas that are compared with the explanation of the description of long words. economics is closely related to the use of mathematical functions and models. some examples of important rusydiana, sanrego, & rahayu │ modeling islamic economics and finance research: a bibliometric analysis international journal of islamic economics and finance (ijief), 4(1), 149-176│152 and often used functions are demand and supply functions, budget functions, production possibilities curve functions, production functions, and other economic functions. another aim of mathematical approach is to derive a set of conclusions or theorems from a given set of assumptions or postulates chiang (2005). instead, any worldviews where set of assumptions or postulates as a point of embarkation should be critically reviewed. in this context, economics is instilled by values which is derived from a certain worldview. in other words, the normative values/ethics which are derived from a particular worldview will come up with theoretical differences, including mathematical model. mathematical model which derived from western worldview will certainly claimed that economics shall be positive science devoid of value judgment. unfortunately, there are many researches in islamic economic and financial are still working on conventional mathematical model. the model that presents a theory is mainly developed within the framework of western worldview. there is a tendency for the scientification process of economics based on secular values to eliminate the vision or purpose of life of a muslim. al-attas (1995) asserts that the stage of islamization is a solution to organize science to fit the moral message of the qur'an which does not recognize dichotomy. islamic economics will not provide a conventional dichotomic customary space between substantive and normative descriptions in social science (abusaud 1993). because consideration to make ethics or morals into endogenous variables in a socio-economic system becomes a necessity (choudhury 1990). al-attas’s (2014) method of islamization of knowledge consists of two steps. first, is to carry out the stage of isolation or elimination of foreign elements and key concepts from the body of existing knowledge, and second, to infuse islamic values and key concepts into it. however, islamic economics methodology (including the usage of mathematical model) should not start from scratch but use the relatively more advanced development in conventional economics (theories and methodologies) and attempt to make them compatible with islamic economics (hasan, 2016; haneef & furqani, 2012). therefore, apart from the beneficial usage of mathematical model, the current working researches shouldn’t just purely adopt or a mere infusing the islamic values into the mainstream’s model. what really matter for adopting mathematical models into the islamic economics is that, it shouldn’t cause obstacles in achieving the aim of islamic economics, which is falah (abdullahi, 2018). bibliometric mapping is an important research topic in literature studies. two aspects of bibliometrics which will be distinguished are the development of the bibliometric map and therefore the graphical illustration of the map. bibliometrics is used as a methodology in many fields of science, first and rusydiana, sanrego, & rahayu │ modeling islamic economics and finance research: a bibliometric analysis international journal of islamic economics and finance (ijief), 4(1), 149-176│153 foremost for publication patterns in different scientific disciplines. for several decades bibliometrics has provided advantages in management science for making decisions. the use of bibliometrics is a quantitative and statistical analysis to describe patterns of publications without involving segments or describing patterns from publications or entire sections of literature. researchers can use the bibliometrics method in evaluations to determine the influence of a single author or to describe the relationship between two or more authors. van eck & waltman (2007b) stated that bibliometrics is a study of the production and dissemination of information which is operationally reviewed through the production and dissemination of media that records information to be stored and disseminated. some previous studies related to islamic economics and finance using this method include research conducted by rahman et al. (2020) related to sri sukuk, ahmid & ondes (2019) on phd research on the theme of islamic banking and finance in the uk, and rehman & othman (1994) related to islamic economic literature in general. iii. methodology this study uses international publication data on the application of mathematical models in islamic economic and financial research sourced from the scopus database. collecting data through publications on scopus with the mathematic model in islamic economics and finance keywords with the categories article titles, abstracts, keywords in the period 1983 2019. from the search results obtained as many as 100 publication articles. data in the form of publications, years of publication, country case studies, number of article authors, research topics, citations, and methodological approaches used by each publication article were analyzed using microsoft excel 2010. whereas the development trends of mathematical model publications in islamic economic and financial research analyzed using vosviewer software. to create maps, vosviewer uses vos mapping techniques (van eck and waltman 2007a), where vos stands for visualization of similarity. vosviewer can display maps that are built using appropriate mapping techniques. therefore, this program can be used not only to display maps built using vos mapping techniques but also to display maps constructed using techniques such as multidimensional scaling. vosviewer runs on a large number of hardware and operating system platforms and can be started directly from the internet like web of science or scopus database. the purpose of vos is to place items in low dimensions such that the distance between the two items accurately reflects the uniformity or interrelation of the items. for each pair of items i and j, vos requires an input similarity sij (sij rusydiana, sanrego, & rahayu │ modeling islamic economics and finance research: a bibliometric analysis international journal of islamic economics and finance (ijief), 4(1), 149-176│154 ≥ 0). vos treats the sij equation as a measurement on a ratio scale. the equations of sij are usually calculated using the power of association defined in equation 1 (for example van eck & waltman, 2007b). vos determines the location of items in the map by minimizing. 𝑉(𝑥𝑖 , … , 𝑥𝑛 ) = ∑ 𝑠𝑖𝑗 ‖𝑥𝑖 − 𝑥𝑗 ‖ 2 𝑖<𝑗 (1) to be: 2 𝑛 (𝑛−1) ∑ ‖𝑥𝑖 − 𝑥𝑗 ‖ = 1𝑖<𝑗 (2) there are two computer programs that have already implemented vos mapping techniques. both of these programs use the smacof algorithm variants mentioned above to minimize equation 1 to equation 2. in addition to the mapping of islamic economic and financial research that uses the mathematical model application approach, this study also tries to map the quality of these studies based on the islamization framework proposed by al-attas. two terms are used in mapping these studies; 1. originative, meaning that the research carried out has carried out the process or stages of islamization, 2. adaptive, meaning that the research carried out only adopts an existing mathematical model with or without any process or stages of islamization framework. the basic idea of originative and adaptive has come from the fundamental issue, whereby islamic economics and finance and conventional ones were departing from different worldviews. the difference between the theoretical foundation of the two might come up with a different conceptual outcome. the ethical foundation of islamic economics will certainly recognize a specific scientific body of knowledge, including realistic model building (hasan, 2016). using the islamization framework of al-attas (2014), any attempts that carry out the stage of isolation or elimination of foreign elements and key concepts from the body of existing knowledge, and infusing islamic values and key concepts into it are considered as originative paper. according to choudhury (2012), the originative process should be deductively carried out from the basic teaching of islamic economy. he argued to totally reject the conventional neoclassicism and returning to an epistemological system premised on the tawhidi worldview of unity of knowledge. whereas adaptive paper, could be and the two form, namely incorporatedadaptive and purely-adaptive papers. the former is characterized by papers that employing the existing conventional mathematical model with any attempts to critically evaluate the basic concept behind the model. whereas the later, the papers only replicating the existing mathematical model and rusydiana, sanrego, & rahayu │ modeling islamic economics and finance research: a bibliometric analysis international journal of islamic economics and finance (ijief), 4(1), 149-176│155 apply it as an analysis basis or framework to the practices of islamic economic and finance. iv. results & analysis this study reviewed 100 studies with publishing from 1983 to 2019. during this period, research on mathematical models in islamic economic and financial research indexed by scopus occurred in 2011 as many as 9 published articles. at the beginning of the appearance of scopus indexed papers on mathematical models in islamic economic and financial research, from 2010 to 2014, only 1 to a maximum of 4 papers were published en masse. in 2010 and above compared to the previous year there was an increase in the number of scopus indexed papers on mathematical models in islamic economic and financial research. however, in 2012 and 2019 there was a large decrease in publication articles by 5 articles indexed by scopus related to mathematical models in islamic economic and financial research (figure 1). in addition, the reviewed papers are also classified based on the study location. in 100 papers, the most research on mathematical models in islamic economic and financial research that was indexed by scopus was conducted in malaysia with 27 papers and the second highest in indonesia with 21 papers. other mathematical model studies in islamic economic and financial research take place in pakistan, saudi arabia, the united states, oman, and iran, with 15, 10, 9, 5, and 2 papers respectively (table 1). this finding is relevant to the results of the publication of the islamic finance development report (2019) which put malaysia, indonesia, and pakistan as the best countries based on islamic finance knowledge indicators, especially the number of peer-reviewed articles and the number of research papers. figure 1. classification of publications by year table 1. classification of publications by case study 1 4 2 1 1 1 1 2 4 3 2 1 1 2 1 3 1 1 2 2 3 4 4 9 4 5 6 8 8 6 6 1 1983 1985 1987 1990 1993 1995 1997 2001 2004 2006 2008 2010 2012 2014 2016 2018 n u m b e r o f p u b lic a ti o n year rusydiana, sanrego, & rahayu │ modeling islamic economics and finance research: a bibliometric analysis international journal of islamic economics and finance (ijief), 4(1), 149-176│156 classification of scientific articles based on the focus of research was also carried out in this study. studies conducted cover various sectors such as islamic banking, islamic economics, islamic monetary, islamic capital markets, accounting, islamic business and marketing, zakat, islamic insurance (takaful), and endowments. of the 100 studies, the focus of research on the most mathematical models is in the islamic banking sector as many as 41 articles, followed by islamic economics as many as 29 articles, followed by islamic monetary and islamic capital markets, each of which is 6 articles, followed by islamic accounting, sharia business and marketing, islamic insurance 4 each and 6 articles of social funds, namely zakat and endowments (waqf). (figure 2). no. country number of article 1. malaysia 27 2. indonesia 21 3. pakistan 15 4. kingdom of saudi arabia 10 5. united states 9 6. oman 5 7. iran 2 8. united kingdom 1 9. italy 1 10. kuwait 1 11. morocoo 1 12. nigeria 1 13. netherlands 1 14. qatar 1 15. singapore 1 16. sudan 1 17. tunisia 1 18. australia 1 total 100 rusydiana, sanrego, & rahayu │ modeling islamic economics and finance research: a bibliometric analysis international journal of islamic economics and finance (ijief), 4(1), 149-176│157 figure 2. classification of publications by study focus classification of articles based on the number of citations is shown in table 2. there are 10 articles that have the most citations. the number of citations from each journal was obtained from google scholar on january 17, 2020. the article with the most citations was titled "islamic interest-free banking, a theoretical analysis" which discusses mathematical models on islamic banking with as many as 443 citations. then the topic of many mathematical models used as citation is the topic of islamic economics and followed by the topic of islamic banking, and islamic capital markets. the article with the 10 most citations is dominated by articles published under 2000. khan's article (1986) was the most cited because it's one of the first research uses mathematical models for islamic banking at a time when other similar research still rarely use it. khan criticizes islamic economic academics for the absence of theories that strengthen the building of the islamic economics system, especially in the research about islamic banking and monetary compared to conventional banking. meanwhile, choudhury & hoque (2006) discussing on corporate governance related to islamic socio-scientific epistemology. the results show that there is a big difference between the concept of islamic corporate governance with mainstream literature. in its time, this paper was also one of the first to discuss mathematical modeling in the islamic version of corporate governance theory proposals. another research that often used as a reference is an article written by khan (1989). slightly different from khan's (1986) research article, this research tries to use mathematical modeling to compare islamic financial systems based on a variable return scheme (vrs) with conventional systems based on 41 29 6 6 4 4 4 6 islamic bank islamic economy islamic monetary islamic capital market islamic business and marketing islamic accounting takaful others (zakat and waqf) study focus n u m b e r o f p u b lic a ti o n rusydiana, sanrego, & rahayu │ modeling islamic economics and finance research: a bibliometric analysis international journal of islamic economics and finance (ijief), 4(1), 149-176│158 table 2. classification of publications by citation no year of publication title citation 1 1986 islamic interest-free banking, a theoretical analysis 443 2 2006 corporate governance in islamic perspective 182 3 1989 towards an interest-free islamic economic system 179 4 1984 macro consumption function in islamic framework 91 5 1983 portfolio management of islamic banks, certainty model 65 6 1994 comparative economics of some islamic financing techniques 63 7 1993 equilibrium in a non-interest open economy 59 8 1996 cost of capital and investment in a non-interest economy 52 9 1984 the role of sock exchange in islamic economy 42 10 1993 equity capital, profit sharing contracts and investment, theory and evidence 39 a fixed return scheme (frs). substantial results found in this article include mentioning that debt-based transactions (fixed) frequently used in financial transactions due to asymmetric information and high monitoring costs. classification of articles based on a methodological approach is shown in figure 3. based on 100 articles reviewed, it is divided into three categories, namely quantitative approaches, qualitative approaches, and mixed approaches, which are a combination of quantitative and qualitative. articles that use a quantitative methodology approach as much as 32 or 32% and a qualitative approach amounting to 55. while those who use two methodological approaches at the same time (mixed) as many as 13. the majority of mathematical models are used to calculate the profit-loss sharing (pls) scheme which amounts to 16 publication articles and there are other economic models, namely profit sharing ratio (psr), expectation spread (es) model, and tax compliance behavior model. the mathematical model that plays a role in calculating a problem in the article being reviewed is the optimization theory. figure 3. classification of publications by methodology approach 13% 55% 32% mixed qualitative quantitative rusydiana, sanrego, & rahayu │ modeling islamic economics and finance research: a bibliometric analysis international journal of islamic economics and finance (ijief), 4(1), 149-176│159 4.1. map of development mathematical model research in islamic economic and financial research from the search results from the database 100 documents were then exported to the .txt format, inputted and analyzed with vosviewer, the following results were obtained. 4.1.1. visualization of network co-word maps the results of the co-word map analysis of these keywords form the basis of mapping co-occurrence of important or unique terms contained in certain articles. mapping is a process that allows one to recognize elements of knowledge and configuration, dynamics, interdependence, and their interactions. knowledge mapping is used for the purposes of technology management, which includes the definition of research programs, decisions related to technology activities, the design of knowledge base structures, and the making of education and training programs. related to bibliometrics, science mapping is a method of visualizing a science. this visualization is done by creating a landscape map that can display topics from science (royani, et al., 2013). the results of the visualization of the co-word network map of mathematical model research in islamic economic and financial research can be seen in figure 4. figure 4. network visualization of co-word maps rusydiana, sanrego, & rahayu │ modeling islamic economics and finance research: a bibliometric analysis international journal of islamic economics and finance (ijief), 4(1), 149-176│160 figure 4 shows that the map of the development of mathematical model research in islamic economic and financial research is divided into 3 clusters as follows. ▪ cluster 1 consists of 14 terms that is islamic banking, musyarakah model, profit loss sharing (pls) contract, comparative, perspective, central bank, islamic monetary, aitab (al-ijarah tsumma al-bai’) instrument, contrasting economic epistemology, economic coalition, adverse selection, islamic bank, islamic financial industry, and investigation. ▪ cluster 2 consists of 9 terms that is inequality, equity, efficiency, interest free economy, country, debt alternative, problem, islamic, and guide. ▪ cluster 3 consists of 5 terms that is islamic economic theory, large economy, conventional counterpart, state, and framework. cluster 1 talks a lot about contracts and practices in islamic banking, in particular the scheme and modeling of profit-loss sharing, both mudharabah, and musyarakah. some modeling related to the pls scheme, among others, was carried out by bakhtiar et al. (2014), halim (2013), halim et al. (2016), hasan (2010), khaled & khandker (2015), sugema et al. (2010), sumarti & marendri (2017), sumarti et al. (2015), wahyudi & sakti (2016) and wolf et al. (2018). meanwhile, specifically, the mudharabah profit-sharing modeling has been carried out by cahyandani et al. (2017), jaffar & isa (2011), and omar & jaffar (2016). the mathematical modeling research for the musharakah scheme has been investigated by jaffar (2010), jaffar et al. (2017), mostafa et al. (2016), and samson et al. (2008). although the majority is applied in the banking industry, there are also those who make the takaful industry and the capital market as the object of study. for example, relatively recent research, for example, wolf et al. (2018) proposes a simple mathematical model that shows that the pls contract can be used between mudharib and shahibul maal as potential alternative contracts for institutional debt financing. the important conclusion in his research is that the pls financing scheme is an effective financing alternative, especially for medium-term and long-term loans, not short-term. cluster 2 in the visualization of co-word maps has a lot to do with the issue of fairness and injustice in financial transactions. the researchers consider that the islamic-based transaction agreement especially profit sharing can answer this problem. the results of research conducted by researchers are at least able to prove in a mathematical formula that pls-based financing is an alternative to ribawi-based debt financing. islamic guidelines in dealing are considered capable of providing solutions to achieve justice and benefit between investors and business people. some research that shows this can be found in studies conducted by bashir et al. (1993), hasan & siddiqui (1994), rusydiana, sanrego, & rahayu │ modeling islamic economics and finance research: a bibliometric analysis international journal of islamic economics and finance (ijief), 4(1), 149-176│161 hasan (2010), khan (2015), and tag el-din (1992). wolf et al. (2018) even prove that the pls scheme can be an alternative to long-term interest-based loans in developing countries. meanwhile, cluster 3 in the co-word map visualization has a lot to do with theories that underlie islamic financial and business transactions which are then reduced to mathematical models both macro as an economic system and micro as the form of islamic economic and financial contracts as a comparison of conventional contracts in industry commercial banking in several countries. as has been shown previously, several islamic banking scheme practices are found in countries such as malaysia, indonesia, pakistan, and some gcc countries. an example is a research conducted by abdullahi (2018), kiaee et al. (2013), and wahid (1985). indeed some terms and topics are among these three clusters. but in general, based on bibliometric calculations and mapping through vosviewer, these three clusters are the largest and most structured. some terms and topics are between the 2 clusters in which there is interconnectedness. because in principle, in islam and also islamic finance and finance, there are no elements or variables that stand alone. the elements tend to relate to each other or are known as interdependence. the only one that is not affected is god (allah) as an absolute independent variable (choudhury, 1990, 2009, 2011). 4.1.2. visualization of density maps co-author the cluster density view, is an item (label) that is marked the same as the visible item. each item point has a color that depends on the density of the item at the time. this identifies the color of the dots on the map depending on the number of items associated with other items. this section is very useful for obtaining an overview of the general structure of a bibliometric map by paying attention to the parts of the items that are considered important to be analyzed. through this worksheet, we can interpret the authors who write the most publications. visualization of the density map of co-authors of the development of mathematical model research in islamic economic and financial research can be seen in figure 5. rusydiana, sanrego, & rahayu │ modeling islamic economics and finance research: a bibliometric analysis international journal of islamic economics and finance (ijief), 4(1), 149-176│162 figure 5. visualization of density maps of co-author figure 5 shows the density map which is the result of an analysis using all the articles in the development of mathematical model research in islamic economic and financial research, both related and unrelated. there are 6 cluster if sorted according to the author. the authors who wrote the most publications related to mathematical models in islamic economic and financial research are masudul alam choudhury, rifki ismal, zubair hasan, novriana sumarti, nurfadhlina abdul halim and maheran mohd jaffar. choudhury, ismal, and hasan, relatively researched under the name of one author and not a co-author. meanwhile, the rest of it, tend to do research and publications in the form of writers along with other researchers. the majority of choudhury's research is about meta-epistemology (choudhury, 2011), islamic criticism of the secular economy (choudhury, 1990, 2009), and a concept known as tauhidic string relationship (tsr). meanwhile, ismal majored in researching mathematical models in financing portfolios in islamic banks (ismal, 2009, 2011b, 2012, 2014) and islamic monetary themes in general (ismal, 2011a, 2013). as for hasan examines consumption related to islamic economics, pls, and the stability of the gold currency (hasan, 2005, 2008, 2010). sumarti researched a lot of profit sharing contract schemes in islamic banking and other transactions such as ijarah. interestingly, the mathematical modeling methods used are relatively varied, such as the use of the semifuzzy logic method (sumarti & marendri, 2017), optimization techniques (sumarti et al., 2014), and data simulation (sumarti et al., 2015). this is understandable because of the background of researchers who are academics with a mathematician background. rusydiana, sanrego, & rahayu │ modeling islamic economics and finance research: a bibliometric analysis international journal of islamic economics and finance (ijief), 4(1), 149-176│163 halim and jaffar generally researched and carried out mathematical modeling for pls schemes both in banks and other financial institutions. the difference, halim conducted a study on the application of the ijarah muntahiya bittamlik scheme or the aitab contract (halim et al. 2012; halim et al., 2016; halim, 2013) while jaffar more demonstrated the pls model in the musyarakah transaction agreement (jaffar et al., 2017; jaffar, 2010) and mudharabah (omar & jaffar, 2016) or both (jaffar & issa, 2011). in conclusion, generally each researcher has a different tendency. some prefer to write as a single writer, others write together with other researchers. although the majority of the mathematical model stubs for the pls scheme, there are variations in application both in banking and in other islamic financial industries. likewise, islamic financial transaction agreements are objects, mudharabah, musyarakah, ijarah to the contract cooperation scheme 'salam' as an object of the research. interestingly enough, researchers who write a lot about the topic of mathematical modeling in islamic economics and finance, at least have a background not only in economics, muamalah, or finance but also have the ability and background of qualified mathematics. from the journal sources, the results of the visualization of the map overlay co-sources (publication sources) the development of research on mathematical models in islamic economic and financial research are illustrated in figure 6 below. journals that look significant in terms of number of publications are journal of king abdul aziz university (jkau) islamic economics. jkau islamic economics is the first professional journal in the field of islamic economics. this journal was first published in 1983 under the title "journal of research in islamic economics" or jrie. this journal has published several classic articles written by professionals in the field of islamic economics. this journal has been indexed by scopus starting in 2009. besides jkau, it appears that the journals incorporated in emerald international publication institutions are humanomics (new name: international journal of ethics and systems). next is a journal based in the state of pakistan, the pakistan development review (pide). outside the three journals above, there are applied mathematical sciences, contributions to islamic economics theory, international journal of islamic and middle eastern finance and management, procedia-social and behavioral sciences, studies in economics and finance, advanced science letters, managerial finance, journal of banking and finance, social epistemology and several other journals and publications. mathematical modeling research in islamic economics and finance and islamic economic themes, in general, have been widely published in many internationally reputed journals with various global indexes such as scopus, web of science (wos), abdc, and other indexers. likewise, well-known international publications such as elsevier, emerald, springer, sage, taylor & rusydiana, sanrego, & rahayu │ modeling islamic economics and finance research: a bibliometric analysis international journal of islamic economics and finance (ijief), 4(1), 149-176│164 figure 6. visualization of map overlay co-sources (publication sources) francis, inderscience to wiley & blackwell. according to rusydiana (2020), there are at least 119 scopus indexed journals that publish articles on islamic economics and finance globally. issues related to islamic financial economics have indeed become one of the interesting topics that are sought after in international reputable economic journals, in addition to other topics related to the theme of sustainable development goals (sdgs), studies of chinese economic development, and the halal industry. based on the grouping done by the author, in general, islamic economic and financial modeling research is divided into 3 groups: (1) originative, (2) incorporated-adaptive, (3) purely-adaptive. some examples of research included in the first group (originative) are research conducted by choudhury (2014, 2012, 2011), putri et al. (2018), ahmad et al. (2011), and hossain (2006). what choudhury did, for example, he used a deductive approach in conducting his research. choudhury proposed a concept known as tawhidic string relationship (tsr). the example of research included in the second group (incorporatedadaptive) is research conducted by ghazali et al. (2019), khaldi & hamdouni (2018), saputra et al. (2017), sumarti et al. (2015), bakhtiar et al. (2014), ismal (2014), halim et al. (2012) and ismail & tohirin (2008). meanwhile, some examples of the third group are those carried out by derbali et al. (2017), martan et al. (1984), keen (2017), and sapuan et al. (2015). in terms of numbers, research in the first group is relatively less compared to other research in the second and third groups. rusydiana, sanrego, & rahayu │ modeling islamic economics and finance research: a bibliometric analysis international journal of islamic economics and finance (ijief), 4(1), 149-176│165 however, as a truly solid concept, basic research is needed that tries to formulate a more comprehensive and robust concept of islamic economics and finance. according to choudhury (2012), the originative process should be deductively carried out from the basic teaching of islamic economy. he argued to totally reject the conventional neoclassicism and returning to an epistemological system premised on the tawhidi worldview of unity of knowledge. v. conclusion & recommendation 5.1. conclusions based on the results and discussion, the following conclusions are obtained. the number of publications of the development of mathematical model research results in islamic economic and financial research indexed by scopus and other reputable publication from 1983-2019 has increased since 2010 but is still small. islamic banking and islamic (macro) economics are the most research topics. network visualization shows that the map of the development of mathematical model research in islamic economic and financial research is divided into 3 clusters. cluster 1 consists of 14 terms. cluster 2 consists of 9 terms and cluster 3 consists of 5 terms. cluster 1 talks a lot about contracts and practices in islamic banking, in particular the scheme and modeling of profit loss sharing, both mudharabah, and musyarakah. cluster 2 in the visualization of co-word maps has a lot to do with the issue of fairness and injustice in financial transactions. meanwhile, cluster 3 in the coword map visualization has a lot to do with the theory underlying islamic finance and business transactions. the authors who published the most research results of mathematical models in islamic economic and financial research that were indexed by scopus and other reputable journal were masudul alam choudury, rifki ismail and zubair hasan. the name of the publication that mostly published the results of mathematical model research in islamic economic and financial research that was indexed by scopus was the journal of king abdulaziz university: islamic economics (jkau-ie). 5.2. recommendations based on the grouping by the author, in general, islamic economic and financial modeling research is divided into 3 categories: (1) originative, (2) incorporated-adaptive, (3) purely-adaptive. in terms of numbers, research in the first group is relatively less compared to research in the second and third groups. despite the development of using mathematical model in those researches, the approach tends to be adaptive (inductive) from conventional models that already exist. a challenge to review the mainstream model need rusydiana, sanrego, & rahayu │ modeling islamic economics and finance research: a bibliometric analysis international journal of islamic economics and finance (ijief), 4(1), 149-176│166 to be further critically reviewed. hence, it is necessary for researcher to formulate a mathematical model with a deductive approach that is reduced from islamic norms or ethics derived from the alquran and sunnah. for islamic banking and finance practitioners, it is necessary to collaborate with academics to carry out economic and financial modeling that can be beneficial to stakeholders, especially bank customers. as for regulators, islamic economic and financial modeling is expected to be an important input in the context of consideration in macro policymaking that can encourage islamic banking and other islamic financial economies to be better. going forward, the clustering of these 3 categories is very open for discussion by islamic economic and financial researchers in the world, with the hope that dialectics and the development of islamic economic theory will not stop halfway. rusydiana, sanrego, & rahayu │ modeling islamic economics and finance research: a bibliometric analysis international journal of islamic economics and finance (ijief), 4(1), 149-176│167 references abbas, m. 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(2016). a proposed formula for reserve requirement–financing to deposit ratio: the case of islamic banking in indonesia. in macroprudential regulation and policy for the islamic financial industry (pp. 121–131). https://doi.org/10.1007/978-3-31930445-8 jaffar, m. m. (2010). new musharakah model in managing islamic investment. isra international journal of islamic finance, 2(2), 25–36. jaffar, m. m. (n.d.). mathematical musyarakah model in managing islamic investment between two parties using two profit sharing rates. jaffar, m. m. (2010). mudharabah and musyarakah models of joint venture investments between two parties. in international conference on science and social research (cssr 2010) (pp. 42–47). https://doi.org/10.1109/cssr.2010.5773814 jaffar, m. m., & mohd isa, n. b. 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(2018). islamic financial intermediation compared to ribaoui financial intermediation: a theoretical and mathematical analysis. international journal of economics and financial issues, 8(3), 268–283. rusydiana, sanrego, & rahayu │ modeling islamic economics and finance research: a bibliometric analysis international journal of islamic economics and finance (ijief), 4(1), 149-176│171 khaled, s. a., & khandker, a. w. (2015). profit-loss sharing contract formation under zero interest financial system. journal of king abdulaziz university, islamic economics, 28(2), 75–107. https://doi.org/10.4197/islec.28-2.3 khan, h. (2015). some implications of debt versus equity-based financing in the backdrop of financial crises. journal of king abdulaziz university, islamic economics, 28(1), 165–180. https://doi.org/10.4197/islec.28-1.7 khan, m, f. 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(2016). analyzing the profit-loss sharing contracts with markov model. communications in science and technology, 1(2), 78–88. https://doi.org/10.21924/cst.1.2.2016.17 wolf, f., nabin, m. h., & bhattacharya, s. (2018). a mathematical demonstration of the viability of profit/loss sharing as a debt alternative in presence of market frictions. journal of emerging market finance, 17(3_suppl), 1–17. https://doi.org/10.1177/0972652718798075 rusydiana, sanrego, & rahayu │ modeling islamic economics and finance research: a bibliometric analysis international journal of islamic economics and finance (ijief), 4(1), 149-176│174 appendix table of research publications on mathematical models on islamic economics and finance no name of publication number of articles journal 1. advance science letters 1 2. alqimah : the journal of management and science 1 3. applied mathematic sciences 2 4. applied mathematics 1 5. asian academy of management journal 1 6. communications in computer and information science 1 7. communications in science and technology 1 8. corporate governance 1 9. economic and administrative sciences 2 10. humanomics 5 11. international journal of commerce and management 1 12. international journal of economics and financial issues 1 13. international journal of ethics and systems 1 14. international journal of islamic finance 1 15. international monetary fund 1 16. international research journal of finance and economics 1 17. islamic economic studies 2 18. islamic economics 1 19. islamic middle eastern finance and management 3 20. islamic monetary economics and finance 1 21. journal of applied finance and banking 1 22. journal of asset management 1 23. journal of banking and finance 1 24. journal of business finance & accounting 1 25. journal of emerging market finance 1 26. journal of islamic economics 1 27. journal of islamic economics, banking, and finance 2 28. journal of king abdulaziz university 19 29. journal of mathematics 1 30. journal of research islamic economics 5 31. jurnal ekonomi malaysia 1 32. jurnal keuangan dan perbankan 1 33. jurnal teknologi 1 34. mathematical and fundamental sciences 1 35. pakistan development review 7 rusydiana, sanrego, & rahayu │ modeling islamic economics and finance research: a bibliometric analysis international journal of islamic economics and finance (ijief), 4(1), 149-176│175 36. pertanika journal of social sciences and humanities 2 37. procedia-social and behavioral sciences 2 38. social epistemology 1 39. studies in economics and finance 2 conference 1. 8th international conference on islamic economics and finance 1 2. iop conference series: materials science and engineering 3 3. the 5th international conference on research and education in mathematics 1 4. aip conference proceedings 2 5. international conference on science and social research (cssr 2010) 1 6. international conference on business, engineering and industrial applications 1 7. conjunction with 4th international postgraduate conference on science and mathematics 1 8. simposium kebanggan sains matematik ke-16 1 9. 20th national symposium on mathematical sciences 1 10. international seminar on macroeconomics from islamic perspective:theory and contemporary issues 1 11. ieee symposium on humanities, science and engineering research analysis 1 working paper 1. imf working paper 1 2. islamic economics and finance no. 0805 1 magazine article 1. bulletin of political economy : a development planning model and application using islamic relational epistemology 1 book & book section 1. introductory mathematics and statistics for islamic finance 1 2. macroprudential regulation and policy for the islamic financial industry 1 3. idb:irti book no.3 1 total 100 rusydiana, sanrego, & rahayu │ modeling islamic economics and finance research: a bibliometric analysis international journal of islamic economics and finance (ijief), 4(1), 149-176│176 this page is intentionally left blank. international journal of islamic economics and finance (ijief) vol. 3(2), page 143-170, july 2020 predictors of young people’s career intentions as islamic bankers hanudin amin universiti malaysia sabah, malaysia corresponding email: hanudin@ums.edu.my article history received: june 7 th , 2020 revised: june 30 th , 2020 accepted: july 20 th , 2020 abstract understanding the willingness of university students pursuing their career as islamic bankers has proven to be one of the most challenging research topics in the islamic banking field. this study examines the factors affecting the career intentions as islamic bankers among university students in malaysia. drawing upon decomposed theory of planned behavior (dtpb), this study examined the factors determining the students' willingness to become islamic bankers as their future job. our analysis is based on the 350 respondents involved. results obtained show that all factors are examined were instrumental in determining the career intentions as islamic bankers. our findings should be interpreted with caution. we identified two limitations, first is on the use of the university students as proxies and second our data which was confined to islamic finance program whilst neglecting other students from business and finance disciplines. the results help improve the role of bank managers to provide proper packages of training to improve the students’ confident to become future islamic bankers. besides, this study extends the dtpb’s applicability to include career intentions as islamic bankers in a malaysia context. keywords: student, islamic banker, dtpb, graduates, malaysia. jel classification : a22; c83; j24; p36 @ ijief 2020 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.3225 web: https://journal.umy.ac.id/index.php/ijief/article/view/8970 citation: amin, h. (2020) predictors of young people’s career intentions as islamic bankers. international journal of islamic economics and finance (ijief), 3(2), 143-170. doi: https://doi.org/10.18196/ijief.3225 https://doi.org/10.18196/ijief.3225 https://doi.org/10.18196/ijief.3225 amin │ predictors of young people’s career intentions as islamic bankers international journal of islamic economics and finance (ijief), 3(2), 143-170│144 i. introduction 1.1. background owing to the uncertain economic future of islamic banking system drawn from the stern competition and public fallacy, islamic banks are under increasing pressure not only in retaining their existing customers but also attracting the new ones. bank customers have expectations concerning islamic banking products that may be based on, firstly, financial benefits offered, secondly, satisfaction with the patronization with islamic banks and lastly their satisfaction to deal with bankers who managed their queries effectively. of these, reliable bankers are the key to gaining competitive advantage to build profitable long-term customer relationships, which contributes to greater sales volumes, secured repeat sales, positive word-ofmouth and importantly customer loyalty. hiring the right person for the right job is challenging today for islamic banks. job seekers have options whether they want to end up with the banking industry or other industries, relatively based on their discretion and interest. the same case also goes to students at universities majoring banking and finance who have such discretion but somewhat are confused to determine their right career pathway due to lack of exposure and mixed opinions from diverse parties that leave them hanging and helpless. consequently, many become teachers and at their best they become entrepreneurs. such a decision also leads to brain drain to the islamic banking industry and also among themselves as they could not apply the theories that have been learnt at the university to practice. similarly, they force themselves to learn a new discipline to secure their current jobs – at the expense of their knowledge extensions in islamic banking. according to bank negara malaysia (2011), the islamic banking industry requires a pool of skilled talent that can drive the development of the islamic banking industry. it is also asserted that the industry needs about 200,000 employees to meet the demand of well-educated employees in high growth and niche areas of the industry. following icd thomson reuters (2019), malaysia is ranked first in the world with an index score of 131.86, followed by bahrain (74.25) and united arab emirates (71.1) inter alia. in the south-east asia countries, malaysia has the highest score for islamic finance development indicator (ifdi) (131.86), followed by brunei (50.45) and indonesia (49.96), to mention some. if graduates are not tapping on this opportunity, the national agenda to be an international hub for islamic finance could be difficult to be attained or else other countries will lead the way. current research on career choice, however, offers little guidance on career intentions as islamic bankers. given several growing studies across different amin │ predictors of young people’s career intentions as islamic bankers international journal of islamic economics and finance (ijief), 3(2), 143-170│145 disciplines namely accounting (law, 2010) and property management (ayodele, 2019), support for the antecedents determining young intellectuals’ willingness to become islamic bankers remains equivocal. moreover, there is a relative paucity of knowledge about the specific topic of career pathways as bankers and factors determining their likelihood are relatively fallen short. an interesting study by mohd zain et al. (2010) in malaysia describes entrepreneurship intention among malaysian business students. this study employs undergraduate students as samples to determine their career intentions to become entrepreneurs in the future. family influences, academic performance and attended entrepreneurship courses, were jointly determined the intention. equally, these studies have paid little attention to firstly, islamic bankers as the research context and secondly the contributing factors determining the islamic banker careers – which warrant further empirical investigations to close the gap. we identify three research gaps found in the extant literature but are not limited to: 1) prior studies have paid limited attention to career intentions among young people to become islamic bankers in the future (mohd zain et al., 2010, law, 2010); 2) efforts in extending the application of the dtpb to our present context are somewhat limited and to our knowledge, it is inconclusive (md husin & ab rahman, 2016); and 3) battery items developed to gauge career intentions from the context of young people are not properly developed in the extant pieces of literature (law, 2010; ayodele, 2019). the current study provides adjustment to the items to contribute to the body of knowledge in the area of islamic banking employment. 1.2. objective in light with the context of the present study, the banks need to identify what factors young intellectuals consider to be the most important when opting to become islamic bankers in the future. hence, this study uses decomposed theory of planned behavior (dtpb) developed by taylor and todd (1995) as a baseline theory to identify potential key attributes and investigates the relationships between those attributes developed and young intellectuals’ willingness to become future islamic bankers, at least. the rest of the paper is organised as follows. in section 2, details of the literature review and hypotheses development are given. in section 3, details of the methodology that covers data, model development and method are presented. section 4 provides detail results on the measurement model, structural model and analysis whilst in section 5, research implications are interpreted. section 6 concludes the study. amin │ predictors of young people’s career intentions as islamic bankers international journal of islamic economics and finance (ijief), 3(2), 143-170│146 ii. literature review and hypotheses development 2.1. background theory this study considers the dtpb as a baseline theory to explain the contributing factors determining young intellectuals' willingness to pursue a career as islamic bankers. the dtpb was based on the theory of planned behavior (tpb) that received extensions proposed by taylor and todd (1995) to enhance the theoretical contributions that can be drawn from the tpb. these authors decomposed the attitudinal belief, normative belief and control belief into several dimensional constructs to provide higher descriptive power and a more accurate understanding of the factors influencing behavioral formation. through the decomposition, two advantages are documented but are not confined to these descriptions. first, the relationship between belief and the factors influencing intentions would become clearer and easy to be understood. second, the act of decomposition can provide a stable set of beliefs, which can be applied across a variety of contexts. our decisions to select the dtpb are due to two reasons. first, the dtpb considers wider factors relevant to understand the individuals' formation of willingness to pursue islamic bankers. the factors embedded in the dtpb were decomposed into more manageable specific factors that contribute to the performance of the first level factor. the second reason is driven by the fact that the dtpb is expected to provide more accurate and precise empirical findings on the development of behavioral intention in the area under contemplation – hence closing the research gaps existed in the literature. in our work, the dtpb is modified to better reflect the research context in which a new discipline of islamic banking comes into play. besides, the modification also includes new variables that can extend the applicability of the theory into the present context. the decomposition acts are extended to attitude, subjective norm and perceived behavioral control within the realm of islamic bankers. furthermore, attitude is influenced by religiosity index and career reputation. subjective norm is determined by descriptive and injunctive norms. perceived behavioral control is influenced by self-efficacy. facilitating condition is also included in which supports from islamic banks to equip students with necessary information can accelerate their intentions to become future islamic bankers for the islamic banking industry. amin │ predictors of young people’s career intentions as islamic bankers international journal of islamic economics and finance (ijief), 3(2), 143-170│147 2.2. previous studies 2.2.1. attitude attitude is defined as one’s belief that being an islamic banker is whether favorable or opposite, and its importance has earned empirical support from various disciplines of job seeker intentions (lin, 2010; van hooft and de jong, 2009). it is expected in other contexts that one's good attitude can be translated in the form of significant outcome and it is directed for the formation of his willingness to pursue a career as islamic bankers. a work by van hooft and de jong (2009) examined job search intention, and later job search behavior. this study reported a significant effect brought job search attitude on the job search intention, in turn, affected job search behavior. additionally, beliefs related to viewing temporary employment as a means to provide a sense of freedom and secure a good work-life balance. likewise, lin (2010) found a significant relationship between attitude and job seeker intentions. the result obtained was in such way because job seekers perceive a job search website to have a user-friendly web design and to be easy to navigate, their attitudes are likely to be positive. in another context, khapova et al. (2007) argued that behaviors that were believed to have desirable outcomes were favored and vice versa, implying that those professionals who had a favorable disposition towards career will more likely to perform favorable behavior. these studies jointly lead us to the following hypothesis: h1: attitude is significantly related to the willingness to pursue a career as islamic bankers 2.2.2. religiosity laura et al. (2012) investigated spirituality in undergraduate social work career choice. the study found out that more than 80 per cent of students considered their spirituality to be influential in their career choice. unlike laura et al. (2012), abu bakar et al. (2016) studied religiosity as a source of influence on work engagement and found a positive impact of religiosity on several human resources and organizational outcomes. however, few studies treat religious belief as a job or personal resource from a human resource management perspective. importantly, the study reported that religiosity was essential in determining work engagement. further, wibowo (2017) examined the relationship between religiosity and entrepreneurial intention in indonesia and found it was essential in the formation of the personal attitude to carry out an entrepreneurial activity in systematic manners. unlike laura et al. (2012) and abu bakar et al. (2016), wibowo (2017) discovered that entrepreneurial intentions were statistically significant amin │ predictors of young people’s career intentions as islamic bankers international journal of islamic economics and finance (ijief), 3(2), 143-170│148 between a religious group and non-religious group. in other words, the religious group tends to have more conducive perception towards the entrepreneur as a profession. based on their findings, h2 is postulated as: h2: religiosity is significantly related to the attitude towards the willingness to pursue a career as islamic bankers 2.2.3. career reputation an earlier work by felton et al. (1994) examined factors influencing the business student's choice of a career in chartered accountancy. evidently, certified accounting students appear to place more emphasis on good long term earnings and promising job market opportunities. those who enrolled accounting perceived it as benefit exceeded cost whilst those who unrolled it perceived that the costs exceeded benefits. this work earned extensions. for instance, a study by ahmed et al. (1997) examined factors affecting accounting students' career choice in new zealand. the results indicate that potentially certified accountants see that the benefits of becoming professional accountants are greater than the associated costs. this finding is consistent with turban et al.’s (1998) study who found out that organization reputation positively influenced perceptions of recruiter behaviors and job and organizational attributes. unlike sugahara and boland (2006), sugahara and boland (2006) examined perceptions of the certified public accountants by accounting and non-accounting students in japan. evidently, career prospects in the majority determine job selection. good advancement opportunities were statistically significant between accounting students and non-accounting students. hence, h3 is proposed as: h3: career reputation is significantly related to the attitude towards the willingness to pursue a career as islamic bankers 2.2.4. subjective norm following ajzen (1991), people expectations were important to impact one’s behavior whether to perform or not to perform the behavior under contemplation. still ajzen (2002), social pressure mainly what people believe can influence the viewpoint concerning the behavior and so do the current context. in another study, khapova et al. (2007) found a significant relationship between subjective norm and career behavior, implying one’s decision is related to what shared by others on some particular issues. it is a matter of fact, some individuals place greater importance on what others believe and comply than that of themselves out of inconsistency in their confidence but improved when the second opinion comes into play. amin │ predictors of young people’s career intentions as islamic bankers international journal of islamic economics and finance (ijief), 3(2), 143-170│149 likewise, lin (2010) found a significant relationship between subjective norm and job seeker intentions. the result obtained was so because job seekers perceive people support as of today are encouraging and optimistic to those job seekers for the improved status of life. therefore, the more individuals are under social pressure to pursue their career, the more likely they to have stronger intentions toward career advancement. given these assertions, h4 is hypothesized as: h4: subjective norm is significantly related to the willingness to pursue a career as islamic bankers. 2.2.5. injunctive norm taylor and todd (1995) found subjective norm was related to the injunctive norm in explaining certain behavior. following aronson et al. (2010), injunctive norms are people's perceptions of what behaviors are approved of or disapproved of by others. in other words, it explicates about the approval of certain behavior as if one gets into it out of a green light offered by others in his social circle. prior studies have indicated that injunctive norm affects individuals' beliefs about the people influence in their decision making (cialdini, 2007; smith and louis, 2008). consistent with previous studies, this study treats injunctive norm on subjective norm belief. indeed, injunctive norms provide individuals with important information about what the relevant peer group believes should or ought to be done concerning particular social behavior. besides, the norms send messages regarding the implied social sanctions that may arise from not conforming to the ideals of a relevant peer group (cialdini, 2007). thus, in the context of islamic bankers recruitment services, university students' behavior can be shaped by the information they received about what other students at their university are indicating should be done. our assertion is supported by smith and louis (2008) who believed that knowledge dissemination of others doing can influence others doing too. hence, the following hypothesis is proposed: h5: injunctive norm is significantly related to the subjective norm towards the willingness to pursue a career as islamic bankers 2.2.6. descriptive norm the term descriptive norms may imply the frequency with which an individual's peer group participates in behavior or endorses a particular belief or attitude can significantly predict behavioral intention (cialdini, 2007; smith and louis, 2008). in other words, it is referred to one's belief about whether amin │ predictors of young people’s career intentions as islamic bankers international journal of islamic economics and finance (ijief), 3(2), 143-170│150 most individuals important to him will pursue a career as islamic bankers in the future. in more detail, a descriptive norm regarding career intentions as islamic bankers involves understanding the frequency with which the peer group participate in the discussion of the issue concerned and being pursuing career intentions. for instance, my close friends will pursue a career as islamic bankers in the future or another example is my siblings will pursue a career as islamic bankers in the future (see taylor and todd, 1995). unlike the injunctive norm, descriptive norm explains a student's peer group believes that other students should become as islamic bankers in the future. the manipulation of public perception of the descriptive norm has been shown to influence the frequency and intensity with which peer groups endorse particular behaviors (lawson, 2016). so do career intentions as islamic bankers. hence, h6 is hypothesized as: h6: descriptive norm is significantly related to the subjective norm towards the willingness to pursue a career as islamic bankers 2.2.7. perceived behavioral control following ajzen (1991), perceived behavioral control is defined as perceived control over the performance of behavior and suggests it is a concept of selfefficacy. mathieson’s (1991) definition of perceived behavioral control is the individual's perception of his or her control over the performance of the behavior. mathieson (1991) demonstrated that behavioral control influences the intention to use a piece of information. a positive relationship between perceived behavioral control and intentions is also found in taylor and todd (1995) study, which examines users in a computer resources center. jointly, these studies provide departure. in our study, however, perceived behavioral control was decomposed into self-efficacy and facilitating condition. self-efficacy is a cognitive appraisal or judgment of future performance capabilities and must be measured against some type of behavior. it refers to “people’s judgments of their capabilities to organize and execute courses of action required to attain designated types of performances” (bandura, 1986). a study by lin (2010) confirmed a significant effect of perceived behavioral control on career intentions. the behavior is shaped when individuals have beliefs in that the doing is facilitated if there are no or limited constraints found in performing a behavior. therefore, we postulate: h7: perceived behavioral control is significantly related to the willingness to pursue a career as islamic bankers amin │ predictors of young people’s career intentions as islamic bankers international journal of islamic economics and finance (ijief), 3(2), 143-170│151 2.2.8. career self-efficacy prior studies have documented the importance of selfefficacy as an independent variable, where perceived behavioral control is brought into play. a study by md husin and ab rahman (2016) provides an interesting result pertinent to the effect of self-efficacy in which it was discovered that self-efficacy was significantly related to perceived behavioral control. likewise, this result is expected as one’s skill and capability to do certain behavior are essential in the formation of a behavior (bandura, 1986). this outcome earlier was supported by another interesting study by zolait (2010). clearly, zolait (2010) confirmed the significant relationship selfefficacy and perceived behavioral control, in the context of internet banking and we expect to extend its applicability to the career intention. these two studies are benefited from an interesting work by shih and fang (2004) in which they found that self-efficacy was essential in influencing perceived behavioral control. hence, a person who is skillful and knowledgeable are expected to perform a behavior better than other peers. despite its importance, there exists no study examining the importance of this variable in the context of career intentions as islamic bankers out of differences in research scope and paradigm of inquiry. based on this assertion, h8 is thus hypothesized as: h8: career self-efficacy is significantly related to the perceived behavioral control towards the willingness to pursue a career as islamic bankers 2.2.9. facilitating condition zolait (2010) proposed a relationship between facilitating condition and perceived behavioral control. the result obtained, however, was insignificant – implying resources (i.e. information and support) needed are somehow incomplete and unreachable and for that issues of controllability and ability are not influencing one’s decision. however, the relationship found was insignificant – implying it is not a factor. however, a study by md husin and ab rahman (2016) reported different outcome in which facilitating condition is essential for the formation of behavior. in general, resources like time, money or even opportunities are known as influencing factors on perceived behavioral control (md husin and ab rahman, 2016; ajzen, 1991). given its flexibility, rana et al. (2015) discovered the significant effect of facilitating condition on behavioral intention, mainly in the context of e-government. users who had a capacity tended to undertake an effort to perform the behavior. the findings of these authors had been following the outcomes of the previous studies (taylor and todd, 1995). the finding here is in tandem with a work of teo et al. (2008), who asserted that facilitating conditions are environmental factors that influence individuals’ willingness to undertake amin │ predictors of young people’s career intentions as islamic bankers international journal of islamic economics and finance (ijief), 3(2), 143-170│152 certain types of tasks. when an individual believes that they have more resources, their perceptions of control are relatively high and hence their behavioral intention can increase. thus, h9 is postulated as: h9: facilitating condition is significantly related to the perceived behavioral control towards the willingness to pursue a career as islamic bankers iii. methodology 3.1. data subjects of this study were final year students at a public university in east malaysia. employing judgmental sampling for data collection, two criteria were used as follows – first, the students chosen have considered becoming future islamic bankers once they complete their studies, and second, the students chosen are well-exposed and trained by islamic finance scholars for adulthood and enhanced learning experiences. as for data collection, a total of 400 questionnaires are provided to elicit responses from the respondents chosen. the data collection was conducted from 1st december 2019 until 31st january 2020 to generate variations in respondents' responses. of these, we managed to get 350 usable questionnaires that qualify them for further analysis of the data collected. table 1 depicts our profiles of respondents. our battery items were adapted from selected previous studies. three items for attitude were adapted from taylor and todd (1995). one item for career reputation was adapted from felton et al. (1994) and two items were adapted from sugahara and boland (2006). three items for religiosity were adapted from abu bakar et al. (2016). three items each for subjective norm, injunctive norm and descriptive norm were adapted from taylor and todd (1995). moreover, three items for perceived behavioral control were adapted from taylor and todd (1995). three items for self-efficacy were adapted from shih and fang (2004). in terms of facilitating condition, two items were adapted from taylor and todd (1995) and one from shih and fang (2004). three items for willingness were adapted from shih and fang (2004). for each battery item, a likert-type scale of 1-5 was used. prior to the actual fieldwork, we have conducted a pilot test to identify any ambiguity associated with the battery items and based on our finding, the changes are directed only in terms of the layout and vocabulary for clarity. amin │ predictors of young people’s career intentions as islamic bankers international journal of islamic economics and finance (ijief), 3(2), 143-170│153 table 1. demographic details demographic detail sample percentage gender female 236 67.40% male 114 32.60% age <20 12 3.40% 21-30 336 96.00% >31 2 0.60% ethnic malay 240 68.60% aboriginal sabahan 94 26.90% aboriginal sarawakian 16 4.60% source: author’s analyzed data 3.2. model development our study’s model is based on the dtpb, which is revised to reflect our context, that is career intentions as islamic bankers. all items are revised to measure final year students’ willingness to become islamic bankers. the model has a single main dependent variable, that is career intentions. this dependent variable is hypothesized to be influenced by attitude, perceived behavioural control and subjective norm. each variable is composed of subvariables to reflect the dtpb. the hypothesized relationships are established based on our literature analyses (taylor and todd, 1995; md husin and ab rahman, 2016). given this description, figure 1 is presented as follows: figure 1. research model attitude career reputation religion perceived behavior control self-efficacy future career subjective norm descriptive norm injunctive norm willingness amin │ predictors of young people’s career intentions as islamic bankers international journal of islamic economics and finance (ijief), 3(2), 143-170│154 3.3. method partial least squares-structural equation modeling (pls-sem) was employed to examine our research hypotheses using a software developed by ringle et al. (2005) namely smartpls2.0 m3. pls-sem is both appropriate to be applied to a sample size of less than 250 and a sample size of more than 250 (hair et al., 2016). it is the softer model of sem, which relaxes the distributional requirement. pls-sem is a non-parametric method, which is not relied on any distribution of the sample under investigation. it is very robust model estimations with data that have normal as well as extremely non-normal distributional properties (reinartz et al., 2009). this is proven by a study by lee and kozar (2008) work in which their sample size of 312 documented robust and significant finding – pls-sem produces improved estimates for the hypotheses developed and so do in the case of the present study. because of this, pls-sem is appropriate. besides, pls-sem is easier to use or in other words, it provides simultaneous results for factor analysis, discriminant validity and structural analysis, where a graphic representation comes into play. iv. results 4.1. measurement model this study employs a two-stage approach to analyze data. first, the approach considers the measurement model that can take some particular steps for data purification and the avoidance of cross-loadings in factor analysis. the analyses included are factor loadings, reliability test and composite reliability, to mention some. if all items meet these analyses, all of them will be retained for the second stage. in the second stage, a structural analysis displays the relationship between the variables tested and the criterion variable. this stage is useful to examine whether the null hypotheses need to be rejected or not, and later inferences can be documented accordingly. table 2 presents the results obtained from factor analysis. all items were statistically significant in representing the variables that they supposed to measure with. all items were loaded beyond the recommended value of 0.707 and for that, the discriminant validity is not an issue. amin │ predictors of young people’s career intentions as islamic bankers international journal of islamic economics and finance (ijief), 3(2), 143-170│155 table 2. factor analysis factor item source code fl ave cr ca att becoming an islamic banker is a good idea taylor and todd (1995) att1 0.831 0.653 0.850 0.735 becoming an islamic banker is something positive taylor and todd (1995) att2 0.798 becoming an islamic banker is beneficial taylor and todd (1995) att3 0.795 cr pursuing a career as an islamic banker has a good long term earning felton et al. (1994) cr1 0.858 0.688 0.869 0.776 being as a future islamic banker has excellent prospects sugahara and boland (2006) cr2 0.819 being as a future islamic banker has high social prestige sugahara and boland (2006) cr5 0.811 dn my friends will pursue their future career as islamic bankers taylor and todd (1995) dn1 0.847 0.700 0.875 0.787 my siblings will pursue their future career as islamic bankers taylor and todd (1995) dn2 0.878 most people who are significant to me will pursue their future career as islamic bankers taylor and todd (1995) dn3 0.782 sn the people who influence my decisions would think that i should pursue my future career as an islamic banker taylor and todd (1995) sn1 0.846 0.747 0.898 0.832 the people who influence my decisions would think that i should consider my future career as an islamic banker taylor and todd (1995) sn2 0.861 the people who influence my decisions would think that i should define my future career as an islamic banker taylor and todd (1995) sn3 0.884 in my parents will think i should pursue my future career as an islamic banker taylor and todd (1995) in1 0.906 0.759 0.904 0.845 my siblings will think i should pursue my future career as an islamic banker taylor and todd (1995) in2 0.760 amin │ predictors of young people’s career intentions as islamic bankers international journal of islamic economics and finance (ijief), 3(2), 143-170│156 my friends will think i should pursue my future career as an islamic banker taylor and todd (1995) in3 0.938 rel my religion asks me to find a halal job abu bakar et al. (2016) rel1 0.758 0.660 0.853 0.741 my religion determines my future career abu bakar et al. (2016) rel2 0.858 my religion asks me to be self-reliant abu bakar et al. (2016) rel3 0.818 pbc i have the ability to pursue my future career as an islamic banker taylor and todd (1995) pbc1 0.773 0.719 0.884 0.801 i have the knowledge to pursue my future career as an islamic banker taylor and todd (1995) pbc2 0.904 i have a control in selecting my future career as an islamic banker taylor and todd (1995) pbc3 0.860 se knowing enough to pursue my future career as an islamic banker is important to me shih and fang (2004) se1 0.891 0.754 0.901 0.837 being able to choose my future career is important to me shih and fang (2004) se2 0.946 i know enough to choose my future career shih and fang (2004) se3 0.756 fc i have the time to think about my future career as an islamic banker shih and fang (2004) fc2 0.889 0.747 0.898 0.837 i have the time needed to pursue my future career as an islamic banker taylor and todd (1995) fc1 0.895 i have the money needed to invest in pursuing my future career taylor and todd (1995) fc3 0.806 wls i plan to become an islamic banker in the future shih and fang (2004) wls1 0.875 0.732 0.891 0.818 my future career as an islamic banker is a priority shih and fang (2004) wls2 0.855 i will make every effort to ensure i will become an islamic banker shih and fang (2004) wls3 0.838 notes: cr= composite reliability, ca= cronbachs alpha, att=attitude, cr=career reputation, dn=descriptive norm, in=injunctive norm, pbc=perceived behavioral control, rel=religion, se=self efficacy, sn=subjective norm, wls=willingness, fl=factor loading. amin │ predictors of young people’s career intentions as islamic bankers international journal of islamic economics and finance (ijief), 3(2), 143-170│157 table 3. discriminant analysis item att cr dn fc in pbc rel se sn wls att 0.808 cr 0.499 0.830 dn 0.358 0.383 0.837 fc 0.271 0.257 0.314 0.864 in 0.450 0.378 0.277 0.248 0.871 pbc 0.279 0.326 0.414 0.526 0.274 0.848 rel 0.466 0.442 0.242 0.285 0.461 0.358 0.812 se 0.297 0.348 0.352 0.705 0.271 0.657 0.267 0.868 sn 0.433 0.470 0.320 0.325 0.641 0.363 0.240 0.410 0.864 wls 0.584 0.519 0.406 0.244 0.379 0.357 0.223 0.314 0.520 0.856 notes: att=attitude, cr=career reputation, dn=descriptive norm, in=injunctive norm, pbc=perceived behavioral control, rel=religion, se=self efficacy, sn=subjective norm, wls=willingness. besides factor analysis, we also examine the data obtained using ave, composite reliability and cronbach’s alpha. the details are presented in table 2. as for ave, the results obtained indicate that all variables under contemplation were greater than the threshold value of 0.5, meeting the convergent validity. as for cr, the results also indicate that composite reliability for all constructs was beyond the recommended value of 0.70, implying the convergent validity for the said constructs. cronbach’s alpha values for all variables were greater than the required value of 0.6, confirming acceptable internal consistency. moreover, a discriminant validity analysis is conducted to examine whether variables are distinct compared with others. table 3 presents the square root of ave for each variable was greater than the correlation with other constructs (bold values), meeting the test for discriminant validity. this means that each variable is different compared with other variables inferring the discriminant validity result is acceptable. 4.2. structural model in evaluating the appropriateness of the pathways developed specifically in this study, pls analyses were conducted by integrating all factors under contemplations. in this study, we hypothesized the willingness to pursue a career as islamic bankers as the first dependent variable, whilst others like attitude, subjective norm and perceived behavioral control served not only as independent variables but also dependent variables for their decomposition. in more detail, attitude, subjective norm and perceived amin │ predictors of young people’s career intentions as islamic bankers international journal of islamic economics and finance (ijief), 3(2), 143-170│158 behavioral control accounted for 44.44 per cent the variance of the willingness. the effects of attitude, subjective norm and perceived behavioral control on the willingness were statistically significant. table 4. structural analysis pathway estimate (β) t-value supported att  wls 0.421 8.039 yes cr  att 0.364 6.455 yes dn  sn 0.154 3.777 yes fc  pbc 0.126 2.182 yes in  sn 0.598 14.843 yes pbc  wls 0.134 2.793 yes rel  att 0.305 5.618 yes se  pbc 0.568 10.703 yes sn  wls 0.289 5.313 yes notes: att=attitude, cr=career reputation, dn=descriptive norm, in=injunctive norm, pbc=perceived behavioral control, rel=religion, se=self efficacy, sn=subjective norm, wls=willingness. the attitude was significantly related to the willingness (t=8.039, pvalue<0.000). good attitude has a high likelihood to translate into the intention and willingness – and therefore potential future actual behavior is expected. this finding extends the generalizability of attitude to include the context of islamic bankers, and thus extends the appropriateness of the theory as proven earlier taylor and todd (1995). hence, the higher the extent of attitude, the better is the willingness. similarly, we also discovered the significant effect of career reputation on the attitude (t=6.455, pvalue<0.000). this finding aligns with earlier studies extending the applicability of the career reputation in determining one’s future career advancement (turban et al., 1998; ahmed et al., 1997; felton et al., 1994). furthermore, religiosity factor was also instrumental in determining attitude towards the willingness (t=5.618, p-value<0.000). this outcome is consistent with earlier works of abu bakar et al. (2016) and wibowo (2017) in which religiosity level can determine individual’s willingness to improve their work engagement and entrepreneurial intentions, respectively. moreover, the subjective norm was significantly related to the willingness (t=5.313, p-value<0.000). importantly, family influences are likely quite instrumental in determining one's job selection. this is proven correct when a study by law (2010) confirmed a significant effect of parental influence on the decision to choose a cpa career. typically, the goal congruence among family members can help establish one’s career pathway. our study also amin │ predictors of young people’s career intentions as islamic bankers international journal of islamic economics and finance (ijief), 3(2), 143-170│159 reported the significant effects of descriptive and injunctive norms on the subjective norm. our findings were in light with aronson et al. (2010) who claimed that injunctive norms are people perceptions of what behaviors are approved by others and descriptive norms are people perceptions of how people behave. figure 2. analyzed research model perceived behavioral control was also a significant factor determining the willingness to pursue a career as islamic bankers (t=2.793, p-value<0.000). this finding is related to one's ability, which indicates their skill, knowledge and importantly they have control over those materials at hand. given this assertion, our finding provides another extension from the extant literature in which a work by giles and rea (1999) confirmed our hypothesis in that perceived behavioral control was essential for individuals to make a future career decision. our finding also demonstrated the significant effect of selfefficacy on perceived behavioral control, confirming its alignment with giles and rea (1999). since our study includes facilitating condition, the technical resources are rarely accessible to future bankers and because of that, the inclusion of the factor will offer another extension. our study reported a significant relationship between facilitating condition and career option. the finding here is somewhat in tandem with a work of teo et al. (2008), who asserted that facilitating conditions are environmental factors that influence amin │ predictors of young people’s career intentions as islamic bankers international journal of islamic economics and finance (ijief), 3(2), 143-170│160 individuals’ willingness to undertake certain types of tasks. in our cases, professional advice by existing bankers and exhibition about career pathways are two from many resources that can help students to make improved decision pertinent to their future career. 4.3. analysis this study has confirmed that all hypothesized relationships are proven to be significant and therefore the model developed is valid to represent young people’s willingness to become future islamic bankers. of the factors considered, we found out that attitude ranked first and appeared to be critical, followed by people influence and control factor in understanding the reasons why young people choose islamic bankers as their future job. the attitude of young people is shaped based on the respondents’ perception of career reputation found in an islamic banker job as well as the influence of religion. the information available about the job can determine young people’s attitude in terms of good long-term earning, prospects and importantly high social prestige. on the other hand, the level of one’s religion compliance can also determine his attitude towards future career pathway. this means that the willingness to take up the job is due to its halalness and importantly the earning of self-reliant among young people for their sustainability. studying career intentions among young graduates or even the final year students has been limited and falling short (ahmed et al., 1997; zain et al., 2010). explaining in more detail, a study by ahmed et al. (1997) examined about accounting students’ career choice in new zealand whilst zain et al. (2010) examined about entrepreneurship intentions among malaysian business students and jointly these studies have not paid any attention to why young people choose islamic bankers as their future employment. this is perhaps owing to different research paradigm employed. in reality, however, our current study has been different compared with earlier works and the differences are found in several ways:  first, the present study seeks to understand the factors determining young people’s willingness to become islamic bankers in the future using empirical investigations; and  second, the present study extends the applicability of the dtpb in understanding young people’s willingness to choose the career pathway. hence, the present study adds new knowledge about young people’s willingness to become islamic bankers where an examination of factors influencing is evaluated accordingly. amin │ predictors of young people’s career intentions as islamic bankers international journal of islamic economics and finance (ijief), 3(2), 143-170│161 in terms of contributions, this study has extended the dtpb, while retaining its parsimony within the context of islamic banking employment. first, our adapted battery items are adjusted to reflect the present context. in the research model, the variables namely career reputation and religion are introduced to capture attitude towards the willingness whilst other variables are also captured based on literature analyses. second, significant effects are found to all proposed hypothesized relationships that proved our proposed theoretical framework for islamic banker is valid and appropriate. third, this study supports taylor and todd’s (1995) research that found significant relationships between subjective norm, descriptive and injunctive norms, and therefore extend their generalisability to islamic banking employment setting. it also extends the contributions made by various studies earlier, which are extending the dtpb and found it valid to obtain extensions and so do the present case (md husin & ab rahman, 2016; shih & fang, 2004). importantly, we modify battery items identified from previous pieces of literature to echo the current context, where specific instruments are developed that become as a guide for future researchers, where islamic banking employment comes into play. v. research implications 5.1. theoretical implications in this study, we decomposed attitude into religiosity and career reputation, the subjective norm decomposed into injunctive and descriptive norms and perceived behavioral control decomposed into self-efficacy and facilitating condition. the proposed model efficaciously applied the extended dtpb to career intentions as islamic bankers to strengthen our belief of islamic finance students' willingness to put themselves as our future islamic bankers. it is worth noting that ignoring the students' perception of career intentions as islamic bankers may lead to career intentions' model that is sketchy and conceivably misleading. acknowledging the dtpb as a baseline theory, this study focused on the career intentions as islamic bankers to concede how to develop an effective job outlet for future bankers, where the supports are not only from public universities but also visioned by islamic banks. besides, this study makes a key contribution by explaining the students’ behavioral intention in the islamic banking context. our study, furthermore, extended the usefulness of the dtpb to include islamic bankers as an essential career pathway among the student, and therefore new extensions and generalizations are drawn from the current study. amin │ predictors of young people’s career intentions as islamic bankers international journal of islamic economics and finance (ijief), 3(2), 143-170│162 5.2. methodological implications this study offers two methodological implications. first, we enhance the battery items used in this study, identified through literature analyses and later received refinement through the pilot test, which was identified the ambiguity and later adjustment made to ensure the battery items employed can be easily understood plainly by respondents of interest. second, the cross-discipline battery items' application is acceptable. our battery items were identified from other areas, not related directly to career intentions as islamic bankers. after adjustments, they were valid and reliability proven in our empirical analyses. hence, this approach indicated that borrowing or extending measures from other disciplines are acceptable provided reconciliation is taken place to reflect the context under contemplation. third, our use of pls is somewhat splendid and efficient given the running of data for analyses can be done simultaneously and subsequently adjustments to delete the invalid item, if any, can easily be done through the graphical adjustments found in the pls analysis. our study revealed a message in that pls is accepted to be applied to a new case like in the case of career intentions as islamic bankers. 5.3. practical implications consistent with the dtpb, our results obtained indicated that the students' willingness to take up islamic bankers as their future job is collectively explained by their attitude, subjective norm and perceived behavioral control. of the attitudinal beliefs, their religiosity and career reputation determine their attitude. hence, providing career knowledge about islamic bankers, sufficient learning about the job and its description might contribute to inculcate a positive attitude of the students towards their willingness to be future islamic bankers. as for injunctive and descriptive norms, there is a need to tap into social media markets through the creation of groups of people who share a concern or a passion about being islamic bankers (i.e. facebook and instagram). importantly, there is also a need into developing the concept word-of-mouth online that can facilitate the formation of individuals’ decision to become islamic bankers. besides, family, friends and peers who existed both online and offline can promote a positive image about becoming islamic bankers would have a greater effect than mass media reports. another important practical finding was that students with high self-efficacy have greater perceived behavioral control compared with their peers. hence, improving their control perceptions of career intentions as islamic bankers can enhance their willingness. besides, facilitating condition can also serve as a contributing factor determining the students' willingness. enhanced training courses through industrial training amin │ predictors of young people’s career intentions as islamic bankers international journal of islamic economics and finance (ijief), 3(2), 143-170│163 provided by islamic banks to the students should be made accessible to everyone. vi. conclusion and recommendation 6.1. conclusion this work aimed to examine some factors that might influence the decisions of the students to choose islamic bankers as their future job in the malaysian banking industry. the results obtained suggest that the students who intend to select a career as islamic bankers give significantly higher priority to attitude, followed by the subjective norm and perceived behavioral control. attitude is an intrinsic factor and is shaped through one's interaction with others on future career and the disseminated career information, in which these are processed greatly before one is ended up with a final career decision. similarly, not surprisingly, they perceive the benefits of becoming islamic bankers to be greater than religiosity, and these two factors were significantly determined attitude towards career intentions as islamic bankers. career reputation that includes a good salary, benefit and whatsoever are some of the reasons behind the significant outcome. further, the results obtained indicate that the injunctive norm was more influential than the descriptive norm in explaining subjective norm. existing exhibitions and shared careers’ success by extant islamic bankers are some leading attributes to this manageable result – implying others’ approval is appealing. the results also indicate that self-efficacy is more likely determining career intentions compared with its peer – facilitating condition. this suggests that one can determine the best in his selection of future career. 6.2. recommendation the results obtained provide an essential guide for practitioners in promoting islamic banker as a future job among final year students at universities. as such, managers of islamic banks should hire graduates based on their merits and the success of the interview process at the expense of double standard conception. the findings obtained also suggest managers should make resources available in terms of the information center, specialized personnel and materials of future employment to support young people’s willingness to become islamic bankers. for regulators, the results obtained in this study suggest that the government can stimulate young people’s participation in the industry by improving the information available about future jobs in the islamic banking industry, financial incentives and importantly provide finishing course before they can enter the job market. amin │ predictors of young people’s career intentions as islamic bankers international journal of islamic economics and finance (ijief), 3(2), 143-170│164 offering final year students with cogent courses required specifically for the industry is relatively essential. by itself, a collaboration between the government, practitioners and universities are vital to produce synergy in attracting young graduates to participate in the industry, which in turn, can strengthen its talent management. likewise, the results of the study should be interpreted in light of several limitations. first, the use of third-year students as proxies for actual graduates may have reduced external validity. future research should focus on actual graduates seeking employment in malaysia. second, the study was examining the career intentions as islamic bankers of the students of islamic finance program and the perception drawn from other business and finance students were not elicited. future research is therefore expected to include them to investigate their career intentions and the question of whether the factors impacting islamic finance students will be similar to these students will be answered. despite these limitations, our study served as an eye-opener to all islamic finance scientists to explore further this discipline of research for extensions and generalizations, at least. acknowledgement i would like to thank my family members for their encouragement. my father, hj amin hassim who taught me the meaning of hardworking and dedication. my mother, hjh halima undang, who made his life better. my wife, zuraidah anis for her extraordinary 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(1995). decomposition and crossover effects in the theory of planned behaviour: a study of consumer adoption intentions. international journal of research in marketing, 12(2), 137-155. amin │ predictors of young people’s career intentions as islamic bankers international journal of islamic economics and finance (ijief), 3(2), 143-170│167 teo, t., c. b. lee., & c. s. chai. (2008). understanding preservice teachers’ computer attitudes: applying and extending the technology acceptance model. journal of computer assisted learning. 24(2), 128-143. turban, d. b., forret, m. l., & hendrickson, c. l. (1998). applicant attraction to firms: influences of organization reputation, job and organizational attributes, and recruiter behaviours. journal of vocational behavior, 52(1), 24-44. van hooft, e. a., & de jong, m. (2009). predicting job-seeking temporary employment using the theory of planned behaviour: the moderating role of individualism and collectivism. journal of occupational and organizational psychology, 82(2), 295-316. wibowo, b. (2017). religiosity and entrepreneurial intention. etikonomi, 16(2), 187-206. zain, z. m., akram, a. m., & ghani, e. k. (2010). entrepreneurship intention among malaysian business students. canadian social science, 6(3), 3444. zolait, a. h. s. (2010). an examination of the factors influencing yemeni bank users’ behavioural intention to use internet banking services. journal of financial services marketing, 15(1), 76-94. amin │ predictors of young people’s career intentions as islamic bankers international journal of islamic economics and finance (ijief), 3(2), 143-170│168 appendix a. research questionnaire battery items dear respected respondent, we invite you to participate in this questionnaire survey, which is on young people’s willingness to become islamic bankers. thank you for your willingness to spare your time in answering this questionnaire. we request that you read the instructions provided carefully and to respond as accurately as possible. you are the respondent of this study if you meet the following criteria: 1. you are well-exposed to islamic finance both formally and informally 2. you wish to become an islamic banker in the future all information provided is confidential and will be used for research analysis purposes only. if you have any doubts, questions or in need of clarification, please do not hesitate to contact me. your kind cooperation in this study is highly appreciated. thank you. yours sincerely, hanudin amin, phd researcher © hanudin amin, phd amin │ predictors of young people’s career intentions as islamic bankers international journal of islamic economics and finance (ijief), 3(2), 143-170│169 section a: factors influencing listed below are a series of statements about the factors for preference to become an islamic banker. please indicate the degree of your agreement or disagreement with each statement by circling only one of the five alternatives after each statement. absolutely disagree disagree slightly disagree agree absolutely agree 1 2 3 4 5 attitude att becoming an islamic banker is a good idea 1 2 3 4 5 becoming an islamic banker is something positive 1 2 3 4 5 becoming an islamic banker is beneficial 1 2 3 4 5 career reputation cr pursuing a career as an islamic banker has a good long term earning 1 2 3 4 5 being as a future islamic banker has excellent prospects 1 2 3 4 5 being as a future islamic banker has high social prestige 1 2 3 4 5 religion rel my religion asks me to find a halal job 1 2 3 4 5 my religion determines my future career 1 2 3 4 5 my religion asks me to be self-reliant 1 2 3 4 5 subjective norm sn the people who influence my decisions would think that i should pursue my future career as an islamic banker 1 2 3 4 5 the people who influence my decisions would think that i should consider my future career as an islamic banker 1 2 3 4 5 the people who influence my decisions would think that i should define my future career as an islamic banker 1 2 3 4 5 descriptive norm dn my friends will pursue their future career as islamic bankers 1 2 3 4 5 my siblings will pursue their future career as islamic bankers 1 2 3 4 5 most people who are significant to me will pursue their future career as islamic bankers 1 2 3 4 5 injunctive norm in my parents will think i should pursue my future career as an islamic banker 1 2 3 4 5 my siblings will think i should pursue my future career as an islamic banker 1 2 3 4 5 my friends will think i should pursue my future career as an islamic banker 1 2 3 4 5 amin │ predictors of young people’s career intentions as islamic bankers international journal of islamic economics and finance (ijief), 3(2), 143-170│170 perceived behavioral control pbc i have the ability to pursue my future career as an islamic banker 1 2 3 4 5 i have the knowledge to pursue my future career as an islamic banker 1 2 3 4 5 i have a control in selecting my future career as an islamic banker 1 2 3 4 5 self-efficacy se knowing enough to pursue my future career as an islamic banker is important to me 1 2 3 4 5 being able to choose my future career is important to me 1 2 3 4 5 i know enough to choose my future career 1 2 3 4 5 facilitating condition fc i have the time to think about my future career as an islamic banker 1 2 3 4 5 i have the time needed to pursue my future career as an islamic banker 1 2 3 4 5 i have the money needed to invest in pursuing my future career 1 2 3 4 5 willingness wls i plan to become an islamic banker in the future 1 2 3 4 5 my future career as an islamic banker is a priority 1 2 3 4 5 i will make every effort to ensure i will become an islamic banker 1 2 3 4 5 section b: demographic listed below are items about the demographic of respondent for career intentions as islamic bankers. please circle only one of the alternatives available. 1. gender a. female b. male 2. age a. <20 b. 21-30 c. >31 3. ethnic a. malay b. aboriginal sabahan c. aboriginal sarawakian © hanudin amin, phd international journal of islamic economics and finance (ijief) vol. 4(2), page 263-292, july 2021 assessment of the service performance of zakah institutions in gombe metropolis, nigeria sagir muhammad sulaiman international institute of islamic banking and finance (iiibf), bayero university kano, nigeria corresponding email: sageeerala@gmail.com mohammed magaji international institute of islamic banking and finance (iiibf), bayero university kano, nigeria warshu tijjani rabiu international institute of islamic banking and finance (iiibf), bayero university kano, nigeria article history received: may 31st, 2021 revised: july 20th, 2021 accepted: july 23th, 2021 abstract zakah is an important tool in islamic economic system, it plays a crucial role in reducing some social and economic problems such as poverty, unemployment, indebtedness and inequitable redistribution of income in the muslim communities. the zakah institutions in gombe metropolis are said to practice favouritism and unfair service quality and distribution of zakah funds among recipients. the main objective of this study is to empirically examine perception of the zakah recipients towards the services provided by the institutions. this study adopted descriptive survey design approach. pls-sem is employed to test the hypothesized model of the study. the result reveals that reliability, responsiveness and assurance significantly affect performance of zakah institutions but tangibility and empathy were found to be insignificant. the study recommends the need for zakah institutions in gombe metropolis to consider improving the tangibles and empathy dimensions of service quality. the study also recommends the need to concentrate on the antecedents of service quality as it will assist zakah institutions to improve performance. lastly, the study suggests the establishment of zakah board that will serve as regulatory body in charge of supervising the activities of private zakah institutions in gombe state. keywords: service quality, performance, structural equation modelling. jel classification: m30, z12, n20, m39 type of paper: research paper @ ijief 2021 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.v4i2.11847 web: https://journal.umy.ac.id/index.php/ijief/article/view/11847 citation: sulaiman, s. m., magaji, m., & rabiu, w. t. (2021). assessment of the service performance of zakah institutions in gombe metropolis, nigeria. international journal of islamic economics and finance (ijief), 4(2), 263-292. doi: https://doi.org/10.18196/ijief.v4i2.11847. mailto:sageeerala@gmail.com https://doi.org/10.18196/ijief.v4i2.11658 https://doi.org/10.18196/ijief.v4i2.11847 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v4i2.11847&domain=pdf sulaiman, magaji, & rabiu │ assessment of the service performance of zakah institutions in gombe metropolis, nigeria international journal of islamic economics and finance (ijief), 4(1), 263-292 │264 i. introduction 1.1. background zakah is an important tool in islamic fiscal system. it plays a vital role in reducing socio economic problems such as poverty, unemployment, indebtedness and inequitable redistribution of income in muslim communities (dogarawa, 2008). allah commanded to distribute zakah to the eight asnafs mention in the noble quran, the idea behind that was to satisfy the basic needs of those who are vulnerable and destitute in society. zakah is given to the asnafs for them to enjoyed the bounties of allah and that will subsequently motivate them to be able to contribute their own effort toward the progress of society. zakah also signal the spirit of brotherhood, making the less privilege know that society cares much about them and their needs. (siddiqui, 1976). zakah aims at reducing socio-economic difficulty of muslims communities by optimising the redistribution of wealth in those respective communities. zakah is a redistribution tool that is capable of alleviating poverty as evident during the time of umar bin khattab (r.a), furthermore, during time umar bin abdul aziz the people were prosperous to the extent that there was no eligible recipient of zakah (hudayati & tohirin, 2010). the history has shown that if zakah is properly managed, it can alleviate the poverty (nadzari, rahman & umer, 2012). hence common problems found in most of development countries such as hunger, poverty, inequality and other social vices can be addressed by implementing zakah (bakar, ibrahim, & noh, 2014). the administration of zakah during the early days of islam had been organized centrally by the state. the state appointmented the zakah collector as well the record keepers (qardawi 2010). however, history has shown that there have been discontinuities of the above practice as a result of colonization across the globe (abdullatif, 2012). this brought about serious ambiguity in the mind of muslim that leads to make some muslims not to pay zakah as appropriately as possible. at post colonist era many muslim countries begun to implement sharia system with re-emergence of the institution of zakah as a compulsory collection system i.e. a system where the central authority is responsible for the assessment, collection and distribution of zakah and there is enforcement law against the defaulters, failure to pay results to judicial consequences (abdullatif, 2012). in reality, talking about zakah administration, it is proper to emphasize the vital role of government in collection and distribution of zakah as evidence in countries like saudi arabia, sudan, libya, yemen, pakistan and indonesia sulaiman, magaji, & rabiu │ assessment of the service performance of zakah institutions in gombe metropolis, nigeria international journal of islamic economics and finance (ijief), 4(1), 263-292 │265 in nigeria, the history of zakah administration may be traced to the old sokoto caliphate after the jihad of sheik usman ibn fodio which was governed based on islamic system. the emirates under the caliphate were charged with the responsibility of administering zakah funds through public treasury. zakah happens to be the most powerful fiscal tool to the government during that time. in the same vein the system was frustrated and collapsed with the emergence of the colonial masters. inevitably the system re-emerged in 1982 following a conference held in bayero university kano which leads to the creation of kano state zakah and hubsi commission (kszhc) and subsequently with the implementation of sharia in zamfara state in 1999 (mustafa, baita, adhama & sabo, 2018). nigerian federal government does not have laws as well as regulatory body that guides and supervised zakah collection and distribution. however, the states has initiated bodies that are responsible for the collection and disbursement of zakah. additionally, it is important to note that there is no state own zakah collection institution in gombe state, therefore, some private registered islamic institutions engage themselves in the collection and disbursement of zakah in order to ensure alleviation of poverty in gombe metropolis. among those are jama’atul izalatul bidia wa iqamatus sunnah (jibwis a) gombe, jama’atul izalatul bidia wa iqamatus sunnah (jibwis b) gombe, and council of da’awa gombe. meanwhile, jibwis a&b are two different institutions that only shared name in common but differ in leadership style. the above named three private islamic institutions aimed at the same goal but differs in term of service quality renders to the asnafs. in zakah institutions, service quality (servqual) is very important because it portrays the image of islam. the , servqual in zakah institutions involves how zakah institution as ‘amil deals with zakah payers (muzakki) as well as zakah recipients (mustahiq) . a good quality service encourages all the stakeholders to maintain the loyalty and confidence of zakah payers and attracts more zakah payers to pay through respective formal zakah institutions (mustafa, et al., 2018). most of the studies conducted on zakah try to explain the type, nature, importance and objective of zakah, waqf and sadaqa in general as as an isntrument for alleviating poverty and ensuring fair distribution of wealth among the populace. thus, they are empirical studies by (hamisu, 2017; wali, 2013; sa’id et al.; 2012 & kani, 2012) on zakah and poverty alleviation. to the researchers’ knowledge, although studies on servqual have been widely carried out, there are very few studies conducted on zakah institutions servqual. hence this study tries to fill in the gap by examining the perception of the zakah stakeholders, i.e., zakah recipients towards the services given by the institutions in gombe state, nigeria. sulaiman, magaji, & rabiu │ assessment of the service performance of zakah institutions in gombe metropolis, nigeria international journal of islamic economics and finance (ijief), 4(1), 263-292 │266 1.2. objective the main objective of this study is to assess the service quality performance of zakah institutions in gombe metropolis. the specific objective of the research accomplished are stated as; ito examine the influence of zakah institution staff reliability on zakah institution service performance in gombe metropolis. iito access the influence of zakah institution tangibility on zakah institution service performance in gombe metropolis. iiito investigate the influence of zakah institution staff empathy on zakah institutions service performance in gombe metropolis. ivto examine the influence of zakah institution staff responsiveness on zakah institutions service performance in gombe metropolis. vto access the influence of zakah institution staff assurance on zakah institution service performance in gombe metropolis. this study comprises of five parts, part one is introduction, part two talks on both empirical and theoretical literatures. part three is the methodology. part four consists of data presentation and analysis. lastly part five is the conclusion, and recommendation for further studies. ii. literature review 2.1. background theory input, process, output, link and outcome (ipolo) model was developed by keehley & abercrombie (2008), to measure the performance of non-profit making organisations. according to the theory performance of organisations should be measured in the following dimensions; input, process, output and outcome. the dimensions of zakah performance measurement are, firstly, involve input or in other words resources availability, this signifies factor input are required to run an institution. input resources comprises of infrastructure existence, available data and staffs of the institutions among others. secondly, the process dimension which is aim at identifying recipient of zakah (asnafs) is another issue of concern. the third dimension refers to output and that signifies the achievement of the institution (abd halim mohd noor, rasool, yusof, ali, & rahman, 2015). outcomes are as result of process as well as output, the expectation was that the status of asnafs will improve due to the zakah they received. in order to measure outcome some issues need to be taken into consideration i.e the improvement may not be exclusively due to zakah. hence, issues such as bias in selection as well as counterfactuals need to be considered. (keehley & abbercrombie, 2008). sulaiman, magaji, & rabiu │ assessment of the service performance of zakah institutions in gombe metropolis, nigeria international journal of islamic economics and finance (ijief), 4(1), 263-292 │267 this study therefore, adopts ipolo model because of its relevance with the topic of the research as its theoretical framework that will help in achieving the objectives of the study. 2.2. previous studies abd wahab, alam, al haq, hashim and zainol (2020) investigate the effectiveness of zakat institutions from the zakat recipients’ perspective. the study basically based on primary data. the data was collected through a structured questionnaire survey. 427 samples were collected through stratified random sampling technique from eleven zones of kedah, where partial least squares approach was employed as the main data analysis of the study. the study identified the main four perspectives as enshrined by the balanced scorecard technique which include financial effectiveness, customer effectiveness, internal effectiveness and learning & growth effectiveness that are interlinked and need a coherent addressing in terms of zakat recipients’ upliftment. the recipients did put emphasis on the priority of the financial effectiveness, but in a non-profit environment where the customer effectiveness is vital, may require the service enhancement along with putting the emphasis on learning and making certain systematic rejuvenation of the processes, as well as the planned financial decision to make effects conducive to empowerment of the recipients. the study is constrained with limitations, firstly, the sample consists only from one state of malaysia and that is kedah. secondly, only the performance from empowerment is studied, and many other factors are though equally significant to take into account, such as the sustainability of the recipients. thirdly, a cross-sectional study may not give a long-term perspective. therefore, the study tried to understand only the performance through the empowerment of recipients ignoring the consequences on the recipients’ sustainability. mokhtar, saad, salleh, shaari and nafi, (2020) investigate the effects of service quality and reputation towards the customers’ satisfaction at one of the zakat institutions in one of the states in malaysia. respondents of the study were residences who reside in the state and used the institution services. the study employed quantitative research design and 280 questionnaires were distributed to the respondents. the data was collected through a systematic sampling method. descriptive and inferential analysis has been conducted. and all the data were analysed through the ibm statistical package for social sciences (spss) version 25.0. findings showed that 88.9% of zakah institutions customer’s satisfactions are being influenced by service quality. the study found that reliability, assurance and brand reputation have significant relationship towards the customers’ satisfaction. however, the study was only conducted in a northern state in malaysia in four different locations. thus, this sulaiman, magaji, & rabiu │ assessment of the service performance of zakah institutions in gombe metropolis, nigeria international journal of islamic economics and finance (ijief), 4(1), 263-292 │268 could give an issue on possibility of the sampling of the study which was not sufficient to represent other zakat institutions. zakaria and mohamad (2019) examines zakah recipients’ perceptions of daruriyat/basic needs and the effectiveness of zakah funds to fulfill the needs and elevate recipients’ standard of living to hajiyat/comfort living. data were gathered from in-depth interviews and focus group discussions with majlis agama islam kelantan (maik)’s zakah recipients. the data were audiorecorded, transcribed verbatim and analysed qualitatively by referring to daruriyat/basic needs of maqasid al-shariah. results indicated that recipients perceive daruriyat needs as needs consisting of property, life, lineage and intellect. the study also perceived that zakah has successfully assisted them in fulfilling the needs but has yet to elevate their life to the standard of hajiyat/comfort. although faith is one of the maqasid al-shariah daruriyat elements and paramount in one’s life, none highlighted it as important. this provides useful insights to zakah agency to educate recipients on the importance of faith and rejuvenate its programs so that the recipient’s standard of living would be raised to a higher level. the goal of maqasid alshariah in zakah jurisprudence will be achieved, if zakah funds successfully fulfil all the five elements of daruriyat needs (faith, property, life, lineage and intellect) and elevate recipients’ standard of living to the standard of hajiyat/comfort. nahar (2018) explore stakeholders’ views toward zakah management performance issues based on a selected zakat institution (zi) operating on a corporatized platform with corporate administrative style. a quantitative approach using a questionnaire survey distributed to muslims in the state which zi is operating was adopted. a total of 448 usable responses are used in the analysis covering descriptive and mean difference. the results indicate that managerial reform configuration in terms of corporatization has been viewed positively by stakeholders, translated into a comforting agreement score toward zi’s improved management performance (collection, disbursement and reporting). such perceptions are, however, observably sensitive to demographic factors of gender and employment type. the survey also document evidence that the corporatization exercise itself had improved respondents’ confidence toward zi being the zakat administrator in the state. the study possesses few methodological limitations that should be acknowledged. first, although respondents were assured complete anonymity and confidentiality, bias resulting from self-reporting may have potentially influenced the results. second, the respondents are discernibly represented by a small fraction of zakat stakeholders in selangor, whose perceptions might not be representative of the entire population, thereby raising the generalizability concern. sulaiman, magaji, & rabiu │ assessment of the service performance of zakah institutions in gombe metropolis, nigeria international journal of islamic economics and finance (ijief), 4(1), 263-292 │269 hamisu, (2017) assess the performance of kano state zakah and hubusi commission (kszhc) towards collection and distribution of zakah in kano state. logit regression model (lrm) and descriptive statistics has been used for the analysis of zakah recipient’s satisfaction about the performance of kszhc. finding reveals that kszhc discharged its responsibility of zakah collection and distribution very well, therefore its performance towards achieving its goal and objective is satisfactory. however, the study employed weak technique of analysis (i.e lrm) in analysing the variables of study which are latent construct in nature, hence, further study can employ more robust technique such as sem. wahab and rahman, (2013) in their studies assess the efficiency of zakah institutions in malaysia during the period of 2003-2007 and examine the determinants of efficiency, the technical efficiency analyses has been carried out, and the finding reveals that size of the management staff, computerized zakah system, committee of auditors and decentralization which have significant impact on zakah institutions in malaysia as full corporatization and decentralization are positively associated with the efficiency of zakah institutions. however, the duration covered by the study is either short or much longer compared to the time of the writing. indeed, the work is diligently written using robust methodological approach. this contains valuable indicators that can be used to measure the dependent variable of this work. wali (2013), analyse the role of zakah institution in poverty reduction with particular reference to kano state zakah and hubsi commission. secondary data was used, which was obtained from reports and memos of the commission. the study found that, zakah poverty rate in the state failed to tackle the poverty in kano state by considering the increase in poverty rate in the state. since the inception of kano state zakah and hubsi, the total zakah collected by the commission heavily relies on grant from the state government. sa’id et al. (2012), examine the composite performance measurement for zakah organizations using a series of focus group interviews, descriptive statistics and logic model. they found out that performance assessment of zakah institutions should be based on financial perspective, customer satisfaction, internal perspective as well as learning and growth perspective. thus, the study recommends that zakah managers should be more creative and innovative in increasing zakah collection and its disbursement to the rightful recipients within the same year. a study by muhammad and rahim (2012) examine role of zakah in reducing poverty in sarawak, the state employed policies and programs which aimed at eradicating the menace of poverty in the state. the programs comprise of new economic policy (nep), national development policy and vision policy among sulaiman, magaji, & rabiu │ assessment of the service performance of zakah institutions in gombe metropolis, nigeria international journal of islamic economics and finance (ijief), 4(1), 263-292 │270 others, the programs are aimed to eradicate poverty and to achieved distribution of resources. data was source from zakah collection authority, descriptive statistical was employed through the use of frequency distribution tables, charts and percentage. the findings of the study reveal that more attention was given only to the poor (masakin) and the indebted (garimin) by reducing the problem of absolute poverty, the research also found out that 60% of zakah fund was distributed while 40% was saved by the tbs. therefore, there is need for the tbs to employ a financing model that enable the investment of the idle fund in form of business between tbs and the asnaf. 2.3. conceptual framework figure 1 shows that all the six variables of the study are latent constructs in nature, service performance is the endogenous latent variable, whereas service quality dimension, namely, reliability, tangibility, empathy, responsiveness and assurance are the exogenous constructs of the study. figure 1. research model source: adopted from dick and basu (1994); zainol, abu bakar, ibrahim & minhaj, (2016) service performance of zakah institution reliability tangibility empathy assurance responsiveness sulaiman, magaji, & rabiu │ assessment of the service performance of zakah institutions in gombe metropolis, nigeria international journal of islamic economics and finance (ijief), 4(1), 263-292 │271 iii. methodology this section describes the methodology used to access this work. the section presents the following: research design, population of the study, sample size and sampling technique, sources and method of data collection, techniques of data analysis, model specification as well as estimation procedure. 3.1. data a descriptive research design is employed in this study. the study target population is drawn from three private religious organizations namely jama’atul izalatul bidia wa iqamatus sunnah (jibwis a) gombe, jama’atul izalatul bidia wa iqamatus sunnah (jibwis b) gombe and council of da’awa gombe as at july 2020, the recipients of zakah in gombe metropolis are amount to be 2278. the study used yamane’s (1967) formula with an error margin of 5 percent in finding the sample size of the study which is amount to be 400 (see table 1). purposive sampling technique is used in selecting the respondents of the study. primary data is used in this study and data is collected through the use of self-administered questionnaires. table 1. proportional distribution of sample size no name of organization number of recipients sample size proportion 1 izalatul bidia wa iqamatus sunnah (jibwis a) gombe 1006 177 2 izalatul bidia wa iqamatus sunnah (jibwis b) gombe 752 132 3 council of da’awa gombe 520 91 total 2278 400 source: organization officials (2020) and computed by author 3.2. model development according to othman and owen (2001) service quality dimension can be categorised as most adopted and cited components in service quality literature. the servqual views of parasuraman, et al., (1988) is a 22-items scale that measures service quality along five dimensions, reliability, tangible, empathy, responsiveness and assurance namely, these forms the basis upon which each works has been built (sureshchandar et al., 2002). initially parasuraman, et al. (1985) identified 10 dimensions of service quality which include: (1) tangibles, (2) reliability, (3) responsiveness, (4) access, (5) courtesy, (6) communication, (7) credibility, (8) security, (9) understanding and (10) competence. subsequently, parasuraman, et al. (1988) collapsed the initial 10 dimensions into five which include: (1) reliability, (2) responsiveness, (3) tangibles, (4) assurance and (5) empathy. here, assurance captures communication, competence, credibility, courtesy and security dimensions sulaiman, magaji, & rabiu │ assessment of the service performance of zakah institutions in gombe metropolis, nigeria international journal of islamic economics and finance (ijief), 4(1), 263-292 │272 while empathy captures access and understanding dimensions. sachdev and verma (2004) made the following explanations in respect of the five dimensions. reliability refers to performance of service in a dependable and appropriate manner by zakah institutions staffs, it is also view as staff effort in meeting up with deadline in providing services, staff ability to provide courteous and diligent services, knowledge and experienced management team, sincere effort to assist customers, proper advice to the customer, friendliness of personnel to the customers, provision of wide and easy network for customer access, integrated value-added service and is in accordance to islam. tangible, refers to availability and appearance of facilities and personnel, interior comfort of the organization, physical facility of the organization, external appearance such as parking space, location convenience such as accessibility via public transport, counter partitions/special room for customer with "issues". materials associated with service such as brochure or magazines, operation house, number of counters during peak hours, relevant forms associated with the service, facilities for disabled people. empathy is willingness of staff to understand the needs of customers, employees’ ability to understand customer’s needs, giving personal attention to customers and employees have a sense of humor, employees. take care of customers specific needs, confidentiality of customer moral issue, value added service in terms of financial/personal counselling, zero service charge, availability of user-friendly forms, value added services such as photocopy services and filling forms for customers. responsiveness and willingness of staff to assist customers and provide prompt service. employees’ knowledge about zakah, employees are always willing to assist customers. ability of employees to fulfill customer’s needs. courteous counter service staff, fast and efficient counter service, number of branches available, prompt service, one stop centre, that is everything under one roof, number of staff/counters available, staff never too busy to respond to customer’s needs. the above index may be used by zakah institution to assess individual performance (said, et. al., 2012). with regards to employees, the performance index could motivate the staff towards achieving desired result. better organizational success may be achieved via the index and the index may serve as a guideline for motivating not only zakah institution but also all islamic philanthropic organizations that are currently performing below average to learn from these at higher ranking level. assurance: it means to inspire trust and confidence. assurance is defined as employees’ knowledge of courtesy and the ability of the zakah institution and its employees to inspire trust and confidence. this dimension is likely to be sulaiman, magaji, & rabiu │ assessment of the service performance of zakah institutions in gombe metropolis, nigeria international journal of islamic economics and finance (ijief), 4(1), 263-292 │273 particularly important for the services that the zakah stakeholders i.e., payers and beneficiaries perceives as involving high rising and/or about which they feel uncertain about the ability to evaluate. trust and confidence may be embodied in the person who links the customer to the company. thus, employees are aware of the importance to create trust and confidence from the customers to gain competitive advantage and for customers’ loyalty. performance: has been interpreted by the many scholars in different ways. however, regarding non-profit organization like zakah institutions performance may be seen as the consequences of organizational activities that have been carried out (kasri, 2013). therefore, performance of institution may be regarded as a mirror that reflects the productive efficiency and the organizational impact to the society. according to broeckling (2010) states that performance measurement of non-profit organization may be regarded as an avenue used in measuring organizations, programs and their impact, and this is due to some internal and external forces that includes demand for accountability, stimulants for growth and development, competition, pressure from funders and an increase in the private sector performance measurement tools. in view of this we may say that performance measure in islamic non-profit organization like zakah is an attempt to know how well these institutions discharge their duties towards collection and distribution as enshrined in the islamic legal system. however, the issue of performance measurement is earnestly desired to non-profit organizations like that of zakah for they face the challenges of scarce donors and government funding (kaplan 2001). regarding the ways of performance measurement in private sectors, it involves comparison of financial information such as profit margin and stock price whereas non-profits organizations like zakah are looking for similar yardstick to indicate their relative value and social impact which is referred to as non-profit organization equivalent (hatry, 1999). therefore, to determine how well zakah institution performed, its activities must be evaluated against its own purpose of establishment such as ability to reduce the incidence of poverty and identification of resources input and output of an organization at both monetary and nonmonetary perspective (kasri, 2013). the functional relationship of the model is given υ𝑖 = (𝑋𝑖1, 𝑋𝑖2, 𝑋𝑖3, 𝑋𝑖4𝑋𝑖5, ) (1) 𝑌𝑖 = 𝜛𝑜 + 𝜛𝑖 𝑋𝑖1 + 𝜛𝑖 𝑋𝑖2 + 𝜛𝑖 𝑋𝑖3 + 𝜛𝑖 𝑋𝑖4 + 𝜛𝑖 𝑋𝑖5 + 𝜀𝑖 (2) 𝑃𝐹𝑀𝑖 =𝜛𝑜 + 𝜛1𝑅𝐿𝐵𝑖 + 𝜛2𝑇𝐺𝐵𝑖 + 𝜛3𝐸𝑀𝑃𝑖 + 𝜛4𝑅𝑃𝑉𝑖 + 𝜛5𝐴𝑆𝑈𝑖 + 𝜀𝑖 (3) 𝑃𝐹𝑀𝑖 = performance. 𝑅𝐿𝐵𝑖 = reliability. 𝑇𝐺𝐵𝑖 = tangibility. 𝐸𝑀𝑃𝑖 = empathy. sulaiman, magaji, & rabiu │ assessment of the service performance of zakah institutions in gombe metropolis, nigeria international journal of islamic economics and finance (ijief), 4(1), 263-292 │274 𝑅𝑃𝑉𝑖 = responsiveness. 𝐴𝑆𝑈𝑖 = assurance. 𝜛𝑜= autonomous variable. 𝜛1, 𝜛2 and 𝜛3= are parameter estimates or coefficients 𝜀𝑖 = the error variance 3.3. method the analytical tools to be employed include both descriptive and inferential statistical methods. the descriptive method involves the use of tables, frequency and percentages to describe the data, the inferential statistic; sem (i.e., variance based structural equation modelling) method is used to analyses the performance of zakah institution using service quality in gombe state metropolis. the idea behind using pls-sem technique was that the variables of the study are latent construct. therefore, data will be analyse using spss version 22.0 and smartpls 3.0. iv. results and analysis prior the main analysis, data went into some form of cleansing, which includes multi-collinearity and normality test, respondent’s demographic characteristics is presented. subsequent to which the hypotheses were evaluated. however, hypothesis testing requires other rigorous preliminary analysis and validation, thus, occurs in two different stages. the first is the measurement model, where the individual item reliability, internal consistency reliability, convergent and discriminant validity are assessed. the second section provides result on postulated hypothesis, path coefficient significance, r-squared values, lastly, exogenous variable effect size and predictive relevance of the whole model also reported and discussed. 4.1 survey response analysis the study distributed 400 questionnaires to zakah beneficiaries in gombe metropolis, the questionnaires was adopted from parasuraman, et al. (1985), however, only 383 responses were retrieved representing 95.7% which is considered fit and sufficient for the survey (sekaran, foster, lucas & hankins, 2003). 4.2 data cleaning and pre-estimation test in multivariate analysis data screening and other preliminary examinations are vital in achieving qualitative data set (hair, black, babin, & anderson, 2010). sulaiman, magaji, & rabiu │ assessment of the service performance of zakah institutions in gombe metropolis, nigeria international journal of islamic economics and finance (ijief), 4(1), 263-292 │275 this analysis provides an insight on any violation of the basic assumptions associated with multivariate analysis (hair, money, samouel, & page, 2007). in fact, conducting these analyses provides the researcher with understanding on how well the data fit the intended analysis. there are two basic issues to be put into consideration in data cleaning and preliminary analysis. they are testing of normality and multi-collinearity tests. this is the process of examining the data before further analysis i.e. inferential statistics can be conducted. 4.2.1 normality test a normality test using skewness and kurtosis was conducted with the sole aim of improving the statistical accuracy of the analysis, especially the path coefficient estimations. table 2. result of normality test tests of normality variable skewness kurtosis performance -0.847 1.889 reliability 0.743 -0.876 tangibility -0.948 -1.857 empathy -0.893 0.851 responsiveness 0.453 0.819 assurance 0.873 -1.971 from the table 2, the skewness and kurtosis result clearly indicates that all items are within the acceptable threshold of -1 to +2 for skewness and -2 to +2 for kurtosis. specifically, the maximum and minimum numbers in table 2 of skewness ranges from -0.893 to 0.873, while, the values of the kurtosis range from a minimum of -1.971 to a maximum of 1.889, thus, satisfying the normality assumptions. 4.2.2 multi-collinearity test multi-collinearity refers to a situation in which two or more independent variables become highly correlated. the presence of multi-collinearity among the independent variables can substantially distort the estimates of regression coefficients and their statistical significance tests (hair, black, babin, anderson, & tatham, 2010). sulaiman, magaji, & rabiu │ assessment of the service performance of zakah institutions in gombe metropolis, nigeria international journal of islamic economics and finance (ijief), 4(1), 263-292 │276 table 3. tolerance and variance inflation factors (vif) latent constructs collinearity statistics variance inflation factor (vif) tolerance value reliability 1.025 0.975 tangibility 1.033 0.968 empathy 1.098 0.911 responsiveness 1.043 0.958 assurance 2.088 0.478 table 3 indicates that multi-collinearity did not exist among the exogenous latent constructs as all vif values were less than 5 and tolerance values is greater than 0.2 as suggested by hair et al. (2011). thus, that none of the variables is highly correlated as such the data is free from multi-collinearity. 4.3 demographic profile of the respondents this section describes the demographic profile of the respondents of the study. the demographic characteristics examined in this study include gender, age, marital status and category of zakah recipient. table 4. demographic characteristics of the respondents frequency percentage (%) gender male 277 72.3 female 106 27.7 total 383 100.0 age below 30 14 3.7 30-39 65 17.0 40-49 129 33.7 50-above 175 45.7 total 383 100.0 marital status single 13 3.4 married 210 54.8 divorced 102 26.6 widow 58 15.1 total 383 100.0 category of zakah recipient fuqara 116 30.3 masakin 125 32.6 mu'allaf 48 12.5 algharimin 74 19.3 fisabilillah 20 5.2 total 383 100.0 sulaiman, magaji, & rabiu │ assessment of the service performance of zakah institutions in gombe metropolis, nigeria international journal of islamic economics and finance (ijief), 4(1), 263-292 │277 the characteristics of the respondents as shown above in table 4 highlight that 277(72.3%) were men while 106 (27.7%) were female. this signifies that male zakah recipients double the female counter part. the descriptive statistics shows that 14 (3.7%) of the respondents age below 30, 65 (17.0%) of the respondents fall within the age bracket of 30-39, 129(12.7%) representing 4049, 175 (45.7%) aged between 50above. this revealed that most of zakah recipients are old i.e., within the range of 50 and above. among the respondents 13(3.4%) are single, 210 (54.8%) are married, 102(26.6%) are divorced and 58(15.1%) are widowed. the table 4 also reveals that 116(30.3%) of the respondents are in category of fuqara, while 125(32.6%) are in category of masakin, while 48(12.5%) of the respondents are mu'allaf and 74 (19.3%) of the respondents are algharimin, lastly 20(5.2%) of the respondents falls in fisabilillah category, this clearly signifies that majority of the respondents are masakin 32.6% then follow by fuqara 30.3%. 4.4 descriptive analysis of the latent constructs after the overall data cleaning and screening, descriptive statistics of the latent variable of the study were also evaluated, presented and discussed. specifically, four latent variables were analysed to determine their mean, standard deviation as well as the minimum and maximum values. table 5 provides a summary of the descriptive statistics of the study. table 5. descriptive statistics for latent variables descriptive statistics lantern construct n mean std. deviation statistic statistic performance 383 4.2963 .77239 reliability 383 4.4517 .47414 tangibility 383 4.0161 1.19077 empathy 383 3.7942 1.05646 responsiveness 383 4.0292 .89066 assurance 383 3.4569 .93109 table 5 shows that the mean and standard deviation for the performance were 4.2963 and 0.77239, respectively. this suggests that organization tended to have moderate level of performance. table 5 also indicates that the mean for the reliability was 4.4517, with a standard deviation of 0.47414, suggesting that the organization reliability level as high. further, the results show a moderate score for the tangibility (mean = 4.0161, standard deviation = 1.19077) but a low score for empathy with mean and standard deviation of 3.7942 and 1.05646, the results show a moderate score for the responsiveness (mean = 4.0292, standard deviation =0.89066) and lastly the results show a sulaiman, magaji, & rabiu │ assessment of the service performance of zakah institutions in gombe metropolis, nigeria international journal of islamic economics and finance (ijief), 4(1), 263-292 │278 low score for the assurance (mean = 3.4569, standard deviation = 0.93109) respectively. 4.4. evaluation of pls-sem path model results structural equation model (pls-sem) is a second-generation statistical tool that involve latent variables and multiple indicators. this study used a twostep process to evaluate and report the results of pls-sem path. this two-step process adopted in the present study comprises (1) the assessment of a measurement model, and (2) the assessment of a structural model, as depicted in figure 1 (hair et al., 2014; hair et al., 2012; henseler et al., 2009). 4.4.1 assessment of measurement model in order to assess outer model (measurement or factor model) in smartpls analysis. the measurement model is key in determining the goodness, reliability, and validity of the measures used. it constitutes assessing individual item reliability, internal consistencies of the items, convergent and discriminant validity respectively (henseler et al., 2009). figure 1. measurement model sulaiman, magaji, & rabiu │ assessment of the service performance of zakah institutions in gombe metropolis, nigeria international journal of islamic economics and finance (ijief), 4(1), 263-292 │279 individual item reliability this refers to the convergence of sub-item of a particular construct and was assessed by examining the outer loadings of each construct’s measure (hair et al., 2014). in adherence to the yard stick for retaining items with loadings between 0.40 and 0.70, it was discovered that out of 36 items, three were deleted because they presented loadings below the threshold of 0.40 which are asu3=0.103, rlb1=0.395, rlb3=0.382, the deletion of items should not exceed 30% of all items in the measurement model (hair et al., 2013). internal consistency this refers to the convergence of sub-item of a particular construct in order to measure the same construct (bijttebier et al., 2000). in essence, composite reliability measures inter-items consistency, hence, ensures the existence of correlations among sub-items of a construct. the most common method of assessing internal consistency are cronbach’s alpha (cronbach, 1951) and composite reliability (fornell & larcker, 1981). hence, the present study adopted both cronbach’s alpha and composite reliability in ascertaining internal consistency to clear doubt in the validity of the study. convergent validity convergent validity refers to the extent to which items truly represent the intended latent construct and indeed correlate with other measures of the same latent construct (hair et al., 2007), it explained in table 6. convergent validity was assessed by examining the average variance extracted (ave) of each latent construct as suggested by fornell and larcker (1981). sulaiman, magaji, & rabiu │ assessment of the service performance of zakah institutions in gombe metropolis, nigeria international journal of islamic economics and finance (ijief), 4(1), 263-292 │280 table 6. loadings, composite reliability and average variance extracted factor loadings composite reliability (pc) average variance extracted cronbach alpha performance 0.962 0.767 0.952 pfm1 0.929 pfm2 0.888 pfm3 0.828 pfm4 0.950 pfm5 0.509 pfm6 0.961 pfm7 0.928 pfm8 0.921 reliability 0.813 0.476 0.732 rlb2 0.429 rlb4 0.815 rlb5 0.707 rlb6 0.798 rlb7 0.627 tangibility 0.962 0.811 0.971 tgb1 0.818 tgb2 0.981 tgb3 0.848 tgb4 0.890 tgb5 0.871 tgb6 0.980 empathy 0.949 0.758 0.944 ept1 0.917 ept2 0.935 ept3 0.807 ept4 0.957 ept5 0.645 ept6 0.923 responsiveness 0.967 0.856 0.957 rpv1 0.976 rpv2 0.923 rpv3 0.936 rpv4 0.964 rpv5 0.819 assurance 0.804 0.585 0.645 asu1 0.764 asu2 0.909 asu4 0.589 sulaiman, magaji, & rabiu │ assessment of the service performance of zakah institutions in gombe metropolis, nigeria international journal of islamic economics and finance (ijief), 4(1), 263-292 │281 discriminant validity the last validity of the measurement model is the discriminant validity. discriminant validity is aimed at examining the difference that exists between constructs in the study (barclay et al., 1995). despite aiming at explaining the same thing, constructs are expected to be dissimilar, thus, sharing more with its items than the other constructs. specifically, measures of one construct are not expected to overlap in the territory of another construct. adequate discriminant validity is achieved when a construct shares more variance than it does with other construct of the model. hence this study adopted (fornell & larcker 1981). discriminant validity where the cross loading is ascertains at the item or indicator level. the cross loadings threshold is 0.50 and above (hair et al., 2010). however, values greater than 0.40 is also accepted, it explained in table 7. table 7. cross loadings assurance empathy performance reliability responsibility tangibility asu1 0.764 0.238 0.059 0.049 -0.015 0.043 asu2 0.909 0.197 0.137 0.059 0.082 0.007 asu4 0.589 0.254 0.077 0.028 -0.042 0.040 ept1 0.311 0.917 0.036 0.057 0.011 0.055 ept2 0.237 0.935 0.016 0.098 0.095 0.058 ept3 0.292 0.807 0.015 0.032 0.064 0.104 ept4 0.305 0.957 0.035 0.081 0.047 0.069 ept5 0.421 0.645 -0.012 0.030 -0.056 0.073 ept6 0.233 0.923 0.031 0.105 0.102 0.038 pfm1 0.089 0.034 0.929 0.281 0.187 -0.046 pfm2 0.083 0.059 0.888 0.273 0.187 -0.029 pfm3 0.075 0.080 0.828 0.313 0.051 -0.046 pfm4 0.122 0.014 0.950 0.275 0.153 -0.056 pfm5 0.250 -0.004 0.509 0.279 0.087 0.094 pfm6 0.121 0.004 0.961 0.290 0.142 -0.054 pfm7 0.064 0.023 0.928 0.291 0.197 -0.019 pfm8 0.107 0.043 0.921 0.315 0.112 -0.059 rlb2 -0.014 -0.022 0.077 0.429 0.072 0.037 rlb4 0.059 0.106 0.316 0.815 0.095 0.058 rlb5 0.004 -0.084 0.198 0.707 0.069 0.048 rlb6 0.087 0.195 0.278 0.798 0.107 0.054 rlb7 0.024 -0.019 0.189 0.627 0.070 0.046 rpv1 0.035 0.076 0.156 0.129 0.976 0.152 rpv2 0.040 0.039 0.181 0.117 0.923 0.118 rpv3 0.009 0.098 0.111 0.085 0.936 0.145 rpv4 0.042 0.081 0.148 0.113 0.964 0.155 rpv5 0.019 0.055 0.135 0.100 0.819 0.194 tgb1 0.069 0.182 0.016 0.095 0.244 0.818 tgb2 0.021 0.037 -0.034 0.053 0.140 0.981 tgb3 0.069 0.139 -0.013 0.093 0.222 0.848 tgb4 0.067 0.143 -0.009 0.121 0.199 0.890 tgb5 0.046 0.146 -0.011 0.088 0.207 0.871 tgb6 0.022 0.060 -0.020 0.064 0.164 0.980 sulaiman, magaji, & rabiu │ assessment of the service performance of zakah institutions in gombe metropolis, nigeria international journal of islamic economics and finance (ijief), 4(1), 263-292 │282 4.4.2 assessment of significance of the structural model figure 2. structural model having ascertained the measurement model, next, the present study assessed the structural model. the present study also applied the standard bootstrapping procedure with a number of 5000 bootstrap samples and 383 cases to assess significance of the path coefficients the structural model is concerned about r2, coefficient, p-value, predictive relevance (q2) and effect size (f2) was explained by the structural model with help of bootstrapping. figure 2 provides the graphical display of the standardized path coefficient (β) and tvalues of the hypothesis in this study, when a study is exploratory in nature, researchers often assume a significance level of 10% (significance level= 1.65), table 8 provides standardized path coefficient (β), tvalues and confidence intervals as suggested by cho and abe (2013). it can be deduced that all direct relationship between variables (responsiveness and performance) is accepted. also, the relationship between the two variables (assurance and performance) is accepted but tangible and performance is rejected. also, the relationship between empathy and performance is rejected and lastly the relationship between reliability and performance is accepted, in essence, three alternative hypotheses are accepted and two null hypotheses are accepted. sulaiman, magaji, & rabiu │ assessment of the service performance of zakah institutions in gombe metropolis, nigeria international journal of islamic economics and finance (ijief), 4(1), 263-292 │283 test of hypothesis hypotheses one was stated in null form as reliability is not positively related to performance. the result revealed a significant and positive relationship between reliability and performance based on 0.1 significance level with tvalue of 1.65 (β = 0.391, t= 5.593), hence we accept the alternative hypothesis. this finding is consistent with previous results by hamisu, (2017); abd halim et. al., (2020) and norazlina and abdul rahman (2013). hypotheses two was stated in null form as tangibility is not positively related to performance. the result revealed an insignificant and negative relationship between tangibility and performance based on 0.1 significance level with tvalue of 1.65 (β = -0.078, t=1.166), hence we accept the null hypothesis. this finding is inconsistent with previous results by hamisu, (2017); abd halim et. al., (2020) and norazlina and abdul rahman (2013). hypotheses three was stated in null form as empathy is not positively related to performance. the result revealed an insignificant and negative relationship between empathy and performance based on 0.1 significance level with tvalue of 1.65 (β = -0.030, t= 0.405), hence we accept the null hypothesis. this finding is inconsistent with previous results by hamisu, (2017); abd halim et. al., (2020) and norazlina and abdul rahman (2013). hypotheses four was stated in null form as responsiveness is not positively related to performance. the result revealed a significant and positive relationship between responsiveness and performance based on 0.1 significance level with t-value of 1.65 (β = 0.135, t=2.587), hence we accept the alternative hypothesis. this finding is consistent with previous results by hamisu, (2017); abd halim et. al., (2020) and norazlina and abdul rahman (2013). hypotheses five was stated in null form as assurance is not positively related to performance. the result revealed a significant relationship between assurance and performance based on 0.1 significance level with t-value of 1.65 (β = 0.188, t= 1.818), hence we accept the alternative hypothesis. this finding is consistent with previous results by hamisu, (2017); abd halim et. al., (2020) and norazlina and abdul rahman (2013). table 8. results of direct hypotheses note: ***significant at 0.1 (two-tailed) relationship beta t-statistics findings rlb->pfm 0.391 5.593 supported tgb->pfm 0.078 1.166 not supported ept->pfm 0.030 0.405 not supported rpv->pfm 0.135 2.587 supported asu->pfm 0.188 1.818 supported sulaiman, magaji, & rabiu │ assessment of the service performance of zakah institutions in gombe metropolis, nigeria international journal of islamic economics and finance (ijief), 4(1), 263-292 │284 assessment of variance explained in the dependent latent variables the next is to determine the r-squared value which is an important segment in assessing the validity of the structural model. the r-squared is also referred to as coefficient determinant (hair et al., 2012). the r-squared value clarifies the variance that exists in explaining endogenous variable as a result of one or two exogenous variables (hair et al., 2010). although the acceptable level of r2 value depends on the research context (hair et al., 2010), an r-squared value of 0.10 is a minimum acceptable level. table 9. variance explained in the dependent variables variable variance explained (r2) zakah performance 15% table 9 explains that in predicting the dependent variable in the model an rsquare of (0.145 = 15 percent) is estimated which signifies the variance in zakah performance. this is to say, that other variables or predictors that could explain the remaining model account for (0.85= 85 percent). according to (hair, et al., 2012) the acceptable thresh hold value of accepting r-squared is 0.19, 0.50 and 0.75 described as weak, moderate and substantial. assessment of effect size (f2) having assessed and confirmed the postulated hypotheses of the study, the next criteria for the evolution of the structural model is the effect size (f2) (hair et al., 2013). effect size indicates the relative effect of a particular exogenous latent variable on endogenous latent variable(s) by means of changes in the rsquared (chin, 1998). cohen (1988) describes f2 values of 0.02, 0.15 and 0.35 as having weak, moderate, strong effects respectively. table 10 shows the respective effect sizes of the latent variables of the structural model. table 10. effect sizes of the latent variables on cohen’s (1988) recommendation independent variable dependent variable f2 effect size reliability performance 0.216 moderate tangibility performance 0.071 weak empathy performance 0.032 weak responsiveness performance 0.172 moderate assurance performance 0.197 moderate from the table 10, it can be concluded that all the exogenous variables of the study namely reliability, tangibility, empathy, responsiveness and assurance possess some exploratory power towards the endogenous variable. specifically, reliability, responsiveness and assurance have a moderate effect sulaiman, magaji, & rabiu │ assessment of the service performance of zakah institutions in gombe metropolis, nigeria international journal of islamic economics and finance (ijief), 4(1), 263-292 │285 on performance while tangibility and empathy have a weak effect on performance. assessment of predictive relevance subsequent to determining the effect size or variation of the r-square, hair et al. (2013) recommended that predictive relevance of the model should be ascertained using stone-geisser’s (q²) (geisser, 1974; stone, 1974). the process is a resampling technique where data are systematically deleted and predicted on each of the endogenous construct’s indicators (geisser, 1974; hair et al., 2011; stone, 1974). in fact, predictive relevance estimates how well the model of the study predicts or represents omitted cases (chin, 1998; hair et al., 2013). the process is only befitting for endogenous reflective constructs to ascertain its predictive relevance in the model. if the predictive relevance (q2) value is greater than zero, then the model has predictive relevance (hair et al., 2013). table 10 presents the results of the cross-validated redundancy q2 test. table 11. q2 or cross-validation redundancy total sso sse q2 performance 3,064.000 2,762.778 0.098 the table 11 revealed that cross-validation redundancy result is q²=0.098 for the endogenous variable which is above zero and signifies predictive relevance of the model. v. research implication and disscussion the primary aim of this study is to assess the performance of zakah institution in gombe metropolis through the use of service quality dimension (reliability, tangibility, empathy, responsiveness and assurance). specific objectives of the study are to assess whether reliability, tangibility, empathy, responsiveness and assurance has influence on performance of zakah institution in gombe metropolis. to address this relevant data is collected and analyzed and the following conclusions were drawn: the result of this study shows a significant positive effect between reliability and performance of zakah institutions in gombe metropolis. the result of this study revealed that reliability positively influence performance of zakah institutions in gombe metropolis. therefore, this study concludes that reliability improve the performance of zakah institution in gombe metropolis. the result of this study shows an insignificant effect between tangibility and performance of zakah institutions in gombe metropolis. the result of this sulaiman, magaji, & rabiu │ assessment of the service performance of zakah institutions in gombe metropolis, nigeria international journal of islamic economics and finance (ijief), 4(1), 263-292 │286 study revealed that tangibility does not influence performance of zakah institutions in gombe metropolis. therefore, this study concludes that tangibility does not improve the level of performance of zakah institution in gombe metropolis. the result of this study shows an insignificant effect between empathy and performance of zakah institutions in gombe metropolis. the result of this study revealed that empathy does not influence performance of zakah institutions in gombe metropolis. therefore, this study concludes that empathy do not improve the level of performance of zakah institution in gombe metropolis the result of this study shows a significant positive effect between responsiveness and performance of zakah institutions in gombe metropolis. the result of this study revealed that responsiveness positively influence performance of zakah institutions in gombe metropolis. therefore, this study concludes that responsiveness improves the performance of zakah institution in gombe metropolis. the result of this study shows a significant positive effect between assurance and performance of zakah institutions in gombe metropolis. the result of this study revealed that assurance positively influence performance of zakah institutions in gombe metropolis. therefore, this study concludes that assurance improve the performance of zakah institution in gombe metropolis. vi. conclusion and recommendation 5.1. conclusions based on the findings from empirical i.e., the results from the data analysis, the following recommendations are made in order to provide adequate measure to complement the assessment of the performance of zakah institutions in gombe metropolis. (i) it is fundamental for the zakah institutions in gombe metropolis to consider improving the tangibles and empathy dimensions of service quality as the results of this research proved that they are underperforming in the model i.e., zakah recipient’s perception was out rightly unsatisfactory on the two dimensions. (ii) the square multiple correlation of the model appears to be (0.145) i.e., service quality dimension was able to explain only 14 percent variation in performance of zakah institutions in gombe metropolis, the study sulaiman, magaji, & rabiu │ assessment of the service performance of zakah institutions in gombe metropolis, nigeria international journal of islamic economics and finance (ijief), 4(1), 263-292 │287 recommends concentrating on the antecedents of service quality as it will assist zakah institutions in gombe metropolis in delivery its mandate and consequently improve its performance. (iii) the state government should intervene by providing an institution that will serve as regulatory body that will be supervising the activities of zakah institutions in gombe state and also this study recommend the need for establishment of government own institution that will be engaging in collecting and distribution of zakah, like sokoto state zakah and endowment commission (sozecom) in sokoto state, zamfara state zakah and endowment board (zszeb) zamfara state and kano state zakah and hubsi commission (kszhcom) in kano state. 5.2. recommedation this study assesses the performance of zakah institutions in gombe metropolis; however, the outcomes from this research cannot be generalized across the zakah institutions in nigeria; hence there is need for similar research across zakah institutions in nigeria, this will assist in comparing and contrasting the findings so as to be able to make proper generalization. sulaiman, magaji, & rabiu │ assessment of the service performance of zakah institutions in gombe metropolis, nigeria international journal of islamic economics and finance (ijief), 4(1), 263-292 │288 references abd halim mohd noor, m. s., rasool, a., yusof, r. m., ali, s. m., & rahman, r. a. 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(2019). effectiveness of zakah in fulfilling daruriyat/basic needs and elevating the zakah recipient’s standard of living to hajiyat/comfortable life in the perspective of maqasid alsyariah. jurnal pengurusan (ukm journal of management), 56. sulaiman, magaji, & rabiu │ assessment of the service performance of zakah institutions in gombe metropolis, nigeria international journal of islamic economics and finance (ijief), 4(1), 263-292 │292 this page is intentionally left blank. international journal of islamic economics and finance (ijief) vol. 5(2), july 2022, pages 335-350 volatility and stability of esg equity in indonesia toward internal and external shocks indra gunawan1*, muhammad firdaus2, hermanto siregar3, mulya e. siregar4 *) corresponding email: idgunawan@bpkh.go.id article history received: september 6th, 2021 revised: september 24th, 2021 april 29th, 2022 july 17th, 2022 accepted: july 31st, 2022 abstract the environmental, social, and governance (esg) index is rising in popularity globally, especially in indonesia. this study, therefore, attempts to prove that esg equity is less volatile than non-esg equity since specific esg components are essential parts of the shariah values. using data from 2009 to 2020, the vector error correction model (vecm) method was utilized to investigate further the link between esg and other endogenous variables, such as the dow jones islamic market (djim), fed rate, jakarta composite index (jci) index, exchange rate, and bi rate. the results showed that all internal and external variables significantly influenced esg equity in very low magnitude, except for djim negatively and fed rate positively. however, the irf findings revealed what transpired to the esg equity, which could endure shocks from both internal and external simultaneously and stabilize more swiftly. moreover, the fevd results uncovered that all internal and external variables had a minor impact on esg equity, totaling less than 9 percent. meanwhile, the impact of the same variables on non-esg equity, i.e., jci and djim, were higher at 38 percent and 13 percent, respectively. in addition, esg equity tended to have a dominant influence on other nonesg equity. therefore, the indonesian stock market will be more stable if ethical investing norms, such as esg equity, are followed, which will be more judicious in achieving long-term growth. keywords: environmental social and governance; equity, market; vecm. jel classification: g120, q560, c190 type of paper: research paper @ ijief 2022 published by universitas muhammadiyah yogyakarta, indonesia doi: https://doi.org/10.18196/ijief.v5i2.12693 web: https://journal.umy.ac.id/index.php/ijief/article/view/12693 citation: gunawan, i., firdaus, m., siregar, h., & siregar, m. e. (2022). volatility and stability of esg equity in indonesia toward internal and external shocks. international journal of islamic economics and finance (ijief), 5(2), 335-350. doi: https://doi.org/10.18196/ijief.v5i2.12693. 1,2,3,4 school of business, ipb university, bogor, indonesia 2 school of business, ipb university, bogor, indonesia 3 school of business, ipb university, bogor, indonesia 4 school of business, ipb university, bogor, indonesia https://doi.org/10.18196/ijief.v5i1. https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v5i2.12693&domain=pdf gunawan, firdaus, siregar, & siregar │volatility and stability of esg equity in indonesia toward internal and external shocks international journal of islamic economics and finance (ijief), 5(2), 335-350 │ 336 i. introduction 1.1. background according to the 2018 global sustainable investment review, more than 25% of us-domiciled assets under management were invested in sustainable strategies as of the beginning of 2018. blackrock and goldman sachs, two of the world's largest asset managers, have recently pledged to make sustainability a fundamental component of their investment strategy. it was slightly over 50% in canada at 2.1 trillion canadian dollars, a 42 percent increase from 2016. in 2018, esg accounted for 63 percent of investment in australia, whereas the european continent accounted for 46 percent in the same year. in japan, the esg trend rose rapidly from 3% to 18% in two years, from 2016 to 2018. specifically, indonesia's capital market is rapidly increasing. indonesia still has limited fiscal space, poor institutional capacity, and thin domestic financial markets, according to an imf report by breuer et al. (2018). hence, the government must work to address structural barriers, such as a poor investment climate, complicated laws, and limited financial markets (international monetary fund [imf] 2016). a prior imf research by arslanalp et al. (2006) also implied that a financial spillover occurs when a shock from one country's market turbulence spreads to other sectors or even across countries. in this case, the fed rate, foreign exchange, the dow jones esg index, and other macroeconomic variables are all likely to have different effects on esg. more particularly, the sri-kehati index was launched on june 8th, 2009, and managed in collaboration with the indonesian biodiversity foundation (kehati foundation). according to the indonesian stock exchange (idx), the sri-kehati (skehat) is the first green (esg) investment index in indonesia and asean, as well as the second in asia. this index is also part of the sri category, or ethical investing, which is an investment approach that considers both financial and social rewards that contribute to positive change. the first selection process employs negative screening, which is the rejection of particular sectors, firms, or practices from a fund or portfolio based on specified esg criteria, consisting of 25 listed companies that have done well in encouraging sustainable businesses and have good environmental, social, and governance, also known as sustainable and responsible investment (sri). in addition, there is a favorable relationship between esg equity investing and greater returns, particularly with the esg or skehat. it is indonesia’s sole esg index, focusing on esg firms. in 2019, the esg index beat the jakarta composite index (jci) and the lq45 index. according to the bloomberg terminal, the esg index had a return of 174 percent, outperforming the jci and the liquid index, which generated returns of 149 percent and 104 gunawan, firdaus, siregar, & siregar │volatility and stability of esg equity in indonesia toward internal and external shocks international journal of islamic economics and finance (ijief), 5(2), 335-350 │ 337 percent, respectively. in 2018, under bearish conditions, the jci returned a negative 2.5 percent, the liquid index returned a negative 9.0 percent, and the esg returned a negative 4.3 percent. according to empirical studies, previous studies have confirmed the substantial link between lower sustainability risk and higher financial success (whelan et al., 2021). during the global financial crisis of 2008, fernández et al. (2019) discovered that german green mutual funds outperformed their peers in terms of risk-adjusted returns. after the global financial crisis of 2008, esg stocks gained better and recovered faster (wu et al. 2017). mutual funds with high esg stocks outperformed those that invested in low esg stocks (abate et al., 2021), while according to gil-bazo et al. (2010), sri funds succeeded in outperforming other funds. interestingly, islamic funds usually have lower systematic risk than conventional funds during financial crises, regardless of the benchmarks used. for this reason, the study attempts to prove that esg is less volatile than nonesg since specific components are also encouraged in islamic financing value. a similar connection between esg performance and other behavioral finance, including islamic equity, was noted by marwan et al. (2019). they asserted that esg’s overarching concept and goals are incorporated into the theory, practice, and spirit of maqashid shariah and seek to develop better laws for the benefit of society, confirming the identical values of esg and islam. zulkafli et al. (2017) found that from 2009 to 2004, the sri kehati index provided competitive returns, outperforming the jakarta composite index in four out of six measuring tools. in addition, gunawan et al. (2021) compared indonesia's esg, islamic, and liquid equity and discovered that esg provided a better return with rising risk and volatility. further, the major contribution of this research is multidimensional. it adds to the scant empirical study in emerging countries, notably indonesia. it is also one of the first to use vector auto regression (var) and the vector error correction model (vecm) to investigate the relationship between esg (using jci as the benchmark for equity and bi interest rate) and external variables (foreign exchange, dow jones esg index, and fed rate) for market sensitivity. 1.2. objectives this study aims to determine how internal and external factors affect the volatility and stability of the sri-kehati index. using vector error correction model, the study explores the impact on esg equity with jci as the benchmark for equity, bi interest rate, and external variables (foreign exchange, dow jones esg index, and fed rate) for the market’s impact on the volatility parameter. the estimation of market shocks or volatility, which are rare and often manually dated after the fact based on the development of gunawan, firdaus, siregar, & siregar │volatility and stability of esg equity in indonesia toward internal and external shocks international journal of islamic economics and finance (ijief), 5(2), 335-350 │ 338 macroeconomic phenomena, has been assessed before by reinhart and rogoff (2009). then, the structure of this paper is as follows. section i is an introduction, while section ii is a literature survey. in section iii, the researchers discuss data, techniques, and all variables characterizing the entire vecm process. section iv analyzes the result, whereas section v concludes and discusses the empirical findings, managerial implications, and limitations. ii. literature review 2.1. background theory economists and scholars have generally endorsed the efficient market hypothesis (emh), which argues that securities markets are efficient in reflecting information about single stocks or the broader market, as described by fama in his key survey paper "efficient capital markets" (fama, 1970). weak-form efficiency, semi-strong form efficiency, and strong form efficiency are the three categories of form efficiency. the weak form means that past performance in terms of return cannot be used to anticipate the future price. meanwhile, the semi-strong version assumes that the price of securities reacts swiftly to fresh publicly available data. moreover, volatility studies conducted during market turbulence, pioneered by leroy, stepen and richard (1981) and shiller (1979,), have spawned substantial research. one fundamental assumption in the early volatility tests is that anticipated returns are constant and that the market solely causes stock price fluctuation. evidence that projected stock returns fluctuate with predicted inflation rates, interest rates, and other term-structure factors was becoming widespread by the end of the 1970s (bodie (1976), nelson (1976), fama (1976), fama and french (1989)). with more recent data on return predictability, it appears that volatility tests are yet another helpful approach to demonstrate that anticipated returns change over time. however, predictably, they run into the joint hypothesis difficulty. they put market efficiency to the test alongside the supposition that their versions of the consumption-based asset-pricing model incorporate all reasonable variance in expected returns (bertschinger and pfante, 2020). further, this research enriches the literature on the influence of the global financial crisis, including covid-19, stock market index volatility, federal reserve rates, and other monetary policies, on stock market volatility. aside from a single bottom line objective of a stable profit, companies must also be accountable for positive or negative economic, social, and environmental repercussions (elkington, 1997), commonly referred to as the triple bottom line (tbl) genuine concept of the esg. gunawan, firdaus, siregar, & siregar │volatility and stability of esg equity in indonesia toward internal and external shocks international journal of islamic economics and finance (ijief), 5(2), 335-350 │ 339 2.2. previous studies as a reference for long-term and sustainable investment, skehat, which represents indonesia’s esg equity, has to follow consistently with the interpretation of what drives investors' choice to choose sri as organizational and managerial behavior or empirically because of morality (lewis, 2001). sri indexes must also follow a continuous investment cycle, not only to achieve short-term profits but also to combine socio-cultural, educational, economic, technological, and climatic aspects to produce complex causal patterns that influence the efficacy of community-based sustainable initiatives (parnell and seemann, 2005). in addition, the connection between the market’s impact and stock price fluctuations has long been considered significant. in characterizing african equity market behavior, yartey (2008) and gupta and modise (2013) employed a predictive regression framework to evaluate macroeconomic factors. sims et al. (1990) also demonstrated that, from a macroeconomic standpoint, all variables must be controlled endogenously since the approach employed does not put the response variable as a function of other variables, time lag, and other variables lag exogenously if the error term is not autocorrelated. according to maysam et al. (2004) and muzindutsi and niyimbanira (2012), the stock market sector responds differently to macroeconomic change factors. thus, several investors want to commit more funds to investing methods that fulfill certain environmental or ethical standards. previous similar studies of co-integration volatility between equity and macroeconomic factors have been conducted in the scope of a country or the international markets. barakat et al. (2016) showed a positive correlation between exchange rate and equity market performance. the external variables can be presumed from the study of the impact on the islamic equity markets conducted by husin et al. (2013). antonio et al. (2013) also investigated the significant and positive association between the oil price change and the jii islamic as the dependent variable. moreover, the evidence of the non-significant association between the currency on equity volatility was studied by gay jr (2008). studying long-term relationships between time series is significant to studying co-integration between the surrounding markets. these findings suggested that equities volatility and market turbulence had comparable long-run connections. it is consistent with udoka and anyingang (2013) for the nigerian equity market from 1980 to 2009 and jefferis and okeahalam (2000) for three southern african equity markets from 1985 to 1995, using both domestic and foreign economic factors on real equity market returns in south africa, zimbabwe, and botswana. recently, khatatbeh et al. (2020) investigated the influence of covid-19 on quick reaction to afflicted nations. the results indicated a considerable gunawan, firdaus, siregar, & siregar │volatility and stability of esg equity in indonesia toward internal and external shocks international journal of islamic economics and finance (ijief), 5(2), 335-350 │ 340 negative impact on 11 major stock market indices. alali (2020) also scrutinized who's declaration of covid-19 as a global pandemic and its impact on the five largest stock exchanges. the analysis revealed that the who statement negatively impacted the performance of the biggest asian stock markets. in addition, alam and chavali (2020) analyzed the indian stock market and how it was affected during the covid-19 shutdown period of 31 companies listed on bse from february 24th to april 17th, 2020. according to the statistics, the market had a strong favorable response. during the shutdown, the indian stock market performed well. during covid-19, chaudhary et al. (2020) also investigated stock volatility. the garch model was used to analyze the indices of the top ten nations from january 2019 to june 2020. the study showed that returns were negative during the covid-19 period. for some indexes, the garch model had a largely beneficial influence. meanwhile, meher et al. (2020) examined the impact of covid-19 on natural gas and crude oil price fluctuations from may 1st, 2017, to april 30th, 2020. here, covid-19 substantially impacted natural gas and crude oil price volatility. to assess macroeconomic variables, yartey (2008) and gupta and modise (2013) used a predictive regression approach. meanwhile, according to maysam et al. (2004) and muzindutsi and niyimbanira (2012), the stock market sector responds differentially to macroeconomic change variables. then, according to barakat et al. (2016), there was a positive link between the exchange rate and equities market performance. besides, the external variables may be assumed based on the research performed by husin et al. (2013), udoka and anyingang (2013), and jefferis and okeahalam (2000) on the impact on islamic equities markets utilizing both local and foreign market factors. in comparison, khatatbeh et al. (2020) and alali (2020) investigated the global pandemic and its impact on stock exchanges. on the other hand, alam and chavali (2020), chaudhary et al. (2020), and meher et al. (2020) studied the impact on similar market volatility. therefore, this study is one of the first to use vector auto regression and the vector error correction model to examine the relationship between esg performance (using jci as the benchmark for equity and bi interest rate) and external variables (foreign exchange, dow jones esg index, and fed rate). 2.3. esg in islamic perspective the increasing expansion of environmental, social, and corporate governance requirements in global investment has sparked fresh courses regarding the essence of islamic financing. these add poignancy to perennial concerns, such as whether financial goods should conform with shariah by utilizing structures that fulfill the text of religious precepts or if it is better to focus on the gunawan, firdaus, siregar, & siregar │volatility and stability of esg equity in indonesia toward internal and external shocks international journal of islamic economics and finance (ijief), 5(2), 335-350 │ 341 outcomes of investments and how they will benefit society and the natural environment. in addition, shariah investment is a subset of environmental, social, and governance (esg) investing, and this can also work vice versa since it uses the same sorting and filtering techniques to exclude certain assets. many studies, notably kumar et al. (2018), have focused on esg investment. fu et al. (2019) also conducted a literature review on various esg styles, including sharia, and concluded that developing shariah-compliant portfolios requires the same exclusion processes as esg investing and that in all-equity, shariah-compliant portfolios incur no additional performance costs. the foundation theories of ethical investment established that portfolio restrictions are also based on moral decisions that limit the investible universe. moreover, sandwick and collazzo (2021) found that the impact of restricted investing is most obvious during the asset selection process. the portfolio management techniques backed by the theory are otherwise unchanged for limited investment. in this regard, shariah rules impose simple constraints: no interest-bearing investments, investing only in the real economy and avoiding prohibitions (e.g., alcohol, gambling, pork). as an aside, there are parallels between shariah-compliant and sri and esg investment, which both adhere to many of the same principles as shariah-compliant investing. iii. methodology 3.1. method current academics investigated dynamic connections between economic climates. in this case, var is a time-series data analysis method developed in reaction to major macroeconomic models' inability to effectively anticipate the economy in the 1970s. var is also an equation system in which each linear function variable and the lag value of all endogen variables in the equation system is represented as a constant. stock (1987), west (1988), and sims et al. (1990) found that when variables are non-stationary, parameter estimates of var are consistent, but small samples can lead to biased estimations. according to sims (1989), the bayesian estimation approach may be better suited for designing and estimating var models with non-stationary variables. 𝑌𝑡 = 𝐴0 + 𝐴1𝑌𝑡−1 + 𝐴2𝑌𝑡−1 + ⋯ + 𝐴𝑝𝑌𝑡−𝑝 + ɛ𝑡 (1) where: yt: the dependent variable vector (y1t, y2t,…, ynt) is n x 1 in size. a0: the intercept vector is n x 1. ai: the parameter matrix of size n x n, for every i = 1, 2,…, p n: the number of variables in the system of equations p: the amount of lag in the system of equations gunawan, firdaus, siregar, & siregar │volatility and stability of esg equity in indonesia toward internal and external shocks international journal of islamic economics and finance (ijief), 5(2), 335-350 │ 342 εt: the remaining vector (ε1t, ε2t,…,εnt) of size n x 1 in the case of two variables, {yt} and {zt}, {yt} affects {zt}, and vice versa {zt} also affects {yt}. in var, the circular effect (mutual influence) between the two variables is modeled as follows: 𝑦𝑡 = 𝑏10 − 𝑏12𝑧𝑡 + 𝑦11𝑦𝑡−1 + 𝑦12𝑧𝑡 +∈ 𝑦𝑡 (2) 𝑧𝑡 = 𝑏10 − 𝑏12𝑦𝑡 + 𝑦21𝑦𝑡−1 + 𝑦22𝑧𝑡−1 ∈ 𝑧𝑡 (3) vecm is a subset of the var. because of the existence of a non-stationary yet co-integrated data type, this extra constraint is required. when two or more variables in an equation are not stable at the data level, co-integration may occur in the equation (verbeek, 2000). if there is a co-integration equation in the model following the co-integration test, it is advised that the cointegration equation be entered into the model. most time-series data have i (1) or are stationary in the first difference. as a result, the vecm model was utilized in this study to predict the loss of long-term data if it turns out that the data used i (1). the co-integration restriction information was then used by vecm in its requirements. thus, the var design for non-stationary series with a co-integration relationship is frequently referred to as vecm. the vecm specification prevents endogenous variables' long-term relationships from converging into co-integration relationships while allowing for short-term dynamics. because the divergence from the long-run equilibrium is progressively rectified by a partial sequence of short-run adjustments, the term co-integration is also known as the error term. the following equation from verbeek (2000) shows the vecm equation: ttkttttt zyyyxy  +++++= −−−− 121 .... (4) where: γ = short-term coefficient of relationship β = coefficient of a long-term relationship yt = endogenous variables used in the model 3.2. data weekly observations of esg index share prices combined with the djim index, fdtr index, jci index, exchange rate, and bi rate from bloomberg terminal were used from the first week of june 2009 to the fourth week of june 2020. the sri-kehati index, indonesia's sole esg index with jci as the equity benchmark, and the bi rate were all used as the interest rate benchmark, according to maysam, et al. (2004) and muzindutsi and niyimbanira (2012), and barakat et al. (2016). for market turbulence, external variables, such as gunawan, firdaus, siregar, & siregar │volatility and stability of esg equity in indonesia toward internal and external shocks international journal of islamic economics and finance (ijief), 5(2), 335-350 │ 343 foreign exchange, dow jones esg index, and the fed rate, are all likely to have varying influences, as mentioned by yartey (2008) and gupta and modise (2013). 3.3. model development this section explains the established models, assumptions, and modifications. for the chosen approach, the researchers follow hasan and javed (2009), who used var. however, because the data were stable in i(1) and contained cointegration, the researchers employed vecm instead by using weekly data with macroeconomic factors, including the exchange rate and the foreign portfolio investment. the proposed modified model also follows beenstock and chan (1988), using both interest rates and foreign equity markets. for additional dow jones index and the exchange rate, the researchers follow kumar and sahu (2017). then, the general-purpose econometric model was upgraded by adding the fed rate following yartey (2008) and gupta & modise (2013) using weekly instead of monthly data: esg = f (djim, fdtr, jci, xr, bi − rate) (5) where: esg is the real value of the esg index; djim is dow jones index; fdtr is the federal reserve rate (fed rate); jci is the jakarta composite index; xr is the exchange rate; bi rate is the bi rate. the researchers elaborated on the logarithmic model: 𝐸𝑆𝐺𝑡 = 𝐷𝐽𝐼𝑀𝑡 + 𝐹𝐷𝑇𝑅𝑡 + 𝐽𝐶𝐼𝑡 , +𝐿𝑋𝑅𝑡 + 𝐵𝐼 − 𝑟𝑎𝑡𝑒𝑡 + 𝑈𝑡 (6) where: esg is the real value of the esg index; djim is the dow jones index; fdtr is the fed rate; jci is the jakarta composite index; lxr is the log of usd idr currency; bi-rate is the bi-rate. chan (2010) stated that the var is a form of a starting point for other analyses, such as co-integration analysis, stability test, impulse response, and variance decomposition. then, to determine the optimal lag, the following procedure began with stationary, unit root, and co-integration tests. in addition, the impulse response function and prediction error variance decomposition were used to better comprehend the long-run connection with the vector-autoregressive model. changes in the variables were represented by shocks to error terms in the structural var form, depending on the impulse response function. the researchers also generated esg index forecast error variance decompositions to see which proxy measures, such as the djim index, fdtr index, jci index, exchange rate, and bi rate, were most significant to esg. besides, the study applied the augmented dickey-fuller (henceforth adf) test developed by gunawan, firdaus, siregar, & siregar │volatility and stability of esg equity in indonesia toward internal and external shocks international journal of islamic economics and finance (ijief), 5(2), 335-350 │ 344 dickey and fuller (1981) to examine the unit root in each series, with the following hypothesis: 𝐻0: 𝜃 = 0, i.e., the time series is non-stationary and needs to be differenced (has a unit root). 𝐻𝑎: 𝜃 < 0, i.e., the time series is stationary (has no unit root). if the estimated value is more than the t-statistic value (or the p-value is less than 5%), the null hypothesis (= 0) is rejected, and the time series is considered stationary. the order of the stationary series is denoted as i(0) if the null hypothesis is rejected at level (without differencing), but the order is marked as i(1) if the null hypothesis is rejected at the first difference i(1). iv. results and analysis 4.1. preliminary tests 4.1.1. stationarity test the first stage in var vecm modeling is to evaluate the stationarity of each variable included in the model. the results of each variable's stationarity test for the model of the effect of the djim index, fdtr, jci, xr, and bi rate on the esg index are presented below. table 1. unit root test variables level first difference t-statistic prob.* conclusion t-statistic prob.* conclusion esg -1.84772 0.3573 non-stationary -26.1223 0.0000 stationary djim -0.758 0.8294 non-stationary -24.7052 0.0000 stationary fdtr -1.24316 0.6571 non-stationary -13.0882 0.0000 stationary jci -2.3561 0.1549 non-stationary -25.7243 0.0000 stationary xr -0.41396 0.9041 non-stationary -21.5096 0.0000 stationary bi-rate -2.04725 0.2666 non-stationary -10.0139 0.0000 stationary table 1 shows the stationarity test findings, revealing that all variables were not stationary at the level. it is supported by the augmented dickey-fuller (adf) test findings, which were completely negligible in ordinary real-world scenarios (5 percent). in other words, the null hypothesis (that there is a unit root or that the data is non-stationary) was accepted. furthermore, using the adf test to re-test the stationarity of each variable in the first differentiation condition (first difference), it was discovered that each variable coming from the first distinction was stationary. gunawan, firdaus, siregar, & siregar │volatility and stability of esg equity in indonesia toward internal and external shocks international journal of islamic economics and finance (ijief), 5(2), 335-350 │ 345 4.1.2. johansen-julius’s (1990) co-integration test the johansen test of co-integration established by johansen and juselius (1990) may be used to determine the number of the cointegrating vector if the time series are non-stationary at the level and the variables are integrated in the same order (s). then, the maximum eigenvalue test's null hypothesis compares the number of r cointegrating vectors against the alternative of r+1 co-integrating vectors. if the variables are found to be co-integrated after performing the johansen-juselius test, it may be argued that the variables have a longrun equilibrium connection. the vecm technique may also be used for these objectives. table 2. co-integrating test no. of ce (s) eigenvalue statistic critical value prob.** none* 0.082316 117.0187 103.8473 0.0051 at most 1 0.040439 67.71061 76.97277 0.2061 at most 2 0.034333 44.01605 54.07904 0.2872 at most 3 0.021765 23.96289 35.19275 0.4651 at most 4 0.013101 11.33174 20.26184 0.5105 at most 5 0.006533 3.762331 9.164546 0.4487 the johnsen (1988) and juselius (1990) method is generally used to test the co-integration relationship between variables in the var model. johansen's co-integration test on esg index, djim index, fdtr, jci, xr, and bi-rate showed in table 2 that with probability (0.0051), test results were to reject the null hypothesis under the 5% level, meaning that there was at least one co-integration equation. 4.1.3. the optimum lag a crucial step for structural var models will determine the optimal amount of lag to use in the model. examining the optimal lag length can have the benefit of a variety of valuable information, specifically by using akaike information criterion (aic), schwarz criterion (sc), and hannan-quinn criterion (hq). to be able to determine this lag, the previous step was to evaluate the value of the residual covariance ( ̂ ), which can be calculated as follows:  = det       −  t tt ee pt 'ˆˆ 1 (7) gunawan, firdaus, siregar, & siregar │volatility and stability of esg equity in indonesia toward internal and external shocks international journal of islamic economics and finance (ijief), 5(2), 335-350 │ 346 where p is the parameter number of each equation in var. furthermore, the log-likelihood value assuming a normal (gaussian) distribution can be calculated: l =  ++ ˆlog)2log1( 2 k t (8) where p is the parameter number of each equation in var. furthermore, the log-likelihood value assuming a normal (gaussian) distribution can be calculated as follows: a var test was conducted to determine the optimal amount of lag used in the variables to be analyzed. this study's optimal amount of lag was based on the smallest or minimum akaike information criteria (aic) value. the determination of the optimal lag of the exchange rate transmission model affected by the shock through the indirect exchange rate transmission line can be seen in the following table. table 3. optimum lag lag logl lr fpe aic sc hq 0 -864.266 na 8.58e-07 3.058931 3.104737 3.076805 1 5875.645 13313.99 5.01e-17 -20.5049 -20.18427* -20.37979* 2 5937.624 121.1266 4.57e-17 -20.5962 -20.0008 -20.3639 3 5985.304 92.17527 4.39e-17 -20.6373 -19.767 -20.2977 4 6030.919 87.22152 4.25e-17* -20.67107* -19.5259 -20.2242 5 6064.133 62.80879* 4.29e-17 -20.6613 -19.2413 -20.1072 6 6076.542 23.20434 4.66e-17 -20.5784 -18.8836 -19.917 7 6093.935 32.15773 4.98e-17 -20.513 -18.5433 -19.7444 8 6118.309 44.54907 5.19e-17 -20.4721 -18.2276 -19.5963 * indicates lag order selected by the criterion. lr: sequential modified lr test statistic (each test at 5% level) fpe: final prediction error aic: akaike information criterion sc: schwarz information criterion hq: hannan-quinn information criterion aic sc hq ( ) ( )2 / 2 /l t k t− + ( )2 / log( ) /l t k t t− + ( )2 / 2 log(log( )) /l t k t t− + gunawan, firdaus, siregar, & siregar │volatility and stability of esg equity in indonesia toward internal and external shocks international journal of islamic economics and finance (ijief), 5(2), 335-350 │ 347 if the aic size becomes the benchmark for determining the optimum lag, the vecm model will be optimum at lag 4. if the sc size is the benchmark for determining the optimum lag, the vecm model will be optimum at lag 1 (table 3). to know the best model, the test was done with the trial system from lag 1 to lag 8. it indicates that the current events were affected by the events of the previous 1 to 8 weeks. 4.1.4. the var stability test the var equation system is first checked for stability using the var stability condition test. the var model is considered stable if all the polynomial function's roots are in the unit circle or if the absolute value is 1, and the resulting irf and fevd are considered valid. table 4. var stability test root modulus 0.999542 0.007488i 0.99957 0.999542 + 0.007488i 0.99957 0.986882 0.008737i 0.98692 0.986882 + 0.008737i 0.98692 0.972927 0.97292 0.943555 0.94355 -0.17662 0.17662 -0.081177 0.147207i 0.16810 -0.081177 + 0.147207i 0.16810 0.031351 0.054339i 0.06273 0.031351 + 0.054339i 0.06273 0.046327 0.04632 no root lies outside the unit circle. var satisfies the stability condition. based on table 4, the var stability test results of the model showed a modulus value below 1, meaning that the vecm model was more stable than could be considered a robustness test. it can be proven that the model had a modulus of all roots of a characteristic polynomial in the range of 0.04632-0.99957. 4.1.5. robustness and correlation tests before, ebiwonjumi et al. (2022) examined the presence of multicollinearity using the variance inflation factor (vif) for the explanatory components in nigeria's economic determinant, whereas avdiu and stephan (2022) used vif to predict us inflation. because all models employed the same independent variables (see table 5), this study’s additional robustness test based on vif findings revealed that all independent variables had a vif value less than 10, gunawan, firdaus, siregar, & siregar │volatility and stability of esg equity in indonesia toward internal and external shocks international journal of islamic economics and finance (ijief), 5(2), 335-350 │ 348 indicating that they were free of multicollinearity. the fact that all regressions had minimal vif statistics also indicates that the predictors were not correlated and were jointly significant to explain the response variable. table 5. robustness test with variance inflation factor (vif) independent vif results bi-rate 3.17 xr 3.48 fdtr 4.43 djim 3.46 jci 6.48 each variable was ranked according to the correlation test findings, with jci having the highest correlation to esg, followed by fdtr, djim, xr, and bi rate. correlation rank order test is shown in table 6. table 6. correlation rank order test esg jci fdtr djim lnkurs birate esg 1 0.876 0.751 0.745 0.743 -0.606 jci 0.876 1 0.738 0.888 0.793 -0.759 fdtr 0.751 0.738 1 0.767 0.626 -0.338 djim 0.745 0.888 0.767 1 0.861 -0.629 xr 0.743 0.793 0.626 0.861 1 -0.69382 birate -0.606 -0.759 -0.338 -0.629 -0.694 1 4.2. results 4.2.1. vecm estimation esg investors are primarily concerned with long-term gains (herringer et al., 2009). a long-run equilibrium explains why the esg index with various economic climate factors co-integrates. on the other side, economic conditions, such as inflation, money supply, or gdp, are not useful in projecting changes in the esg index in the short term because of the time lag period. in this case, gdp is typically provided quarterly, whereas share prices are available within seconds during trade days. then, the vecm was built using r studio, an open-source econometric program. the first equation is explained as the co-integration equation of the ecm, and the equation's results are shown in table 7. the results uncovered that all variables were significant in the long run, and the variables had some effects as well. then, the following co-integration equation is set from the vecm estimation analysis: gunawan, firdaus, siregar, & siregar │volatility and stability of esg equity in indonesia toward internal and external shocks international journal of islamic economics and finance (ijief), 5(2), 335-350 │ 349 esg index = 99.91006 -0.20964 djimt-1 + 0.06392 jcit-1 + 0.05095 fdtrt-1 + 0.06122 bi ratet-1 + 0.17438 lnkurs t-1 (9) the long-term equation results explained that the djim negatively and significantly affected the esg index. in this regard, if the offshore market continues in a bullish trend, capital flight will have a negative impact on the indonesian market, particularly the esg index. it is in line with bhat (2018) and adrangi et al. (2019) but is contrary to wongbangpo and sharma (2002), who found a negative link between asean stocks and inflation. meanwhile, bekhet and mugableh (2012) focused on the malaysia stock exchange. in the 50-bps (shock) ffr impulse simulation, according to mccarthy and zakrajsek (2003), the effect varied to the market. table 7. vecm model (long run and short run) esg (skehati) long run model variable coeff |t-stat| djim(-1) -0.2096 [ 4.33782] ** jci(-1) 0.0639 [-2.06689] ** fdtr(-1) 0.051 [-3.90154] ** birate(-1) 0.0612 [-2.47588] ** lnkurs(-1) 0.1744 [-2.38963] ** c 99.91 short run model cointeq1 -0.0181 [-2.06597] ** d(s_skehat(-1)) 0.0002 [ 0.00451] d(s_skehat(-2)) 0.0208 [ 0.39900] d(s_djim(-1)) 1.7779 [ 3.67933] ** d(s_djim(-2)) -0.4939 [-1.00991] d(s_jci(-1)) -1.6355 [-3.55913] ** d(s_jci(-2)) -0.1677 [-0.36079] d(fdtr(-1)) 0.6175 [ 2.15035] ** d(fdtr(-2)) 0.6618 [ 2.34852] ** esg (skehati) d(birate(-1)) -0.1275 [-0.25947] d(birate(-2)) 0.2343 [ 0.47693] d(lnkurs(-1)) 0.5719 [ 0.29324] d(lnkurs(-2)) -1.0812 [-0.56362] c 0.0379 [ 0.38098] dummy 0.009 [ 3.09887] ** r-squared 0.06788 adj. r-squared 0.04282 sum sq. resids 74.51278 s.e. equation 0.36543 f-statistic 2.70889 log-likelihood -228.5147 akaike aic 0.85197 schwarz sc 0.9733 mean dependent 0.00457 s.d. dependent 0.37351 4.2.2. impulse response function the best way to characterize the dynamic structure in a model is to analyze the response of the model to shocks or innovation that occurs in the model. there are two ways to do this: irf (impulse response function) analysis or fevd (forecast error variance decomposition) analysis. irf can examine the relationship between variables by showing how endogenous variables react to a shock within the variable and other endogenous variables. irf is also used to determine the response of an endogenous variable to significant innovations from an endogenous variable that directly affects the variable gunawan, firdaus, siregar, & siregar │volatility and stability of esg equity in indonesia toward internal and external shocks international journal of islamic economics and finance (ijief), 5(2), 335-350 │ 338 itself and is passed on to all other endogenous variables through dynamic structures in the vecm model. in short, irf measures the effect of a shock at one time on shocks from endogenous variables at that time and in the future. then, impulse response function (irf) was carried out to assess the dynamic response of the esg index, djim index, fdtr index, jci index, xr, and bi-rate variables to a certain variable shock. meanwhile, irf aimed to isolate a shock to make it more specific, meaning a variable that could be affected by a particular shock. the following is the result of the impulse response of the esg index if other variables, such as djim, fdtr, jci, lnkurs, and bi rate, were imported. figure 1. esg response if jci, fdtr, djim, lnkurs, and bi rate are impulse figure 1 depicts that a shock of one standard deviation of the djim in the second week would increase the esg index by 0.05 percent, after which it continued to depreciate at the lowest level in a negative zone by -0.06 percent. the fdtr line in figure 1 also shows that a shock of one standard deviation of fdtr in the seventh week would increase the esg index by 0.08 and be stable in a positive trend for the next 100 weeks. in addition, the bi rate and exchange rate standard deviation would slightly increase (appreciation) the esg index, and both would continue to be stable after the seventh week in the positive range; the bi rate was a bit higher than the exchange rate percent for the next 100 weeks. meanwhile, jci responded in a negative zone along the 100 weeks but below djim response. besides, bi rate, exchange rate, and jci were considered neutral. thus, the researchers inferred that the speed of esg towards the new stable equilibrium was extremely excellent based on all results of the impulse of all endogenous factors on the esg response. periods (week) e s g r e sp o n se ( % ) gunawan, firdaus, siregar, & siregar │volatility and stability of esg equity in indonesia toward internal and external shocks international journal of islamic economics and finance (ijief), 5(2), 335-350 │ 339 figure 2 illustrates that a shock of one standard deviation of srikehati’s would increase up to 0.03 percent as the top to the bottom of 0.01 percent on the positive level. the shock on the djim in the fourth week would increase (appreciation) of the esg index by 0.005 percent and continued to decline until it reached the lowest point of appreciation in the fiftieth week of 0.01 percent, after which it continued to depreciate at the lowest level until 100week period. figure 2 also explains that a shock on fdtr, bi rate, and the exchange rate would not impact the jci (neutral) for 100 weeks. figure 2. jci response if srikehati, fdtr, djim, exchange rate, and bi rate are impulse. then, the jci response was positive at 0.03 percent on the first week, then turned negative, remained positive until the 28th day, and stable for the next 100-week period. jci response after djim shock was positive 0.005 percent to the third week until the 10th week slid down and stable in the negative zone until the end period. then, jci response after fdtr shock was positive 0.005 percent until the fourth week and stable in a positive trend. in addition, jci did not react when there was a shock from the exchange rate, even though it was initially in a positive position. meanwhile, the jci response was higher than the srikehati and djim. djim as the external shock consistently influenced srikehati and jci. based on figure 3, if the jci was startled, djim's response was positive by 0.018 percent until the fourth week period and then dipped to 0.015 percent until the tenth week and remained constant until the end. meanwhile, if skehati was startled, djim's reaction increased by 0.014 percent in the fourth week, continued to fall negatively until the 43rd week, and was stable to the end. on the other hand, djim's response was insignificant when fdtr, lnkurs, and birate were impulsive from the first to the fourth week at 0.005 percent and remained practically neutral until the end of the period. -0,02 -0,01 0 0,01 0,02 0,03 0,04 1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97jc i r e sp o n se ( % ) periods (week) srikehati fdtr djim lnkurs birate gunawan, firdaus, siregar, & siregar │volatility and stability of esg equity in indonesia toward internal and external shocks international journal of islamic economics and finance (ijief), 5(2), 335-350 │ 340 figure 3. djim response if srikehati, jci< fdtr, exchange rate, and bi rate are impulse figure 4. esg impulse response accumulated irf comparison of all variables' responses (skehati, jci, fdtr, djim, xr, birate) shown in figure 4, while other variables are stimulated or shocked indicates that skehati's response was largest when fdtr, jci, and djim were stimulated. skehati, in other words, was the most responsive and had the biggest reaction. the second variable with a substantial reaction was fdtr, and the response value seemed large when the impulses from the jic, djim, and skehati variables were considered. the fdtr reaction, on the other hand, was not as robust as the skehati response. when the impulses from the djim and skehati variables were combined, the jci response was observed. however, jci's response was not as strong as skehati's and fdtr's. -0,005 0 0,005 0,01 0,015 0,02 1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97 d ji m r e sp o n se ( % ) period (week) srikehati jci fdtr lnkurs birate gunawan, firdaus, siregar, & siregar │volatility and stability of esg equity in indonesia toward internal and external shocks international journal of islamic economics and finance (ijief), 5(2), 335-350 │ 341 4.2.3. the forecast error variance decomposition (fevd) fevd describes a dynamic structure in the var model to determine the strengths and weaknesses of each variable in affecting other variables in the long run. the fevd breaks down the range from forecasting errors to the components associated with each endogenous variable in the model. it can be ascertained that factors influence the fluctuation of certain variables. in this analysis, the variables were the esg index, djim index, fdtr index, jci index, lnkurs, and bi rate, as shown in figure 1, figure 2, and figure 3. figure 5 ilustrates that the most important factor influencing sri-kehati in variance decomposition was sri-kehati itself, followed by the fed rate. the djim itself, as well as the minor between sri-kehati and the exchange rate, had the most prominent impact on djim. meanwhile, the jci findings were mixed, with sri-kehati and djim having a significant effect. in addition, the fed's results differed from theirs and were heavily influenced by djim and srikehati. then, the bi rate had the most influence, with modest contributions from djim and sri-kehati. on the other hand, the exchange rate varied greatly between itself, jci, the fed rate, and djim. figure 5. esg skehati fevd based on figure 6, during the first week of shock, esg was affected by itself 100 percent. contributions from other variables began to play a role in the second week, where esg contributed 97.87 percent, djim by 0.458 percent, jci by 1.1803 percent, fdtr by 0.474, and bi rate by 0.002045 percent. at week 100, the esg shock was still dominated by itself with a smaller proportion of 88.48 percent, djim of 2.318 percent, jci of 0.2716 percent, fdtr of 8476, bi rate of 0.406595 percent, and exchange rate of 0.052007 gunawan, firdaus, siregar, & siregar │volatility and stability of esg equity in indonesia toward internal and external shocks international journal of islamic economics and finance (ijief), 5(2), 335-350 │ 342 percent. thus, the stability of fdtr and djim is required in the short and long term, which can affect esg. if the shock from the us, for instance, is followed by the phenomenon of fly-to-quality and forced selling actions due to risk mitigation from global investors, this may affect esg and other asset classes in indonesia or even wider markets. figure 6. variance decomposition of esgkehati the impulse result showed how a variable responded if another variable was shocked. the overall results demonstrated sri-kehati's response within 5-7 weeks and back to the stable. the impulse response by large was in the srikehati 's response when there was a shock from the fed rate, jci, and djim. the second largest was the fed rate response if there were innovations from djim and sri-kehati. another result of djim response if other variables were imported was not very significant, along with jci’s small response when srikehati and djim were shocked. 4.2. analysis this study adds to the body of knowledge about the impact of the global financial crisis on stock market volatility, including covid-19, stock market index volatility, federal reserve rates, and other monetary policies. it is one of the first studies to explore the connection of three stock indexes with the co-integrating equation using var vecm. in this case, the esg index is expected to do well if the fed rate and the djim remain stable. in the short run, market volatility influenced forecasts of esg price changes. it was verified by variance decomposition analysis, which indicated that shocks in the esg index were explained by the fed rate and the dow jones, both of which have consistently had the greatest impact on the esg index. in addition, there was a long-run link between the esg index and external variables, in line with maysam et al. (2004) and muzindutsi and niyimbanira, that the stock market sector responded differently to macroeconomic change factors (2012). there was also a positive relationship between the exchange rate and the equity market's performance. 75% 80% 85% 90% 95% 100% 1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97c o n tr ib u ti o n o f e s g ( % ) period (week) s_srikehati s_djim s_jci fdtr birate lnkurs gunawan, firdaus, siregar, & siregar │volatility and stability of esg equity in indonesia toward internal and external shocks international journal of islamic economics and finance (ijief), 5(2), 335-350 │ 343 johansen's co-integration test showed a significant long-run relationship between all market variables. in a co-integration approach, var followed by vecm tests were used to analyze the relationship between the esg with other endogenous variables: djim index, fed rate, jci index, exchange rate, and bi rate. the negative effect of interest on stock prices suggests that varying inflation rates generated more volatility, and thus the demand for minimum returns would also rise, lowering market valuations. wongbangpo and sharma (2002) have established a negative correlation between inflation and stock prices in five asian countries, namely indonesia, singapore, malaysia, thailand, and the philippines, while bekhet and mugableh (2012) proved the case on the malaysia stock exchange. in this respect, bank indonesia always considers the ffr in making decisions, with the term of sufficient space to consider changes in the bi rate corresponding to the ffr cut or hike. nowadays, not only central banks or regulators, entrepreneurs, industries, and academia will respond positively to the decline in interest rates, so it is hoped that strong support for bi and the government will strengthen to increase public confidence significantly. mccarthy and zakrajsek (2003) estimated that the 50-bps (shock) ffr impulse simulation responded to the company's sales of manufactured products with optimum longevity. in general, existing research indicates that effective corporate governance and sound environmental standards may generate value for shareholders (renneboog et al., 2008). another interesting finding is that islamic equity has proven to be the most stable in all periods. it is in line with husin et al. (2013), udoka and anyingang (2013), and jefferis and okeahalam (2000) on the impact on islamic equity markets utilizing both local and foreign market factors, which could infer the external influences. before, khatatbeh et al., chaudhary et al. (2020), alam and chavali (2020), maher et al. (2020), and alali (2020) examined the global pandemic and its impact on stock markets. furthermore, islamic equity is generally considered in line with esg since they both apply ethical and value screening requirements. the main distinction is that most of esg indonesia's members work in traditional banking and finance, which islam bans and is likely the source of instability. the further result from the non-parametric test discovered by gunawan et al. (2021) is that indonesia’s esg index is riskier and offers higher profit than islamic and liquid equity. v. conclusion and recommendation 5.1. conclusion according to the co-integrating equation, fdtr and djim stability is necessary, which might affect esg in the short term. for the estimate of the dynamic response, only djim and jci exhibited negative correlations with the esg gunawan, firdaus, siregar, & siregar │volatility and stability of esg equity in indonesia toward internal and external shocks international journal of islamic economics and finance (ijief), 5(2), 335-350 │ 344 index simultaneous impulse response function. in the long term, the findings of the variance decomposition for esg demonstrated that the fed rate had the largest impact on esg, followed by the dow jones index. both impacts indicated capital flight, most likely prompted by rising interest rates or a possible bullish trend in offshore equity. in the near run, every market volatility considerably impacted forecasting esg price fluctuations. it was confirmed by variance decomposition analysis, which revealed that shocks in the esg index were explained by shocks in the fed rate and dow jones, which have had the biggest impact on the esg index in the past. as a result, this article stressed that the esg index and a mix of the chosen market’s impacts had a long-run correlation. however, the limitation of the study is due to the small sample size, few market variables, and only focus on indonesia. therefore, the future extension may involve a greater scope of higher-scale data, with sophisticated methods applying artificial intelligence to a huge, big data panel. 5.2. recommendation the sri-kehati issuers' strict selection is projected to become a standard for the foundation of capital markets investment instruments, such as traditional mutual fund investments, exchange trade funds (etfs), and other forms of novel structured esg-based products. the sri-kehati index's working pattern is based on global investing trends because today's investors are examining not only financial factors but also social, environmental, and sustainable development principles. these crucial factors have a significant impact on investment decisions. thus, estimating the market’s impact on indonesia’s esg index will not only benefit investors' portfolio and risk management strategy but also provides important implications for regulators, especially indonesia’s financial service authority (ojk) and the central bank of indonesia. in addition, the significant negative impact of esg performance from the fed rate and dow jones esg during the short and long run will have to be managed considerably. firstly, ojk and bank indonesia must enforce market deepening campaigns to strengthen indonesia’s financial inclusion and intensify public literacy over esg investment. it aims to reinforce the domestic financial capacity to enter the market, replacing the capital flight. secondly, bank indonesia must also be ready with the policy-mix strategy to tackle some external factors on the monetary side supported by the ministry of finance on the fiscal side. gunawan, firdaus, siregar, & siregar │volatility and stability of esg equity in indonesia toward internal and external shocks international journal of islamic economics and finance (ijief), 5(2), 335-350 │ 345 references adrangi, b., chatrath, a., macri, j., & raffiee, k. 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(2017). the performance of socially responsible investments in indonesia: a study of the sri-kehati index (ski). gadjah mada international journal of business 19(1), 59-76. gunawan, firdaus, siregar, & siregar │volatility and stability of esg equity in indonesia toward internal and external shocks international journal of islamic economics and finance (ijief), 5(2), 335-350 │ 350 this page is intentionally left blank international journal of islamic economics and finance (ijief) vol. 5(2), july 2022, pages 201-224 banks’ reaction to the covid-19 pandemic and currency crises: empirical evidence from iran reza gholami1*, aisyah abdul-rahman2 *) corresponding email: rgholami_458@yahoo.com article history received: may 29th, 2022 revised: july 22nd, 2022 accepted: july 25th, 2022 abstract since 2019, the global economy has been suffering from a crisis caused by a novel virus called covid-19, which creates an uncertain condition for investors by simultaneously affecting both the supply and demand sides of the economy. investors are expected to be more cautious in investing under uncertain conditions created by covid-19, but this issue has been neglected in the literature. therefore, the researchers addressed it by examining the banks’ behavior in constructing their portfolios based on empirical evidence from the islamic republic of iran (iran). the researchers focused on the banking system as it is a major investor in the economy that is more sensitive to surprises due to its business model structure. by categorizing the iranian banks’ assets into fixed, variable, and no-interest rates, the researchers examined the weight change of the three contracts in the banks’ portfolios during the covid-19 and a regular currency crisis. the researchers then applied ardl regression analysis for the iranian central bank's monthly data (january 2010 to june 2021). the results revealed that the weight of the fixed rate contracts in the banks’ portfolio, on average, was higher during the crisis than in normal periods and was even higher facing covid-19 or uncertainty conditions. thus, this study adds to the literature on the covid-19 crisis, and its findings help policymakers to provide a prompt reply to such a crisis through the banking system. keywords: bank’s portfolio, covid-19, currency crisis, fixed rate contract, iranian banks jel classification: g11, g21, g29, n30, d81 type of paper: research paper @ ijief 2022 published by universitas muhammadiyah yogyakarta, indonesia doi: https://doi.org/10.18196/ijief.v5i2.14825 web: https://journal.umy.ac.id/index.php/ijief/article/view/14825 citation: gholami, r., & abdul-rahman, a. (2022). bank reactions to covid-19 pandemic and currency crisis: empirical evidence from iran. international journal of islamic economics and finance (ijief), 5(2), 201-224. doi: https://doi.org/10.18196/ijief.v5i2.14825. 1 expediency discernment council, islamic republic of iran 2 universiti kebangsaan malaysia, malaysia mailto:rgholami_458@yahoo.com https://doi.org/10.18196/ijief.v5i1. https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v5i2.14825&domain=pdf gholami & abdul-rahman │ bank reactions to covid-19 pandemic and currency crisis: empirical evidence from iran international journal of islamic economics and finance (ijief), 5(2), 201-224 │ 202 i. introduction since 2019, the world has been suffering from a novel virus called covid-19. this fatal virus with a very high mortality rate (baud et al., 2020) is, in fact, a strain of coronavirus with no specific treatment and high transmission rates. for this reason, governments worldwide unanimously persist in social distancing policy and closing borders to prevent its spread. the implemented policies have then negatively affected both supply and demand sides of the economy. in this case, lockdowns and business closures affect the supply side, while loss of income due to voluntary or optional layoffs from work and a steep drop in investments (guterres, 2020) negatively influence the demand side. in addition, because of investment reduction due to a surge in uncertainties in the economies, the implemented policies have hurt not only the current economic growth but also the future economic growth. it is estimated that the covid-19 pandemic has imposed an enormous cost on the global economy so that it is expected to fall 6.4% to 9.7% of world gdp (park et al., 2020) and a 13% to 32% drop in the global trade (weiss et al., 2020). needless to say, it is not the first time the world has faced an economic crisis. the global economy, in fact, has experienced a variety of economic crises over the past centuries. currency crisis (rapid rise in the value of foreign currencies), credit crunch (the lack of money for financial institutions), banking crisis (the widespread bank run), financial crisis, debt or fiscal crisis, and housing crashes are the popular economic crises in the global economy. all these crises have occurred repeatedly in the economy and have imposed great costs. for instance, the average output costs of currency crises were about 4% of gdp and around 6-7% for banking crises (nakatani, 2019). it means recurrent and covid-19 crises are the same in imposing negative impacts on economies. however, it is believed that the economic crisis raised by the covid-19 pandemic is both deeper and wider than the conventional one in the recent century (maliszewska et al., 2020; ludvigson et al., 2020). despite the similarities in the economic effects and consequences of the regular and covid-19 crises, there is a fundamental difference between them. the most important difference between covid-19 and the regular economic crisis is that the latter is predictable3, while the former has been unprecedented. by the logic that the economic agents are expected to behave differently in the face of predicted and unprecedented crises, the result of their decisions will not necessarily be the same (sharma et al., 2020). alternatively, agents are already preparing and planning to reduce known risks in facing a predictable crisis. however, when they face an unpredictable crisis, they enter an uncertain condition with unknown risks. therefore, the rational agents facing an unprecedented crisis must plan and make decisions 3 there are a vast literature in generating early warning indexes for a currency crisis (krznar, 2004). gholami & abdul-rahman │ bank reactions to covid-19 pandemic and currency crisis: empirical evidence from iran international journal of islamic economics and finance (ijief), 5(2), 201-224 │ 203 when the crisis is underway. it means their behavior would differ in dealing with each of these crises. given the key difference between a predictable and an unprecedented crisis, the question is, will the outcome of economic agents’ decisions be the same facing these two cases? the researchers addressed this question by focusing on the banking system's reactions to covid-19 and a regular economic crisis. the researchers focused on the banks for some reasons; first, banking systems are the spring of liquidity insurance and play a strategic role in economies (barattieri et al., 2020). second, as the spread of covid-19 has triggered withdrawal rates due to depositors’ precautionary reactions, the banking sector has been the first group to feel the consequences of the unexpected crisis stemming from covid-19 (prior, 2020; barua and barua, 2021; greenwald et al., 2021). moreover, the banks felt the crisis earlier because many debtors did not pay their obligations to the banks due to the loss of their jobs. these factors increased the banking system's stress even more than they experienced during the global financial crisis (gfc) (aldasoro et al., 2020; demirgüç-kunt et al., 2020). third, despite the problems on their debt side, banks still had control over their assets and could control the risk and uncertainties by managing their asset. in addressing the issue, the researchers concentrated on two specific crises, i.e., currency and the covid-19 crises. the researchers emphasized currency crisis instead of another form of regular economic crisis because it is the most frequent crisis (laeven and valencia, 2020). a currency crisis is, in fact, the result of a lack of enough money, liquidity, or foreign currency in the domestic market. the shortage of foreign currency in the domestic economy causes exchange rate depreciation. this crisis affects bank behavior, which finally leads to the currency crisis. additionally, the researchers focused on the islamic republic of iran’s banking system to provide an empirical study for two reasons. (1) the financial system structure in iran is bank-based (ebrahimi, 2014), and the banking system plays a remarkable role in financing businesses or essential iranian needs. (2) iran has experienced both currency and covid19 crises in less than a decade, and it can be claimed that the iranian banking system structure has not experienced significant changes during this period. then, iran could be the right laboratory environment for discussing the effects of those two naturally different crises. considering the above discussions, this empirical study's main objective was to evaluate and compare the banks' reactions to first-time and regular crises. more specifically, the researchers aimed to see how iranian banks reacted to an unprecedented shock in changing portfolios and whether the banks’ reaction has been different in facing an unprecedented and an ordinary crisis. to do this, the researchers applied regression analysis to data collected from different iranian databases. worth noting that the banking system in iran is a totally sharia-compliant banking system that operates based on islamic contracts. in fact, the iranian banking system became a full fledge islamic gholami & abdul-rahman │ bank reactions to covid-19 pandemic and currency crisis: empirical evidence from iran international journal of islamic economics and finance (ijief), 5(2), 201-224 │ 204 banking system after the approval of iranian law for usury free banking (ilufb) in 1983 (a few years after the iranian great revolution in 1979). other banks worldwide are almost entirely interest-based or dual banking systems in some countries (in which both islamic and conventional banks work side by side). in addition, the iranian banking system allocates its resources through 14 different islamic permissible contracts (uquds), which can be classified into three primary categories: fixed rate of return (frr) or low-risk contracts, rate of return (vrr) or risky contracts, and qard al-hasan (no-interest rate) contracts. in this study, the researchers collected monthly data for these uquds from 31 private and state-owned banks in iran from 2010 to 2021, covering both crises. then, the researchers defined two specific periods for currency crises based on the deviation of the market exchange rate from its path. moreover, this study is novel in the topic, data, and the iranian case. the existing literature mostly focused on the economic impact of covid-19, such as its impact on economic growth, supply shock, imposed costs, or deposit withdrawal rate across countries or sectors (ludvigson et al., 2020, baqaee and farhi, 2020, mckibbin and fernando, 2020). only a few studies highlighted the impact of covid-19 on investment decisions. singh (2020), focusing on the outperformance of the esg (environmental, social, and governance) portfolio during covid-19, stressed that this result could have come from the investors’ tendency for safer investment strategies and corporate fundamentals. in focusing on the corporate-bond funds' major outflows during covid-19, falato et al. (2020) found outflows were more severe during covid-19 than during gfc. however, this decision was more severe during covid-19. besides, in comparing investing in real estate investment trust and gold in turkey during various crises, sumer and ozorhon (2020) revealed that the turkish real estate investment trust (riskier) index performed better than gold prices in the 2018 turkish currency crisis and 2020 covid-19 crisis, but not in the 2008 gfc period. against this background, the recent research about covid-19 have neglected crisis impact on banks portfolios. the study result indicates that predicted and unpredicted crises positively impact fixed-rate contracts. however, in facing a first-time crisis (covid), investors are three times more interested in a less risky asset than in a recurrent crisis (currency crisis). then, the remainder of this paper is as follows. section 2 presents a brief review of the literature from two aspects: the first is reviewing the existing literature about covid-19 and the currency crisis to note their differences, and the second discusses iran’s banking system structures to see how they supplied their funds or finance the businesses. the applied methodology and data collection are in section 3. then, section 4 describes the results, and the final section provides concluding remarks. gholami & abdul-rahman │ bank reactions to covid-19 pandemic and currency crisis: empirical evidence from iran international journal of islamic economics and finance (ijief), 5(2), 201-224 │ 205 ii. literature review the literature section contains a brief review of two topics. at first, the researchers discussed the main differences between the currency and the covid-19 crises and then briefly introduced the iranian banking system and its applied contracts in practice. 2.1. currency crisis vs. covid-19 crisis the world economy has seen many crises over recent centuries. in recent decades, the global economy has experienced big crises, such as the currency crisis of latin america (the 1980s), european (in 1992), asian financial twin crises (both banking and currency crisis), gfc (in 2007-2008), and recently a deep economic crisis stemmed from covid-19 epidemic (2019). however, the currency crisis is the most frequent in the global economy. a regular currency crisis is often associated with banking crises, known as twin crises (glick and hutchison, 2011; eijffinger and karataş, 2020). laeven and valencia (2020) reported 151 systemic banking crisis episodes around the globe during 19702017. a currency or balance-of-payments crisis results from sharp currency depreciation, a large decline in international reserves, or a combination of the two, as stated by kaminsky (1998). it may happen by a sudden and dramatic reversal in private capital flows. hence, the conventional models of currency crises are often based on the capital outflows resulting from the difference between domestic and foreign interest rates under fixed exchange rate regimes (krugman, 1979; flood and garber, 1984). the capital outflow may be ignited by war or sanctions when the country suffers from a long-term trade deficit. capital outflow will also stimulate the shortage of foreign currency in the domestic market, specifically when the central banks’ reserve of foreign currency is not enough to manage the domestic market. this condition incentivizes speculators to attack on foreign exchange markets. currency depreciations then threatens the viability of domestic banks when their liabilities are in foreign currencies, increasing the probability of failing to meet their obligations at a promised exchange rate. unlike currency, the covid-19 crisis differs to some extent (krugman, 2020). covid-19 crisis is alarming because it rapidly spreads inside the population, with a mortality rate as high as 5.7% of infected people (baud et al., 2020), and there is still unknown treatment for it. in this regard, governments worldwide unanimously persist in policies to prevent its transmission. social distancing, business closure, compulsory and voluntary leaves from work (with or without pay) and staying at home are common government policies to break the chain. however, limiting businesses and economic activities led to a sharp rise in the unemployment rate and a reduction in economic output through a drop in consumption and investment activities. gholami & abdul-rahman │ bank reactions to covid-19 pandemic and currency crisis: empirical evidence from iran international journal of islamic economics and finance (ijief), 5(2), 201-224 │ 206 on the other hand, compulsory and voluntary leaves from work and business closure not only reduced the governments’ tax revenues but also increased their direct payment to aid those suffering a sudden loss of income because of the economic lockdown. then, the governments faced an intensification of the government budget deficits that caused a sharp rise in the debts. government debt will stimulate the interest rates in the future, a further reduction in future investment, and a longing for the recession. furthermore, because of lockdowns, business closure, and social distancing policy, the investment during covid-19 was lower than before; meanwhile, the saving was higher due to a lower level of private consumption. some studies have believed that the impact of covid-19 on the global economy was deeper, and its recovery period was longer than a currency crisis (kituyi, 2020; maliszewska et al., 2020). according to them, covid-19 severely hurt both supply and demand sides of the economy (specifically for durable goods). therefore, during the covid-19 crisis, consumption was lower, and saving was higher. meanwhile, in a currency crisis, money is hot, and demand for durable goods and assets is higher. in addition, the main difference between the covid-19 pandemic and a regular currency crisis is that the former is an unprecedented crisis, while the latter is a regular one. their difference in nature, in fact, causes agents’ different reactions in facing each of them. while agents’ problem in facing a known repeated crisis is managing the mostly known risks, their reaction in facing an unexpected crisis is more complex due to uncertainty. in fact, an uncertainty that is a key feature of a first-time event is not simple to measure its level as it varies by its base and the degree to which it experiences (alpers, 2019). oppositely, it is mostly possible to measure or guess risks with different degrees of probability in case of a repeated crisis. it means that a reduction in uncertainty originating from the spread of the virus pandemic involves plummeting the likelihood of unwelcome consequences and their effect on the businesses at different steps of the value chain (figueira-de-lemos and hadjikhani, 2014; sniazhko, 2019). nonetheless, a currency crisis creates risks that well-known policies can manage, such as expanding international reserves, raising interest rates at the policymakers’ level, or revising portfolios at the firms’ level. further, the above discussion reveals that agents’ decision-making process is expected to be different in facing a first-time crisis such as covid-19 and a regular crisis such as a currency crisis (magnani and zucchella, 2019). thus, the researchers attempted to address this issue in this study. to do this, the researchers focused on banks to address their reactions to each mentioned crisis on their asset combination. here, considering the banking system as a representative of the financial system would not be an unreasonable assumption for several reasons. first, it is well known that bank is the most effective player in the economies, so their development would be an important factor for economic prosperity. the bank business model usually works by accepting deposits from economic agents with excess savings to invest them by making loans or directly investing in securities or government gholami & abdul-rahman │ bank reactions to covid-19 pandemic and currency crisis: empirical evidence from iran international journal of islamic economics and finance (ijief), 5(2), 201-224 │ 207 bonds. due to this role, banks play a leading role in economies and operate as an important player in allocating funds, shaping the economies, and even recovering the economies in all countries over the world (beck, 2020). the second reason is the structure of the bank’s business model. the structure of the bank's business model is such that it has made it sensitive to crisis (fu et al., 2014; cecchetti and schoenholtz, 2020). it means that banks rapidly react to a crisis by changing their portfolio. for this reason, it is highly expected that the banks play a strategic role in controlling the shock by providing the needed funds (brei et al., 2020; acharya and steffen, 2020). in the case of brazil, for instance, by predicting the central bank response policy to the currency crisis (rising interest rate), banks rearranged their portfolio from loans (riskier assets) to government bonds (less risky assets) to avoid the probable bankruptcy (gruben and welch, 2001). therefore, by focusing on banks, the researchers addressed how they managed the uncertainty faced by covid-19 and how their solution differed from the currency crisis. the discussion, as mentioned earlier, also indicates that banks have both incentive and ability to make faster and deeper changes in their balance sheet in response to different crises. the central bank’s policy response to any crisis will strengthen the banks’ motivation, for example, considering the case when the central bank implemented an easy money policy to confront the covid19 turmoil. in such a case, the banking system will encounter an excess money supply during the pandemic. hence, its logical response would probably be to reduce the interest rate to lower the risk of defaults, control mismatch problems and reduce the likelihood of insolvency. it means the banks must be more precautions in extending the loan to investment opportunities in this environment. then, the loans are more probable to extend to lower-risk assets, such as frr loans, bonds, or commission-based incomes. as a result, the expected weight of frr assets will exceed the weight of vrr in facing a first-time crisis such as covid-19 compared to a regular one. then, reviewing the existing literature revealed that many studies have focused on the effects of this turmoil on the banks. some of them concentrated on depositors’ withdrawal rates that have greatly increased due to the pandemic and its effect on market funding (li et al., 2020; wu and olson, 2020; barua and barua, 2021; ichsan et al., 2021). they mostly explained how banks managed the huge liquidity demands in the early periods of the covid-19 crisis. they further discussed that bank liquidity and solvency problems were stronger before this crisis than before the gfc (2007), but both federal reserve and depositors’ liquidity supply were injected in at the right time. many other studies, such as elnahass et al. (2021), feyen et al. (2021), aldasoro et al. (2020), and demirgüç-kunt et al. (2020), emphasized comparing the impact of covid-19 on islamic and conventional banks and also on banks' performance (how a bank allocated its resources to reach the gholami & abdul-rahman │ bank reactions to covid-19 pandemic and currency crisis: empirical evidence from iran international journal of islamic economics and finance (ijief), 5(2), 201-224 │ 208 goals) in developed and developing economies or during this pandemic and gfc (2007) period. they mostly found that, despite some minor differences in the impact of covid-19 on various types of banks, this pandemic significantly enhanced all banks’ stress and severely hurt their profitability, stock market valuations, and financial stability. regarding to the bank balance sheet, acharya and steffen (2020) argued the potential stress that might be imposed on banks’ balance sheet through firms’ higher demand for money. focusing on the 100 largest banks and firms’ outstanding credit line and applying some indexes such as capital ratio, they concluded that the current amount of capitalization of the banking sector is enough to deal with liquidity stress. clearly, the existing literature has paid less attention to the banks’ reaction to the pandemic through their decision on the combination of their assets. therefore, the researchers addressed these issues in an empirical framework in this paper. the researchers will add to the existing growing body of literature on the covid-19 pandemic by discussing the banks' response to this pandemic by focusing on the banking asset combination of risky and risk-free assets. moreover, by emphasizing the iranian banking system (as a full fledge islamic banking system) in response to the covid-19 shock, the researchers contribute to the islamic banking literature by conducting an empirical study. finally, considering the covid-19 crisis as an unprecedented one that generates an uncertain condition for economic agents, the researchers add to the agents’ decisions making process in an uncertain condition and how it differs from a risky situation. 2.2. iran’s banking system iranian financial system is dominated by banks and financial and credit institutions; hence, banks and credit institutions have a crucial role in supplying funds and financing the real economy. according to ilufb, iran’s financial institutions must use islamic contracts for both the supply of funds (financing) and demanding deposits (borrowing) (iran, 1983). it means the financial institutions in iran must operate only based on permissible contracts introduced by ilufb, and conventional banking or financial services are illegal. according to ilufb, 12 contracts, including musharakah4, mudarabah5, legal partnership, forward transaction (salam or advance payment sale), salaf6, musaqat7, ijarah8, jualah9, instalment sales, debt purchase, direct investment, and qard al-hasan10, are permissible in iran’s banking system. 4 musharakah is a partnership structure in islamic finance in which partners share in the profits and losses of a business. 5 mudarabah is a special kind of musharakah where one partner provides total required money for a business. 6 salaf is similar to futures, with the difference being that the contract’s total price is paid in advance. 7 financer in this contract may provide an orchard to a farmer for a period for a share of the profit. 8 it means leasing or hiring ijarah in islamic banking. 9 one party in this contract purchases another party's services for a specified commission. 10 qard al-hasan is an interest-free loan or benevolent economic behavior. gholami & abdul-rahman │ bank reactions to covid-19 pandemic and currency crisis: empirical evidence from iran international journal of islamic economics and finance (ijief), 5(2), 201-224 │ 209 moreover, a look at the set of acceptable contracts reveals that they are three different types: (1) vrr or participation contracts, such as musharakah, mudarabah, musaqat and legal partnership, whose rate of return depends on market conditions, (2) frr contracts, such as installment sales, ijarah, jualah, and salam that their rate of returns are determined exogenously, and (3) nir or qard al-hasan, a zero-interest rate contract. according to the data published regularly by the central bank of iran (cbi), on average, about 5% of outstanding facilities extended by banks and credit institutions in the iranian banking system to the non-public sector (supply of funds) are nir and using qard al-hasan contract. in addition, the most important part of funds in the iranian banking system (about 65%) is frr financing/contracts. the higher share of frr may be due to asymmetric information problems in partnership contracts and banks' preferences for frr contracts. lastly, about 30% of the total supply funds of the iranian banking system are vrr assets, which are based on participation contracts. these shares are, on average, of the long run and may dramatically change in different years. furthermore, the iranian economy has experienced both currency and covid19 crises over recent decades. the currency crisis opened with a jump in the market exchange rate and ended with a sharp decline in this rate, while the covid-19 crisis started with a formal announcement by the iranian ministry of health and medical education (mohme) and still is in the run. on february 19th, 2020, mohme reported the first confirmed cases of covid-19 infection in iran. iran started the policies such as deploying all points of arrival, including maritime, land, and air, to control all arrival persons, providing the necessary protocol, preparing emergency hospitals and beds, and implementing a social distancing plan. these policies have been implemented in an environment where us sanctions are effective too. to fight the coronavirus over the period of the outbreak, besides allocating 20% of the state budget for the year 2020 (about $10 billion), the government decided to support the businesses by nointerest payment financing and deferred installments for three months, payment into a form of qard al-hasan to anybody who applies, and others. all the aforementioned policies affect the banks’ behavior on both asset and liability sides. however, to date, no study discussed the reaction of the banking system to covid-19, except samadi et al. (2021), who studied the comovement of the different asset prices, such as gold, oil, exchange rate, and the stock market, from september 2014 to june 2020 covering both sanction and the covid-19 period. they found that the oil price had a low comovement with the other markets. iii. methodology generally, a bank must determine its optimal portfolio (according to assets’ risk and return) in facing uncertainties that originate from different economic states. markowitz (1952) showed that diversification of assets (with different risks and returns) in constructing a portfolio improves the expected return of gholami & abdul-rahman │ bank reactions to covid-19 pandemic and currency crisis: empirical evidence from iran international journal of islamic economics and finance (ijief), 5(2), 201-224 │ 210 the portfolio with a certain level of risk or reduces the portfolio's risk for a certain level of return. it means a bank can construct a portfolio of frr and vrr contracts (diversify its portfolio by different contracts) to take a higher return for a given risk. when the funds are efficiently allocated to selected assets, there will be a positive relationship between the supply of funds and each contract rate of return. then, if the bank faces with different crisis (shock) that changes the economic risks, it must construct a portfolio of assets that minimizes risks for a given overall return. the bank can then manage risks by changing the weight of frr and vrr contracts in the constructed portfolio. in reality, there are many contracts (bank products) with different risks and returns. banks use a maximizing return function with a given risk constraint, considering wi as the weight of contract i={ffr, vrr, qr} in the portfolio (or the supply of fund under the 𝑖 contract), ri is the return of the 𝑖th contract, and δr 2 and e(r) represent the variance of the portfolio and its expected mean, respectively. the objective function is maximizing the portfolio's expected return e(r)= ∑ wiri, subject to a certain level of risks for the portfolio (σi 2). in other words, each product should be allocated so that for a given return, the risk must be minimized. solving the minimizing problem will give the weight of products in the following equation (1). wi=f(δi 2, ri, δij) (1) equation (1) shows that the weight of contracts in the optimal portfolio depends on the contract rate of return, its variance 𝜎𝑖 2 and its covariance 𝜎𝑖𝑗 with another contract (𝑗). it means the weight of contract changes by its associated risks and the systematic risks. moreover, this weight varies by the magnitude of the risks. in other words, any endogenous or exogenous factor, such as rapid and unpredictable changes in the foreign exchange market or covid-19-related economic crisis, may change the weight of assets in the investors’ optimal portfolio through the change in the assets’ risk. as iran experienced both crises over the last two decades, it would be a proper case to see how each crisis, with different nature, has impacted the banks’ optimal portfolio composition. in this study, for the sake of simplicity, the researchers defined musharakah, mudarabah, legal partnership, and direct investment as vrr, forward transaction (salam, salaf), ijarah, ju’alah, instalment sales, and debt purchase as frr, and qard al-hasan as no interest rate (nir). to see the bank’s reaction (in their portfolio combination) to facing a different crisis, the researchers considered the following specification. fvt=f(rfixedct, rexpect, dumexcht, dumcovidt, fvt-1) (2) equation (4) implies the simple linear functional formulation of the model. 𝐹𝑉𝑡 = 𝛽0 + 𝛽1𝑅𝐹𝐼𝑋𝐸𝐷𝐶𝑡 +𝛽2𝑅𝐸𝑋𝑃𝐸𝐶𝑡 + 𝛽3𝐷𝑈𝑀𝐸𝑋𝐶𝐻𝑡 + 𝛽4𝐷𝑈𝑀𝐶𝑂𝑉𝐼𝐷𝑡 + 𝐹𝑉𝑡−1 + 𝜀𝑖𝑡 (3) gholami & abdul-rahman │ bank reactions to covid-19 pandemic and currency crisis: empirical evidence from iran international journal of islamic economics and finance (ijief), 5(2), 201-224 │ 211 in equations 3 and 4, fv is a ratio that measures the banks’ reaction by changing the value of frr and vrr contracts (fvt= value of frrt value of vrrt ) in their portfolio. the higher the ratio, the higher the weight of frr in banks' portfolios and banks’ tendency to avoid the risks. equation 4 states that fv changes by the change in the nominal profit rate of frr contract (rfixedc), the nominal profit rate of vrr contract (rexpec), and the lagged dependent variables (fvt-1). including fvt-1 as an explanatory variable in the model demonstrates that the current shares of contracts are heavily determined by their past levels. the justification is that the structure of the banks is not so flexible that it completely changes the past behavior in one month. then, the researchers included a dummy for covid (dumcovid) and another for currency shock (dumexch) to examine their effects on the fv separately. dummies are 1 when shock happens and 0 otherwise. 3.1. data this study used monthly data on funds supplied by contracts (14 contracts) and the exchange rate. the data for money supplied under different contracts were obtained from the cbi database. it covered the period from january 2010 to june 2021. regarding the exchange market, due to sharp depreciation since 2011, a multiple-tier exchange rate regime was in place, including the open market rate (sana), the official exchange rate (or reference rate applied by the government to import essential goods or holding bank accounts), and the nima (the integrated forex deals system) rate11. the researchers also employed the sana rate regularly published by the tgju.org website. it is an appropriate rate because it quickly reflects market developments. then, the researchers used the monthly consumer price index published by statistical center for iran as a proxy for the inflation rate. for the interest rate, the researchers obtained the data from the cbi database. in this case, cbi does not use the benchmark interest rate but sets the bank profit rates for lending/borrowing. in the case of the vrr contract, cbi determines a minimum level of profit rate for bank investment (loans) and a maximum level for accepting deposits. all these rates are often determined one time in a year. it means there is no monthly series for the bank profit rate. hence, the researchers divided them into 12 (where they needed them) to produce monthly series. although the monthly rate would be constant throughout a year, it would differ between years. 11 it is a rate obtained from a market (developed by cbi since 2018), where exporting companies sell their export earnings to fund imports. gholami & abdul-rahman │ bank reactions to covid-19 pandemic and currency crisis: empirical evidence from iran international journal of islamic economics and finance (ijief), 5(2), 201-224 │ 212 iv. results and analysis 4.1. determining the currency crisis periods a currency crisis often occurs when a domestic currency depreciates through speculative attacks on the foreign exchange market. this pressure on the foreign exchange market could be measured by a conventional index called exchange market pressure indexes (empi). the concept of empi, originally developed by girton and roper (1977), is based on a weighted average of three components: (1) reduction in foreign reserves, (2) depreciation of local currency to capture foreign exchange market pressure, and (3) difference in domestic and foreign interest rate. 𝐸𝑀𝑃𝐼 = 𝑤1 ( ∆𝐸𝑡 𝐸𝑡 ) + 𝑤2 ( ∆𝑖𝑡 𝑖𝑡 ) − 𝑤3( ∆𝐹𝑡 𝐹𝑡 ) (4) in equation (2), 𝐸𝑡 stands for the real exchange rate, 𝑤 is the weights, 𝑖𝑡 is the nominal interest rate, and 𝐹𝑡 is the level of central bank foreign reserves. this index, a predictor for a currency crisis, states that it will probably occur when an economy with lower foreign reserves suffers from higher inflation and lower interest rates. however, this index is not applicable for this study because the iranian economy is almost closed due to the widespread financial and economic sanctions. as sanctions have severely restricted capital flows, the impact of interest rate differences on the exchange market is nearly zero. moreover, cbi did not publish the data for its foreign reserves. consequently, due to the lack of data and ineffectiveness of interest rate in the foreign exchange market, two components of 𝐸𝑀𝑃𝐼 were removed, and the index summarized the exchange rate variation ( ∆𝐸𝑡 𝐸𝑡 ). according to the above discussion, the researchers detected the currency crisis episodes in iran. based on this study’s definition, the researchers determined a period as a currency crisis episode, when the exchange rate has experienced at least one year or, more specifically, a 12-month continuous positive growth. further explanation is that the researchers focused on the periods as currency crisis episodes when the exchange rate has continuously experienced more than zero growth in the whole period until this trend stopped and the exchange rate recorded zero or negative growth. in addition, worth noting that the researchers could use other methods to detect the windows, such as the exact date of the start of the sanction, the timing of the government's decision to intervene in the foreign exchange market, and others. yet, the strong point of focusing on exchange rate developments instead of the method is that it is simpler to detect the periods. it is because the exchange rate is the outcome of all events and decisions (either with a positive or negative impact on the exchange rate). in other words, this technique offers more specific windows (a more accurate start and end time of crisis). then, the researchers came up with the windows through trial and error. applying this technique led the researchers to three distinct episodes from january 2010 to june 2021. table 1 presents these periods. gholami & abdul-rahman │ bank reactions to covid-19 pandemic and currency crisis: empirical evidence from iran international journal of islamic economics and finance (ijief), 5(2), 201-224 │ 213 table 1. currency crisis episodes over 138 months ending in june 2021 table 1 shows that the exchange rate experienced successive positive growth in three distinct periods (january 2012-march 2012, july 2017-october 2018, and october 2019-october 2020). in all three episodes, imposing new sanctions or tightening the existing sanctions (mostly by the us) stimulated speculative attacks in the foreign exchange market. the first episode started by imposing a sanction on iran from the first month of 2011 to the third month of 2012. the second window began a few months later (in 2017) when president trump took office and imposed a rigorous and wide range of sanctions on the iranian central bank, oil sales, metal, businessmen, and trade. these sanctions negatively impacted the iranian currency. however, after 16 months, the iranian exchange market experienced a stable condition at a new exchange rate level. finally, the last episode started in october 2019 due to the rising tensions between iran and the us. the third wave lasted for 13 months. then, table 2 displays the magnitude of the speculative attack on the domestic currency depreciation for each period. table 2. average growth of exchange rate in currency crisis episodes and non-crisis period as it is clear from table 2, the average monthly growth of the exchange rate was 0.41 in the non-crisis period and 4.08, 9.5, and 7.88 for the first, second, and third crisis periods, respectively. it indicates that the average monthly growth of the exchange rate was at least ten times (in comparison with the first crisis) and at most 23 times (in comparison with the second episodes) more than the non-crisis period (0.41). 4.2. determining the covid-19 crisis episode the covid-19 crisis started in october 2019 when the iranian ministry of health and medical education reported the first confirmed cases of covid-19 infection in iran. then, it has become a serious problem since february 2020 and still is in effect. hence, the researchers defined a specific 17-months period for pandemic crisis (february 2020– june 2021), with an eight-month periods length/ month change in average monthly us$ price (rial) total depreciation (%) 1st month last month jan 2011-march 2012 15 10,800 18,930 75.3 jul 2017-oct 2018 16 37,780 151,230 300.3 oct 2019-oct 2020 13 114,310 298,870 161.4 periods number of months exchange rate average monthly growth (%) non-crisis period 132 0.41 jan 2011-march 2012 15 4.08 jul 2017-oct 2018 16 9.50 oct 2019-oct 2020 13 7.88 gholami & abdul-rahman │ bank reactions to covid-19 pandemic and currency crisis: empirical evidence from iran international journal of islamic economics and finance (ijief), 5(2), 201-224 │ 214 overlap (february 2020 to october 2020) by the third wave of the currency crisis. 4.3. evolution of the iranian banking system’s assets during the crisis after determining the crisis periods, the researchers examined the impact of three currency shocks, apart from covid-19 shocks, on the weight of fv and nir contracts in the banks' portfolios. in this regard, the researchers calculated the ratio of total funds supplied by using any of the contracts to the total fund supplied by all banks (weight) during each crisis. figure 1 depicts the evolution of fv and zero rate assets’ share in the portfolio of the iranian banking system from january 2010 to june 2021. figure 1.a illustrates how banks replaced vrr with frr in crises. in this graph, the left column indicates the values of fv, while the column graph displays the crisis episodes. as the graph shows, fv behaved differently facing a crisis, specifically in 2011 and 2020-2021. by occurring the currency crisis, the value of fv was reduced but raised during the covid-19 crisis. it means the value of fv tends to increase during a crisis. the important point about the third currency crisis and covid-19 is that while the iranian financial market was still suffering from the consequences of the currency crisis (due to the us successive sanctions), the impact of covid-19 intensified the tendency for most of the period. in addition, overall, banks preferred the frr contracts during the covid-19 crisis, while they were less interested in using them during the currency crisis. as the nature of nir differs from others, the researchers revealed its changes in figure 1.b. in this figure, the weight of nir was displayed on the right vertical line, while the column graph demonstrated the crisis episodes. as the figure shows, the contracts’ weight experienced a dramatic monthly change over the past 138 months. however, the graph clearly shows that the share of zero rate contracts in the bank's portfolio increased in times of crisis. figure 1. impact of the currency and covid-19 crisis on fv and nir contracts in iranian banks’ portfolio source: central bank of the islamic republik of iran (2021) and tgju (2021) 1.a. evolution of fv during currency & covid19 crisis 1.b. evolution of nir during currency & covid-19 crisis 0,5 1,0 1,5 2,0 2,5 3,0 3,5 2 0 1 0 1 0 2 0 1 1 0 2 2 0 1 1 0 6 2 0 1 1 1 0 2 0 1 2 0 2 2 0 1 2 0 6 2 0 1 2 1 0 2 0 1 3 0 2 2 0 1 3 0 6 2 0 1 3 1 0 2 0 1 4 0 2 2 0 1 4 0 6 2 0 1 4 1 0 2 0 1 5 0 2 2 0 1 5 0 6 2 0 1 5 1 0 2 0 1 6 0 2 2 0 1 6 0 6 2 0 1 6 1 0 2 0 1 7 0 2 2 0 1 7 0 6 2 0 1 7 1 0 2 0 1 8 0 2 2 0 1 8 0 6 2 0 1 8 1 0 2 0 1 9 0 2 2 0 1 9 0 6 2 0 1 9 1 0 2 0 2 0 0 2 2 0 2 0 0 6 dum(exch) dum(covid) fv=frr/vrr 2 0 1 0 1 0 2 0 1 1 0 2 2 0 1 1 0 6 2 0 1 1 1 0 2 0 1 2 0 2 2 0 1 2 0 6 2 0 1 2 1 0 2 0 1 3 0 2 2 0 1 3 0 6 2 0 1 3 1 0 2 0 1 4 0 2 2 0 1 4 0 6 2 0 1 4 1 0 2 0 1 5 0 2 2 0 1 5 0 6 2 0 1 5 1 0 2 0 1 6 0 2 2 0 1 6 0 6 2 0 1 6 1 0 2 0 1 7 0 2 2 0 1 7 0 6 2 0 1 7 1 0 2 0 1 8 0 2 2 0 1 8 0 6 2 0 1 8 1 0 2 0 1 9 0 2 2 0 1 9 0 6 2 0 1 9 1 0 2 0 2 0 0 2 2 0 2 0 0 6 2 0 2 0 1 0 dum(exch) dum(covid) nir gholami & abdul-rahman │ bank reactions to covid-19 pandemic and currency crisis: empirical evidence from iran international journal of islamic economics and finance (ijief), 5(2), 201-224 │ 215 in addition to the graph, the researchers compared the weight of the mentioned contract in the portfolio in each period using statistical methods. 4.4. estimation in estimating equation 3, two points should be considered. first, due to the including a dependent lagged variable as an explanatory variable in the mode, ordinary least square (ols) method would produce a biased and inconsistent estimation (rois et al., 2012). second, the adf unit root test12 results, which is a necessary condition for avoiding spurious estimation, developed by dickey and fuller (1979), revealed that only one variable was stationary (table 3). table 3. unit-root estimation variables t-statistic (prob.) level 1st difference 𝐹𝑉 -1.18 (0.68) -4.35 (0.00)*** rfixedc -1.4 (0.58) -13.15 (0.00)*** inf -3.46 (0.01)*** dumcovid -13.15 (0.00)*** dumexch -13.1 (0.00)*** figures in parenthesis are p-values. ***indicates significance at a 1% level. table 4. empirical results of the ardl model dependent variable independent variables fv coefficients prob. intercept 0.02035 0.7024 𝐹𝑉−1 0.930935*** 0.0000 𝐼𝑁𝐹−3 0.010397** 0.0418 rfixedc 0.020276 0.4076 dumcovid 0.132223*** 0.0000 dumexch 0.033018*** 0.0102 number of observations = 127 breusch-godfrey test for fv f statistic = 1.9 (0.15) normality test jarque and bera (jb) jb = 911 (0.00)*** heteroskedasticity test (arch) f = 0.03 (0.86) ramsey reset test f = 5.8 (0.017)*** note *, **, and *** stand for coefficients’ significance at 10%, 5%, and 1%, respectively. the numbers in parenthesis are the p-value. 12 the test includes intercept but not trend. gholami & abdul-rahman │ bank reactions to covid-19 pandemic and currency crisis: empirical evidence from iran international journal of islamic economics and finance (ijief), 5(2), 201-224 │ 216 as table 3 displays, inf was stationary at the level, but the rest were stationary at 1st difference. it denotes that the model contained stationary i(0) and non-stationary i(1) variables. along with including lagged variables in the model, this feature made autoregressive distributed lag (ardl) approach an appropriate technique (greene, 2008). then, table 4 presents the estimation results of the ardl approach for fv. since both rfixedc and maximum rexpec are determined by iranian policymakers and are almost close to each other, inf has been considered a proxy for rexpec. it is assumed, by this proxy, that, expecting higher inflation in the future, the bank preferred the vrr contract to get a higher return by sharing in the higher level of oncoming profit or the increase in asset value13. then, as the durbin watson test was inconclusive for first-order correlation, the breusch-godfrey test was employed to ensure that this study’s model did not suffer autocorrelation. the results are presented in the third row of table 5. as the table shows, the p-value was 0.15 (greater than 5%), and the null hypothesis stating autocorrelation between series was rejected. in the case of normality, the researchers used jarque and bera's (1980) statistics. as it appears from the 4th row of the table, p-value was zero. it means the null hypothesis that the data were normally distributed was rejected. however, it is said that autocorrelation is more important than normality assumption. furthermore, the arch statistic rejected the heteroscedasticity of the residuals (5th row of the table), the cusum test confirmed no structural problem in the models, and coefficients were stable at a 95% significant level (figure 2). -12 -8 -4 0 4 8 12 i ii iii iv i ii 2020 2021 cusum 5% significance figure 2. plots of cumulative sum of recursive residuals 13 according to both of hq and aic criteria, the appropriate lag order is 3 for inf, for fv and 0 for rest. gholami & abdul-rahman │ bank reactions to covid-19 pandemic and currency crisis: empirical evidence from iran international journal of islamic economics and finance (ijief), 5(2), 201-224 │ 217 after ensuring the goodness of the model, the researchers interpreted the coefficients. as table 5 shows, the coefficients of the dummies for both shocks were significant at a 99% level14, and their sign aligned with the researchers’ expectations. furthermore, the profit rate of the frr contract was as expected, although it was not significant. however, the sign of inf was against the researchers’ expectations and statistically significant. in addition, the rest of the coefficients had corrected signs statistically significant. therefore, according to these findings, in line the researchers expected, both crises significantly and positively impacted fv. the interpretation is that, in the face of crises, iranian banks invested more resources in less risky contracts. to ensure that the impact of covid-19 differs from the currency crisis, the researchers applied the wald equality test (table 5). table 5. empirical results of wald test 𝛽𝐶𝑜𝑣𝑖𝑑 = 𝛽𝐸𝑥𝑐ℎ f (1, 129) = 7.746047 (p-value= 0.0062) 𝛽𝐶𝑜𝑣𝑖𝑑 = 4𝛽𝐸𝑥𝑐ℎ f (1, 129) = 5.47e-06 (p-value= 0.9981) as table 5 displays, the equality test for two crises in the fv model rejected the equality of two dummies coefficients (covid-19 and currency shocks). however, the null hypothesis stating the coefficient of covid-19 (𝛽𝐶𝑜𝑣𝑖𝑑) is about three times greater than the coefficient of currency shock (𝛽𝐸𝑥𝑐ℎ), was not rejected. then, the researchers may say that, in facing the first-time crisis, investors were more interested in a less risky asset than in facing a recurrent crisis. furthermore, good results are that the iranian banks have invested more of their resources on less risky assets facing both predicted and unprecedented crises. however, in facing an unprecedented crisis, they allocated more funds to a less risky asset than when they faced a recurrent crisis. 4.5. discussion the differences in the nature of the crisis (either an unprecedented one such as covid-19 or a regular one such as a currency crisis) have caused a different response from the investors. the different response was due to the complexity of the condition caused by the existence of uncertainty. in other words, investing is riskier in an unknown condition. in these circumstances, the investor must logically manage the risks by outweighing the less risky asset in his portfolio. in line with this logic and with magnani and zucchella (2019) and gruben and welch (2001), this empirical study verified that the banking system, as the most important investor in an economic system, invested much of its resources in low-risk but fixed return assets. 4.6. implications based on what has been said, banks can respond faster to different crises. policymakers may use the bank response as a leading index and apply a policy proportionate to the type of crisis. in confronting an unprecedented crisis, for 14 the researchers also used a dummy variable for slopes, but the results were not significant. gholami & abdul-rahman │ bank reactions to covid-19 pandemic and currency crisis: empirical evidence from iran international journal of islamic economics and finance (ijief), 5(2), 201-224 │ 218 instance, a policy maker must apply an easier monetary policy (compared to other crises) to reduce the interest rate. a reduction in the interest rate will decrease the investment cost and raise the expected return. in other words, an easier monetary policy will reduce the risk for every income unit by increasing the expected return. as a result, investors will be encouraged to invest in a greater range of assets that causes a reduction in the risk of defaults, controls mismatch problems and reduces the likelihood of insolvency. v. conclusion and recommendation 5.1. conclusion the covid-19 pandemic, which affects both the supply and demand side of the economy, has generated the deepest economic slump in nearly a century. it is inherently different from the currency crisis as the most frequent conventional crisis. as it was a first-time shock, it created much uncertainty in the economy. therefore, the depth and extent of the crises' impact on the banking system as a key player in the global financial market should be very different. however, the research on covid-19 has not yet addressed these issues. as the banking system normally shows different reactions to different crises for survival, this study addresses the banks’ asset side reactions to covid-19 and currency crises for the iranian banking system. in this respect, the iranian banking system has suffered both first-time and predicted crises in the recent decade. the empirical results have verified that the currency and covid-19 crises had a statistically significant impact on banks’ assets. in both crises, the banks increased their portfolio's share of frr and nir. it means the banks avoided risky investment and vrr contracts, specifically when they faced uncertain conditions. this empirical finding also confirms that the frr share increase during the covid-19 crisis was greater than the currency crisis. it is consistent with the findings of barua and barua (2021) and falato, goldstein and hortaçsu (2020), which found that the investment funds outweighed their less risky asset. it indicates that uncertainty intensified the banks’ risk avoidance behavior. moreover, the covid-19 crisis has shown that the global economic structure is so fragile that any small shock, even a virus, could fuel a major global economic crisis. thus, policymakers must encourage banks and other financial institutions to supply more funds under vrr contracts as this type of contract can be an instrument in preventing the crisis or faster recovering them (abdulrahman and gholami, 2020). in addition, banks may play an entrepreneurial role (abdul-rahman et al. 2014) by offering equity-based financing products (abdul-rahman et al. 2019 and abdul-rahman et al. 2020) in helping the government and businesses to survive the covid-19 crisis. gholami & abdul-rahman │ bank reactions to covid-19 pandemic and currency crisis: empirical evidence from iran international journal of islamic economics and finance (ijief), 5(2), 201-224 │ 219 5.2. recommendation one of the limitations of this empirical research is that data gathered were constrained to some specific period as the researchers could not gather a longer data set. moreover, the monthly data for interest or asset profit rates were unavailable, preventing the researchers from exploring the role of riskadjusted return in the banks’ behavior. hence, future studies may consider the role of this variable in their model. acknowledgment this study is under the fundamental research grant scheme (frgs/1/2019/ss01/ukm/02/3), funded by the ministry of higher education, malaysia. the researcher would like to thank mr. hasankhani (phd candidate in international economics, mofid university, qom, iran, for helping the author in providing this paper. gholami & abdul-rahman │ bank reactions to covid-19 pandemic and currency crisis: empirical evidence from iran international journal of islamic economics and finance (ijief), 5(2), 201-224 │ 220 references abdul-rahman, a., & gholami, r. 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(2020). the effect of covid-19 on the banking sector. in pandemic risk management in operations and finance (pp. 89-99). springer, cham. gholami & abdul-rahman │ bank reactions to covid-19 pandemic and currency crisis: empirical evidence from iran international journal of islamic economics and finance (ijief), 5(2), 201-224 │ 224 this page is intentionally left blank. international journal of islamic economics and finance (ijief) vol. 4(1), page 1-30, january 2021 mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria sagir muhammad sulaiman international institute of islamic banking and finance (iiibf), bayero university kano, nigeria corresponding email: sageeerala@gmail.com muhammad abdulaziz muhammad saal consultancy kano, nigeria, mamhus530@gmail.com aliyu dahiru muhammad bayero university kano, nigeria, alttahir797@gmail.com tasiu tijjani sabiu northwest university kano, nigeria, ttsabiu.economics@nwu.edu.ng article history received: november 29th, 2020 revised: january 6th, 2021 accepted: january 18th, 2021 abstract the world has become a global village as competition among banks is now intense. globalization is fuelling increased competition in nigerian banking industry and as a result, banks are challenged to adopt customer centred strategies that would enable them to gain customer loyalty, maximize profitability and survive the competition. there is no business that survives without customers’ patronage and islamic banks are not an exception. customers are key stakeholders to the survival of any business, thus, satisfying the customer through providing high quality services is core to islamic banking business. the aim of the study is to examine the mediating role of customer satisfaction in investigating the relationship between service quality and customer loyalty in non-interest bank i.e. jaiz bank of kano state metropolis, nigeria. the variance based (sem) technique is employed in analyzing the hypothesized model of the study. service quality positively and significantly influences customer satisfaction and customer loyalty, whereas, customer satisfaction does not significantly mediate the relationship between service quality and customer loyalty among customers of jaiz bank in kano state metropolis, nigeria. the study recommends for providing high quality service in order to achieved maximum loyalty from the customers. it was further recommended on the need for reviving of the existing regulatory bodies or institutions that will ensure proper implementation of good service quality delivery among non-interest banks in nigeria. keywords: service quality dimensions, customer satisfaction, customer loyalty, sem jel classification: m30; m31; c83; m39. type of paper: research paper @ ijief 2021 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.v4i1.10424 web: https://journal.umy.ac.id/index.php/ijief/article/view/10424 citation: sulaiman, s. m., muhammad, m. a., muhammad, a. d., & sabiu, t. t. (2021) mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria. international journal of islamic economics and finance (ijief), 4(1), 1-30. doi: https://doi.org/10.18196/ijief.v4i1.10424. mailto:sageeerala@gmail.com mailto:ttsabiu.economics@nwu.edu.ng https://doi.org/10.18196/ijief.v4i1.10424 https://doi.org/10.18196/ijief.v4i1.10424 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v4i1.10424&domain=pdf sulaiman, muhammad, muhammad, & sabiu │mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria international journal of islamic economics and finance (ijief), 4(1), 1-30 │ 2 i. introduction 1.1. background islamic banking emerges following an attempt by king abdul aziz university in makkah to organized first international conference on islamic economics and subsequently establishment of the first commercial islamic bank named dubai islamic bank in the uae and also the establishment of islamic development bank in jeddah, saudi arabia in year 1973. establishment of islamic banks followed suit in egypt, sudan, kuwait, bahrain and nigeria (faosiy, ahmed, & adekunle 2016). the history of full-pledge islamic banking in nigeria began in january 2012 after the approvement granted by central bank of nigeria to jaiz bank to operate as a regional interest-free bank in nigeria. as a result, jaiz bank became the first and the only full-fledged islamic bank operating in the country (husna & fuaad, 2017). banking has become part and parcel of our everyday life as individuals and business organizations cannot do without engaging in banking activities. while the majority of individuals cannot live comfortably without having a personal bank account for safe keeping of money and withdrawals when the need arises, all enterprises rely on banks to carry out their business activities including money transfers, payment for purchases and salaries and safe keeping of company’s assets. banks play an important role in the financial life of individuals and businesses as their essential activities facilitates the process of production, exchange and distribution of wealth. the basic function upon which other functions depends of banks to individuals and business organizations is the acceptance of deposit and advancing of loans. banks are the custodians and distribution of liquid capital, which is the lifeblood of our personal needs, commercial and industrial activities as well as the economic well-being of the nation by, ensuring economic and social stability and sustainable growth and development of the economy. as interest free banking services is offered to better maximize customers satisfaction compared to conventional banking which is based on charging of interest, there is a need to examine the level of customer satisfaction with islamic banking services especially as interest free banking is touted to be a better alternative to conventional practice of charging interest on capital/loan. more so, in order to be competitive islamic banks, need to assess the level of customers’ satisfaction with their products because without satisfied customers they can neither survive nor beat the competition. jayasundara, ngulube and minishi-majanja (2016) states that every competitive firm has to be interested in assessing the satisfaction level sulaiman, muhammad, muhammad, & sabiu │mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria international journal of islamic economics and finance (ijief), 4(1), 1-30 │ 3 of its customers because customer loyalty ensures the continuity of a firm, loyal customers are advocates and more tolerant to the firm. loyal customer and cordial customer relationships are elements for survival and favourable competition in the global world of intense rivalry in business. pleasing customer satisfaction is important to islamic banks approach to penetrate the market and gain high market share. there is no business that survives without customers’ patronage and islamic banks are not an exception. customers are key stakeholders to the survival of any business, thus, satisfying the customer through high quality service offering is core to the business of islamic banks. enhancing islamic service quality and maximizing the level of customer satisfaction with islamic banking services is therefore needful for islamic banks to attract new customers, retain existing ones and survive in the face of intense competition especially as a new entrant with limited market share and restricted customer base relative to conventional banks resulting from different combinations of expectations and performance outcome (schiffman, kanuk and hansen 2012). the servqual is a model of service quality which was developed by parasuraman, valarie, zeithaml and len berry between (1985; 1988). furthermore, five major service quality dimensions are identified i.e. as reliability, assurance tangibles, empathy and responsiveness (zeithaml, berry and parasuraman, 1996; parasuraman, berry & zeithaml, 1991). customer satisfaction is determined by a number of factors including quality, perceived value, customer support service and price, ease of use (user friendliness), speed and security. information on which factors are the determinants of customer satisfaction is important to service organizations like banks since customer satisfaction is what the banks depends on to win customer loyalty and cause the customer to repeat purchase of the service. increased customer satisfaction often leads to a lower turnover of the company’s present customers. as customer satisfaction rises, so does customer loyalty and intention to repurchase. in addition to being loyal, satisfied customers are always less price-sensitive and more willing to pay a higher price than other customers. particularly, the research conducted by kotler and armstrong (2010) underlined service quality, service charges and perceived value as the determinants of customer satisfaction in the banking industry. the world has become a global village as competition among banks has become intense. globalization is fuelling increased competition in nigeria banking industry and as a result banks are challenged to adopt customer centred strategies that would enable them to gain customer loyalty, maximize profitability and survive the competition. conventional banking sulaiman, muhammad, muhammad, & sabiu │mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria international journal of islamic economics and finance (ijief), 4(1), 1-30 │ 4 services even though interest based have gained worldwide acceptance and the majority of customers cutting across all religious spheres are already acclimatized with these products unlike islamic banking services that are relatively new and restricted in principle to adherents of islam. non-interest banks are in a situation of competing with already established conventional banking some of whom have been in existence for some decade in the nigeria banking environment with well experienced staffs, spread of many branches as well as wide range of customers. therefore, to excel in this competitive market, islamic banks needs to formulate and effectively implement customer satisfaction driven strategies to attract new customers, retain existing ones and propel existing customers to buy more or patronage more islamic financial services. the prospects of islamic banking in nigeria are beyond doubt, however, islamic banking is a new method of banking in nigeria when compare to conventional banking that is there for some decades, therefore, there is urgent need for islamic banks to revisit their strategies by creating awareness and to teach nigerian citizens about how it operates (unegbu & onuoha, 2013). today customers are more significant than ever before and consumers’ freedom of choice has no bound. customers taste for high quality of products or service they are offered is very high and increasing every day by day. delighting customers and achieving high customer satisfaction scores especially as customers taste changes daily is ever more difficult. and even after islamic bank satisfy their customer with improved financial services, significant number of them could still leave the bank and start doing business with rival banks. given that they have freedom of choice and varieties of services amongst which to choose from in the market place they switch from one product to another without notice and change brand loyalty at will. since the taste, fashion and re-purchase behaviour of customers are constantly changing and unpredictable there is a need therefore to examine the level of customers’ satisfaction with islamic banking services for the purpose of understanding the preferences of customers in taking decision to develop a customer satisfaction programme and improve on the efficiency and product range of islamic financial services. 1.2. objective the aim of the study is to examine the role of customer satisfaction as a mediator in the relationship between service quality and customer loyalty in jaiz bank plc of kano state metropolis. specifically, the study attempts: (i) to determine the influence of service quality dimensions on customer satisfaction in jaiz bank plc of kano state metropolis. (ii) to determine the influence of customer satisfaction on customer loyalty in jaiz bank plc of sulaiman, muhammad, muhammad, & sabiu │mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria international journal of islamic economics and finance (ijief), 4(1), 1-30 │ 5 kano state metropolis. (iii) to determine the mediating effect of customer satisfaction in the relationship between service quality and customer loyalty in jaiz bank plc of kano state metropolis. this paper comprises of five sections. introduction is presented in first section, both empirical and theoretical literatures were explained in second section. the third section explain methodology of the study. data presentation and analysis were discussed in fourth section. and finally, the fifth section contained conclusion, recommendation and frontier for further studies. ii. literature review 2.1. background theory this research chooses balanced scorecard (bsc) to be the theoretical framework, bsc theory was developed by robson (2002). an attempt was made to come up with new methods of performance for companies and enterprises which is later called bsc theory, this effort was as result of the fact that financial measures of performance were insufficient for the modern business enterprise. the bsc theory emerged out of an argument that company success is beyond looking at just the financial statement, because financial statement reveals only the past performance but do not really explain the current situation as well as where the business is likely to be in the nearest future. bsc provides a strategy that is consistence and in reliable manner which can implemented in public sector as well as profit and nonprofit oriented enterprises. success stories emerged and hence, bsc secure recognition as best suit any types of organization. the sole aim of bsc theory to identify the role play by other factors besides financial statement toward adding value to an organization and directly or indirectly influence the organization to succeed. the study adopted bsc theory because it is a theory that explain the influence non-financial factor i.e., service quality on customer loyal which will subsequently increase the performance of noninterest bank. 2.2. previous studies in order to determine a literature gap, there is the need to provide comprehensive review of related empirical literatures, this study was able to review and thematically analysed some previous studies among which are; slack and singh (2020) explore the effect of service quality on satisfaction and loyalty of customer and also the mediating role of customer satisfaction between the dependent and independent variable. an exploratory research approach was adopted in the study. in total, 480 customers of supermarket were issued questionnaire. descriptive statistics were employed to sulaiman, muhammad, muhammad, & sabiu │mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria international journal of islamic economics and finance (ijief), 4(1), 1-30 │ 6 determine the level of service quality, and inferential statistics to test the research hypotheses with the help of paired sample t-test. the findings indicate that service quality provides by supermarkets is perceived as being unsatisfactory, whereas, service quality significantly affects customer satisfaction and loyalty and customer satisfaction partially mediates the relationship between service quality and customer loyalty which subsequently lead to lower customer loyalty. this study provides a hint as to where supermarkets should concentrate when marketing their product and services and may help in knowing the strategies to adopt in order to retain and attract more long-term loyal customers. this research could be useful to government, policy makers and other related regulating agencies in making right decisions and policies. however, a more robust technique of analysis should further be use test the relationship between the latent variables of study. teeroovengadum, (2020) aims to reveal gender-based difference with regard to the effect relationship between service quality dimensions and customer satisfaction in the of banking sector. primary data is collected by using the survey design strategy. the questionnaires were directly administered to bank customers in mauritius. as result of unavailability of sampling frame because of confidentiality reasons, a nonprobability sampling technique, i.e., the purposive sampling technique was employed. the respondents were asked to respond to the survey but conditionally if they had a bank account and had regularly used bank services during the previous two years. data is collected from 282 customers of banks. because of the prediction-oriented aim of the present study, the partial least squares-structural equation modeling technique is used to test a set of relevant hypotheses. the results provide mixed findings and the moderating effect of gender is found to be statistically significant for one service quality dimension but not for the other two. the permutation and partial least squares-multigroup analysis tests both support the hypothesis that gender moderates the relationship between environment quality and customer satisfaction. future studies could consider the moderating role of categorical variable such as age group, education level and work experience among others. surahman, yasa, and wahyuni, (2020) were able to assess the effect of service quality on customer loyalty and customer satisfaction as a mediator between the relationship of service quality with customer loyalty. data was collected from 100 respondents who were tourist that visited the badung regency village. the data were analyzed using structural equation modeling with partial least square approach. the results indicate an insignificant direct effect of service quality on customer loyalty. significant direct influence on service quality with customer satisfaction, and customer satisfaction with sulaiman, muhammad, muhammad, & sabiu │mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria international journal of islamic economics and finance (ijief), 4(1), 1-30 │ 7 customer loyalty. furthermore, the results show an indirect effect between service quality and customer loyalty, which is mediated by customer satisfaction. the findings empirically indicate that service quality has a negative effect on customer satisfaction. and customer satisfaction has a full mediating effect, customer satisfaction is important in explaining the quality of service that subsequently drive customer loyalty. based on the results it can be concluded that this research offers empirical evidence of the relationship of service quality, customer satisfaction and customer loyalty. this research makes a theoretical contribution by clarifying the high level of service quality influence in increasing customer loyalty through customer satisfaction. khatoon, zhengliang and hussain (2020) examines the influence of electronic (e)-banking service quality dimensions on customer purchasing intentions and also the mediating role of customer satisfaction. 235 sample of questionnaires were distributed among employees and customers working in different banks of qatar. both correlation analysis and regression analysis were employed to test the study hypothesis in order to achieved the objective of the study. the results of the study revealed that all the service quality dimension (i.e., responsiveness, reliability, communication, privacy, efficiency, and security) have a significant effect on customers purchasing intentions. customer purchasing intentions significantly increased with the increase of e-banking service quality. a partial mediating role of customer satisfaction was found between e-banking service quality and customer purchase intentions. however, a more robust technique of analysis (i.e., structural equation modelled) should be further employed to test the relationship between the endogenous, exogenous and moderating variables. yadav and rai (2019) examine the mediating effect of customer satisfaction between service quality and customer loyalty with banking industry in india, the study respondents are customers that own a saving or current account with any of four commercial banks namely, sbi bank. pnb bank, hdfc bank and icici banks and also frequently using the account for transaction purpose for more than three years. the study targeted 400 respondents using snowball sampling technique and questionnaire was distributed equally across the four banks. simple linear regression was used in the study and the findings revealed a strong influence of service quality dimension on customer loyalty in the banking sector. the research model or equation predictive effect was found to be moderate. the study also finds that customer satisfaction mediates the relationship between service quality and customer loyalty at almost 83.03%. however, more robust technique of analysis can be further employed to properly and simultaneously modelled the direct and indirect causal relationship between the variable of the study i.e., structural equation modelling. sulaiman, muhammad, muhammad, & sabiu │mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria international journal of islamic economics and finance (ijief), 4(1), 1-30 │ 8 ozkan, suer, keser and kocakoc (2019) examine the relationship between the customer satisfaction, service quality (i.e., perceived value of services) on customer loyalty, and also the mediating effect of corporate image and corporate reputation between the independent and dependent variable in the turkish banking sector, the study adopted a survey designed and sem analysis is conducted in order to study the relationships (i.e., effect) between variables of the study. the findings of the study indicate that corporate image and corporate reputation can be used as indicators that measure performance of a bank. the results also signify that customers perceive quality and satisfaction influence loyalty through perceived value, image and reputation. meanwhile, this study employed customer satisfaction as independent variable and there is need to further test the mediating role of customer satisfaction and also more studies are needed in other to generalize the results. yaqub, halim and shehzad (2019) were able to assess the effect of four independent variables namely price fairness, justice to service, perceived service quality and relational bonds on customer loyalty as the dependent variable and also to investigate how customer satisfaction mediates the relationship between them. the study distributed 539 questionnaires among customers that are prepaid subscribers based through a proportionate stratified random sampling in four major capital cities of pakistan. data collected was analysed by using spss version 23 and the smart pls structure equation modelling (pls-sem). findings of the study reveals that perceived service quality and customer satisfaction significantly influence customer loyalty. also, customer satisfaction actually mediated the relationship between the predictors and explained variable. hence, there is need to replicate similar study in different case study (i.e., beyond pakistan) for proper generalization. myo, khalifa and aye (2019) empirically examine the relationship between the following independent variables namely service quality (sq), customer satisfaction (cs) and dependent variable customer loyalty (cl) with novotel yangon max hotel services. the study adopted social exchange theory, the study also assesses the mediating role play by customer satisfaction between service quality as independent variable and customer loyalty as the dependent variable. the samples are 400 copies of questionnaire were distributed among the customers using simple random sampling. the study adopted sem to test the study’s hypotheses. findings of the study reveals that sq have direct impact on cl and also cs mediate the relationship between sq and cl. however, the paper needs to further find out the extent of the mediating role of cl (i.e., partial or full mediation) and similar study can be conducted by selecting different case study for making general conclusion. sulaiman, muhammad, muhammad, & sabiu │mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria international journal of islamic economics and finance (ijief), 4(1), 1-30 │ 9 2.3. conceptual framework figure 1. research conceptual framework. source: adopted from yadav and rai (2019) figure 1 shows that all the three variables are latent variables which are all represented with oval shape, whereas, customer satisfaction is the dependent variable, service quality and customer satisfaction are independent and mediating variable respectively. iii. methodology the aim of the research is to examine the role of customer satisfaction as a mediator in the relationship between service quality and customer loyalty with jaiz bank plc kano state, nigeria. 3.1. data survey exploratory research design was employed in this study. the target population of this research are customers of jaiz bank plc of kano state metropolis that span across five branches in the state; namely hotoro branch 4512 customers; zoo road branch 9786 customers; kabuga branch 14,319 customers; tafawa balewa branch 33,606 customers and bello road branch 29,866 (jaiz bank plc head office, 2019). service quality delivery is usually aimed at satisfying clients; hence, customers are in good position to answer questions pertaining the extent of service quality delivery of their respective bank. the total population is 92,089 customers and with the aid of the yamane (1967) formula the study arrived at 400 sample size. primary data is employed using self-administered questionnaire, the study adopt five likert scales hence, the five-point likert-scale that is adopted for this study has the following ratings: strongly agree = 5, agree = 4, neither agree nor customer loyalty customer satisfaction service quality sulaiman, muhammad, muhammad, & sabiu │mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria international journal of islamic economics and finance (ijief), 4(1), 1-30 │ 10 disagree= 3, disagree = 2, strongly disagree = 1, a convenient sampling technique is employed in the study due to inaccessibility of sampling frame and the distribution of questionnaire is proportionate across the bank’s branches. table 1. summary of sample size proportion distribution jaiz banks branches population of each branch proportion of sample size hotoro 4512 20 zoo road 9786 42 kabuga 14,319 62 tafawa balewa 33,606 146 bello road 29,866 130 total 92,089 400 source: jaiz bank plc head office (2019) and computed by author. the table 1 reveal that sample size was distributed proportionately, there are 4,512 customers in hotoro branch the sample size is equal to 20, while zoo road jaiz bank branch has 9,786 customers and the proportionate sample size is 42, kabuga branch has 14,319 customers and sample is 62, tafawa balewa has 33,606 customers with proportionate sample size of 146 and bello road branch has 29,866 customers with proportionate sample size of 130, this make the population of the study to be 92,089 customers of jaiz bank in kano metropolis as at 2019. 3.2. model development this study empirically tests the research model that contain three variables in which service quality dimensions is the independent variable, and customer loyalty is the dependent variable and lastly customer satisfaction is the mediating variable. all measures used in this research are adapted from existing scales (see. parasuraman et al., 1994; zeithaml et al., 1996; brady et al., 2002; olorunniwo and hsu, 2006; yadav and rai, 2019; ozkan, et al., 2019; yaqub, et al., 2019; myo, et al., 2019; slack and singh, 2020; teeroovengadum, 2020; khatoon, et al., 2020; zhengliang and hussain, 2020). customer loyalty: customer loyalty is defined as a serious commitment to repurchase a particular product/service and also to recommend the product/service to others oliver (1999). the concept of customer loyalty is more related to attitude and behaviour which exhibited from the mind, from these two concepts a third perspective of customer loyalty a raised through combining both attitudinal and behavioural concepts of loyalty. this sulaiman, muhammad, muhammad, & sabiu │mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria international journal of islamic economics and finance (ijief), 4(1), 1-30 │ 11 integrated approach takes account of both concepts so as to come up with concept of customer loyalty. according to zeithaml et al., (1996) behavioral aspect of customer loyalty represents actual repeat purchase of products or services from the same company as well as recommending the company to others. displaying such commitment to the company by showing a resistance to switch to another competitor (zeithaml et al., 1996). service quality: this signifies the difference between expectation and perceived service received by customer and also this entails the extent of service delivery or quality (gronroos, 1984; parasuraman et al., 1985). a lot of attempt were made by different previous researchers to come up with different measures of service quality dimensions, meanwhile, an exploratory research was performed also in an effort to refined with subsequent scale in 1988, this effort yields a result in which original ten dimensions of service quality were merge into five dimensions: reliability, responsiveness, tangibles, assurance and empathy (parasuraman et al, 1988) customer satisfaction: customer satisfaction was defined as the customers’ evaluation of product or service in terms of whether that service has met their needs or expectations (zeithaml and parasuraman 1996). satisfaction is the consumer’s response or judgment that a product or service rightly feature itself by providing a pleasurable level of consumption (oliver, 1999). according to kotler (2008) customer satisfaction is the feeling of happiness or unhappiness as a result of comparing the perceived performance of services or products with the expected performance. customer satisfaction is also defined as the cognitive judgment of a customer resulting out of an interaction between the customer’s personality and a company’s marketing practices in the perspective of the expectation the customer had with the product and perception of the benefits received (rai and srivastava, 2014). the multi-variate regression model is usually presented in the form 𝑌𝑖 = 𝑎0 + 𝛼1𝑋𝑖+𝛼2𝑋𝑌𝑖+𝑒𝑖 ……………………………….……………………… (1) 𝐶𝐿𝑇𝑖 = 𝑎0 + 𝛼1𝑆𝑅𝑄𝑖+𝛼2𝑆𝑅𝑄𝑖(𝐶𝑆𝑇)𝑖+𝑒𝑖 ………………………..……… (2) where: 𝐶𝐿𝑇𝑖= customer loyalty as dependent variable 𝑆𝑅𝑄𝑖= service quality as independent variable 𝐶𝑆𝑇𝑖= customer satisfaction as mediating variable 𝑎0= intercepts/ autonomous variable. it depicts the degree of the dependent variable even without the existence of independent variable. 𝛼1 and 𝛼2= are parameter estimates of the regression 𝑒𝑖= error term which signifies other factors that could influence dependent variable that are not captured in the model. sulaiman, muhammad, muhammad, & sabiu │mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria international journal of islamic economics and finance (ijief), 4(1), 1-30 │ 12 3.3. method technique for data analysis for this study was variance based structural equation modelling (sem) using the partial least square estimator (see. reinartz, haenlein and henseler, 2009; kock, and lynn, 2012; roldán, and sánchez-franco, 2012 and hair, hult, ringle and sarstedt, 2014), the data will be analyse using statistical package for social sciences (spss version 22) and smart-pls version 3. iv. result and analysis 4.1. descriptive analysis the survey questionnaire required the respondents to answer four demographic questions reflecting their gender, age group, monthly income and occupation status. out of four hundred respondents (400) that received the questionnaire only three hundred and seven (307) respondents filled and properly return the questionnaire. this represented 76.8% feedback which is high enough to produce valid and reliable results in the study. this section summarises the frequency distribution of respondents on different demographic items as shown in tables 2. sulaiman, muhammad, muhammad, & sabiu │mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria international journal of islamic economics and finance (ijief), 4(1), 1-30 │ 13 table 2. demographic information variables options frequency percentage gender male 254 82.7 female 53 17.3 total 307 100.0 age group 18-29 73 23.8 30-59 182 59.3 60 and above 52 16.9 total 307 100.0 monthly income below ₦50,000 94 30.6 ₦51,000-₦100,000 72 23.5 ₦101,000-₦150,000 53 17.3 ₦151,000-₦200,000 42 13.7 ₦201,000-₦250,000 29 9.4 ₦251,000 above 17 5.5 total 307 100.0 occupation status civil servant 164 53.5 business man 83 27 farmer 43 14 student 17 5.5 total 307 100.0 source: field survey data (2019) and computed by author. the descriptive summary displayed in table 2 shows 254 (82.7%) of respondents are male while 53(17.3%) are female. in term of age group of the respondents, 73(23.8%) are within 18-29 years, 182(59.3%) of the subjects are within 30-59 years; 52 (16.9%) are 60 years and above. in case monthly income; 94 (30.6%) of the respondents earned below ₦50,000; 72(23.5%) earned ₦51,000-₦100,000; 53(17.3%) earned ₦101,000₦150,0000; 42(13.7%) earned ₦151,000-₦200,000; 29(9.4%) earned ₦201,000-₦250,000; 17(5.5%) earned ₦251,000 above, in term of occupation status of the respondents; 164(53.5%) are civil servant; 83(27%) are business men and women; 43(14%) are farmer while only 17(5.5%) are students. 4.2. descriptive analysis of construct of the study descriptive statistics of variable of the study were also statistically analysed. specifically, three constructs were analysed in order to determine their minimum, maximum, mean and standard deviation values. table 3 provides a summary of constructs descriptive statistics. sulaiman, muhammad, muhammad, & sabiu │mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria international journal of islamic economics and finance (ijief), 4(1), 1-30 │ 14 table 3. descriptive analysis of construct descriptive statistics construct no items n min max mean sd. customer loyalty 5 307 1.00 5.00 3.77 0.6079 customer satisfaction 5 307 1.00 5.00 3.89 0.7861 service quality 22 307 1.00 5.00 3.80 0.7715 source: field survey data (2019) and computed by author table 3 shows that the mean and standard deviation for customer loyalty were 3.77 and 0.6079, respectively. this suggests that respondents are little bit moderate when it comes to issue of loyalty. table 3 also indicates that the mean for customer satisfaction was 3.89, with a standard deviation of 0.7861; suggesting that the respondents’ satisfaction is little bit above moderate. lastly, the results show a moderate score for service quality performance (mean = 3.80, standard deviation = 0.7715). 4.3. pre-estimation test preliminary analysis is used to address the normality of data and existence of multicollinearity in the model. this is the process of examining the data before further analysis i.e. inferential statistics can be conducted. this process will provide assurance that the data to be examined are of good quality for further analysis. 4.3.1. normality test table 4 shows the normality test for the constructs used in the study, in which the skewness and kurtosis of the data support normality distribution of the variable as both values fall within the range of -1 to +1 for the skewness and -2 to +2 for the kurtosis (ghasemi & zahediasl, 2012). values falling outside this range indicate a non-normal distribution of data. based on the table 4, it can be concluded that the data is normally distributed. table 4. normality test for the construct variable skewness kurtosis service quality -0.653 1.326 customer satisfaction -0.693 0.938 customer loyalty -0.844 0.982 source: field survey data (2019) and computed by author sulaiman, muhammad, muhammad, & sabiu │mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria international journal of islamic economics and finance (ijief), 4(1), 1-30 │ 15 4.3.2. multicollinearity diagnostic the variance inflation factor (vif) identifies the similarities between independent variables and the strength of that similarity. variance inflation factor between 1-5 and tolerance value of greater than 0.2 suggest that there is a moderate similarity but it is not severe enough to warrant corrective measures. while vifs greater than 5 and tolerance value of less than 0.2 represent critical levels of multicollinearity where the coefficients are poorly estimated and the p-values are questionable. table 5. normality test for the construct variable tolerance vif service quality 0.614 1.734 customer satisfaction 0.706 1.417 source: field survey data (2019) and computed by author from table 5 the variance inflation factor (vif) level is below 5 across the variables, and the tolerance values exceed 0.2, hence no existence of multicollinearity among the explanatory variables of the study and it is desirable for a good model. 4.4. pls-sem path model results structural equation model (pls-sem) is a multivariate technique that is use to analyzed the interrelationship between many constructs i.e. exogenous, endogenous, moderating and mediating variable, it is also a more robust statistical tools use to analyzed latent variables with multiple indicators simultaneously. pls-sem is divided into two part namely, measurement/outer model and structural/inner model, the later analysed the inner part a model while the former measure the outer part of a model as presented in figure 2 (hair et al., 2014; hair et al., 2012; henseler et al., 2009). 4.4.1. assessment of measurement model in order to assess outer model (measurement or factor model) in smart-pls, test such as individual item reliability, internal consistencies of the items, convergent and discriminant validity respectively need to be conducted (henseler et al., 2009). sulaiman, muhammad, muhammad, & sabiu │mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria international journal of islamic economics and finance (ijief), 4(1), 1-30 │ 16 figure 2. measurement model/ inner model source: field survey data (2019) and computed by author using smart-pls. 4.4.1.1. individual item reliability this refers to the factor loading of items or indicators of particular latent construct, it is examined by analyzing the outer loadings of each construct’s measure (hair et al., 2014). meanwhile, the threshold for retaining indicator with loadings between 0.40 and 0.70, it was discovered that out of 32 indicators, none were deleted because they presented loadings above the yard stick of 0.40. 4.4.1.2. internal consistency this refers to the convergence of indicators of a particular latent construct in order to measure the same latent variable (bijttebier, delva, vanoost, bobbaers, lauwers and vertommen, 2000). therefore, composite reliability measures inter-indicator consistency, hence, ensures the existence of correlations among sub-indicator of a latent construct. the study employed three approaches of assessing internal consistency, namely, cronbach’s alpha (cronbach, 1951), rho_a and composite reliability (fornell & larcker, 1981 and dijkstra and henseler, 2015). hence, the present study adopted both approaches i.e. cronbach’s alpha, rho_a and composite reliability in ascertaining internal consistency level and to clear doubt in the reliability of sulaiman, muhammad, muhammad, & sabiu │mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria international journal of islamic economics and finance (ijief), 4(1), 1-30 │ 17 the study. based on bagozzi and yi (1998) as well as dijkstra and henseler (2015) rule of thumb that the reliability most be at least 0.70. thus, the cronbach’s alpha, rho_a and composite reliability of the study were found to be above 0.70, which signifies internal consistency reliability of the measures used in this study. table 6. individual item reliability, internal consistency reliability and convergent validity source: field survey data (2019) and computed by author using smart-pls factor loadings cronbach alpha rho_a composite reliability (pc) average variance extracted customer loyalty 0.898 0.898 0.925 0.711 clt1 0.811 clt 2 0.830 clt 3 0.881 clt 4 0.859 clt 5 0.833 customer satisfaction 0.808 0.817 0.867 0.567 cst1 0.680 cst 2 0.804 cst 3 0.788 cst 4 0.758 cst 5 0.729 reliability 0.938 0.938 0.953 0.801 rlb1 0.891 rlb2 0.898 rlb3 0.885 rlb4 0.911 rlb5 0.890 responsiveness 0.824 0.825 0.884 0.656 rpv1 0.821 rpv 2 0.841 rpv 3 0.826 rpv 4 0.749 empathy 0.898 0.901 0.924 0.709 ept1 0.810 ept 2 0.851 ept 3 0.866 ept 4 0.819 ept 5 0.865 assurance 0.906 0.907 0.934 0.780 asr1 0.872 asr2 0.865 asr3 0.891 asr 4 0.906 tangibility 0.709 0.726 0.822 0.539 tgb1 0.761 tgb2 0.824 tgb3 0.746 tgb4 0.584 sulaiman, muhammad, muhammad, & sabiu │mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria international journal of islamic economics and finance (ijief), 4(1), 1-30 │ 18 4.4.1.3. convergent validity convergent validity entails the extent to which a particular indicator represents the intended latent variable and also correlate with other indicators of the same latent variable (hair, money, samouel, and page, 2007). hence, this current study adopted the use of ave, this can be achieved when the ave is greater than 0.5 (fornell & larcker, 1981). as indicated in table 6, the values of the average variances extracted range between 0.539 and 0.801, suggesting acceptable values. 4.4.1.4. discriminant validity discriminant validity is also another form of validity test of measurement model which is aimed at examining the difference that exists between latent variable in a study (barclay et al., 1995). the assumption is that despite aiming at explaining the same thing, latent variables are expected to be dissimilar, hence, discriminant validity refers to the extent to which a particular latent variable is different from other latent variables (duarte & raposo, 2010). therefore, discriminant validity is the correlations among the latent variable and should be compared with the square root of the average variances extracted, the square root of the average variances extracted (values in bold face) were all greater than the correlations among latent variable as shown in table 7, this signifies adequate discriminant validity (fornell & larcker, 1981). 4.4.2. assessment of significance of the inner model after examining the outer model, the current study examined the inner model. the current study also applied the standard bootstrapping procedure with a number of 500 bootstrap samples and 307 cases to assess significance of the path coefficients the inner model which is concerned about r2, coefficient, p-value, predictive relevance (q2) and effect size (f2) which will be explained by the structural model with help of bootstrapping as shown in figure 3. table 7. discriminant validity fornell-larcker criterion variable 1 2 3 4 5 6 8 assurance 0.883 customer loyalty 0.694 0.843 customer satisfaction 0.503 0.566 0.753 empathy 0.721 0.668 0.402 0.842 reliability 0.698 0.756 0.573 0.641 0.895 responsiveness 0.775 0.753 0.533 0.665 0.823 0.891 tangibility -0.014 0.016 0.017 0.007 0.006 0.003 0.734 source: field survey data (2019) and computed by author using smart-pls sulaiman, muhammad, muhammad, & sabiu │mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria international journal of islamic economics and finance (ijief), 4(1), 1-30 │ 19 figure 3. structural model/ outer model source: field survey data (2019) and computed by author using smart-pls. 4.4.2.1. direct relationship the figure 3 above provides the graphical display of the regression coefficient (β) and tvalues of the hypothesis in this study, this current study uses a significance level of 5% (t-value= 1.96) two-tailed, table 8 provides standardized path coefficient (β), tvalues and confidence intervals as suggested by hair et al., (2010). table 8. direct relationship source: field survey data (2019) and computed by author using smart-pls hypothesis one was stated in alternative form as service quality positively influence customer satisfaction. the result revealed a significant effect between service quality and customer satisfaction at 0.05 significance level with t-value of 1.96 two-tailed (β = 0.546, t-value=10.330 & p-value= 0.000), hence we accept the alternative hypothesis. this finding corroborates with the finding of khatoon, et al., (2020), yadav and rai, (2019), ozkan, et al., (2019), yaqub, et al., (2019) and myo, et al., (2019) who found positive and significant relationship between service quality and customer satisfaction. hypothesis relationship beta t-value p-value findings 1 srq->cst 0.546 10.330 0.000 supported 2 srq->clt 0.672 15.285 0.000 supported 3 cst->clt 0.199 4.524 0.000 supported sulaiman, muhammad, muhammad, & sabiu │mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria international journal of islamic economics and finance (ijief), 4(1), 1-30 │ 20 hypothesis two was stated in alternative form as service quality positively and directly influence customer loyalty. the result revealed a significant effect between service quality and customer loyalty at 0.05 significance level with t-value of 1.96 two-tailed (β = 0.672, t-value=15.285 & p-value= 0.000), hence we accept the alternative hypothesis. this finding conforms with the finding of khatoon, et al., (2020), yadav and rai, (2019), ozkan, et al., (2019), yaqub, et al., (2019) and myo, et al., (2019) who found positive and significant relationship between service quality and customer satisfaction. hypothesis three also was stated in alternative form as customer satisfaction positively influence customer loyalty. the result revealed a significant effect between customer satisfaction and customer loyalty at 0.05 significance level with t-value of 1.96 two-tailed (β = 0.199, t-value=4.524 & p-value= 0.000), hence we accept the alternative hypothesis. this finding conforms with the finding of khatoon, et al., (2020), yadav and rai, (2019), ozkan, et al., (2019), yaqub, et al., (2019) and myo, et al., (2019) who found positive and significant relationship between service quality and customer satisfaction. 4.4.2.2. indirect relationship according to albers (2010), the indirect effect is the summation of both direct and indirect effects that exists between two particular variables. the basic idea of testing a mediating effect is to establish if the independent variable influence on the mediating variable can be extended to the dependent variable (ramayah, lee and in, 2011). thus, the mediation of the present study was to ascertain the indirect effect of the exogenous variable (service quality) on the endogenous variable (customer loyalty) through a mediating variable (customer satisfaction). the present study adopted the most robust method of bootstrapping or re-sampling mediation technique. the bootstrapping (re-sampling) technique has the advantage of analyzing both main and indirect complex model effect simultaneously as the case in this study. thus, making pls-sem as the most widely used method in mediation studies (chin, 1998; hair et al., 2011; hayes & preacher, 2010). however, pls-sem version 3.0 provides the result concurrently with that of the direct relationship as shown in table 9. table 9. indirect relationship source: field survey data (2019) and computed by author using smart-pls hypothesis relationship beta t-value p-value findings 1 srq->cst->clt 0.109 3.791 0.000 supported sulaiman, muhammad, muhammad, & sabiu │mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria international journal of islamic economics and finance (ijief), 4(1), 1-30 │ 21 from table 9 the relationship between service quality and customer loyalty was established through the mediation of customer satisfaction and hence the indirect effect is significant (β = 0.109, t-value=3.791 & p-value= 0.000). 4.4.2.3. variance accounted for furthermore, the study evaluates the variance accounted for (vaf) as recommended by hair et al. (2014). the vaf is aimed at evaluating the extent effect of the mediating variable. despite hayes (2013) submission that the effect of the mediating variable (full or partial mediation) should not be a source of worry so long as the indirect (effect) relationship is significant. however, vaf is a process that explains the proportional effect of indirect effect in relation to the total effect. accordingly, in line with ramayah et al., (2011) and hair et al., (2014) the extent of mediation is ascertained using vaf formula below: 𝑉𝐴𝐹 = 𝑎∗𝑏 𝑎∗𝑏+𝑐 where a = is coefficient value between independent construct and mediating construct, b= is coefficient value between mediating construct and dependent construct, c= is coefficient value between independent construct and dependent construct. therefore, variance accounted for 𝑉𝐴𝐹 = 0.546 × 0.199 0.546 × 0.199 + 0.672 𝑉𝐴𝐹 = 0.1391833 𝑉𝐴𝐹 = 13.9% the results indicate that 13.9% of the total effect has been explained by the mediating latent variable (customer satisfaction) on the relationship between service quality and customer loyalty. accordingly, it can be deduced that there is no mediating effect of customer satisfaction. this is in line with hair et al. (2013) classification, that vaf value that is less than 20% indicates absence of mediation, while 20% to less than 80% indicates partial mediation and 80% and above indicates full mediation. 4.4.2.4. assessment of variance explained in the endogenous latent variables the next is to determine the r-squared value which is an important segment in assessing the validity of the structural model. the r-squared is also referred to as coefficient determinant (hair et al., 2012). the r-squared sulaiman, muhammad, muhammad, & sabiu │mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria international journal of islamic economics and finance (ijief), 4(1), 1-30 │ 22 value clarifies the variance that exists in explaining endogenous variable as a result of one or two exogenous variables (hair et al., 2010). although the acceptable level of r2 value depends on the research context (hair et al., 2010), an r-squared value of 0.10 is minimum acceptable level. table 10. variance explained in the dependent variables source: field survey data (2019) and computed by author using smart-pls in predicting the variation in mediating and dependent variable in the model the findings revealed an r-square of (0.637= 63.7percent) and (0.299= 29.9%) respectively and this signifies the variance in customer satisfaction and customer loyalty. according to (hair, et al., 2012) the acceptable thresh hold value of accepting r-squared is 0.19, 0.50 and 0.75 described as weak, moderate and substantial. therefore, in case of variance in customer loyalty and customer satisfaction the r-squared are moderate and weak respectively. 4.4.2.5. assessment of effect size (f2) having assessed and confirmed the postulated hypotheses of the study, the next criteria for the evolution of the structural model is the effect size (f2) (hair et al., 2013). effect size indicates the relative effect of a particular exogenous latent variable on endogenous latent variable(s) by means of changes in the r-squared (chin, 1998). it is calculated as the increase in rsquared of the latent variable to which the path is connected, relative to the latent variable’s proportion of unexplained variance (chin, 1998). cohen (1988) describes f2 values of 0.02, 0.15 and 0.35 as having weak, moderate, strong effects respectively. table 11 shows the respective effect sizes of the latent variables of the structural model. from the table 11, it can be concluded that service quality as exogenous variables possess strong effect on explaining both customer loyalty and customer satisfaction, whereas, customer satisfaction possess weak effect in explaining customer loyalty. table 11. assessment of effect size (f2) independent variable dependent variable f2 effect size service quality customer loyalty 0.871 strong service quality customer satisfaction 0.426 strong customer satisfaction customer loyalty 0.076 weak source: field survey data (2019) and computed by author using smart-pls variable variance explained (r2) customer loyalty 0.637=63.7% customer satisfaction 0.299=29.9% sulaiman, muhammad, muhammad, & sabiu │mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria international journal of islamic economics and finance (ijief), 4(1), 1-30 │ 23 4.4.2.6. assessment of predictive relevance table 12. assessment of predictive relevance total sso sse q2 customer loyalty 1,595.000 921.157 0.422 customer satisfaction 1,595.000 1,344.223 0.157 source: field survey data (2019) and computed by author using smart-pls subsequent to determining the effect size or variation of the r-square, hair et al. (2013) recommended that predictive relevance of the model should be ascertained using stone-geisser’s (q²) (geisser, 1974; stone, 1974). the process is only befitting for endogenous reflective constructs to ascertain its predictive relevance in the model. if the predictive relevance (q2) value is greater than zero, then the model has predictive relevance (hair et al., 2013). table 12 presents the results of the cross-validated redundancy q2 test. the table 12 above revealed that cross-validation redundancy result for direct and indirect relationship in the model is q²=0.422 and q2=0.157 respectively, hence, all the models i.e. direct and indirect q2 is above zero and this signifies predictive relevance of the model. 4.4.2.6. model fitness. the recent development in pls-sem has come with some positive change, especially as a response to the constant critique of the need for a more rigorous analysis, especially for variance-based sem (henseler, 2017). one of these culminate development is the bootstrap-based tests of the overall model fit which is one of the key challenges in sem. in line with the previous studies and the recent update on the smartpls 3.2.6 software, the present studies used standardized root mean square residual (srmr), root mean square residual covariance (rms theta) and exact model fit test using d uls to examine the model fit of the present study. table 13. assessment of predictive relevance saturated model srmr 0.060 d_uls 2.032 rms theta 0.127 source: field survey data (2019) and computed by author using smart-pls the good of fit (gof) of the present study as presented in table 13 above, has indicated that the mode has achieved the threshold to establish that the model and data fit into the study. specifically, an srmr value of 0.060 is found to be ok as compared to the threshold of ≤ 0.08. in the same vein, the sulaiman, muhammad, muhammad, & sabiu │mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria international journal of islamic economics and finance (ijief), 4(1), 1-30 │ 24 duls values of the study is not significant with values of 2.032. similarly, the rms theta value of the study is 0.127 which is within the threshold values of ≤0.12-0.14. this signifies or indicate an overall model fit as suggest by (henseler et al., 2015., djikstra and henseler, 2015). v. conclusions and recommendations 5.1. conclusions the primary aim of this study is to examine the role of customer satisfaction as a mediator in the relationship between service quality and customer loyalty in jaiz bank plc kano state metropolis. specifically, the study attempts: (i) to determine the influence of service quality dimensions on customer satisfaction with jaiz bank plc of kano metropolis. (ii) to determine the influence of customer satisfaction on customer loyalty in jaiz bank plc of kano metropolis. (iii) to determine the mediating effect of customer satisfaction in the relationship between service quality and customer loyalty in jaiz bank plc in kano state metropolis. to solve this, the survey data is analyzed, and hence, the study drawn the following conclusions. service quality positively and significantly influence customer satisfaction and customer loyalty, whereas, customer satisfaction does not significantly mediate the relationship between service quality and customer loyalty among customers of jaiz bank in kano state metropolis, nigeria. 5.2. recommendations based on the outcome or empirical findings of the study the following recommendations are made. service quality is a pivotal factor to be consider by non-interest banks, hence providing good service delivery is necessary so as to maximum loyalty from the customers, the study also recommends the reviving of the existing regulatory bodies or institutions that will ensure proper implementation of service quality dimension i.e. (reliability, responsiveness, assurance, tangibility and empathy) in non-interest banks i.e.(jaiz bank) in kano state metropolis, nigeria. 5.3. recommendation for further research there is need to replicate this study in non-interest banks across all the states in nigeria in order to compare and contrast the findings so as to achieved proper generalisation. sulaiman, muhammad, muhammad, & sabiu │mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria international journal of islamic economics and finance (ijief), 4(1), 1-30 │ 25 references albers, s. 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(1996). the behavioural consequences of service quality, journal of marketing 60 (april), 31 – 46. sulaiman, muhammad, muhammad, & sabiu │mediating role of customer satisfaction between service quality and customer loyalty with non-interest bank in nigeria international journal of islamic economics and finance (ijief), 4(1), 1-30 │ 30 this page is intentionally left blank. international journal of islamic economics and finance (ijief) vol. 4(1), page 51-78, january 2021 socioeconomic impact of covid-19 in mena region and the role of islamic finance m. kabir hassan university of new orleans, united state, corresponding email: m.rabani@ku.edu.bh mustafa raza rabbani kingdom university, bahrain yomna abdullah university of bahrain sakhir, bahrain article history received: november 30th, 2020 revised: december 18th, 2020 accepted: january 21st, 2021 abstract this paper analyses the socio-economic impact of the noble corona virus (covid-19) on ‘middle east and north africa’ (mena) region as well as the role and opportunities of islamic finance post covid-19. the findings show that pandemic has affected the mena region massively like any other region in the world. since around 69% of the word’s crude oil supply is from this region alone, this causes it to suffer from dual shocks of covid-19 pandemic as well as the declining crude prices that is caused by shocks from both ends, negative supply shock and a negative demand shock. the 19 countries in mena region include from some of the richest countries of the world such as, qatar, kuwait, and saudi arabia, to some of the most vulnerable, poor and war ridden countries like yemen, syria, and morocco. to mitigate the adverse effects of the pandemic, we suggest some immediate actions that can be taken such as a public fund to support health system, financial support to individuals and sme’s, financial support to corporations in order to prevent job loss and layoff and assurance of liquidity in domestic markets to prevent liquidity crunch. finally, the paper analyses the role of islamic finance in the region in recovery post covid-19 and show that islamic finance can be utilized as an alternative financial system in providing the relief to the covid-19 affected people and entrepreneurs. keywords: africa, covid 19, fintech, economic policy jel classification: c31; p19; p29; p48; z12 article type: research paper @ ijief 2021 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.v4i1.10466 web: https://journal.umy.ac.id/index.php/ijief/article/view/10466 citation: hassan, m. k., rabbani, m. r., & abdullah, m. (2021) socioeconomic impact of covid-19 in mena region and the role of islamic finance. international journal of islamic economics and finance (ijief), 4(1), 51-78. doi: https://doi.org/10.18196/ijief.v4i1.10466 https://doi.org/10.18196/ijief.v4i1.10466 https://doi.org/10.18196/ijief.v4i1.10466 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v4i1.10466&domain=pdf hassan, rabbani, & abdullah │ socioeconomic impact of covid-19 in mena region and the role of islamic finance international journal of islamic economics and finance (ijief), 4(1), 51-78 │ 52 i. introduction 1.1. background this paper analyses the socio-economic impact of covid-19 on ‘middle east and north africa’ (mena) region as well as it also explores the role of islamic finance in post covid-19 revival of economic activities. noble corona virus popularly known as the covid-19 started in the wuhan province of china in november 2019. the first case for the covid-19 was detected on 17 november 2019 in wuhan city of china (islamic development bank group, 2020). since then, it has already reached and made a mark in almost every country of the world. in first phase of the economic impact of the virus, it mainly triggered because the inter-dependence of countries on each other mainly on china, being the most important contributor in the global supply chain. in february 2020, china reacted with a massive lockdown to stop the spread of the virus and consequently it halted the economic activities. china is one the biggest exporter of raw materials and finished goods in mena region and economic contraction in the china created spillover effect in this region also as industries in mena are mainly dependent on china for supply of primary and intermediate raw material (ozili, 2020). the covid-19 is becoming critical with the daily increase in number of cases and number of deaths rising in mena countries, mainly, bahrain, saudi arabia, egypt and morocco. by march 2020, covid-19 has already reached to every country in mena region and disrupted the economic activities. the first covid-19 case in mena was detected in united arab emirates (uae), when a four-member family with a travel history to china was found covid-19 positive in january 2020 (ehrlich, ghimire, khraiche, & raza, 2020). mena countries are characterized by the varying level of health and other economic infrastructure across the region. according to the world bank data, there is a varying level of health infrastructure in mena region illustrated by the number of physicians per 1000 people, for instance, qatar has 7 physicians per 1000 population whereas in the other hand countries like yemen have only 0.5 physician (el hayek et al., 2020). mena region is considered as one of the most important sources for the global financial stability due to its huge oil, natural gas and petroleum reserves (boukhatem & ben moussa, 2018). according to the world atlas, it consists of the 19 countries including all 6 gcc counties, muslim countries in gulf and north africa region. the term mena is defined as the muslim majority countries located in this region, although few countries in the region are not muslim dominated (policy digest, 2012). mena region has grown in its geohassan, rabbani, & abdullah │ socioeconomic impact of covid-19 in mena region and the role of islamic finance international journal of islamic economics and finance (ijief), 4(1), 51-78 │ 53 political importance since ‘arab spring’ of 2011, when several it is long serving dictatorial political leader was dethroned. even before covid-19, mena was regarded as a troubled region due to the civil war in iraq, yemen and syria resulting into the biggest civil refugee since world war ii. according to an estimation from world bank, 15 million people have fled these wars ridden countries and taken shelter in countries like, jordan, lebanon and turkey. covid-19 is having a significant impact on the economies of the mena region, leading to the fall in oil production, hospitality and tourism are worst affected and decline in gdp per capita income. disruption in global supply chain has affected the domestic production, demand, and supply. covid-19 presents an arduous threat for the vulnerable and fragile economies in mena region as the threat is more alarming for the countries with low resources and in a situation of continuous war and conflict, such as afghanistan, iraq, syria, yemen, lebanon, and somalia. remittances constitutes of around 14% of gdp in fragile economies of the mena region and it is expected to go down by 20% due to fall in global income (li, chung, pireku, beitzel,, sanborn, tang, hammer, ritter, wan, berry, & hang, 2020). it is also going to hit the gdp of these fragile economies as it is expected to shrink by average 7% across 2020 as compared to the average growth of about 2.5% in 2019, consequently it will lead to fall in gdp per capita from $ 2900 in 2018-19 to $ 2100 in 2020 (imf, 2020). the oil exporting economies will be the biggest hit due to fall in crude oil prices, creating a fiscal ripple effect by reducing the private consumption expenditure and reduction in energy investments. islamic finance and banking are a significant part of the development agenda of the countries in the mena region. it has emerged as the growth stimulator in the region as there is clear evidence that islamic finance stimulated the growth in this region (nicola et al., 2020). since, islamic finance is accepted as the ethical finance and based on the rules and principles prescribed by the sharia, it is expected to play a huge role in recovery of the economies postcovid-19. islamic finance in combination with the financial technology will be the most important tool in fight against the economic consequences of the covid 19 (hassan, 2020). islamic finance has several financial services like, qardh-al-hasan, zakat, waqf and social sukuk which are tailor made for the crises and pandemic-like situation (hassan, rabbani &yomna, 2020; syed, khan, rabbani & thallasinos, 2020) . 1.2. objectives this paper investigates the socio-economic impact of covid 19 and role of islamic finance as a post covid-19 response in the region. the emerging and hassan, rabbani, & abdullah │ socioeconomic impact of covid-19 in mena region and the role of islamic finance international journal of islamic economics and finance (ijief), 4(1), 51-78 │ 54 budding response of literature rated to covid-19 has given little response to all important mena countries. the findings show that covid-19 has created a massive disruption in supply chain, falling production, falling domestic demand due to loss of income and loss of jobs. the governments and policymakers should take immediate account of the prevailing situation and devise an enduring to take the economies out of it. we suggest that islamic finance can be entrusted with the more decisive and important role in post covid-19 revival. our paper contributes to the existing strand of literature in the several ways. first, we are the first to document the socio-economic impact of covid 19 in mena region. second, role of islamic finance in recovery from covid-19 has not be examined and analyzed so far, it will prove to be an asset for the governments and policymakers. the findings of the study will also add to the growing list of literature conducted on other countries and regions of the world such as (hassan et al. 2020; mohammad et al. 2020; wójcik 2020). finally, the paper will contribute the filament of literature on the impact of covid-19 on various sectors of the economy (hassan et al., 2020; khan et al., 2021; rabbani, abdullah, bashar, khan and ali, 2020; abdullah, hassan and rabbani 2020; duszak, maze, sessa, fleshon, golding, nikola, hughes 2020; ghani, 2020; hepburn, o'callaghan, stern, stiglitz and zenghelis, 2020) our study will open avenue for future work to conduct a methodologically rigorous research on the socio-economic impact of covid 19 and role of islamic finance aftermath. the present study is divided into the five parts. the first part introduces the paper and highlights the objectives of the study whereas, second part reviews the available literature on covid-19 and provides the background theory. third part of the study presents the methodology used for the study. in fourth part we analyses the data related to covid-19 and its economic impact on various sections of the society. fourth part also discusses the solution to the economic damage created by the pandemic and proposes islamic social finance tool as the probable solution. in fifth and final section, we conclude and provide the recommendations based on the analysis and discussion. ii. literature review 2.1. background theory economic impact of covid-19 is highly uncertain, and it is difficult to devise a proper tool to measure its exact effect on the economy which makes it even difficult for the policymakers and governments to formulate an appropriate strategy and macroeconomic response to tackle the economic consequences hassan, rabbani, & abdullah │ socioeconomic impact of covid-19 in mena region and the role of islamic finance international journal of islamic economics and finance (ijief), 4(1), 51-78 │ 55 of the virus (mckibben & fernando, 2020). (achou et al., 2020) presents a theory of keynesian supply shocks, where they argue that the supply shocks always stimulate the aggregate demand than the shocks themselves. they further conclude that the economic consequences associated with the covid19 such as, lay off, shutting down of the industries, unemployment and firm exits may have this feature. (erceg, ružojčić, and galić 2020; catherine, miller, and sarin 2020) presented a comprehensive review of the socio-economic review of covid-19 pandemic where they divided the total economy in to three sectors, primary, secondary and tertiary. primary sector included the industries involved in extraction of raw material such as agriculture, petroleum, and oil etc. they concluded that there is around 20% drop in the prices of agricultural produce and in the oil and energy sector the deceleration in the number of covid cases and caused some stabilization in oil prices and there is still much uncertainly. the secondary sector includes manufacturing industry. they concluded that on an average manufacturing industry are predicted to reduce its global production by a significant margin. they included education, healthcare and finance industry in the tertiary sector and concluded that, this is the worst hit sector among the three and immediate liquidity is required in this sector. 2.2. previous studies in the past few of months there has been a wave of research on economic impact of covid-19 and ways to overcome the consequences brought in by the covid-19 and its associated measures. (sharif et al., 2020) argues that most of the studies focuses on the large problems that humanity has faced in a long time and it lacks substance as far as investigation into economic impact of covid-19 is concerned. most of the studies are of general nature focusing on a country or region. hassan, et al (2020) have done an inclusive analysis of post covid-19 economic impact and role of islamic finance. they concluded that the covid19 has shocked the entire world with its swift spread across the globe causing a pause to the normal way of living. economies are on the verge of crashing, banks are facing liquidity problems, regulators do have the liberty of taking time to come up with solutions and what not. islamic banks were already facing issues due to fall in crude prices in saudi arabia and iran. with covid19, the problems are only getting worse, in countries where emis are delayed for a period of 3-6 months, banks must survive with literally 0 cash inflows. however, fintech seems to be booming faster than ever in this period due to the need of living a contactless lifestyle. islamic finance seems to have a solution for building up the falling businesses and economies because of the hassan, rabbani, & abdullah │ socioeconomic impact of covid-19 in mena region and the role of islamic finance international journal of islamic economics and finance (ijief), 4(1), 51-78 │ 56 foundation on what sharia-based financing is assembled. as per a french economist, m. allais, the only way to recover from the damages caused by the coronavirus pandemic is through structural reform. the structural reform must be in way of reduced burden on consumers and increase support for them to get back up. the projected reform requires the interest rate to be charged at 0% and tax rate to be around 2%. islamic finance provides tools to support affected communities such as zakat, qard al hasan, social sukuk and waqf. these social tools can be used to recover from the blow caused by the covid-19 impact to needy individuals, small and medium sized enterprises (smes). the coronavirus pandemic has hit a pause button to normal life and adversely affected small businesses and mainly the poor community. this study provides a solution to help small businesses recover and sustain this highly unstable and depressed economy. the implementation of islamic finance tools such as, qard al hasan and zakat jointly along with fintech as a solution is explored in this research. qard al hasan are loans provided without any expectation of being repaid while zakat is the islamic tax which must be paid by every eligible muslim. a model is developed by (mohammad et al., 2020) to provide flexible loans using artificial intelligence and natural language processing (nlp). this model comprises of three modules – 1) gathering data to assist in decision making process, 2) to recommend a potential list of interested lenders 3) to uphold records of information and deliver required communication. a webbased platform of this model can be achieved with the use of data analytics, nlp and artificial intelligence resulting in transparency and efficiency. fintech will provide islamic finance with the necessary tools to help the community by alleviating poverty and ensuring social justice, which is the foundation of shariah based finance. with the use of nlp and artificial intelligence, this model of zakat and qard al hasan can benefit many businesses and boost the economy as a result. however, huge costs would have to be incurred to develop such a platform and with governments already over-burdened, it’s a hard path ahead (mohammad et al. 2020; damak, roy, and mensah 2020;) conduct an empirical analysis on islamic equity investments indices around the world and concluded that islamic finance indices have outperformed their conventional counterpart in the first quarter of 2020. with the covid outbreak, investors find islamic equity investments as safe heaven asset due to its stringent screening it also hedging benefits to the investors. they further concluded that the excess benefits provided by the islamic indices are due to the systemic risk, it means that the hedging benefit comes at an additional cost. hassan, rabbani, & abdullah │ socioeconomic impact of covid-19 in mena region and the role of islamic finance international journal of islamic economics and finance (ijief), 4(1), 51-78 │ 57 iii. methodology following the world bank, we divide the 19 mena countries based on the availability of oil resources and the size of their native populations. the mena region consists of 19 countries which can be divided in to three groups namely gulf cooperation council (gcc), developing oil exporters and developing oil importers (mena world bank monitor, 2018). we collect data regarding the cases and deaths of covid-19 during the period march 2020 to july 2020 from the world health organization (who). we employ discourse analysis which is used for analyzing a social issue through a variety of discourse (wodak & meyer, 2011). the period of analysis is from 1st january 2020 to 1st july 2020. table 1 presents the various data sources used. in the gcc countries, the first covid case was detected on 25th january 2020 in the united arab emirates (uae) as four members of a family with a travel history to wuhan city in china was confirmed with a positive covid case. our sample period allows us to capture all mena countries governments' response measures and the impact of those policy on individuals and institutions. furthermore, this period involves a strict lockdown and announcement of governments' stimulus packages. table 1. data sources data source period of data covid 19 cases who and worldometer 25th january 2020 to 22nd nov. 2020. mobility across gcc countries gulf business magazine 25th january 2020 to 22nd nov. 2020. curfew across countries respective government websites 25th january 2020 to 22nd nov. 2020. policy response imf and respective government websites. updated till 1 july 2020. foreign aid spending media sources updated till 1 july, 2020. hassan, rabbani, & abdullah │ socioeconomic impact of covid-19 in mena region and the role of islamic finance international journal of islamic economics and finance (ijief), 4(1), 51-78 │ 58 iv. result and analysis 4.1. trend analysis the number of total confirmed cases in the mena countries represents about 6% of the global numbers. whereas, the number of total deaths cases in the mena countries represents about 7% of the global numbers. the gcc countries has the highest number of confirmed cases compared to the other two regions of the mena countries. table 2 presents the data on total (new) confirmed cases in last 7 days and change in new cases in last 7 days as of 22 nov. 2020. while, the highest total number of deaths is seen in developing oil exporters and the lowest number of deaths is observed in gcc countries. a possible reason this trend is the good health system in gcc countries which prevents the deterioration of the health status of the active cases. table 2. total new and confirmed cases in last 7 days as on 22 november 2020 region new cases in last 7 days (%) change in new cases in last 7 days * cumulative cases (%) new deaths in last 7 days (%) change in new deaths in last 7 days* cumulative deaths (%) europe 1 771 673 (44%) -6% 16 873 383 (29%) 32 684 (49%) 10% 375 368 (27%) americas 1 603 498 (39%) 11% 24 563 600 (42%) 22 005 (33%) 15% 697 740 (51%) south-east asia 351 822 (9%) -6% 10 367 553 (18%) 4706 (7%) 4% 158 566 (12%) eastern mediterranean 250 746 (6%) 5% 3 796 649 (7%) 6299 (9%) 10% 96 354 (7%) africa 47 106 (1%) 15% 1 446 041 (2%) 1088 (2%) 30% 32 538 (2%) western pacific 36 046 (1%) 9% 834 216 (1%) 439 (1%) 1% 16 816 (1%) global 4 060 891 (100%) 1% 57 882 183 (100%) 67 221 (100%) 11% 1 377 395 (100%) source: who epidemiological update – 24 november 2020 hassan, rabbani, & abdullah │ socioeconomic impact of covid-19 in mena region and the role of islamic finance international journal of islamic economics and finance (ijief), 4(1), 51-78 │ 59 table 3. a six months’ trend analysis 12 august 12-july 12-june 12-may 12-april 12-march total confirmed cases 20162474 993,426 568,430 240,237 92,137 9,914 new cases 214985 12,926 12,565 7,392 3,488 1,336 total confirmed deaths 737417 24,762 13,281 8,686 5,111 367 new deaths 4835 409 236 79 173 67 table 3 presents a six months’ trend analysis for the total (new) number of confirmed and the total (new) number of deaths (who stopped issuing daily situation report 6 august onwards). there has been an evidenced growth in both the number of cases and deaths during our sample period. the highest growth rate in the total number of confirmed cases is seen in april of about 829.4% while the lowest growth rate is evidenced in july of about 74.7%. a similar trend is observed in the total numbers of deaths as the highest growth rate is documented in april. while the lowest growth rate in the total number of deaths is seen in june of about 52.9%. regarding the new cases, the lowest growth rate in new cases is evidenced in july, while, there was a drop in the number of new deaths in may as shown by the negative growth rate compared to the number of deaths in april. figure 1 documents the trend analysis for five months in the gcc countries. we observe a continuous increase in the total number of confirmed cases. whereas, the number of deaths remains relatively low in the gcc countries. a huge increase in the total number of confirmed cases is seen in april, being the highest growth rate of about 1964% compared to the total number of confirmed in march. while, the growth rate in the numbers of total confirmed cases and deaths is at lowest level in july, suggesting that the virus is spreading at a lower rate compared to earlier months. hassan, rabbani, & abdullah │ socioeconomic impact of covid-19 in mena region and the role of islamic finance international journal of islamic economics and finance (ijief), 4(1), 51-78 │ 60 figure 1. trend analysis in gcc countries figure 2 presents the numbers of cases and deaths in developing oil exporter countries. the highest growth rate in the total number of confirmed cases is seen in april of about 705%, whereas the lowest growth rate is evident in may of about 61%. regarding the total number of deaths, the highest growth rate is also seen in april and the lowest growth rate of 36% is observed in june. figure 3 presents the number of confirmed cases in oil importer countries. a similar trend to the other two groups of mena, he highest growth rate in the total number of confirmed cases is seen in april of about 3114%, whereas the lowest growth rate is evident in july of about 99%. regarding the total number of deaths, the highest growth rate is also seen in april and the lowest growth rate of 115% is observed in june. figure 2. trend analysis in developing oil exporter countries 0 75.000 150.000 225.000 300.000 375.000 450.000 525.000 600.000 march april may june july total confirmed cases new cases total confirmed deaths new deaths 0 50.000 100.000 150.000 200.000 250.000 300.000 350.000 400.000 march april may june july total confirmed cases new cases total confirmed deaths new deaths n u m b e r o f c a s e s n u m b e r o f c a s e s month month hassan, rabbani, & abdullah │ socioeconomic impact of covid-19 in mena region and the role of islamic finance international journal of islamic economics and finance (ijief), 4(1), 51-78 │ 61 figure 3. trend analysis in developing oil importer countries table 4 reports the average growth rate during the five months, from march to july 2020, in the total number of confirmed cases and deaths across the three groups of mena countries. overall, the highest average growth rate in total confirmed cases as well as the total number of deaths is found in oil importer countries. some possible reasons for this trend are inadequate precautionary measures and poor health systems. table 5 show the country-level situation of covid-19 in mena countries. the highest number of confirmed cases and death is found in iran with 841,308 cases. whereas, the lowest number of confirmed cases is seen in yemen and the lowest number of deaths is in somalia. there are no countries with zero reported new cases or death in last one week as on 22 nov. 2020. the total reported cases are on the declining side in some countries but second wave has already been started in the countries like iran and jordan. two countries with zero reported new cases on 12th july 2020 which are syria and djibouti, while, 8 of the 19 mena countries have recorded zero death on that day. within the gcc countries, iran has the highest number of confirmed cases. in the developing oil exporters' countries, iran also holds the first place in the number of total confirmed (deaths) cases. egypt has the highest number of total confirmed (deaths) cases among the developing oil importers. 0 20.000 40.000 60.000 80.000 100.000 120.000 march april may june july total confirmed cases new cases total confirmed deaths new deaths n u m b e r o f c a s e s month hassan, rabbani, & abdullah │ socioeconomic impact of covid-19 in mena region and the role of islamic finance international journal of islamic economics and finance (ijief), 4(1), 51-78 │ 62 table 4. average growth rate during the five months in the total number of confirmed cases and deaths average growth rate in total confirmed cases average growth rate in total deaths gcc 725% 279% developing oil exporters 228% 341% developing oil importers 913% 1658% table 5. covid-19 situation in mena countries as of 22 november 2020 reporting country/te rritory/are a new cases in last 7 days cumulative cases cumulative cases per 1 million population new deaths in last 7 days cumulative deaths cumulative deaths per 1 million population iran 91 783 841 308 10 016 3 293 44 327 528 jordan 36 856 178 161 17 461 468 2 172 213 morocco 32 751 320 962 8 696 559 5 256 142 iraq 16 640 533 555 13 265 302 11 925 296 lebanon 10 975 115 242 16 884 88 894 131 united arab emirates 8 650 157 785 15 953 20 548 55 tunisia 8 132 87 471 7 401 473 2 752 233 libya 4 180 76 808 11 178 73 1 068 155 kuwait 3 393 139 734 32 720 28 863 202 egypt 2 129 112 676 1 101 93 6 535 64 saudi arabia 2 084 355 034 10 198 120 5 761 165 oman 1 918 121 360 23 765 39 1 365 267 qatar 1 492 137 062 47 574 1 235 82 sudan 1 111 15 839 361 74 1 193 27 bahrain 1 068 85 591 50 301 5 338 199 syria 541 7 154 409 31 372 21 somalia 81 4 382 276 1 108 7 yemen 1 2 073 70 2 605 20 4.2 socio-economic impact of covid-19 on mena countries 4.2.1 impact on health care sector covid-19 is a health crisis, therefore, it is expected to have a significant impact on the health care sector. the impact of the pandemic depends on the status of the health care infrastructure which differ across the mena countries. overall, the health care sector measured by the number of physician per 1,000 people is poor in mena region compared to europe and north america. table 6 reports these statistics during the period 1990-2017. hassan, rabbani, & abdullah │ socioeconomic impact of covid-19 in mena region and the role of islamic finance international journal of islamic economics and finance (ijief), 4(1), 51-78 │ 63 table 6. number of physicians per 1,000 people source: https://data.worldbank.org/ compared to other countries in mena region, the gcc countries have a good health care sector as in all of the 6 gcc countries, the number of doctors and nurses are above the world average (gcc stat, 2020). compared to other gcc countries, kuwait is considered to be best in terms of number of hospital beds, doctors and nurses (gcc stat, 2020). the negative impact of covid-19 on gcc health care sector include the burden on the current health care systems, delay on pre-covid-19 scheduled appointments and the effect on some health departments such as physical therapy and dental services as some of these services were banned for some time as a measure of social distancing (gcc stat, 2020). in a different context, egypt has a low level of health care infrastructure, supplies and protective tools, which caused the pandemic to affect a large number of medical staff (ozili, 2020). a similar concern was raised in morocco due to the fear of the burdening of the current health care system. overall, the world bank had concern on the impact of covid-19 on african countries due to their poor health care systems. some of the mena countries such as yemen, libya and syria are suffering from political conflicts which makes their health responses more challenging. fekri and al-awlaqi (2020) indicate that the health care system in yemen is fragile and there are concerns whether it will be able to cope with the spread of covid-19. the concerns include the lack of protective equipment, shortage of medicines and supplies, limited number of laboratories and isolation locations. mikael and al-jumaili (2020) argue that the health care sector in iraq faces several challenges in reducing the spread of the virus. these challenges include shortage of protective equipment, hygiene tools, quarantine facilities and ambulances and low level of public awareness. in attempts to support the health systems and slow the spread of the virus, the world bank has supported countries with medical supplies, technical assistance and policy advice (world bank, 2020). the world bank recommends that the government spending need to be devoted to health care sector along with establishment of a strategy to reduce the spread of the virus. it also suggested that there will be a need to continue in random tests and boost the capacity of the department of intensive care unit. region 1990 2000 2010 2017 mena 0.69 1.25 1.57 1.32 european union 2.95 3.08 3.35 3.74 north america 1.83 2.52 2.39 2.61 https://data.worldbank.org/ hassan, rabbani, & abdullah │ socioeconomic impact of covid-19 in mena region and the role of islamic finance international journal of islamic economics and finance (ijief), 4(1), 51-78 │ 64 4.2.2 impact on stock markets the global stock markets have reacted negatively to the spread of covid-19 due to the increase in risks, low demand and supply disruptions. the stock markets in the mena region have documented a similar trend. according to the gcc statistical center, the stock markets in the gcc countries have recorded a negative return starting from january 2020 to march 2020. figure 4 presents the return of selected mena stock markets during the period january 2020 to april 2020. figure 4. performance of selected mena stock markets during the period january 2020 to april 2020. the highest drop was seen in march of about 15.7%, however, in the next month the stock markets recovered achieving a return of 9%. the highest drop in february was in qatar market by about 9.1%, whereas in march, dubai financial market, had the highest decline of 31.6% which also had the highest increase in return in april 2020 of about 14.4%. oman was the best performing market during the period from january to april 2020, with the lowest decline of 2.5%. (ozili & arun, 2020) show that companies listed in casablanca stock exchange have evidenced a drop in value in march 2020 due to the announcement of confirmed cases of covid-19. the egyptian stock market index (egx 30) has dropped by 39% during the period from february to april 2020 (oecd, 2020). 4.2.3 impact on tourism sector according to the world travel and tourism council, the tourism sector is about $245 billion of the gdp of the middle east countries and it provides 6.7 million jobs. table 7 reports the statistics of tourism and travel gdp in 2018 and three possible scenarios in 2020. the council argues that the baseline scenario suggests that the covid-19 will cause a 51% job loss and in its -40,00% -30,00% -20,00% -10,00% 0,00% 10,00% 20,00% adx dfm tadawul qatar bahrain oman kuwait january february march april hassan, rabbani, & abdullah │ socioeconomic impact of covid-19 in mena region and the role of islamic finance international journal of islamic economics and finance (ijief), 4(1), 51-78 │ 65 table 7. impact of covid-19 on tourism and travel gdp region 2019 best case loss baseline case loss worst case loss middle east $245 billion $99 billion $125 billion $179 billion africa $168 billion $53 billion $75 billion $120 billion source: world travel and tourism council contribution to the gdp. the number of international (domestic) visitors will decline by 54% (35%). while in the african countries, the travel and tourism adds $168 million to the gdp and provides 24.6 million jobs. there will be about 44% drop in number of jobs and 45% decline in its contribution to the gdp due to the pandemic. the number of international (domestic) visitors will decline by 50% (35%). 4.3 economic evidence according to the world bank, the gdp growth in mena countries is expected to decline by 1.1% during 2020 due to the health concerns, social distancing measures and the crash in the oil prices. furthermore, the real gdp per capita is anticipated to contract by 2.6% during this year because of the decline in demand mainly in oil and tourism sectors. based on the gcc statistical center, the gdp of gcc countries is anticipated on average to contract by 2.2% in 2020, while it will recover it 2021 to reach on average to 0.4%. the oil sector is one of the main sectors for mena countries as many of them are oilexporters countries. the output of the oil exporter countries is predicted to contract by 3.9% and 0.6% is the expected growth rate in oil-importers countries. overall, it is anticipated that the pandemic will cost the mena countries about us$116 billion which represents 3.7% their gdp in the year 2019 (world bank, 2020). table 8 shows the projected real gdp growth of mena countries during 2020 based on the international monetary fund (imf) estimations. the majority of mena countries are expected to have a negative rate of real gdp growth due to the pandemic and decrease in oil prices. the only two countries with positive gdp growth are egypt and djibouti. the highest decline in gdp growth is expected in libya, followed by lebanon. while, the lowest contraction in the gdp is anticipated to be in kuwait. the pandemic has started as a health crisis but then became an economic recession due to low demand caused by social distancing, shut down policies, and fear. this low demand in turn had affected the supply side which resulted in the closures of some companies, laid of employees and low revenues. hassan, rabbani, & abdullah │ socioeconomic impact of covid-19 in mena region and the role of islamic finance international journal of islamic economics and finance (ijief), 4(1), 51-78 │ 66 table 8. projected real gdp growth in mena countries during 2020 country projected real gdp growth in 2020 (%) gcc bahrain -3.6 kuwait -1.1 oman -2.8 qatar -4.3 saudi arabia -6.8 uae -3.5 developing oil exporters algeria -5.2 iran -6 iraq -4.7 libya -58.7 yemen -3 syria na developing oil importers djibouti 1 egypt 2 jordan -3.7 lebanon -12 morocco -3.7 tunisia -4.3 west bank &gaza na 4.4. sociological evidence the pandemic has magnified some of the challenges faced by mena countries such as the inefficiency in the public sector, the low competitiveness between businesses, and high unemployment rate of about 25% pre-pandemic, across youth and females which is a main problem given that majority of the population are under 35 years and 40% of the unemployed are women (world bank, 2020). similarly, the unemployment rate is also expected to increase in the gcc countries due to the high number of employees in the services sector which was adversely affected by the pandemic (gulf health council, 2020). furthermore, the poverty is a main concern in some of the mena countries, as in 2011, 42% of mena's population lived on daily income below us$5.50 (world bank, 2020). the poverty problem makes the implementation of precautionary measures, such as proper hand washing and hygiene, social distancing and work from home scheme, very challenging. as a precautionary measure, most countries worldwide have taken the decision of school’s closure. the north african countries have closed their hassan, rabbani, & abdullah │ socioeconomic impact of covid-19 in mena region and the role of islamic finance international journal of islamic economics and finance (ijief), 4(1), 51-78 │ 67 schools by middle of march, whereas the gcc countries have taken early closure decision by the end of february. unesco suggest the continuation of education using virtual learning platforms. the success of this suggestion depends on the availability of such platforms and tools in a country, which is not the case in all mena countries. furthermore, staying at home may increase violence, decrease social networking and activities between students. 4.5. role of islamic finance and opportunities islamic finance is considered as the stable financing method that can promote financial stability, growth, financial inclusion and generating long term employment. it precludes the unethical and unfair trade practices such as, riba, gharar, maisir, and excessive speculation etc. (hassan and soumar 2015). islamic banking and finance has an important role in the development agenda of the mena region due to its relevance in the overall development of the region as well as development of the individual countries in the region (naceur & ghazouani, 2007). though the current growth and potential development of islamic banks is very promising among gcc nations but when observe other countries in the mena region, the situation is not symmetric, as islamic banking is relatively new with most of the banks are less than 40 years old and competing with each other. the recent technological advancements such as growth of fintech and changes in customers’ demand increase the complexity of the situation (yu & hassan, 2008). looking at the economic challenges such as financial inclusion, inequality of income and employment generation (chowdhury & shumon, 2020) faced by the mena countries, the role of islamic finance becomes of utmost important as it is more suited to solve the issues of income inequality, financial inclusion and employment generation (kim et al., 2018). a potential growth of islamic finance is difficult to achieve in this region partly due to spread of banking assets across many institutions in the region. if islamic finance want to grow and provide the alternative banking they need to be more customer centric which means they need to provide and customize its financial services according to the needs and demands of the customers in the specific countries and region (boukhatem & ben moussa, 2018). standard and poor’s (s&p) report in june 2020 indicates that the pandemic offers a growth opportunity for the islamic finance, which is more cohesive, transformative and consistent. though islamic finance industry grew at an overwhelming 11.4% in 2019 but the growth is expected to be in single digit during 2020-21 (s&p, 2020). with appropriate coordination between different islamic finance stakeholder and use of financial technology, islamic hassan, rabbani, & abdullah │ socioeconomic impact of covid-19 in mena region and the role of islamic finance international journal of islamic economics and finance (ijief), 4(1), 51-78 │ 68 finance has the potential to emerge as a new avenue for the investors as well as to serve as a sustainable finance model to various stakeholders (sun et al., 2020). 4.5.1 solution to the health and economic crises and the role of islamic finance the outbreak of covid-19 pandemic, mainly a health emergency has disrupted all walk of social, political and economic life of the societies at all levels, especially the poor, daily wage laborers, marginal and vulnerable section of the society including small and micro enterprises (mohammad et al., 2020). the economic damages caused by the pandemic is massive and it will take years to heal and recover (sharif et al., 2020). islam is the complete way of life and it has solution to the every challenges posed by the society, if the principles of qur’an and sunnah applied in the right spirit and direction (“islamic finance: principles and practice,” 2010). dealing issues like the current pandemic in islamic finance must be addressed holistically including islamic social finance (isf), islamic commercial finance (icf) and policies of the government with respect to micro and macro policies. the pandemic has adversely affected the islamic commercial finance and in this case the governments and islamic social finance has to play the leading role in recovery during and post covid. historically, islam has proved that the islamic social finance is the way to go during the pandemic like these. 4.5.2 lesson from crisis management policies of umar bin khattab umar bin khattab (r.a.), second and longest serving caliphate among the rashidun caliphate in islamic history faced a similar pandemic named as amwas including severe drought and famine. it was so severe that people had nothing to eat, the livestock were dying, and wild animals came to the town and it was a huge panic among the people. people from the far flung areas travelled to the madina munawwara to seek help and advice from the caliphate umar bin khattab (r.a.). umar bin khattab (r.a.) is historically regarded and respected as one of the most dynamic and dedicated ruler who is also famous for serving rather than getting served (patmawati, 2016). the caliphate took several policies which can be named as the tools of islamic social finance to deal with the problem of the crises. the policies adopted by the caliphate umar bin khattab (r.a.) included; 1. the zakat collection on livestock was abandoned and delayed due to the fact that several livestock died and also farmers could use these livestock for food purposes. 2. the reserve fund from bait-ul-maal was used to help the poor and affected people for food and medical purposes. hassan, rabbani, & abdullah │ socioeconomic impact of covid-19 in mena region and the role of islamic finance international journal of islamic economics and finance (ijief), 4(1), 51-78 │ 69 3. the rich and people from the madinah and nearby area was encouraged to donate heavily and help the affected people. 4. people were encouraged to slaughter their camels for food as they do not eat camel meat and even during emergency period. 5. the punishment for stealing the food was relaxed as people were finding hard to feed their families. the basic spirit of islam and its ethical principles of love for humanity, compassion, togetherness and global brotherhood remains same in every situation (iqbal & lewis, 2009). islamic finance has changed as it has adopted to the needs and requirements of the modern competitive world without compromising the basic ethos and principles of sharia. in the following section, we talk about the role and tools of islamic social finance that can be utilized to fight the economic consequences caused by the pandemic. 4.5.3 islamic finance tools during and post covid-19 covid-19 has caused a great damage to the real economy and it is the principal reason for the slowdown in the core islamic finance markets and rising unemployment. the predominant migrant population in mena region as well as comprehensive and timely stimulus package announced by the respective governments will absorb some of the shocks in the short run (rabbani et al., 2021). however, in the long run, loss to several stakeholders is expected. islamic finance and its instruments can help the economy, banks, corporate and financial institutions to sustain and pass this difficult time. some of the social instruments as described by (hassan et al. 2020) that could be used during and as a post covid measure are explained as follows: figure 4. islamic finance tools during and post covid source: adopted from hassan et. al, 2020 hassan, rabbani, & abdullah │ socioeconomic impact of covid-19 in mena region and the role of islamic finance international journal of islamic economics and finance (ijief), 4(1), 51-78 │ 70 figure 4 shows that islamic finance has a wide range of tools that can help and serve the society in times of crisis. furthermore, if these islamic tools is combined with the innovative technologies like fintech it can be very useful to help the covid affected and vulnerable parties of the society (m.r. rabbani et al., 2021), (rabbani, 2020). financial technology (fintech) is the use of innovative technology in delivering the financial services to the users (atif et al., 2021), (khan and rabbani, 2020a; khan 2020b). islamic finance can play a vital role in the strategy of responses to covid-19 as its tools can well suited to each stage of the pandemic (rabbani et al, 2020). short run and emergency support: islamic finance can cater to the needs of the poor and needy on immediate basis. in other words, the main objective of these tools is to help the poor and needy in times of need and crisis. some of these short run emergency support services provided by the islamic finance include. zakat: it is the compulsory charity from the eligible muslims for the poor and needy every year. muslims are required to contribute 2.5% of their wealth for the poor and needy every year. zakat can be an important islamic finance tool to provide immediate and urgent financial support. often zakat payers donate its zakat money on cash basis and make it really a great financial tool to help the covid affected people. islamic microfinance: prior literature document that islamic microfinance promotes entrepreneurship, boosts employment, reduces poverty and helps poor and vulnerable sections of the society (alkhan & hassan, 2020). in times of covid-19, islamic microfinance can be used help the poor and vulnerable. as the basic feature of islamic microfinance is to provide financial assistance to those who do not have access to the formal and traditional banking system. the poor and needy people are the most adversely affected parties in the society by the covid and islamic microfinance can be a lease of life for them. qardh-al-hasan: it is the interest free loan provided by the one party to another party based on benevolence. the principal is paid by the borrower to lender on due date without adding any markup. it is one of the most potential islamic finance tools to help the covid-19 affected individuals and smes if combined with the fintech (mohammad et al., 2020). sadaqa: it is the voluntary donation by muslims for the poor and needy and the amount of sadaqa is purely at the will of the ’donor’. holy prophet muhammad ملسو هيلع هللا ىلص described sadaqa and du’a as the two-miracle arrow in islam’s squiver. it can potentially be used to help the muslims affected by the covid19 by direct cash transfer or by transferring other non-cash benefits. hassan, rabbani, & abdullah │ socioeconomic impact of covid-19 in mena region and the role of islamic finance international journal of islamic economics and finance (ijief), 4(1), 51-78 │ 71 medium term support: the biggest challenge which will arise after diminish of the pandemic is the need of financing source for equipment, machines, and tools. islamic banks can play an important role in financing of these facilities to the covid-19 affected people and institutions and support their recovery in the medium term. the most important and notable islamic financing tool could be the sharia compliant crowdfunding for raising capital. sharia compliant crowdfunding platforms are the innovative and disruptive financial innovation for raising money from the market without intermediaries like banks and other financial instructions. the other tools can be sharia compliant smart contracts based on mudaraba, murabaha and musharaka. smart contracts are the financial innovation using blockchain technology which automatically executes the terms of the contract upon the due date. islamic banks could take this as an opportunity and align their financing activities with the un-sdg’s (united nations sustainable development goals). in 2018, albaraka banking group launched a 600 million us$ initiative in collaboration with undp for the regions like mena, asia and europe (undp, 2020). the pandemic shed light on the importance and the need for similar initiatives to provide more relief to the poor and vulnerable sections of the society affected by the pandemic (khan & rabbani, 2021). long run reclamation and resilience: islamic financial instruments like social sukuk, awqaf and smart contracts can be the potential warrior in fight against the economic consequences of the covid-19. the social sukuk can be aligned with the un-sdgs to help poor and vulnerable governments mainly in african part of the mena region. waqf is the endowment made by the muslims for the social, religious and benevolent reason. in case of waqf, financial and nonfinancial assets are donated for the social cause on permanent basis (sun et al., 2020). covid-19 has provided an opportunity for stakeholders to tackle the devastation created by the pandemic and invest in sustainable development. islamic financial is the most suited and resilient financial system in crises as it has appropriate financing tools available at each stage of the crisis (kim et al., 2018). with innovative technologies like fintech this battle must be fought and won by the islamic financial institutions (rabbani et al., 2020). hassan, rabbani, & abdullah │ socioeconomic impact of covid-19 in mena region and the role of islamic finance international journal of islamic economics and finance (ijief), 4(1), 51-78 │ 72 v. conclusion and recommendation 5.1. conclusion covid-19 has inflicted havoc in the almost everyone’s lives across the globe, and mena region is not an exception. it has created damage to the individuals and organization in the region that will require substantial time and resources to recover the economy. this paper analyzes the socio-economic impact of covid-19 on mena region and role of islamic finance. the pandemic has started as a health crisis but then became an economic recession due to low demand caused by social distancing, shut down policies, and fear. this low demand in turn had affected the supply side which resulted in the closures of some companies, laid of employees and low revenues. we conclude that though the number of direct cases remain higher in the gcc part of the region but it is the african continent of the region which is more susceptible and vulnerable due to the economic damage caused by the pandemic. despite the high number of cases and death rates in gcc countries, they are expected to have a v-shaped recovery due to their strong financial and policy reforms. whereas, other countries in the arab region like yemen syria are already war ridden; and high volume of national debt will find it difficult to recover and find stability post covid-19. it is the african side of the region which needs to rethink its exposure to the global economy and spillover repercussions for african countries in the mena region. several questions arise at this stage such as whether the negative impact of globalization is more than the positives? with a little or no support from the stronger and more powerful economies in the region, will they reduce their dependencies on them? will the countries like bahrain and kuwait reduce their dependency on oil revenue due to the consistent and sharp fall in the oil prices due to pandemic? future studies may try to find answers for these questions as well it might be interesting for further studies to examine the direct financial impact of covid 19 on mena region. this paper also analyzes the role of islamic finance during and post covid-19 period in mena region. the findings indicate that islamic finance and banking, which has proven its importance during and post financial crisis of 2008, is expected to play the same role in recovery from the economic shock created by the pandemic. the growing adoption of financial technology (fintech) by the islamic financial institutions will boost the prospects of ifis in quick and speedy recovery from the shock. bahrain is the country with largest strength of islamic financial institutions in the region, on the other hand kuwait and saudi arabia are having the largest asset per bank followed by the uae and qatar. to conclude, islamic finance and banking is expected to be more hassan, rabbani, & abdullah │ socioeconomic impact of covid-19 in mena region and the role of islamic finance international journal of islamic economics and finance (ijief), 4(1), 51-78 │ 73 resilient in crisis as shown during the financial crisis mainly due to the fact that its financing is based on the real economy and it avoids the interest based transactions and investment in toxic assets like financial derivatives. 5.2. recommendations based on the findings of the study, the following recommendations are suggested. a more integrated effort between the different department of the governments, private organizations and civil societies are needed to tackle the economic mayhem created by the pandemic. it is suggested that islamic finance institutions are to be given more role in fighting the economic adversities of the pandemic. islamic finance has certain social financing tools like zakat, qardh-al-hasan, social sukuk etc. which are tailor made for the situation like covid-19 (ali et al. 2020; rabbani et al. 2020). covid-19 pandemic has given acceptance and popularity to the technology based financial services and islamic finance in combination with the islamic financial technology (fintech) has the capacity to emerge as the winner and challenge the conventional financial system. it is further recommended that governments across the mena region must show more trust towards the islamic financial system and stimulus packages announced during and after pandemic must go through the 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(2008). global and regional integration of the middle east and north african (mena) stock markets. quarterly review of economics and finance. https://doi.org/10.1016/j.qref.2006.06.003 hassan, rabbani, & abdullah │ socioeconomic impact of covid-19 in mena region and the role of islamic finance international journal of islamic economics and finance (ijief), 4(1), 51-78 │ 80 this page is intentionally left blank. international journal of islamic economics and finance (ijief) vol. 3(2), page 63-94, special issue: islamic social finance and ethics the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province eko gondo saputro universitas islam indonesia, indonesia corresponding email: ekogondosaputro@gmail.com sahabudin sidiq universitas islam indonesia, indonesia, sahabudinsidiq@gmail.com article history received: june 5 th , 2020 revised: august 6 th , 2020 accepted: august 30 th , 2020 abstract aceh is one of the provinces that paves the way for the islamic development in indonesia. therefore, aceh has a strong islam preaching and becomes the center of science. innovations made in islamic knowledge with government policies in managing zakat funds collected from the community-made aceh are through the baznas in provincial level namely baitul mal aceh; one of the baznas with highly effective allocation to collection ratio (acr) levels. baitul mal aceh has a superior program aiming at making mustahik into muzzaki consisting of education, health assistance, and economic empowerment programs. this research was conducted to see the effect of zakat, infaq, shadaqah (zis) through economic growth, education, health, and hdi on poverty in aceh. the method used in this research was structural equation model-partial least square (sem-pls). the results revealed the direct effect of zis on economic growth, health, and hdi, as well as the total indirect effect of zis on economic growth and poverty in aceh. the results also showed that the effect of zis through health and hdi on economic growth and the effect of zis through hdi on poverty in aceh. keywords: zis, poverty, pls jel classification: p36, d31, i3 @ ijief 2020 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.3234 web: https://journal.umy.ac.id/index.php/ijief/article/view/8965 citation: saputro, e. g., & sidiq, s. (2020). the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province. international journal of islamic economics and finance (ijief), 3(2), 63-94. doi: https://doi.org/10.18196/ijief.3234 mailto:ekogondosaputro@gmail.com mailto:sahabudinsidiq@gmail.com https://doi.org/10.18196/ijief.3227 https://doi.org/10.18196/ijief.3227 saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │64 i. introduction 1.1. background according to muhammad (2004) historians estimate that islam entered aceh through perlak or samudera pasai in the 7 th or 9 th century ad and immediately came from makkah to aceh until then the province of aceh was announced as the city of “serambi makkah”. because of the rapid development on islamic teachings, aceh has become the center for islamic science to date. these islamic values not only put in science, but also modified with the programs of aceh provincial government that have welfare effects on the community itself. one of them is how the aceh government, through the national zakat board (baznas) of aceh, utilizes the collected zakat funds to be distributed to fields that are considered to improve the community welfare such as in the fields of education, health, and economy. according to the indonesia zakat outlook report in 2018, it was explained that aceh through aceh-provincial-based baznas (baitul mal aceh) was categorized as one of the provinces with a highly effective acr (allocation to collection ratio) percentage. this shows how the implementation of islamic sharia law in aceh community is tremendously firm and community support for amil zakat bodies in collecting zakat funds. then, the zakat funds collected shall later be distributed to benefit the community welfare in general, which absolutely, shall be perceived by the community of aceh in particular. in the implementation of zakat distribution programs aimed at the welfare of aceh community, several problems are frequently encountered which are usually common to afflict even in other areas, namely poverty. the problem of the high poverty rate is still a major problem in the indonesian economy. the percentage of poverty in aceh, which is quite higher than other provinces in indonesia, becomes a big problem for aceh. saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │65 figure 1. poverty percentage, 2019 source: central bureau of statistics of the republic of indonesia (bps) the data on figure 1 shows the 10 provinces in indonesia which have the largest percentage of poverty in 2019. it can be seen that aceh is ranked 6 th with the highest percentage of poverty out of 34 provinces in indonesia with a percentage of poverty of 15.32%. this shows that one of the regions contributes the highest percentage of poverty in indonesia is aceh. it can be concluded that one of the major problems faced by the aceh provincial government in achieving the ultimate goal of distributing zakat funds for community welfare is poverty. figure 2. percentage of poor population of regencies/cities in aceh (2016-2018) source: central bureau of statistics of the republic of indonesia (bps) 27.53 22.17 21.09 17.69 15.52 15.32 15.23 14.56 13.48 12.71 0 5 10 15 20 25 30 p a p u a w e st p a p u a e a st n u sa t e n g g a ra m a lu k u g o ro n ta lo a ce h b e n g k u lu w e st n u sa t e n g g a ra c e n tra l s u la w e si s o u th s u la w e si poverty percentage 0 5 10 15 20 25 c e n tr a l a ce h b a n d a a ce h n o rt h a ce h a ce h b e sa r w e st a ce h b e n e r m e ri a h b ir e u e n a ce h s in g k il n a g a n r a y a s o u th a ce h a ce h t a m ia n g s a b a n g la n g sa e a st a ce h g a y a l u e s a ce h j a ya s u b u lu ss a la m p id ie j a ya p id ie lh o ks e u m a w e s im e u le u s o u th w e st a ce h s o u th e a st a ce h 2016 2017 2018 saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │66 figure 2 shows the percentage of poor population in aceh regencies/cities during the 2016-2018 period. the regencies with the highest percentage of poor population are aceh barat, bener meriah, aceh singkil, gayo lues, pidie jaya, and pidie, with poverty percentages in the six regencies showing an average of 17,21%. the regency with the lowest percentage of poor population is banda aceh with a poverty rate of 7%. it is because banda aceh regency is the economic center of aceh. however, when viewed from fluctuations that occur from 23 regencies/cities in aceh, most experience fluctuations but tend to decline, except for 2 regencies namely aceh besar and aceh jaya which experience fluctuations but tend to increase. even though most of the regencies/cities experience fluctuations that tend to decline, the percentage of poverty is still fairly high because it ranges from 11% to 20%. it tends to decrease during the period from 2016 to 2018, but most of the regencies/cities in aceh have high percentage of the poor population. islam has a serious concern in reducing poverty. islam commands its people not to feel that their possessions are their full property, yet in that property, there is a right for others. the form of obligation in issuing a portion of assets for each muslim is interpreted in the third pillar of islam, namely zakat. according to mulajawan et al., (2016), zakat is an obligation commanded by allah swt to issue certain assets to certain parties. this explains that the assets we have are entirely not ours, but also “rights” for certain parties. thus, it can be stated that zakat is one of the forms of instrument in islam which becomes one of the tools in reducing poverty. then, it becomes an obligation that must be fulfilled by each individual in a certain period. the most considered attention of aceh provincial government to the obligations of its people in carrying out the commands of allah swt is zakat. the combination of local regulations issued by the aceh provincial government with islamic sharia law (qanun) aiming to benefit the economic potential of moslems can run effectively and the community can feel the benefits, especially in the local economy. saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │67 figure 3. total collection and distribution of zis in aceh (2014-2018) source: baitul mal aceh based on the data above, it can be seen that the collection and distribution of zakat in aceh regency/city in stretches every year always increase. the distribution form of zakat in education field is in form of providing education assistance or scholarship for the poor starting from the elementary school level to the diploma level. furthermore, in the health field, the poor shall get good health facilities and infrastructure. the last is community economic empowerment program that aims to make mustahik to be muzzaki, which means making those who are in poverty to be economically independent in order that they can issue zakat. most of the previous researchers analyzed zakat on poverty to see how the direct effect of zakat on poverty reduction in a region. it can be known from the research conducted by akram & afzal (2014) which explained the longterm and short-term effects of zakat on poverty in pakistan, or athoillah (2018) which explained that zakat has effects in increasing economic growth and reducing poverty in java. however, the distribution of zakat funds is done through several components so that it can be stated that it can reduce poverty or poverty reduction is not necessarily because of the effect of zakat. therefore, the present research will examine further on how zakat through components or other variables is related to variables that play a role in poverty reduction such as education, health, and human development index (hdi). 2014 2015 2016 2017 2018 collection 192.1 220.16 247.78 265.4 280.27 distribution 153.05 166.43 200.38 204.96 207.22 0 50 100 150 200 250 300 id r b il li o n saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │68 1.2. objectives based on the research background aforementioned, this present study will examine how the effect of zakat, infaq, shadaqah (zis) through education, health, and hdi in reducing poverty in aceh. it is then proceeded to ensure that the analysis results are in line with the achievement of the zis distribution program carried out by baitul mal aceh in its efforts to reduce poverty in aceh. it is expected that this research will have a good effect not only in aceh particularly, but also in indonesia in terms of zakat management so that it can maximize the existing potential to overcome the poverty. the paper comprises five sections. the first is introduction, followed by the literature review, methodology in the third section; the result and analysis in fourth section; and the final section presents the conclusion and recommendations. ii. literature review 2.1. zakat in macroeconomics according to the macroeconomic aspect, zakat has various important economic implications, among others, allocative efficiency, macroeconomic stability, social security, income distribution, and economic growth. zakat transfers part of the rich income that is generally the small part of society to the poor who is generally the largest part of society. therefore, this will directly increase the demand for goods and services from the poor, which are basic needs in general such as food, clothing, and shelter. higher demand for the basic needs of the people related to zakat will affect the production composition of goods and services in the economy, because it will bring the allocation of resources towards sectors that are more socially desirable. then, this will increase allocative efficiency in the economy (wibisiono 2015). in an economy that does not have mandatory income transfers and that of a large proportion of the population is poor, the real needs of society are reflected in market demands. goods and services needed by many people, such as food, shelter, clean water, health, and education, are frequently not produced. if zakat transfers income to the poor, the demand for goods and services of the poor will increase. in this context, it can be seen that the allocative function of zakat which reallocates resources from the rich to the poor is one of the effective ways to fight poverty. therefore, the effect of zakat in the economy reflected in macro indicators will be related to economic growth, poverty, and inequality which are also tremendeously saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │69 good as part of the working system of islamic macroeconomics. islamic macroeconomic systems are different from mainstream macroeconomic theories such as keynesian and neoclassical values. then din (1986) argues regarding to the role of zakat fiscal policy. when the collected zakat funds spent in the form of consumption and production goods, the ratio of consumption goods to production goods can be used as fiscal instrument. during the expansion period, this ratio decline as zakat is spent more on production. meanwhile, during the recession period, this ratio will increase with zakat expenditure directed at consumer goods, so that it will produce an expansionary effect for recovery. then, zakat is considered as automatic fiscal stabilizer, in which zakat with fixed rates functions as proportional tax will reduce the impact of multipliers; therefore, it can reduce output fluctuations automatically. 2.2. zakat and poverty according to mulajawan et al., (2016),, the notion of poverty is inseparable from thoughts about the objectives of the existence of sharia or maqasid sharia. various sharia teachings are closely related to poverty matters such as alms, neighbors, and so on. poor is related to the concept of human needs, especially basic needs. poverty, according to the islamic view, is closely related to the concept of human needs consisting of five concepts of basic human needs (five maslahah), including: religion (deen), physical (nafs), reason or knowledge (‘aql), descent (nasl), and material welfare (maal). in the islamic view, development has an important role in fighting poverty. according to moslem economists, development according to islam itself has a broader scope and a longer period. there are at least five characteristics of development, namely; comprehensive covering moral, spiritual and material aspects for human life, human development, physical aspects, and sociocultural environment. there is a balance among economic resources, changes, quantity, and quality with an emphasis on aspects of quality change, and finally the optimization of utilization and resource distribution can occur. consequently, poverty reduction is moral and social responsibility. in fiqh, it has been a collective agreement (ijma’) that caring for the poor is dissent among moslem scholars (sadeq 2006). saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │70 figure 4. poverty reduction according to islam source: sadeq (2006), p.308 the need to reduce poverty has been further emphasized in the qur'an and the hadith. however, strategically and technically, it needs consideration from moslem economists and scholars. in general, poverty reduction can be classified into three objectives, namely: 1. to formulate a series of policies to reduce certain forms of poverty; 2. to provide a guaranteed life in a decent life or to adopt a fair income distribution system. guarantees for a decent standard of living are not only setting levels of drinking wages, but also including more comprehensive things, such as guarantees of minimum income, health services, education access, and economic and financial resources access; 3. to prepare a redistribution instrument that is under islamic principles and implement it. there are at least two poverty reduction instruments agreed by fiqh experts, namely inheritance law and zakat. 2.3. zakat and economic growth according to metwally (1995), zakat on assets that are productive but not productive will encourage their owners to produce it if they are not willing their wealth to be consumed by zakat. the level of zakat on assets that is not or less productive represents the opportunity cost of investing. on the other hand, the zakat will make the economy go round. within the rotation of the economy, employment, income generating, and community welfare. in other words, zakat can be used to control and drive the economy. qardhawi (2002) added that zakat has meaning to grow, then the wealth spent on zakat in the micro-economy will grow and in the macro-economy will be able to grow the economy. zakat is one of the economic instruments which has dimensions of the afterlife and world dimensions, but these two dimensions will not have significant effects on the economy if the poverty reduction positive measures income growth functional distribution of income equal opportunity preventive measures control of ownership prevention of malpractice corrective measures compulsory transfer of zakat recommende d transfer charity state responsibility saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │71 implementation is not integrated with economic activity. in general, economic growth is measured by a number of indicators. in finding out the effect of zakat on economic growth, zakat can be included in the measurement indicators. correlation analysis is expected to provide a clear description of the relation between zakat and growth. thus, zakat can be integrated into financial system and be contributed to economic activities in order to achieve sustainable development. moslem economists believe that zakat invested in accordance with overall production priorities will benefit the poor in particular and the economy in general, namely through the multiplier effect on employment and income. zakat will gradually eliminate poverty and reduce the price turnover in a numer of people. as a result, employment and income will increase in the economy which finally increases the living standards of people, and ultimately will increase the aggregate volume of zakat collected, which in turn, will positively affect the rate of economic growth in terms of poverty reduction, unemployment and inflation rates reduction. 2.4. zakat and human development index according to susmodiningrat (2002), zakat is part of the mustahik empowerment efforts which can be seen from three sides. the first is making an atmosphere or climate which allows people to develop their potential (enabling). this means, every human being, mustahik, has the potential to be developed and no mustahik is completely powerless. therefore, empowerment is an effort to build, encourage, motivate, and raise awareness of its potential and strive to develop it. the second, reinforcing the potential power of the mustahik (empowering). this reinforcement includes concrete steps, and involves providing various inputs, as well as opening access to various opportunities which only make mustahik have power. as with education, zakat is able to change fiscal conditions through mustahik knowledge and skills. thus, the quality of labor and the quantity of work can be offered. it is expected that by increasing the quality and quantity of labor could boost productive sectors. the third, empowering in the sense of protecting. this means that in the process of empowerment, it should make the weak mustahik in the powerlessness to become strong. finally, the concept of empowerment in zakat is applied by the amil zakat agency (baz) and the amil zakat institution (laz) as the institutions which play a role in the people’s economic development and empowerment sustainably. basically, the concept of zakat applied in the management of saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │72 zakat has three main dimensions, specifically spiritual dimension, social dimension, and economic dimension. these three dimensions are related to the parameters of human development which consist of health, education, and decent living standard. therefore, the zakat managed by the institutions seems to play a role and becomes one of the instruments that supports human development. 2.5. review of related research researches on zakat and poverty have been done by practitioners and academics with various kinds of findings. some studies have found a significant effect of zakat on poverty, but there are findings that show the opposite. nisthar & nufile (2017), in their research examined the relation between natural poverty and the collection of zakat and gdp in malaysia. the results of their research reveal that there is a negative relation between poverty and zakat collection and there is a positive relation between gdp and zakat collection. thus, every increase in zakat collection can reduce poverty and increase real growth in malaysia. kareem & bankole (2016), in their research entitled zakat, poverty reduction, and inculsive growth in nigeria show that the more zakat given to poverty reduction, the better the welfare that occurs in nigeria, meaning that an increase in zakat on the poverty reduction will lead to an increase in community welfare. it is similar to the research conducted rédha et al., (2016) which examined the effect of collecting zakat funds in reducing poverty in algeria. the results show that the algerian zakat fund can help make new businesses that have effect on reducing unemployment and poverty, but the contribution is still slight. however, in contrast, the results of research conducted by khasandy & badrudin (2019) which examined the effect of zakat on economic growth, hdi, poor population presets, and the gini index are different. the results of their research reveal that zakat in indonesia does not affect economic growth and social welfare. this shows that zakat in indonesia does not have a large role in economic growth and social welfare. similar findings are found in the research done by nurjanah et al., (2019), regarding the effect of economic growth and distribution of zakat funds on poverty in three districts in west java province. the results of their research show that partial distribution of zakat funds does not have negative and insignificant effect on the number of poor people. saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │73 iii. methodology 3.1. data the data used in this study include exogenous latent variables consisting of zis (x1) with zis acceptance indicators (x1.1) and zis distribution (x1.2). in addition, endogenous latent variables consisting of education (y1) with the indicators of rough participation rate (apm) indicators (y1.1) and pure participation rate (apm) (y1.2), health (y2) with the indicators of number of health centers (y2.1) and number of health workers (y2.2), hdi (y3) with life expectancy indicators (y3.1), literacy rate (y3.2), school expectation rate (y3.3), and expenditure (y3.4), economic growth (y4) and poverty (y5) with the indicators of poor population (y5.1), poverty depth index (y5.2), and poverty severity index (y5.3) in 23 regencies/cities of aceh in 2011-2018 (184 data). the data were collected within a certain period of the sample. the source of this research data, data of poverty, grdp, health, and hdi were obtained from the official website of the central bureau of statistics (bps; education data were obtained from the official website of the ministry of education and culture; and zis receipt and distribution data were obtained from the national zakat board (baznas) of aceh, baitul mal aceh. 3.2. methodology according to hair et al., (2013), structural equation modeling is a multivariate technique that combines aspects of analytical factors and pathways, which allows researchers to simultaneously examine the relation between manifest variables and latent variables, and between latent variables. there are various methods used when developing sem; one of which is partial least square (pls). pls in sem can handle all types of data from non-parametric to parametric with minimal assumptions about the characteristics of the data to develop or to construct a theory. testing by using sem pls aims to maximize the explanation of endogenous latent contstruct variants (ependent variables) and minimize unexplained variants. in terms of latent variables formed in sem pls, the indicators can be either reflective or formative. in this study, the reflective indicators are manifesto indicators of the construct and in accordance with classical test theory that assumes that the variance in the measurement of latent variables is the function of true score added by error (ghozali & latan, 2015). saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │74 3.3. model development figure 5. path diagram based on the path diagram in the figure above, the structural equation is obtained for the measurement model and the structural equation for the measurement model is as follows: 3.3.1. equation outer model endogenous variabel 1 (reflective): education (y1) y1.1 = y1.1 1 + y1.1 (1) y2.1 = y2.1 1 + y2.1 (2) endogenous variabel 2 (reflective): health (y2) y2.1 = y2.12 + y2.1 (3) y2.2 = y2.22 + y2.2 (4) endogenous variabel 3 (reflective): hdi (y3) y3.1 = y3.13 + y3.1 (5) y3.2 = y3.23 + y3.2 (6) y3.3 = y3.33 + y3.3 (7) y3.4 = y3.43 + y3.4 (8) endogenous variabel 4 (reflective): economic growth (y4) y4 = y44 + y4 (9) endogenous variabel 5 (reflective): poverty (y5) zis/x1 (1) edu/y1 (1) hea/y2 (2) hdi/y3 ( 3 ) gro/y4 ( 4 ) pov/y5 ( 5 ) saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │75 y5.1 = y5.15 + y5.1 (10) y5.2 = y5.25 + y5.2 (11) y5.3 = y5.35 + y5.3 (12) exogenous variable 1 (reflective): zis (x1) x1.1 = x1.11 + x1.1 (13) x1.2 = x1.21 + x1.2 (14) 3.3.2. equation of the inner model mathematically, it can be written as follows: 1 =  (1,) 2 =  (1,) 3 =  (1,) 4 =  (1, 1, 2, 3) 5 =  (1, 1, 2, 3) then, the functions are explained as follows: 1 = 11 1 +1 (15) 2= 12 1 + 2 (16) 3 = 13 1 + 3 (17) 4 = 14 1 + 24 1+ 34 2+ 44 3+ 4 (18) 5 = 15 1 + 25 1+ 35 2+ 45 3+ 5 (19) where:  = loading factor; ,  = residual between latent variabels and indicators;  = laten exogenous variables;  = laten endogenous variables;  = path coefficient;  = residual model; y1.1 = rough participation rate; y1.2 = pure participation rate; y2.1 = number of community health center; y2.2 = number of health workers; y3.1 = life expectancy; y3.2 = literacy rate; y3.3 = old school expectation rate; and y3.4 = expenditure; y4 = economics growth; y5.1 = percentage of poor population; y5.2 = poverty depth index; y5.3 = poverty severity index; x1.1 = acceptance of zis; x1.2 = distribution of zis. saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │76 iv. results and analysis 4.1. results 4.1.1. assessing the outer model the outer model analysis specifies how each block of indicators relates to the latent variable. outer model uses two types of testing namely; validity and reliability test. validity testing is also divided into two tests, namely the validity test on the reflective indicator and the validity test on the formative indicator. 4.1.2. validity test constructions with reflective indicators assume that the covariance between model measurements is explained by the variant that manifests the construct domain. the direction of the indicator is from construct to indicator. the validity test of reflective indicators uses three tests namely convergent validity, discriminant validity, and average variance extracted (ave). the test results in this study are as follows: 4.1.3. convergent validity convergent validity test is related to the principle that the gauges (manifest variables) of a construct should be highly correlated. the convergence validity test of the reflective indicator using the smartpls 3.2.8 program can be seen from the loading factor value for each construct indicator. the rule of thumb usually used to assess convergent validity is that the loading factor value must be  0.50. saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │77 table 1. outer loading outer loading x1 y1 y2 y3 y4 y5 x1.1 0.959 x1.2 0.958 y1.1 0.945 y1.2 0.892 y2.1 0.808 y2.2 0.840 y3.1 0.804 y3.2 0.729 y3.3 0.653 y3.4 0.780 y4 1,000 y5.1 0.628 y5.2 0.806 y5.3 0.833 source: smartpls 3.2.8 calculation outer loading is used to measure the convergence validity of the measurement model (instrument). from the results of data processing with pls in the table above, it can be seen that the majority of the indicators of each loading value meets the convergent vallidty because all loading factors is > 0.50. therefore, it can be concluded that the convergence validity of the endogenous construct group x1 (zis), y1 (education), y2 (health), y3 (hdi), and y5 (poverty) is valid. 4.1.4. discrimant validity the measurement model with reflective indicators is assessed based on cross loading measurements with constructs. if the correlation of constructs with measurement items is greater than other construct measurements,this means that latent constructs predict their block size better than other block sizes. saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │78 table 2. cross loading value cross loading x1 y1 y2 y3 y4 y5 x1.1 0.959 -0.349 0.462 0.571 0.626 -0.138 x1.2 0.958 -0.298 0.465 0.580 0.624 -0.129 y1.1 -0.336 0.945 -0.465 -0.223 -0.407 0.113 y1.2 -0.278 0.892 -0.355 -0.143 -0.278 -0.030 y2.1 0.354 -0.485 0.808 -0.075 0.575 -0.035 y2.2 0.439 -0.271 0.840 0.457 0.542 -0.216 y3.1 0.450 -0.343 0.188 0.804 0.484 -0.279 y3.2 0.454 -0.249 0.194 0.729 0.288 -0.321 y3.3 0.432 0.034 0.125 0.653 0.315 -0.195 y3.4 0.450 -0.011 0.217 0.780 0.303 -0.323 y4 0.652 -0.382 0.676 0.473 1,000 -0.234 y5.1 -0.160 -0.048 -0.057 -0.300 -0.123 0.628 y5.2 -0.100 0.125 -0.139 -0.305 -0.209 0.806 y5.3 -0.063 0.040 -0.154 -0.257 -0.195 0.833 source: smartpls 3.2.8 calculation based on the results of the cross loading estimation above, it shows that each indicator in the construct has a greater loading factor value than other construct values. therefore, this shows that each indicator is valid to explain its respective endogenous construct and proves that the discriminant validity of all indicators are valid. 4.1.5. construct reliability the next stage is testing the consistency of measurements (reliability) with average variance extract (ave) and composite reliability (cr). high reliability indicates that indicators have high consistency in measuring latent constructs. reliability can be known through the value of composite reliability (cr) and average variance extracted (ave). composite reliability is regarded to be good if it has a value of ≥ 0.70. ave value is considered good if it has a value of ≥ 0.05 (ghozali 2014). the results of the ave and cr tests are shown in the following table: table 3. reliability value of exogenous constructs to endogenous constructs exogenous constructs composite reliability average variance extract conclusion x1 (zis) 0.958 0.919 reliable y1 (education) 0.915 0.844 reliable y2 (health) 0.809 0.680 reliable y3 (hdi) 0.831 0.553 reliable y4 (economic growth 1.000 1.000 reliable y5 (poverty) 0.803 0.580 reliable source: smartpls 3.2.8 calculation saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │79 based on the results of the validity and reliability tests of the measurement model, it can be concluded that all observed variables is valid in measuring latent variables and the reliability of the measurement model is good as well. this shows that the indicator is reliable in constructing the latent variable constructs. 4.1.6. structural model evaluation (inner model) after testing the outer model, evaluation of the structural model (inner model) is then performed to see the compatibility between the constructs in the structural model and the predictive ability of the model. structural model is evaluated by using path coefficients or t-values and p-values for each path to test the significance of the constructs in the structural model. figure 6. the analyzed reseacrh model 4.1.7. the relation between exogenous constructs and endogenous constructs evaluation of structural models is in the form of relation between exogenous constructs and endogenous constructs that can be seen through statistical ttest or p-value and structural path co-affinity. if the value of t-statistics is > ttable and if the value of p-value is < 0.05, it can be concluded that there is an effect between exogenous and endogenous constructs. the results of data decreasing that can explain the relation between exogenous constructs and endogenous constructs can be seen in the table below: saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │80 table 4. path coefficient original sample p-value conclusion x1 -> y1 -0.337 0.000 rejected x1 -> y2 0.483 0.000 accepted x1 -> y3 0.600 0.000 accepted x1 -> y4 0.319 0.000 accepted x1 -> y5 0.206 0.045 rejected source: smartpls 3.2.8 calculation table 5. total indirect effect variable original sample p-value conclusion x1 -> y4 0.333 0.000 accepted x1 -> y5 -0.345 0.000 accepted source: smartpls calculation 3.2.8 table 6. indirect specific effect source: smartpls 3.2.8 calculation 4.2. analysis 4.2.1. the effect of zis on education education sector is one of the superior programs of baitul mal aceh. this education program consists of full scholarship, sustainable education assistance, and one-time assistance. the three programs target elementary to diploma education levels by providing full assistance (full scholarship), assistance in carrying out compulsory education (sustainable education assistance), and assistance for acehnese students who are doing their final assignments (one-time assistance). the analysis results show the original sample/coefficient value of (-0.337) and are significant at a probability value of less than alpha of 5% (0,000). it is assumed that there is a direct, positive, and significant effect of zis on education, but the results show a negative and significant direct effect of zis variable original sample p-value conclusion x1 -> y1 -> y4 0.010 0.604 rejected x1 -> y2 -> y4 0.227 0.000 accepted x1 -> y3 -> y4 0.097 0.017 accepted x1 -> y1 -> y5 0.014 0.621 rejected x1 -> y2 -> y5 -0.077 0.073 rejected x1 -> y2 -> y5 -0.282 0.000 accepted saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │81 on education or distribution of zis done by baitul mal aceh in the education program to reduce poverty in aceh. the analysis results are in accordance with the condition of education in aceh that is quite ironic. according to data from the ministry of education and culture, it is found that the quality of teachers and graduates in aceh in 2015 was ranked 32 out of 34 existing provinces. figure 7. teacher competency test source: ministry of education and cultrue figure 7 shows the teacher competency test that illustrates how the quality of teachers in all provinces in indonesia in 2015. it can be seen that the quality of the best teachers occupied by yogyakarta with a value of 67.02 and the lowest quality of teachers occupied by north maluku with a value of 44, 79. aceh was ranked 32 out of 34 provinces in indonesia in terms of quality of teachers with a value of 48.33. this value is even greater than west papua and papua. this illustrates how teachers as an important component in improving education have not been able to present education in aceh. 0 10 20 30 40 50 60 70 80 y o g ya jarta c e n tra l ja va ja ka rta e a st ja va b a li b a n g ka b e litu n g w e st ja va w e st su m a te ra r ia u islan d so u th k a lim a n tan b a n te n e a st k a lim a n tan r ia u b e n g ku lu w e st k alim an ta n la m p u n g n o rth k alim an ta n so u th su la w e si n o rth su m a te ra w e st n u sa t e n g ga ra g o ro n ta lo ja m b i so u th su m a te ra c e n tra l k alim an ta n n o rth su la w e si so u th e st su la w e si e a st n u sa t e n g g ara w e st su law e si c e n tra l su la w e si w e st p a p u a p a p u a a ce h m alu ku n o rth m a lu ku teacher competency test saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │82 figure 8. rough participation rate in aceh regencies/cities (2016-2018) source: ministry of education and cultrue the next is the rough participation rate (apk) as an illustration to find out the number of students who study at certain levels of education. it can be seen in figure 8 that 13 out of 23 regencies/cities in aceh have rough participation (apk) values that tend to decrease, namely central aceh, north aceh, banda aceh city, west aceh, bener meriah, biruen, langsa city, pidie jaya, pidie, lhoksemawe city, simeuleu, southwest aceh, and southeast aceh. not only experiences the decline, some of the regencies also have apk values that are far from the apk value nationally or compared to other provinces in indonesia. it also shows how population participation in education in several regencies in aceh is decreasing every year. figure 9. budget for education from zis and provincial government source: baitul mal aceh & regional educatioan balance 0 10 20 30 40 50 60 70 80 90 100 c e n tra l a ce h b a n d a a ce h c ity n o rth a ce h a ce h b e sar w e st a ce h b e n e r m e ria h b ire u e n a ce h sin g kil n a g a n r aya so u th a ce h a ce h t am ia n g sa b a n g lan gsa c ity e a st a ce h g ayo lu e s a ce h ja ya su b u lu ssa la m c ity p id ie jaya p id ie lh o kse u m a w e c ity sim e u le u so u th w e st a ce h so u th e st a ce h 2016 2017 2018 5.67 11.83 11.59 11.98 1134.76 976.22 2723.28 3028.05 0 500 1000 1500 2000 2500 3000 3500 2015 2016 2017 2018 b il li o n r u p ia h zis government budget saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │83 therefore, if connected to zakat distribution program carried out by baitul mal aceh in the education sector, the nominal distribution which is not as much as the aceh provincial government budget for the education sector has not been able to improve the quality of aceh's education. the data from figure 4.4 above shows how the significant difference is related to the presentation of zis and the budget of aceh government, especially in its efforts to improve education in aceh. zis distribution conducted by baitul mal aceh is not as much as that done by aceh government. thus, it can be stated that it also does not have a large contribution in efforts to improve education in aceh, even though the realization of zis distribution in education program continues to increase every year. it happens because even a large government budget has not been able to improve education in aceh, but on the contrary, it is even decreasing because of poor teacher quality and population participation in education in aceh. the results of this study are in line with the research conducted by by akram & afzal (2014) regarding the dynamic role of zakat in reducing poverty in pakistan. the results show that the distribution of zakat done by the pakistani government does not have significant effect on education both in short and long term. hence, this present study shows that the distribution of zakat is not able to improve education in pakistan. therefore, the researchers provide recommendations in order that the pakistani government can ensure free education for children and young adults and can establish vocational institutions in remote and urban areas. 4.2.2. the effect of zis on health zis has a positive and significant effect on health in aceh. health is the part of social programs in baitul mal aceh and is one of the leading programs. there are three health assistance programs in the social program, namely lifelong ummah compensation assistance, medical equipment aid, and funds assistance for cancer and thalesmia patients. these assistances are addressed to people who do not have wealth and income, who are relatively old and sick. the assistances are provided in the form of monthly compensation of rp. 300,000; medical assistance program is in the form of wheelchairs, walking aids and hearing aids; and funds assistance program for cancer and thalesmia patients is addressed to patients from poor families through financial support in undergoing routine checks to hospital, and accommodation costs during the medical examination. hopefully, it can help the community to be able to live a good life. the analysis shows the original sample/coefficient value of (0.483) and is significant at a probability value of less than alpha of 5% (0,000). this reveals saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │84 that the distribution of zis conducted by baitul mal aceh has a direct effect in improving the quality of public health. this result is also in line with social sub-programs in health funding assistance that is addressed to someone who is categorized in need of health assistance both through adequate health facilities and infrastructures, and baitul mal aceh can meet all of them. this finding is also in accordance with the research conducted by suprayitno et al., (2017), regarding the effect of zakat on human development in 5 regions in malaysia. the results show that the more zakat funds collected, the stronger it is for zakat to play an important role in social life, social welfare, and economic development in its efforts to replace the role of the government budget in achieving it. in addition, there are programs implemented such as programs to meet basic needs, ongoing programs both physical and psychological and spiritual needs. besides, one of the programs is health and insurance implemented for short and long term. 4.2.3. the effect zis on hdi (human development index) zis has a positive and significant effect on hdi in aceh. if the components of hdi are explained, the components generally are education, health, and economy. in education, baitul mal aceh supports the existence of educational assistance in the form of scholarship. in its social programs, it supports life for mustahik who are economically weak, sick, and do not have family; provides medical aid to support the life of mustahik to be better; and provides assistance for cancer and thalesma sufferers to be able to obtain health facilities and infrastructure to get recovered. furthermore, in economy, in terms of spending, it is done by directing mustahik not to be fully consumptive so that they are able to be economically independent and turn mustahik into muzzaki. the analysis shows the original sample/coefficient value of (0.600) and is significant at a probability value of less than alpha 5% (0,000). this shows that the distribution of zis carried out by baitul mal aceh has a direct effect in improving the quality of the community. the presentation of the above programs shows how baitul mal aceh through education, health and economy programs, which support the quality of aceh community is getting better. thus, the results found are in accordance with the objectives of the baitul mal aceh programs which are related to improving the quality of aceh community. this present research is also in line with what was done by rédha et al., (2016) who examined the effect of zakat fund financing in reducing poverty in algeria. the results show that financing through the distribution of zakat saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │85 funds made to projects undertaken has a positive and significant effect on increasing hdi. hence, an increase in new projects carried out through zakat funds will improve the quality of the community (hdi). 4.2.4. the effect of zis on economic growth zis has a positive and significant effect on economic growth. baitul mal aceh supports economic independence for every mustahik and it hopefully can have an effect on the economy in aceh. the program in economic empowerment that is carried out by baitul mal aceh is in the form of skill training for acehnese, provision of venture capital, and assistance provision for working equipment for businesses that have started their businesses. the analysis results on the effect of zis on economic growth in aceh reveal the original sample/coefficient value of (0.319) and are significant at a probability value of less than alpha of 5% (0,000) on directly effect and original sample/coefficient value of (0.333) and are significant at a probability value of less than alpha of 5% (0,000) on indirectly effect . this shows that the distribution of zakat funds carried out by baitul mal aceh through mustahik economic development program in particular, supported by education and health programs, can directly and indirectly increase economic growth in aceh. the analysis results on the effect of zis through education on economic growth in aceh show the original sample/coefficient value of (0.010) and are insignificant at a probability value greater than alpha 5% of (0.604). this shows that the distribution of zakat funds carried out by baitul mal aceh does not have a significant effect on economic growth through the educational program undertaken. this result is also in accordance with the poor condition of education in aceh that affects the quality of graduates who also describe the community quality, and when associated with productivity, it certainly does not have a significant effect on economic growth in aceh. in contrast to the analysis results on the effect of zis through health on economic growth, it shows the original sample/coefficient value of (0.227) and are significant at a probability value of less than alpha of 5% (0,000). this shows that the distribution of zis through health programs carried out by baitul mal aceh is done by targetting "all" mustahik who are sick even to mustahik who have serious diseases such as cancer, and by providing medical aid for those in need. therefore, the health program can make mustahik able to access good health facilities and infrastructure. besides, this can make mustahik have good health conditions and mustahik who need medical devices can support their activities, so that it can increase mustahik productivity that can support economic growth in aceh. saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │86 other findings on the effect of zis through hdi on economic growth are also found in which it has a positive and significant effect of zis on economic growth through hdi. it is proven from the original sample/coefficient value which is of (0.097) and is significant at the probability value which is less than alpha 5% (0.017). this shows that programs made by baitul mal aceh such as education, health, and community economic empowerment can directly improve the quality of the community, so that it can have an effect on community productivity which then has a multiple effect on economic growth in aceh. the results of the present study are also in line with the findings otained by athoillah (2018), and mohamed et al., (2019) showing the positive and significant effect of zakat on economic growth. both studies were conducted in two different countries. athoillah (2018) , conducted a study in indonesia with a focus on the island of java, where the results showed that zakat had a positive effect on economic growth; zakat has a negative but not significant effect on unemployment and zakat has a negative and significant effect on poverty. furthermore, and mohamed et al., (2019) conducted research in malaysia in which the results showed that there was a significant relation among zakat, gdp, and poverty. it also showed that there was an important relation between zakat and an increase in gdp which then had a higher effect in inducing poverty reduction. 4.2.5. the effect of zis on poverty the main objective of baitul mal aceh through its superior programs especially in education, social (health), and economic empowerment, is to make mustahik economically independent so that it can remove mustahik from poverty and is able to become muzzaki. the analysis shows the original sample/coefficient value of (0.206) and is significant at a probability value of less than alpha 5% (0.045). this reveals that the distribution of zis conducted by baitul mal aceh through the community economic empowerment program directly has a positive effect or can increase poverty in aceh. it is assumed that there is a direct, negative, and significant effect of zis on reducing poverty, but the results show a positive and significant direct effect of zis on poverty. saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │87 figure 10. percantage of poor people in aceh province (2014-2018) source: central bureau of statistics of the republic of indonesia (bps) the data above show the percentage of poor population in aceh in 20142018. the percentage of poor people during the last 5 years shows fluctuations but it tends to increase. especially in the period of 2016-2018 which showed a significant increase; even in 2018, it had a greater percentage of poor people than in 2014. hence, the distribution of zis carried out by baitul mal aceh especially in the economic empowerment program could not reduce directly but it is on the contrary. this is because the reality reveals that the percentage of poor people in aceh has been increasing each year, especially in the last five years. therefore, it is not easy to make the distribution of zis in playing its role to have a large/direct effect on poverty reduction in aceh, especially not only on the percentage of poor people at the provincial level that continues to increase, but the percentage of poverty in each regency/city of aceh also increases. 18.05 17.08 16.73 16.89 18.49 15.5 16 16.5 17 17.5 18 18.5 19 2014 2015 2016 2017 2018 percentage of poor population saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │88 figure 11. distribution of zakat source: baitul mal aceh besides the problem of a high percentage of the poor population, it is also related to how baitul mal aceh conducts community economic empowerment programs. the data in figure 4.6 show that the distribution of zakat to asnaf poor people has fluctuations that tend to decrease. the data above also show that the distribution of zakat for ibn sabil or someone who is on journey is quite high or even greater than the distribution for asnaf fakir. therefore, the program to reduce poverty in the province has not yet got the most attention. thus, it needs a focus on the distribution of zakat distribution to asnaf fakir and poor, especially to asnaf ibnu sabil that naturally is not a resident of aceh but has a substantial realization of zis distribution. however, the results of other analyzes show that there is an indirect effect of zis on poverty, namely the original sample/coefficient value of (-0.345) and is significant at a probability value greater than alpha 5% (0,000). this reveals that through programs implemented by baitul mal aceh (education, health and economic empowerment of mustahik), it can indirectly reduce poverty in aceh. the next finding shows that the effect of zis distribution through education on poverty is not found with the original sample/coefficient value of (0.014) and is significant at a probability value greater than alpha 5% (0.621). in addition, the effect of zis through health on poverty is also not found with the original sample/coefficient value of (-0.077) and is significant at a probability value greater than alpha 5% (0.073). this shows that the 0 2000 4000 6000 8000 10000 12000 14000 fakir miskin amil muallaf gharimin fisabilillah ibnu sabil 2015 2016 2017 saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │89 distribution of zis through education and health programs carried out by baitul mal aceh does not have a significant effect in reducing poverty in aceh. it is different from the analysis results on the effect of zis through hdi on poverty showing that it has a negative and significant effect, with the original sample/coefficient value of (-0,282) and is significant at a probability value of less than alpha 5% (0,000). this shows that in order to reduce poverty rates in aceh, it needs a complete and perfect combination of programs that can have an effect on mustahik. it includes education, health, and economic independence so that mustahik has good quality. when mustahik can access education, good health conditions, and can be economically independent, it can indirectly remove mustahik from the poverty circle through reflection of the mustahik quality illustrated by high (good) hdi components. table 7. percentage of poor population in aceh province (regencies/cities) kab/kota 2014 2015 2016 2017 2018 central aceh 16.99 17.51 16.64 16.84 15.58 banda aceh 7.78 7.72 7.41 7.44 7.25 north aceh 19.58 19.2 19.46 19.78 18.27 aceh besar 16.13 15.93 15.55 15.41 14.47 west aceh 23.7 22.97 21.46 20.38 19.31 bener meriah 22.45 21.55 21.43 21.14 20.13 bireuen 16.94 16.94 15.95 15.87 14.31 aceh singkil 17.77 21.72 21.6 22.11 21.25 nagan raya 20.85 20.13 19.25 19.34 18.97 south aceh 12.79 13.24 13.48 14.07 14.01 aceh tamiang 14.58 14.57 14.51 14.69 14.21 sabang 17.02 17.69 17.33 17.66 16.31 langsa 12.08 11.62 11.09 11.24 10.79 east aceh 15.88 15.85 15.06 15.25 14.49 gayo lues 21.43 21.95 21.86 21.97 20.7 aceh jaya 16.52 15.93 15.01 14.8 14.85 subulussalam 19.72 20.39 19.57 19.71 18.51 pidie jaya 21.78 21.4 21.18 21.82 20.17 pidie 20.29 21.18 21.25 21.43 20.47 lhokseumawe 11.93 12.16 11.98 12.32 11.81 simeuleu 19.92 20.43 19.93 20.2 19.78 aceh barat daya 17.99 18.25 18.03 18.31 17.1 aceh tenggara 13.75 14.91 14.46 14.86 14.29 source: central bureau of statistics of the republic of indonesia (bps) saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │90 table 7 shows the percentage of poor population in aceh regencies/ cities during 2014-2018 at the regency and city level. it can be seen that all regencies/cities in aceh experienced fluctuations but tended to decline. thus, it can be concluded that the zis program that has targets in each regency/city in aceh is able to reduce poverty indirectly through programs that are held (education, health, economic empowerment), but it is still at the regency/city scale. although the percentage of poverty in the regencies/cities in aceh province is still in average 11-20% or in other words, it can be stated that it has a high percentage of poor population. the results of this study are also in line with the findings made by abdelmawla (2014) in his research on the effect of zakat and knowledge on poverty reduction in sudan. his findings showed that zakat had a significant effect on poverty reduction in sudan in which the increasing percentage of expenditure for the poor from the total zakat funds is highly recommended in reducing inequality in income distribution. furthermore, the research conducted nisthar & nufile (2017) concerning a comparative analysis of the relation between poverty and the collection of zakat funds and real gdp in malaysia. their findings showed that there was a negative relation between poverty reduction and zakat collection and real gdp in which the increase in zakat collection can lead to poverty reduction in malaysia. v. conclusion and recomendation 5.1 conclusion zakat, infaq, shadaqah (zis) has a direct effect on health, economic growth, and hdi. zis also indirectly affects economic growth and poverty. this shows that zis has a contribution in reducing poverty in aceh indirectly, namely through human development index (hdi). the baitul mal aceh programs comprising of education, health, and economic empowerment have the ultimate goal to improve the quality of mustahik, so that the mustahik hopefully can be economically independent and be removed from poverty. 5.2 recommendation for the central government, in terms of regulations, it is expected that it will be able to make regulations that can maximize the potential of existing zakat funds to be absorbed well like the regulations that direct the public to pay their zakat to the relevant zakat institutions, so that the existing potential can be maximally absorbed. it is also for regulations related to mustahik, such as saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │91 regulations regarding integrated data (through central bureau of statistics (bps) and national family planning coordinating agency (bkkbn)) so that the distribution of zakat carried out by baznas can be on target. for the national amil zakat body (baznas) both at the provincial and regional levels, it is recommended to improve its performance in the collection and distribution of zis. therefore, zis distribution can be perceived by mustahik or more poor people. in broader scale, it is expected that baznas can begin to reach not only at the provincial and regional levels, but also at sub-district, district, and even neighborhood levels. thus, the collection of funds can be maximized and its distribution can be perceived by the poor at various levels of the region. for further researches, this research can be carried out on zakat institutions with good (effective) management of zakat funds and distribution of zakat in other provinces. it is expeced that other findings will be able to provide encouragement for other provinces that are not maximum yet to be able to improve their performance so that the hope is that it can be applied at the national level, and the benefits of the distribution of zis funds can be perceived on a wider scale. saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │92 references abdelmawla, m. a. (2014). the impacts of zakat and knowledge on poverty alleviation in sudan: an empirical investigation (1990-2009). journal of economic cooperation and development, 35(4), 2–46. akram, m. m., & afzal, m. (2014). dynamic role of zakat in alleviating poverty: a case study in pakistan. munich personal repec archive. athoillah, m. a. (2018). the zakat effect on economic growth, unemployment, and poverty in the island of java: panel data analysis 2011-2012. ekspansi: jurnal ekonomi, keuangan, perbankan, dan akuntansi, 10(2), 205–230. din, t. el. (1986). allocative and stability function of zakat in an islamic economy. journal of islamic banking and finance, 3. ghozali, i. (2014). structural equation modeling, metode alternatif dengan partial least square (pls) (4th ed.). semarang: badan penerbit universitas diponogoro. ghozali & latan. 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(2017). zakat and sdgs: impact zakat on human development in the five states of malaysia. international journal of zakat, 2(1), 61–69. https://doi.org/10.37706/ijaz.v2i1.15 susmodiningrat, g. (2002). pemberdayaan masyarakat dan jaring pengaman sosial. jakarta: gradia pustaka utama. wibisiono, y. (2015). mengelola zakat indonesia: diskusi pengelolaan zakat nasional dari rezim undang-undang no.38 tahun 1999 ke rezim undang-undang no.23 tahun 2011. jakarta: kharisma utama. saputro & sidiq │ the role of zakat, infaq and shadaqah (zis) in reducing poverty in aceh province international journal of islamic economics and finance (ijief), 3(2), si, 63-94 │94 this page is intentionally left blank international journal of islamic economics and finance (ijief) vol. 6(1), january 2023, pages 105-132 indonesian stocks’ volatility during covid-19 waves: comparison between ihsg and issi muhammad syauqy alghifary1, dzuliyati kadji2, iffah hafizah3 corresponding email: alghifary.oqy@student.ub.ac.id article history received: may 30th, 2022 revised: october 3rd, 2022 november 14th, 2022 accepted: december 9th, 2022 abstract this study aims to compare islamic and conventional stocks’ performance amid a crisis. the performance was measured by analyzing the volatility of the indonesian sharia stock index (issi) and the composite stock price index (ihsg) during the covid-19 pandemic. based on the results of the different tests using the paired t-test and wilcoxon rank test methods, it was uncovered that the issi and ihsg experienced significant changes before and after discovering the first case of covid-19 in indonesia. significant changes in both values were also found when the delta variance spread. meanwhile, when the third wave occurred due to the presence of the omicron variant, issi and ihsg could move more stable and did not experience significant shocks. then, the estimation results of the garch model conclude that both islamic and conventional stocks have an immense volatility power with an identical value of 0.94 or close to 1. the volatility is also significantly influenced by the previous volatility and the squared error, representing other previous events outside the model. moreover, the volatility in islamic and conventional stocks is not much different, even though both stocks have different characters in the debt and income ratio. fundamental factors also cause this high volatility in the form of shocks in several macroeconomic variables, including the rupiah exchange rate, gold prices, and world oil prices. besides, the contagion effect that occurred during the covid-19 crisis also contributed to the spread of systemic risk in global stock indexes on stock volatility in indonesia. keywords: islamic stocks, conventional stocks, volatility, covid-19 pandemic, garch model jel classification: e22, e44, g11, g17 type of paper: research paper @ ijief 2023 published by universitas muhammadiyah yogyakarta, indonesia doi: https://doi.org/10.18196/ijief.v6i1.14838 web: https://journal.umy.ac.id/index.php/ijief/article/view/14838 citation: alghifary, m. s., kadji, d., & hafizah, i. (2023). indonesian stocks’ volatility during covid-19 waves: comparison between ihsg and issi. international journal of islamic economics and finance (ijief), 6(1), 105-132. doi: https://doi.org/10.18196/ijief.v6i1.14838. 1,2 brawijaya university, indonesia 3 hasanudin university, indonesia mailto:alghifary.oqy@student.ub.ac.id https://doi.org/10.18196/ijief.v6i1. https://doi.org/10.18196/ijief.v6i1. https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v6i1.14838&domain=pdf alghifary, kadji, & hafizah | indonesian stocks’ volatility during covid-19 waves: comparison between ihsg and issi international journal of islamic economics and finance (ijief), 6(1), 105-132 │ 98 i. introduction the growth of stock investors has experienced a rapidly increasing trend over the last five years. as of september 2021, the number of stock investors has reached 2.8 million sid (single investor identification) number. this amount covers 45.26% of the total capital market investors with a sid registered in the indonesian central securities depository (ksei). compared to the previous year, the number of stock investors throughout 2021 has grown by 72.69%. this number is greater than the total growth of investors in the capital market, which reached 61.86% (puspitasari, 2021). figure 1. number of stock investors on the indonesia stock exchange source: financial services authority (ojk) (2021) interestingly, indonesia's stock investment trend experienced rapid growth during the covid-19 pandemic. based on figure 1, the number of stock investors more than doubled during the pandemic compared to the previous 1.08 million sid in 2019. in this regard, millennials are the most dominating age group, with 59.23% of the total investors in the capital market (sidik, 2021). based on a survey conducted by the katadata insight center of 806 stock investors, 41.3% of millennials stated that they had just started investing in stock in the last two years, particularly when the covid-19 pandemic case was first identified in indonesia (siringoringo, 2021). however, it is undeniable that the presence of covid-19 has also affected the indonesian economy since it first appeared in march 2020. not to mention the capital market, the pandemic crisis caused the composite stock price index (ihsg) to reach its lowest point of decline in the last decade. the incident occurred on march 24, 2020, when the ihsg value fell 37% from the beginning of the year to 3,937. a drastic reduction followed this decline in stock market capitalization reaching idr 1,907 trillion (tamara, 2020). the impact of the 629,639 830,318 1,082,110 1,666,058 2,877,098 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 2017 2018 2019 2020 2021 t o ta l in ve st o r (p e rs o n ) period (year) alghifary, kadji, & hafizah | indonesian stocks’ volatility during covid-19 waves: comparison between ihsg and issi international journal of islamic economics and finance (ijief), 6(1), 105-132 │ 99 covid-19 pandemic has also caused indonesia to fall into a recession in the third quarter of 2020 due to negative economic growth for two consecutive quarters. the second quarter recorded economic growth of -5.32%, the lowest growth rate since 1998. meanwhile, the third-quarter economic growth reached -3.49% (fauzia, 2020). the negative economic growth extended until the first quarter of 2021, at the level of -0.74%. the crisis consequently required the indonesian government to adjust macroeconomic policies to maintain domestic economic stability. one of the implemented policies is to change the benchmark interest rate set by the central bank. figure 2 shows that bank indonesia has made six changes to the benchmark interest rate or bi 7-day reverse repo rate during the last two years, from the initial 5.0% in early 2020 to 3.5% in february 2021. this level is the lowest in the history of applying the benchmark interest rate in monetary policy (elena, 2021). figure 2. the trend of bi 7-day reverse repo rate source: bank indonesia (2021) changes in these macroeconomic variables certainly impact capital market development since one of the macroeconomic variables affecting investment is interest rates (mankiw, 2009). therefore, changes in the benchmark interest rate set by the central bank will determine the public interest in investing, including in the capital market. apparently, several researchers have attempted to investigate the impacts of the covid-19 pandemic crisis on stock markets from varied points of view. from the islamic stock market point of view, the evaluation of the effect of covid-19 on islamic stock markets is crucial for several reasons. first, during the last decade, the islamic finance industry has recorded tremendous growth, which is anticipated to reach 8% average yearly growth by 2025 to $4.95 trillion (adil, 2022). second, in recent times, the attractive risk-return characteristics and ethical issues of islamic products tend to motivate nonmuslim investors, particularly ethical investors, to choose islamic products for 5.0% 4.75% 4.5% 4.5% 4.5% 4.25% 4.0% 4.0% 4.0% 4.0% 3.75% 3.75% 3.75% 3.5% 3.5% 3.5% 3.5% 3.5% 2.0% 3.0% 4.0% 5.0% 6.0% ja n f e b m a r a p r m e i ju n ju l a g u s e p o kt n o v d e s ja n f e b m a r a p r m e i ju n 2020 2021in te re st r a te ( p e rc e n t) period (month) alghifary, kadji, & hafizah | indonesian stocks’ volatility during covid-19 waves: comparison between ihsg and issi international journal of islamic economics and finance (ijief), 6(1), 105-132 │ 100 their portfolios. third, the islamic stock markets have empirically shown their outperformance over their conventional counterparts, especially in times of crisis, even though the portfolio size of the islamic stock markets is smaller than the conventional (al-khazali et al., 2014). in this paper, from a portfolio performance perspective, the researchers extended the current literature to examine whether returns earned by investors tracking the issi (indonesian sharia stock index) were significantly different from those of the ihsg (composite stock price index). thus, the researchers conducted a comparative study regarding the volatilities of issi and ihsg during this pandemic crisis to provide a better avenue for investors to diversify their portfolios by considering the volatility of both stocks. several previous studies have analyzed comparing islamic and conventional stocks’ performance amid a crisis. siregar (2020) compared the performance of lq45 with jii (jakarta islamic index) at the beginning of the spread of covid19 cases and explained that lq45 experienced a 1.22% decline in stock prices on average, while jii, on average, experienced an increase of 0.14%. globally, al-khazali et al. (2014) found that the dow jones sharia index performed better than the conventional index during the global economic crisis. for this reason, the current study aims to fill the gap in previous research by using inferential statistical analysis to compare the performance of the issi (indonesian sharia stock index) and the ihsg during the covid-19 pandemic. it is based on the recommendation of nurdany et al. (2021), which only examined issi's volatility during the covid-19 pandemic with garch analysis. following the problems described, this study aims to compare the issi values before and after the covid-19 virus spread, compare the ihsg values before and after the covid-19 virus spread, and measure the issi and volatility ihsg during the covid-19 pandemic. this study further attempts to verify the stock index endurance during the pandemic and indicates that the stock market volatility may last if the crisis is not over. in addition, fundamental factors also cause this high volatility in the form of shocks in several macroeconomic variables, including the rupiah exchange rate, gold prices, and world oil prices. the results of this research are expected to benefit various interested parties in the capital market industry in indonesia. for capital market regulators, this research can become a reference for evaluating policies implemented to develop the stock market and sustain macroeconomic stability. the results of this study can also be deemed to determine the strategic steps to maintain stock price stability during an economic crisis for stock issuing companies. as for investors, the research findings can help predict stock prices in the future, especially in times of crisis, by considering the volatility when choosing investment products since the stocks have experienced high volatility throughout the pandemic. alghifary, kadji, & hafizah | indonesian stocks’ volatility during covid-19 waves: comparison between ihsg and issi international journal of islamic economics and finance (ijief), 6(1), 105-132 │ 101 ii. literature review 2.1. volatility volatility is a statistical measure used to gauge the movement and distribution of a security product or market index prices at a specific time (hayes, 2021). the greater the volatility of the value of an asset, the greater the risk of investing in it (nugroho & robiyanto, 2021). in this regard, price fluctuations that occur in a short period have high volatility, whereas if the price movement is slow, the volatility is low (mamtha & srinivasan, 2016). in other words, volatility can be an indicator to assess financial market stability. volatility, in general, can be measured by calculating the variance or standard deviation of the data set of price movements of an asset. according to thampanya et al. (2020), stock price volatility is broadly influenced by two determinants: fundamental and behavioral factors. fundamental factors are derived from conventional financial theory, assuming that investors follow fundamental financial theories and design investment strategies based on risk and profit calculations. meanwhile, behavioral factors emphasize that investors are ordinary people easily influenced by sentiment and psychological conditions, so investment decisions are made more based on good or bad news circulating. fundamental factors also consist of indicators that can be measured clearly and unbiased, such as macroeconomic variables, including inflation rates, interest rates, exchange rates, and gdp (francis & soffer, 1997), as well as company financial ratios such as roa (return on assets), roe (return on equity), and cash flow (chang & dong, 2006). on the other hand, several studies have also proven that behavioral factors determine stock volatility driven by investor sentiment based on their beliefs about future conditions (baker & wurgler, 2007). based on the theory of capital market behavior, investors will buy more shares, and asset prices will be pushed above their fair value when bullish sentiment dominates the market. meanwhile, when bearish sentiment dominates, investors will sell or hold their shares, so prices are dragged below the fundamental value (shefrin & statman, 1994). 2.2. previous studies numerous studies have been conducted on the impacts of the economic crisis on both conventional and islamic stocks. chebbi et al. (2021) researched the stock liquidity conditions of s&p 500 index companies during the covid-19 pandemic-induced economic crisis. the s&p 500 is a collection of the 500 largest publicly traded companies in the united states by market capitalization. the study's findings demonstrated a significant negative correlation between covid-19 cases and company liquidity. those indicate alghifary, kadji, & hafizah | indonesian stocks’ volatility during covid-19 waves: comparison between ihsg and issi international journal of islamic economics and finance (ijief), 6(1), 105-132 │ 102 that the company's liquidity would decrease if daily covid-19 cases increased. moreover, li et al. (2021) comprehensively analyzed the relationship between the covid-19 pandemic and the stock market in g20 member countries. they concluded that the volatility linkage between stock markets in g20 member countries increased significantly during the covid-19 crisis. this volatility linkage was primarily transmitted by developed country stock markets, affecting developing country stock markets. aside from the crisis phenomenon during the covid-19 pandemic, there have previously been numerous studies analyzing stock market conditions during the economic crisis. dang & nguyen (2020) analyzed the relationship between liquidity risk and stock performance during the 2008-2009 global financial crisis from 17,493 companies across 41 countries. the study found that stocks that made more profits before the crisis experienced a more significant price decline when there was a liquidity shock on global financial markets during a crisis. in particular cases in indonesia, haryanto (2020) examined the relationship between the number of covid-19 cases and the ihsg value. using the multiple linear regression analysis techniques, the study results concluded a significant negative effect of the covid-19 case on the ihsg value. hence, every 1% increase in covid-19 cases would cause a decrease in the value of the ihsg by 0.03%. alfira et al. (2021), examining the impact of covid-19 on the share price of islamic banks in indonesia, also discovered comparable findings. their research revealed that the share prices of bank rakyat indonesia syariah (bris) and state pension savings bank syariah (btps) had decreased since the first case of covid-19 was reported in indonesia. on the other hand, mirza et al. (2022) revealed the condition of islamic stock mutual funds when the covid-19 crisis occurred. this study took samples from six countries: malaysia, pakistan, saudi arabia, qatar, kuwait, and the united arab emirates. using the sharpe ratio, sortino ratio, and jensen's alpha measurements, the study results demonstrated that islamic equity mutual funds in the six countries could show positive performance amid economic pressure due to covid-19. this study also concludes that islamic stock mutual funds are investment products with haven properties during a crisis. before the emergence of the covid-19 crisis, kenourgios et al. (2016) analyzed the condition of the islamic stock market during the global financial crisis in the case of the subprime mortgage and eurozone sovereign debt crises. this study took the period 2007-2015, which included both crisis phenomena, and used a sample of islamic stock indices in european countries, g7 members, and brics (brazil, russia, india, china, and south africa). the study unveiled that most islamic stock indices were unaffected by financial system shocks or transmission risks during the global financial crisis. alghifary, kadji, & hafizah | indonesian stocks’ volatility during covid-19 waves: comparison between ihsg and issi international journal of islamic economics and finance (ijief), 6(1), 105-132 │ 103 in indonesia, muhaimin et al. (2021) scrutinized the movement of shares listed on jii during the covid-19 crisis. by using descriptive analysis, the research results revealed that jii experienced positive performance trends following the implementation of large-scale social restrictions (psbb) in indonesia in the april-july 2020 period. according to nuryani et al. (2021), jii's performance during the covid-19 crisis was influenced by exchange rate variables, the sci index (shanghai composite index), and the djia index (dow jones industrial average). meanwhile, another index, the issi, also experienced relatively high volatility from positive and negative shocks during the covid-19 crisis (nurdany et al., 2021). also, positive shocks had a more substantial effect than adverse shocks on the issi stock return rate. from the results of these studies, it can be concluded that the crisis impacts the volatility of both islamic and conventional stocks. for an in-depth analysis of this phenomenon, developing studies also compared the impact of the crisis on islamic and conventional stocks. hasan et al. (2021) compared the conditions of islamic and conventional stocks during the covid-19 crisis. their study aimed to assess the impact of covid-19 on islamic stock markets and compared market reactions to comparable conventional stock markets to understand stock market reactions during crisis periods better. the study used the dow jones index and the ftse as a sample for january-november 2020, each of which has a particular index for conventional and islamic stocks. the study uncovered that the pandemic caused identical volatility in both stock market categories. this study also stated that islamic and conventional stocks experienced a reasonably strong relationship in their movements during the covid-19 crisis. a study on the performance of islamic and conventional stocks was also carried out by siregar (2020) in indonesia in the march-july 2020 period, or when the covid-19 case first entered indonesia. the study compared the passion for conventional stock transactions and islamic stocks in the capital market to find out the differences and advantages of these islamic stocks. the study employed the lq45 and jii indexes as a representative sample of conventional and islamic stocks. the study results revealed that lq45 and jii experienced fluctuations during the crisis. however, this study found that jii performed better with an average increase in the share price of 0.14%, in contrast to lq45, which experienced a decrease in the average share price of 1.22%. based on the literature above, it was found that the economic crisis impacted the occurrence of capital market volatility, including islamic and conventional stocks. however, the volatility varies depending on the stock index sampled and the crisis period analyzed. this volatility can also cause performance alghifary, kadji, & hafizah | indonesian stocks’ volatility during covid-19 waves: comparison between ihsg and issi international journal of islamic economics and finance (ijief), 6(1), 105-132 │ 104 differences in islamic and conventional stocks depending on their respective strengths. iii. methodology 3.1. data this study used time-series data. the time-series data consisted of daily stock prices listed on the issi and ihsg values. data on the movement of stock prices could be obtained from the official portal of the indonesia stock exchange. because these data were not collected directly by the authors, the data used were included in the category of secondary data. in this case, the daily stock price means the issi and ihsg values at the closing of the stock exchange on that day according to the stock exchange operating hours. then, the value of all stocks on the indonesia stock exchange is represented by ihsg. meanwhile, issi signifies only stocks of sharia-compliant companies. each of their volatility would be estimated in a different equation. daily stock prices were used to compare stock performance before and after the spread of the covid-19 virus. this study further compared stock prices between 30 days before and after the official announcement from the government regarding the covid-19 variant. daily stock price data were also utilized to measure volatility during a pandemic, but the data should be transformed to find the daily return measurement of volatility that began in march 2020 when the first covid-19 case was found in indonesia until march 2022 with a total period of 500 days. 3.2. model development time series data in the financial sector, such as stock prices, are prone to volatility clustering, which is if there is relatively high data variability at one time, the same trend will occur in the next period. the distribution of residuals from stock price data is also often fat tails, and it has a greater tendency for extreme events to occur in a certain period. based on these properties, the garch model can explain data variance (enders, 2004). bollerslev (1986) introduced the garch model of the simplest equation as follows: 𝜎𝑡 2 = 𝜔 + 𝛼𝜀𝑡−1 2 + 𝛽𝜎𝑡−1 2 the model is a variance equation, stating that the conditional variance σ at time t depends not only on the square of the error in the previous period but also on the conditional variance in the previous period (gujarati, 2004). moreover, each ihsg and issi has its model and is not united in one equation. alghifary, kadji, & hafizah | indonesian stocks’ volatility during covid-19 waves: comparison between ihsg and issi international journal of islamic economics and finance (ijief), 6(1), 105-132 │ 105 the result obtained from the garch estimation would be compared to measure the difference between ihsg and issi in their volatility. 3.3. method comparative analysis can be done using a different test method: paired t-test or wilcoxon signed-rank test. paired t-test is carried out if the sample data are normally distributed. meanwhile, wilcoxon signed-rank test is conducted if the sample data are not normally distributed. therefore, before performing a different test, it is necessary to test for normality. in this study, the difference test was conducted utilizing the software spss. meanwhile, in measuring the volatility of a variable, the most appropriate analytical method to use is the garch (generalized auto regressive conditional heteroskedasticity) model (enders, 2004). as the name implies, this model considers heteroscedasticity elements in different time series. several previous studies that analyzed stock volatility also used the garch model, including aliyev et al. (2020), azakia et al. (2020), mhd ruslan & mokhtar (2021), naik et al. (2020), and nurdany et al. (2021). to test using the garch model, the data must first go through the stationarity test process. the stationarity test can be done by using unit roots and correlograms. if the data are stationary, it can be estimated using the arma (autoregressive moving average) model to obtain the best model from the mean equation. the selection of the best arma model is shown from the smallest akaike information criterion (aic) and schwarz information criterion (sic) values. against the arma model formed, a heteroscedasticity test was conducted to identify the model’s volatility element. when it was found that the existing model was not homoscedastic, the data processing continued to the garch analysis stage. a series of analysis processes would be carried out utilizing the software eviews. iv. results and analysis 4.1. comparative analysis 4.1.1. results the presence of the covid-19 pandemic undoubtedly impacts the movement of the country's economy, including the stock market. when compared between 30 days before and after the emergence of the first covid-19 case in indonesia, it can be seen that the movement of issi and ihsg values experienced a negative trend. the lowest value was recorded on march 24, 2020, or 22 days after the entry of the covid-19 case in indonesia, where issi touched 115.95 and the ihsg touched 3,937.63. alghifary, kadji, & hafizah | indonesian stocks’ volatility during covid-19 waves: comparison between ihsg and issi international journal of islamic economics and finance (ijief), 6(1), 105-132 │ 106 the same thing happened when the peak second wave of covid-19 cases in indonesia occurred due to the spread of the delta variant. the issi and ihsg values decreased when compared between 30 days before and after the delta variant’s appearance in indonesia. at first, the issi value was 184.29. this figure decreased to 171.29 after 30 days since the detection of the first delta case. likewise, the ihsg decreased from 6,356.16 to 5,996.25. meanwhile, due to the omicron variant, a different trend occurred in indonesia's issi and ihsg values movement during the third wave of covid-19 cases. the issi and ihsg values increased slightly when compared between 30 days before and after the emergence of the first omicron variant case on december 16, 2021. the issi value increased from 186.22 to 188.36. meanwhile, the ihsg increased from 6,586.44 to 6,645.51. figure 3. issi and ihsg value before and after the emergence of the first case of covid-19 source: indonesian stock exchange (2020) figure 4. issi and ihsg value before and after the emergence of delta variant source: indonesian stock exchange (2021) 110.00 120.00 130.00 140.00 150.00 160.00 170.00 180.00 190.00 200.00 1 6 11 16 21 26 31 36 41 46 51 56 61 in d e x v a lu e ( p o in t) period (day) 3,800.00 4,100.00 4,400.00 4,700.00 5,000.00 5,300.00 5,600.00 5,900.00 6,200.00 6,500.00 1 6 1116212631364146515661 in d e x v a lu e ( p o in t) period (day) 110.00 120.00 130.00 140.00 150.00 160.00 170.00 180.00 190.00 200.00 1 6 11 16 21 26 31 36 41 46 51 56 61 in d e x v a lu e ( p o in t) period (day) 4,100.00 4,400.00 4,700.00 5,000.00 5,300.00 5,600.00 5,900.00 6,200.00 6,500.00 6,800.00 1 6 1116212631364146515661 in d e x v a lu e ( p o in t) period (day) alghifary, kadji, & hafizah | indonesian stocks’ volatility during covid-19 waves: comparison between ihsg and issi international journal of islamic economics and finance (ijief), 6(1), 105-132 │ 107 figure 5. issi and ihsg value before and after the emergence of omicron variant source: indonesian stock exchange (2021) based on figure 3, 4, and 5, it can be clearly seen that the highest volatility of the issi and ihsg value movements occurred during the first wave of covid19 cases in indonesia. when compared between 30 days before and after the first case’s appearance, the issi value fell to 24.86%, and the ihsg value fell to 25.93%. it was in stark contrast to the second wave, which only fell by 7.05% and 5.66%, respectively, and the third wave, which actually grew positively by 1.15% on the issi and 0.90% for the ihsg. according to the prior discussion, every wave of covid-19 has a similar movement tendency between issi and ihsg. however, this tendency does not adequately explain the comparison between issi and ihsg before and after the covid-19 case. given that the covid-19 virus affected the stock market, the researchers had to divide the data into two categories: before and after the covid-19 variants arrived in indonesia. table 1. descriptive statistics of issi and ihsg mean n std. deviation std. error mean pair 1 ihsg pre-first case 5955.8260 30 194.52154 35.51461 ihsg post first case 4720.2557 30 458.89349 83.78211 pair 2 issi pre-first case 172.5367 30 6.55064 1.19598 issi post first case 138.2620 30 12.93999 2.36251 pair 3 ihsg pre delta 6062.2040 30 105.22733 19.21179 ihsg post delta 5959.9083 30 113.88358 20.79220 pair 4 issi pre delta 178.4510 30 2.55470 .46642 issi post delta 173.6917 30 2.42699 .44311 pair 5 ihsg pre omicron 6628.9517 30 56.50490 10.31634 ihsg post omicron 6623.6017 30 51.85356 9.46712 pair 6 issi pre omicron 188.2253 30 1.53414 .28009 issi post omicron 188.0177 30 1.49000 .27203 table 1 reveals that each wave of covid-19 reduced the average issi and ihsg values in 30 days. the first wave had the most significant decline in issi and 110.00 120.00 130.00 140.00 150.00 160.00 170.00 180.00 190.00 200.00 1 6 11 16 21 26 31 36 41 46 51 56 61 in d e x v a lu e ( p o in t) period (day) 4,100.00 4,400.00 4,700.00 5,000.00 5,300.00 5,600.00 5,900.00 6,200.00 6,500.00 6,800.00 1 6 1116212631364146515661 in d e x v a lu e ( p o in t) period (day) alghifary, kadji, & hafizah | indonesian stocks’ volatility during covid-19 waves: comparison between ihsg and issi international journal of islamic economics and finance (ijief), 6(1), 105-132 │ 108 ihsg values. meanwhile, the smallest drop happened in the third wave when the omicron variety expanded to indonesia. when comparing the two types of stocks, the ihsg's average value dropped more severely than the issi during the first wave of covid-19. before the arrival of covid-19 cases in indonesia, the average ihsg value declined by 20.75%, while the average issi value decreased by 19.87%. when the decline in values was compared to the change in the average value of the two during the omicron variant wave, it was discovered that there was a very slight difference. the average ihsg value decreased by 0.08%, slightly less than the average issi value, which fell by 0.11%. the data in the preceding table can also be used to compare volatility in the issi and ihsg based on their relative standard deviation values. both the issi and the ihsg demonstrated an increasing and reducing volatility tendency in the first and third waves of ihsg volatility increase. in contrast, issi volatility dropped, except for the second wave. when the percentage change was compared, each wave of covid-19 consistently delivered more extensive volatility changes to the ihsg than the issi. the ihsg experienced an increase in volatility of up to 135.91% during the first wave, exceeding the issi's growth of 97.54%. similarly, the ihsg experienced a volatility change of 8.2 % in the second and third waves, while the issi experienced a volatility change of less than 5%. to confirm that the spread of the covid-19 variant caused the change in value, a different test should be performed, comparing the ihsg and issi value groups before the spread of the covid-19 virus and ihsg and issi value groups after the virus variant spread. before executing the difference test, the data were assessed to determine their normalcy as a determinant of the different test methods used. since the number of samples from each variable exceeded 50, the kolmogorov-smirnov test was performed to determine normality (cleff, 2014). the following criteria were employed to make decisions in this test:  the value of sig. >0.05 means the data are normally distributed, and the comparison test is carried out using the paired t-test method.  the value of sig. <0.05 indicates that the data are not normally distributed, and the comparison test is conducted using the wilcoxon rank test method.  according to table 2, a significant value of 0.05 was observed in the ihsg and issi variables in the first wave. in the delta and omicron variant waves, the ihsg and issi variables showed a significance value greater than 0.05. as a result, it is possible to conclude that the ihsg and issi data in the first wave were normally distributed. in contrast, the ihsg and issi data in the delta and omicron variant waves were alghifary, kadji, & hafizah | indonesian stocks’ volatility during covid-19 waves: comparison between ihsg and issi international journal of islamic economics and finance (ijief), 6(1), 105-132 │ 109 not. based on these findings, the wilcoxon rank test was the best alternative test method for the ihsg and issi variables in the first wave. meanwhile, the paired t-test method was employed for the ihsg and issi variables on the delta and omicron waves. table 2. normality test results ihsg first case issi first case ihsg delta issi delta ihsg omicron issi omicron n 60 60 60 60 60 60 mean 5338.0408 155.3993 6011.0562 176.0713 6626.2767 188.1215 std. deviation 714.30593 20.05144 120.32383 3.44412 53.83522 1.50301 test statistic .187 .161 .108 .060 .095 .087 asymp. sig. .000 .001 .079 .200 .200 .200 following that, each data group was assessed using a comparative test based on the method provided by the normality test. several studies were run to determine the impact of the covid-19 variant's spread on changes in the ihsg and issi values. in this regard, if the various tests reveal a substantial difference, it is determined that changes in the ihsg and issi values can occur due to the covid-19 variant's spread. the following are the decision criteria for the various tests utilizing the paired t-test or wilcoxon rank test methods:  the value of sig. >0.05 indicates no significant difference in the stock index value before and after the spread of the covid-19 variant.  the value of sig. <0.05 implies a significant difference in the stock index value before and after the spread of the covid-19 variant. table 3. wilcoxon rank test results ihsg post first case ihsg pre-first case issi post first case – issi pre-first case z -4.782b -4.782b asymp. sig. (2-tailed) .000 .000 table 4. paired t-test results difference t df sig. (2-tailed) pair 3 ihsg pre delta – ihsg post delta 102.29567 3.468 29 .002 pair 4 issi pre delta – issi post delta 4.75933 8.161 29 .000 pair 5 ihsg pre omicron – ihsg post omicron 5.35000 .372 29 .713 pair 6 issi pre omicron – issi post omicron .20767 .718 29 .479 alghifary, kadji, & hafizah | indonesian stocks’ volatility during covid-19 waves: comparison between ihsg and issi international journal of islamic economics and finance (ijief), 6(1), 105-132 │ 110 according to table 3, the value of sig. for ihsg and issi in the first wave was 0.05 based on the different test outputs. similarly, table 4 revealed the value of sig. for ihsg and issi during the delta variant wave were both 0.05. meanwhile, when the test period was conducted during the omicron variant wave, the sig. value of the ihsg and issi showed a number greater than 0.05, indicating that it was insignificant. based on these results, it is possible to conclude that significant changes in the ihsg and issi values occurred during the spread of the covid-19 virus in the first wave and the delta variant wave. 4.1.2. analysis because the ihsg and issi values changed significantly, the two stock indices were assessed to have weak resistance to the covid-19 crisis during the first and delta variant waves. the findings of this analysis are proportional to the findings of hasan et al. (2021) against the dow jones and ftse indexes, showing that both islamic and conventional stocks are vulnerable to the consequences of the covid-19 issue. still, it is necessary since the covid-19 issue prompted indonesia to enter an economic slump, resulting in numerous national companies losing income and terminating worker contracts (febrianto & rahadi, 2021). interestingly, a different stock market reaction occurred during the third wave caused by the omicron variant. based on the various tests above, there was no significant difference in the ihsg and issi values before and after indonesia's spread of the omicron variant. it could happen because of differences in investor behavior in responding to events that occurred (thampanya et al., 2020). according to the indonesia stock exchange (idx) monthly report from march 2020, when the covid-19 virus first invaded indonesia, net trade by worldwide investors was negative, specifically -3.49 billion share units. when the delta version began to spread in may 2021, the idx stated that net trading by worldwide investors was similarly negative at 1.64 billion share units. meanwhile, worldwide investor mood continued to recover in december 2021, as demonstrated by a positive net trade of 5.69 billion shares. the restrictive policies enforced by the local government may impact the behavior of stock investors. of course, it can also affect stock price swings. at first, banning community activities led to panic selling among stock investors. regarding covid-19 prevention policies, the indonesian government imposed large-scale social restrictions (psbb) at the outbreak's start in reaction to the virus's increasingly widespread dissemination (debora, 2020). when the delta variety became more widespread, the authorities promptly imposed an emergency community activity restriction (ppkm), followed by ppkm level 4 in the java-bali region, for more than a month (bardan, 2021). these two policies severely restricted people's activities, causing economic activity to alghifary, kadji, & hafizah | indonesian stocks’ volatility during covid-19 waves: comparison between ihsg and issi international journal of islamic economics and finance (ijief), 6(1), 105-132 │ 111 suffer. meanwhile, as the omicron form spread, the government merely applied ppkm level 3 with less stringent limitations, which was only valid for one month (waseso, 2022). the presence of relaxation policies during the wave of the omicron variant undoubtedly provides an opportunity for the economy's wheels to turn more steadily. the influence on stock prices can also be attributed to covid-19 instances. haryanto (2020) and khalid et al. (2021) discovered that the number of covid19 models substantially impacted stock value and volatility. based on the indonesian covid-19 handling task force report, the number of active covid19 cases in march 2020 reached a very high level, accounting for 85.80% of all positive cases recorded. the number of active cases was still at 5.6% as of may 2021, and the positive monthly rate was 10.7 %, which was greater than the who (world health organization) standard. meanwhile, active cases declined dramatically to 0.1% in december 2021, with a positive rate of only 0.11 %. based on these findings, it is highly probable that the occurrence of the omicron variety in december 2021 did not result in significant changes to the ihsg and issi values. 4.2. volatility analysis 4.2.1. results most earlier studies employed stock return data as the observed variable in the garch model (azakia et al., 2020; irfan et al., 2021; mhd ruslan & mokhtar, 2021; nurdany et al., 2021). to calculate the return value of each stock index, the stock price data must be transformed into a natural logarithm using a first-order differential equation (aliyev et al., 2020). adopting this transformation could make it easier for researchers to measure changes in a stock's value and rate of return. figure 6. the volatility of issi and ihsg return the data transformation results were then exhibited in a graph to show the volatility. the issi and ihsg return exhibited identical volatility in the graph alghifary, kadji, & hafizah | indonesian stocks’ volatility during covid-19 waves: comparison between ihsg and issi international journal of islamic economics and finance (ijief), 6(1), 105-132 │ 112 above. significant changes would follow changes in the high rate of return. this condition is referred to as volatility clustering, one of the characteristics of heteroscedastic data that must be examined using the garch model (enders, 2004). as a result, the two stock indexes under consideration, i.e., issi and ihsg also displayed volatility clustering. besides being heteroscedastic, the garch model also requires that the data to be analyzed must be stationary. to ensure this, the stationarity test was carried out using the augmented dickey-fuller (adf) method to identify the presence of a unit root in the observed data. the basis for decision-making in the stationarity test is as follows:  a probability value of >0.05 indicates that the data contains a unit root and is not stationary.  a probability value of <0.05 indicates that the data does not contain a unit root and is stationary. table 5. stationarity test results issi ihsg t-statistic prob.* t-statistic prob.* augmented dickey-fuller test statistic -17.56089 0.0000 -17.03850 0.0000 test critical values: 1% level -3.976629 -3.976629 5% level -3.418889 -3.418889 10% level -3.131986 -3.131986 based on table 5, the resultant probability value at the level was <0.05. similarly, the statistical value of the adf test, -17.56 for issi and -17.04 for ihsg, was less than the value of the corresponding critical areas. therefore, the researchers could conclude that the issi and ihsg data were stationary since they lacked a unit root. the adf test results, which revealed that the data were stationary at the level, were then used to create acf (autocorrelation function) and pacf (partial autocorrelation function) plots based on the correlogram graph. afterward, acf and pacf charts were used in arma modeling to determine the correct order. the pacf plot was used to determine the ar (autoregressive) order, while the acf plot was employed to determine the ma (moving average) order. significant acf and pacf values were determined based on the lag with a plot exceeding the boundary line. based on table 6 and 7, both returns showed acf and pacf plots exceeding the limit at the lag third. therefore, the tentative models that could be used were arma (3.0), arma (0.3), and arma (3.3). each model was then estimated to get the coefficient of determination (r2), aic, and sic. the best arma model chosen was the one with the largest r2 and the smallest aic and sic values. alghifary, kadji, & hafizah | indonesian stocks’ volatility during covid-19 waves: comparison between ihsg and issi international journal of islamic economics and finance (ijief), 6(1), 105-132 │ 113 table 6. correlogram of issi return autocorrelation partial correlation ac pac q-stat prob 1 0.000 0.000 6.e-07 0.999 2 -0.096 -0.096 4.6031 0.100 3 0.192 0.194 23.171 0.000 4 0.024 0.012 23.472 0.000 5 0.042 0.082 24.349 0.000 6 0.007 -0.030 24.374 0.000 7 -0.049 -0.046 25.592 0.001 8 0.017 -0.009 25.736 0.001 9 -0.154 -0.172 37.806 0.000 10 -0.082 -0.065 41.228 0.000 table 7. correlogram of ihsg return autocorrelation partial correlation ac pac q-stat prob 1 0.018 0.018 0.1613 0.688 2 -0.075 -0.076 3.0124 0.222 3 0.183 0.187 19.899 0.000 4 -0.004 -0.020 19.907 0.001 5 0.068 0.102 22.245 0.000 6 0.034 -0.009 22.827 0.001 7 -0.055 -0.039 24.383 0.001 8 0.034 0.009 24.972 0.002 9 -0.140 -0.163 35.035 0.000 10 -0.093 -0.071 39.462 0.000 table 8. summary of arma modelling for issi and ihsg returns stock model r2 aic sic issi arma (3, 0) 0.0336 -5.8771 -5.8517 arma (0, 3) 0.0329 -5.8764 -5.8510 arma (3, 3) 0.0322 -5.8737 -5.8398 ihsg arma (3, 0) 0.0301 -5.8469 -5.8216 arma (0, 3) 0.0279 -5.8446 -5.8193 arma (3, 3) 0.0282 -5.8429 -5.8091 based on table 8, it can be seen that the best model for returns was arma (3,0). this model demonstrated that the return value heavily influenced the return on issi and ihsg in the most recent period over the preceding three periods. the chosen arma model was used as the mean equation in the garch model analysis. to identify the presence of the garch effect as an element of volatility in the model, a heteroscedasticity test using the archlm (lagrange multiplier) method was performed on the mean equation formed from the arma model. the basis for decision-making in the heteroscedasticity test is as follows: alghifary, kadji, & hafizah | indonesian stocks’ volatility during covid-19 waves: comparison between ihsg and issi international journal of islamic economics and finance (ijief), 6(1), 105-132 │ 114  a probability value of >0.05 implies that the data does not contain intense volatility and is homoscedastic, so it does not need to be estimated using the garch model.  a probability value of <0.05 implies that the data contains intense volatility and is heteroscedastic, so it needs to be estimated using the garch model. table 9. heteroskedasticity test results indicator issi ihsg f-statistic 57.42780 43.70854 obs*r-squared 51.67620 40.33075 prob. f 0.0000 0.0000 prob. chi-square 0.0000 0.0000 table 9 shows the results in the form of a probability value lower than 0.05 for both issi and ihsg data. based on this parameter, the issi and ihsg return data were both heteroscedastic and volatile. thus, the next step was to estimate how much volatility happened based on the observed data using the garch model. the garch model estimation generally yields two types of equations: the mean and the variance equations. according to the arma model, the mean equation signifies how much stock returns from the prior period influence the current average stock return. table 10. garch model estimation indicator issi ihsg coefficient probability coefficient probability mean equation c 0.000717 0.1135 0.000860 0.0608 ar(3) 0.101435 0.0368 0.118476 0.0123 variance equation c 4.80e-06 0.0228 5.05e-06 0.0133 resid(-1)^2 0.059841 0.0219 0.064508 0.0239 garch(-1) 0.884831 0.0000 0.877207 0.0000 meanwhile, the variance equation explains how much the volatility persistence of the stock index is determined by the volatility and the squared error in the previous period. the estimation in table 10 was carried out using the garch (1.1) model. all independent variables in the predicted output had a significant effect since their probability values were less than 0.05. the constant value was also greater than zero, and the outcome of the sum of the coefficients of the independent variable was one. in other words, this model is thought to help evaluate the volatility of the issi and ihsg. alghifary, kadji, & hafizah | indonesian stocks’ volatility during covid-19 waves: comparison between ihsg and issi international journal of islamic economics and finance (ijief), 6(1), 105-132 │ 115 4.2.2. robustness test however, before assessing the model, the arch-lm test was performed to guarantee that the garch model was free of heteroscedastic features. according to table 11, the heteroscedasticity test using the arch-lm approach yielded a probability value greater than 0.05. this value suggests that the issi and ihsg return data processed using the garch model had been free from heteroscedasticity. these results strengthened the feasibility of the model to be used in analyzing issi and ihsg returns. table 11. heteroskedasticity test result for garch model indicator issi ihsg f-statistic 2.071596 1.782812 obs*r-squared 2.071297 1.783595 prob. f 0.1507 0.1824 prob. chi-square 0.1501 0.1817 4.2.3. analysis table 10 show the estimated output of the garch model formed in analyzing the volatility of the issi and ihsg, the resulting equation for the volatility of the issi is as follows: 𝜎𝑡 2 = 4,80 × 10−6 + 0,0598𝜀𝑡−1 2 + 0,8848𝜎𝑡−1 2 meanwhile, the equation formed for the volatility of the ihsg is as follows: 𝜎𝑡 2 = 5,05 × 10−6 + 0,0645𝜀𝑡−1 2 + 0,8772𝜎𝑡−1 2 the above equation is a form of the variance equation that describes the factors determining how much stock volatility occurs. the sum of the coefficients α+β becomes a measure of the volatility persistence in each stock index investigated (campbell et al., 2012). the greater the sum, the more volatility, and the longer it can last. according to the equation, the volatility persistence of the issi stock index was in the region of 0.94. the volatility equation for the ihsg stock index also yielded the same result. since the resulting value was so close to one, the researchers could conclude that issi and ihsg were both highly volatile during the covid-19 pandemic in indonesia. furthermore, the probability value of each independent variable was less than 0.05, indicating the strength of high volatility. this value suggests that the previous period's volatility (σ2) and squared error (ε2) considerably affected the next period's volatility. the coefficient value on variable ε2 also describes the impact of occurrences outside the model. in this study, variable ε2 in the ihsg equation had a coefficient of 0.0645, more significant than the coefficient ε2 of 0.0598 in the issi equation. it demonstrates that external alghifary, kadji, & hafizah | indonesian stocks’ volatility during covid-19 waves: comparison between ihsg and issi international journal of islamic economics and finance (ijief), 6(1), 105-132 │ 116 factors outside the model had a more significant impact on ihsg return volatility. in this case, domestic macroeconomic factors or global stock index movements are examples of the events under consideration. the estimated output of the garch model also yielded the same results as the output of the comparative tests, indicating that the covid-19 problem had a proportional effect on issi and ihsg during the pandemic period, which encompasses three waves. these findings are consistent with hasan et al. (2021), who discovered that islamic and conventional equities exhibited identical volatility and a strong association during the covid-19 crisis. this type of effect is typical because the covid-19 pandemic is not just a financial sector crisis but a multifaceted catastrophe that shocks different social areas of people's lives (saputra & ariutama, 2021). therefore, while issi and ihsg have distinct personalities, their impact is not much different. fundamental reasons, such as volatility in macroeconomic variables, can also contribute to the persistence of volatility in indonesian stocks (thampanya et al., 2020). based on nugroho & robiyanto's (2021) research, the fundamental factors that also experienced volatility during the covid-19 pandemic included the rupiah exchange rate and world gold price. the volatility in both variables significantly influenced indonesia's stock exchange market. another variable that also became the attention was world oil volatility, which increased in the middle of the covid-19 crisis (bourghelle et al., 2021). syebastian et al. (2021) also mentioned a significant correlation between the world oil price and stock volatility in indonesia. the covid-19 crisis caused volatility in various domestic and global economic indicators. as a high-risk return investment asset, the stock is undoubtedly easily influenced by volatility, which occurs in other instruments. macro-economy variables cause it, but stock market volatility in a country is also caused by volatility in other countries' stock markets. this influence is called a contagion effect, a theory explaining that a crisis occurring in a region or country can spread its effect to another country on a domestic or international scale (dornbusch et al., 2000). during the crisis of covid-19, the systemic risk resulting from the contagion effect experienced an increase in the financial sector (louati et al., 2022). based on the research by kamaludin et al. (2021), the capital market condition in asean-5 countries had a solid correlation to the dow jones index movement in the middle of the pandemic era. referring to contagion theory, it is widespread if stocks in indonesia experienced intense volatility because of dow jones index volatility. the identical volatility between ihsg and issi clarified that islamic rules application in issi stocks does not ensure stronger endurance during the crisis. it was caused by the substantial impact of covid-19 in many aspects, affecting either the real or financial sector. ihsg and issi values also reached their alghifary, kadji, & hafizah | indonesian stocks’ volatility during covid-19 waves: comparison between ihsg and issi international journal of islamic economics and finance (ijief), 6(1), 105-132 │ 117 lowest and highest values in a decade because of this pandemic. it confirms the presence of great volatility in indonesian stocks during covid-19. the great volatility also indices that indonesian investors are sensitive to financial news, especially during the crisis. based on supply and demand law, investors’ preference as customers is strongly correlated with the stock price. v. conclusion and recommendation 5.1. conclusion the stock market experienced high volatility and uncertainty due to the pandemic. in less than a month, the covid-19 crisis resulted in the drop of ihsg value to its lowest point in the last decade. both islamic and conventional stocks experienced similar volatility during the covid-19 pandemic. based on the different test results using the paired t-test and wilcoxon rank test methods, it was concluded that the issi and ihsg experienced significant changes before and after discovering the first case of covid-19. significant changes in both values were also found when the delta variance spread. in contrast, when the third wave occurred due to the presence of the omicron variant, issi and ihsg did not experience significant shocks. this condition might happen because the community's immunity has been developed, and the government has been able to implement adaptive policies to prevent virus transmission. the policy was then relaxed during the spread of the omicron variant, where the government allowed various community activities in public spaces. during the first wave of cases and the delta variant wave, the number of active cases and the positivity rate were still above the who standard. meanwhile, when the omicron variant was found, the active cases and the positivity rate approached 0, below the who standard. the volatility in issi and ihsg is also proven by detecting heteroscedasticity elements in stock return data. based on the heteroscedasticity test results, it was found that both stock indices had a heteroscedastic return value and experienced high volatility. by applying the garch model in the analysis, the strength of stock volatility could be measured along with the factors influencing it. the estimation results of the garch model conclude that both islamic and conventional stocks had an immense volatility power with an identical value of 0.94 or close to 1. the current volatility is also significantly influenced by the previous volatility and the squared error representing other previous events outside the model. moreover, the volatility in islamic and conventional stocks was not much different, even though both stocks had different characters in the debt and income ratio. fundamental factors also caused this high volatility in the form alghifary, kadji, & hafizah | indonesian stocks’ volatility during covid-19 waves: comparison between ihsg and issi international journal of islamic economics and finance (ijief), 6(1), 105-132 │ 118 of shocks in several macroeconomic variables, including the rupiah exchange rate, gold prices, and world oil prices. in addition, the contagion effect that occurred during the covid-19 crisis also contributed to the spread of systemic risk in global stock indexes on stock volatility in indonesia. furthermore, the identical result between ihsg and issi estimation was caused by the pandemic's significant effect on either the real or financial sector. it implies that issi is not more stable than ihsg to face the crisis, and vice versa. besides, islamic rules application in issi stocks does not ensure more vital endurance during the crisis. the effect of the crisis also cannot be denied by indonesian stocks, so it influences the investors’ preference, which is sensitive to financial news. 5.2. recommendation this study indicates that the volatility in the stock market may last as long as the crisis is not over. therefore, investors are suggested to pay attention to the volatility that occurred in the previous days to predict stock prices in the future. since the stocks have experienced high volatility throughout the pandemic, stock issuing companies should adapt quickly and prepare alternative strategies to maintain stock price stability amid a crisis. likewise, government agencies are highly encouraged to maintain macroeconomic stability, including exchange rates, inflation, and interest rates. this research, nonetheless, has several limitations on the information presented. the use of issi and ihsg as variables representing sharia and conventional stocks was not enough to reveal the differences in character between the two stocks, considering that the ihsg includes all issuers listed on the indonesia stock exchange, both sharia and conventional stocks. so far, no index has included conventional stocks only. therefore, it is recommended for further researchers who want to compare the performance of islamic and conventional stocks to classify between the sharia and conventional stocks specifically. references adil, m. 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(2022, february 8). ini aturan ppkm level 3 di jabodetabek, diy, bali dan bandung raya. https://nasional.kontan.co.id/news/ini-aturanppkm-level-3-di-jabodetabek-diy-bali-dan-bandung-raya alghifary, kadji, & hafizah | indonesian stocks’ volatility during covid-19 waves: comparison between ihsg and issi international journal of islamic economics and finance (ijief), 6(1), 105-132 │ 124 this page is intentionally left blank international journal of islamic economics and finance (ijief) vol. 3(2), page 171-198, july 2020 economic thought, foundational problems of mainstream economics and the alternative of islamic economics jasmin omercic international islamic university malaysia, malaysia corresponding email: omercic_jasmin@hotmail.com mohamed aslam mohamed haneef international islamic university malaysia, malaysia, mdaslam@iium.edu.my mustafa omar mohammed international islamic university malaysia, malaysia, mustafa@iium.edu.my article history received: june 16 th , 2020 revised: july 18 th , 2020 accepted: july 20 th , 2020 abstract economic thought always permeated human living. economic thought and the development of economics as a discipline in the last few centuries made it central to the world order. however, the foundational problems that mainstream economics suffers from led to uncounted crises and issues within the same order that created it. a physicalist ontology, rationalist epistemology, axiological futility and methodological deficiency are the problems of philosophical foundations of mainstream economics we reviewed in this paper. the methodology of this paper is qualitative and generally adopts the library research and critical content analysis methods to review and respond to identified foundational problems. muslims islah and tajdid responses to the west and mainstream economics problems and issues found shape in islamisation of knowledge (iok) and islamic economics (ie). the recent shift to integration of knowledge (iok) universalizes the appeal and revives the zeal for ie development in light of iok based on iok in this paper. a thorough analysis of iok, iok and ie responses to the west and mainstream economics enabled us to appraise it as the alternative and solution to the foundational problems. the paper clarified the way for future research in ie in light of iok and directed the practitioners and regulators towards economic reasoning based on robust foundations. keywords: alternative foundations, integration of knowledge, islamic economics, mainstream economics. jel classification : b40, b50, b59, p40 @ ijief 2020 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.3226 web: https://journal.umy.ac.id/index.php/ijief/article/view/9101 citation: omercic, j., haneef, m. a. m., & omar, m. m. (2020). economic thought, foundational problems of mainstream economics and the alternative of islamic economics. international journal of islamic economics and finance (ijief), 3(2), 171-198. doi: https://doi.org/10.18196/ijief.3226 mailto:mdaslam@iium.edu.my https://doi.org/10.18196/ijief.3225 https://doi.org/10.18196/ijief.3225 omercic, haneef, & omar│ economic thought, foundational problems of mainstream economics and the alternative of islamic economics international journal of islamic economics and finance (ijief), 3(2), 171-198 │172 i. introduction 1.1. background economic thought has always come hand-in-hand with social development. a robust economy facilitated the prosperity and expansion of the hellenic and roman civilisations. it was present with the rise of islam in the 7 th century which heralded sustained economic integration and established clear rights and duties, while also driving industrial europe and the contemporary period (chapra, 2016; koehler, 2014). modern economic thought took concrete shape in the last 300 years although its roots are traceable to the legacies of earlier civilisations. medieval thomistic (named by thomas aquinas 12251274ac), feudalist, mercantilist and protestant economic thought challenged the christian paternalistic ethic (cpe) 1 and dichotomised economic thought into normative and positive trends. the later became dominant with the rise of science and the positivistic shift 2 in economic thought that guided classical economics and continues to guide mainstream neoclassical economics today (hunt, 2016; blaug, 1997; mahomedy, 2016, 2017). modern economics, like all other social sciences, are western sciences, and rooted in foundations that reflect western thought, worldview, and practice. western civilisation and its worldview have asserted global influence since the 16 th century (hunt, 2016; al-attas, 1978; ali, 2016). western economic thought is an undertaking of many scholars who spent their lives contributing to the field, primarily focusing on issues of growth and development. people’s welfare and wellbeing receive little attention and the outcome of all these three centuries of economic thought is massive inequality and concentration of market/economic power as a hallmark of western economics. it has perpetuated global crises and failed to reduce socioeconomic challenges in contemporary times according to stiglitz (2019) and furqani (2012). many scholars have pointed out that its shortcoming is due to its materialist nature, the neglect of its foundations, ethical roots, and its spiritual/religious teachings. such a materialist orientation of economics as a discipline may be the legacy of the western civilisation but need not be the path taken by humanity at large (mirakhor, 2020; lee & lavoie, 2013; putnam & walsh, 2012; chapra, 2016). for that reason, as the motivation of this paper, we appraise the development of islamic economics (ie) in light of the integration of 1 christian paternalistic ethic represented the authoritative status of some set of rules, regulations and foremost authority of the catholic church that determined what was ethical and moral in a society based on some scriptural and own interpretation (hunt, 2016). 2 positivistic shift refers to greater use of mathematics, statistics, and physics in economics during the middle of the 19 th and early 20 th century to prove it is pure science and not social science (arif, 1985, 1987). omercic, haneef, & omar│ economic thought, foundational problems of mainstream economics and the alternative of islamic economics international journal of islamic economics and finance (ijief), 3(2), 171-198 │173 knowledge (iok) based on the islamisation of knowledge (iok) as an alternative to mainstream economics. by mainstream economics, we refer to the dominant neoclassical economics and elements of other streams of economics like keynesianism, post-keynesianism, monetarism, etc., that are partially and indirectly acceptable within neoclassical economics (see lee & lavoie, 2013 for more details). beginning with a brief evolution of the development of mainstream economics, this paper identifies its foundational problems that have caused many contemporary theoretical and practical problems globally. however, we acknowledge in this paper the strengths of mainstream economics, its beneficial contributions yet appraise the alternative ie in light of iok based on iok. following gaps in literature corroborate this paper’s motivation further. economics has proved to be neither value-free nor ideology-free in view of canterbery (1987) and hunt (2016). religions (islam, christianity, or others) have contributed to its development. while the islamic civilisation‘s contributions to economic thought are increasingly immanent in contemporary times, western economists erroneously categorised it within the schumpeterian gap 3 according to pribram (1983), hunt (2016) and islahi (2005, 2014). the rise of ie and iok in the 20 th century proved that the islamic civilisation contributed to the development of economic thought and other disciplines. with increased research, contemporary western literature is being forced to acknowledge and revise the historical development of economic and other thought in view of saliba (2007). that represents the need and corroborates this paper’s aspiration to appraise ie development through iok based on iok in order to revive the legacy/classical practices in contemporary times and overcome the problems and recurrent issues of mainstream economics. from canterbery (1987) and hunt (2016), we learn that when mainstream economics mechanised the homo economicus in attempts to replicate scientific rationality axioms, its empiricism, predictability, infallibility, utilitarianism, consistency, constant maximisation of value levelled human activity into cause-effect relationships. the great depression in the 1930s witnessed keynesian economics challenge such an approach to economics and promoted socialist economics packaged in the us president roosevelt’s ‘new deal’ economic recovery programme, i.e. the greater role of government in markets and the rise of syndicate rights. the classical and 3 this period known as the ‘schumpeterian gap’ lasted for over more than 600 years (7 th to 13 th century) to which the least credit is acknowledged for the development of economics as a discipline or science besides other sciences (hunt, 2016; ali & thompson, 1999). today, it is gradually recognized and acknowledged. omercic, haneef, & omar│ economic thought, foundational problems of mainstream economics and the alternative of islamic economics international journal of islamic economics and finance (ijief), 3(2), 171-198 │174 other economic thought variants constantly rivalled it but ultimately all fell into the ‘positivistic shift’ trap. therefore, this gap corroborates the need for an alternative approach to economics, like ie, that is aware of this trap and can integrate the best contributions of economic thought for betterment of humanity. moreover, modern economic thought proved to have questionable philosophical foundations that comprise its ontology, epistemology, axiology, and methodology. the positivistic-scientific quest in economics resulted in repetitive crises, irrational exuberance for stability and prosperity, financialisaton, environmental destruction, and constant materialisation and desacralisation according to shiller (2015), stiglitz (2019) and al-attas (2014). hence, among the multiple assumptions, regressions, testing, modelling, and other economic methodologies, some are more and some less relevant today. thus, the state of economics today suffers from a methodological deficiency resulting from marginalisation and narrow philosophical foundations, namely ontology (theory of being), epistemology (theory of knowledge and its sources) and axiology (the study of the nature of value or valuation) in view of mahomedy (2016, 2017), furqani (2012) and is evident from even stiglitz (2019). 4 mainstream economics narrowed the nature, role, and position of human beings to that of homo economicus and a unidimensional or unidisciplinary positivistic development of economics. while some alternative western economic schools or heterodox economic thought like post-keynesianism, institutionalism, neo-austrianism, neoricardian or post-autistic economics and others questioned the approach and aspects of mainstream economics (boşca, 2015), no one seriously questioned or discussed its philosophical foundations according to mahomedy (2016) and furqani (2012). this represents a great gap that this paper aims to fill. hence, while appreciating the beneficial contributions of mainstream economics, this paper attempts to address the identified gaps of foundational problems of mainstream economics, recurrent issues and general approach to economics as findings and results by highlighting muslim responses to mainstream economics based on foundations that have the potential to overcome its identified foundational problems and issues. since the encounter with western civilisation and economic thought, muslims objected to its approach and imposition of its narrow and flawed foundations and worldview. it is for those reasons that this paper appraises ie as an alternative in light of the contemporary significance and shift to iok yet based on iok. we simultaneously acknowledge the need to overcome the 4 see also haneef (2014), furqani and haneef (2012), hunt (2016), and canterbery (1987) for greater detail. omercic, haneef, & omar│ economic thought, foundational problems of mainstream economics and the alternative of islamic economics international journal of islamic economics and finance (ijief), 3(2), 171-198 │175 shortcomings of ie and iok raised since inception that in no way diminish their robust foundations. many studies increasingly proved that ie and iok proved to have sound and comprehensive philosophical foundations. for instance, such an approach is genuine and realistic in contrast to the abstract nature of mainstream western economics in view of haneef (1997) and furqani (2012). the increasing significance of knowledge integration in contemporary times and the shift from islamisation of knowledge (iok) to integration of knowledge (iok) makes the development of ie with the use of beneficial contributions of mainstream economics conducive and commendable. this represents the way how this paper fills the gaps of questionable mainstream economics foundations, economic thought, its issues and constant economic instabilities as a major contribution of this paper to the reviving interest of ie development due to its potential in theory and practice. linking the theoretical foundations of ie that we appraise as the solution to those of mainstream economics with the practices in the islamic banking and finance industry has the potential to rectify recurrent challenges of the industry in actualising its aspirations genuinely. to justify that, later sections provide us with a greater insight into or review of the foundational problems of mainstream economics and acquaints us with the deeper repercussions of those foundations and related problems and issues. 1.2. objective with a clarified motivation of this paper to address the earlier identified gaps of mainstream economics’ foundational problems, issues and general approach to economics, we can clearly state that the main objectives of this paper are to review the foundational problems of mainstream economics in greater fashion and then appraise ie development through iok based on iok through identification of muslim responses to such economic reasoning and lifestyle since the 16 th century gradual western revival. such objectives reveal the seriousness of the need for robust philosophical foundations that mainstream economics suffers from and credits muslim responses to such foundations before they matured in many consequential issues prevalent in our times. thus, it strongly supports our objective of appraising ie via iok to produce an economics that meets the needs of humanity more appropriately. along the background and objectives in our introductory part of this paper, the following literature review section highlights in greater detail the problems, issues and approach of mainstream economics that further clarify the seriousness of the gaps that this paper aims to fill via appraisal of ie development via iok based on iok. we discussed the problems of physicalist omercic, haneef, & omar│ economic thought, foundational problems of mainstream economics and the alternative of islamic economics international journal of islamic economics and finance (ijief), 3(2), 171-198 │176 ontology, rationalist epistemology, axiological futility and methodological deficiency of mainstream economics. those justify why ie development is possible and necessary. a section on the adopted methodology of this paper precedes the results and analysis section where we present the muslim responses to western thought and that of economics generally through islah (reform) and tajdid (renewal) movements with a focus on iok and ie. we finalised this section with explaining the significance of ie development via iok based on iok as the alternative approach to economic reasoning and foremost the solution to problems and issues of mainstream economics. lastly, we conclude and provide recommendations for practitioners, regulators and future research. ii. literature review this section reviews necessary literature in order to enable us to appraise in this paper the development of islamic economics (ie) in light of the integration of knowledge (iok) based on islamisation of knowledge (iok) as the solution to foundational problems and related issues of mainstream economics. it firstly presents the ontological, epistemological, axiological, and methodological foundational problems and related issues of mainstream economics. it then highlights the findings and results as muslim responses in the form of islah and tajdīd movements of which iok and ie are relevant in overcoming the problems of mainstream economics. despite their shortcomings, iok and ie have sound foundations and decades of development have helped to identify the need and rising significance of iok as the future framework approach of ie development that has the potential to overcome the problems of mainstream economics. thus, addressing the mainstream foundational problems and adopting the iok approach to developing ie is an alternative approach and has the potential to fill the gaps identified in sections that follow. that shall pave the way forward for ie methodological development with robust foundations. omercic, haneef, & omar│ economic thought, foundational problems of mainstream economics and the alternative of islamic economics international journal of islamic economics and finance (ijief), 3(2), 171-198 │177 2.1. problems and issues with mainstream economics 2.1.1. physicalist ontology 5 ontology is the branch of metaphysics that deals with the nature of being (merriam-webster, 2004). mainstream economics adopted a ‘physicalist ontology’ as part of its philosophical foundations that perceives everything as physical because of the positivistic influence since the 16 th -century that phased away the mercantilist phase of economic thought. the climax of physicalist ontology occurred in the middle of the 19 th century when it became the norm in science and life. 6 heilbroner and milberg (1995) and hunt (2016) mentioned how the scientific or positivistic orientation of economics excluded normative contributions or insights into economic phenomena. malkawi (2014) explained that the western approach to knowledge perceived such contributions subjectively. this is a philosophical problem of mainstream economics that caused many issues. this paper addresses the issue through appraising ie development as the solution through iok based on iok. the physicalist ontology is recognised by its conceptualisation of human nature as material, materialistic, self-interested, greedy yet rational (brue & grant, 2012). arif (1985, 1987) highlighted how smith’s theory of moral sentiments gradually shifted and gained features of such an ontology via stratification 7 to systematise economic thinking in ways similar to the mathematics and physics of the day (pribram, 1983; mahomedy, 2016, 2017). such a shaped physicalist ontology that perceived only matter and tangible objects as a source of value led to intensified economic thinking with an imperialist and colonialist mindset that spread throughout the world in 5 see the origin of the term in mahomedy (2016, 2017). 6 it can be traced back to the 13 th -century thomistic phase of economic thought (characterized by the philosophical thought and writings of thomas aquinas (1225-1274 ac) concerning catholic christian ethical and moral teachings), rooted in christian ethics, morality, and values aimed to end oppressive class relationships of those and earlier times with the help of christian paternalistic ethic (cpe). the ethic was eventually abused by elites/lords of subsequent centuries feudalistic system that led to what was characterized as the 'first phase of distancing from cpe or also called the maturing phase'. subsequent mercantilism phase of economic thought (where the cpe in the hands of the church weakened and shifted to mercantilist capitalists.) aggravated it and led to the 'second phase of distancing from cpe or the mature phase' that shaped ontological physicalism in the real sense, empowered the protestants' ethic to defeat the catholic church as the paternal authority and gradually nurtured the positivistic way of thinking (hunt, 2016; mahomedy, 2016, 2017). systematized enlightenment writings reflected the shift from concerns about moral sentiments to positivistic thinking even more and so further fostered ontological physicalism. for more detail see enlightenment economics writings of adam smith (1723-1790), david hume (1711-1776), robert malthus (1766-1834), david ricardo (1772-1823), jeremy bentham (1748-1832), his students james mill (1773-1836), joh stuart mill (1806-1873). 7 stratification starts with abstract thinking that usually involves values, norms, ethics, morality and as such help link it with more systematized products of thought that enable appreciation of it and presentation systematically. however, the promise for success is absent. that is apparent in the stratification attempt of economics as a science from moral sentiments. in return, it shows the need for a revision of present economics whose issues root back into the early years of development (arif, 1985, 1987). omercic, haneef, & omar│ economic thought, foundational problems of mainstream economics and the alternative of islamic economics international journal of islamic economics and finance (ijief), 3(2), 171-198 │178 the 18 th and 19 th centuries with destructive and exploitative consequences (said, 1979; mirakhor, 2020; jomo, 2020). the problem of physicalist ontology became embedded in mainstream economics. since the great depression, it has caused significant unemployment, inflation, unsustainable living, poverty, inequality, etc. (stiglitz, 2016, 2019). ten smaller recessions since world war ii followed 8 (hunt, 2016; froyen & low 2001; froyen, 2009) due to such an ontology and the rationalist epistemology, axiological futility, and methodological deficiency of mainstream western economics. neither mainstream orthodox economics nor heterodox variants addressed this ontological problem of mainstream economics nor resolved the created issues. such an ontology that levels everything to matter, contradicts the human constitutions comprising body and soul. for example, the competitive maximisation of material wealth worsened inequality, poverty, unemployment levels, and neglected human religious, spiritual, emotional, and psychological dimensions of meaning (chapra, 2016). such are nonmaterial needs ensuring social welfare which historical experience valued for centuries alongside material welfare (bakar, 2019; nasr, 2006). therefore, it is necessary to cater to the material and spiritual needs of humanity. hence, this paper proposes ie development via iok based on iok as an alternative ontological foundation. 2.1.2. rationalist epistemology epistemology is the theory of knowledge (merriam-webster, 2004). because of the interrelatedness of ontology and epistemology (blaug, 1997), the mainstream economic physicalist definition of the nature of beings (ontology) affected the epistemological development of a theory of knowledge in economics followed by futile axiology and deficient methodology. like the physicalist ontological foundations of mainstream economics, the rationalist epistemology was gradually nurtured since the 16 th century but drew its roots from earlier medieval times (froyen & low, 2001, froyen, 2009; lin, 2015). the positivistic shift with a physicalist ontology shaped the rationalist epistemology and adopted only senses and reason as sources of knowledge. the recognition of rationalist axioms guided by reason and empiricism based on experience derived from senses led to the rationalist epistemology of mainstream economics (mahomedy, 2016, 2017). it claims that the theory of knowledge is solely derived from reason 8 to name a few: 1948-1949 for eleven months, 1953-1954 for thirteen months, 1957-1958 and 1960-1961 for nine months, 1969-1971 for more than two years, 1974-1975, 1979-1980, 1981-1982, 1990-1991, etc. (see hunt, 2016). omercic, haneef, & omar│ economic thought, foundational problems of mainstream economics and the alternative of islamic economics international journal of islamic economics and finance (ijief), 3(2), 171-198 │179 and senses. thus, mainstream economics considered everything metaphysical and intangible irrelevant. such an epistemology conceptualises a problematic homo economicus by limiting the human being to material needs while ignoring other psychological, social, or spiritual needs. another issue of such an epistemology led to pure attempts of replication of physics. the two issues caused mainstream economics’ theoretical disjointedness from reality. more serious alternatives emerged only in the 1930s with keynesian economics leading the way yet ultimately failing despite being more social welfare-oriented with later alternatives proving no different (mahomedy, 2016, 2017). hence, mainstream economics dominated the economic narrative and practice as a science with shallow ontological and epistemological foundations (mahomedy, 2016, 2017; furqani, 2012; mirakhor, 2020). continuing with the same epistemological foundation in contemporary times offers no future for economics or humanity at large and demands a critical review of its development and critique. otherwise, issues of unemployment, poverty, inflation, instability, inequality, indebtedness, climate change, environmental destruction, desacralisation will persist and worsen. the 2008 global recession is the most recent outcome of such foundations guiding economic analysis (stiglitz, 2016, 2019; geithner, 2015; greenspan, 2008). since then, there has been renewed interest in mainstream economics to improve the adoption of heterodox economic thought (lee & lavoie, 2013). however, it still does not address the foundational problems of mainstream economics like epistemology. while the rationalist epistemological approach of mainstream economics bases best outcomes on value maximisation, zero-sum games, etc., it exponentially exacerbates the health of global economics with all earlier mentioned issues. it enables participation of the affluent and leaves greater social segments outside the workings of the economic system (galbraith, 1987, 1998; stiglitz, 2016, 2019). hence, analysing the rationalist epistemology at work in contemporary fluctuating markets led economists to use more social, psychological, behavioural, and moral elements to predict market behaviour more accurately (isra, 2018; stiglitz, 2019; shiller, 2019). apparent real-life issues caused by such rationalist epistemology justifies this paper’s ie development in light of iok based on iok to overcome that problem. omercic, haneef, & omar│ economic thought, foundational problems of mainstream economics and the alternative of islamic economics international journal of islamic economics and finance (ijief), 3(2), 171-198 │180 2.1.3. axiological futility axiology is defined as the theory that studies the nature, type, and criteria of value, value judgements, especially in ethics (merriam-webster, 2004). human nature leads people to contemplate and wonder, and according to nasr (2006), the greek and roman civilisation are a multidisciplinary outgrowth of philosophising about value, ethics, and morality. axiology as an element of philosophical foundations in economics undoubtedly played a big role in early economic thought but the positivistic oriented mindset expelled it centuries later (hunt, 2016; furqani, 2012). nienhaus (1989) explained how economic thought before the middle of the 19 th century incorporated greater moral, ethical, and value considerations while it became completely neutralised until today. that created the problem of axiological futility. an orientation towards the mastery of technical tools of quantification became dominant (haneef, 2014). it shaped the market demand for labour with the greatest ability to maximise firm profits. axiological futility and its neutrality in economics rendered it irrelevant in studies. however, contemporary complex market structure led to issues of asymmetric information and agent contract theory that demand a greater role of ethics, morality, and values in providing complete information and structuring contracts fairly with the greatest transparency. a futile axiological mainstream economics approach cannot resolve the issue completely without greater behavioural insights and analysis in economics (shiller, 2015). thus, the greater role of ethics, morality, and unique aspects of value becomes significant today what inevitably revives the relevance of axiology in economics (chapra, 2016; stiglitz, 2019). therefore, a greater need for axiological reasoning in economics challenges the status-quo of mainstream economics. 9 its absence in mainstream economics intensifies financialisation and perpetuates other issues (chapra, 2017; mirakhor, 2020). while the futility of axiological role (ethics, morality, values) in mainstream economics created moral and ethical disorientation in societies, empirical evidence revealed the greater need for morality and ethics in socio-economic and other relations (stiglitz, 2019; mirakhor, 2020). hence, the need for the development of an alternative to mainstream economics like ie with strong axiological foundations that this paper proposes in light of iok based on iok. 9 see also medearis (2009), dunn (2012), lee and lavoie (2013), gordon and adams (1989), black (1986) for greater detail. omercic, haneef, & omar│ economic thought, foundational problems of mainstream economics and the alternative of islamic economics international journal of islamic economics and finance (ijief), 3(2), 171-198 │181 2.1.4. methodological deficiency methodology is defined as a body of methods, rules, procedures, and postulates used in a discipline to analyse, explain, attain certain objective/s (merriam-webster, 2004). mainstream economics developed a substantial methodological body of knowledge over the centuries of the development of economics. discourse about methodology in economics continues today and differences of opinion exist in what a complete methodology involves (machlup, 1978). with the philosophical foundations of mainstream economics discussed earlier, perceptions of the human as purely materialistic, self-interested, utility and wealth maximiser yet rational being led to the development of the methodology of economics aiming to attain it. thus, the methodology of mainstream economics relates to processes of thinking that shaped views of external reality in an incomplete and particularistic manner (malkawi, 2014; mahomedy, 2016, 2017). machlup (1978) explained that historically, metaphysical, spiritual, and moral/ethical (axiological) aspects as parts of the ‘map of territory’ of philosophy were relevant in ontology, epistemology, and methodology. 10 different interpretations of each of the elements over the centuries of development of economic thought created confusion in thinking due to foundational problems. today, the methodology of mainstream economics rejects elements like spirituality, morality, and ethics. such a deficient unidimensional methodology perpetuated issues of rising inequalities, multiple crises, environmental disasters, and wars (malkawi, 2014). the mechanical methodology exercised with a focus on numerical, mathematical, statistical and econometric techniques exacerbates the above issues because the obsession with getting appropriate estimated samples, determining the range and defined benchmark values has distracted attention to issues of rising poverty, unemployment, public and government debt levels and unsustainable lifestyles, etc. (keen, 2011; piketty, 2014). such a partial methodological analysis of problems of reality produced technical economists in contemporary times, who rarely preach their ideas to the world. while sophisticated mathematical and other technical modelling increase the economics abstractness from reality, there are frequent economic instabilities, crises, asymmetric information and risks (default, exchange, market risk, etc.) (ariff, 2020; mirakhor, 2020; jomo, 2020). 10 machlup (1978) mentioned kant, windelband, royce, croce, max weber, montague, bridgeman, whitehead, moris cohen, reichenbach, felix kaufmann, schutz, carnap, morgenau, popper, feigl, braithwaite, ernest nagel, and hempel as examples of more dynamic thought in economics. the methodology involved ontology and epistemology or ontology involved epistemology and methodology or epistemology involved ontology and methodology or otherwise. even metaphysics existed for some and was relevant (machlup, 1978). omercic, haneef, & omar│ economic thought, foundational problems of mainstream economics and the alternative of islamic economics international journal of islamic economics and finance (ijief), 3(2), 171-198 │182 furthering such methodological practices renders economic analysis, output, products susceptible to fallacies of the scientific paradigm that are probability-based or pure numerical signs of growth (putnam & walsh, 2012). for example, measurements of gross domestic product (gdp), nominal or real, as an indicator of economic growth is numerical and do not reflect the genuine economic, social, political, religious-spiritualpsychological wellbeing of society. it is unidimensional and an example of aggregate measurements that may reduce indicators of acute economic depressions but does little to ensure genuine social multidimensional wellbeing (stiglitz, 2019; piketty, 2014). such measurements are part of the financialisaton and aerobics of accounting practices that benefit the affluent who aggregately control markets and maintain others subservient to them (stiglitz, 2016, 2019; lin, 2015). hence, it became a fact today that mainstream economics suffers from severe methodological deficiency besides earlier discussed problems of philosophical foundations. that relevantises this paper in proposing ie development in light of iok based on iok to resolve such problems. iii. methodology prior to presenting the results and analysis through exploring the muslim responses to earlier gaps as reviewed foundational problems of mainstream economics, we explain the methodology adopted in this paper. the paper adopts a qualitative approach in the form of a literature survey, discourse and critical content analysis. according to denzin and lincoln (2008), qualitative research is a positioned undertaking that finds the observer on a planet composed of interpretable script made of books, articles, manuscripts, interviews, etc. that make the world perceptible to everyone, change thoughts and the world. qualitative methods permit and empower the researcher to instigate an erudite, refined but classy, stylish, holistic, and exhaustive comprehension of the objectives of a study via stepwise arduous data collection and analysis. according to ritchie and lewis (2003), the result of the entire process generates reliable and validated synthesis of inputs as solutions within an elaborated context that is not generalisable like any study. this paper also adopted a non-customary methodological pluralism throughout. it combined the method of concretisation (from general to particular and vice versa), comparative method, historical method, and methods of logic (induction, deduction, analysis, synthesis, analogy, logical abstraction, and generalisation) in the content analysis and library research omercic, haneef, & omar│ economic thought, foundational problems of mainstream economics and the alternative of islamic economics international journal of islamic economics and finance (ijief), 3(2), 171-198 │183 throughout this paper. hadzic (2005) perceived this as an unorthodox and unique methodological pluralism because of the unique nature of ie and development in this paper. the unique methodology of iok and ie with sources of knowledge in islam stands for tawhid (belief in one god and unity of knowledge), qur’an as revelation, sunnah as prophetic pbuh heritage, fiqh and usul al-fiqh, or others and compels us to integrate the respective methodologies to understand each aspect in this paper. hence those are relevant and complementary methodologies for appraisal of ie and its methodology through an iok based on iok in this paper but also for the way forward in ie development via iok. since this paper is a contribution to the methodology of ie, then such methodological pluralism becomes incumbent and commendable. this paper aspires to instigate research in ie through iok based on sound foundations and serve the humanity. it is for those reasons that the methodology adopted in this paper is foundational for this and future studies. iv. results and analysis 4.1. muslim responses the physicalist ontology, rationalist epistemology, axiological futility and methodological deficiency problems of mainstream economics’ philosophical foundations faced varying responses. since intensifying colonialism from the 16 th century, muslims gradually intensified the resistance to the west. in such an effort, ie emerged in contemporary times as an alternative to mainstream economics and most importantly the above foundational problems. although humanity lives better than centuries ago because of contributions of mainstream economics, the need for reforms of philosophical foundations and contents of the discipline is urgent. a brief review of muslim responses to mentioned foundational problems of mainstream economics represent our results or findings and promotes a novel approach of developing the alternative ie in light of iok to filter and integrate mainstream economics with comprehensive ontological, epistemological, axiological, and methodological foundations (mirakhor, 2020). omercic, haneef, & omar│ economic thought, foundational problems of mainstream economics and the alternative of islamic economics international journal of islamic economics and finance (ijief), 3(2), 171-198 │184 4.2. iṣlaḥ (reform) and tajdīd (renewal) movements throughout centuries, iṣlaḥ (reform) and tajdīd (renewal) movements have revived the thought and improved lifestyles in muslim societies 11 (de bellaigue, 2017). the aim was to reinstate genuine islamic teachings. the debates about the use and role of reason and transmitted tradition/revelation (a’ql and naql/wahy) were always of significant concern to the muslim intelligentsia. 12 essentially, the debates were methodological and linked to philosophical foundations, namely ontology, epistemology, and axiology. the scholars worried about the overuse of reason, rejection of reason, infringement of revelation, and limitations of interpretation of revelation (malkawi, 2014; hallaq, 2005, 2009). reform and renewal movements always touched upon and addressed philosophical foundations and worldview problems that mainstream economics suffers from. however, the discourse lacked focus on methodology and methods to develop alternatives to mainstream economics like ie. the discourse was customarily dynamic and of a multidisciplinary, holistic, or pluralist methodological nature, and became popular in contemporary times (haneef & furqani, 2015 in el-karanshawi et al., 2015; walbridge, 2011). 13 unlike the nature (ontology) of homo economicus of mainstream economics, islam always perceived it as homo islamicus, which incorporates material and non-material (metaphysical) dimensions, altruism, and social welfare orientations, etc.. muslim responses incorporated comprehensive and holistic foundations, namely an ontology that went beyond physicalism to the metaphysical realms; an epistemology that sourced knowledge from reason, senses, revelation (metaphysics) that involves axiology (ethics, morality, and values) inevitably; and a methodology with a broad scope to address human needs as objectives/maqasid. it was always an integrative nexus of foundations that sought to attain the ultimate truth haqq. in contemporary times, islamisation of knowledge (iok) 14 is an intellectual movement with ontological, epistemological, axiological, and methodological 11 reformers came at the verge of every hundred years according to the saying of the prophet muḥammad, peace and blessings upon him (pbuh): "allah at the head of every century will raise for this ummah someone who will revive her religion for her." (abu dawud, 2000, no. 4291). the hadith prophesized reformers' inevitable coming and the occurrence of religious crises after the death of the prophet muḥammad pbuh. 12 it was partially nurtured by the declaration of the halt of ijtihād (muslim legal reasoning) around 10 th century ad. the condition and circumstances of the muslim intelligentsia since the 10 th century onwards but even earlier is far more complex but the debate on reason and tradition/ revelation is sufficient to frame this paper as primarily methodological (malkawi, 2014; walbridge, 2011). 13 see also putnam and walsh (2012); aydin (2013); nienhaus (1989); mahyudi (2016) etc.. 14 the reform and renewal movement of iok is traceable to times of prophet muḥammad, pbuh until today but was shaped as iok in the middle of 20 th century (al-faruqi, 1982; nasr, 2006). omercic, haneef, & omar│ economic thought, foundational problems of mainstream economics and the alternative of islamic economics international journal of islamic economics and finance (ijief), 3(2), 171-198 │185 foundations. it is a methodological process rooted in ontological, epistemological, and axiological foundations aiming to refine legacy/classical and modern bodies of knowledge in relation to sources of knowledge in islam that are equally universal and particular (al-attas, 1978; safi, 1993; haneef, 1997). the counterpart in economics is ie what renders iok a relevant methodological approach to develop ie (haneef, 2014). however, considering the experience of iok development (sardar & henzell-thomas, 2017; haneef, 2014), integration of knowledge (iok) is today a more natural and neutral approach for ie development that this paper appraises based on iok because of common and sound philosophical foundations. an iok approach to ie development based on iok enables fusion of extant contributions to iok and ie into outputs that foster genuine ie development along being the solution to problems of mainstream economics (furqani, 2012). however, this requires more thorough study in future. 4.3. iṣlaḥ and tajdīd through islamisation of knowledge (iok) and islamic economics (ie) why iok, and what does iok mean to ie? since inception, iok aimed to filter, change, refine, and integrate islamic and western bodies of knowledge. ie attempted this task in the discipline of economics. the two were almost parallel developments in the 20 th century. while resemblance and influence between the two exist, the iok methodological approach was not explicitly applied for ie development. it is important to say that ie was perceived as the greater success of iok. both created high enthusiasm and revealed unleashed potential to humankind (haneef, 2014; sardar, 1989; sardar & henzell-thomas, 2017). the common and comprehensive foundations make both a creative approach in developing ie to overcome problems of mainstream economics discussed in earlier sections. it is with these foundations that muslims always responded to the west and mainstream economics as with iok and ie, respectively. the methodology is common for both but particular for ie as a discipline. that is evident from extant methodological writings in ie such as furqani and haneef (2012). thus, iok is a sound basis upon which to develop a genuine ie and its methodology. the sound philosophical foundations transcend the foundational problems of mainstream economics beyond the physicalism in ontology to metaphysics, beyond reason and experience in epistemology to revelation/metaphysical channels of knowledge, emphasizes axiological moral/ethical role in dealing with economic and other phenomena as well as adopts a pluralist methodological approach. these are clear findings that autonomously represent a potential to transform humanity problems into sustainable solutions. omercic, haneef, & omar│ economic thought, foundational problems of mainstream economics and the alternative of islamic economics international journal of islamic economics and finance (ijief), 3(2), 171-198 │186 meanwhile, we appraise in this paper the integration of knowledge (iok) as a term that is more neutral, inclusive, and universally appealing than islamisation of knowledge (iok). 15 however, any integration must be based on something and in this paper iok is based on iok. hence, iok for ie development based on iok to overcome earlier identified problems of mainstream economics. it is then clear that iok, iok, and ie refer to the same sources of knowledge including those of the west (furqani, 2012). definitions of iok and ie reflect it directly and facilitate understanding the iok based approach to ie development in this paper as an alternative to overcome problems with mainstream economics. al-attas (1978) defined iok with reference to knowledge as: “with reference to god as being its origin, is the arrival (husul) in the soul of the meaning (ma’ana) of a thing or an object of knowledge; and with reference to the soul as being its interpreter, knowledge is the arrival (wusul) of the soul at the meaning of a thing or an object of knowledge.” (p. 161) hence, it is the process of gradually discovering the meaning of the object of knowledge with our rational and spiritual faculties, the mind and the heart as the seat of human intellect where integration or a link of knowledge and human faculties becomes apparent. these reflect an ontology beyond physicalist realms and an epistemology with physical and metaphysical sources or channels of knowledge. the role of akhlaq/ethical (axiological) and pluralist methodological approach is also integral and welcoming within the broad philosophy of integration based on islamisation (al-attas, 2014). in a later section, al-attas (1978) explains iok: “after the isolation process referred to, the knowledge free of the elements and key concepts isolated are then infused with the islamic elements and key concepts which, in view of their fundamental nature as defining the fitrah, in fact, imbue the knowledge with the quality of its natural function and purpose and thus makes it true knowledge.” (p. 162-163) thus, unnecessary elements are removed from knowledge and imbued with necessary elements and concepts derived from sources of knowledge in islam (haneef, 1997). that then reflects the pure nature of knowledge and enables it to have its function and purpose to attain the truth and reality, haqq and haqiqah (furqani, 2012). the sources of knowledge are of course an epistemological aspect that equally refers to ontology. both pay attention to the centrality and interplay of revelation and reason guided by a revelation-based ethics (axiology) in line with reason. the methodology recognizes plurality of methodological approaches in such a nexus of 15 it was the international institute of islamic thought (iiit’s) that promoted the shift from islamization to integration in the 21 st century what justifies the use of iok in this paper (sardar & henzell-thomas, 2017). iiit is a non-profit intellectual organization that promotes iok but emphasizes integration as a key focus in the 21 st century. omercic, haneef, & omar│ economic thought, foundational problems of mainstream economics and the alternative of islamic economics international journal of islamic economics and finance (ijief), 3(2), 171-198 │187 ontology, epistemology and axiology. similarly, iok is for isma’il raji alfaruqi’s (1982) to ‘recast knowledge as islam relates to it’: “to redefine, and reorder the data, to rethink the reasoning and relating of the data, to reevaluate the conclusions, to re-project the goals, and to do so in such a way as to make the disciplines improve the vision and serve the cause of islam (peace).” (p.44-50) iok has a universal and particular appeal to humanity and muslims to attain peace through disciplinary perfection and attainment of what al-attas defined as truth and reality. with the shift to iok today, we particularise the idea to integrate islamic and modern bodies of knowledge through critical multidisciplinary interaction to overcome problems and issues like those of mainstream economics. it reflects and revives the islamic tradition of differences of opinion (walbridge, 2011) and pluralist methodology that the prophet (pbuh) addressed as mercy for mankind. like iok, ie practice is traceable in the history of islamic civilisation, yet modern ie is a construct of the 20 th century (irfan, 2015). haneef (1997) defined ie as: “an approach to interpreting and solving man’s economic problems based on the values, norms, laws, and institutions found in, and derived from, the sources of knowledge in islam.” (p. 50) the definition of ie, and that of iok, reveals that knowledge of each is derived from the same sources and both have the same objectives. while revelation is central for ie, reason is given no less attention than in mainstream economics. what differentiates the former from the latter is the source of guidance from the revelation that is and must be universally appealing to humanity, yet in principle particularly important for muslims. thus, our earlier analysis of the findings of robust philosophical foundations of iok as a muslim reform and renewal response to the west apply to ie as a response to mainstream economics. hence, ie development through iok based on iok as the alternative and solution to foundational problems and issues of mainstream economics. we proposed in this paper the ie development with such universal appeal and sound philosophical foundations in light of iok based on iok as an alternative and solution to problems of mainstream economics. ie does not reject mainstream economics outrightly in that process but selectively integrates excellent practices (chapra, 2016; furqani, 2012). ie development via iok carries the methodological proposition to humanity’s economic and other issues and problems subject to improvement yet linked with sound foundations unlike mainstream economics (malkawi, 2014). the relevance of iok for ie is apparent, and such a nexus or framework of iok for ie development would suit this papers objective to overcome foundational problems of mainstream economics but even further development of ie. omercic, haneef, & omar│ economic thought, foundational problems of mainstream economics and the alternative of islamic economics international journal of islamic economics and finance (ijief), 3(2), 171-198 │188 although mahomedy (2016, 2017) and others such as furqani (2012) attempted to appraise ie earlier, they proposed no particular and practical systematic direction for ie development via a nexus with iok based on iok, as undertaken in this paper. hence, mainstream economics continued to dominate the muslim world. its problems persisted for centuries until today and very notable chronic issues are extravagant debt financing and spending amidst extreme inequalities and instabilities, rising unemployment, inflation and debt, environmental devastation and climate change, dehumanisation, and desacralisation of everything (stiglitz, 2016; 2019). because of all the above, this paper perceives the current state of mainstream economics with its problems and approach to knowledge as a reason for today’s confusion and crisis in economic thinking. it represents the problem of this paper as a theoretical account that we addressed thoroughly and systematically through reviewing the iok and ie muslim responses with robust philosophical foundations. however, much needs to be addressed in practice to dispel and prevent deepening of such mainstream foundational problems and further issues affecting humanity. the heterodox economics including the thought of post-modernists/social constructivists proposed some remedies (kuhn, 1970, 2012; lee & lavoie, 2013). however, they adopted the problematic philosophical foundations of mainstream economics. that perpetuated the problems and issues for many decades. hence, there is an apparent need for an alternative approach to economics with sound, comprehensive and holistic ontological, epistemological, axiological, and methodological foundations to overcome the problems of mainstream economics mentioned above. ie development in light of iok is the alternative we appraised based on iok. the robustness of this integrative or iok approach to ie development requires future intellectual and practical insights and efforts respectively. as such, it is with these theoretical constructions that awareness of upcoming generations is raised to carry out the amanah (responsibility, burden) with genuine determination. 4.4. the significance of ie development via iok based on iok as the alternative the significance of this paper’s ie appraisal in light of iok based on iok is its multidisciplinary methodological principles-based approach of integrating legacy/classical and modern bodies of knowledge to overcome problems of mainstream economics. integrating the bodies of knowledge focuses on economics yet includes contributions from other disciplines. this approach is omercic, haneef, & omar│ economic thought, foundational problems of mainstream economics and the alternative of islamic economics international journal of islamic economics and finance (ijief), 3(2), 171-198 │189 perhaps the first of its type that directly adopts the methodological approach of iok for ie development. it demonstrates how to overcome problems with mainstream economics on ontological, epistemological, axiological, and methodological bases without neglecting the contributions of mainstream economics. the contribution of this paper’s proposition significantly expands the frontiers of multidisciplinary research in economics. we can characterise it as an ibn khaldunian approach that fosters more multidimensional approaches to solving human economics and other problems (chapra, 2016; khan, 2013, 2013a; alatas, 2014). besides the above, the appraisal of development of ie in light of iok based on iok in this paper directs future research based on sound ontological, epistemological, axiological, and methodological foundations that universally appeal to humanity and particularly to muslims. another significance of the appraised in this paper is reviving the relevance of islamic and other legacy studies to the development of economics, particularly ie. it links its role in the development of economics in the past and today. our approach clarifies the universal dimensions of iok and ie as contemporary developments beneficial to humanity. it likewise clarifies no harm in benefiting from western bodies of knowledge like mainstream economics that scholars like haneef (1995, 2014), ramadan (2009, 2009a), malkawi (2014) strived to promote. that holds true despite the foundational problems of mainstream economics. the appraised development of ie in this paper contributes to re-linking the islamic banking and finance (ibf) industry and ensuring it is based on sound ie foundations. it directs ibf development in relation to and within the iok based ie development. hence, stakeholders who shall benefit most from this undertaking are academicians and researchers through the additional stock of knowledge and a new methodological approach and development of methodological principles to validate theories and integrate knowledge. students may learn how important studies of ontology, epistemology, axiology and methodology are as philosophical foundations that shape the worldview of individuals. it highlights the importance of methodology and methods as tools of inquiry in relation to foundations that guide the reasoning/ijtihad within the overall worldview that helps determine if something is sound or not. hence, the paper is educational material for everyone. even policymakers may learn how our appraised approach facilitates future economic policymaking to benefit humanity. lastly, the current paper is a novel contemporary blueprint for ie development subject to improvement. omercic, haneef, & omar│ economic thought, foundational problems of mainstream economics and the alternative of islamic economics international journal of islamic economics and finance (ijief), 3(2), 171-198 │190 v. conclusion and recommendation 5.1. conclusion in this paper, we identified foundational problems of mainstream economics and appraised ie as the alternative and solution. we appraised ie development in light of iok based on iok because of the need for integration to have a basis but also as a result of challenges of development faced by iok and ie over the decades. we have seen that a persistent mainstream economic’s physicalist ontology limits the understanding of reality despite much non-physicalist experience throughout history. likewise, a rationalist epistemology indicated the limitation set upon human potential to harmonise the physical with metaphysical sources of knowledge and foremost limits the human understanding of reality (haqiqah) and truth (haqq). axiological futility apparently deprived humans from valuing reality accordingly and treating it with utmost ethics and morality. all of the above explains the problem of methodological deficiency. limitations and deprivation with the earlier problems restricted proper methodological reasoning over reality of life and economic phenomena particularly. collectively, such philosophical foundations of mainstream economics were the source of uncounted economic and issues of other sort. humanity at large bears the consequences of the issues even today. however, we noted that the sound foundations of iok and ie expand the ontology and epistemology with metaphysical realms of reality and channels of knowledge guided by ethics (axiology). these enable the human perception of reality of life and economic phenomena holistically along with the pluralist methodological engagement while actualizing the defined objectives/maqasid. muslims always responded with such comprehensive foundations to the west and mainstream economics particularly. indicatively, these findings expand the horizon of humans and identify the errors of historical perception in economic thought. it is for these reasons that ie development in light of iok based on iok is central. humanity necessitates a universal interpretation of reality and economics per se because the nature of life and reality of globalization demands it. multidisciplinarity is attainable via integration within disciplines like ie and such benefits particular and all disciplines simultaneously because all are interconnected. omercic, haneef, & omar│ economic thought, foundational problems of mainstream economics and the alternative of islamic economics international journal of islamic economics and finance (ijief), 3(2), 171-198 │191 5.2. recommendations today, the practice of mainstream economics led many to question the purpose, structure and orientation of the discipline. firstly, our recommendations for everyone are to ponder about how history is replete with facts of much metaphysical experience along the physical or material experience. likewise, we recommend adding revelation and religious/spiritual traditions and ethics as central sources of knowledge along reason and sensual experience. reference to writings of philosophy would make it obvious to be part of any discipline’s foundations and origin. with that in mind, we recommend the integration of all the above in methodological processes of reasoning in economics or other disciplines. it is necessary to deeply contemplate about the implications that the failure to adopt given recommendations would cause. our recommendation to practitioners, inclusive of academia and industry, is to always perceive the necessity of thought about the philosophical foundations (ontology, epistemology, axiology and methodology) in order to understand and explain phenomena holistically. greater adoption and development of trainings, seminars, workshops in industry and academia on what those foundations imply would represent a great platform where experts of texts and contexts may exchange their views. hence, practitioners may correct their perception about reality and accordingly revise many undergoing projects in relation to more universal philosophical foundations and avoid limitation and potential consequential issues of a narrow perception. we recommend the practitioners to use and integrate the renewed perception of reality with social needs, starting from the necessities (daruriyyat), the commendable (hajiyyat) and the luxuries (tahsiniyyat) as the practical objectives of shari’ah. our recommendation for regulators is to integrate with the efforts of practitioners the implementation of various projects on ground. a particular recommendation for regulators is to oversee, evaluate and effectively ensure communication among and within different institutions, parties, shareholders and stakeholders, givers and receivers of services. this would ensure that the impact of projects and a renewed perception of reality on sound foundations is maximised while any repercussions eliminated. this paper is a blueprint that intends to shape the way we think about economics and life generally. hence, it is subject to improvement. future research may explore the way different institutions perceive appraised foundations in this paper and avenues of realigning institutional and theoretical efforts towards a common integrated (iok) based socio-economic development. future researchers may do field work of ie development via omercic, haneef, & omar│ economic thought, foundational problems of mainstream economics and the alternative of islamic economics international journal of islamic economics and finance (ijief), 3(2), 171-198 │192 iok where engagement with a number of practitioners, industry and academia, brings integrative output such as projects, seminars, workshops and how those benefit society. that would help crystallise our appraised approach to ie development 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(2011). god and logic in islam: the caliphate of reason. cambridge: cambridge university press. omercic, haneef, & omar│ economic thought, foundational problems of mainstream economics and the alternative of islamic economics international journal of islamic economics and finance (ijief), 3(2), 171-198 │198 this page is intentionally left blank international journal of islamic economics and finance (ijief) vol. 4(si), page 121-152, special issue: islamic banking participatory banks in turkey: issues and proposed strategy based on swot analysis zulfahmi international islamic university malaysia, malaysia nida el-adabi islamic college, indonesia, corresponding email: zf.takaful@gmail.com abrista devi ibn khaldun university, bogor, indonesia, abristasmart@gmail.com eyup asker turkiye finans,turkey rusni hassan international islamic university malaysia, hrusni@iium.edu.my article history receive: november 30th, 2020 revised: january 7th, 2021 accepted: march 12th, 2021 abstract turkey has a long history in islamic civilization. however, there is still lack of research to examine participatory banks in turkey. this is despite the fact that the legacy of strong islamic law, the majority muslim population, and the strategic location of the country have failed to serve as catalyst to boost market share of participation banks in the country. this study is aimed at developing priority ranking of swot factors and strategies on the participatory bank development in turkey. data are collected from experts and practitioners of participation (islamic) bank in turkey. analytic network process (anp) is used as the methods of analysis. the finding shows that the aspects of participatory banks in turkey are derived from strengths, opportunities, weakness and threats factors. sharia board is the main strength of this study, while inadequate competitive product is the main weakness. in the future, government support stands as the first priority from opportunity aspect. islamic bank in turkey also needs to aware on the absence of separate law as the main priority of threats aspect. another finding shows that separated law and regulation is the main strategies of the study. concomitantly, the study suggests separate law and regulation as the main strategy to enhance banks participation in turkey. this study could serve as reference point for the regulator in formulating appropriate policy strategies to increase market share of participatory banks in turkey. keywords: participation bank, turkey, swot, solutions, strategies jel classification: g21, g28 type of paper: research paper @ ijief 2021 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.v4i0.10475 web: https://journal.umy.ac.id/index.php/ijief/article/view/10475 citation: zulfahmi, devi, a., asker, e., & hassan r. (2021) participation banks in turkey: issues and proposes strategies based on swot analysis. international journal of islamic economics and finance (ijief), 4(si), 121-152. doi: https://doi.org/10.18196/ijief.v4i0.10475 mailto:zf.takaful@gmail.com mailto:abristasmart@gmail.com mailto:hrusni@iium.edu.my https://doi.org/10.18196/ijief.v4i0.10475 https://doi.org/10.18196/ijief.v4i0.10475 zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│122 i. introduction 1.1. background islamic banking (hereinafter referred to as ib) has been undergoing an unprecedented growth over the past few decades across the globe. the number of full-fledge ib coupled with its window have been flourishing not only in muslim majority countries but also in non-muslim countries such as united kingdom (uk), france, luxembourg, france, australia, singapore and others. even so, ib has started its operations in south america following the successful conversion of a conventional bank in suriname into full-fledge ib in the early 2018. this has paved the way to the better development of islamic banking and finance industry. at the global market, ib has been growing enormously with the volumes approaching us$ 1.7 billion as in june, 2020, marking a banking asset share 72.4% globally (ifsb, 2020). the share of islamic banking industry is expected to have less impact because of the pandemic covid-19. this statistical figure, therefore, indicates that ib has performed very well thus far and gaining well acceptance in many countries. according to the islamic financial services industry stability report 2020 (ifsb, 2020), there is a presence of ib in at least 36 jurisdictions in the world. the share of ib has continued to increase in many countries, and hence deepening its penetration. the increases in ib market share were experienced across 19 countries, including gulf-cooperation countries (gcc), middle east and north africa (mena, exclude gcc), and asia region. in this regard, the international monetary fund (imf) has highlighted the key success factors of the ib market penetration as follows: (i) the ethical principles and socially responsible business, (ii) the resilience during global financial meltdown, (iii) the increasing demand for shariah compliant instruments, (iv) the innovation of shariah compliant products, and (v) the sound regulatory framework and infrastructure (imf, 2015). although its rapid penetration, ib industry is still at the infancy stage of its development. the modern ib has just started in the early 1970s, while the conventional banking system has firmly established for more than 400 years. at this level, ib faces various challenges from the regulatory and market perspective. among of the challenges faced by ib such as (i) the difficulty of regulatory harmonization of ib across jurisdictions, (ii) the poor shariah governance framework in some countries, (iii) implementing the basel iii1 particularly in the inclusion of tier-1 and tier-2 capital and those regulatory 1 the basel iii regulatory capital has been issued to strengthen banking sector ability against the shocks arising from economic difficulties. basel iii has increased the minimum capital levels to 10.5% by 2019 compared to the current 8% of risk-weighted assets (rwa). zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│123 capital should be comply with islamic principles (isra and thomson reuters, 2016). moreover, it is worth noting that the ib industry is highly concentrated in few countries. as of june 2020, it has been observed that iran, sudan, saudi arabia, brunei and kuwait appear as the top five largest ib markets beat malaysia which in the previous year entered into the top 5. in comparison with conventional banks, it remains to be seen that the market share for ib industry far below the conventional banking industry. as reported by ifsb (2020) shows that emerging economies like indonesia, egypt, and turkey have only less than 15% share of their total domestic banking assets. share of the current global islamic banking assets of across several jurisdiction in 2020. the current progresses of participatory banking in turkey (also called as islamic banking in turkey [yanikkaya and pabuccu, 2017]) have been discussed by many studies. the journal wrote by yanīkkaya and pabuccu (2017) about the current issues of participation bank in turkey could be the important source to see the condition of islamic banking progress in this country nowadays. this article explained that the problems or concerns inhibiting an expansion of the turkish islamic banking sector have summarised as follows: (1) lack of sharīʿah governance causes misperceptions. table 1. share of global islamic banking assets (%) (3q19) country total assets (in million us$) percentage (%) bahrain 31,860 1.8% bangladesh 37,170 2.1% brunei 7,080 0.4% egypt 14,160 0.8% indonesia 35,400 2.0% iran 506,220 28.6% jordan 12,390 0.7% kuwait 111,510 6.3% malaysia 196,470 11.1% oman 12,390 0.7% pakistan 19,470 1.1% qatar 107,970 6.1% saudi arabia 440,730 24.9% sudan 10,620 0.6% turkey 46,020 2.6% uae 153,990 8.7% others 27,435 1.6% total 1,770,885 100% zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│124 source: ifsb report (2020) except for saudi arabia, all muslim countries have sharīʿah governance frameworks at the bank level and some even have nationwide boards. it is hard to standardize practices among ibs without the jurisdiction of a higher board; (2) there is a lack of regulatory institutions focusing specifically on islamic banking constraints and legal improvements.; (3) lack of instrument variety pushes ibs to operate almost solely on murābahah transactions. only saudi arabia has achieved high islamic banking penetration by using murābahah schemes dominantly. all other prominent countries have introduced various instrument schemes; (4) the perception of islamic banking is very weak within the society. a significant portion of the society thinks that ibs are not necessarily interest-free and makes choices based on cost-benefit considerations. ibs have to express their moral merits more and be cost-efficient at the same time; (5) the operational efficiency of ibs is lower compared with cbs. worse, the gap is not closing; and (6) the lack of academic research and educational institutions to study the aforementioned problems further aggravates them. orhan (2018) studied on business model of islamic banks in turkey, and stated that convenience policies is required to attract more deposit as well as develop islamic bank in turkey. erol, et al (2013) examined the comparison between the performance of islamic bank and conventional banks in turkey. as the implication, since the finding shows that islamic bank has better earning management than the counterpart, this due to ib in turkey has good opportunity to attract more capital from outside countries. therefore, ib in turkey needs to be aware on the future challenge that might be faced. study on existing condition and future challenge of islamic banks has been considerably conducted in many countries. such as study by muhammad, basha, and alhafidh (2019) regarding the promotional strategies of islamic banking in uae by using empirical review. the latest study conducted by al arif, masruroh, ihsan, & rahmawati, (2020) adopted swot analysis to determine alternative strategies to improve the role of sharia business units in accelerating business growth in indonesia. in addition, amrani and najab (2020) also presented the exploratory study of participative banking in morocco by utilizing swot analysis. swot refers to s (strength), w (weakness), o (opportunity), and t (threats). hence, swot analysis is widely used to explore alternative strategies by considering perspective opportunities and challenges in many research areas. it can be widely considered that there is still lack of study on the determining alternatives strategies to enhance the participation bank in turkey. the strategy means alternative actions that can be taken in short and long term by policy makers involve practitioners and regulators of participatory banks zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│125 in turkey. the need to hunt the issue and to fill the research gap motivates us to do study on issues and proposed strategies based on swot analysis for participatory bank in turkey. this study contributes to fill the gap that previous studies did not include swot and anp (analytic network process) analysis in their investigation to determine the best strategies to enhance participatory bank in turkey. the significance of this study is also served as reference point for the regulator in formulating appropriate policy strategies to increase market share of participatory banks in turkey 1.2. objective according to the problem as discussed, this study intends to fill the gap by critically examining the issues and challenges faced by participatory banking based on swot analysis. it will propose the strategies to increase the development islamic finance in the country. in doing so, this study will design the appropriate methods to discover these issues and challenges faced by participatory banking in turkey. ii. literature review 2.1 background theory islamic banking in turkey is so called as ‘participation banks’. the ib in turkey has experienced a dramatic development since its establishment in 1985 (yanikkaya and pabuccu, 2017). in the beginning, ib in turkey was established under the name ‘special finance houses’ (sfh) without making any reference to the shariah tenets due to the secular political system of the country. as the name implies, they were not considered as banks. the secular sensitiveness of public policies is no less significance precluded the development of ib in turkey and making them at the crawling stage for a long time. this has caused turkey to catch up with the global development and innovations of ib (asutay, 2013). the ib conditions were started to improve following the triumph of the justice and development party (akp) as the majority in turkish parliament in 2002. since then, ib in turkey had began the new development and significantly improved. turkey enacted its banking act no. 5411 in 2005, which promulgated the transformation of the status of ‘special finance houses’ (sph) into participation banks (hereinafter referred to as pb). the former were regarded non-bank financial institutions and were not governed by the regulator. because of this reason, they were covered by the deposit insurance. meanwhile, the latter have the status of banks and therefore have the same regulatory treatment as conventional banks. pb, in this zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│126 regard, is also covered by the saving deposit insurance fund (ayse et al., 2012). pb in turkey is clearly untapped and still remains as a ‘big potential’. moreover, the decline in the value of turkish lira against the us dollar in the year 2016 and 2017 has important ramification to the decline in pb asset growth rate (ifsb, 2020). it is worth noting that the drop of overall pb asset in this country has gained serious attention from the regulators and policy makers in turkey. 2.1.1. an overview of turkish economic and financial conditions the republic of turkey is a contiguous transcontinental country, located mostly on anatolia in western asia, and on east thrace in south-eastern europe. turkey is bordered by eight countries, bulgaria to the northwest; greece to the west; georgia to the northeast, armenia, iran and the azerbaijani exclave of nakhichevan to the east, and iraq and syria to the southeast. the mediterranean sea is to the south; the aegean sea is to the west, and the black sea is to the north. turkey is a democratic, secular, unitary, constitutional republic with a diverse cultural heritage. turkey had population of 84.805 million in january, 2021 and expected to reach 86.705 million by 2025. turkey’s unemployment rate was 10.794% of total labour force. turkey’s real gross domestic product (gdp) was worth us$ 754.41 billion in 2019 which represents 0.63% of the world economy. per capita gdp was at us$ 28167.40 in 2019 with the purchasing power parity is adjusted to 159% of the world’s average. in 2016, turkey government’s revenue was try 808.819 billion whereas the expenditure was try 867.358 billion. this resulted turkish government’s net lending / borrowing negative at try 58.539 billion in 2016 indicating that enough financial resources were not made available by the government to boost economic growth. the current account balance for turkey was negative at usd 32.602 billion for the year 2016 and is expected to decline at a cagr of 1.59% and reach usd 35.879 by 2022. this negative current account balance indicates the turkey is a net borrower from the whole world. despite the current political turmoil and manifold uncertainties, turkey remains a significant market and economic partner for german companies. unfortunately, substantial structural deficiencies counteract fundamentally high growth potential. with around 79 million inhabitants and a young population with an average age of 31 years, turkey remains an attractive market and investment location for international companies despite the current political upheavals and geopolitical uncertainties. zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│127 2.1.2. the current development of participatory banking industry in recent years, the turkish banking sector including participation banking (pb) has been undergoing a robust performance. the annual growth rate of turkish banking sector in the last six years is accounted for 18 percent. even so, the asset growth of banking sector is higher the growth of turkish gdp and reached more than usd 800 billion as the end of 2015. as of november 2016, there are more than fifty banks in turkish banking system, which consists of 34 deposit banks, 13 development and investment banks, and 5 pbs. there is no separate legislation that regulates pbs in turkey. the pb including albaraka bank, kuveytturk, turkey finance, ziraat participation banks, and vakif participation banks. we notice that the license of bank asya (asya katilim bankasi a.s) was terminated in 2016 by the banking regulation supervision agency (brsa). according to the turkish banking law no.5411, bank asya was audited by the brsa in 2015 and it was found that the bank had made a numerous of illegal transactions and given credit to customers without obeying regulatory rules. in short, the bank license was terminated in july 2016. as we mentioned previously, pb in turkey only have only around 5 percent of market share. however, aysan, dolgun, & turhan (2013) believed that pb in turkey still can play a critical role in channelling untapped capital into more productive activities. it is important to note that these pbs, in their ‘liability’ side of their balance sheets, use profit and loss sharing methodology. on the ‘asset’ side, almost all of their financing facilities are channelled to tangible projects in the real sector (both households and companies). next, to have a complete picture on the development of turkish pb, table 2 shows an overview of pb total assets from 2001 to 2015. referring to the table 2, total assets of turkish pb increased gradually from as low as 1.08 percent in 2001 to 5.10 percent in 2015. nevertheless, shareholders equity remains at the same level as of december 2015. next, the non-performing loans (npl) ratio worsened due to the problems of bank asya in 2016. moreover, the performance ratios (roa and roe) were decreased substantially from 2 percent in 2010 to 0.4 percent in 2015, and from 16.9 percent in 2010 to 4.1 percent in 2015, respectively (brsa tukey, 2015). this statistic reveals that pb in turkey becomes less profitable throughout the period 2010 – 2015. we notice that the decreasing profit occurred concurrently with basel iii liquidity standard implementation, particularly after 2013. zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│128 table 2. total assets (thousand tl), asset growth, and market share of turkish banking sector and participation banks year banking sector pbs growth rate (%) share (%) 2001 218,873,000 2,365,000 4.37 1.08 2002 216,637,000 3,962,000 67.53 1.83 2003 254,863,000 5,112,000 29.05 2.01 2004 313,751,000 7,298,000 42.75 2.33 2005 406,915,000 9,945,000 36.26 2.44 2006 498,587,000 13,729,000 38.05 2.75 2007 580,607,000 19,435,000 41.55 3.35 2008 731,640,000 25,769,000 32.59 3.52 2009 833,968,000 33,628,000 30.50 4.03 2010 1,006,672,000 43,339,000 28.88 4.31 2011 1,217,711,000 56,079,000 29.39 4.61 2012 1,370,614,000 70,279,000 25.33 5.13 2013 1,732,413,000 96,086,000 36.72 5.55 2014 1,994,329,000 104,319,000 8.56 5.23 2015 2020 2,347,715,000 119,719,000 14.76 5.10 source: banking regulation and supervision agency (brsa) the current progress of pb development in february 2019, turkish banking authority bddk has approved for operations emlak katilim bankasi, making it the sixth islamic bank in this country. the state-owned emlak bank converted to become a participation bank. it focuses on the construction and real estate sectors. turkey’s government aims to increase the share of participation banking assets to 15 percent of the country’s total banking sector by 2025. in december 2018, participation banks held 206.8 billion turkish liras ($38.9 billion) in assets, accounting for 5.3 percent of the banking sector, according to data from the participation banks association of turkey (tkkb). this was up from 160.7 billion liras in december 2017, when islamic banking assets made up 4.9 percent of the banking sector. to expand the sector, the government opened two islamic banks prior to emlak, they were ziraat katilim in 2015 and vakif katilimin 2016. the other participation banks are albaraka turk, kuveyt turk and turkiye finans (global islamic economy gateway, 2019). 2.1.3. swot analysis in determining banking strategy some previous studies were found in identifying the strategy for banking by employing swot model analysis. latest study by by al arif, et al (2020) zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│129 applied swot model to determine alternative strategies to improve the role of sharia business units in accelerating business growth in indonesia. another study is also conducted by amrani and najab (2020), where they presented the exploratory study of participative banking in morocco by utilizing swot analysis. some other previous articles also was found where swot analysis is employed to obtain alternative strategy for banking institutions (goksu and becic, 2012; imtiaz and shahid, 2013; elmassah, 2015; beg, 2016). helms and nixon (2010) mentioned that swot (strengths weakness, opportunities, and threats) is strategic management tool which provides guidance not only for practitioners in institutions but also policy makers. swot was firstly practically introduced in harvard academics in the 60s by ansoff (1987). in the academics term, swot analysis was described by learned, et al (1969). currently swot analysis has been widely used as a main tool in order to solve complex strategic conditions by minimizing the information and improve decision-making result. this is also supported by glaister and falshaw (1999) that swot is an appropriate tool for strategic planning. further, pandya (2017) explained that swot analysis provides the outcomes to help individual or organization to make the improvement by considering current and probable future situation which will be benefitting to the institution. helms and nixon (2010) assert that swot has becoming a popular tool in business marketing research particularly to define the strategy for business. this tool is favorite for countless practitioners due to its simplicity and practice in the usage. swot is also able to capture a very complex variables as well as complex decision factors. in addition, buukozkan and ilicak (2019) assert that swot analysis is a powerful method to evaluate the internal and external perspective of an organization. to obtain the proper alternative strategy for institutions, managers (as decision makers) normally will consider internal condition of the company (strengths and weakness factors). proctor (1992) elaborates some internal factors such as image of company, organizational structure, access to the natural and financial resources, and financial and operational efficiency. after identifying their internal conditions, managers are required to observe their external factors (opportunity and threats). according to proctor (1992) external factors might be in the form of customers and competitors conditions, market trends and risks, partners, suppliers, infrastructures, information and technology, and political issue. those factors are considered to help managers to make better decision making particularly on strategy for future direction of company. as for most studies denote swot as strength, weakness, opportunities and threats, pandya (2017) developed lisa framework as description to modern swot, where lisa, l stands for zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│130 leveraging (strengths), i stands for improving (weakness), s stands for seizing (opportunities), and a stands for awareness (threats). 2.2. previous studies yanikkaya and pabuccu (2017) evaluated the root causes of the stagnation of the participatory bank in turkey. this study provided an interesting finding that participatory bank in turkey in practice is deviating from the practice of islamic banking in general in other countries. one of them is the participatory bank in turkey does not have a sharia governance framework for both banking and national level. the implication of this research is that turkey needs a good sharia governance framework for both levels. in addition, the turkish government also needs to increase public perceptions about islamic banking. there is also limited number of regulatory and research institutions that focus on islamic banking in turkey. therefore, this study provides a recommendation that participatory banks in turkey should improve business models, operational efficiency and infrastructure to increase the growth of participatory bank. several previous studies also evaluated the performance of islamic banks in turkey compared to conventional banks. yanikkaya and pabuccu (2017) stated that the financial efficiency of islamic banks in turkey is less efficient than conventional banks. however, in the previous year, a study conducted by erol, et al (2013) stated that the participatory bank in turkey performed better in profitability and asset management. otherwise, participatory bank in turkey is considered more sensitive to market risks. the reason behind this was pb allows lower provisional losses than conventional one. besides, pb also contains some tax advantages. study by orhan (2018) attempted to identify the business model of participation banks in turkey by utilizing balance sheet ratios. this study explains that the value proposition of the participatory bank in turkey is depending on the collected-fund. customer segmentation in participatory banks in turkey is dominated by private sector. the majority of funds disbursed were loans with a murabahah contract, so pb was very dependent on the mark-up income that was seeded in the murabahah contract. this study concludes that pb practices in turkey are basically similar to conventional banks but still have some peculiarities. however, unfortunately, this research based on empirical study does not provide an overview of the challenges faced by pb in the future. zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│131 knowing the challenges that islamic bank might face is vital to determine the best strategy in order to enhance the islamic bank’s development in a country. several previous studies have raised the topic of the challenge and strategy of islamic banks in several countries. for instance, sa'id (2020) conducted 25 semi-structured interviews to analyze the evolution of islamic banking in nigeria by applying actor-network theory perspective. the findings of this research include the islamic banking evolution in nigeria arose due to a relationship between human and non-human actors. other research was conducted by al arif, et al (2020) which was adopting swot analysis to determine alternative strategies to improve the role of sharia business units in accelerating business growth in indonesia. this study implied two approaches (qualitative and quantitative), where in-depth interview is conducted to obtain qualitative data, and arima method is utilized to analyze the secondary data. the findings of this study also provide two main results, namely as for qualitative, conversion from unit to fullfledge bank, merger among units, and acquisition of units by commercial banks. meanwhile, as for quantitative, none of units can achieve 50% of the asset share from its parent bank. in addition, amrani and najab (2020) also presented the exploratory study of participative banking in morocco by utilizing swot analysis. from the above previous studies, we can conclude that there is still lack of study discuss on the issue and challenge faced by participatory bank in turkey. considering that by identifying the challenge it can help policy makers to select better strategies and reduce cost. several studies on the topic of challenge and strategy to improve the role of islamic banks utilized swot (strength, weakness, opportunity, and threat) approach to extract the best strategy. therefore, this study is attempted to explore the issue from swot perspective and derive the best alternative strategy by employing decision making method. iii. methodology 3.1 data the objective of this study is intended to explore the issues and challenges of participatory bank in turkey by adopting swot (strength, weakness, opportunity, and threats) model. therefore, the data obtained in this study is primary data from the expert opinion. this study involves several expertise respondents to gather their opinion and view regarding the issues and challenges participatory bank in turkey. generally, respondent of this study is divided into two groups of respondent, zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│132 academics respondent and practitioners respondent. overall, the expert respondents in this study are selected based on the criteria, as follows: a. the expert has good experience in the participatory banks in turkey and deals directly with the islamic banks agenda. b. the expert has good knowledge and understanding about theory and practice of islamic bank. c. the expert from academics are regularly publish their research work on islamic banks and present their finding in both local and international conferences. there are nine (9) selected respondents who properly contribute to the model decomposition and synthesis. four respondents are coming from practitioners and five respondents are coming from academics. according to nyumba, et al (2018) asserted that the number of participants for fgd could range from 3 to 21 participants. however, in the anp, big issue is not emerging from the number of respondents, but from the quality of respondent. therefore, selecting proper and knowledgeable respondents is vital in this method. 3.2 model development swot model decomposition is conducted through study literature and focus group discussion (fgd) by inviting nine experts who have good understanding about the problem discussed in this study. some relevant journals and papers on participatory banking in turkey are utilized to obtain the variables or elements regarding the issue and challenge of participatory banking in turkey. further, focus group discussions by inviting experts who have better knowledge on this topic are invited. in order to have an effective fgd, an experienced moderator is selected to lead the discussion. according to dawson, manderson, and tallo (1993), fgd begins with the opening and participant introduction and followed by the presentation on the main topic and the overall research questions. the moderator would then lead and manage the flow of discussion based on specific research questions. the fgd will end with a closing statement from each participant and conclusion from the moderator. the constructed swot model based on fgd is subsequently validated by one expert who is deemed the most knowledgeable respondent among the peers. anp (analytic network model) is applied to decompose swot model, where anp is using both qualitative and quantitative approach to get the priority for each variables. model on issue and challenge participatory bank in turkey is provided in three main levels, first, goal cluster, second, swot aspect clusters, and third, strategy cluster. goal cluster involves issue and zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│133 challenge participatory bank in turkey based on swot. meanwhile, there are 4 elements under strength cluster, namely strategic of geographic between europe and asia/market leader, central board of shariah advisory board in internal pb, experiences more than 30 years, and there are 6 pb with over 1,100 branches and 15,650 personal. the weaknesses in this study are the asset of pb still not significant compare with potential market share, banker’s shariah awareness on pb still need to improve, inadequate competitive product (majority in murabahah). the opportunities involve legal legacy from ottoman, majority muslim population/potential market share, significant supporting from government, and become the world centre of halal industry. the threats that might be faced by participatory bank in turkey involve people awareness on pb still weak, there is no separate law for pb in turkey, taxation; it’s effect to pricing, higher than cbs (in several akad/transactions), secular constitution. the strategies consist of massive education for practitioners and public, separated law and regulation for pb, convert strong government banks to pb or opern pb window, and incentive or tax discount for bp to publish competitive product. issues and challenges participatory bank in turkey based on swot anp network model can be seen through figure 1. zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│134 figure 1. anp framework model 3.3 method to provide a comprehensive result from the model decomposition and synthesize activity, this study employs both qualitative and quantitative approaches. qualitative approach is conducted to decompose the anp framework by utilizing swot model approach and validate the model by doing study literature and in-depth interview, meanwhile quantitative approach is conducted by doing synthesize to get the weight of priority by using pair-wise comparison questionnaire. therefore, this study is utilizing mix-method, qualitative and quantitative method. the methodology used in this study is anp (analytic network process). anp is commonly used as decision making tools in various discussion subjects. decision making by anp is based on the priority value (eigenvalue), which is generated from mathematical calculations through matrix and supermatrix zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│135 calculations. anp is part of the multiple criteria decision making (mcdm) technique which allows researchers to prepare a number of complex criteria in a model. contrary to its predecessor method, ahp (analytic hierarchy process), anp allows researchers to make a relationship of the feedback network on the model. due to this study adopts the swot model, and with the consideration that each swot sub-criteria may have a relationship or are interrelated, the authors considered that anp is the suitable tool / method to answer the objective of this study. adopting swot model into anp framework has been utilized by some previous studies, such as cindy, mohammad, and teguh (2019) study on the banking and financial technology and rusydiana and devi (2013) study on the baitul maal wat tamwiil in indonesia. overall, there are three steps of anp methodology, first anp model decomposition. as already mentioned earlier, model decomposition is conducted in two ways, study literature and in-depth interview to some experts in islamic bank in turkey. the results of interviews which is obtained from the experts can be utilized to form the swot-anp framework (model) consisting several clusters and elements. in this case, the expert is selected by determining some criteria (as already explained in the ‘data’ sub section). model validation is also important part in this step. researcher requests to one of the expert to validate the constructed model (popular with ‘expert validation’). the second step is quantifying the model to get the weight of priority. due to this, pair-wise comparison questionnaire is prepared for the respondents to answer. the questions in the anp questionnaire are in the form of pairwise comparisons (comparisons of pairs) between elements in the cluster to find out which of the two has the greater influence (more dominance) and how big the difference is seen from one side. the numerical scale 1-9 employed as the translation of verbal assessment (see table 3). saaty and vargas (2006) proposed the use of ratio ratings of each pair of factors in the hierarchy to obtain (not directly provide a value) measurement of the ratio scale. any methodology with a hierarchical structure should use a ratio-scaling priority for elements above the lowest level of the hierarchy. this is important because the priority (or weight) of an element at any level of the hierarchy is determined by multiplying the priority of the element at the level by the priority of the parent element. anp uses a ratio scale at all the lowest levels of the hierarchy / network, including the lowest level (alternatives in the choice model). the ratio scale is from 1 to 9 where 1 denotes for and 9 denotes for extreme importance. filling out the questionnaire by the respondent must be accompanied by a researcher to maintain consistency of the answers given. in general, the zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│136 questions on the anp questionnaire are numerous. so that non-technical factors can cause a high level of inconsistency. the last step of anp analysis is synthesis. synthesis is derived from the multiplying of all local priority to obtain global priority. matrix and supermatrix calculation is used in this step. however, anp software super decision does not provide the feature to see the consensus value of respondents. therefore, geometric mean calculation is required in the end of the synthesis to obtain the consensus priority value. the geometric mean is a type of average calculation that shows a certain tendency or value which has the following formula (ascarya, 2011): equation: where, gm = geometric mean; r = judgment of individual respondent; n = number of respondents; and k = number of pair-wise comparisons. after measuring geometric mean value as consensus value of all respondents, addition calculation is organized to get the agreement value among raters. kendall’s coefficient of concordance technique is used to get the rater agreement value. this kind of calculation is quite vital in the anp as additional analysis and validating the priority result. rater agreement is indicated by how the column totals differ, or, in another word, rater agreement is expressed to the extent of numbers differ; variance or standard deviation. the formula can be expressed as: w = variance over column totals / maximum possible variance over column totals as a result, kendall’s value (w value) has the value between 0 and 1. if w is 0 means that all respondents is completely disagree to the priority in a cluster. on the other hand, if w is 1 means that all respondents is completely agree to the priority in a cluster. p-value is calculated to indicate the significance of kendall’s value. zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│137 iv. result and analysis 4.1 results the result of interview and data processing of pair-wise questionnaire will be discussed in the following narration. to begin with, the discussion on finding and analysis of anp on the issues and challenges pb in turkey will be divided into several parts, starting from the discussion on the priority of aspect, priority of strength cluster, priority of weakness cluster, priority of opportunity cluster, priority of threats cluster, and priority of proposed strategy. the anp synthesis results which is resulting from the pair comparison questionnaire will be discussed by presenting a priority table consisting of three (3) components, namely geometric mean results of the group of practitioners (gm practitioners), geometric mean results of the academic group (gm academics), and the overall geometric mean results / consensus (gm overall). each geometric mean value will also be supported by the calculation result of the rater agreement (w) and the significance value of w (p-value). as explained in sub-chapter research methodology, the rater agreement explains how much the respondents agree on the priority results obtained from the geometric mean in one cluster. the discussion on finding is also supported by previous literatures and underpinning theory in the next sub discussion. figure 2 describes the finding of priority from the aspect cluster. according to geometric mean value, both groups (academics and practitioners) have the same priority level to determine the most important swot aspect of the model, where opportunity stands as the first priority (0.364 and 0.314 respectively), and then followed by strengths (0.237 and 0.256 respectively), academics and practitioners are in the different opinion to determine the third and forth priority. academics put weakness as the third priority (0.211) and threats as the last priority (0.169), otherwise practitioners put threats as the third priority (0.192) and weakness as the last priority (0.188). figure 2 also provides information regarding the geometric mean value by all groups of respondent. geometric mean overall show the most priority from aspect cluster is opportunities (0.341), followed by strength (0.245), weakness (0.201), and threats (0.179). the results of the rater agreement show that respondents from group of academics and all respondents agree that opportunity is the most priority aspect with value of w = 0.812 and w = 0.548 respectively. on the other hand, respondents from practitioner group did not agree with the priority results in this cluster, as indicated by the value of w = 0.325. zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│138 figure 2. geometric mean cluster of aspect figure 3 provides the priority from the strength cluster. according to geometric mean value, both groups (academics and practitioners) have the same priority level to determine the most important strengths of the model, where central board of shariah advisory board in internal pb stands as the first priority (0.291 and 0.304 respectively), however, academics and practitioners are in the different opinion to determine the second and third priority. academics put strategic of geographic between europe and asia/market leader as the second priority (0.288) and there are 6 pb with over 1,100 branches and 15,650 personal as the third priority (0.251), otherwise practitioners put number of branches and personal as the second priority (0.236) and strategic of geographic as the third priority (0.231). nonetheless, they are in opinion to the last priority, where experiences became the last priority in this cluster (0.148 and 0.173 respectively). figure 3 also explains the geometric mean value by all groups of respondent. geometric mean overall show the most priority from strength cluster is sharia board (0.297), followed by strategic of geographic (0.261), number of branches and personal (0.244), and experiences (0.158). the results of the rater agreement show that respondents from group of academics and all respondents agree that sharia board is the most priority aspect with value of w = 0.600 and w = 0.482 respectively. on the other hand, respondents from practitioner group did not agree with the priority results in this cluster, as indicated by the value of w = 0.125. w = 0.548 p-value = 0.002 w = 0.812 p-value = 0.007 w = 0.325 p-value = 0.272 zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│139 figure 3. geometric mean cluster of strength the priority of weakness cluster is showed through figure 4. according to geometric mean value, both groups (academics and practitioners) have the same priority level to determine the most priority of weakness of the model, where inadequate competitive product (majority in murabahah) stands as the first priority (0.422 and 0.336 respectively), however, academics and practitioners are in the different opinion to determine the second priority and last priority. academics put lack of banker’s sharia awareness as the second priority (0.334) and asset is not compatible as the last priority (0.222), while practitioners put asset is not compatible as the second priority of the model (0.335) and lack of banker’s sharia awareness as the last priority (0.267). figure 4 also explains the geometric mean value by all groups of respondent. geometric mean overall show the most priority from weakness cluster is inadequate competitive product (majority in murabahah) (0.381), and then followed by lack of banker’s sharia awareness (0.302), and asset is not compatible in the last priority (0.267). the results of the rater agreement show that respondents from group of academics and all respondents agree that inadequate competitive product (majority in murabahah) is the most priority aspect with value of w = 0.840 and w = 0.346 respectively. on the other hand, respondents from practitioner group did not agree with the priority results in this cluster, as indicated by the value of w = 0.062. w = 0.482 p-value = 0.005 w = 0.600 p-value = 0.029 w = 0.125 p-value = 0.682 zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│140 figure 4. geometric mean cluster of weakness furthermore, the priority of sub-clusters of opportunity factors is provided in figure 5 to have a more detailed framework on the issues and challenges pb in turkey. geometric mean value indicates that, both groups (academics and practitioners) are in different opinion on the priority level of opportunity cluster, academics set majority muslim population/potential market share as the most priority of the cluster (0.270), while supporting from government stands in the second rank (0.256). diversely, practitioners set supporting from government as the first priority (0.329) and majority muslim population/potential market share as the second priority of the cluster (0.302). on the other hand, they are in the same opinion to the third and forth priority, where world centre halal industry stands as the third priority (0.214 and 0.216 respectively) and legal legacy from ottoman stands in the last priority (0.210 and 0.126 respectively). figure 5 also describes the geometric mean value by all groups of respondent. geometric mean overall shows the most priority from opportunity cluster is government support (0.286), followed by majority muslim population (0.284), world centre halal industry (0.215), and legal legacy from ottoman (0.167). the results of the rater agreement show that respondents from group of academics and all respondents disagree to the priority of the cluster with value of w = 0.04 and w = 0.220 respectively. otherwise, respondents from practitioner group agree with the priority results in this cluster, as indicated by the value of w = 0.700. w = 0.346 p-value = 0.045 w = 0.840 p-value = 0.015 w = 0.062 p-value = 0.779 zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│141 figure 5. geometric mean cluster of opportunity figure 6 also presents anp analysis on threats cluster. geometric mean value indicates that, both groups (academics and practitioners) are in the same opinion on the priority level of threats cluster, where there is no separate law becomes the most priority of the cluster (0.386 and 0.390 respectively), meanwhile both groups of respondent are arguing to the second and third priority. academics set taxation is becoming the second priority of the model (0.241) and people awareness is still weak as the third priority (0.219). on the other side, practitioners put people awareness is still weak as the second priority (0.266) and taxation is becoming the third priority of the model (0.197). meanwhile, these two groups are in the same opinion regarding to the last priority, where secular constitutions stand in the last rank of threat cluster (0.133 and 0.108 respectively). geometric mean overall shows the most priority from threats cluster is no separate law (0.338), followed by people awareness still weak (0.239), taxations (0.220), and secular constitution (0.122). the results of the rater agreement show that respondents from group of academics, practitioners and all respondents agree to the priority of the cluster with value of w = 0.808, w = 0.900 and w = 0.842 respectively. w = 0.220 p-value = 0.115 w = 0.04 p-value = 0.896 w = 0.700 p-value = 0.038 zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│142 figure 6. geometric mean cluster of threats final figure describes the priority of strategies cluster. according to the finding, all groups of respondent are in the same opinion to the priority of strategy cluster. this is definitely showing us that a geometric mean consensus result is also similar. the most priority of strategy on issues and challenge participatory bank in turkey based on swot is separated law and regulation (0.307), and then followed by massive education (0.246), inventive or tax discount (0.201), while strong government stands as the last priority (0.159). the results of the rater agreement show that respondents from group of academics and all respondents agree to the priority of the cluster with value of w = 0.552 and w = 0.323 respectively. meanwhile, respondents from practitioner group disagree with the priority results in this cluster, as indicated by the value of w = 0.175. w = 0.842 p-value = 0.000 w = 0.808 p-value = 0.007 w = 0.900 p-value = 0.013 zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│143 figure 7. geometric mean cluster of strategy 4.2 analysis the first finding indicates that both groups (academics and practitioners) have the same priority level to the most important strengths, where central board of shariah advisory board in internal pb stands as the first priority. in turkey, each pb has its own sharia advisory board which helps the bank to ensure that their operational activities are running in the sharia corridor (aysan, et al, 2013). by ensuring that the operational activities in islamic banking are in line with sharia principle, this will bring trust to the society on financial system. moreover, adem (2014) mentioned the need of a nationwide board in turkey for a healthier infrastructure in islamic financial institution. gun (2016) presents the case of sharia advisory board mechanism in the term of participation banks in istanbul, turkey. sharia advisory board is presumably able to resolve agency cost as well as assist istanbul to reach the objective of being the financial center in the world. the establishment of sound sharia advisory board will help islamic financial industry to operate in a fully sharia principle, therefore the trust on financial system can be thoroughly delivered to the society and effect to the augment of the volume (esen & karabacak, 2014). baklouti (2020) asserts the point that good characteristics of sharia advisory board in islamic banking will affect to the financial performance of the bank. however, this finding contradicts to the study conducted by yanikkaya & pabuccu (2017) that the sharia governance in participatory banks in turkey is still not optimal. this means that the role of the shara advisory board still needs to be improved. w = 0.323 p-value = 0.033 w = 0.552 p-value = 0.041 w = 0.175 p-value = 0.552 zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│144 as for weakness, both groups (academics and practitioners) have the same priority level to determine the most priority of weakness of the model, where inadequate competitive product (majority in murabahah) stands as the first priority. pls (profit and lost sharing) – based financing product should be an advantage in islamic banking, unfortunately sale-based contract ‘murabahah’ dominates islamic banking product. orhan (2018) asserts that pb’s turkey financing is dominated with murabahah contract. in regard to this, orhan (2018) attempted to conclude that this practice basically similar to the practice in the traditional bank, where the bank mostly rely on giving the loan. while simultaneously, murabahah contract that dominates islamic banking products do not only occur in turkey. several countries also have experienced similar problems, such as in indonesia, malaysia, bahrain and several other countries (samad, et al, 2005; juliana, et al, 2019; miah & suzuki, 2020). there are some reasons underpinning this situation, for instance, miah & suzuki (2020) assert that the risk behind plsbased financing product contains higher risk and uncertainty. at the same time, pls-based financing will be limitedly used unless the regulations are changed. kadir (2016) added the point that the importance of adequate competitive product will lead to the customer intention to use islamic banking product. the customers automatically seek the product which is compatible to their need as well as competitive in pricing. masood, sheikh, & abbasi (2017) also supported the case of bankers’ awareness problem in islamic bank is still low and need to be optimally improved through education and socialization specifically from related government. another finding arises from this study is the priority of opportunity cluster, where both groups (academics and practitioners) are in different opinion, academics set majority muslim population/potential market share as the most priority of the cluster, while practitioners set supporting from government as the first priority aspect. nugroho (2014) addresses the issue of supporting from government is becoming a very significant role to enhance the potency of islamic bank through their capacity building function (government as an agent of change and an agent of development). massive socialization also can be the responsibility of the government to enhance islamic financial literacy of the society. on the other hand, the lack of government support (lack of political will) will affect to the delay of islamic bank enhancement (sari, bahari & hamar, 2016; reni & ahmad, 2016; nugroho, et al, 2017). the effectiveness of government support to boost the market share of islamic bank in the country can be seen from the practice in malaysia, where government support leads to the fast-growing of islamic banking system in that country. in addition, al nasser and muhammed (2013) supported the view that one of government support to develop islamic bank in malaysia is in the form of sound infrastructure. therefore, zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│145 this finding is expected to take the edge off government support problems in turkey as previously mentioned by yanikkaya and pabucu (2017) that the lack of government support in islamic banking development between 80s and 90s can be properly abolished. as for strategy, separated law and regulation is becoming the most priority of strategy cluster. lamiha, (2012); esen & karabacak (2014) support the view that separated law and regulation on islamic bank is becoming the critical factor to establish sound participatory banking in turkey. further, the existence of participatory bank’s law and regulation separated from traditional banking can generate the trust of public to such institutions. overall, the issues and challenges faced by participatory banking based on swot analysis can be divided into five important implications. participatory banks stakeholder is required to be focus on several aspects which is in high level priority. the central board of shariah advisory in internal participatory bank in turkey becomes the strength of the model. therefore, the role and function of such board need to be frequently evaluated and improved in order to accelerate the islamic finance in turkey (esen & karabacak, 2014; gun, 2016; yanikkaya & pabuccu, 2017; yas, aslan & ozdemir, 2018). there is no doubt that in islamic financial industry, sharia advisory board has the vital role to ensure that the product and services which are offered by the institutions are compliance to sharia. the board is scheduled to review the existing product as well as review the upcoming profitable product before delivered to the market. nevertheless, participatory banks in turkey is also demanded to put concern on the issue of murabahah financing product as dominant product in islamic bank. however, as the complementary of traditional banking, since its establishment, islamic bank in almost all countries declared themselves as profit and lost sharing (pls) banks. islamic banks should have different approach to deliver the financial product to the society (samad, et al, 2005; rusydiana & devi, 2013; kadir, 2016; juliana, et al, 2019; miah & suzuki, 2020). this result reinforced earlier studies completed by khan & mirakhor (1990); iqbal (1997) that profit and loss sharing (pls) paradigm which is predominantly by mudharabah (profisharing) and musyarakah (joint venture) concept becomes a unique feature of islamic banking. consequently, political willingness from local government is vital to boost the volume of profit and lost sharing contract in islamic bank. participatory banks practitioner also need to take a look to the opportunity from the turkey’s government support as motivation to develop islamic financial product and services needed by the community. in this case, there are several things that can be formed as government support, for instance, massive socialization and education on financial literacy, supporting regulation, tax subsidies on islamic financial product, etc (nugroho, 2014; zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│146 sari, bahari & hamar, 2016; reni & ahmad, 2016; nugroho, et al, 2017) on the other hand, there is no separate law for pb in turkey takes the highest priority in the threat cluster. the key-element strategy that tailored to the goal is separated law and regulation. v. conclusion and recommendation 5.1 conclusion overall, this study ascertained the current and future analysis of participatory bank in turkey. the analysis contains four main aspects, strength, weakness, opportunity and treat. the discussion on strategy has been provided in this article. as the model developed, we can conclude that there are four important aspects that can be considered as the factors to develop participatory banks in turkey, namely, strength, weakness, opportunity, and threat. each aspect in this level consisted of 3 (three) to 4 (four) sub-element and has been validated by the experts. the most priority under strength cluster is central board of shariah advisory board in internal pb, while the most priority under weakness cluster is inadequate competitive product (majority in murabahah). while other parts like opportunity cluster, significant supporting from government stands in the first rank. on the other hand, there is no separate law for pb in turkey takes the highest priority in the threat cluster. the key-element strategy that tailored to the goal is separated law and regulation. 5.2 recommendation the finding also provides managerial implications for practitioners of participatory bank, regulators in turkey, at the same time also provides a theoretical implications for prospective researcher. as the finding imply, the participatory banks need to adopt four meaningful strategies to enhance the participatory bank in turkey according to its priority, namely separated law and regulation, massive education, incentive or tax discount, and sound government where can be in the form of strong islamic banking framework and sharia governance practice for both local and national levels. finally, this study has also contributed to the existing knowledge related to islamic banking theory and practice, particularly in turkey. as the novelty of this study, authors presented the case of participatory bank in turkey and explored the issue and challenge by developing swot-anp framework as well as determine the relevant strategy by applying decision-making method. however, in the process of obtaining the data, this study has several limitations. first, since this study captured the data from expert, zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│147 islamic banks consumer perspective might be applied to seek the strategy of participatory bank development in turkey. secondly, further research might employ another approach to prioritize the strategy of participatory bank development in turkey; for instance, interpretative structural modeling and other quantitative approaches might be applied to obtain result from different perspective and angel of studies. zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│148 references adem, e. s. e. n. 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(2017). causes and solutions for the stagnation of islamic banking in turkey. isra international journal of islamic finance. yas, m., aslan, h., & ozdemir, m. (2018). modern history of islamic finance and a strategic roadmap for its development in turkey. in turkish economy (pp. 213-238). palgrave macmillan, cham. zulfahmi, devi, asker, & hassan │ participation banks in turkey: issues and proposes strategies based on swot analysis international journal of islamic economics and finance (ijief), 4(si), 121-152│152 this page is intentionally left blank. international journal of islamic economics and finance (ijief) vol. 3(2), page145-174, special issue: islamic social finance and ethics reducing poverty through optimization of zakat on agriculture and profession siectio dicko pratama bps-statistics of lampung utara regency, indonesia corresponding email: siectio@hotmail.com rezha nursina yuni bps-statistics of indragiri hilir regency, indonesia article history received: june 13 th , 2020 revised: august 8 th , 2020 accepted: august 30 th , 2020 abstract zakat is a system in islam that is designed to allocate the wealth from the rich to the poor and the needy. the effectivity of zakat in reducing poverty has been proven in the history of islam. nevertheless, nowadays, zakat is still unable to eliminate poverty. bad planning and organizing of zakat are the main reason for that especially the less information about the potency of zakat in each region. indonesia is a country that is rich in natural resources and has many workforces. so, indonesia may have hidden potential of agricultural and professional zakat. this study tries to calculate the potency and the impact of the zakat on reducing poverty. the effect will be examined descriptively and statistically and also will be presented by mapping all the provinces in indonesia. the result shows that there are about 16.1 trillion rupiahs of zakat potential furthermore able to reduce the poverty rate in indonesia for 0.75 percent. dki jakarta is the most affected province by zakat because its poverty rate reaches 0.22 percent. to implement this theory in real practice, the utilization of the mosque to distribute zakat funding where baznas represents as the manager is suggested. keywords: poverty gap, poverty reduction, zakat on profession, zakat on agriculture. jel classification: p36, d63, d31 @ ijief 2020 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.3237 web: https://journal.umy.ac.id/index.php/ijief/article/view/9029 citation: pratama, s. d., & yuni, r. n. (2020). reducing poverty through optimization of zakat on agricultural and profession. international journal of islamic economics and finance (ijief), 3(2), 145-174. doi: https://doi.org/10.18196/ijief.3237 https://doi.org/10.18196/ijief.3225 https://doi.org/10.18196/ijief.3225 pratama & yuni │reducing poverty through optimization of zakat on agriculture and profession international journal of islamic economics and finance (ijief), 3(2), si, 145-174│146 i. introduction 1.1. background islam is a religion which gives much attention to social welfare, as it is cited in qur’an surah al-hashr verse 7,”...so that it will not be a perpetual distribution among the rich from among you”. this verse shows that in islam, the property should not only amongst the rich but also has to be welldistributed to those who need it. hence, there is a command in islam which obliged the muslim to give some of their wealth to the poor, called zakat. in general, all people whose wealth exceeding their basic needs and the wealth remains intact in a year must pay zakat. furthermore, they who receive zakat must be in eight categories mentioned in qur’an, those are; the poor, the needy, zakat administrators, new muslim (those whose hearts are to be reconciled), those in slavery, the debt-ridden, muslim who strive into god and the wayfarer (sabiq, 2013). therefore, zakat should be able as a solution to eliminating poverty. the main reason why zakat should be the best solution to alleviate poverty, especially extreme poverty, is that the recipients are the poor and the needy. it is different from tax. the distribution of tax does not require a certain group of people. it depends on the government. the effectivity of zakat in eradicating poverty is not only on paper. it is proven from the history that at least in two periods of government, zakat has been successfully forming complete alleviation of poverty in two periods of time, the second islamic caliphate of islam umar bin khattab r.a (13-22 h) and umar bin abdul aziz (99-101h). at that time, eligible recipients of zakat were none because of the prosperity at that period. the key to success in those periods is proper planning and worthy management (arif, 2017). inadequate information about how much zakat has been collected also can be a reason why the implementation of the zakat system cannot be as good as before in history (ismail, 2013). the reason why zakat cannot give a significant impact on poverty reduction could be due to so much potential zakat which is unreached all this time. it is commonly known that indonesia is an agricultural country. about 12.72 percent of gross domestic product is the agricultural sector. moreover, 27.33 percent of all workers, which is the highest proportion, are from agricultural workers (bps-statistics of indonesia, 2020). it is a fact that the agricultural sector has a significant impact on the majority of indonesian. nevertheless, the amount of zakat collected from agriculture remains unclear, although the zakat rate is higher at 5 or 10 percent. by looking at the potential, the agricultural sector should contribute more to zakat collection. pratama & yuni │reducing poverty through optimization of zakat on agriculture and profession international journal of islamic economics and finance (ijief), 3(2), si, 145-174│147 another hidden potential of zakat in indonesia is zakat on profession. research conducted by asfarina et al. (2019) estimated that the potential of zakat on household income using contemporary fiqh approach under realistic scenario reaches rp34.73 trillion, while the total zakat collected by amil zakat national agency (baznas) was only rp8.2 trillion in 2018. it means that there were about rp26.53 trillion of realistic zakat potential that cannot be realized. then, if we simply focus on developing the collection of professional zakat, we might be able to increase the zakat collection significantly. the unavailability of the zakat potential data specifically on profession at the regional level makes it difficult to develop proper management in collecting zakat. the studies on zakat have been conducted by many researchers and practitioners such as firdaus et al. (2012) and asfarina et al. (2019) who studied the potential of zakat in indonesia. notwithstanding, the studies on the zakat potential and its connection to poverty alleviation are still scarce. study by shirazi et al. (2009) estimated the potential zakat collection and the resource required for eliminating poverty. thus, studies to analyze the influence of zakat potential for the specific kinds of zakat are urgently needed. hopefully, this research can provide a basic foundation for further studies about the other kinds of zakat potential and the effort to alleviate poverty through the zakat instrument. 1.2. objectives faulty planning on managing zakat has been a major reason why the application of the zakat system meets failure (arif, 2017). one of the reasons while devising improper planning is inadequate information about the characteristic of a regency, the unknown target measurement of zakat collected, and even the uncertainty about the effectivity of the zakat system itself. accordingly, the main goal of this research is to calculate the potential of agricultural zakat, profession zakat, and the income shortfall of the poor people from the poverty line and then map them by provinces based on certain levels. besides, the impact of zakat potential on the poverty gap will also be examined statistically to make sure whether the zakat system is effective in alleviating poverty. the organization of this paper will be explained as follows. the background theory related to this study and previous researches will be discussed in chapter 2. chapter 3 will reveal the data used in this research from the source of data and ways to cover the limitation of data. moreover, the model development and method used will also be discussed in this chapter. chapter 4 will discuss the findings from all of the analysis used and the pratama & yuni │reducing poverty through optimization of zakat on agriculture and profession international journal of islamic economics and finance (ijief), 3(2), si, 145-174│148 possible practical implementation from those findings. lastly, the conclusion of the research will be provided as well as the recommendations for further researches, practitioners, and policymakers in chapter 5. ii. literature review 2.1. the definition of poverty poverty is strongly related to the lack of well-being means that poor people are those who cannot live in prosperity. it is defined as an inability of someone to fulfill basic needs such as food, clothing, health, housing, and education. these minimum basic needs then interpreted into a financial measurement in the form of money which is known as a poverty line. they whose income below the poverty line are categorized as the poor ones (haughton & khandker, 2009). nevertheless, islam defines poverty in two viewpoints: quantitative and qualitative explanation. in a qualitative view, a person can be considered as a poor when he is informed by at least three well-informed and trusted persons in the same clan. when come to the quantitative interpretation, someone is mentioned as poor when he has assets less than four dinars (peerzade, 1997). the poverty line becomes a significant aspect of measuring poverty. it is counted by summing the food poverty line and the non-food poverty line. the food poverty line is the value of the expenditure to fulfill the basic needs of food which is equal to 2100 kilocalories per capita per day. besides, the non-food poverty line is the minimum need for housing, clothing, education, health, and other non-food basic needs. all the needs both food and nonfood are groups by packs of commodity, 52 commodities for food and 51 commodities for non-food in urban and 47 commodities in rural. poverty also can be analyzed from the perspective of gap and severity. the poverty gap index shows the average income of people below the poverty line. it is also able to be named as the proportion of the poverty line. if all the poverty gaps of each individual are summed up, we will obtain the minimum cost to reduce the poverty with the assumption of perfect distribution. meanwhile, the poverty severity index is the square of the poverty gap index. it is used to describe the inequality of income among the poor (haughton & khandker, 2009). pratama & yuni │reducing poverty through optimization of zakat on agriculture and profession international journal of islamic economics and finance (ijief), 3(2), si, 145-174│149 2.2. the zakat system in islam in literary terms, the meaning of zakat is to grow, to develop, and to bless. it is mentioned in the qur’an surah at-taubah verse 103,” take from their wealth a charity by which you purify them and cause them to increase”. it is the reason for zakat to be a purifier of wealth, an improvement of goodness, and a wish to get the blessing (sabiq, 2013). zakat is conceptually defined as particular taking from determined wealth by special conditions and for the specific recipients (kausar et al. 2016). zakat is charged neither to everyone nor to every wealth. there are specific conditions where muslims are obliged to pay zakat. if the wealth of muslims does not meet the conditions, then they have no obligation to pay zakat. zakat is supposed to be obtained to the wealth in this six requirements; 1) islam, it is required only for muslims, 2) zakat payers must be in healthy mind and soul, 3) the wealth is fully under his ownership, 4) the riches are developed or have the potency to grow, 5) reach the nisab or minimum amount of wealth that must be paid for zakat, and 6) has been under the settlement for at least a year (huda et al. 2008). zakat also has various kinds. in general, zakat consisted of zakat al-fitr and zakat al-mal (aisyah, 2014). zakat al-fitr is given during ramadhan for every adult muslim whose extra food for their own. they have to pay zakat 2.5 kilograms of staple food which is normally consumed in a region, intended as purification of muslims who have fasted in full month with a goal that everyone in eid al-fitr will break their fast and celebrate the day delightfully. on the contrary, zakat al-mal is meant to purify the wealth. the people who are over wealth should donate some of their wealth to those who need it. there are eight types of zakat on wealth: zakat on income, zakat on business, zakat on savings, zakat on gold and silver, zakat on shares, zakat on livestock and zakat on crops. yet, this research defines the coverage into two types: zakat on incomes (zakat on profession) and zakat on agricultural products (the sum of zakat on livestock and crops). zakat on agricultural product is zakat which is charged for plants that have any economic value such as grains, tubers, vegetables, fruits, and all the plants which are meant to be invested or developed. agricultural zakat does not need any requirement to own in a year because it is paid at harvest. people whose obligatory to pay zakat on agriculture are they whose yields more than 750 kg for basic food (ministry of religion, 2011). different from others, the value of agriculture is not 2.5 percent but depended on the irrigation system. if the irrigation system is from rain or river or anything free, then the value is 10 percent of yields. but if the irrigation system requires the farmers to purchase water, then the value is 5 percent only. pratama & yuni │reducing poverty through optimization of zakat on agriculture and profession international journal of islamic economics and finance (ijief), 3(2), si, 145-174│150 meanwhile, if the irrigation system is the combination of those two ways, the amount of zakat is about 7.5 percent (rahman et al. 2014). another type of zakat is zakat on profession. similar to agricultural zakat, zakat on profession is also presented when earning income. this kind of zakat is required to be charged from people with these requirements; islam, independence, full ownership, getting income in halal ways, exceeding the limit of nisab, and fulfilling haul (ministry of religion, 2011). zakat on profession is charged for every kind of income whether it is routine or not. it includes salaries, wages, honorariums, or services that have been more than nisab. the nisab is one by twelve of 85 grams of gold per month. if in a month the income meets the nisab, then the calculation of zakat on profession is 2.5 percent of income (center of strategic studies –amil zakat national agency, 2019). 2.3. previous studies one of the popular researches in indonesia when it comes to the estimation of zakat potential is research conducted by firdaus et al. (2012). the research estimates the total amount of zakat in indonesia is about 217 trillion rupiahs. the method of the research is quite comprehensive because it has covered the household units, the companies, bumn, and even the government. asfarina et al. (2019) modified the estimation by conducting research to estimate the potential of zakat using better proxies and calculation methods as well as various fiqh approaches. the result of the study stated that the potential zakat in indonesia is only about 69.57 trillion rupiahs under the classical fiqh approach. but, when it is under the contemporary fiqh approach, the result is 216.54 trillion rupiahs. another research conducted by shirazi et al. (2009) compared the estimation of zakat potential and the required resource to eradicate poverty. the study covered 38 oic-member countries. the resource shortfall was predicted by using the poverty gap index. the multiplication between the poverty gap index, poverty line, and the total population was defined as the total amount required to bring all the poor people up to the poverty line. meanwhile, the zakat potential is estimated by using national income approach. the result revealed that the estimated potential of zakat had covered all the resource shortfall in half of the sample countries. not only that, but all those countries also produce surplus funds which are adequate to cover other countries which experienced the deficit resource. pratama & yuni │reducing poverty through optimization of zakat on agriculture and profession international journal of islamic economics and finance (ijief), 3(2), si, 145-174│151 some kinds of zakat also have impacts on poverty. mujiatun (2018) with his research in medan city concluded that zakat on profession, even it had not been optimal yet, was capable of reducing poverty. the research in tegalsari district about the management of zakat in coping poverty conducted by syafa et al. (2020) concluded that proper utilization of profession zakat will eradicate poverty at the regional and national levels. the even distribution of agricultural zakat potential to the poor people was proved to decrease the poverty level according to rarasati & dewanti (2018). it is not only the poverty level, but the well-distribution of agricultural zakat was also capable to lessen the depth and the severity of poverty. surely, both zakat on profession and zakat on agriculture has a significant impact on eliminating poverty. iii. methodology 3.1. data the most significant concern in any researches about zakat particularly at the macro level is the availability of data. the low availability of data regarding zakat at the province either national level forces this research to do some approaches. in general, we use the ratio between muzakki and muslim workers in each province to perceive the number of people who required to pay zakat. this ratio is an approach to the nisab of zakat. because we could not determine the data of people whose obligatory to pay zakat by their kind, so we use this approach to estimate the number of muzakki. the ratio later is used by multiplying the average income of workers and the total workers to get the estimated zakat potential in a region. the number of muzakki in every province in indonesia is adapted from the research conducted by ahsan et al. (2009). meanwhile, the total of muslim workers is the total of workers multiplied by the comparison between the muslim and general population. this ratio will be calculated for specific kind of zakat with the formula as follows a. (1) notes: : the ratio of muzakki and muslim workers for zakat in province : the number of muzakki in province : total population in province : muslim population in province : total workers of sector in province pratama & yuni │reducing poverty through optimization of zakat on agriculture and profession international journal of islamic economics and finance (ijief), 3(2), si, 145-174│152 due to specific data of muzakki was 2007's condition, the workers' data was also in the same condition precisely in august 2007 which both were available on statistics indonesia's website. nonetheless, the ratio between muslims and all populations is more updated because 2007 data is unavailable. the data is from 2010's population census published by bpsstatistics indonesia (sub-directorate of demographic statistics, 2011). yet, because north kalimantan is the new province in 2012, its data taken from the publication released by bps-statistics of east kalimantan (division of integrated processing and statistical dissemination, 2012). it counts by summing up the total of muslims in the districts whereas presently being part of north kalimantan. zakat on agricultural products is required to be charged by the term the agricultural products reach the equivalent of 625 kg rice. the amount is about 10 percent for non-irrigated field and 5 percent for the irrigated field. if the field is the combination of irrigated and non-irrigated, then the amount of zakat is about 7.5 percent. therefore, it comprehended that people who required to pay agricultural zakat are those whose agricultural business and products are more than 625 kg of rice. to approach this, the data that we used is the agricultural sector's self-employed workers. for estimating the muzakki, as we explained, the muzakki-muslim workers' ratio is being used. the estimated amount of zakat is applied by using the average of the agricultural sector's self-employed workers for a year. this data then multiplies by the number of estimated muzakki and 0.075 which is resulted from the amount of required zakat (7.5 percent is mixed of irrigated and non-irrigated field). the formula below is literally adopted from ahsan et al. (2009) and rosele et al. (2014). it is then modified and adjusted by the availability of the data and the condition in indonesia. this is the equation: ( ) (2) notes: : the estimated amount of agricultural zakat in province : the monthly average income of self-employed workers in the agricultural sector in province : total self-employed workers in the agricultural sector in province : the ratio of muzakki and muslim workers for agricultural zakat in province furthermore, zakat on profession is also charged for people whose monthly income is equivalent to 625 kg of rice consumed daily. the term to pay this zakat is also similar to the zakat of agriculture. the zakat is paid when we get the income with the amount is higher than 625 kg rice. the difference is for people whose income and amount of money is not 5 nor 10 percent but 2.5 pratama & yuni │reducing poverty through optimization of zakat on agriculture and profession international journal of islamic economics and finance (ijief), 3(2), si, 145-174│153 percent. because of that, the formula to estimate the amount of zakat on profession is almost similar to the agricultural zakat. the formula to measure the professional zakat potential is literally adopted from asfarina et al. (2019) and ahsan et al. (2009) as main references to build the equation with some adjustments and modifications. hereabouts is the formula to get the zakat potential on the profession. ( ) (3) notes: : the estimated amount of zakat on profession in province : the monthly average income of all workers as employees in province : total workers as employees in province : muzakki-muslim workers ratio for all workers as employees in province 3.2. model development the zakat potential is defined by zakat on agricultural products and zakat on profession. according to rarasati & dewanti (2018), agricultural zakat was able to reduce the depth of poverty which also help to reduce the poor people. besides, shirazi et al. (2009) found that the potential of zakat estimated from three different opinions of zakat (including the type of zakat similar to profession zakat) was sufficient to fulfill the resource shortfall of poor people under $1.25 a day and $ 2.0 a day of the poverty line. z2 alone (potential of zakat similar to zakat on profession) had been enough to provide the income shortfall of the poor using $1.25 a day of the poverty line. therefore, preliminary hypothesis in this research is both the potential of agricultural and profession zakat will reduce the poverty. following novignon et al. (2012), the proposed model is as follows: (4) notes: : the poverty gap index in province : the estimated amount of agricultural zakat in province : the estimated amount of zakat on profession in province : constant : regression coefficient of : regression coefficient of : error term pratama & yuni │reducing poverty through optimization of zakat on agriculture and profession international journal of islamic economics and finance (ijief), 3(2), si, 145-174│154 3.3. method the methods applied in this study are poverty gap index analysis, geospatial analysis, and multiple linear regression. the poverty gap index analysis is applied to measure the income shortfall of the poor as the poverty line determined by bps-statistics of indonesia. therefore, the poverty line will specifically depend on each province. afterward, the calculation of both zakat potential and the income shortfall give the result that will be mapped by using geospatial analysis to ease the interpretation. in this section, we also examine the impact of zakat potential on poverty descriptively. lastly, the advanced model will be estimated by the procedure of multiple linear regression. all the methods will be explained further in the following paragraphs. the poverty gap index is the gap within the income of the poor from the poverty line. furthermore, it is also the minimum cost to eliminate poverty so it will enable us to know how much money transferred to the poor until their income can be upward to the poverty line (haughton & khandker, 2009). the multiplication between the poverty line, the poverty gap index, and the sum of the population in the regency will estimate how much money is needed to send all the poor upward to the poverty line. it is following the formula of resource shortfall measured by shirazi et al. (2009). after obtaining the result of the income shortfall calculation, the estimated of zakat potential will be applied as the deduction to the shortfall. then, the excess of the income shortfall after subdued by zakat potential will be transformed into a new poverty rate for each province in indonesia. it obtained by proportioning the excess of the income shortfall with the total income shortfall then multiplying it with the poverty rate. geospatial analysis is defined as a technique to analyze data by referencing the two-dimensional minimum frame and relating it to the territory (smith et al. 2018). we use this approach to ease the interpretation and analysis calculation of the agricultural and the profession zakat. it also counts the income shortfall of poor people. the principal thing about geospatial analysis is the classification method. consequently, we use a popular method which frequently used in any spatial analysis named jenks's natural breaks. this method optimizes data set into multiple classes based on the gap which is generally applied in the data distribution. accordingly, the variance within classes will be minimum and between classes will be maximized. to achieve the condition, data in a class whose big deviation of the class average will be transferred to another class (jiang, 2012). the method used to examine the advanced model is multiple linear regression. this popular technique has some utilizations, those are; a) the pratama & yuni │reducing poverty through optimization of zakat on agriculture and profession international journal of islamic economics and finance (ijief), 3(2), si, 145-174│155 value of effect from every independent variable to dependent variables are simultaneous and even partial, b) the comparison effect between applied independent variables to dependent variables, and c) the prediction of the dependent variable value. to implement this analysis, we need to have a minimum of five observations of each independent variable and fulfill all the basic assumptions of the multiple linear regression model (asra et al. 2017; hair et al. 2010). the assumptions requirement must be fulfilled to produce the best linear unbiased estimators (blues). the estimation of parameters from that model will be valid and reliable. the assumptions are linear in parameters, no serial correlation, no perfect collinearity, zero conditional mean, homoscedasticity, and normality (wooldridge, 2009). iv. result and analysis 4.1. results 4.1.1. the potential of zakat in indonesia the calculation of zakat potential produces that there is 18.77 trillion rupiahs potential of zakat in indonesia. in particular, the total of agricultural zakat potential is about 2.57 trillion rupiahs, and about 16.2 trillion rupiahs rest is the potential of zakat on profession. the total fund of zakat potential is almost triple higher than the amount of zakat collected by baznas in 2017 which is about 6.2 trillion rupiahs (center of strategic studies –amil zakat national agency, 2019). the total amount of profession zakat interestingly is almost equivalent to the projection of zakat potential for civil servant in indonesia. it predicts that the zakat potential of civil servants enables them to reach 10 trillion (widjaja, 2018). there is only about 6 trillion difference with projected zakat. consider that the profession zakat in this paper limited only to cover the workers with regular incomes, the estimation is wellearned. hence, the zakat potential can be optimized with a proper rule from the government or even the right policy from authorized institutions. table 1 shows the amount of zakat potential by types and provinces. dki jakarta and jawa barat are provinces with the highest zakat potential. both of them are supported by high zakat on profession that reaches about 3.150 billion and 3.116 billion rupiahs. the contribution of zakat on agriculture in the provinces is quite small. riau and nusa tenggara timur are the provinces with the most zakat potential on agriculture. this is particularly remarkable because ntt is a province where muslims are not the majority. the high potential zakat on agriculture in ntt perhaps caused by self-employed workers in the agricultural sector is quite high with proportion around 58 pratama & yuni │reducing poverty through optimization of zakat on agriculture and profession international journal of islamic economics and finance (ijief), 3(2), si, 145-174│156 percent of the total workers. besides, the gross domestic regional product (grdp) from the agricultural sector also contributes approximately 27 percent of total grdp, the highest sector of all in regencies and municipalities in ntt. moreover, the proportion of muzakki and the muslim population in ntt reaches 74 percent which is the highest of all provinces. the data explains why zakat potential on agriculture in ntt is high. table 1. the result of the measurement of zakat potential in indonesia by provinces provinces zakat on agriculture (million rupiahs) zakat on profession (million rupiahs) total of zakat potential (million rupiahs) aceh 102,853.13 258,694.01 361,547.14 sumatera utara 151,653.93 671,618.19 823,272.12 sumatera barat 82,094.73 247,905.96 330,000.69 riau 289,375.73 647,663.28 937,039.02 jambi 120,626.17 190,146.37 310,772.54 sumatera selatan 126,427.67 289,970.28 416,397.95 bengkulu 18,319.02 45,990.76 64,309.78 lampung 73,107.86 158,019.74 231,127.60 kep. bangka belitung 60,746.17 188,104.07 248,850.24 kep. riau 5,519.18 619,570.49 625,089.66 dki jakarta 8,877.41 3,150,672.74 3,159,550.16 jawa barat 123,248.28 3,115,897.70 3,239,145.97 jawa tengah 84,801.46 609,502.79 694,304.25 di yogyakarta 11,698.47 193,685.54 205,384.02 jawa timur 160,043.93 875,715.83 1,035,759.76 banten 53,243.83 1,488,293.47 1,541,537.30 bali 33,386.40 403,944.20 437,330.60 nusa tenggara barat 1,291.47 4,919.98 6,211.45 nusa tenggara timur 235,503.57 658,581.13 894,084.70 kalimantan barat 63,475.25 144,121.15 207,596.40 kalimantan tengah 59,817.91 199,588.36 259,406.27 kalimantan selatan 69,808.26 273,436.59 343,244.86 kalimantan timur 117,053.19 644,089.68 761,142.86 kalimantan utara 36,169.39 118,580.05 154,749.44 sulawesi utara 46,396.49 148,194.63 194,591.12 sulawesi tengah 41,405.01 79,689.47 121,094.48 sulawesi selatan 114,334.91 250,179.53 364,514.44 sulawesi tenggara 24,045.55 61,661.27 85,706.82 gorontalo 9,454.72 30,380.26 39,834.99 sulawesi barat 13,999.44 19,482.59 33,482.03 maluku 20,539.08 49,997.23 70,536.32 maluku utara 29,703.75 64,347.35 94,051.10 papua barat 21,891.60 73,563.81 95,455.40 papua 157,804.49 221,606.40 379,410.89 indonesia 2,568,717.48 16,197,814.90 18,766,532.38 source: data processed pratama & yuni │reducing poverty through optimization of zakat on agriculture and profession international journal of islamic economics and finance (ijief), 3(2), si, 145-174│157 compared to the gdp in agriculture sector, the potential zakat on agriculture is only about 0.1 percent of gdp. although it is one-third of the total zakat collected by baznas in 2017, the value is low yet. it probably caused by the limitation of this research only focused on self-employed workers whereas the big potential profit of the agriculture sector is in the employer-assisted by permanent/paid workers. this study omitting it because of the average wages in the kind of employment status is not available. the detail of the potential agricultural zakat is explained in the figure below. figure 2. the zakat potential on agriculture by provinces in indonesia source: data processed figure 2 shows the map of agricultural zakat potential in indonesia. if we look thoroughly to five provinces that count on agriculture as a leading sector, these are bengkulu, sulawesi tengah, lampung, gorontalo, and sulawesi barat, we will discover that the zakat potential on agriculture is categorized in red color in all those five provinces. it means that they are low and very low. based on data from bps-statistics of indonesia, the agriculture sector of all those provinces contributes more than 30 percent of grdp. the values in 2016 consecutively are 30.66 percent, 31.26 percent, 31.86 percent, 37.09 percent, and 42.07 percent. it proved that the agriculture sector in those provinces is quite potential. this verdict is unexpected because the five provinces that have the most contribution to grdp experience low zakat potential. consequently, the zakat potential in these five provinces needs to be dug up further by conducting another research that is not only limited to the self-employed worker. several factors affect the low and very low agricultural zakat potential. two of them are the total of muzakki in the regency and the welfare of the farmers. from the data collected, sulawesi barat and gorontalo experienced pratama & yuni │reducing poverty through optimization of zakat on agriculture and profession international journal of islamic economics and finance (ijief), 3(2), si, 145-174│158 a low number of total muzzaki. if it is compared to their muslim population, the proportions are consecutively 6.82 percent and 6.75 percent, the second and the third-lowest of all provinces. the other provinces, lampung, bengkulu, and sulawesi tengah only have a 2-3 percent gap. the values are 8.56 percent, 8.90 percent, and 9.3 percent. not only that but also the number of poor also worked in the agriculture sector is quite high. bengkulu, sulawesi barat, and sulawesi tengah placed them in the 4th, 5th, and 6th rank of the muzakki that work in the agricultural sector. 40 percent in bengkulu, 38.33 in sulawesi barat, and 36.57 percent in sulawesi tengah of the poor work in the farming sector (sub-directorate of social vulnerability statistics, 2019a). these mean that the farmers in those provinces mostly remain less prosperous so that they who are feasible to be muzakki are only a few. figure 2 also reveals another unique verdict. papua that supposed to be low for zakat potential surprisingly has high of it, though 68.24 percent of the muzakki work in the agricultural sector. notwithstanding, the proportion of muzakki and muslims is about 16 percent or in the 10th grade compared to the other provinces. this circumstance is similar to the condition of ntt which gains the second-highest zakat potential on agriculture although 51.92 percent of the poor work in the agricultural sector. from these facts, a hypothesis developed that muslims in ntt and papua specifically who work in agriculture tend to have more assets than muslims in other provinces leading to a presumption that the majority of poor people who worked in agriculture may be non-muslims. albeit, those assumptions need to be studied thoroughly and carefully and cannot be concluded with less evidence. back to the analysis of zakat potential on profession, figure 2 describes the result of the measurement by the province in quite comprehensive design. dki jakarta and jawa barat become the highest potential of zakat. it is relevant because dki jakarta is the province with the highest provincial minimum wages (ump) in 2019 which reach to 3,940,973 rupiahs (debora, 2018). this amount is high enough even nearly equal with the nisab of zakat. moreover, the percentage of employees in jakarta compared to other employment statuses is 65 percent, the second-highest in indonesia. so, the zakat on profession undoubtedly is a real potential in jakarta. meanwhile, jawa barat even the ump is not as excellent as jakarta, the total number of laborers is the largest of all provinces, around 10.1 million people. even the second largest province is only 7.4 million. this number of laborers is potential if the zakat is collected from their incomes. pratama & yuni │reducing poverty through optimization of zakat on agriculture and profession international journal of islamic economics and finance (ijief), 3(2), si, 145-174│159 figure 3. the zakat potential on profession by provinces in indonesia source: data processed in general, jawa is the most potential island for profession zakat. whereas maluku and papua along with sulawesi are lack potential thus those provinces are mapped as red. if the potential agriculture zakat's map appears to be well-distributed, the different views appeared in the profession zakat mapping. western indonesia manages to have more potential zakat than eastern indonesia does. it perhaps caused by the sum of laborers. the 10 provinces that have the highest workers as employees are in western indonesia, meanwhile, the fifth-highest are in jawa. whilst in eastern indonesia, 9 of 10 provinces with a small number of muslims are populated. therefore, it is presumable the western overtakes the eastern from the aspect of zakat potential. although there is a concentration of laborers in jawa, not all provinces are classified as green or potential. yogyakarta is lacking the potential of profession zakat. yogyakarta's low ump that is only 1,570,922 rupiahs, the lowest of all provinces in indonesia, becomes the main reason why profession zakat is lacking potential. besides, sumatera selatan and sulawesi selatan require to be underlined. the total employees for both of them are numerous, continuously 2.8 million, and 1.4 million population. they are the sixth and seventh of all provinces. moreover, the ump in both provinces reaches 2.8 million rupiahs. the potential of profession zakat in these two provinces requires to be analyzed further. there are at least seven provinces in indonesia experienced a very lack potential of zakat both on agriculture and the profession. those are bengkulu, kalimantan utara, sulawesi barat, nusa tenggara barat, gorontalo, maluku, and maluku utara. among all the provinces, three of them, bengkulu, gorontalo, and nusa tenggara barat are the provinces with majority muslims. yet, the zakat collection remains low. the major reason is pratama & yuni │reducing poverty through optimization of zakat on agriculture and profession international journal of islamic economics and finance (ijief), 3(2), si, 145-174│160 the number of muzakki. in gorontalo, there is only 69,350 people or 6.85 percent of total muslims whose obligatory to pay zakat. this is the thirdlowest of all provinces after sulawesi barat and ntb. severely, there are only 21,052 individuals or only 0.48 percent of muslims in ntb who are identified as muzakki. these facts reveal why gorontalo and nusa tenggara barat are lacking the potential for this kind of zakat. the case for bengkulu is a bit different. there are about 148,704 muzakki in bengkulu. this number is not a little, even bali has 105.857 muzakki. the matter that occurred in bengkulu is more likely because of the economic and social conditions of the province. there are several reasons to explain this inter alia; the poor people mostly work in agriculture (4th highest in indonesia), the least number of muzakki (148,704 people, 11th lowest in indonesia), the small amount of ump (2,040,000 rupiahs, 7th cheapest in indonesia), and the low total of the employee both in number and proportion (7th lowest of employee proportion, 6th fewest number of the employee). it appears that bengkulu has no zakat potential both on profession and agriculture. further studies about the potential of zakat in bengkulu will be extremely appealing. by mapping the zakat potential on profession and agriculture as it is previously shown, we able to obtain the picture of the location where zakat on profession has potency and whereabouts zakat on agriculture is effective. meanwhile, zakat on agriculture is quite effective to be obtained in almost provinces in sumatera while zakat on profession is efficacious in jawa. the potency of zakat on agriculture can be more dug up in bengkulu, sulawesi tengah, lampung, gorontalo, and sulawesi barat. on the contrary, if we aspire to aim more zakat on profession, sumatera selatan and sulawesi selatan perchance to be great alternatives. this due to their high ump (the 7th and the 8th highest of all provinces) and their high capacity of employees (also the 7th and the 8th most of all provinces) although the potential of profession zakat has remained below. at least, all the information has given some fundamental to build good and proper planning and organizing on zakat management development. 4.1.2. how zakat contributes to reduce poverty the welfare of indonesian society has a slowdown in the last five years. it is proven by the reduction of the poverty rate that is only 1.55 percent from september 2014 to march 2019. it indicated that in six months, poverty reduction is approximately only 0.172. surprisingly, the alleviation in the urban area appeared to be faster than in the rural ones. from september 2014 to march 2019, the percentage of poor people in urban diminished around 1.47 percent whereas, in rural, the poverty rate decreased only pratama & yuni │reducing poverty through optimization of zakat on agriculture and profession international journal of islamic economics and finance (ijief), 3(2), si, 145-174│161 about 0.91 percent throughout that time. this finding arises with a new analysis of the village funding use. since the launching in 2015, all the data encourage to a thesis that the village funding did not give any significant impact to the poverty in an urban area because the decrease rate of poverty in a populated area is faster than in village ones though there is nonadditional funding in a rural area in the last five years. figure 4. the poverty rate in 2019 by provinces source: bps-statistics of indonesia (2020), processed figure 4 describes the poverty rate among all provinces in indonesia. it appears that the poverty rate is not over divergent because only a few provinces in indonesia underwent a high poverty rate. it indicates that the equality of development that becomes the priority of development lately is starting to reveal some results. kalimantan island dominates the provinces with a very low poverty rate by presenting nearly all the provinces in dark green color except kalimantan barat. the poverty level in kalimantan is successfully surpassing provinces in jawa that are represented as the center of development for all this time. on the opposite, eastern indonesia still become the center of poverty although it is not as bad as in the past whereas all provinces are vulnerable to poverty. ntt and papua are still provinces with a very high poverty rate. one point to note from the class distribution of the map is that classification in this poverty rate not applying jenks natural breaks as applied previously but the fixed figure ones. at first, we make a scale from zero to the highest poverty rate figure and then divide the highest figure with four to form an interval. hence, we have got the range of the first class that is 0 – 6.63, the second class is 6.64 – 13.27, the third class is 13.28 – 19.90, and the last class is 19.91 – 26.55. the following new poverty rate of all provinces will also be pratama & yuni │reducing poverty through optimization of zakat on agriculture and profession international journal of islamic economics and finance (ijief), 3(2), si, 145-174│162 classified using the interval. it is determined to be implemented to ease the interpretation and the analysis of how much the zakat potential role in indonesia poverty reduction. the jenks natural breaks method's using will create a new benchmark of each class so that it will be hard to identify provinces that underwent a great reduction of poverty rate effected by zakat potential. zakat has contributed to reducing poverty by fulfilling the amount of money that transferred to the poor so that they can be upward to the poverty line. the requiring transfer can be acquired by analyzing the poverty gap index. in indonesia, the poverty gap index in march 2019 is 1.55 so the total transfer needed is 177.19 trillion rupiahs. the total zakat potential produced in this research is 14.41 trillion. if these funds are well-distributed on target later those will be able to cover 2 million people. consequently, the poverty rate after the zakat distribution becomes 8.47 percent, only 0.75 percent down. it is only from the zakat of agriculture and profession. if we referred to specific research conducted by firdaus et al. (2012) who counted the zakat potential from the household, manufacturing, and savings, the total of zakat reach 217 trillion. if that funding can be obtained and distributed in a proper target, later the poverty in indonesia will disappear. figure 5. the poverty rate after the distribution of zakat potential by provinces source: bps-statistics of indonesia (2020), processed figure 5 is portraying the poverty rate obtained after the distribution of the amount of potential zakat to the poor following the perfect distribution presumption. at a glance, the map's look tends to be green. in western indonesia, at least three provinces are successful to upgrade to a level higher among another riau, jambi, and jawa barat. their amount of zakat potential can be strong factors affected because jawa barat is potential for zakat on pratama & yuni │reducing poverty through optimization of zakat on agriculture and profession international journal of islamic economics and finance (ijief), 3(2), si, 145-174│163 profession and riau is potential for zakat on agriculture. another thing noticed is the province in crimson color is the one that left. nusa tenggara timur has been able to increase one level into a province having high poverty after the zakat distribution. it means that the zakat instrument can be quite effective to eliminate poverty in ntt. however, in eastern indonesia, maluku utara and sulawesi utara are provinces that can increase one level up too. previously, maluku utara and sulawesi utara are categorized as provinces with a low poverty rate. after the zakat distribution, they now classified as very low poverty rates. hence, zakat can be an effective instrument to fight poverty even in the province with non-muslim as the majority. one thing underlined from the method of zakat in reducing poverty is the distribution of zakat assumed to be perfect. it means that all the poor are supposed to accept the funding evenly. it is extremely difficult to manifest. nonetheless, there are several reasons which explain why zakat is resembling the assumption of perfect distribution as it is required by the poverty gap index analysis. firstly, zakat has specific beneficiaries where the first two are the poor and the needy so that zakat funding is not supposed to be used for other programs except for the poor only. secondly, the method applied to determine the recipient of zakat is by using the information from the nearest neighborhood and also the data published officially by the government. the research conducted by ariyani, (2016) provided evidence that well-managed zakat produces an effective approach to reducing poverty. one of the good managements exemplified in the research is combining bottom-up and topdown methods. lastly, zakat is a part of the prayer for muslims so that everyone whose obligatory to pay demanding their funds for being welldistributed to the exact beneficiary. it will indirectly create a public-control of the funding so that the funds will be invulnerable to misuse. therefore, optimizing the potential of zakat and developing the zakat institution will be very promising to actualize the zero-poverty goal. this impact may be even greater than the utilization of village funding in the case of poverty alleviation. 4.1.3. the regression result we were working on the linear regression model on the impact of the zakat potential of agriculture and the profession on the poverty gap. it did not run well actually but we managed to find the solution. firstly, our model was not a normal distribution, so we need to solve this by doing the logarithmic natural transformation. the disturbance of the assumption has not ended up yet. the transformation model had autocorrelation so the regression's result will be spurious (wooldridge, 2009). so, we run the generalized least square regression and here is the result. pratama & yuni │reducing poverty through optimization of zakat on agriculture and profession international journal of islamic economics and finance (ijief), 3(2), si, 145-174│164 ̂ this equation finally has fulfilled all the assumptions of multiple linear regression. the multicollinearity did not occur after considering the value of vif (variance inflation factor). both independent variables have vif's value of 2.601. the value is smaller than 5 so it concluded that there is no multicollinearity. hence, the white test was conducted to detect heteroscedasticity. the value of nr 2 is 2.31 which is greater than the probability of chi-square. thus, there is not enough evidence to reject the constant variance. normality is tested using the kolmogorov smirnov test. the p-value resulted from the test is 0.2, greater than 0.05 of a significant level. it means that the null hypothesis cannot be rejected so we are sure that the distribution of data is normal. ultimately, the detection of autocorrelation is generated by calculating the durbin watson statistic (dw statistic)'s value. the value is 1.856 that located between du (1.58) and 4-du (2.42). if the dw statistic is within the interval, then there is no autocorrelation. therefore, the estimation in the model is statistically valid and reliable so it can be well interpreted in explaining the impact of zakat on poverty. the adjusted r 2 is the value that explains the effect of the independent variables (zakat on agriculture and profession) toward the dependent variable (poverty). the value is 0.1145 or 11.45 percent meaning that the poverty gap is affected by all the independent variables as much as 11.45 percent, and the rest are impacted by other variables out of the model. there are many factors that cause the poverty gap such as inflation, job security, economic growth, and even other kinds of zakat. it seems reasonable. notwithstanding, the small amount of the impact can be caused by many things such as so many zakat potentials that have not covered yet in this research. the equation shows that zakat potential on profession has a significant impact on the poverty gap index. it means that the collection of zakat potential on the profession enables to reduce the average income gap between the poor and also the poverty line. every increment in zakat potential on the profession as much as 10 percent will affect the gap between the average income of the poor and the poverty line reduced by 2.4 percent. similarly, the potential zakat on agriculture which is also significant at a 5 percent level has the positive direction of the relationship. it signifies that for each increment of 10 percent potential zakat on agriculture will affect the increase of the income gap between the poor and the poverty line at 2.6 percent. this result contradicts the preliminary theory. pratama & yuni │reducing poverty through optimization of zakat on agriculture and profession international journal of islamic economics and finance (ijief), 3(2), si, 145-174│165 some reasons can explain why agricultural zakat has the same direction as the poverty gap. the main reason perhaps caused by the determination of agricultural zakat which is approached by average wages. agricultural zakat does not give any impact on people's welfare. instead, poor people who work in the agricultural sector tends to continue. so, when the incomes of the farmers are allocated for zakat, then the average incomes of total workers in the agricultural sector is reduced. the increase of the poor who works in the agriculture sector is supported by the data from bps-statistics indonesia that the poor farmers in 2018 are about 49 percent then rise to 49.41 percent in 2019 (sub-directorate of social vulnerability statistics, 2018, 2019b). there is no meaningful impact of agricultural zakat on poverty, the average incomes that are reduced, and the poor farmers that increase conceive the evidence that agricultural zakat causes the poverty gap widened. the research from abdulhakim & alamsyah (2011) and khumairoh (2018) concluded that agricultural zakat did not significantly benefit the economics and society. abdulhakim & alamsyah (2011) use the amount of money as an approach and found that people tend to pay zakat al-fitr or other kinds of zakat except agriculture's whereas khumairoh (2018) only provide rice as zakat payment. another reason is the approach used to measure potential zakat on agriculture which is turned to money. the amount of zakat on agriculture, based on the theory, is not paid with money but agricultural products. if farmers are harvesting their dates, they have to pay zakat by the time their products reach the nisab. so, the form of zakat is 5 percent of harvested dates, not the money gained from the result. even in qur’an surah albaqarah verse 2, allah commands to pay zakat with the best quality of products (sabiq, 2013). so, when the potential of agriculture zakat is approached by money, the effect will be on the income of farmers so it will increase the income gap of the poor and the poverty as explained before. although some scholars perhaps pay zakat with money, it is proven that the enthusiasm of people is very low as it is studied by abdulhakim & alamsyah (2011). however, perceiving the exact approach to measure agriculture zakat potential mainly at the national level is quite complex. it needs a huge amount of funds and resources. it is the main reason why this research is using this approach. at least, the general views about the location where agricultural zakat has potency can be defined. nonetheless, future research is not recommended by using this approach because it is proven that it is not effective. pratama & yuni │reducing poverty through optimization of zakat on agriculture and profession international journal of islamic economics and finance (ijief), 3(2), si, 145-174│166 4.2. analysis this study has attested that zakat on profession has a great impact on poverty. its potency is capable to reduce the poverty rate in some provinces such as kepulauan riau and bali below 2 percent and even below 0.5 percent in jakarta. the regression result also shows that it has a significant impact on the poverty gap reduction that it can reduce 2.4 percent of the poverty gap if the zakat potential on the profession increases by 10 percent. zakat on profession is also a kind of zakat that is almost capable to be controlled by the government because most people whose obligatory to pay zakat are the civil servants. accordingly, we only need to complete the management of this kind of zakat from upstream to downstream so that the impact of zakat will be very effective to reduce poverty. the best example of zakat management is looking at the way people had their success in managing zakat in the past. in the era of caliph umar bin khattab and umar bin abdul aziz, zakat is very effective so that it can eradicate poverty. many studies said that in the era, there was zero absolute poverty (arif, 2017; nazri et al. 2012). at least two main strategies behind the success of umar bin abdul aziz; 1) the act of justice from the caliph creates trust between the people and the caliph so it was not hard to collect zakat from the wealth, and 2) local distribution of funds, so the collected zakat must first be distributed to the area of the poor where it was taken. the zakat would go to the nation only if the poor of the region had been satisfied and then it will be directed to poor people in another region which is not fulfilled (tahir, 2015). meanwhile, in the time of caliph umar bin khattab, his key to success in zakat management is the policy to decentralize zakat distribution (s. aisyah & ismail, 2019). the one to be bold from those two eras is that zakat was distributed by local distribution system so the zakat beneficiaries will be prioritized to get the aid from the location where zakat is collected. if there is a surplus, it will be allocated to the nearest region. according to the experience in the past, the solution to zakat management is the local distribution which is very hard to implement at this time. it is shown by the data about aid recipients from the government which always has a big chance to be deceived. despite, the implementation of this local distribution might be able to do by utilizing the function of the mosque. the mosque is more entrusted than any institution. it can be shown that in eid al-fitr when people have to pay zakat, most muslims come to the mosque to pay their zakat rather than to the zakat institution. moreover, the research from hasim (2017) about the management of the mosque in yogyakarta concluded that people can obtain the economic benefit from the mosque. even in yogyakarta, the management of zakat done by the jogokaryan mosque experienced the best achievement with percentages of about 85.71 pratama & yuni │reducing poverty through optimization of zakat on agriculture and profession international journal of islamic economics and finance (ijief), 3(2), si, 145-174│167 percent. besides, zakat management in the mosque can identify the real poor in the region. if they are equipped by the preliminary data from the government, the combination of bottom-up and top-down data as suggested by ariyani (2016) can be implemented. the mosque officer is ordinarily more honest because they pray continuously and serve the people well just expecting god’s blessing. they are also and more trusted by people. thus, the possibility to mistreat the zakat funds is smaller. utilizing the mosque does not mean that baznas has nothing to do with that. conversely, baznas has a crucial role in the success of this concept. baznas must assess the regency which mosque that has been ready. the collection of zakat on profession should be through baznas because it is more possible if it is related to the civil servant. but, baznas also must announce that their funds will be distributed through the mosque around them. baznas will determine the amount of money needed in each region. this new method may be able to improve the collection of zakat funding and the impact on the welfare of people. in spite, the cooperation from all people including religious leaders in every region is fully needed. considering the findings in this research, this new management method may be eligible to be implemented in jakarta and jawa barat first as the provinces with the most potential of zakat. it can then be evaluated. if it is success, it can be prevailed gradually in other provinces by considering the potential of zakat (as it is provided in this research) and the readiness of the local government. v. conclusion and recommendation 5.1. conclusion the total potential zakat in indonesia (the sum of agricultural and profession zakat potential) reach 16.1 trillion rupiahs with dki jakarta and jawa barat as the most provinces with the highest amount of zakat potential. both the provinces also have the most potential of zakat on profession whereas the most potential of agricultural zakat is in ntt and riau. provinces such as bengkulu, sulawesi tengah, lampung, gorontalo, and sulawesi barat have great potential for the agriculture sector according to the structure of gdp. however, the potential of agricultural zakat in those provinces is still low. similarly, sumatera selatan and sulawesi selatan also are the provinces with high ump and the big number of employees. but, the potential of profession zakat in both of them is quite small. zakat can contribute to reducing poverty by minimizing the poverty gap between the average income of the poor with the poverty line. in indonesia, pratama & yuni │reducing poverty through optimization of zakat on agriculture and profession international journal of islamic economics and finance (ijief), 3(2), si, 145-174│168 in the assumption of perfect distribution, this zakat potential can reduce the poverty rate as much as 0.75 percent. even jakarta has the new poverty rate after being simulated by distributing zakat to 0.22 percent (almost zero). riau, jambi, and jawa barat are also successful to upgrade their poverty rate to a very low poverty rate. surprisingly, ntt can leave the very high poverty rate because of this zakat potential. in the view of statistic, the kind of zakat which has a significant impact in minimizing the gap between the poor and the poverty line is zakat on profession. every increase of the potential zakat on profession about 10 percent will affect the reduction of the poverty gap by about 2.4 percent. 5.2. recommendation all those effects of zakat on poverty are under the perfect distribution assumption. zakat is the instrument that is closer to the assumption. so, it is all depended on zakat management. in the era of caliph umar bin khattab and umar bin abdul aziz, the management of zakat count on local distribution. this is their key to success. therefore, this study suggests imitating the management process in the times by utilizing the mosque as a spearhead in zakat distribution and baznas as the key manager to manage the mosque and the zakat funding. the implementation of top-down and bottom-up data about the zakat recipient can be implemented by this system so that zakat will be distributed on target. jogokaryan mosque in yogyakarta can be a good role model in implementing this because it has proved as the mosque with good management of zakat in indonesia. the regulator must try to implement this starting with jakarta and jawa barat first as they are the provinces with the most potential zakat. if they are success, then it can be more developed gradually. the map of potential zakat provided in this research can be used as a reference to choose the provinces as the next target to be expanded. as the regulator can start with zakat on profession because it is very possible as the government has the power, the zakat institutions can strengthen the potency of agricultural zakat and implement the local distributions zakat system. the provinces with can try to start maximizing the potential of agricultural zakat is ntt and riau as they are the most potential zakat on agricultural product. the one to note is the collection of agricultural zakat must be based on agricultural products, not the money or income because it is not effective. it will be great if the zakat institution can apply this system to one village first and then expand it if it is success. pratama & yuni │reducing poverty through optimization of zakat on agriculture and profession international journal of islamic economics and finance (ijief), 3(2), si, 145-174│169 further studies are not recommended by using the approach of this research specifically in approaching the amount of agricultural zakat. in this research, it is proven that the bias in this method makes the zakat potential on agriculture widen the poverty gap from the poverty line. it is better if the future studies specifically on agricultural zakat can cover the real amount of zakat in the form of agricultural product as it is required by the sharia, not by the approach of money or wages. even on a smaller scale, the result of the study will be very useful to detect the real potential of agricultural zakat in this agraris country. not only that, but this paper also encourages to conduct more researches about specific kinds of zakat whether it is regarding the collection, management or even distribution and also, it will be great if more researches similar to this are conducted in a regencies/municipalities level in provinces with great potential of zakat. the author suggests developing more research about agricultural zakat in bengkulu, sulawesi tengah, lampung, gorontalo, and sulawesi barat and profession zakat in sumatera selatan and sulawesi selatan. pratama & yuni │reducing poverty through optimization of zakat on agriculture and profession international journal of islamic economics and finance (ijief), 3(2), si, 145-174│170 references abdulhakim, m. t., & alamsyah, d. s. 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(2009). introductory econometrics : a modern approach. toronto: nelson education, ltd. pratama & yuni │reducing poverty through optimization of zakat on agriculture and profession international journal of islamic economics and finance (ijief), 3(2), si, 145-174│174 this page is intentionally left blank international journal of islamic economics and finance (ijief) vol. 5(2), july 2022, pages 225-258 comparison of the environmental, social, and governance stock index with sharia stock index performance before and during the covid-19 pandemic in southeast asia een nuraeni1*, faaza fakhrunnas2 *) corresponding email: eenxnuraeni@gmail.com article history received: december 12th, 2021 revised: june 19th, 2022 june 21st, 2022 june 30th, 2022 accepted: july 2nd, 2022 abstract covid-19 is a pandemic event with a global impact from a health and economic point of view. the number of confirmed cases of covid-19 that continues to grow has caused several countries to implement lockdown policies. however, it has implications for an increasingly depressed stock market. thus, it can affect the performance of stock indexes in various countries. for this reason, this research aims to examine the effects of the covid-19 pandemic on the islamic stock index and the environmental, social, and governance stock index in southeast asia and then compare the two indexes when responding to the covid-19 pandemic. the models used in this research were event study and vector error correction model (vecm). this study utilized time-series data with a five-month daily period from december 2019 to april 2020. the event study model results showed that the number of positive cases of covid-19 significantly affected the stock index performance, except for the esg stock indexes in singapore. moreover, the vecm results revealed that the number of positive cases of covid-19 had a significant effect on the stock index performance in the long and short term, except for the sharia stock index, which did not have a significant impact on the short term in singapore and did not have a significant impact on the long term in malaysia, namely the hijrah index. keywords: covid-19, stock market, index, event study, vecm model. jel classification: c32, e44, g11, g23. type of paper: research paper @ ijief 2022 published by universitas muhammadiyah yogyakarta, indonesia doi: https:/doi.org/10.18196/ijief.v5i2.13392 web: https://journal.umy.ac.id/index.php/ijief/article/view/13392 citation: nuraeni, e., & fakhrunnas, f. (2022). comparison of the environmental, social, and governance stock index with sharia stock index performance before and during the covid-19 pandemic in southeast asia. international journal of islamic economics and finance (ijief), 5(2), 225-258. doi: https://doi.org/10.18196/ijief.v5i2.13392. 1 universitas islam indonesia, indonesia 2 universitas islam indonesia, indonesia mailto:eenxnuraeni@gmail.com https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v5i2.13392&domain=pdf nuraeni & fakhrunnas│ comparison of the environmental, social, and governance stock index with sharia stock index performance before and during the covid-19 pandemic in southeast asia international journal of islamic economics and finance (ijief), 5(2), 225-258│226 i. introduction 1.1. background covid-19 originated in wuhan, china, and appeared at the end of december 2019. the covid-19 outbreak spreads quickly, affecting 213 countries, including indonesia (ascarya, 2022). in january 2020, confirmed cases of covid-19 in multiple parts of the world reached up to 10,000 cases, and 200 people died. meanwhile, in march 2020, the number of cases jumped even higher to reach 750,000 cases, and 36,000 people died (bank indonesia, 2020). not only that, but the confirmed cases of covid-19 in southeast asia are also increasing daily. based on figure 1, singapore had the highest number of positive cases compared to other countries in the southeast asia region as of april 25, 2020. it is also known that the covid-19 cases in singapore were recorded at 12,693 cases, and the total death was 12 cases. these cases have caused several countries to implement lockdown policies and establish strict health protocols to slow the virus spread rate. however, a series of lockdown policies have hampered economic operations and created a sentiment of fear from the public. as a result, the stock market has become more volatile (sadiq, hsu, zhang, and chien, 2021), as shown by the declining performance of stock indexes in various countries. figure 1. total positive cases and deaths from covid-19 in southeast asia of april 25, 2020. source: our world in data (2020) 0 2.000 4.000 6.000 8.000 10.000 12.000 14.000 singapore indonesia philippines malaysia thailand vietnamese brunei cambodia 12.693 8.607 7.294 5.742 2.907 270 138 122 12 720 494 98 51 0 1 0 covid-19 cases c o u n tr ie s in s o u th e a st a si a covid-19 cases and deaths deaths positive cases nuraeni & fakhrunnas│ comparison of the environmental, social, and governance stock index with sharia stock index performance before and during the covid-19 pandemic in southeast asia international journal of islamic economics and finance (ijief), 5(2), 225-258│227 figure 2. stock index movements in southeast asia from december 21, 2019, to april 30, 2020 source : national institute of health research and development (2021) figure 2 shows the stock index movement in southeast asia, especially the sharia stock index and the esg index in indonesia, malaysia, and singapore. in the january period, several indexes experienced a decline, such as the singapore sharia stock index, namely sgxasiashar, which reached the level of sgd7,952.70 on january 23, 2020 (european centre for disease prevention and control [ecdc], 2020). according to abdullah and kim (2020), this period was the announcement of the first covid-19 case in singapore on january 23, 2020. thus, it caused a decline in the sharia stock index in singapore. in the march period, almost all indexes experienced a decline. according to khatatbeh, hani, and abu-alfoul (2020), during this period, the world health organization (who) declared covid-19 a pandemic and the announcement of the first case of covid-19 in indonesia (national institute of health research and development, 2021). still shown in figure 2, according to bursamalaysia (2021), the sharpest decline in the index was found in the malaysian stock index, namely fbm mids cap shariah, until it reached the level of myr7,732.560 on march 19, 2020. then, the esg index in indonesia also experienced a sharp decline, where the sri-kehati index fell to idr252.83 on march 19, 2020 (investing, 2020). therefore, this study wants to dig deeper into how the stock market performance reacted due to the covid-19 pandemic, considering that the capital market has a crucial role in the country’s economy. 100 1000 10000 02/12/2019 02/01/2020 02/02/2020 02/03/2020 02/04/2020 p ri c e period stock index movements in southeast asia sri kehati ft4gbm sgesglead jii30 ftsebmhijrs sgxasiashar sgesgtrans jii70 fbmidscaps ftsebmemashar issi nuraeni & fakhrunnas│ comparison of the environmental, social, and governance stock index with sharia stock index performance before and during the covid-19 pandemic in southeast asia international journal of islamic economics and finance (ijief), 5(2), 225-258│228 empirically, according to previous research by liu, manzoor, wang, zhang, and manzoor (2020), all countries and regions affected by the covid-19 pandemic experienced significant and negative stock market returns. then, the confirmed cases of covid-19 had a significant and detrimental impact on the performance of major asian stocks on abnormal returns. in addition, according to khatatbeh et al. (2020), research results showed negative and significant abnormal returns and cumulative abnormal returns when the first cases of covid-19 appeared in each country, especially after the who’s announcement. the results of other studies by he, sun, zhang and li (2020) revealed that the covid-19 pandemic negatively affected stock prices on the shanghai stock exchange, while the covid-19 pandemic positively affected stock prices on the shenzhen stock exchange. meanwhile, according to ashraf (2020), the stock market responded negatively to the increase in confirmed covid-19 cases. it means that stock market returns decreased as the number of confirmed cases increased. then, there was also a negative relationship between growth in the number of deaths due to covid-19 and stock returns. lastly, according to research conducted by al-awadhi, alsaifi, al-awadhi, and alhammadi (2020), the covid-19 pandemic had a negative relationship with stock market returns. in this case, stock returns were significantly and negatively related to an increase in the number of confirmed positive cases of covid-19. it was also negatively associated with the increase in the number of deaths due to covid-19. these results also uncovered a negative effect on all companies included in the hang seng index and the shanghai stock exchange. thus, the novelty of this study is not only focused on the effect of the covid19 pandemic on the stock index through event studies, such as that conducted by khatatbeh et al. (2020); this study also wants to add a new point, i.e., comparing the environmental, social, and governance stock index performance with sharia stock index and determine whether the impact of the covid-19 pandemic has a long-term or short-term relationship. then, the contribution of this research is to improve existing studies, such as those that have been carried out by liu et al. (2020), al-awadhi et al. (2020), ashraf (2020), khatatbeh et al. (2020), who examined the impact of covid-19 on stock markets across countries, and he et al. (2020) in china. hence, it is hoped that this point of view can provide a new perspective on comparing the performance of the two stock indexes during the covid-19 pandemic. therefore, it is important to conduct research entitled “comparison of the environmental, social, and governance stock index with sharia stock index performance before and during the covid-19 pandemic in southeast asia.” nuraeni & fakhrunnas│ comparison of the environmental, social, and governance stock index with sharia stock index performance before and during the covid-19 pandemic in southeast asia international journal of islamic economics and finance (ijief), 5(2), 225-258│229 ii. literature review 2.1. background theory a research-based event study by fama in 1970 can represent the market reaction to specific events. theoretically, fama (1970) stated that the market could be efficient when the current stock price describes all available information. the capital market is said to be efficient if the market can respond quickly to obtain a new equilibrium price that thoroughly explains all available information. the faster the news is delivered, which can be seen in the share price, it can be ascertained that the more efficient the capital market. fama (1970) then categorized the market hypothesis into three forms: 2.1.1 weak form in this market category, stock prices in the capital market represent all information through historical prices. stock prices and past information influence current stock prices to help obtain current stock prices. various stock price trends can be obtained through analysis of previous information. 2.1.2 semi-strong form according to fama (1991), the market can be categorized as efficient in the semi-strong form if the existing stock prices reflect all past information and significant public information. the market can be said to be efficient when stock prices reflect all published information. thus, when the information becomes public, all investors will respond quickly, and the price will increase to reflect all the information in the market. 2.1.3 strong form the strong form of the efficient market indicates that the existing price reflects all public or private information. therefore, the strong form of an efficient market describes all past information, information on the market, and personal information that only certain parties can find, such as the company's management or the board of directors. through this understanding, it can be shown that the strong-efficient market form is the most restrictive form of the market. thus, it is by accessing publicly available information and information that only certain parties discover. 2.2. previous studies qoyum, sakti, thaker, and alhashfi (2021) investigated the influence of islamic labels on environmental, social, and governance (esg) performance. their study found that islamic companies performed better than non-islamic nuraeni & fakhrunnas│ comparison of the environmental, social, and governance stock index with sharia stock index performance before and during the covid-19 pandemic in southeast asia international journal of islamic economics and finance (ijief), 5(2), 225-258│230 companies in environmental and social issues. therefore, islamic companies have taken a good step in integrating islamic values with esg factors. in addition, al-awadhi et al. (2020) showed that the covid-19 pandemic had a negative relationship with stock market returns. the daily growth of covid19 cases with death cases had a negative relationship with significant stock returns. meanwhile, lee, jais, and chan (2020) revealed that all sectoral indexes and klci, except the plantation sector, experienced a negative relationship with covid-19 cases in malaysia. it indicates that almost all sector performances in the malaysian stock market were significantly affected by the covid-19 outbreak. furthermore, alam, alam, and chavali (2020) examined the effect of the lockdown period caused by covid-19 on the indian stock market. their study sought to determine significantly positive abnormal returns in the lockdown period around the date of the event and the speed at which information was absorbed into stock prices. the results of this study uncovered that abnormal returns were positive around the current lockdown period. the research also proves that the lockdown positively impacted the indian stock market’s performance. moreover, ashraf's (2020) results disclosed that the stock market responded negatively to the growth in confirmed cases of covid-19. when the confirmed cases increased, the stock market returns decreased. meanwhile, the response to the number of deaths due to covid-19 was not very strong. thus, this study showed that the stock market quickly responded to the covid-19 pandemic, depending on the outbreak’s severity. meanwhile, liu et al.'s (2020) study indicated that the covid-19 outbreak significantly and negatively affected stock market returns in all affected countries and regions. then, the stock markets of asian countries responded more quickly to the covid-19 pandemic. not only that but confirmed positive cases for covid-19 had a significant and detrimental effect on the stock index's performance, especially in asia, which experienced a more significant decline in abnormal returns. not only that, khatatbeh et al.'s (2020) study aimed to explain the direct reaction of stock indexes of countries affected by covid-19. using an event study, their research used the abnormal return variable as the measurement variable. the results showed that the global stock market had correctly anticipated the impact of the covid-19 pandemic, indicated by negative and nuraeni & fakhrunnas│ comparison of the environmental, social, and governance stock index with sharia stock index performance before and during the covid-19 pandemic in southeast asia international journal of islamic economics and finance (ijief), 5(2), 225-258│231 significant abnormal returns and cumulative abnormal returns at the time the first case of covid-19 appeared and after the who announcement. on the other hand, he et al.'s (2020) study investigated the effect of the covid-19 pandemic on the stock market. the model used was an event study, so the study used abnormal return variables as the measurement variable. the study results revealed that the covid-19 pandemic negatively impacted stock prices on the shanghai stock exchange, while covid-19 positively impacted the shenzhen stock exchange. moreover, he, liu, wang, and yu's (2020) study aimed to examine the direct effects of covid-19 on stock markets in eight affected countries. the countries in question were china, italy, south korea, france, spain, germany, japan, and the united states. the results of this study stated that overall, covid-19 had a negative impact on european and american stock markets. however, in this case, covid-19 had a negative impact but only in the short term on the stock markets in the eight affected countries. iii. methodology 3.1. data table 1. sharia stock index and esg stock index in southeast asia source: bursamalaysia, (2021); investing, (2021); sgx, (2021) this research used time-series data for the daily period from december 2019 to april 2020 to examine the impact of covid-19 on both esg and sharia stock indexes in the three selected southeast asia countries: indonesia, malaysia, and singapore. this study involved three countries only because, during the research period, these three countries had the highest positive cases of covid-19 in southeast asia. this measure is important because the number of covid-19 cases was a proxy for the covid-19 pandemic variable in this study. quoting from our world in data (2020), the third country with the most cases during the research period was the philippines, with 7,294 cases. however, the philippines did not yet have an esg index during the study indonesia malaysia singapore sharia stock index • jii 30 • jii 70 • issi • ftse bursa malaysia emas shariah (emas) • ftse bursa malaysia hijrah shariah (hijrah) • fbm mids cap shariah (midscap) • ftse sgx asia shariah 100 index (sgxshar) esg index • srikehati • ftse4good bursa malaysia index (f4gbm) • iedge sg esg leaders index (leaders) • iedge sg esg transparency index (trans) nuraeni & fakhrunnas│ comparison of the environmental, social, and governance stock index with sharia stock index performance before and during the covid-19 pandemic in southeast asia international journal of islamic economics and finance (ijief), 5(2), 225-258│232 period. thus, the position was replaced by a country in the next order, malaysia, with 5,742 cases. the stock indexes used in this study are explained in table 1. 3.2. model development table 2. description of variables variable measure source dependent variable cumulative abnormal return (car) percent investing.com, sgx.com, bursamalaysia.com independent variable the number of the covid-19 cases (covid) person ecdc.europa.eu exchange rate (kurs) dollar/domestic currency investing.com interest rate (int) percent bps.go.id, investing.com, dbs.com dow jones industrial average (djia) price (us$) investing.com as explained in table 2, the variable used in this study consisted of cumulative abnormal return (car) to measure the stock index performance as the dependent variable. then, the primary independent variable was only the number of positive cases of covid-19 (covid) as a proxy for the covid-19 pandemic variable. meanwhile, the exchange rate (kurs), interest rate (int), and the dow jones industrial average (djia) variables were actually independent variables. however, in the model, they were only positioned as complementary variables. in addition, following the efficient capital market theory proposed by fama (1970) and referring to the research conducted by qoyum et al. (2021), this study proposed the following hypotheses: hypothesis 1 = covid-19 pandemic has a significant relationship to the performance of islamic stock indexes in southeast asia. hypothesis 2 = covid-19 pandemic has a significant relationship to environmental, social, and governance stock index performance in southeast asia. hypothesis 3 = the sharia stock index performance is better than southeast asia's environmental, social, and governance stock index performance during the covid-19 pandemic. 3.3. method this study applied the event study methodology to see the effect of the covid-19 pandemic on the performance of stock indexes in the three nuraeni & fakhrunnas│ comparison of the environmental, social, and governance stock index with sharia stock index performance before and during the covid-19 pandemic in southeast asia international journal of islamic economics and finance (ijief), 5(2), 225-258│233 countries before and during the event. then, the vector error correction model (vecm) methodology was employed to measure whether the covid19 pandemic had a short-term and long-term impact on the performance of stock indexes. according to he et al. (2020) on the calculation of the event study method, the event window in this research was 30 days before the day of the event (t-30), on the day of the event (t0), and 30 days after the day of the event (t+30). then, according to khatatbeh et al. (2020), the analysis began by determining the event date (t0) at the time of the announcement of the first confirmed positive case of covid-19 in each country. in this study, the day of the event (t0) occurred on march 2, 2020, in indonesia, january 25, 2020, in malaysia, and january 23, 2020, in singapore. then, the actual returns were identified before calculating the abnormal returns. according to hartono (2017), the actual return calculation can be done using the following formula: 𝑅𝑖,𝑡 = 𝑃𝑖𝑡 − 𝑃𝑖𝑡−1 𝑃𝑖𝑡−1 (1) where pit is the stock price i on period t, and pit-1 is the stock price of the previous period. according to khatatbeh et al. (2020), the abnormal return calculation can use the formula as follows: 𝐴𝑅𝑖𝑡 = 𝑅𝑖𝑡 − 𝐸(𝑅𝑖𝑡 ) (2) where arit is the abnormal return of stock i on period t; rit is the actual return of stock i on period t; e(rit) is the expected return for stock i on period t. then, the cumulative abnormal return can be measured by the following formula: 𝐶𝐴𝑅𝑖(𝑡1,𝑡2) = ∑ 𝐴𝑅𝑖𝑡 𝑡=𝑡1 𝑡2 (3) cari(t1, t2) is cumulative abnormal return in stock i on period t, and arit is abnormal stock return i on period t. in addition, the vector error correction model was utilized to find out the effect of covid-19 on the performance of stock indexes in the long term and short term. according to nageri, nageri, and amin (2015), the research model of vecm used is as follows: 𝜟𝐶𝐴𝑅𝑡 = ∑ 𝛽1𝐶𝐴𝑅𝑡−1 𝑛 𝑖=1 + ∑ 𝛽2𝐶𝑂𝑉𝐼𝐷𝑡−1 𝑛 𝑖=1 + ∑ 𝛽3𝐼𝑁𝑇𝑡−1 𝑛 𝑖=1 + ∑ 𝛽4𝐿𝑂𝐺(𝐾𝑈𝑅𝑆)𝑡−1 𝑛 𝑖=1 + ∑ 𝛽5𝐿𝑂𝐺(𝐷𝐽𝐼𝐴)𝑡−1 𝑛 𝑖=1 + 𝛽6𝐸𝐶𝑇𝑡−1 + µ (4) nuraeni & fakhrunnas│ comparison of the environmental, social, and governance stock index with sharia stock index performance before and during the covid-19 pandemic in southeast asia international journal of islamic economics and finance (ijief), 5(2), 225-258│234 where 𝛽1,𝛽2,𝛽3,𝛽4,𝛽5, 𝛽6 are the coefficients of each variable; ectt-1 is the error correction term; µ is the residual value. iv. results and analysis 4.1. results 4.1.1 descriptive statistical results table 3. descriptive statistic variable mean maximum minimum standard deviation indonesia car_jii30 0.046 0.214 -0.008 0.060 car_jii70 0.038 0.187 -0.005 0.051 car_issi 0.025 0.121 -0.006 0.032 car_srikehati 0.021 0.081 -0.010 0.026 covid (person) 63.630 415.000 0.000 115.581 int (%) 0.047 0.050 0.045 0.002 kurs (dollar/idr) 14,501.85 16,575.00 13,572.50 954.78 djia ($) 26,210.20 29,551.42 18,591.93 3,089.64 malaysia car_emas -0.048 0.002 -0.093 0.030 car_hijrah -0.023 0.016 -0.053 0.014 car_midscap -0.223 0.011 -0.681 0.214 car_f4gbm -0.018 0.004 -0.072 0.020 covid person) 40.767 235 0.000 65.079 int (%) 0.027 0.03 0.025 0.002 kurs (dollar/myr) 4.210 4.445 4.055 0.113 djia ($) 26,210.20 29,551.42 18,591.93 3,089.64 singapore car_leaders -0.007 0.086 -0.054 0.013 car_trans -0.008 0.078 -0.058 0.013 car_sgxshar -0.069 0.027 -0.230 0.080 covid (person) 110.272 1,426.000 0.000 277.675 int (%) 0.018 0.020 0.013 0.003 kurs (dollar/sgd) 1.387 1.459 1.344 0.033 djia ($) 26,210.20 29,551.42 18,591.93 3,089.64 the description of descriptive statistics in table 3 explains the mean, maximum, minimum, and standard deviation values of the data. in general, it can be seen that the car_jii30 value was the highest mean value during the study period compared to other indexes at 0.046. then, positive cases of covid-19 in singapore were the most cases reaching 1,426 cases. moreover, the stock index in malaysia, car_midscap, had a higher standard deviation than another stock index of 0.214, indicating a higher risk. according to yong, nuraeni & fakhrunnas│ comparison of the environmental, social, and governance stock index with sharia stock index performance before and during the covid-19 pandemic in southeast asia international journal of islamic economics and finance (ijief), 5(2), 225-258│235 ziaei, and szulczyk (2021), it can be explained that during the pandemic, stock returns in malaysia, especially the midscap index, showed a larger negative slope. 4.1.2 the event study results table 4. the event study results in indonesia days jii30 jii70 issi sri kehati car t-stat car t-stat car t-stat car t-stat -30 0.004 0.114 0.003 0.083 0.001 0.050 0.003 0.082 -25 0.003 0.102 -0.001 -0.031 -0.003 -0.106 0.014 0.437 -20 0.013 0.457 0.008 0.306 0.002 0.094 0.020 0.700 -15 0.003 0.127 0.004 0.172 0.001 0.066 0.022 0.925 -10 -0.004 -0.195 0.001 0.054 -0.001 -0.070 0.022 1.106 -5 0.007 0.445 0.010 0.707 0.007 0.599 0.023 1.615 0 0.029*** 4.432 0.026*** 4.308 0.017*** 3.251 0.042*** 6.711 5 0.054** 3.656 0.046*** 3.389 0.030** 2.553 0.046** 3.280 10 0.067*** 3.236 0.047** 2.435 0.026* 1.516 0.081*** 4.105 15 0.113*** 4.418 0.074 3.139 0.055*** 2.631 0.061** 2.521 20 0.109*** 3.718 0.082*** 3.006 0.056** 2.304 0.068** 2.433 25 0.112*** 3.411 0.095*** 3.121 0.058** 2.151 0.035 1.136 30 0.131** 3.638 0.114*** 3.413 0.071** 2.414 0.022 0.630 descriptions: *= significant at 10%, **= significant at 5%, ***= significant at 1% table 4 explains that the stock indexes jii30, jii70, issi, and srikehati had positive and significant car values on the first day the covid-19 case appeared in indonesia. then, after the event, the car value was significant from +5 days to +30 days. however, the srikehati index was only significant from day 0 to day +20. it suggests that the market responded positively and profitably when the first case of covid-19 occurred. table 5 shows the results that before the occurrence of positive cases of covid-19 in malaysia, the hijrah, midscap, and emas indexes showed a negative and significant effect in responding to the covid-19 pandemic event on day -20 for the emas index. then, the hijrah and midscap indexes also had a negative and significant impact on day -15 until the event occurred. after the positive case of covid-19 in malaysia, all these indexes had a negative and significant impact until day +30, except for the f4gbm index, which was only significant on certain days. table 6 reveals that the sgxshar index had a positive and significant impact on the day the event occurred in the first case of covid-19 in singapore. however, it had a negative and significant effect on day +5, +20, until day +30, seen in the negative and significant car values. this result was different from nuraeni & fakhrunnas│ comparison of the environmental, social, and governance stock index with sharia stock index performance before and during the covid-19 pandemic in southeast asia international journal of islamic economics and finance (ijief), 5(2), 225-258│236 the leaders and transparency indexes. the two indexes only decreased at the time before the event and after the event, but not significantly. table 5. the event study results in malaysia days hijrah midscap emas f4gbm car t-stat car t-stat car t-stat car t-stat -30 0.002 0.153 0.001 0.052 0.002 0.136 0.001 0.059 -25 -0.011 -0.710 -0.015 -0.895 -0.015 -0.962 0.002 0.167 -20 -0.018 -1.266 -0.019 -1.268 -0.021* -1.464 0.002 0.208 -15 -0.021* -1.681 -0.026** -1.956 -0.024** -1.913 0.002 0.223 -10 -0.024** -2.310 -0.036*** -3.386 -0.026** -2.546 -0.001 -0.084 -5 -0.028*** -3.931 -0.042*** -5.514 -0.031*** -4.345 -0.002 -0.387 0 -0.020*** -6.369 -0.067*** -19.866 -0.028*** -8.743 -0.008*** -2.878 5 -0.025** -3.440 -0.119*** -15.747 -0.038*** -5.274 -0.010* -1.678 10 -0.035*** -3.431 -0.113*** -10.611 -0.045*** -4.487 -0.007 -0.802 15 -0.030** -2.384 -0.117*** -9.002 -0.041*** -3.337 -0.008 -0.821 20 -0.035** -2.424 -0.137*** -9.122 -0.049*** -3.451 -0.014 -1.141 25 -0.051*** -3.150 -0.226*** -13.401 -0.070*** -4.433 -0.022* -1.673 30 -0.053*** -2.977 -0.337*** -18.264 -0.088*** -5.046 -0.032** -2.169 descriptions: *= significant at 10%, **= significant at 5%, ***= significant at 1% table 6. the event study results in singapore days sgxshar leaders transparency car t-stat car t-stat car t-stat -30 0.004 0.192 -0.002 -0.061 -0.001 -0.033 -25 0.021 0.965 -0.005 -0.182 -0.003 -0.119 -20 0.012 0.599 -0.004 -0.196 -0.003 -0.144 -15 0.003 0.207 -0.004 -0.202 -0.002 -0.128 -10 0.008 0.622 -0.003 -0.175 -0.002 -0.119 -5 0.009 0.900 -0.004 -0.313 -0.003 -0.255 0 0.010** 2.247 -0.005 -0.882 -0.003 -0.601 5 -0.029** -2.899 -0.005 -0.474 -0.004 -0.365 10 -0.004 -0.347 -0.011 -0.703 -0.010 -0.619 15 -0.013 -0.794 -0.010 -0.523 -0.009 -0.456 20 -0.046** -2.320 -0.010 -0.428 -0.008 -0.353 25 -0.091*** -4.080 -0.011 -0.430 -0.009 -0.348 30 -0.071*** -2.931 0.003 0.105 0.001 0.047 descriptions: *= significant at 10%, **= significant at 5%, ***= significant at 1% nuraeni & fakhrunnas│ comparison of the environmental, social, and governance stock index with sharia stock index performance before and during the covid-19 pandemic in southeast asia international journal of islamic economics and finance (ijief), 5(2), 225-258│237 figure 3. the stock movement index in indonesia, malaysia, and singapore during the event figure 3 displays the response of the stock index movement in indonesia, malaysia, and singapore at the time of the first case of covid-19. overall, all stock indexes received negative-actual returns due to the emergence of positive cases of covid-19 in each country. it can be shown through the malaysian sharia index, namely the midscap index, which experienced the sharpest decline of 2.45%. it was because most people in malaysia were worried about the rising cases of covid-19, considering the characteristics virus easily spread from one country to another. thus, the emergence of uncertainty in the stock market resulted in many stockholders selling their stocks. meanwhile, the leaders index occupied the top position and only decreased by 0.39%. it was because the singapore government handled the pandemic well during the covid-19 pandemic. 4.1.3 the vecm results the output table of the pre-tests of stationarity, lag optimum, stability, and cointegration can be seen in the appendix, showing that vecm was the proper method since the data were not stationary in level, but they were stationary in the first difference, and cointegrations between variables existed. 4.1.3.1 stationarity test based on appendix i, it was found that at the level, all variables had an augmented dicky-fuller (adf) t-statistic value and the phillips perron (pp) tstatistic value smaller than the critical value, mackinnon, except for car_leaders and car_trans, which were stationary at the level of the adf test and pp test on intercept, trend and intercept, and none. meanwhile, the covid_ind variable was only stationary at the level of the adf test. moreover, -2,45% -2,29% -1,52% -1,44% -1,20% -0,93% -0,92% -0,75% -0,53% -0,43% -0,39% -3,00% -2,50% -2,00% -1,50% -1,00% -0,50% 0,00% midscap srikehati f4gbm emas hijrah jii70 issi sgxshar jii30 trans leaders return in % s to ck i n d e x actual return (%) nuraeni & fakhrunnas│ comparison of the environmental, social, and governance stock index with sharia stock index performance before and during the covid-19 pandemic in southeast asia international journal of islamic economics and finance (ijief), 5(2), 225-258│238 in appendix ii, it can be explained that all variables were stationary at level 1st difference. the augmented dicky-fuller (adf) t-statistic value and the phillips perron (pp) t-statistic value were greater than the mackinnon critical value. thus, it can be concluded that the appropriate research model was the vecm method because all variables were stationary at level 1st difference. 4.1.3.2 lag optimum in carrying out the lag length, one of the criteria, akaike information (aic), can be determined by choosing the smallest aic value (widarjono, 2018). based on the optimum lag test result in appendix iii, it was revealed that the lag of each of these variables was around lags to 2,6 and 7. 4.1.3.3 var stability test in testing the vecm method, the var stability test needs to be done first. it is carried out to ensure the impulse response function analysis becomes valid and stable (rusydiana, 2009). when all the roots in the var system have a modulus smaller than one, the var system can be said to be stable (gujarati, 2003). based on appendix iv, the results indicated that the model used in each variable showed a stable condition because all these variables had a modulus value below one. thus, the impulse response function analysis could be said to be valid. 4.1.3.4 cointegration test appendix v shows the cointegration test results using the johansen cointegration test (widarjono, 2018). the results uncovered a long-term relationship between the dependent and independent variables. it can be shown through the trace statistic value compared to the critical value. these results found that the variables studied had a value trace statistic greater than the critical value. hence, it can be interpreted that the variables studied had a long-term relationship between one variable and another. it can be concluded that the vecm model could be used in this study because the variables studied had cointegration. 4.1.3.5 the vecm estimation results table 7. short-term and long-term vecm estimation in indonesia short-term error correction: car_jii30 car_jii70 car_issi car_srikehati cointeq1 -0.132*** [-4.517] -0.074*** [-4.595] -0.010 [-0.416] -0.054*** [-2.386] d(covid(-1)) -0.000*** [-2.564] -0.000*** [-2.694] -0.000* [-1.54596] 0.000 [ 0.317] d(covid(-2)) -0.000* [-1.471] -0.000** [-1.667] 0.000 [ 0.188] -0.000** [-2.313] d(covid(-3)) -0.000*** [-2.767] -0.000*** [-2.834] -0.000** [-2.090] d(covid(-4)) -0.000*** [-2.690] -0.000*** [-2.462] -0.000** [-2.058] d(covid(-5)) -0.000*** [-3.014] -0.000*** [-2.553] -0.000 [-0.991] d(covid(-6)) -0.000*** [-3.769] -0.000*** [-3.488] 0.000 [ 0.676] d(covid(-7)) 0.000 [ 0.431] d(int(-1)) 0.857 [ 0.507] -0.110 [-0.079] -0.038 [-0.036] -0.425 [-0.302] d(int(-2)) -1.332 [-0.791] -1.359 [-0.987] 0.047 [ 0.044] 1.052 [ 0.742] d(int(-3)) 1.484 [ 0.867] 0.127 [ 0.092] 2.014* [ 1.324] d(int(-4)) 0.165 [ 0.095] -0.084 [-0.060] 1.998* [ 1.298] d(int(-5)) 0.825 [ 0.478] 0.991 [ 0.724] -1.374 [-0.859] d(int(-6)) 3.678** [ 2.103] 1.670 [ 1.186] 1.868 [ 1.193] d(int(-7)) 0.172 [ 0.102] d(logdjia(-1)) 0.147*** [ 3.747] 0.066*** [ 2.875] 0.019 [ 1.007] 0.069* [ 1.495] d(logdjia(-2)) 0.156 *** [ 3.492] 0.079*** [ 2.761] 0.032** [ 2.000] 0.040 [ 0.799] d(logdjia(-3)) 0.081** [ 1.818] 0.043* [ 1.435] -0.005 [-0.129] d(logdjia(-4)) 0.048 [ 1.140] 0.010 [ 0.362] 0.029 [ 0.794] d(logdjia(-5)) 0.090** [ 2.299] 0.059** [ 2.101] 0.028 [ 0.891] d(logdjia(-6)) 0.046* [ 1.581] 0.024 [ 1.094] 0.018 [ 0.626] d(logdjia(-7)) -0.023 [-0.904] d(logkurs(-1)) 0.434*** [ 3.387] 0.272*** [ 2.639] 0.186*** [ 2.983] -0.113 [-0.868] descriptions: *= significant at 10%, **= significant at 5%, ***= significant at 1% nuraeni & fakhrunnas│ comparison of the environmental, social, and governance stock index with sharia stock index performance before and during the covid-19 pandemic in southeast asia international journal of islamic economics and finance (ijief), 5(2), 225-258│240 table 7 (cont). short-term and long-term vecm estimation in indonesia short-term error correction: car_jii30 car_jii70 car_issi car_srikehati d(logkurs(-2)) -0.154 [-1.116] -0.093 [-0.848] -0.140** [-2.247] -0.055 [-0.457] d(logkurs(--3)) -0.305*** [-2.366] -0.260*** [-2.541] -0.107 [-0.986] d(logkurs(-4)) 0.020 [ 0.145] -0.005 [-0.045] 0.145* [ 1.451] d(logkurs(-5)) 0.090 [ 0.710] 0.189** [ 1.836] -0.068 [-0.645] d(logkurs(-6)) -0.208** [-1.793] -0.148* [-1.565] 0.005 [ 0.054] d(logkurs(-7)) -0.042 [-0.407] long-term cointegrating eq: cointeq1 car_jii30 car_jii70 car_issi car_srikehati covid(-1) -0.000*** [-4.872] -0.000*** [-4.044] -0.000** [-1.997] 0.000*** [ 2.915] int(-1) 5.292* [ 1.423] 8.316* [ 1.506] 1.277 [ 0.681] 23.498*** [ 4.587] log(djia)(-1) 1.065*** [ 4.910] 0.814*** [ 2.627] 0.526*** [ 6.085] 1.508*** [ 4.013] log(kurs)(-1) 1.465*** [ 3.936] 1.002** [ 1.850] 0.698*** [ 4.521] 2.876*** [ 4.185] c -25.134 -18.275 -12.125 -44.055 r-squared 0.641 0.620 0.272 0.634 f-statistic 3.525*** 3.216** 2.898** 2.655** descriptions: *= significant at 10%, **= significant at 5%, ***= significant at 1% table 7 shows that the covid variable negatively and significantly affected all islamic stock indexes in indonesia in the short and long term. meanwhile, on the esg index, the covid variable only had a negative and significant effect in the short term. it denotes that when there was an increase in the number of positive cases of covid-19, it could reduce the sharia stock index performance in the short and long term and the esg index only in the short term. however, the results differed from the esg index in the long term; when there was an increase in the number of positive cases of covid-19, it could improve the esg stock index performance in the long term. nuraeni & fakhrunnas│ comparison of the environmental, social, and governance stock index with sharia stock index performance before and during the covid-19 pandemic in southeast asia international journal of islamic economics and finance (ijief), 5(2), 225-258│241 table 8. short-term and long-term vecm estimation in malaysia short-term error correction: car_emas car_hijrah car_midscap car_f4gbm cointeq1 0.062** [ 1.757] 0.134*** [ 3.167] 0.001 [ 0.291] -0.005 [-1.265] d(covid(-1)) -0.000 [-0.001] -0.000 [-0.275] 0.000 [ 0.092] 0.000 [ 0.789] d(covid(-2)) 0.000 [ 1.006] 0.000** [ 1.699] -0.000* [-1.663] -0.000 [-0.968] d(covid(-3)) 0.000 [ 0.077] 0.000 [ 0.862] -0.000 [-0.475] -0.000 [-0.587] d(covid(-4)) -0.000 [-1.028] -0.000 [-0.693] -0.000 [-0.271] 0.000** [ 1.996] d(covid(-5)) -0.000** [-1.797] -0.000** [-2.314] 0.000 [ 0.122] 0.000** [ 1.663] d(covid(-6)) -0.000*** [-3.127] -0.000*** [-3.076] 0.000 [ 0.989] 0.000*** [ 2.491] d(covid(-7)) -0.000** [-2.306] d(int(-1)) 1.868 [ 1.285] 3.301** [ 1.751] 1.448 [ 0.238] -1.026 [-1.257] d(int(-2)) -0.088 [-0.062] 1.700 [ 0.996] -1.659 [-0.275] -0.873 [-1.072] d(int(-3)) 1.483 [ 1.029] 1.672 [ 0.927] 0.809 [ 0.132] -0.171 [-0.206] d(int(-4)) 1.735 [ 1.265] 1.908 [ 1.130] 22.042*** [ 3.772] 2.374*** [ 3.033] d(int(-5)) 4.023*** [ 2.775] 6.854 [ 3.898]*** -9.820* [-1.540] -1.433** [-1.690] d(int(-6)) -0.441 [-0.304] 0.063 [ 0.035] 12.287** [ 1.908] 0.779 [ 0.916] d(int(-7)) 3.597** [ 2.023] d(logdjia(-1)) -0.057 *** [-2.395] -0.101*** [-3.459] 0.319** [ 2.251] 0.091*** [ 5.437] d(logdjia(-2)) -0.023 [-1.024] -0.104*** [-3.126] 0.188 [ 1.264] 0.059*** [ 3.105] d(logdjia(-3)) -0.001 [-0.055] -0.035 [-1.216] -0.034 [-0.261] 0.002 [ 0.139] d(logdjia(-4)) 0.017 [ 0.721] 0.037 [ 1.204] -0.130 [-0.969] -0.012 [-0.683] d(logdjia(-5)) -0.007 [-0.288] -0.043* [-1.404] 0.366*** [ 2.696] 0.063*** [ 3.525] d(logdjia(-6)) 0.039** [ 1.740] 0.018 [ 0.571] -0.069 [-0.561] 0.019 [ 1.136] nuraeni & fakhrunnas│ comparison of the environmental, social, and governance stock index with sharia stock index performance before and during the covid-19 pandemic in southeast asia international journal of islamic economics and finance (ijief), 5(2), 225-258│242 table 8 (cont). short-term and long-term vecm estimation in malaysia descriptions: *= significant at 10%, **= significant at 5%, ***= significant at 1% in general, table 8 shows that the covid variable had a negative and significant effect on the sharia stock index in malaysia only in the short term. it signifies that an increase in the number of positive cases of covid-19 could reduce the sharia stock index performance in the short term. meanwhile, the covid variable had a positive and significant effect on the sharia stock index in the long term and the esg index in the short and long term. but the hijrah index did not have a significant impact in the long term. it denotes that when there was an increase in the number of positive cases of covid-19, it could improve the sharia stock index performance in the long term except the hijrah index, and the esg index both in the short term and in the long term. short-term error correction: car_emas car_hijrah car_midscap car_f4gbm d(logdjia(-7)) -0.017 [-0.619] d(logkurs(-1)) -0.178 [-0.995] -0.200 [-0.911] 2.362*** [ 2.584] 0.321*** [ 2.805] d(logkurs(-2)) 0.157 [ 0.881] 0.184 [ 0.827] -1.270* [-1.376] 0.001 [ 0.009] d(logkurs(--3)) -0.063 [-0.357] 0.206 [ 0.952] 0.065 [ 0.077] -0.056 [-0.510] d(logkurs(-4)) -0.102 [-0.580] -0.060 [-0.282] 0.309 [ 0.360] 0.063 [ 0.555] d(logkurs(-5)) 0.030 [ 0.183] -0.351** [-1.674] -0.048 [-0.057] 0.137 [ 1.238] d(logkurs(-6)) 0.068 [ 0.484] 0.148 [ 0.749] -0.227 [-0.319] 0.021 [ 0.236] d(logkurs(-7)) 0.021 [ 0.120] long-term cointegrating eq: cointeq1 car_emas car_hijrah car_midscap car_f4gbm covid(-1) 0.000*** [ 2.553] 0.000 [ 0.573] 0.040*** [ 4.987] 0.003*** [ 4.174] int(-1) -20.385*** [-6.679] -20.692*** [-8.529] -78.065 [-0.573] -31.883** [-1.923] log(djia) (-1) -0.105 [-1.008] -0.173** [-2.084] 18.528*** [ 3.284] 1.150** [ 1.884] log(kurs) (-1) -1.637*** [-4.182] -2.290*** [-7.460] 5.218 [ 0.286] -3.394* [-1.566] c 4.012 5.642 -195.172 -6.070 r-squared 0.430 0.607 0.612 0.659 f-statistic 1.558 2.489** 3.269** 4.000*** nuraeni & fakhrunnas│ comparison of the environmental, social, and governance stock index with sharia stock index performance before and during the covid-19 pandemic in southeast asia international journal of islamic economics and finance (ijief), 5(2), 225-258│243 table 9. short-term and long-term vecm estimation in singapore short-term error correction: car_leaders car_trans car_sgxshar cointeq1 -0.765*** [-2.406] -0.622** [-2.063] -0.001 [-0.079] d(covid(-1)) -0.000** [-1.754] -0.000* [-1.412] -0.000 [-0.506] d(covid(-2)) -0.000** [-1.912] -0.000* [-1.600] -0.000 [-0.385] d(covid(-3)) -0.000*** [-2.541] -0.000** [-2.218] 0.000 [ 0.536] d(covid(-4)) -0.000** [-2.080] -0.000** [-1.792] 0.000 [ 0.524] d(covid(-5)) -0.000** [-1.855] -0.000* [-1.614] 0.000 [ 0.016] d(covid(-6)) -0.000** [-2.046] -0.000** [-1.749] -0.000 [-0.165] d(covid(-7)) -0.000** [-2.056] -0.000** [-1.746] -0.000 [-0.146] d(int(-1)) 5.850* [ 1.545] 6.733** [ 1.782] -0.587 [-0.231] d(int(-2)) -0.511 [-0.218] -0.287 [-0.125] -5.962*** [-2.525] d(int(-3)) -0.419 [-0.191] -0.326 [-0.152] -4.406** [-1.903] d(int(-4)) 0.357 [ 0.139] 1.396 [ 0.553] 0.326 [ 0.129] d(int(-5)) -1.855 [-0.726] -0.877 [-0.349] 0.965 [ 0.404] d(int(-6)) -3.932* [-1.556] -3.418* [-1.384] 4.890** [ 1.862] d(int(-7)) -6.668** [-2.076] -5.753** [-1.796] 3.218 [ 1.011] d(logdjia(-1)) -0.048 [-0.831] -0.052 [-0.950] 0.135** [ 2.312] d(logdjia(-2)) 0.109** [ 1.804] 0.105** [ 1.820] 0.133** [ 1.943] d(logdjia(-3)) 0.078 [ 1.217] 0.065 [ 1.057] 0.081 [ 1.191] d(logdjia(-4)) 0.019 [ 0.316] 0.004 [ 0.072] 0.0744 [ 1.183] d(logdjia(-5)) -0.129** [-2.138] -0.129** [-2.218] 0.056 [ 0.891] d(logdjia(-6)) 0.106** [ 1.739] 0.105** [ 1.830] 0.070 [ 1.036] nuraeni & fakhrunnas│ comparison of the environmental, social, and governance stock index with sharia stock index performance before and during the covid-19 pandemic in southeast asia international journal of islamic economics and finance (ijief), 5(2), 225-258│244 table 9 (cont). short-term and long-term vecm estimation in singapore descriptions: *= significant at 10%, **= significant at 5%, ***= significant at 1% table 9 displays that the covid variable had a negative and significant effect on the sharia stock index in singapore in the long term and the esg index both in the short and long term. in other words, an increase in the number of positive cases of covid-19 could reduce the sharia stock index performance in the long term and the esg index both in the short and long term. however, there are interesting results on the sharia stock index in the short term, revealing that the covid variable had no significant effect on the sharia stock index. it indicates that when there was an increase in the number of positive cases of covid-19, it had no significant effect on the sharia stock index performance in the short term. short-term error correction: car_leaders car_trans car_sgxshar d(logdjia(-7)) -0.020 [-0.292] -0.006 [-0.094] 0.095* [ 1.470] d(logkurs(-1)) -0.225 [-0.394] -0.478 [-0.856] -0.693 [-1.209] d(logkurs(-2)) -0.851* [-1.551] -0.896* [-1.648] 0.268 [ 0.493] d(logkurs(--3)) 1.552*** [ 2.766] 1.490*** [ 2.727] -0.640 [-1.172] d(logkurs(-4)) -0.547 [-0.956] -0.584 [-1.041] 0.397 [ 0.803] d(logkurs(-5)) -1.294** [-1.973] -1.140** [-1.760] 0.145 [ 0.262] d(logkurs(-6)) -0.175 [-0.299] -0.104 [-0.180] 0.521 [ 1.028] d(logkurs(-7)) -0.017 [-0.028] 0.048 [ 0.080] -0.867* [-1.637] long-term cointegrating eq: cointeq1 car_leaders car_trans car_sgxshar covid(-1) -0.000*** [-8.550] -0.000*** [-8.895] -0.002*** [-5.494] int(-1) -7.777*** [-12.241] -8.054*** [-12.302] -85.917*** [-7.053] log(djia) (-1) 0.061*** [ 9.385] 0.040*** [ 6.110] 0.106 [ 0.709] log(kurs) (-1) 0.128*** [ 3.198] 0.124*** [ 2.967] 1.624** [ 2.123] c -0.499 -0.280 0.251 r-squared 0.793 0.793 0.534 f-statistic 6.195*** 6.197*** 1.847** 4.1.4 impulse response function figure 4. the irf results in indonesia (ind), malaysia (mly), and singapore (sg) -.001 .000 .001 .002 .003 .004 1 2 3 4 5 6 7 8 9 10 response of d(car_issi) to d(covid_ind) -.002 .000 .002 .004 .006 1 2 3 4 5 6 7 8 9 10 response of d(car_jii30) to d(covid_ind) -.002 -.001 .000 .001 .002 .003 .004 .005 .006 1 2 3 4 5 6 7 8 9 10 response of d(car_jii70) to d(covid_ind) -.002 -.001 .000 .001 .002 .003 .004 .005 1 2 3 4 5 6 7 8 9 10 response of d(car_srikehati) to d(covid_ind) -.002 -.001 .000 .001 .002 .003 .004 1 2 3 4 5 6 7 8 9 10 response of d(car_emas) to d(covid_mly) -.005 .000 .005 .010 .015 .020 .025 1 2 3 4 5 6 7 8 9 10 response of d(car_midscap) to d(covid_mly) -.002 -.001 .000 .001 .002 .003 .004 .005 .006 1 2 3 4 5 6 7 8 9 10 response of d(car_hijrah) to d(covid_mly) -.001 .000 .001 .002 .003 1 2 3 4 5 6 7 8 9 10 response of d(car_f4gbm) to d(covid_mly) -.015 -.010 -.005 .000 .005 .010 .015 1 2 3 4 5 6 7 8 9 10 response of d(car_leaders) to d(covid_sg) -.004 .000 .004 .008 .012 1 2 3 4 5 6 7 8 9 10 response of d(car_sgxshar) to d(covid_sg) -.012 -.008 -.004 .000 .004 .008 .012 1 2 3 4 5 6 7 8 9 10 response of d(car_trans) to d(covid_sg) based on figure 4 about the irf calculation results, the country that experienced the most shock when a pandemic occurred was malaysia. it can be seen that in the middle of the period, the stock index in malaysia experienced very sharp fluctuations. meanwhile, singapore was the country that experienced the lowest shock. it can be seen through the stable movement of the graph from the beginning of the period to the end of the period. although at the end of the period, it showed a decline. however, overall fluctuations in singapore's stock index were relatively stable compared to other countries. 4.2. analysis in this study, the event study method and vecm showed different results in each country. according to the event study calculation in indonesia, the first case of covid-19 had a positive and significant impact on all the stock indexes from the day of the incident until the following days. it was because, in the authors’ view, many indonesian people still did not know the covid-19 virus characteristics at the time of the incident. moreover, there was still no government policy such as a lockdown policy at that time. thus, the emergence of the first case of covid-19 still had a positive and significant impact on the stock index. this result follows research by khatatbeh et al. (2020) that the stock market in china had a positive and significant car value after the first confirmed case of covid-19 on december 31, 2019. in addition, the vecm results revealed that the covid variable had a negative and significant effect on all indexes both in the long and short term, except for the esg index, which had a positive and significant effect in the long term. it was because the characteristics of the companies listed in the esg stock index prioritize business practices with environmental, social, and governance principles with the potential to have good returns. thus, most companies listed on the esg index, namely sri-kehati, were likely to have good potential in the long term. this result does not align with the research conducted by he et al. (2020), stating that the covid-19 pandemic would not have a significant effect in the long term. however, it had a short-term negative impact on the stock market. then, in malaysia, according to the event study calculation, the first case of covid-19 had a negative and significant impact on all stock indices from before the day of the incident until the following days, except the esg index, which was only negative and significant on certain days. this result is also supported by the vecm calculation that the covid variable negatively and significantly affected the sharia stock index in the short term. the negative and significant effect was because the number of positive cases increased every day since the first. according to lee et al. (2020), the number of positive cases of covid-19 increased until it reached 25 cases at the end of february. nuraeni & fakhrunnas│ comparison of the environmental, social, and governance stock index with sharia stock index performance before and during the covid-19 pandemic in southeast asia international journal of islamic economics and finance (ijief), 5(2), 225-258│247 then, it increased rapidly on march 31 to 2,626 cases. as a result, the malaysian government announced a movement control order (mco) effective from march 18 to march 31, 2020. thus, it resulted in many stockholders selling their stock due to concerns caused by covid-19 and mco. these results are consistent with the research by he et al. (2020), showing that the covid-19 pandemic negatively impacted stock prices on the shanghai stock exchange. however, the results were different for the vecm calculation in the long-term sharia stock index and the esg index, which had a positive and significant impact due to the covid-19 pandemic. it happened because, over time, the company might be able to adapt to new circumstances. not only that, with increasing digitization, it is also possible for companies to create more innovations in the future. thus, the covid-19 pandemic in malaysia could have a positive and significant impact. these results are in accordance with the research conducted by hidayat, maulana, and arief (2021), which found that in the long term, covid-19 had a positive and significant impact on the jci performance. moreover, according to the event study calculation in singapore, the islamic stock index experienced a negative and significant effect after the covid-19 pandemic. these results support the research conducted by liu et al. (2020) that cases of confirmed positive covid-19 had a significant and detrimental effect on the performance of the stock index, especially the index in asia, which experienced a greater decline in stock indexes. however, when the first case of covid-19 appeared, it had a positive and significant impact. meanwhile, the esg stock indexes did not experience a significant impact. this result is also supported by the vecm calculation, showing that the covid variable had no significant effect on the islamic stock index in the short term. it was because when the covid-19 pandemic occurred, the singapore government handled it swiftly. according to woo (2020), key fiscal, analytical, operational, and political capacities created after the sars crisis in singapore in 2003 made the country stronger in responding to the initial onset of covid19. thus, it resulted in a positive impact on stock markets. in addition, based on the vecm calculation in the long term, the covid variable had a negative and significant effect on all stock indexes in singapore, both sharia and esg. according to the ecdc (2020), the number of positive cases of covid-19 in singapore increased sharply by 1,426 people in april 2020. it led to panic selling to investors and a shift of funds by investors to safer instruments. it caused the shares in the index to experience a significant decline. this finding has the same results as those of novalina and rusiadi (2020), which showed that during the covid-19 pandemic, financial and trade indexes had a significant effect in the long run. nuraeni & fakhrunnas│ comparison of the environmental, social, and governance stock index with sharia stock index performance before and during the covid-19 pandemic in southeast asia international journal of islamic economics and finance (ijief), 5(2), 225-258│248 v. conclusion and recommendation 5.1. conclusion based on the research, it can be concluded that the results of the regression estimation event study showed that the islamic stock index and the esg stock index in indonesia experienced a positive and significant impact after the positive case of covid-19. in contrast to singapore, the islamic stock index experienced a negative and significant impact in responding to the positive case of covid-19, while the esg stock index did not significantly influence responding to the covid-19 pandemic. in malaysia, the sharia stock index experienced a negative and significant influence even before and after the positive case of covid-19, whereas the esg stock index only had a significant negative effect on certain days. then, the vecm estimation results revealed significant results in almost all the variables studied. since the first case of covid-19, this study found that almost all stock indexes experienced a significant long-term and short-term effect. however, this result did not match the sharia stock index in singapore, which showed that the index did not have a significant effect in the short term, and the sharia stock index in malaysia namely the hijrah index did not have a significant effect in the long term. thus, based on the calculation results, it can be concluded that almost all the results obtained on the esg stock index showed a positive and significant impact when responding to the pandemic. meanwhile, islamic stock indexes experienced more negative and significant effects on the pandemic. it means that, overall, the esg stock index performance is considered to be better than the sharia stock index. in addition, when the esg stock index experienced a negative and significant impact, the perceived impact was not too large, as indicated by the low coefficient value experienced by the esg stock index in singapore in the long term. the findings of this study can be explained in table 10. in general, from these findings, almost all the results rejected hypothesis 3, stating that the sharia stock index performance was better than southeast asia's environmental, social, and governance stock index performance during the covid-19 pandemic. in this study, almost all the results obtained by the esg stock index showed a positive and significant impact when responding to the pandemic. moreover, when the esg stock index experienced a negative and significant impact, the perceived impact was not too large, as indicated by the low coefficient value experienced by the esg stock index in singapore in the long term. in addition, this finding also aligns with the theoretical framework proposed by fama (1970). it agrees with the research conducted because prices on the stock index in indonesia, malaysia, and singapore nuraeni & fakhrunnas│ comparison of the environmental, social, and governance stock index with sharia stock index performance before and during the covid-19 pandemic in southeast asia international journal of islamic economics and finance (ijief), 5(2), 225-258│249 responded to information on the emergence of the first case of covid-19, creating a new equilibrium price. table 10. hypothesis conclusion hypothesis 1 hypothesis 2 hypothesis 3 event study accepted accepted in the calculation of indonesia and malaysia accepted only in the calculation of indonesia rejected in the calculation of singapore rejected in the calculation of malaysia and singapore vecm accepted in the calculation of indonesia, malaysia, excepted the hijrah index in the long term, and singapore in the long term accepted accepted only in the calculation of singapore in the short term rejected in the calculation of singapore in the short term and malaysia, namely the hijrah index in the long term rejected in the calculation of singapore in the long term, indonesia, and malaysia 5.2. recommendation for investors, this finding illustrates that investing in stocks during a pandemic significantly impacts the long and short term. this research is also expected to help investors identify several factors that need to be studied before investing in stock instruments during the covid-19 pandemic by monitoring the development of the number of positive cases of covid-19 in each country. however, the study found that the esg stock index was considered to have performed well despite the covid-19 pandemic. it indicates that companies listed on the esg index may be able to adapt well in responding to the covid19 pandemic. moreover, the business implementation carried out by companies listed on the esg index also prioritizes environmental, social, and good governance awareness to have better prospects. furthermore, the government needs to properly pay more attention to the long-term and short-term effects of the covid-19 pandemic on the performance of stock indexes. the government also needs to focus more on handling covid-19 cases by increasing the production of covid-19 vaccinations to inhibit the growth of positive cases of covid-19 and prevent the emergence of new variants of covid-19. however, this research has several limitations; firstly, in determining the event date in the event study calculation, this study used the day when the announcement of the first case of covid-19 occurred in each country. thus, nuraeni & fakhrunnas│ comparison of the environmental, social, and governance stock index with sharia stock index performance before and during the covid-19 pandemic in southeast asia international journal of islamic economics and finance (ijief), 5(2), 225-258│250 it still did not describe the state of the pandemic's impact on the stock index performance. second, this study employed all indexes in the sharia stock index and the esg stock index, so the two indexes with the same shares might have overlapping results. based on the limitations in this study, the authors recommend further research to determine the day of different events in analyzing the event study, such as at the time of the announcement of the lockdown policy. then, further research can be conducted to investigate the effect of covid-19 on other indexes, use other 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(2021). the impact of covid-19 pandemic on stock market return volatility: evidence from malaysia and singapore. asian economic and financial review, 11(3), 191–204. doi: 10.18488/journal.aefr.2021.113.191.204. appendix appendix i. unit root test at level descriptions: *= significant at 10%, **= significant at 5%, ***= significant at 1% variable unit root test (at level) conclusion intercept trend and intercept none adf pp adf pp adf pp car_ srikehati -1.261 -1.313 -0.718 -0.845 -0.719 -0.776 not stationary car_issi 2.259 3.671 -0.170 0.564 3.574 5.526 not stationary car_jii30 2.119 2.711 -0.486 -0.195 3.488 4.260 not stationary car_jii70 2.806 4.107 0.007 0.600 4.273 5.983 not stationary car_f4gbm -0.931 -1.041 -1.571 -1.904 -0.018 -0.189 not stationary car_emas -0.984 -0.873 -2.605 -2.728 1.221 1.502 not stationary car_hijrah -2.152 -2.334 -2.276 -2.544 -0.534 -0.637 not stationary car_midscap -1.273 -0.889 -2.098 -1.625 -0.324 0.214 not stationary car_leaders -8.715*** -8.920*** -9.040*** -9.176*** -3.108*** -7.896*** stationary car_trans -7.968*** -8.437*** -9.042*** -9.180*** -2.674*** -7.153*** stationary car_sgxshar -0.715 -0.924 -1.949 -2.016 0.225 -0.118 not stationary covid_ind -4.113*** -0.854 -4.586*** -2.851 -3.980*** -0.223 stationary covid_mly -1.231 -2.465 -1.578 -3.183 -0.793 -1.335 not stationary covid_sg 0.774 -1.138 -0.207 -2.073 1.088 -0.787 not stationary log(kurs_ind) -1.280 -0.928 -1.516 -1.446 0.166 0.435 not stationary log(kurs_mly) -0.984 -0.885 -2.157 -2.104 0.395 0.530 not stationary log(kurs_sg) -1.337 -1.036 -2.526 -2.197 0.485 0.620 not stationary int_ind -0.821 -0.816 -2.042 -2.063 -1.459 -1.489 not stationary int_mly -0.945 -0.935 -2.229 -2.296 -1.492 -1.536 not stationary int_sg -0.325 -0.318 -1.753 -1.753 -1.174 -1.178 not stationary log(djia_ind) -0.937 -1.181 -1.455 -1.936 -0.527 -0.523 not stationary log(djia_mly) -1.400 -1.299 -2.018 -1.818 -0.560 -0.438 not stationary log(djia_sg) -1.400 -1.299 -2.018 -1.818 -0.560 -0.438 not stationary appendix ii: unit root test at 1st difference variable unit root test (at 1st difference) conclusion intercept trend and intercept none adf pp adf pp adf pp car_ srikehati -8.305*** -8.354*** -8.339*** -8.379*** -8.335*** -8.416*** stationary car_issi -7.924*** -7.782*** -8.488*** -8.623*** -7.483*** -7.481*** stationary car_jii30 -7.827*** -7.749*** -8.326*** -8.116*** -7.374*** -7.374*** stationary car_jii70 -8.500*** -8.486*** -9.391*** -9.464*** -7.819*** -7.911*** stationary car_f4gbm -11.112*** -11.143*** -11.060*** -11.100*** -11.044*** -11.112*** stationary car_emas -9.255*** -9.735*** -9.214*** -9.770*** -8.943*** -8.874*** stationary car_hijrah -5.788*** -9.949*** -5.773*** -9.904*** -5.755*** -9.954*** stationary car_midscap -3.290** -10.050*** -3.279* -10.016*** -3.199*** -10.035*** stationary car_leaders -12.275*** -27.088*** -12.227*** -27.080*** -12.338*** -27.254*** stationary car_trans -12.332*** -24.503*** -12.279*** -26.947*** -12.396*** -24.647*** stationary car_sgxshar -8.118*** -8.278*** -8.077*** -8.240*** -8.074*** -8.238*** stationary covid_ind -2.621* -20.149*** -3.257* -22.684*** -2.361** -20.939*** stationary covid_mly -11.007*** -16.732*** -10.948*** -16.641*** -11.045*** -16.767*** stationary covid_sg 1.575 -13.458*** 0.885 -13.571*** 1.825 -13.431*** stationary log(kurs_ind) -3.930*** -8.429*** -3.857** -8.377*** -3.962*** -8.451*** stationary log(kurs_mly) -6.945*** -6.891*** -6.901*** -6.925*** -6.967*** -6.913*** stationary log(kurs_sg) -4.557*** -9.066*** -4.532*** -9.028*** -4.535*** -9.052*** stationary int_ind -10.004*** -10.005*** -9.952*** -9.953*** -9.848*** -9.848*** stationary int_mly -10.152*** -10.156*** -10.106*** -10.108*** -10.000*** -10.000*** stationary int_sg -10.079*** -10.079*** -10.144*** -10.149*** -10.000*** -10.000*** stationary log(djia_ind) -13.819*** -13.339*** -13.747*** -13.276*** -13.862*** -13.368*** stationary log(djia_mly) -14.811*** -13.995*** -14.736*** -13.934*** -14.853*** -14.023*** stationary log(djia_sg) -14.811*** -13.995*** -14.736*** -13.934*** -14.853*** -14.023*** stationary descriptions: *= significant at 10%, **= significant at 5%, ***= significant at 1% appendix iii. lag optimum appendix iv. the result of var stability test variable modulus conclusion car_srikehati <1 stable car_jii30 <1 stable car_jii70 <1 stable car_issi <1 stable car_f4gbm <1 stable car_emas <1 stable car_hijrah <1 stable car_midscap <1 stable car_leaders <1 stable car_trans <1 stable car_sgxshar <1 stable variable lag criteria car_srikehati 7 aic car_jii30 6 aic car_jii70 6 aic car_issi 2 aic car_f4gbm 6 aic car_emas 6 aic car_hijrah 7 aic car_midscap 6 aic car_leaders 7 aic car_trans 7 aic car_sgxshar 7 aic appendix v: the result of the johansen cointegration test variable trace statistic 0.05 critical value conclusion car_srikehati 97.201 69.818 cointegrated car_jii30 100.369 69.818 cointegrated car_jii70 98.603 69.818 cointegrated car_issi 99.081 69.818 cointegrated car_f4gbm 89.077 69.818 cointegrated car_emas 84.534 69.818 cointegrated car_hijrah 114.788 69.818 cointegrated car_midscap 83.721 69.818 cointegrated car_leaders 213.608 69.818 cointegrated car_trans 217.636 69.818 cointegrated car_sgxshar 155.122 69.818 cointegrated nuraeni & fakhrunnas│ comparison of the environmental, social, and governance stock index with sharia stock index performance before and during the covid-19 pandemic in southeast asia international journal of islamic economics and finance (ijief), 5(2), 225-258│258 this page is intentionally left blank international journal of islamic economics and finance (ijief) vol. 3(2), page 175-204, special issue: islamic social finance and ethics challenges of zakat integration as source of state revenue raynal yasni polytechnic of state finance stan, indonesia corresponding email: raynalyasni@pknstan.ac.id agam reynaldi reza erlanda directorate general of tax, indonesia article history received: june 13 th , 2020 revised: august 18 th , 2020 accepted: august 30 th , 2020 abstract in the era of new public financial management, where society participation and cost sharing in public goods provision are inevitably pursued by government, some sources can still be explored such as zakat, infaq, and sadaqah as social awareness activities for muslims that are prevalent in the community. there are also other donations on the basis of certain motivations which can reduce the burden of tax revenue to support public policy. the phenomenon of mutual cooperation and caring to help others through social donations emerged even more apparent when the covid-19 pandemic entered a period of social restrictions. this study aims to examine the challenges faced in integrating zakat as an alternate state revenue. the method used is descriptive qualitative using primary data in the form of semi-structured interviews. determination of the source of data on the interviewee is done purposively. they are chosen to represent zakat practitioners, representatives of government and taxation institutions, and academics. the results showed various challenges in integrating zakat as an alternative source of state revenue, namely uniting government programs with receivers, distribution process, strong zakat institutions, supervisory institutions, public trust, increased compliance, issues on state ideology, alignment of rules with other religious communities, revenue earmarking, and spending flexibility. keywords: state revenue, zakat, taxation, budget. jel classification : h2 @ ijief 2020 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.3238 web: https://journal.umy.ac.id/index.php/ijief/article/view/9019 citation: yasni,r., & erlanda, a.r.r., (2020) challenges of zakat integration as source of state revenue. international journal of islamic economics and finance (ijief), 3(2), 175-204. doi: https://doi.org/10.18196/ijief.3238 https://doi.org/10.18196/ijief.3227 https://doi.org/10.18196/ijief.3227 yasni & erlanda │ challenges of zakat integration as source of state revenue international journal of islamic economics and finance (ijief), 3(2), si, 175-204 │176 i. introduction 1.1. background tax revenue had fluctuated from 2014 to 2018 in line with economic development. it grew high in 2015 at 8% when the economy at that time only grew 4.79%, fell to 3.6% in the following year coinciding with the implementation of tax amnesty, then rose sharply in 2018 by 13.2%. tax revenue fluctuations will greatly affect the performance of the state budget in sustaining state spending. the thing to watch out for is when the revenue shrinks by the time the expenditure needs are high, because it will make the burden on the state budget even heavier. this condition was experienced in 2019 where tax revenue growth was only 1.4%. in 2020 it is also believed that tax revenue will still be depressed and may not even grow due to the impact of the covid-19 pandemic. figure 1. tax revenue and growth (trillions of rupiah) source: ministry of finance, macroeconomic framework and fiscal policy 2020 due to the unpredictable effects of the covid-19 pandemic, poverty level in indonesia is still relatively high. although the government has managed to suppress it up to 9.22 percent (bps, september 2019), but with its large population, indonesia ranks first in asean as a country that has extreme poverty in 2020 (world data lab, 2020). poverty is one important indicator to see the success of development of a country (jonnadi, amar, & aimon, 2012). poverty alleviation is also one of the targets of sustainable development goals (sgds). thus, the government pays great attention to the problem of poverty alleviation. in figure 2, we can see the poverty budget for the past five years, where the trend continues to rise in that period. meanwhile, the realization of tax revenue has been continuously falling short over the past five years (figure 2). with a budget deficit policy, this condition tax customs and excise growth (%) yasni & erlanda │ challenges of zakat integration as source of state revenue international journal of islamic economics and finance (ijief), 3(2), si, 175-204 │177 contributes to an increase in government debt. by not achieving the revenue target, the government will cut the budget which will result in reduced effectiveness of the objectives of the expenditure. based on this fact, the government should look for alternative sources of revenue outside those that have been used in the state budget mechanism. khan (2007) stated that there must be a source of revenue other than the public sector and the private sector to overcome the negative effects of poverty. in the era of new public financial management, where society participation and cost sharing in public goods provision are inevitably pursued by government, some sources can still be explored such as zakat, infaq, sadaqah as social awareness activities for muslims that are prevalent in the community. there are also other donations on the basis of certain motivations which can reduce the burden of tax revenue to support public policy. the phenomenon of mutual cooperation and caring to help others through social donations emerged even more apparent when the covid-19 pandemic entered a period of social restrictions. figure 2. poverty budget and tax shortfall (trillions of rupiah) source: http://www.data-apbn.kemenkeu.go.id/ (data processed) several studies have revealed the role of zakat in economy in addition to its contribution to government account. all researchers agree that zakat could affect poverty alleviation as discussed by khan (2007) and atabik (2015). in terms of zakat fund to finance state budget, some researchers already discussed zakat integration from the view of legal aspect such as subekan (2016), positive and islamic law such as tahir (2015), theoretical concept such as kahf (1992), and islamic jurisprudence such as akbar and kayadibi (2013). most of them indeed focus on the legal and sharia discussion since zakat is borne within islamic culture. this paper will complete the analysis of zakat integration within the framework of indonesian experience and public financial management perspectives. tax shortfall poverty budget http://www.data-apbn.kemenkeu.go.id/ yasni & erlanda │ challenges of zakat integration as source of state revenue international journal of islamic economics and finance (ijief), 3(2), si, 175-204 │178 1.2. objective this research will examine various social facts developed around zakat integration by focusing on zakat mal, namely zakat imposed on assets with the terms and conditions set out in islamic principles in supporting state finance. zakat integration is definitely to include zakat as a source of state revenue to be managed according to the principles of state finance. by collecting experiences from practitioners in zakat, tax, budget, and public fund management, and verifying related literature, this research also attempts to reveal various challenges that may arise in the application of such integration. the results of this study should be beneficial for government of indonesia in considering alternative sources of revenue derived from community contributions to religious obligations as a government portfolio in overcoming dynamic economic conditions. this research is also expected to contribute to academic studies related to the role of the use of donation instruments on religious awareness for state finances. this research is organized in five sections. we start by elaborating the background, goals, and benefits of research, followed by theoretical ground and analysis of earlier studies. qualitative data analysis will be outlined next as the method in this research, covering data sources, research instruments, data analysis techniques, and data validity tests. the results and analysis will come in the fourth section and the final section will cover conclusion and recommendations. ii. literature review 2.1. background theory 2.1.1. charity behavior although many studies place charitable behavior as a mystery, in some societies it is associated with tradition. wang and graddy (2008) called it part of the civil life of american society. this includes zakat which was originally paid voluntarily by each individual when the prophet muhammad was still in mecca, but then became an economic obligation when he moved to medina (allami, 2015). allami's research (2015) also showed that there were 57 countries that applied zakat as a tax. however, in some countries such as oman and yasni & erlanda │ challenges of zakat integration as source of state revenue international journal of islamic economics and finance (ijief), 3(2), si, 175-204 │179 morocco, zakat is still a charity activity. in these countries, there is no policy to compel individuals to pay zakat. in reality, charity behavior appears as a social capital that raises voluntary behavior. wang and graddy (2008) mentioned that religious reason was one of the factors that influenced a person to donate and the amount he donated. this phenomenon of social capital can be attributed to the microeconomic concept of public goods that this type of goods can be available on the market not as a result of market mechanisms which rely on tradeoffs. 2.1.2. zakat and tax zakat and tax typically have many similarities. in the concept of zakat of property, zakat is withdrawn in a certain amount of wealth owned (sabiq, 2005: 2), so long as taxes are collected from a certain percentage of taxpayers income (big indonesian dictionary). in the event that the owner of the property falls into poverty or results in reduced assets, he may be freed from paying zakat (sabiq, 2005: 29), as is the case that tax obligations will disappear automatically when a person's income falls below the prescribed taxable income limit (regulation of the minister of finance no 101/pmk.010/2016). wittingly or not, taxes are an obligation for citizens. according to adriani (2005: 2) tax is a contribution to the state (which can be forced) that is owed by those who are obliged to pay it according to regulations, with no achievement returned, which can be directly appointed, and whose use is to finance public expenditures in connection with governmental duties. hosen (1990) and soemitro (1988: 5) agree with adriani's definition. this confirms that paying taxes is the obligation for every citizen whose results are used for the benefit of the administration of the state. meanwhile, zakat is obligatory for every muslim individual who has fulfilled the requirements to issue zakat. one type of zakat is zakat mal which is part of a person's (also legal entities) assets that must be issued for certain groups, after being held for a certain period of time (haul), and surpassing a certain minimum amount (kartika, 2006). recipient and issuer of zakat actually have special terms based on islamic books. muzakki is a person or institution that is required to issue zakat on certain assets. on the other hand, mustahiq or often also called asnaf is a group of people who are entitled to get zakat as specified by the koran. among these groups are included the indigent and the poor. yasni & erlanda │ challenges of zakat integration as source of state revenue international journal of islamic economics and finance (ijief), 3(2), si, 175-204 │180 2.1.3. the state's role in zakat the institutionalization of zakat during the new order period began with a speech by the president while commemorating isra 'mi'raj at the state palace on october 22nd, 1968. in accordance with the president's recommendations in the speech, the amil zakat infaq and sadaqah (bazis) board was formed, pioneered by the regional government of jakarta province. in the reform era, law number 38 of 1999 concerning management of zakat was issued by the government. the government together with the house of representatives (dpr) seeked to advance the social and economic welfare of the nation by issuing the act. furthermore, the decree of the minister of religion no. 581 of 1999 regarding the implementation of law no. 38 of 1999 and the decree of the director general of islamic community guidance and hajj affairs number d-291 of 2000 concerning technical guidelines for the management of zakat were issued. all of the laws issued above aimed to perfect the zakat management system in indonesia. in law number 23 of 2011 concerning management of zakat, there are two organizations that are entitled to manage zakat, namely the national amil zakat agency (baznas) and the amil zakat institution (laz). baznas is an institution that manages zakat nationally, while laz is an institution formed by the community which has the task of assisting the collection, distribution and utilization of zakat. through the enactment of law no. 38 of 1999 concerning management of zakat, government shows that, the rules of islamic law have been transformed into positive state law. thus, the rules of islamic law in the field of zakat have become part of national law. therefore, it is time to manage zakat professionally by applying transparency and accountability. 2.1.4. zakat as state revenue suparmoko (2002: 14) explained that state revenue was government revenue which includes tax revenue, revenue obtained from the sale of goods and services owned and generated by the government, government loans, money printing, and so on. state revenue both from within the country and from abroad is very important for the success of the national development process, especially government revenues from within the country in the form of tax and non-tax revenues as well as revenues from natural resources in the region. article 1 number 9 of law no. 17 of 2003 concerning state finance states that state revenue is money that goes into the state treasury. article 1 of this yasni & erlanda │ challenges of zakat integration as source of state revenue international journal of islamic economics and finance (ijief), 3(2), si, 175-204 │181 law also emphasizes that everything in the form of money and in the form of goods that can be used as state property in connection with the implementation of these rights and obligations is part of the state's finances. hence, state's obligation to advance public welfare as stated in preamble of the 1945 constitution combined with religious obligation that supports these goals (atabik, 2015), ascertain zakat as state revenue. using the current classification of state revenue, zakat can be included in the category of grants or can also be included as non-tax state revenue. at present, state revenue can be divided into two, state revenue and grant and state financing (http://www.data-apbn.kemenkeu.go.id/). 2.2. previous studies there are several studies that are aligned with the topic of this research. some of them related their studies with public policy aspect such as poverty alleviation (khan, 2007; and atabik, 2015). other studies discussed the integration of zakat funds as a source of state revenue. subekan (2016) even stated that zakat had been part of state finance based on current indonesian regulation in state finance. in addition, tahir (2015) proposed a concept of integration of taxes and zakat through legal transformation and the establishment of directorate general of tax and zakat as regulator and supervisory body. moreover, kahf (1992) examined zakat inclusion in state budget using seven assumptions and made several conclusions. firstly, zakat could support budget revenue so that it could be used for other budgeting purposes. secondly, indirect effect of zakat for government revenue included rising the potential for taxation through increasing community productivity, employment, and outputs produced and being policy tool to influence economic activity in society. research of akbar and kayadibi (2013) to some extent was close to the discussion in this paper. by using swot and islamic jurisprudence for descriptive analysis, they argued that integration of zakat in government system should be realized. in broader perspective, miglietta et al. (2014) concluded that civic crowd funding can be used as an effective tool for citizens to overcome the problem of budget deficits while monitoring the resources used for community projects. this paper then uncovered the broad resources of government revenue. this research tries to grab all previous findings that have become consensus and settled. in one sense, this research supports the fact that zakat and poverty program by government cannot be segregated. we also recognize http://www.data-apbn.kemenkeu.go.id/ yasni & erlanda │ challenges of zakat integration as source of state revenue international journal of islamic economics and finance (ijief), 3(2), si, 175-204 │182 that there are still ideological disagreements in society regarding zakat implementation which was exposed by previous studies (akbar et al., 2013 and tahir, 2015). as part of our major contribution, we add up the logic of government financial management which will finally influence the practice of policy to introduce zakat into the budget. 2.3. research framework based on the background and study of the literature presented, the research framework is illustrated in figure 3 below. in this picture, the basis of zakat and tax is equally influenced by socio-economic conditions due to its relationship with people income. tax revenue will grow as gdp grows and zakat collection will also grow in line with gdp growth. besides, it is also influenced by perception of muzakki and their beliefs (firdaus et al., 2012). zakat integration is expected to reduce the burden on the state budget if integrated into poverty alleviation programs as stated by khan (2007) and atabik (2015). including zakat as budget deficit reduction is supported by research of kahf (1997) which took the case of pakistan. figure 3. research framework source: author economic and social conditions economic and social conditions legitimate taxes and other revenues according to the state budget zakat state expenditures poverty alleviation programs other programs + d e fi ci t deficit reduction yasni & erlanda │ challenges of zakat integration as source of state revenue international journal of islamic economics and finance (ijief), 3(2), si, 175-204 │183 iii. methodology 3.1. data the first type of data used in this study is primary data in the form of semistructured interview results. determination of the interviewees was conducted purposively, selected with specific considerations and objectives, and presented as initials, namely: mhz who is an islamic economist and practitioner at a zakat body domiciled in jakarta, siba who is an employee at the fiscal policy agency, ministry finance, ha is a representative of a taxation institution, as who is an academic at the education and training agency of the ministry of finance, rhp who is academic of sharia finance in state polytechnic in jakarta and formerly worked for directorate of debt and grant, directorate general of risk management and financing, ministry of finance, and mrs. ea who is a pioneer of school of sharia finance and accounting trainer in state polytechnic in jakarta. second, secondary data used includes laws, journals, theses, books or other literature from the website, including quantitative state budget data relating to zakat management and state revenue. 3.2. method the method used in this research is descriptive qualitative. the qualitative method is chosen because zakat integration as state revenue is still developing in indonesia and needs to be explored in greater depth. data mining is used to understand the problems that occur because of social life (creswell, 2014: 41). in addition, there are many aspects related to the phenomenon under study such as social, legal, public administration, and religious aspects with diverse characteristics. thus, qualitative methods are very suitable to be applied in order to fully absorb the phenomenon. the nature of this research is descriptive. neuman (2014: 38) explained that descriptive research was a research that aims to provide a clear picture of an event using words or numbers. the description of this study begins with the depiction of the fact of the integration of zakat into the ongoing state revenue where there are groups of data that are further analyzed into challenges that want to be revealed. this analytical approach is in accordance with the inductive approach, which according to sekaran (2006: 36) is a process in which the researcher observes a particular phenomenon and finally arrives at the final conclusion (neuman, 2014). yasni & erlanda │ challenges of zakat integration as source of state revenue international journal of islamic economics and finance (ijief), 3(2), si, 175-204 │184 based on the literature review, this research approach emphasizes the interpretation of the fact of the integration of zakat in indonesia. the interpretivism approach, which according to strauss and corbin (2007) was the result of an in-depth exploration of real phenomena that were complex but rich in meaning, was emphasized by describing and explaining the dynamics of zakat integration as state revenue in indonesia. 3.3. data analysis miles and huberman (1994) stated that the qualitative data analysis was carried out interactively and continuously until the data is saturated. these activities include data reduction, data display, and conclusion drawing or verification. data reduction in this analysis is done by summarizing, choosing the main things, focusing on the important things, looking for themes and patterns. data obtained in the field is written in the form of a detailed description or report. data reduction helps researchers to get a clearer picture, and makes it easier for researchers to do further data collection and look for it if necessary. furthermore, the presentation of data (data display) is done using narrative text (miles and huberman, 1994). finally, data obtained are categorized and searched for themes and patterns for drawing final conclusions. the initial conclusions put forward are still temporary and will change if no strong and supporting evidence is found at the next stage of data collection. the validity of the study is also considered. samples of selected informants who tend to be purposive are done by considering several things that are relevant to the problem of this study. considering that the fundamental issue in this research is about zakat and state revenue, the determination of subject matter expert who masters islamic law and the laws and practices of state finance as well is considered to guarantee the fulfillment of construct validity. internal validity was also carried out in this study by extending the observation, increasing perseverance, triangulation, and using reference material (sugiyono, 2016: 270). for external validity, it is done by writing a research report with a detailed, clear, systematic and reliable description. examination of the results also involves many parties, namely the review team consisting of three people. yasni & erlanda │ challenges of zakat integration as source of state revenue international journal of islamic economics and finance (ijief), 3(2), si, 175-204 │185 iv. results and analysis 4.1. results 4.1.1. view of zakat as an alternative to state revenue in indonesia, zakat as state revenue undergoes a pro and a contra. siba did not give an argument to agree or disagree with the idea. he stated that to enter into state revenue zakat must be included in the state budget (apbn). for the time being, the use of zakat funds is only for social spending and the zakat fund cannot be used for capital expenditure. this argument is supported by rhp who mentioned 8 asnaf as the channels of zakat spending. there is a positive side if the amount of zakat revenue covers the magnitude of social spending needs. this means that there is state revenue other than taxes allocated for social spending such as subsidies, so that the portions of other state revenues can be spent on the other development programs. even so, the government must also look again at the use of zakat in terms of religious law whether it matches the current expenditure model. currently, government does not look to whom budget spending is channeled, whether to muslims or non-muslims. if the social expenditure of zakat is only allowed to be given to muslims, the allocation of spending will be more complicated. furthermore, the interviewee ha said he agreed if there were other sources of revenue other than tax. he stated that in the past few years, the tax revenue had only been around 80%, and the support from other sources was inevitably required. rhp suggested that zakat could complement tax as state revenue since taxes are of several different characteristics to zakat. generally people are obliged pay taxes because of the rules. on the other hand, zakat is actually willingness, just like people going on the pilgrimage, even though they pay dearly, they are willing to sacrifice voluntarily. this means that the obligation to pay zakat and the obligation to pay taxes are supported by different motivation that affects people's behavior. if we talk about sharia finance, muslims are even encouraged to carry out zakat and waqf both in rich and in poor conditions and this becomes an advantage of zakat when tax revenue decreases due to economic conditions. therefore, he agreed upon zakat integration and regretted that this potential has not been optimized by the government. as agreed upon ha statement, that zakat was used as an alternative to state revenue. in subekan (2016), he explained the legal basis which could include zakat as state revenue. article 2 letter i of law no. 17 of 2003 reads that the wealth of other parties obtained using facilities provided by the government are included in the state finances. in the explanation of the law, it is stated that the wealth of other parties as referred to letter i includes assets yasni & erlanda │ challenges of zakat integration as source of state revenue international journal of islamic economics and finance (ijief), 3(2), si, 175-204 │186 managed by other people or entities based on government policy, foundations within the ministry and institution, or state and regional company. meanwhile, baznas is a body formed by the government to manage zakat. from this description it can be interpreted that zakat is a part of state finance. as’s opinion was quite similar to ea’s who also agreed upon zakat integration as state revenue, especially to help the poor and the needy. she argued that from the state law (constitution and zakat law) and islamic law from koran and hadith, it is clear that there is no contradiction in this matter. both support muslims who are obliged to pay zakat. to protect its people as mandated by constitution, it is very appropriate that government uses zakat, one of which is for the poor. for that reason, it could be translated that zakat is government’s right to collect. mhz as practitioners from the zakat body thought almost the same as ha and as. he agreed that zakat became state revenue, but its use must remain in the corridor as managed by baznas. in addition, he added, the recognition of zakat as state revenue must still pay attention to its principles. zakat must be collected and redistributed in the same year. the use of zakat funds must also remain flexible as currently practiced by baznas, it could not be treated like state budget mechanism which is considered rigid as it is today. based on the interviews conducted, the respondents had different opinions. they agreed with the idea of zakat as an alternative source of state revenue with certain conditions, especially in terms of utilization. the interviewees' answers can be summarized in table 1. as also asserted that the state might be involved in the management of zakat because one of the goals of establishing a state was to support the implementation of religious obligations carried out by citizens. this opinion was reinforced by tahir (2015) which stated that without the intervention of the state, the implementation of zakat obligation became less effective. table 1. zakat as state revenue interviewees opinion challenge mhz agree spending flexibility siba do not give opinions earmarking revenue ha agree n/a as agree n/a rhp agree revenue portfolio ea agree government’s right to collect source: author yasni & erlanda │ challenges of zakat integration as source of state revenue international journal of islamic economics and finance (ijief), 3(2), si, 175-204 │187 4.1.2. formulation of zakat regulation as state revenue even though the rules of collecting zakat have already been mentioned in the koran, to become a state revenue, special rules are still needed to regulate them. this requires the government as a regulator to make rules in its collection. the state can make zakat a compulsory levy like a tax because the government has the authority to make binding regulations on zakat funds. the need for this rule of law must be well planned by parties related to the collection, distribution, and administration of zakat. according to siba, to make zakat a state levy, the collection must be regulated in a law. in the 1945 constitution there is an article states that mandatory levies must be regulated by law. the parties involved in the process of drafting the law are the government as the executive and the house of representatives (dpr) as the legislative body. the government as executive consists of the ministry of finance; as an agency that handles state finance, the ministry of religion, the ministry of social affairs, and the coordinating ministry for the economy. in line with that, mhz stated that the parties involved in zakat regulation were mainly the ministry of finance from state revenue point of view, which is also mentioned by ea. as for the program, it can involve the roles of the ministry of social affairs, the coordinating ministry for the economy, the national development planning agency and the state institutions related to current the baznas program. at present, baznas has large programs that support government programs such as economic, humanitarian, educational and religious programs. the economic program can be integrated with the coordinating ministry for the economy, the education program can be integrated with the ministry of education and culture and the ministry of research, technology and higher education, the health program can be integrated with the ministry of health. as said that those who should be involved in the process of drafting the law for zakat integration are the government, islamic community organizations, and muslims themselves. technically, the government is the ministry of finance, while the muslim side is the body that is a manifestation of muslims, namely the indonesian ulema council (mui). the mui membership also consists of several sizable islamic community organizations such as nahdlatul ulama, muhammadiyah, and other islamic community organizations. according to rhp, the government could indeed regulate zakat through state budget law. in order to regulate the technicality, it must refer to the sharia principles and fatwa from the ulama so that the sharia principles are yasni & erlanda │ challenges of zakat integration as source of state revenue international journal of islamic economics and finance (ijief), 3(2), si, 175-204 │188 maintained, because the competence to keep it in accordance with sharia rules is in the sharia experts, not in the government. observing these various opinions, there are at least three parties that need to be involved in the formulation of zakat regulations as state revenues as well as obligations for citizens. house representatives, ministry of finance and other ministries or institutions that have the same program outcomes as baznas, and other non-governmental institutions such as mui and islamic community organizations are among the required parties as summarized in table 2. the zakat regulation must be in the form of a law, as stipulated in the 1945 constitution article 23a that taxes and other levies that are coercive for the purposes of the state are regulated by law. so as such, political and legal issues become the next challenge of zakat integration in indonesia. table 2. zakat regulation formulation as state revenue related parties role challenge house representatives regulation establishment politics and law ministry of finance revenue and expense administration ministry of religion; ministry of social affairs; the coordinating ministry for economy; ministry of education and culture; ministry of research, technology and higher education; ministry of health; ministry of law and human rights; national disaster management authority distribution of zakat baznas zakat collector and distribution mui and islamic community organizations religious fatwa issuance source: author 4.1.3. zakat management framework as state finance 4.1.3.1. zakat management mechanism as state finance based on the 2019 national budget, the total poverty budget is 382.4 trillion rupiah (figure 2) or 15.5% of the total expenditure budget. this value even exceeds the budget deficit in that year of 296 trillion. with the assumption that this poverty budget can be covered by the collection of zakat, there is great potential to further reduce the state budget deficit. according to subekan (2016) there are two mechanisms that can be used in managing zakat funds, namely through the state general cash account yasni & erlanda │ challenges of zakat integration as source of state revenue international journal of islamic economics and finance (ijief), 3(2), si, 175-204 │189 (rkun) and using the public service agency (blu) mechanism. in rkun mechanism, zakat funds are treated as third party funds, which are deposited using zakat account codes. the second mechanism is that zakat funds are managed in the same way as blu funds that has the discretion to use the funds it receives directly without having to deposit it in advance to the state treasury account. in addition to business process discussed above, rhp reminded that withdrawal and spending of zakat must be directed to spending supported by a fatwa from the ulama. therefore, government procedure must be combined with the scholars’ argument (fatwa) to manage zakat spending comply with sharia. nowadays, in addition to baznas, there are institutions that assist the process of collecting and distributing zakat, namely laz. some lazs have also been recognized by the government in regulation of the director general of tax number per-11/pj/2017. the question that arises next is how the institutional status of laz when zakat has been integrated with state finances. in fact, laz is not a body formed by the government. according to as, laz can be embraced by the government in the management of zakat. they could simply report and deposit funds received from muzakki, then an additional column titled transfer via laz can be added to the zakat deposit letter. because zakat has been integrated with state finance, bpk (supreme audit board) can audit the institution. 4.1.3.2. distribution of zakat funds zakat is an economic instrument that can be used to reduce poverty. with the budget, government has prepared various ways for this goal including activities to help low-income people, poverty alleviation, and poverty prevention. the government provides an allocation of funds called the poverty budget. programs included in the poverty budget include the family of hope program, food subsidies (rice for the poor), school operational assistance, health operational assistance, public health insurance, national community empowerment program (pnpm) for urban and rural area, rural infrastructure, tourism, village funds, community business credit and cooperative empowerment, low-cost electricity programs, and low-cost housing programs (http://www.apbn.kemenkeu.go.id). from those various government poverty alleviation programs, there is compatibility with the groups that are entitled to receive zakat. almost all of these poverty alleviation programs are in line with the expenditure orientation required for zakat. when the receipt of zakat is directed to spending aimed at asnaf then it is none other than social spending. http://www.apbn/ yasni & erlanda │ challenges of zakat integration as source of state revenue international journal of islamic economics and finance (ijief), 3(2), si, 175-204 │190 there are interesting things that we need to check out related to rural infrastructure spending. mhz said baznas had built infrastructure in the form of clean water facilities in tegalwaru village. until now the infrastructure that is allowed to be built from zakat funds is the construction of clean water and sanitation facilities. this was done following fatwa number: 001/munas-ix/mui/2015 concerning utilization of zakat, infaq, sadaqah, and waqf for the construction of clean water and sanitation facilities for the community. if examined further, the development of clean water and sanitation is part of the 2015-2019 national medium-term development plan. it can be seen that there is harmony between government programs and the use of zakat funds. in fact, the distribution of zakat funds does have its own limitations. mhz said that the social programs under the government are still too complicated. complete documents are needed in order to authorize cash disbursement. in addition, zakat has the principle of being accepted and distributed in the same year. responding to this situation, siba states zakat will be classified as earmarking since it can only be used on social spending. proceeds from zakat funds will be earmarked to cover the portion of social spending in the budget. earmarking is a government policy in using budgets whose revenue sources and expenditure programs will be specifically determined for their purpose. in public policy theory, efficient use of the budget for the government is important. earmarking is one step to achieve budget efficiency (http://www.fiskal.kemenkeu.go.id). one example of a country that uses earmarking is turkey. the mass housing fund is the second largest spending budget in turkey. these funds are obtained from imported goods taxes, supplementary value added taxes, and petroleum product taxes. the allocation of these funds is to provide credit for small housing and land acquisition (mclearry, 1991). 4.1.4. integration in increasing collection of zakat 4.1.4.1. causes of low realization of collection of zakat baznas noted that zakat, infaq and sadaqah funds collected by government and private amil institutions nationally in 2015 only touched idr 3.7 trillion or only reached 1.3% of its potential. mukhlis and beik (2013) stated that the majority of the muslim population in indonesia were still reluctant and less motivated to pay zakat, especially zakat mal. mhz said that public awareness to issue zakat is still very low so that the current receipt of zakat does not reach 10% of the existing potential. another yasni & erlanda │ challenges of zakat integration as source of state revenue international journal of islamic economics and finance (ijief), 3(2), si, 175-204 │191 cause is no regulation obliges the payment of zakat for those who are rich. the existing zakat act does not yet integrate zakat as part of the state finances. in addition, the lack of socialization in the community is also the cause of the low collection of zakat. according to as and supported in part by ea, currently the government has not made regulations that regulate sanctions for non-compliance zakat payer. even tax obligations that have clear sanctions are avoided by taxpayer. however, the government requisition of zakat will also raise the potential concern from the public if the zakat funds will be misused. the same opinion was stated by ha, who said that although zakat is obligatory according to religion, there is still the issue of compliance in it. thus, this pattern of behavior will be similar to the fact of tax revenue faced by the government, where the realization of revenue always misses the target set each year. the data description above can show the causes of the low realization of zakat receipts. among others, the management of zakat now is not maximally encouraging awareness of paying zakat. there are also lack of socialization and regulatory issues in zakat collection. this is in line with the findings by mubarok and fanani (2014) which stated that the low collection of zakat in indonesia is influenced by the lack of public trust in amil zakat institutions, low understanding in the calculation and distribution of zakat by muslim community, and the absence of sanctions for anyone who does not pay zakat. 4.1.4.2. efforts to increase the collection of zakat the low acceptance of zakat funds currently requires careful efforts in handling them. if later zakat is used as state revenue, adequate efforts are needed so that the receipt of zakat funds can be realized optimally to support the poverty program that is being run. various efforts have been made to increase the receipt of zakat at this time. mhz alluded that inpres number 3 of 2014 concerning optimization of zakat collection in ministries/institutions, general secretariat of state institutions, secretariat general of state commissions, regional governments, state owned enterprises, and regional owned enterprises through national amil zakat agencies, civil servants, employees of state enterprise and regional state enterprise as an appeal to pay zakat through baznas is still considered ineffective. this is because the nature of inpres does not strongly oblige and put sanctions for related institutions that do not implement it. yasni & erlanda │ challenges of zakat integration as source of state revenue international journal of islamic economics and finance (ijief), 3(2), si, 175-204 │192 at present, baznas is working on proposing more powerful regulation of zakat collection. in addition, baznas also proposes that zakat can be a substitute for tax, whereas the current zakat payment position is only as a deduction from taxable income. according to him, if both proposals were accepted, the receipt of zakat would increase by 40 trillion rupiah. aside from the regulatory aspect, baznas also seeks to strengthen public trust in the accountability side by conducting internal audits, external audits, and iso standardization. additionally, baznas also always improves service, transparency of reporting, and professionalism of human resources in the management and distribution of zakat. according to as, to increase public awareness in paying zakat, the government needs to increase their trust in zakat management organizations. furthermore, the government needs to expose as much detail as possible about the management of zakat to the public by the islamic scholars. the scholars are easier to instill trust in the community compare to the government itself. transparent zakat management is also an effort that can be done to increase public trust. in line with all of that, ha believes that to increase public awareness to pay zakat while paying taxes, the directorate general of taxes (dgt) has cooperated with the scholars. the dgt entrusts the scholars to explain that tax is as important as zakat, and the payment of zakat can be used as a deduction from gross income. from the three respondents’ arguments, the government can perform its role to increase the receipt of zakat. first, government can increase public trust in zakat management institutions established by the government. these efforts include increasing transparency and accountability in the management of zakat. mukhlis and beik (2013) stated that public trust in zakat management organizations could be raised by increasing the professionalism of zakat institutions, improving the quality of services in terms of transparency in management, socialization, and administration whose impact will increase muzakki's compliance in paying zakat. with the increase in obedience and trust from muzakki to pay zakat at zakat institutions, the receipt of zakat will also increase along with its potential. huda and tjiptohadi (2013) stated that as an effort to increase the receipt of zakat, real actions were needed so that muzakki would pay their zakat to the zakat institution. the utilization of zakat funds will be more optimal by zakat institutions rather than giving directly to mustahiq. secondly, government needs to cooperate with ulama (scholars) regarding zakat funds management. syahrullah and ulfah (2016) stated that one of the yasni & erlanda │ challenges of zakat integration as source of state revenue international journal of islamic economics and finance (ijief), 3(2), si, 175-204 │193 causes of the low collection of zakat is the low understanding of the obligation of zakat by muzakki. socialization of the obligation of zakat becomes a necessity to increase the receipt of zakat. the socialization on zakat does not only emphasize religious aspects, but also emphasize economic aspects and social responsibility especially for people in need. efforts to influence muzakki to pay zakat through zakat institutions can also be applied to increase muzakki's understanding of zakat obligations. the third effort that can be done is by strengthening regulations regarding zakat. as a consequence of the passing of the zakat law, the government from the central to the regional level is obliged to integrate the policy with these rules. in law number 23 of 2011, the obligation to pay zakat has not yet been regulated. in that case, there are no sanctions that can be imposed on muzakki who does not pay zakat. in the act there is an article that mentions facilities for muzakki to be able to reduce the taxable income of zakat that has been paid. the tax institution should be able to make optimal use of the facilities provided. according to as, until now the zakat infrastructure provided by the government is just exclusively in the formation of baznas and bazda, but has not yet reached its collection. baznas and bazda are considered underperform on the collection of zakat. as a form of worship, zakat has merit and sin consequences even though government does not provide maximum services to muslim communities. 4.1.4.3. zakat as a tax credit making zakat a tax credit is one step to prevent muzakki, who also become taxpayers, from the imposition of double levies. for muslims, zakat and tax are two parallel obligations. someone who has paid zakat to baznas as an institution formed by the government is still burdened with a next obligation namely paying taxes on his income. vice versa, someone who has paid taxes to the state with a nominal value that is higher than zakat, is still required to issue zakat on the object of the same assets and income. the basis for calculating zakat on income is from gross income. this is specified in the decision of the chairperson of the national amil zakat agency number kep.01/bp/baznas/xii/2015 which states the level of income zakat is 2.5% of gross income. as an illustration, this study presents a simulation of two different treatments namely, treatment i of zakat as a deduction of income, while treatment ii of zakat as a tax deduction in the following table 3. yasni & erlanda │ challenges of zakat integration as source of state revenue international journal of islamic economics and finance (ijief), 3(2), si, 175-204 │194 in treatment i, as regulated by law no. 36 of 2008 and law no. 38 of 1999, the zakat that must be issued is idr 2,500,000.00 and the income tax liability that must be borne is idr 2,175,000.00. therefore, the total zakat and tax that must be paid is idr 4,675,000.00. the impact of treatment i is that a person will be hit by two types of deductions on the same income object. in treatment ii, the tax liability was amounted to idr 2,300,000.00, while the taxpayer had paid zakat of idr 2,500,000.00, so there was no tax payable even there was overpayment of idr 200,000.00. table 3. illustration of zakat treatment item treatment i treatment ii gross income 100,000,000 100,000,000 non-taxable income (ptkp) (54,000,000) (54,000,000) taxable income (pkp) 46,000,000 46,000,000 zakat (2.5%) of gross income (2,500,000) pkp after zakat 43,500,000 income tax payable (5%) 2,175,000 2,300,000 (zakat) (2,500,000) income tax due after zakat (200,000) overpayment source: author by making zakat as a tax deduction, the public can avoid double levies in the form of zakat and in the form of taxes. government has an important role in efforts to increase the payment of zakat in society, one of which is through the zakat policy as a tax deduction before considering their personal perspectives towards this issue (al-mamun & haque, 2015). regarding zakat as a tax deduction and its impact on state revenue, the interviewees have almost the same answer. as and ea strongly agree if zakat is treated as a tax deduction. according to as, there are several advantages if zakat is used as a tax deduction. first, the public will try to pay zakat, because this will reduce the tax he or she has to pay to the state. second, spiritually someone has carried out religious orders through payment of taxes. zakat is a religious teaching that is different from tax as a consensus between the people and the government. in the islamic perspective the basis of tax law is not as strong as zakat, even though the tax still has to be paid. the third advantage is that people will try to be more honest. at present the public tends to cover their tax obligations towards the state. if later the zakat is determined as a deduction from the tax, there will be a link between the income data on the zakat report and the tax report. the directorate general of taxes may cross-check between reported income data and deducted zakat. for people who sincerely carry out religious orders, he or she will try to provide correct data. yasni & erlanda │ challenges of zakat integration as source of state revenue international journal of islamic economics and finance (ijief), 3(2), si, 175-204 │195 the same thing was expressed by mhz that he also agreed to make zakat as tax deduction. according to him, bank indonesia has also stated that if zakat is used as a tax deduction, there will be an increase in tax revenue. this is because people who have paid zakat but are not monitored by the dgt will automatically be known. malaysia has also proven the effectiveness of this practice from 2002 to the present. when the law stipulates that zakat can be used as a tax deduction, there is no decrease in the tax revenue even both zakat and tax revenue have increased. siba states that if zakat is used as a tax deduction, it must be integrated with state finances. if it is not integrated with state finances, this condition can reduce tax revenues and narrow the government's fiscal space. if fiscal space becomes narrower, the more financing will be needed, and the interest burden will also be funded by tax revenue. if zakat is integrated with state finances there will be no change in state revenue, only tax revenues will go down. he added that there is a psychological possibility that if zakat enters state revenue, the public will increasingly believe in the government's credibility which is more in line with religious principles. if trust increases, they are not reluctant to pay their obligations as muslims. related to this, ha stated that mathematically it might be possible that state revenue would increase if the taxpayer or muzakki realized that zakat could later be a tax deduction. it could occur if civil servants who have already paid zakat affirm by not utilizing overpaid status or not restoring it. but if everyone thinks of making a refund, there is a possibility that tax revenue will fall. if there is an increase in revenue, it may come from the multiplier effect. based on the respondent's answer, generally there will be no decrease in state revenue if zakat is integrated as a source of state revenue. on the contrary, integrating zakat will increase taxes as well as state revenue. this opinion is supported by suprayitno et al. (2013) in his research on the role of zakat in malaysia and its impact on tax revenue. he concluded that the existence of zakat as a tax deduction caused government tax revenue increased. as a tax deduction, zakat provides incentives for muslim communities to be more honest and correct in filling their own tax burdens. kahf (1992) also concluded that zakat will support taxation through increasing the productivity of the community, employment, and the resulting output. from the arguments that have been described, it is very possible if zakat is treated as a tax credit. meanwhile, according to ha, zakat is only known in islam, so there must be certain comparable practice to stipulate it in a national legal rule. yasni & erlanda │ challenges of zakat integration as source of state revenue international journal of islamic economics and finance (ijief), 3(2), si, 175-204 │196 4.1.4.4. challenges in zakat integration as state revenue some of the narratives above have revealed a number of facts about zakat integration as state revenue. some of these challenges must be considered by the government to enact zakat as an alternative source of state revenue. these obstacles and challenges must first be resolved before the integration policy is implemented. based on the information from the informants, they gave different opinions about these challenges. mhz stated, the first challenge was that the zakat program had not yet integrated with the government programs. zakat programs are currently not included in the tnp2k (national team for the acceleration of poverty reduction). in fact, by its function, the zakat programs are very suitable to be a poverty alleviation program. the position of baznas which is unclear in the government at present followed by low supervision by authorized body dilute confident of the programs created by baznas. furthermore, mhz also revealed that there is a fear that if zakat is used as state revenue, the allocation process of zakat funds may experience obstacles, because they have to go through the parliament. according to as, the first challenge of zakat integration is how the government increases public awareness. the second is the issue of regulation because the current zakat act does not yet integrate zakat as part of state finances. third is socialization to the community and the forth is the preparation of instruments and institutions that are given the authority to collect and distribute zakat. the fifth challenge comes from muslims themselves who might argue that zakat is not a state matter but a matter between him and his lord. the sixth challenge is the muslim faith towards regime in power is still fluctuating. according to him, this condition should not occur. lastly is the challenge of jealousy from other religious communities who will feel muslims are privileged if the rules of zakat are taken over by the state, even though the principle of our state does not explicitly refer to islamic state. siba stated that several issues could be the challenges of zakat integration. the first is political issue, such that there will be issues regarding the basis of the state if zakat is included as an obligation in the law. by calling zakat as state obligation, it can be indirectly perceived that our country is an islamic state. the second challenge is that the government must have managerial skills that are free from corruption. the next challenge is in terms of administration where the government must add a special system of revenue and expenditure for zakat. yasni & erlanda │ challenges of zakat integration as source of state revenue international journal of islamic economics and finance (ijief), 3(2), si, 175-204 │197 rhp stated in sturdy statement that there are no obstacles to integrate zakat as state revenue with the existing state budget conditions. the biggest obstacle is trust from the public to the government. because even in terms of taxes which is in the government's domain, what do they want to use it for is still in doubt by public. if we talk about zakat, we really need to ask whether the government can convince the public. people needs assurance that government will carry out zakat according to the rules and it is not corrupted or something else utilized, otherwise they would be better channel it elsewhere. thus, trust is the highest challenge. in line with as, ea revealed that the obstacle may exist, namely from the community itself. as a comparison, when the government issues cash waqf link sukuk, concerns and questions arise in the community of whether this will cause the waqf funds in mosques to be taken over by government. that is an example how to deal with zakat that has long been a social capital. however, ea disagrees if zakat integration could cause jealousy as mentioned by as. she sees from the example of the issuance of sharia-based state sukuk and even the government has formed an echelon ii unit, namely the directorate of sharia financing. all parties support this policy and there is no jealousy from other religions. this is because all government policies are well-intentioned and in order for the welfare of society. according to ha, the first challenge of zakat integration lies in its use and how to make it mutually supportive with tax revenue. furthermore, even though zakat is only known in islam, arrangements in other religions must be sought for comparable instruments. the challenges outlined by the interviewees can be grouped into several themes. these groupings can be seen in table 4. table 4. challenges of integrating zakat (organized according to theme clusters) no obstacles theme 1 unifying government programs with asnaf distribution 2 distribution process 3 strong zakat institution institutional 4 watchdog 5 public trust socialization 6 increased compliance 7 state ideology regulation, politics, law 8 alignment of rules with other religious communities 9 earmarking revenue administration 10 spending flexibility source: author yasni & erlanda │ challenges of zakat integration as source of state revenue international journal of islamic economics and finance (ijief), 3(2), si, 175-204 │198 4.2. analysis this study has revealed various social facts around zakat integration from the aspect of state revenue administration. to be managed according to the principles of state finance we can see zakat integration challenges from the perspective of actors who experience hardship and aspects of administration and management of state organization. by using qualitative data analysis, findings are narrated from interviewees’ answers. major findings of this study are summarized in table 4. each challenge in the five themes that we state in the table is not new indeed, however we could present them in more details into ten areas of obstacles. these detail obstacles are considered significant factors to reach successful zakat integration. all themes revealed in table 4 are considered mutually inclusive. the success of zakat integration into state finance is the combination of regulation, socialization, institution, distribution, and administration matters altogether. findings of this study could complete what subekan (2016) said that zakat had been part of state finance based on current indonesian regulation in state finance. our state finance regulation which was born as spirit of reform has already claimed zakat as part of state revenue due to state revenue definition coverage. however, we see that his study is slightly limited to administration point of view. social contribution from religious motivation should be managed differently and its integration into state matter needs further and comprehensive approach. these findings also support the research of tahir (2015) that proposed the establishment of institution to concurrently manage zakat and tax (second theme in table 4). what we find further is that strong zakat institution is achieved if it is under government body that occupies government power like directorate general of tax, not like baznas right now. even after it is established with strong authority, government can optimally supervise its operation with ex-post control mechanism by state audit board. state finance is a system of social and economy including politics which support the welfare of a country. from this perspective, we believe that zakat as country resource delved from the social capital must be managed comprehensively by considering all five themes altogether. the current management of zakat in indonesia faces several limitations since it only fits the theme of administration but we lack to execute other themes. to execute all these five themes, we can manage them gradually. one of the stepping stone to integrate zakat that is really suitable with this pandemic situation is to implement zakat as a tax deduction. even though farid (2008) proved in his research that there were several obstacles to the application of zakat as a tax credit in personal income tax in indonesia. these yasni & erlanda │ challenges of zakat integration as source of state revenue international journal of islamic economics and finance (ijief), 3(2), si, 175-204 │199 constraints include institutional, no sanctions in the zakat act, lack of public trust, religious and administrative issues. in contrast, government could perform its tax credit policy to counter this issue. this policy is also a form of government socialization of tax benefit that recognizes zakat as an important social capital in society. as shown in treatment ii table 3, tax credit from zakat will give people an incentive to pay taxes. the existence of this incentive can increase community compliance in paying taxes in one side and enhance social altruism in other side. even with some significant results that we capture in this study, we recognize some limitation to generalize this result. the respondents indeed conform to the requirement for their experience and knowledge both in state finance and zakat, as we duly follow creswell (2014) for narrative and phenomenology research. even though we strongly satisfy with the result as initial information during the time limit, more data must be better. further research should consider expertise of respondents including its number. v. conclusion and recommendations 5.1. conclusion state budget performance in sustaining state expenditure needs to be supported by alternative revenues that emerge from social capital in the community. the government can make zakat an alternative source of state revenue given its great potential and its compatibility with the poverty alleviation program that is being carried out by the government. the integration process will be greatly influenced by the conditions of the views of the community upon the state institutions and the mechanisms that operate within them. the integration of zakat as an alternative source of broad state revenue will experience several challenges, namely: uniting government programs with asnaf, distribution process, strong zakat institutions, supervisory institutions, public trust, increased compliance, state ideology, alignment of rules with other religious communities, revenue earmarking, and spending flexibility. the next challenge is the effort to increase the receipt of zakat if it has been integrated with state revenue. efforts to increase the receipt of zakat are: increasing public trust by increasing the transparency and accountability of the zakat management body established by the government, increasing muzakki's understanding of the obligation to pay zakat through socialization, and making zakat as a tax credit. yasni & erlanda │ challenges of zakat integration as source of state revenue international journal of islamic economics and finance (ijief), 3(2), si, 175-204 │200 5.2. recommendations the results of this study provide recommendations for more specific study of both state finance law and islamic law for the allocation of zakat funds to the government's poverty budget. as a gradual process, government and zakat institution (which is basically controlled by government) should synergize in socialization of obligation of zakat on property through collaboration with islamic scholars and community organizations, which could also be enhanced by serious accommodation in tax credit policy. islamic scholars and community organizations will be more trusted by the public in conducting socialization in aspects beyond policy. further research should analyze zakat as a tax credit with in-depth study on society behavior of its implementation in an effort to increase state revenue, accompanied by economic, social and religious approaches. finally, government should establish integrated muzakki database and taxpayers or otherwise synchronized. synchronizing this data will strengthen the tax base and zakat base which will make it easier for government institutions to coordinate and supervise and further enable all 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(2020). poverty clock. retrieved from https://worlddata.io/portfolio/world-poverty-clock. https://worlddata.io/portfolio/world-poverty-clock international journal of islamic economics and finance (ijief) vol. 5(1), january 2022, pages 31-58 asymmetric impact of oil prices and stock prices on bank’s profitability: evidence from saudi islamic banks md fouad bin amin1 corresponding email: fbinamin@ksu.edu.sa article history received : may 30th, 2021 revised : june 20th, 2021 december 1st, 2021 accepted : december 10th, 2021 abstract the soundness of financial institutions including banks depends on both internal factors and external factors. the profitability of the banks largely affected by external shocks like oil prices and stock prices. as an oil-exporting country, saudi economy particularly its banking sector largely rely on the oil prices. this study examines the asymmetric impact of oil prices and stock prices on saudi islamic banks’ profitability for the period 2000-2020. two saudi islamic banks’ profitability is examined by the factors like return on equity (roe) and return on assets (roa) with the help of a nonlinear autoregressive distributed lag (nardl) model. the estimated results are observed to be unbiased and robust. the results of this study show that oilp and stockp have significant role in determining the islamic banks’ profitability in saudi arabia. both higher oil prices and stock prices have positive influence on roe and roa of saudi islamic banks. this study suggest that development and efficiency of saudi stock market is important and macroeconomic policy should support the country’s economic diversification. the management of islamic banks need to focus on effective risk assessment and market monitoring tools to face the fluctuation of oil prices and their stock prices as these factors affect their profitability. besides, saudi islamic banks need to diversify their investment portfolios into more productive and export oriented private sectors such as small medium enterprises (smes). this strategic policy will enable islamic banks to absorb any future shock of oil prices without affecting their profitability. keywords: profitability; oil prices; stock price jel classification: c32; o13; 016; e44 type of paper: research paper @ ijief 2022 published by universitas muhammadiyah yogyakarta, indonesia doi: https://doi.org/10.18196/ijief.v5i1.11835 web: https://journal.umy.ac.id/index.php/ijief/article/view/11835 citation amin, m. f. b. (2022). asymmetric impact of oil prices and stock prices on bank’s profitability: evidence from saudi islamic banks. international journal of islamic economics and finance (ijief), 5(1), 31-58. doi: https://doi.org/10.18196/ijief.v5i1.11835 1 department of economics, kind saud university, riyadh, saudi arabia mailto:fbinamin@ksu.edu.sa https://doi.org/10.18196/ijief.v5i1.11835 https://doi.org/10.18196/ijief.v5i1.11835 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v5i1.11835&domain=pdf amin │ asymmetric impact of oil prices and stock prices on bank’s profitability: evidence from saudi islamic banks international journal of islamic economics and finance (ijief), 5(1), 31-58 │ 32 i. introduction 1.1. background a sound banking system is a prerequisite for the economic growth and development any economy (habibullah & eng, 2006; priscilla & ezeanyeji, 2019). islamic countries mostly maintain dual banking systems i.e., conventional bank and islamic bank (massah and al-sayed, 2015). islamic bank adopts shariah principles and becomes a predominant player across the globe. its performances outrun the counterpart and even proven resilient to face economic and financial crisis over the last few years (tlemsani & al suwaidi, 2016). one of the key factors behind this success of islamic banks is because of their shariah compliant products and services. it finances longterm and short-term development projects and experiences sustainable growth in most of the islamic countries (thorsten beck, demirgüç-kunt, & merrouche, 2010; m. a. hassan, hafsa, & muhammad, 2011). in saudi arabia, islamic banking industry is well-developed which comprises of four islamic banks, namely, bank al-rajhi, bank al-jazira, bank al-bilad, and bank al-inma. these banks aggregately possess 28.0% of total banking assets in the kingdom. al-rajhi is the largest islamic bank that owns 57.7% of the islamic banking market share. in other estimation, the rest of three islamic banks i.e., al-bilad, al-inma, al-jazira collectively hold 28.0% of total banking assets (khan, amin, khokhar, hassan, & ahmad, 2018). despite the world economic uncertainty, saudi islamic banking industry had witnessed a remarkable improvement in terms of achieving higher profit margins, lower cost of fund, asset size and quality, product-diversity, and outreach. this industry is growing at a rapid pace that contribute to the largest proportion of financing (82%) with the participation of conventional banks’ offering islamic banking products and services (fitchratings, 2021). the conventional banks are attracted by the higher profitability and growth of islamic banks. the relations of bank’s profit with economic growth via financial sector development is well-established. besides, the stock market development has significant impact on capital accumulation, productively and growth of banking sector (king & levine, 1993; levine & zervos, 1998) . bank and capital market are much related where one can be developed at the cost of other (allen & gale, 1999). bank’s profitability is affected by its stock value. the bank faces challenging condition once its value of stock falls. on the other hand, bank’s profitablity depends on external shocks of oil prices and stock prices (alaagam, 2019; hesse & poghosyan, 2009). for instance, the fluctuation in oil prices may harm bank’s profit directly due to the expansion of oil-based lending for businesses and projects and surplus liquidity. the banking sector of oil exporting country may be adversely affected by the decrease of oil amin │ asymmetric impact of oil prices and stock prices on bank’s profitability: evidence from saudi islamic banks international journal of islamic economics and finance (ijief), 5(1), 31-58 │ 33 prices. this leads to fall of exports, government revenues and fiscal balance, gdp growth and equity prices, which creates negative impact on banks’ balance sheets and credit expansion. besides, increase in oil prices might link to higher domestic demand which restore the higher banking performance by lending to low non-performing loan. in contrast, realizing the mechanism from aggregate supply side, oil price hike is beneficial to the saudi economy as its product capacity expanded and lead to higher economic growth. this fact is proven by the incident of higher oil prices between 2005 and 2008 where most of the oil-based economies including saudi arabia funded long-term investment project for diversifying their domestic economies. being a major oil-exporting country in mena region, saudi economy and its financial sector including banking industry largely rely on oil prices. according to saudi general authority of statistics, the saudi economy contracted by 7 percent in the 2020q2 because of 61.8% decrease in oil exports, and both government and private sectors experienced a declining growth rates of 10.1 percent and 3.5 percent, respectively (general autority of statistics, 2020). on the other hand, saudi stock market is appearing as one of key players due to its inclusion in the emerging market (suhad & tahar, 2021) and any volatility of this market also affect the banking sector (alkhareif, 2016) . previous studies conducted in saudi arabia focused on determinants of banks profitability by emphasizing the internal factors i.e., asset, liability, bank size, leverage ratio etc., while some other studies focus on the efficiency and productivity analysis of both conventional and islamic banks in saudi arabia (m. hassan, amin, khokhar, & khan, 2020; m. hassan, khan, amin, & khokhar, 2018; khan et al., 2018; khokhar, hassan, khan, & amin, 2020). as far as the existing literature is concerned, no study has conducted that examined the external factors like oil prices and stock prices that affect the islamic banks’ profitability in saudi arabia by using non-linear approach. this study is an attempt to fill the gap in the existing literatures. 1.2. objective this study attempts to examine the non-linear relations of oil prices and stock prices on the profitability of saudi islamic banks. the rate of return on equity (roe) and return of assets (roa) are used as the proxies of banks’ profitability. this study includes two islamic banks, such as bank alrajhi and bank aljazira for the asymmetric analysis. the study objective is achieved by a nonlinear autoregressive distributed lag nonlinear autoregressive distributed lag (nardl) model (y. shin, yu, & greenwood-nimmo, 2014). this study is an attempt to contribute in the existing literatures by extending the asymmetric analysis with nardl model. amin │ asymmetric impact of oil prices and stock prices on bank’s profitability: evidence from saudi islamic banks international journal of islamic economics and finance (ijief), 5(1), 31-58 │ 34 apart from this section, the rest of this paper is structured as follows: section two highlights on relevant past studies in relations to the variables under study, section three focuses on the data and research method, section four concentrates on the result and discussion of the estimated nardl model and final section makes concluding remarks with policy recommendations. ii. literature review this section highlights on the existing literatures on the bank’s profitability indicators such as return on equity (roe) and return on assets (roa). also, the findings past studies that focus on the its relationships among the oil prices, stock prices and gdp. the main purpose of reviewing the extant literature is to make the theoretical foundation for constructing the models. 2.1. banks’ profitability the existing studies highlighting on bank’s profitability is presented by the proxy of two common factors such as return on equity (roe) and return on assets (roa). some studies measure the bank’s profitability with these two indicators and consider as endogenous variables (anwar & herwany, 2006; arora & arora, 2013; t. beck, demirgüç-kunt, & levine, 1999; kosmidou, 2008; naceur & goaied, 2008; e. sharma & mani, 2012; staikouras & wood, 2004; sufian & habibullah, 2010). both roe and roa are the components of bank’s income statement which are calculated as the profit after paying the tax. the return on equity (roe) indicates bank’s management ability and efficiency to utilize the funds of shareholders and it plays a key role in destemming the degree of financial leverage of the institution (hassan & bashir, 2003). on the other hand, roa indicates the profit gained per value of assets which also shows the managerial capacity to gain profits by utilizing banks’ investment and financial (hassan & bashir, 2003). it also describes the bank’s ability to gain returns from diversified assets’ portfolio (rivard & thomas, 1997; rosly & bakar, 2003). since roe is influenced by roa and the latter might be lower, the banks usually apply financial leveraging principles to enhance roe for achieving the competitive advantages (hassan & bashir, 2003). 2.2. determinants of banks’ profitability empirical studies that measure the bank profitability are categorized into two factors i.e., internal and external. this study focuses on the oil prices, stock prices and gdp as the external factors of islamic bank’s probability. these are the factors that are not controlled by the bank’s management; however, they have positive effect on the bank’s profitability. following sub-section reviews related literatures on these external factors of bank’s profitability. amin │ asymmetric impact of oil prices and stock prices on bank’s profitability: evidence from saudi islamic banks international journal of islamic economics and finance (ijief), 5(1), 31-58 │ 35 2.2.1. oil prices and banks’ profitability the oil-exporters depend on oil export which also creates a positive link with the profitability of their banking industries. despite the fact, many studies ignore this factor in determining the bank’s profitability (demirgüç-kunt & huizinga, 1999; hassan & bashir, 2003). only few studies focus on oil price as an external factor of bank’s profitability. hesse and poghosyan (2009) highlight on mena region by dividing the banks into three types: islamic, conventional, and investment banks. zantioti (2009) and kpodar and imam (2010) concentrate on islamic banks’ profitability and observe that oil prices have positive and significant impact as it improves the banks’ financial condition with higher outreach in the case of net oil exporters in mena region. conversely, the net oil importing countries in the same region experience positive effect of gdp on bank’s profitability. this happens because of the increasing flow of deposits and economic activities. besides, hesse and poghosyan (2009) evaluate the indirect impact of oil shocks on the islamic, conventional and investment banks’ profitability in mena region. this study also focuses other institutional and macroeconomic variables. essayyad and madani (2003) conduct a similar study and observe a positive link between bank’s profitability and oil prices in saudi arabia. kpodar and imam (2010) also experience the similar findings. 2.2.2. stock market and banks’ profitability the outcome of existing literatures focusing on the stock market and bank’s profitability are mixed. the positive linkage is expected between the development of stock market and bank’s performance because a welldeveloped stock market ensures the easy flow of information to banking institutions enabling them to evaluate the potential risk of investment. besides, a sound stock market creates confidence among the borrower to obtain credit from the bank which also lead to increase the banks’ profit. on the contrary, the stock market can also affect negatively on the bank’s profitability. this might be the case of a competitive market where stock market appears to substitute to the banking sector. eichengreen and gibson (2001) examine the determinants of greek commercial banks’ profitability and observe that two factors i.e. market share and concentration ratios of greek banks have positive relation with banks’ profitability. kaya (2002) find a positive link of market share with banks’ profitability in term of roe. hassan and bashir (2003) identify a positive and significant role stock market development and banks’ profitability. in contrary to these findings, rossi, borroni, lippi, and piva (2018) observe that stock market has negative relation with banks’ roa and roe. amin │ asymmetric impact of oil prices and stock prices on bank’s profitability: evidence from saudi islamic banks international journal of islamic economics and finance (ijief), 5(1), 31-58 │ 36 2.2.3. real gdp growth and banks’ profitability many studies focus on macroeconomic and financial determinants of bank’s profitability. these are gdp growth, interest rates, inflation, stock market instability (u. albertazzi & l. gambacorta, 2009; athanasoglou, brissimis, & delis, 2008; beckmann, 2007; lee & hsieh, 2013). the existing literatures also reveal the mixed results. some studies find no influence (p. sharma, gounder, & xiang, 2013) while others explore negative impact on banks’ profitability (ben ameur & mhiri, 2013; ben naceur & omran, 2011; sufian, 2009; tan & floros, 2012; yanikkaya, gumus, & pabuccu, 2018). on the contrary, some other studies observe that economic growth enhance bank’s profitability. this is due to the economic boom and increasing demand for banking products and services (u. albertazzi & l. gambacorta, 2009; athanasoglou et al., 2008; davydenko, 2011; dietrich & wanzenried, 2014a; flamini, mcdonald, & schumacher, 2009; zeitun, 2012). with this mixed result, this study is an attempt to examine the positive relation of bank’s profit and gdp growth in saudi arabia. iii. methodology 3.1. data the study focuses on annual data (2000-2020) of two largest full-fledged islamic banks in saudi arabia i.e., bank alrajhi and bank aljazira. only two islamic banks are selected due to their early islamic banking operation in saudi arabia whereas other two banks such as, bank albilad and bank alinma started their islamic banking in 2004 and 2006, respectively. it considers two profitability indicators of banks i.e., return of equity (roe) and return of assets (roa) as the endogenous variables whereas stock prices of alrajhi and aljazira, oil prices and real gross domestic product are considered as the exogenous variables. all the data are extracted from bloomberg database. 3.2. model specification table 1 shows the description of the variables with the measurement unit and formula of extracting the dependent variables. amin │ asymmetric impact of oil prices and stock prices on bank’s profitability: evidence from saudi islamic banks international journal of islamic economics and finance (ijief), 5(1), 31-58 │ 37 table 1. definition of variables levelling description measurement roe return of equity is the ratio of net profit to shareholders’ equity roe= net profit total equity roa return of asset is the ratio of bank net profit to total assets roa= net profit total assets stockp stock prices (usd) converted to natural logarithm. oilp brent oil price (usd) converted to natural logarithm. rgdp real gross domestic product (usd) real gdp is calculated from gdp deflator and converted to natural logarithm. source: bloomberg (2021) this study adopts a nonlinear autoregressive distribution lag (nardl) approach to show the long-run and short-run asymmetric relations of roe and roa with stockp, oilp and rgdp are constructed based on the approaches of by shin, yu, & greenwood-nimmo (2014) and shin and smith (2001): roe𝑡 = θ0 + θ1stockp𝑡 + + θ2stockp𝑡 − + θ3oilp𝑡 + + θ4oilp𝑡 − + θ5rgdp𝑡 + 𝑒𝑡 (1) roa𝑡 = θ0 + θ1stockp𝑡 + + θ2stockp𝑡 − + θ3oilp𝑡 + + θ4oilp𝑡 − + θ5rgdp𝑡 + 𝑒𝑡 (2) where θ=(θ0, θ1, θ2, θ3, θ4, θ5, and θ6) indicates the cointegrating vector of long-run coefficients; and et is the error term which is assumed to follow normal and independent distribution with zero mean value and constant variance. stockp𝑡 + = ∑ ∆stockp𝑖 + = ∑ max(∆ stockpi, 0) 𝑡 𝑖=1 𝑡 𝑖=1 (3) stockp𝑡 − = ∑ ∆stockp𝑖 − = ∑ max(∆ stockpi, 0) 𝑡 𝑖=1 𝑡 𝑖=1 (4) oilp𝑡 + = ∑ ∆oilp𝑖 + = ∑ max(∆ oilpi, 0) 𝑡 𝑖=1 𝑡 𝑖=1 (5) oilp𝑡 − = ∑ ∆oilp𝑖 − = ∑ max(∆ oilpi, 0) 𝑡 𝑖=1 𝑡 𝑖=1 (6) the long-run relationship of roe and roa with stockp and oilp increase are θ1 and θ3, and decrease are θ2, and θ4 which are assumed to be positive and negative, respectively. since θ2 and θ4 are predicted to be positive which are supposed to change in identical direction, for example, any increase in stockp impact positive long-run changes in roe and roa as related to the effect of stockp decrease on roe and roa of an identical extent i.e., θ1 > θ2. hence, the long-run relationship as shown in eq.1 and eq.2 indicate the non-linear and long-run stockp change pass-through to the roe and roa. δroet = θ + ß0roet−1 + ß1stockpt−1 + + ß2stockpt−1 − + ß3oilpt−1 + + ß4oilpt−1 − + ß5rgdpt + ∑ µi∆roet−i + ∑ (ωi +∆stockpt−i + +ωi −∆stockpt−i − ) q i=0 p i=1 + ∑ (ξi +∆oilpt−i + +ξi −∆oilpt−i − ) q i=0 + ∑ τi∆rgdpt−i + si=0 +εt (7) δroat = θ + ß0roat−1 + ß1stockpt−1 + + ß2stockpt−1 − + ß3oilpt−1 + + ß4oilpt−1 − + ß5rgdpt + ∑ µi∆roat−i + ∑ (ωi +∆stockpt−i + +ωi −∆stockpt−i − ) q i=0 p i=1 + ∑ (ξi +∆oilpt−i + +ξi −∆oilpt−i − ) q i=0 + ∑ τi∆rgdpt−i + si=0 +εt (8) amin │ asymmetric impact of oil prices and stock prices on bank’s profitability: evidence from saudi islamic banks international journal of islamic economics and finance (ijief), 5(1), 31-58 │ 38 two of the exogenous variables are shown in asymmetric form while rgdp is presented as liner form; p, q and s indicate the lag orders. the long-run parameters (θ1= ß1/ ß0), (θ2= -ß2/ ß0), (θ3= ß3/ ß0), and (θ4= -ß4/ ß0) show the long-run effect of stockp and oilp (exogenous variables) increases and decreases, respectively, on roe and roa (endogenous variables). besides, ∑ ωi + 𝑞 𝑖=0 and ∑ ωi − 𝑞 𝑖=0 and ∑ ξi + 𝑞 𝑖=0 indicate the short-run effect of stockp and oilp increases and decreases on roe and roa, respectively. thus, eq.7 and eq.8 present the asymmetric long-run and short-run effect of stockp and oilp on roe and roa. 3.3. method as mentioned outset that this study applies nardl approach which is developed by y. shin et al. (2014). while many studies use ardl approach introduced by m hashem pesaran, shin, and smith (1999) and later on developed by m.h. pesaran, shin, and smith (2001), this study focuses on nardl approach to examine the non-linear relationships among the variables. following stages are maintained in estimating nardl model: i) unit root test for detecting the absence of i (2) and presence of i (0) or i (1) or both; za tests to detect the structural breaks, ii) general-to-specific principles similar to ols technique on eq.7 and eq. 8 to construct final nardl model via trimming the insignificant lags, iii) nardl bound test method to identify the cointegrating variables (y shin, yu, & greenwood-nimmo, 2011) with the null hypothesis (no cointegration) (hn: ß0=ß1+= ß2= ß3+= ß4= ß5 =0) is inspected against the alternative hypothesis (presence of cointegration) (ha: ß0 ≠ ß1+≠ ß2≠ ß3+≠ ß4-≠ ß5 ≠0), iv) long-run and short-run asymmetric relations between the endogenous and exogenous variables by applying wald test, v) non-linear cumulative dynamic multiplier (cdm) effects by the following equations: 𝑚𝑘 += ∑ 𝛿𝑅𝑂𝐸𝑡+𝑖 𝛿𝑆𝑇𝑂𝐶𝐾𝑃𝑡−1 + 𝑘 𝑗=0 , 𝑚𝑘 −= ∑ 𝛿𝑅𝑂𝐸𝑡+𝑖 𝛿𝑆𝑇𝑂𝐶𝐾𝑃𝑡−1 − 𝑘 𝑗=0 , k=0,1,2,3,… (9) 𝑚𝑘 += ∑ 𝛿𝑅𝑂𝐴𝑡+𝑖 𝛿𝑆𝑇𝑂𝐶𝐾𝑃𝑡−1 + 𝑘 𝑗=0 , 𝑚𝑘 −= ∑ 𝛿𝑅𝑂𝐴𝑡+𝑖 𝛿𝑆𝑇𝑂𝐶𝐾𝑃𝑡−1 − 𝑘 𝑗=0 , k=0,1,2,3,… (10) 𝑚𝑘 += ∑ 𝛿𝑅𝑂𝐸𝑡+𝑖 𝛿𝑂𝐼𝐿𝑃𝑡−1 + 𝑘 𝑗=0 , 𝑚𝑘 −= ∑ 𝛿𝑅𝑂𝐸𝑡+𝑖 𝛿𝑂𝐼𝐿𝑃𝑡−1 − 𝑘 𝑗=0 , k=0,1,2,3,… (11) 𝑚𝑘 += ∑ 𝛿𝑅𝑂𝐴𝑡+𝑖 𝛿𝑂𝐼𝐿𝑃𝑡−1 + 𝑘 𝑗=0 , 𝑚𝑘 −= ∑ 𝛿𝑅𝑂𝐴𝑡+𝑖 𝛿𝑂𝐼𝐿𝑃𝑡−1 − 𝑘 𝑗=0 , k=0,1,2,3,… (12) note that, k→∞, 𝑚𝑘 +→ θ1, and θ3, and 𝑚𝑘 −→ θ2 and θ4. amin │ asymmetric impact of oil prices and stock prices on bank’s profitability: evidence from saudi islamic banks international journal of islamic economics and finance (ijief), 5(1), 31-58 │ 39 iv. results and analysis 4.1. descriptive statistics table 2 displays the descriptive statistics of variables under this study where it indicates that roe is less volatile than roa while oil price is less volatile than stock prices. the real gdp of saudi arabia appears to be fourth least volatile variable where stock prices are highest volatile variable throughout the study period between 2000-2020. table 2. descriptive statistics variable mean median maximum minimum std. dev. roar 3.247640 3.070900 7.292900 0.198114 1.855891 roer 0.229315 0.220321 0.418235 0.152878 0.075460 roaj 0.11995 0.092962 0.470678 0.006136 0.103784 roej 0.022664 0.022448 0.032926 0.015099 0.004794 stockp 64.60654 64.15582 150.1119 17.00530 31.23058 oilp 55.65333 48.29000 92.40000 31.23000 20.03583 rgdp 14.51190 14.49900 14.76630 14.12686 0.225578 source: bloomberg (2021) 4.2. stationary and structural break test table 3 displays the result of both dickey-fuller (adf) and phillips-perron (pp) test (dickey & fuller, 1979; perron, 1989) with the integration order of variables under study which indicate that all the five variables have mixed order of i (0) and i(1) and most importantly none of the single variable is falling under integration order of i(0). afterwards, this study conducts the zivotandrews (za) test (zivot & andrews, 1992) to identify the possible structural break point. in table 3, two structural break points have been identified. based on these result, two dummy variables (2008 and 2014) are created which are included in the nardl model as exogenous variables. the justifications of considering two dummies in 2008 and 2014 are for controlling the external shocks of global financial crisis of 2008 and fall of world oil prices on the islamic banking profitability (roe and roa) in saudi arabia. some studies find that the financial crisis of 2008 have negative impact on the banks’ performances (gulati & kumar, 2016; tzeremes, 2015). amin │ asymmetric impact of oil prices and stock prices on bank’s profitability: evidence from saudi islamic banks international journal of islamic economics and finance (ijief), 5(1), 31-58 │ 40 table 3. unit root with structural break test results adf pp-test zivot andrews i(0) i(1) i(0) i(1) t-stat break point roar -1.29[1] -3.04*** [0] -2.50[1] -3.02**[4] -2.12***[1] 2008 roer -5.02***[1] -2.13***[0] -3.92**[0] -4.15***[2] -4.44*[2] 2008 roaj -1.12[1] -2.24*** [0] -1.70[1] -3.08**[4] -3.11***[1] 2008 roej -4.02***[1] -2.16***[0] -2.99***[0] -3.90***[2] -4.14**[2] 2008 stockp -3.62[0] -3.71***[0] -1.75[1] -3.55***[1] -3.54***[1] 2014 oilp -2.22[1] -3.98***[1] -2.53[5] -6.86***[16] -3.50** 2014 lrgdp -3.78[1]** -4.74**[0] -4.18[1]** -4.63**[5] -4.21***[1] 2008 note: an intercept and trend option is used for adf followed by the null hypothesis: the series contain a unit root. in the case of adf test, numbers in [ ] indicate optimal lags and for pp test, number in [ ] is bandwidth: (newey–west automatic) using bartlett kernel. sc is applied for selecting the optimal lag order. the subscript r and j stand for alrajhi and aljazira, respectively. superscript *, **, and *** indicate the rejection of the null hypothesis at 10%, 5%, and 1%, respectively. 4.3. brock, dechert and scheinkmakn (bds) test apart from the stationary and the structural break test results, this study also conducts brock, dechert and scheinkmakn (bds) test for detecting the nonlinear dependencies of both endogenous and exogenous variables as recommended by broock, scheinkman, dechert, and lebaron (1996). the results in table 4 suggest rejecting the null hypothesis of the error terms which are assumed to follow independent and identical distribution of across various dimensions. the rejection of null hypothesis indicates the existence of nonlinearity among the variables and hence justifies to estimate nardl model. table 4. bds non-linearity test results embedding dimension=m series m=2 m=3 m=4 m=5 m=6 roar 0.080083*** 0.091148*** 0.040173* 0.073897** 0.087153*** roer 0.11*** 0.15421*** 0.19445*** 0.209906*** 0.232351*** roaj 0.072465*** 0.106602*** 0.119336** 0.096786* 0.0606* roej 0.057368*** 0.072339*** 0.083339*** 0.084906*** 0.098842*** stockp 0.061468*** 0.124135*** 0.1656*** 0.196757*** 0.218591*** oilp 0.09831*** 0.157826*** 0.190061*** 0.185654*** 0.157062*** rgdp 0.189889*** 0.314598*** 0.404203*** 0.460978*** 0.487706*** note: the subscript r and j stand for alrajhi bank and aljazira bank, respectively. superscript *, **, and *** indicate the rejection of null hypothesis at 10%, 5%, and 1%, respectively. amin │ asymmetric impact of oil prices and stock prices on bank’s profitability: evidence from saudi islamic banks international journal of islamic economics and finance (ijief), 5(1), 31-58 │ 41 4.4. selection of optimal lag order one of the requirements prior to estimating nardl model is to select an appropriate lag orders of endogenous and exogenous variables. the schwarz criteria (sc) lag length criteria has been chosen for the estimation of final nardl model. figures 1-4 depict four set of appropriate nardl models which are derived from top twenty models from each set. -5.20 -5.15 -5.10 -5.05 -5.00 -4.95 -4.90 a r d l (1 , 2 , 1 , 1 , 0 , 2 ) a r d l (1 , 1 , 2 , 1 , 1 , 2 ) a r d l (1 , 2 , 1 , 1 , 1 , 2 ) a r d l (1 , 2 , 1 , 2 , 0 , 2 ) a r d l (1 , 1 , 1 , 1 , 0 , 2 ) a r d l (1 , 2 , 2 , 1 , 0 , 2 ) a r d l (1 , 2 , 2 , 2 , 0 , 1 ) a r d l (1 , 2 , 1 , 0 , 2 , 0 ) a r d l (1 , 2 , 0 , 1 , 0 , 2 ) a r d l (1 , 2 , 1 , 2 , 0 , 1 ) a r d l (1 , 2 , 1 , 1 , 2 , 0 ) a r d l (1 , 1 , 2 , 1 , 0 , 2 ) a r d l (1 , 1 , 2 , 1 , 2 , 2 ) a r d l (1 , 2 , 0 , 0 , 2 , 0 ) a r d l (1 , 2 , 1 , 1 , 2 , 2 ) a r d l (1 , 2 , 1 , 1 , 2 , 1 ) a r d l (1 , 2 , 2 , 1 , 1 , 2 ) a r d l (1 , 1 , 2 , 2 , 1 , 2 ) a r d l (1 , 2 , 1 , 2 , 1 , 2 ) a r d l (1 , 2 , 2 , 2 , 0 , 2 ) schwarz criteria (top 20 models) figure 1. roer, rgdp oilp, stockp figure 2. roar, rgdp oilp, stockp figure 3. roej, rgdp oilp, stockp figure 4. roaj rgdp oilp, stockp -0.4 0.0 0.4 0.8 1.2 1.6 2.0 2.4 a r d l (1 , 2 , 2 , 2 , 1 , 2 ) a r d l (1 , 2 , 2 , 2 , 2 , 2 ) a r d l (1 , 1 , 2 , 2 , 1 , 2 ) a r d l (1 , 2 , 1 , 2 , 1 , 2 ) a r d l (1 , 2 , 2 , 2 , 0 , 2 ) a r d l (1 , 1 , 2 , 2 , 2 , 2 ) a r d l (1 , 2 , 1 , 2 , 0 , 2 ) a r d l (1 , 2 , 1 , 2 , 2 , 2 ) a r d l (1 , 2 , 2 , 2 , 1 , 1 ) a r d l (1 , 1 , 2 , 2 , 0 , 2 ) a r d l (1 , 2 , 2 , 2 , 2 , 0 ) a r d l (1 , 2 , 2 , 2 , 2 , 1 ) a r d l (1 , 1 , 1 , 2 , 0 , 2 ) a r d l (1 , 2 , 2 , 2 , 1 , 0 ) a r d l (1 , 1 , 1 , 2 , 1 , 2 ) a r d l (1 , 1 , 1 , 2 , 2 , 2 ) a r d l (1 , 1 , 1 , 2 , 1 , 1 ) a r d l (1 , 1 , 1 , 2 , 2 , 1 ) a r d l (1 , 2 , 1 , 2 , 1 , 1 ) a r d l (1 , 2 , 2 , 1 , 1 , 2 ) schwarz criteria (top 20 models) -11.0 -10.9 -10.8 -10.7 -10.6 -10.5 -10.4 -10.3 -10.2 -10.1 a r d l (1 , 2 , 0 , 2 , 2 , 2 ) a r d l (1 , 1 , 0 , 2 , 1 , 2 ) a r d l (1 , 2 , 0 , 2 , 1 , 2 ) a r d l (1 , 2 , 1 , 2 , 2 , 2 ) a r d l (1 , 1 , 0 , 2 , 2 , 2 ) a r d l (1 , 1 , 1 , 2 , 1 , 2 ) a r d l (1 , 2 , 2 , 2 , 2 , 2 ) a r d l (1 , 2 , 1 , 2 , 1 , 2 ) a r d l (1 , 1 , 2 , 2 , 2 , 2 ) a r d l (1 , 1 , 1 , 2 , 2 , 2 ) a r d l (1 , 1 , 2 , 2 , 1 , 2 ) a r d l (1 , 2 , 2 , 2 , 1 , 2 ) a r d l (1 , 1 , 0 , 2 , 2 , 1 ) a r d l (1 , 1 , 2 , 2 , 1 , 1 ) a r d l (1 , 1 , 0 , 2 , 1 , 1 ) a r d l (1 , 2 , 2 , 2 , 1 , 1 ) a r d l (1 , 2 , 0 , 2 , 2 , 1 ) a r d l (1 , 1 , 1 , 2 , 2 , 1 ) a r d l (1 , 2 , 0 , 2 , 1 , 1 ) a r d l (1 , 1 , 1 , 2 , 1 , 1 ) schwarz criteria (top 20 models) -7.5 -7.0 -6.5 -6.0 -5.5 -5.0 -4.5 a r d l (1 , 2 , 1 , 2 , 2 , 2 ) a r d l (1 , 2 , 2 , 2 , 2 , 2 ) a r d l (1 , 2 , 1 , 2 , 2 , 1 ) a r d l (1 , 2 , 1 , 2 , 1 , 2 ) a r d l (1 , 2 , 2 , 2 , 2 , 1 ) a r d l (1 , 2 , 2 , 2 , 1 , 2 ) a r d l (1 , 2 , 0 , 2 , 2 , 1 ) a r d l (1 , 2 , 0 , 2 , 2 , 2 ) a r d l (1 , 2 , 2 , 1 , 2 , 1 ) a r d l (1 , 2 , 0 , 1 , 2 , 1 ) a r d l (1 , 2 , 2 , 1 , 2 , 2 ) a r d l (1 , 2 , 0 , 1 , 2 , 2 ) a r d l (1 , 1 , 2 , 2 , 1 , 2 ) a r d l (1 , 2 , 1 , 1 , 2 , 1 ) a r d l (1 , 2 , 1 , 1 , 2 , 2 ) a r d l (1 , 1 , 2 , 2 , 2 , 2 ) a r d l (1 , 0 , 0 , 2 , 2 , 2 ) a r d l (1 , 1 , 1 , 2 , 1 , 2 ) a r d l (1 , 1 , 1 , 2 , 2 , 2 ) a r d l (1 , 0 , 2 , 2 , 2 , 2 ) schwarz criteria (top 20 models) amin │ asymmetric impact of oil prices and stock prices on bank’s profitability: evidence from saudi islamic banks international journal of islamic economics and finance (ijief), 5(1), 31-58 │ 42 4.5. bound test for cointegration in this study, a baseline model is constructed for identifying cointegrating relations among endogenous and exogenous variables where two tests are applied i.e., f-test, and t-test. the general principle is that if the estimated value of f–statistics and t-statistics are greater than their respective critical values (upper limit), null hypothesis of no cointegration is rejected. the results of table 5 show the evidence of rejection of null hypothesis at 1% significant level, thus confirming that in the long run variables move together. table 5. nardl bound testing for cointegration model long-run relationship decision tbdm fpss roer, rgdp oilp, stockp -4.86*** 15.78*** cointegration roar, rgdp oilp, stockp -4.10** 47.55**** cointegration roej, rgdp oilp, stockp -3.90** 16.13*** cointegration roaj, rgdp oilp, stockp -6.25*** 23.35*** cointegration significance level t-statistics f-statistics lower bound upper bound lower bound upper bound 1% -3.43 -4.79 4.53 6.37 5% -2.86 -4.19 3.13 4.61 10% -2.57 -3.86 2.58 3.86 note: number of parameters (k) appear in original model k=5, critical value for finite sample, n=30; the subscript r and j stand for alrajhi and aljazira, respectively. superscript *, **, and *** indicate the rejection of null hypothesis at 10%, 5%, and 1%, respectively. 4.6. results of nardl estimation 4.6.1. short-run relation table 6 displays the nardl estimated results for two models i.e., roer and roej. in the short-run for roer, both positive and negative shocks of oilp have significant impact on roe r where the positive shocks dominate over the negative one, suggesting that a 1% increase in oilp will increase the roe r by 0.002% whereas 1% decrease in oilp will increase the roe r by 0.001%. this finding is similar to zantioti (2009) that focuses on net oil exporting countries in mena region. again, in the short-run for roej, positive shocks of oilp has no impact on roej, but negative shock of oilp has significant impact on roej, implying that 1% decrease in oilp will increase the roej by 0.001%. the reason might be the case of increasing net profit of banks and decreasing the value of total equity. it also indicates that bank’s expansion of oil-based lending and issue of surplus liquidity. amin │ asymmetric impact of oil prices and stock prices on bank’s profitability: evidence from saudi islamic banks international journal of islamic economics and finance (ijief), 5(1), 31-58 │ 43 table 6. estimated results of nardl models based on roe roer, lrgdp oilp, stockp roej, lrgdp oilp, stockp coeff std. error t-stat prob coeff std. error t-stat prob panel a: long-run estimation c 3.024 2.041 1.482 0.198 1.932 0.308 6.280 0.008 roe(-1) -0.877 0.180 -4.865 0.005 -0.382 0.508 0.752 0.506 rgdp(-1) 0.191 0.144 1.333 0.240 0.135 0.022 6.217 0.008 oilp_pos(-1) 0.001 0.001 0.645 0.547 0.001 0.000 4.226 0.024 oilp_neg(-1) 0.000 0.000 0.200 0.850 0.000 0.000 -6.784 0.007 stockp_pos(-1) 0.001 0.000 2.170 0.082 0.000 0.000 -0.800 0.482 stockp_neg(-1) 0.002 0.000 3.930 0.011 0.002 0.000 5.964 0.009 panel b: short-run estimation d(rgdp) 0.557 0.094 5.949 0.002 0.287 0.018 15.922 0.001 d(rgdp(-1)) 0.178 0.058 3.077 0.028 0.013 0.004 3.611 0.037 d(oilp_pos) 0.002 0.000 4.407 0.007 d(oilp_neg) -0.001 0.000 -4.359 0.007 -0.001 0.000 -18.791 0.000 d(oilp_neg) (-1) -0.000 0.000 -13.600 0.001 d(stockp_pos) 0.000 0.000 6.375 0.008 d(stockp_pos(-1)) 0.001 0.000 21.181 0.000 d(stockp_neg) 0.001 0.000 9.341 0.000 0.001 0.000 21.181 0.000 d(stockp_neg(-1)) 0.001 0.000 5.936 0.002 0.000 0.000 -7.092 0.006 ect(-1) -0.877 0.064 -13.763 0.000 -0.821 0.024 16.063 0.001 panel c: model diagnostics bg lm 5.42(0.10) 6.77 (0.08) reset 0.39 (0.56) 0.79(0.51) arch 2.34(0.12) 7.19(0.07) jarque bera-normality test 1.03 (0.59) 0.84(0.65) note: two dummy variables are excluded in the final nardl model because of their insignificant values. the subscript r and j stand for alrajhi and aljazira, respectively. superscript *, **, and *** indicate the rejection of null hypothesis at 10%, 5%, and 1%, respectively interestingly, positive shocks of stockp has no impact on roer, but negative shock of stockp has significant impact on roe r. it indicates that 1% decrease in stockp will decrease the roer by 0.001%. both positive and negative shocks in stockp have significant impact on roej, indicating that, a 1% increase in stockp will increase the roej by 0.001% whereas 1% decrease in stockp will decrease the roej by 0.001%. these outcomes are consistent with eichengreen and gibson (2001), hassan and bashir (2003) and kaya (2002). the rgdp has significant impact on roer and roej, where the magnitude of the impact is observed higher (0.55%) in case of roer than (0.29%) for the roej. these results are in line with the studies dietrich and wanzenried (2014b), zeitun (2012), muhamad, amir, and abdelhakim (2013). the coefficient of the error correction term (ect) of roer and roej are is -88% and -82% indicating that market disequilibrium is adjusted at a speed of 88% and 82% per period, respectively. in other words, the mark equilibrium can be achieved with around one year. amin │ asymmetric impact of oil prices and stock prices on bank’s profitability: evidence from saudi islamic banks international journal of islamic economics and finance (ijief), 5(1), 31-58 │ 44 table 7. estimated results of nardl models based on roa roar, lrgdp oilp, stockp roaj, lrgdp oilp, stockp coeff std. error t-stat prob coeff std. error t-stat prob panel a: long-run estimation c 3352.483 1433.714 2.338 0.144 26.649 2.617 10.182 0.010 roe(-1) 0.429 0.695 0.617 0.600 -0.743 0.119 -6.251 0.025 rgdp(-1) 6.249 101.250 -2.333 0.145 1.869 0.182 -10.245 0.009 oilp_pos(-1) 1.546 0.591 2.617 0.020 0.015 0.002 7.152 0.019 oilp_neg(-1) -0.370 0.181 -2.041 0.051 -0.005 0.000 -14.357 0.005 stockp_pos(-1) 0.116 0.039 -2.945 0.099 0.003 0.001 2.711 0.113 stockp_neg(-1) -0.135 0.025 5.489 0.032 -0.025 0.005 5.301 0.034 panel b: short-run estimation d(rgdp) 2.750 4.993 30.596 0.001 1.868 0.045 41.102 0.001 d(rgdp(-1)) 3.846 3.089 33.613 0.001 0.469 0.026 18.318 0.003 d(oilp_pos) 0.925 0.029 31.516 0.001 0.013 0.000 55.855 0.000 d(oilp_pos(-1)) 0.893 0.027 33.352 0.001 d(oilp_neg) -0.303 0.009 -32.136 0.001 -0.006 0.000 -62.052 0.000 d(oilp_neg(-1)) -0.181 0.006 -27.982 0.001 -0.003 0.000 -26.537 0.001 d(stockp_pos) 0.164 0.005 34.384 0.001 0.004 0.000 29.633 0.001 d(stockp_pos (-1)) 0.003 0.000 19.824 0.003 d(stockp_neg) -0.363 0.011 -31.785 0.001 0.004 0.000 21.029 0.002 d(stockp_neg(-1)) -0.323 0.011 -29.836 0.001 -0.005 0.000 -13.164 0.006 ect(-1) 0.429 0.014 31.599 0.001 -0.743 0.015 -50.895 0.000 panel c: model diagnostics bg lm 7.05 (0.25) 8.29 (0.21) reset 5.53(0.09) 0.13 (0.91) arch 0.18(0.67) 0.29 (0.54) jarque bera-normality test 2.15 (0.34) 1.35 (0.51) note: two dummy variables are excluded in the final nardl model because of their insignificant values. the subscript r and j stand for alrajhi and aljazira, respectively. superscript *, **, and *** indicate the rejection of null hypothesis at 10%, 5%, and 1%, respectively table 7 shows the short-run relations of roar and roaj with exogenous variables. in the short-run (roar), the positive and negative shocks of oilp have significant influence on roar, implying that a 1% increase in oilp will increase the roa r by 0.92% whereas 1% decrease in oilp will increase the roa r by 0.30% which clearly show the dominance of positive effect is more than the negative one. again, both the positive and negative shocks of stockp have significant effect on roar, showing that a 1% increase in stockp will increase the roar by 0.16% while 1% decrease in stockp will increase the roa r by 0.36% a dominance of negative shocks over the positive one. in the short-run (roaj), both positive and negative changes of oilp have significant impact on roaj, suggesting that a 1% increase in oilp will increase the roaj by 0.01% but 1% decrease in oilp will increase the roaj by 0.01%. on the other hand, the positive and negative shocks of stockp have significant impact on roaj with the dominance of the latter one, implying that 1% increase in stockp will increase the roaj by 0.003% but 1% decrease in oilp will increase the roaj by 0.005%. besides, rgdp has significant impact amin │ asymmetric impact of oil prices and stock prices on bank’s profitability: evidence from saudi islamic banks international journal of islamic economics and finance (ijief), 5(1), 31-58 │ 45 on both roar and roaj, and the magnitude of the impact is observed higher (2.75%) in case of roar than (1.87%) for the roaj. the coefficient of the error correction term (ect) of roar and roaj are is 43% and -74% indicating that market disequilibrium is adjusted at a speed of 43% and 74% per period, respectively. in other words, the mark equilibrium is achieved within one and half year to two years. 4.6.2. long-run relation the long-run cointegrating equations are presented in table 8 and table 9 which are based on the estimated nardl results of tables 6 and 7. table 8 displays the long-run relations of roe with the exogenous variables. in the long-run, there is both positive and negative significant impact of oilp on roej with the dominance of latter over the earlier one, in contrast to roe r where oilp has no significant impact. it indicates that 1% increase in oilp is related to the increase in roej by 0.004%, and 1% decrease in oilp is associated to the increase in roej by 5.78%, assuming the influence of other variables constant. moreover, there is both positive and negative impact of stockp on roer with the dominance of latter implying that that 1% increase in stockp is related to the increase in roer by 7.433 %, and 1% decrease in stockp is associated to the decrease in roer by 0.002%, assuming the effect of other variables constant. on the other side, there is only negative and significant impact of stockp on roej indicating that 1% decrease in stockp is linked to the decrease in roej by 0.01%, assuming the outcome of other variables constant. in addition, rgdp has positive and significant impact on the roej showing that 1% increase in rgdp is related to the increase in roej by 0.353%. this result is consistent with athanasoglou et al. (2008) dietrich and wanzenried (2014b). table 8. long-run relation based on roe roer roej variable coeff f-stat p-value decision coeff f-stat p-value decision rgdp(-1) 0.218 0.082 0.780 absence 0.353 1.966 0.011 presence oilp_pos 6.841 1.527 0.245 absence 0.004 0.097 0.021 presence oilp _neg(-1) 9.168 0.001 0.971 absence -5.780 12.047 0.006 presence stockp_pos 7.433 25.097 0.002 presence -7.454 1.676 0.120 absence stockp _neg(-1) 0.002 18.338 0.002 presence 0.006 9.085 0.013 presence note: the long-run relation is obtained by θ1= ß1/ ß0, θ2= -ß2/ ß0, θ3= ß3/ ß0, θ4= -ß4/ ß0, for positive and negative shocks of the oilp and stockp, respectively. the subscript r and j stand for alrajhi bank and aljazira bank, respectively. superscript *, **, and *** indicate the rejection of the null hypothesis at 10%, 5%, and 1%, respectively. table 9 shows the long-run relations of roa with the exogenous variables. in the long-run, positive and negative shocks of oilp have significant impact on both roar and roaj. it suggests that a 1% increase in oilp will increase the roar by 3.604 % and will increase roaj by 0.020% whereas 1% decrease in amin │ asymmetric impact of oil prices and stock prices on bank’s profitability: evidence from saudi islamic banks international journal of islamic economics and finance (ijief), 5(1), 31-58 │ 46 oilp will increase the roa r by 0.862%. and will increase roaj by 0.001%, assuming the effect of others constant. again, the positive and negative shocks of stockp have significant impact on roar but only negative shock of stockp has significant impact on roaj. it implies that a 1% increase in stockp will increase the roar by 0.27 % whereas 1% decrease in stockp will increase the roa r by 0.31% and will increase the roaj by 0.03%, with the assumption of ceteris paribus. moreover, rgdp has significant impact on roaj implying that a 1% increase in gdp will increase the roaj by 2.51%. . table 9. long-run relation based on roa roar roaj variable coeff f-stat p-value decision coeff f-stat p-value decision rgdp(-1) 14.54 0.064 0.813 absence 2.513 17.696 0.006 presence oilp_pos(-1) 3.604 36.038 0.004 presence 0.020 18.544 0.005 presence oilp _neg(-1) -0.862 42.077 0.003 presence -0.001 28.445 0.002 presence stockp_pos 0.270 15.513 0.017 presence 0.004 0.1070 0.755 absence stockp _neg(-1) 0.314 102.82 0.000 presence 0.033 33.855 0.001 presence note: the long-run relation is obtained by θ1= ß1/ ß0, θ2= -ß2/ ß0, θ3= ß3/ ß0, θ4= -ß4/ ß0, for positive and negative shocks of the oilp and stockp, respectively. the subscript r and j stand for alrajhi bank and aljazira bank, respectively. superscript *, **, and *** indicate the rejection of the residuals null at 10%, 5%, and 1%, respectively 4.6.3. asymmetric relationships the wald test statistics are applied to detect the long-run and short-run asymmetric relations with the null hypothesis of symmetry. table 10 shows the absence of both long-run and short-run asymmetric relations of oilp and stockp in the case roej, and there exist only long-run asymmetric relations of oilp for roer. in contrast, long-run asymmetric relations of oilp and stockp with roa exist in the case of both models. again, this study confirms short-run asymmetric relations of oilp and stockp with roar. while this relation of stockp presence with roaj. table 10. wald test for long-run and short-run asymmetry roer roej roar roaj long-run asymmetry long-run asymmetry variable f-stat p-value f-stat p-value f-stat p-value f-stat p-value oilp 2.999 0.059 1.508 0.248 16.059 0.016 79.029 0.000 stockp 0.829 0.3839 0.057 0.815 64.826 0.016 17.800 0.006 short-run asymmetry short-run asymmetry oilp 0.199 0.1409 0.508 0.142 79.756 0.001 1.007 0.354 stockp 0.249 0.123 0.571 0.752 28.988 0.006 65.402 0.000 note: the subscript r and j stand for alrajhi bank and aljazira bank, respectively. superscript *, **, and *** indicate the rejection of the residuals null at 10%, 5%, and 1%, respectively. amin │ asymmetric impact of oil prices and stock prices on bank’s profitability: evidence from saudi islamic banks international journal of islamic economics and finance (ijief), 5(1), 31-58 │ 47 4.6.4. asymmetric adjustment process figure 4-8 exhibit the cumulative dynamic asymmetric multiplier outcome for a total of 15 years with the reaction of roe and roa on the positive and negative changes in stockp and oilp. the solid black line shows the adjustment process of roe and roa with the positive and negative changes in stockp and oilp while the light dash red line which also known as the asymmetric line is situated between lower and upper band under the area of 95% confidence interval. the general rule of detecting the presence of asymmetric relation between the variables is that the zero straight line must crosses between the two boundary (lower and upper) which also indicate the statistically significant result. figure 4. roer -stockp figure 5. roer –oil figure 6. roaj stockp figure 7. roaj oilp figure 4figure 7 present the scenario which is in line with the findings reported in table 10. the cumulative dynamic asymmetric multiplier graphs (figure4 – figure 7) shows that the effect of positive and negative change of stockp and oilp on roa and roe takes around 3-4 years to achieve long-run equilibrium. -.0028 -.0024 -.0020 -.0016 -.0012 -.0008 -.0004 .0000 .0004 .0008 1 3 5 7 9 11 13 15 multiplier for stockp(+) multiplier for stockp(-) asymmetry plot (with c.i.) -.002 -.001 .000 .001 .002 .003 .004 .005 .006 1 3 5 7 9 11 13 15 multiplier for oilp(+) multiplier for oilp(-) asymmetry plot (with c.i.) -.04 -.03 -.02 -.01 .00 .01 1 3 5 7 9 11 13 15 multiplier for stockp(+) multiplier for stockp(-) asymmetry plot (with c.i.) .000 .005 .010 .015 .020 .025 .030 .035 1 3 5 7 9 11 13 15 multiplier for oilp(+) multiplier for oilp(-) asymmetry plot (with c.i.) amin │ asymmetric impact of oil prices and stock prices on bank’s profitability: evidence from saudi islamic banks international journal of islamic economics and finance (ijief), 5(1), 31-58 │ 48 4.7. robustness check since nardl model follow the same assumptions as ordinary least squared (ols) model, it is important to check the assumptions of residuals. the residuals are to be free from normality issue, serial correlation and heteroscedastic distribution. in addition, all the models are to be rightly specified. as can be observed from tables 4.5 and 4.6, the residuals from all the estimated nardl models have no serial correlation, with normal and homoscedastic distribution as evident from breusch-godfrey lm test, jarquebera test and white test, respectively. moreover, the ramsay reset test indicates that all the models have exact functional forms. at the last stage of model diagnostics, the cusum and cusumsq tests are conducted as suggested by pesaran (1997) for checking the nardl models’ stability which are presented in figure 8 and figure 9. figure 8. roer, rgdp oilp, stockp figure 9. roar, rgdp oilp, stockp figure 10. roej, rgdp oilp, stockp -8 -6 -4 -2 0 2 4 6 8 2016 2017 2018 2019 2020 cusum 5% significance -0.4 0.0 0.4 0.8 1.2 1.6 2016 2017 2018 2019 2020 cusum of squares 5% significance 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 2019 2020 cusum of squares 5% significance -6 -4 -2 0 2 4 6 2019 2020 cusum 5% significance -0.4 0.0 0.4 0.8 1.2 1.6 2018 2019 2020 cusum of squares 5% significance -6 -4 -2 0 2 4 6 2018 2019 2020 cusum 5% significance amin │ asymmetric impact of oil prices and stock prices on bank’s profitability: evidence from saudi islamic banks international journal of islamic economics and finance (ijief), 5(1), 31-58 │ 49 figure 11. roaj, rgdp oilp, stockp 4.8. analysis as discussed in previous section, the higher oil prices and stock prices lead to increase the two islamic banks’ profitability in saudi arabia. as an oilexporting country, islamic banks enjoys the benefit of higher oil prices. the banks are inclined to make investment decisions on the oil-based projects. besides, islamic banks’ stock prices are generally affecting their profitability. this is because of the development of saudi financial sector ensures a sound and well-functioning stock market with easy and available information helpful for financial institutions like banks to assess potential risk and make right investment decision. saudi islamic banks have created higher confidence level among the investors and it also provides them lucrative dividends. as a result, islamic banks’ stock prices become higher over the years which lead to gain higher profitability in terms of roa and roe. lastly, the positive link between real gdp growth with the profitability of islamic banks’ which is confirmed by this study indicate that economic growth flourish islamic banking sector by creating higher demand for islamic banking product and services both in the short-run and long-run. in past few years, economic growth along with national development plan enable financial institutions particularly islamic banks to take part in diversified investment projects to achieve saudi vision 2030. v. conclusion and policy recommendations 5.1. conclusion this study examines the asymmetric impact of oil prices and stock prices on two largest islamic banks’ profitability for the period 2000-2020. it considers two determinates of banks’ profitability i.e., roe and roa which are affected the three external factors such as oil prices, stock prices and real gdp. it applies a nonlinear autoregressive distributed lag nonlinear autoregressive distributed lag (nardl) model to achieve the objective. -6 -4 -2 0 2 4 6 2019 2020 cusum 5% significance 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 2019 2020 cusum of squares 5% significance amin │ asymmetric impact of oil prices and stock prices on bank’s profitability: evidence from saudi islamic banks international journal of islamic economics and finance (ijief), 5(1), 31-58 │ 50 in the case of roe, the short-run negative shocks of oilp have significant impact on both roer, where positive shocks dominate over the negative one, and roej where positive shocks of oilp has no impact and negative shock of oilp has significant impact on roej. on the other hand, positive shocks of stockp has no impact on roer, but negative shock of stockp has significant impact on roer. both positive and negative shocks in stockp have significant impact on roej. in the case of both models, rgdp has significant impact on roer and roej. in the case of roe, the long-run positive and negative shocks of oilp have significant impact of on roej with the dominance of latter one, in contrast to roe r where oilp has no significant impact. besides, both positive and negative shocks of stockp have significant impact on roer with the dominance of latter, however, only negative shocks of stockp have significant impact on roej. in this study, the long-run and short-run asymmetric relations of oilp and stockp are not confirmed in the case roej, whereas the long-run asymmetric relations of only oilp is confirmed for roer. the study also finds that rgdp has positive and significant impact on the roej in the long-run. in the case of roa, the short-run positive and negative shocks of oilp have significant influence on both roar, where the dominance of positive effect is more than the negative one, and roaj, where the changes in both effect are the same. on the other hand, the positive and negative shocks of stockp have significant effect on both roar and roaj showing a dominance of negative shocks over the positive one. besides, rgdp has significant impact on both roar and roaj. in the case of roa, the long-run positive and negative shocks of oilp have significant impact on both roar and roaj. besides, positive and negative shocks of stockp have significant impact in the case of roar while only negative shock of stockp has significant impact on roaj. in this study, the long-run and short-run asymmetric relations of oilp and stockp are not confirmed in the case roej, whereas the long-run asymmetric relations of oilp is only confirmed for roer. on the other hand, the long-run asymmetric relations of oilp and stockp is established for both roar ad roaj, while the short-run asymmetric relations of oilp and stockp is confirmed with roar and stockp with roaj. based on the above finding, it is clear that oilp and stockp have significant role in determining the islamic banks’ profitability in saudi arabia. although both positive and negative shocks of oilp and stockp are significant in most cases, the higher oil prices and higher stock prices are observed to be amin │ asymmetric impact of oil prices and stock prices on bank’s profitability: evidence from saudi islamic banks international journal of islamic economics and finance (ijief), 5(1), 31-58 │ 51 dominant factors affecting the profitability of two largest islamic banks in saudi arabia. in addition, real gdp growth as an important external factor affect the islamic banks’ profitability. 5.2. recommendation a few policy recommendations are provided based on the empirical analysis. the findings of this study recommends that policymakers should pay attention to increase the sound and development and efficiency of saudi stock market to achieve the higher profitability of islamic banking sectors which may attract foreign investments and boost the saudi economy. this finding is also important for the portfolio managers to make decision on acquiring islamic banks’ stock. it would be profitable to buy islamic banks’ stock when the trend of oil prices is higher. besides, macroeconomic policy should focus economic diversification for preparing any external shocks in the global market. based on the evidence of this study that any negative shock of oil prices will affect islamic banks’ profitability, the management of islamic banks need to pay attention of the risk assessment, market monitoring, and particularly tying islamic banking capitalization to oil price and stock price shocks might help facing the market fluctuation as these two factors affect their profitability. since oil price is one of the key determinants of saudi islamic banks’ profitability, there is an urgent need for strategic policy to absorb any future shocks. in this regard, islamic banks can play a pivotal role and support the government to effectively implement the saudi economic diversification plan termed as saudi vision 2030. saudi islamic banks and other related financial institutions need to diversify their investment portfolios into more productive and export oriented sectors. these institutions can invest more on small and medium enterprises (smes) to help achieve higher efficiency, productivity, and competitiveness of the industries. thus, the diversified investments policy of islamic financial institutions into private sector can not only facilitate rapid growth of export oriented high-value added industries but also generate huge employment opportunities and attract foreign investment in 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(1992). further evidence on the great crash, the oil-price shock, and the unit-root hypothesis. journal of business & economic statistics, 10(3), 251-270. doi:10.1080/07350015.1992.10509904. amin │ asymmetric impact of oil prices and stock prices on bank’s profitability: evidence from saudi islamic banks international journal of islamic economics and finance (ijief), 5(1), 31-58 │ 58 this page is intentionally left blank. international journal of islamic economics and finance (ijief) vol. 4(si), page 87-120, special issue: islamic banking an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth1 muhammad yusuf ibrahim tazkia islamic university college, indonesia corresponding email: muhammad.ibrahim@student.tazkia.ac.id indra tazkia islamic university college, indonesia, indradata@gmail.com article history received: november 21th, 2020 revised: january 22nd, 2021 accepted: march 12th, 2021 abstract the research is aim to attest and assess empirically the contribution of islamic banking (ibs) on the inclusive growth in indonesia. by taking a trial-stage method i.e. descriptive analysis to elaborate a statistical data, autoregressive distributed lag (ardl) model to assess empirically the contribution in a long-term, and error correction model (ecm) to assess the contribution in a short-term empirically. the findings are, total deposits and total financing only contribute positively significant into gdp and gini ratio in a long-term, that similiar with the previous study. then, a total financing contribute negatively to all indicators of inclusive growth in a long-term, but, its only significance on gdp and gini ratio. but, it was contribute significantly to all indicators in a short-term. so. the findings was only evidence the significance contribution of ibs on inclusive growth in a short-term. based on it, a long-term contribution of ibs still cathegorized as the area that requires an extentions in order to accomplish it. keywords: islamic banking (ibs), inclusive growth, poverty, empirical analysis jel classification: g18, g21, i31, i32, i38 type of paper: research paper @ ijief 2021 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.v4i0.10342 web: https://journal.umy.ac.id/index.php/ijief/article/view/10342 citation: ibrahim, m. y., & indra. (2021) an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120. doi: https://doi.org/10.18196/ijief.v4i0.10342. 1 the research was funded by bank indonesia institute through research grant fund program of bank indonesia 2020. mailto:muhammad.ibrahim@student.tazkia.ac.id https://doi.org/10.18196/ijief.v4i0.10 https://doi.org/10.18196/ijief.v4i0.10475 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v4i0.10342&domain=pdf ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│88 i. introduction 1.1. background islamic banking was a financial institution that operates based on islamic principles and it has grown massively in indonesia since 1992 (ismal, 2010; al nasser & muhammed, 2013). by the average annual growth of assets which up to 51.11% since 2000-2010 and its still growin up (ascarya, 2010). recorded in june 2020, total assets of islamic banking in indonesia reached rp356.33 trillion (ojk, 2020). means, it was increased rapidly than june 2010 which only rp78.14 trillion or it is equal to 456.015% in the past 10 years. with that growth, islamic banking should has contributed to indonesian economic improvement and growth. as in other countries and it has been proven by a several studies.2 and it was shown to has a contribution to gdp as noted in el ayyubi, et al. (2017). however, it is not enough if the role of islamic banking was only measured by gdp. because the goals of islam was not only an exclusive economy, but the inclusiveness or precisely is falah (prosperity) (ismail & shaikh, 2017). so, this analysis will takes an inclusive growth as a measurement of falah. completing a gdp which cannot illustrated an economic dynamic exhaustively (pietak, 2014). inclusive growth alone, officially adopted in indonesia at 2010. even though, the concept was only developed in 2004 by undp (united nation development program). and currently, it was developed by international organizations (kusumawati, elhorst, & haan, 2016). wherein this concept, the economy is not only measure by gdp. but also measured by poverty, employment, and income distribution as formulated by world bank and imf (anand, mishra, & peiris, 2013; kusumawati, et al., 2016). by measuring those instruments, the ideal condition in economy could be achieved. because it is measuring the economy broadly as stated by suryanarayana (2013). so, the concept in line with prosperity goals. hence, inclusive growth is compatible to be used to measure an islamic banking contribution on economy. therefore, the current research will analyze the contribution of islamic banking (ibs) due to an economic through an inclusive growth. it is considered appropriate with an islamic goals on economics. and this research is the complementation of a previous research, abd.majid & kassim (2015). which analyze a contribution of islamic banking (ibs) to the country’s economy, but only measured from gdp. while the current research has improved a measurement of country’s economy by inclusive growth. 2 al-yousif (2002), vaithilingam, et al. (2005), habibullah & eng (2006), ibrahim (2007), cordow, et al. (2011) and abd.majid & kassim (2015). ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│89 besides it, the current research is also aim to verify the statement of previous study with similiar topic, that is, susilo (2015). which stated that islamic financial inclusion has no contribution to the inclusive growth in indonesia, even thought it was not proven empirically. so, the current research will attest it empirically. but it will focus on islamic banking (ibs) to narrow the discussion down and adapt it to the current research goals. in essence, the research will attest and assess the contribution of islamic banking (ibs) to an inclusive growth in indonesia through an empirical approach to accomplish a previous researchs at this topic. 1.2. objectives the purposes of the research are to enriching the analysis and literature of islamic finance and prosperity of growth which representated by an inclusive growth in case of indonesia. and also to attest and assess the contribution of islamic banking (ibs) to inclusive growth. by dual specific objectives, as follows; ro1: analyzing a relationship between islamic banking (ibs) and inclusive growth based on statistical data ro2: attesting and assessing a contribution of islamic banking (ibs) to an inclusive growth in indonesia ii. literature review the research consist of a several theoretical background which associated to a financial literature topic. specifically, involve with an islamic banking (ibs) and inclusive growth theory, as follows: 2.1. islamic banking (ibs) and the indicators an analyzed islamic banking (ibs) was an indonesian islamic banks. then, to adjust it with an analytical goals, the indicators which will be used to measure it are total deposits and total financing of islamic banking (ibs). where the election of those instruments has adapted from a previous research, abd.majid & kassim (2015). although on the research, there are five indicators, that is total deposits, total financing, islamic stock index, inflation in term of consumer price index, and export-import. but, the research analyze the islamic banking and financial institutions (ibfis). so, it was using five indicators to measure it. while, the current research was only focus to analyze the islamic banking (ibs). so, the indicators which will be used at this analysis was only two, that is total deposits and total financing. and the election of the indicators has been reviewed be based on a several previous study. ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│90 such as total deposits which was reinforced by ayuniyyah, et al., (2013) and zirek, et al., (2016) as an indicator of islamic banking (ibs). then also for a compability of total financing as the other indicator of islamic banking (ibs) as proven in dhaoui (2018). so, based on that reinforcement, it can be assumed that the instrument has compable to be an islamic banking (ibs) indicators at this analysis. furthermore, the research is not only presents an evidence of a compability of those indicators. but, it also provide a rationale of the elemination of the other indicators, apart from differences in research object. the rationale of an indicators elimination rfom a previous research was based on t he statement of a several study. as stated in ayuniyyah, et al., (2013) that export-import and inflation has no correlation with islamic banking (ibs). then, for an islamic stock market, although, it was proven that islamic stock market has a correlation with islamic banking (ibs), but when the instrument included as an indicator at this analysis. a discussion will not focus on islamic banking (ibs) to the inclusive growth. so, to narrow down an analysis into islamic banking (ibs). then, the instruments will not included in the analysis. and by the indicators election and elimination, the research will be more efficient and appropriate with an objectives of a research. 2.2. inclusive growth and the indicators inclusive growth is an ideal wealth management concept which can measure an economy exhaustively (lee, 2018). it is also called by shared growth, broad-based growth, or pro-poor growth (suryanarayana, 2013). the concept was discussed by an international organizations and policy makers. but it was first developed by united nations development program (undp) in 2004, and adopted by indonesia in 2010 (kusumawati, et al., 2016). as an introduction, it will be briefly explained about inclusive growth. felipe (2012) defines an inclusive growth as an ideal condition that can be achieved when all of society participate and contribute together. and the statement was similar with anand, et al. (2013) which stated the inclusive growth uses all economic instruments to achieved it. means, it is measure an economy exhaustively. and the overview of the concept has suggested by a several international organizations. even though, there are still a disagreement of a measurement indicators of it. but a several instrument was planned as an indicators by an international organizations, as listed on a table 1. ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│91 table 1. inclusive growth indicators international organizations indicators world bank economic growth poverty employment adb economic growth equal opportunity broader access for participate stange social safety nets imf economic growth income distribution eu commission economic growth employment education poverty undp economic growth equality on income distribution opportunity to participate and have benefir from growth oecd economic growth household income health status jobs based on table 1, there are plenty indicators which has proposed by different organizations. but, this analysis will uses an indicators for an inclusive growth which consider to world bank and imf proposal. the election of the indicators with world bank and imf proposal basis was because of an analytical topic. where the research is about a financial literature, so, the reference that considered appropriate to be used at this analysis is a financial institutions or organizations. therefore, the indicators of inclusive growth at this analysis are economic growth, poverty, employment, and income distribution. and each indicators has its own measurement. at this analysis, the instrument which will be used to measure an economic growth is gdp. it is because gdp has been agreed internationally as a tool as measurement of an economic growth (wesselink, et al., 2007; haller, 2012; edeme, 2018) then, poverty indicators will be representated by a poverty rate. because, it has been a standard to measure a poverty (eberstadt, 2008). apart from being a standard, a poverty rate was also proven illustrates the growth on income side (akinbobola & saibu, 2004). and the other indicator of inclusive growth is employment, which will be measured by unemployment rate. then, the last indicator is an income distribution which basically intend to measure an inequality. so, the gini ratio will be used to ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│92 measure it (catalano, et al., 2009). where the compability of those instrument has been reinforced by a several research, that is farris (2010), brauninger (2002) and onodugo, et al. (2017). 2.3. previous research the research was adapted and developed from abd.majid & kassim (2015), which analyze the contribution of islamic banking and financial institutions (ibfis) on economic growth. but, the research was only use gdp as a sole indicator of growth. even though, its not enough to measure an economic exhaustively (pietak, 2014; ivkovic, 2016). therefore, an inclusive growth has been selected as an indicators to measure an economic condition at this analysis. besides it, there are several research which discuss a similiar topic with current research. that is, doumbia (2008), which analyze the inclusive growth on good governance side. lee (2008), although the study was only a qualitative research which use a descriptive analysis and literature method. then sengupta (2010) which states that inclusive growth was a solution to measure the economy in detail to equality problem. and the other research is suryanarayana (2013) which analyze the inclusive growth in term of the wealth distribution, including a banking sector as a medium of distribution. but, the research was only uses a descriptive analysis. means, the study was non-empirical analysis. so as with the research of susilo (2015) which analyze the effect of islamic financial institution in alleviating a poverty. and states that islamic financial inclusion (including islamic banking) has no effect on poverty alleviation which is a part of inclusive growth but the statement still does not evidence empirically. because the resaerch only use a literature study and a descriptive analysis. so, the current analysis is prepared to analyze the statement and evidence it empirically. 2.4. conceptual framework the following is a conceptual framework which has arranged based on polancic (2008) model. the framework contain an analyzed variables, indicators, measurement and methodology. ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│93 figure 1. conceptual framework of research the research analyze the islamic banking contribution to inclusive growth. where, both of variables has its own indicators. where islamic banking explained by total deposits and total financing. while, the indicators of inclusive growth consist of gdp, poverty rate, unemployment rate, and gini ratio. where the selection of the islamic banking indicators refer to abd.majid & kassim (2015) with some modification (election and elimination of indicators). and the inclusive growth indicators was quoted from world bank and imf model proposal, and it is reinforced by anand, et al. (2013), kusumawati, et al., (2016) and muhammad & david (2019) as a theoritical background. iii. methodology 3.1. research data the research will analyze the contribution of islamic banking (ibs) on inclusive growth. so, a variable that will be analyzed are total deposits and total financing as an indicators of islamic banking (ibs). and use a gdp, poverty rate, unemployment rate, and gini ratio as an indicators of inclusive growth. that whose the data has been collected from reliable sources. where the data of total deposits and financing of islamic banking has been collected from ojk’s (financial services authority of indonesia) website. while, a data of inclusive growth indicators has collected from the website of ministry of trade of indonesia and central bureau of statistics indonesia. which arranged in time series form, starting from 2010 to 2019. but, a collected data still in annual, semiannual, or quarterly. so, in order to balance a data and facilitate an analysis, the data was interpolated into a mothly data based on polynomial approach. its aim to estimate an intermediate value between a predertemined data points (jia, 2017). but for ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│94 a data of gdp which appled manufacture production index as a proxy of that instrument. and balancing an analyzed time series data in the same time interval measure. 3.2. indicators description indicator description is described in table 2 table 2. indicators description variable islamic banking (ibs) indicators deposits financing descriptions for a bank, deposits was a key tools of a financing project. which in practice is used as a financing capital by a bank (onyema & odeiem-ogulu, 2019). and, in islamic banking (ibs), deposits was divided into four scheme, that is wadi’ah (save keeping) deposit, mudharabah (profit sharing) deposit, tawarruq (benevolent) deposit, and qard (cost plus save) deposit (aris, et al., 2013). financing is a provision of funds for a business project agreed by two parties. it causes one party to have obligations to the other for a certain period (kasmir, 2005). and also can be applied personally or without institutional bacground (rivai & arifin, 2010). where in islamic banking (ibs), the it has been devided of two type based on the segment. based on consumer segment, a financing was consist of four product. that is, house financing, personal financing, vehicle financing, and staff financing. then, about a financing which based on corporate segment are consist of, trade financing, asset-based financing, and corporate investment (aris, et al., 2013). variable inclusive growth indicators economic growth poverty measurement gdp poverty rate descriptions economic growth was a complex phenomenon of a country that monitored from population, resources, infrastructure, and the management of government (haller, 2012). and its usually measured by gdp, as a measure that has been recognized internationally (edeme, 2018). a poverty can be defined as a deficiency in wealh distribution by a government into a household. and the limitation of household’s basic needs fulfillment (mowafi & khawaja, 2005). a poverty rate will be used to measure it (goedhart, et al., 1977). and in indonesia alone, a poverty line was measured based on basic needs approach (bps, 2020). indicators employment income distribution measurement unemployment rate gini ratio descriptions the waste of resources which leads to a reduction in the prospect for a longrun growth and reduces a welfare of a country. thus causing an expansion of fiscal costs for the government (chowdhury & zuk, 2018). therefore, the government takes a measure to monitor unemployment in its territory. and use the unemployment rate as agreed by international organizations and the majority of countries (ilo, 2015). income distribution was an important instrument that influences a people’s cohesion and iy also determines an inequality. when an income doesn’t distribute equally, so, an inequality will be exist in a society (stewart, 2000). therefore, gini ratio will be used to measure it. because, a gini ratio was an index which works to measure an equality of wealth distribution of a country. and served in statistical summary (farris, 2010). ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│95 3.3. model development this research is an adaptation and development of abd.majid & kassim’s (2015) research. by taking a similar topic, but narrowed it down to islamic banking (ibs). while abd.majid & kassim’s (2015) was analyze an islamic financial literature in a broader discussion, that is, islamic banking and financial institutions (ibfis). and another difference lies in a research geographical bondaries. where a previous research takes malaysia as a geographical bondaries, but, the current research takes indonesia of its case. furthermore, there is a difference of an analytical object. where it doesn’t analyze the economic growth, but substitute it into inclusive growth as a measure of country’s economic. it is intended as an improvement of a previous research. because after a review, an economic growth was inappropriate to measure an economy based on islamic economic goals. so, an inclusive growth has been selected as a measure of economy because it is in line with islamic economic goals. and based on the reasonings, the research has been complied. with the aim, to analyze the contribution of islamic banking as like as previous research, but on different object, that is, inclusive growth. 3.4. method in line with ro (research objectives), this research will use a mixed method. by combining a descriptive analysis methods as an application of qualitative approach. then, an autoregressive distributed lag (ardl) and error correction model (ecm) model as a tools of quantitative analysis. means, the analysis use quad-stage method model. the first method i.e. descriptive analysis, works to answer ro1 of the research. then, ardl and ecm will be used to answer ro2. but, before applying it, the methods will be briefly explained, as follows; 3.4.1. descriptive analysis theoritically, descriptive analysis was a method which is used to describe a phenomenon of a research. and it was the most used in a research (adams, khan, & raeside, 2007). where the use is intended to elaborate a statistical data and composing an analytical assumption. and the data will be served in a substative form (hart, 1998; ibrahim, et al., 2019). consider to this explanation, the method is appropriate to use in answering ro1. 3.4.2. autoregressive distributed lag (ardl) model autoregressive distributed lag model or referred to as ardl, was a method introduced by pesaran & shin (1995) (hamzah & handri, 2017), that is used ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│96 in a single equation of dynamic regression. and it has a work to analyze a time series data in a long-term econometrical approach (hassler & wolters, 2005). it was a method which compatible to estimate a co-integration of variables. it can capture a dynamic relationship of variables by the existence of lag. so, it will cause a flexibility on a different lag of variables in endogenous and exogenous variables. the model can also analyze the effect of exogenous variables on each lag in different time intervals (zaretta & yovita, 2019). the method is applied to answer ro2, i.e. to attest and assess the contribution of islamic banking (ibs) to inclusive growth. therefore, its required an empirical method such as ardl to answer it. but the use of ardl was only ro evidence the contribution of analyzed variables in a longterm. 3.4.3. error correction model (ecm) error correction model (ecm) at this analysis has a work to accomplish an ardl method in asnwer ro2. where application of ecm will streghtening the result of ardl in answering ro2. ecm firstly introduced by dennis sargan in 1950, then popularized by eangle-granger (1987) (alogoskoufis, 1991). and defined as a method which has a function to adjust an instrument and mantain it, in order to make a research get near to its desired result (phillips, 1957). which in practice, ecm imposes a linier homogenity of researched variables (pagan, 1985). so, the method will accomplish ardl method. that in this analysis, ecm will use to assess the cointegration of variables in a short-term. such as in (tulak, junaidi, & utami, 2017). 3.5. model specification as explained above, the research will use ardl and ecm to answer an empirical analysis of ro2. so, the formulation or model specification of the models is required. therefore, this research has been provide it. the first is ardl model. but the research formulated the model based on varquez et al. (2012). its because a traditional model is considered inapplicable anymore. so, it requires an alternative model which can estimate an hypothetical procudure maximally (johansen, 1992). therefore, a developed model of ardl by varquez et al. (2012) has been selected to formulate a research hypothesis of ardl at this research. and the following are the model; ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│97 𝐿𝐼𝑁𝐶𝑖,𝑡 = ∝ + ∑ 𝛽𝑖, 𝑗 𝑝1 𝑗=1 𝐿𝐺𝐷𝑃𝑖=𝑡,𝑗 + ∑ 𝛽𝑖, 𝑗 𝑝2 𝑗=2 𝐿𝑃𝑅𝑖=𝑡,𝑗 + ∑ 𝛽𝑖, 𝑗 𝑝3 𝑗=3 𝐿𝑈𝑅𝑖=𝑡,𝑗 + ∑ 𝛽𝑖, 𝑗 𝑝4 𝑗=4 𝐿𝐺𝑅𝑖=𝑡,𝑗 + ∑ ∅1𝑗 𝑞1 𝑗=0 𝑙𝑛𝑇𝐷𝑡−𝑗 + ∑ ∅2𝑗 𝑞2 𝑗=0 𝑙𝑛𝑇𝐹𝑡−𝑗 … (1) by a several specifications, as follows; 𝐿𝐺𝐷𝑃𝑖,𝑡 = ∝ + ∑ 𝛽𝑖, 𝑗 𝑝1 𝑗=1 𝐿𝐺𝐷𝑃𝑖=𝑡,𝑗 + ∑ ∅1𝑗 𝑞1 𝑗=0 𝑙𝑛𝑇𝐷𝑡−𝑗 + ∑ ∅2𝑗 𝑞2 𝑗=0 𝑙𝑛𝑇𝐹𝑡−𝑗 ... (2) 𝐿𝑃𝑅𝑖,𝑡 = ∝ + ∑ 𝛽𝑖, 𝑗 𝑝2 𝑗=1 𝐿𝑃𝑅𝑖=𝑡,𝑗 + ∑ ∅1𝑗 𝑞1 𝑗=0 𝑙𝑛𝑇𝐷𝑡−𝑗 + ∑ ∅2𝑗 𝑞2 𝑗=0 𝑙𝑛𝑇𝐹𝑡−𝑗 ... (3) 𝐿𝑈𝑅𝑖,𝑡 = ∝ + ∑ 𝛽𝑖, 𝑗 𝑝3 𝑗=1 𝐿𝑈𝑅𝑖=𝑡,𝑗 + ∑ ∅1𝑗 𝑞1 𝑗=0 𝑙𝑛𝑇𝐷𝑡−𝑗 + ∑ ∅2𝑗 𝑞2 𝑗=0 𝑙𝑛𝑇𝐹𝑡−𝑗 ... (4) 𝐿𝐺𝑅𝑖,𝑡 = ∝ + ∑ 𝛽𝑖, 𝑗 𝑝4 𝑗=1 𝐿𝐺𝑅𝑖=𝑡,𝑗 + ∑ ∅1𝑗 𝑞1 𝑗=0 𝑙𝑛𝑇𝐷𝑡−𝑗 + ∑ ∅2𝑗 𝑞2 𝑗=0 𝑙𝑛𝑇𝐹𝑡−𝑗 ... (5) where; 𝐿𝐼𝑁𝐶𝑖.𝑡 = natural logarithm of inclusive growth as measured by gdp, poverty rate, unemployment rate, and ginir ratio 𝐿𝐼𝑁𝐶𝑖,𝑡 = 𝑙𝑛 [ 𝐼𝑁𝐶𝑖,𝑡 1− 𝐼𝑁𝐶𝑖,𝑡 ] 𝐿𝐺𝐷𝑃𝑖.𝑡−𝑗 = natural logarithm of gdp 𝐿𝑃𝑅𝑖.𝑡−𝑗 = natural logarithm of poverty rate 𝐿𝑈𝑅𝑖.𝑡−𝑗 = natural logarithm of unemployment rate 𝐿𝐺𝑅𝑖.𝑡−𝑗 = natural logarithm of gini ratio 𝑙𝑛𝑇𝐷𝑡−𝑗 = natural logarithm of total deposits of islamic banking 𝑙𝑛𝑇𝐹𝑡−𝑗 = natural logarithm of total financing of islamic banking then, the cointegration of each exogenous variables would be determined in a long term and short term, and the representative variables of inclusive growth added up by the value of estimation coefficient (∅𝑖 ) of each the exogenous variables. then the chain rules would be used to determine the cointegration of the shock of each exogenous variables due to untransformed gdp, poverty rate, unemployment rate, and gini ratio which would be evaluated by the sample of inclusive growth’s average. then, after an ardl estimation, the model will be estimate by ecm method with a model specification as follows; short term effect; ∆𝐼𝑁𝐶𝑖 ∆𝑋𝑖𝑛𝑐 = 𝐼𝑁𝐶𝑖 𝑥 (1 − 𝐼𝑁𝐶̅̅ ̅̅ �̅� ) 𝑥 ∑ ∅𝑘,𝑡−𝑗𝑞𝑖𝑛𝑐 … (6) where; (∅𝑖 ) = estimated value of exogenous variables coefficient 𝑋𝑖𝑛𝑐 = way of exogenous variables cointegrate inclusive growth inc = endogenous variables; inclusive growth by following elaboration, that is, , 𝑋𝑖𝑛𝑐 means, how the exogenous variables (islamic banking (ibs) variable and its indicators) cointegrate inc (inclusive growth variable and its indicators) which classified in the average of the average of inclusive growth to i in observation. ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│98 3.6. stage of analysis regarding to the explanation above, the research uses mixed method which consist of trial-stage method model. by the following stages sequence; 1) descriptive analysis that works to elaborate a statistical data and composing an analytical assumption. and to answer ro1. 2) unit root test, to seek a constancity of data’s mean and variant of each lags (gujarati, 2003). and it will be tested based on augmented dickey fuller (adf) test and the automatic lag will be selected by schwartz information criterion (sic) approach. 3) lag determination, an important stage to seek the best model of ardl (bahmani-oskooee & bohl, 2000). the test will apply f-bound test of ardl long bound testing. 4) breusch-godfrey serial correlation lm test, to ensure that there are no violations of econometric principles by the selected model and test the suitability of the model that has been selected to be estimated at a later stage. 5) autoregressive distributed lag (ardl) model test, to attest and assess the cointegration between islamic banking (ibs) and inclusive growth in a long-term. (to answer ro2) 6) error correction model (ecm), to attest and assess the cointegration between islamic banking (ibs) and inclusive growth in a short-term. (to answer ro2) ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│99 iv. results and analysis 4.1. statistical description graph 1 total deposits of islamic banking graph 2 total dinancing of islamic banking graph 3 gross domestic product (gdp) graph 6 gini ratio graph 4 poverty rate graph 5 unemployment rate figure 2. graphics of research data source: ojk’s website and processed by researcher figure 2 shows a statistical condition of the data. where a graph 1 and graph 2 represent the growth of total deposits and total financing of islamic banking (ibs). and statistically, the graph shows an excellent growth of ibs indicators. that is, the growth are progressive with percentage of growth of 180.2% in total deposits and 166,8% in total financing since december 2015 to december 2019. as it increases, a data of gdp is also show a fairly steady inrease as presented on a graph 3. which of the same time interval, gdp has increase of 136.7%. with annual growth average of 108,4% since 2015.3 but, the other indicators has a contrary trend of the growth. where the trend is a decrease, as shown in graph 4, 5, and 6. although, a graph 6 as an illustration of gini ratio condition has a volatile decrease. but overall, gini ratio decreased steadly sence 2015. as like as poverty rate and unemployment rate that was shown by graph 4 and graph 5.4 based on those explanation, it can be concluded that a data of ibs indicators increases as like as gdp. along with it, a poverty rate, unemployment rate, and gini ratio has decreased. so, the movement of data in the graph shows a relationships that can be an assumption of the research. and those statistical data indicate a several assumption of the analysis, that is; islamic banking 3 data sourced from ministry of trade website and processed by researcher 4 data sourced from central bureau of statistics. 0 50 100 150 200 250 300 350 400 450 ja n -1 0 s e p -1 0 m a y -1 1 ja n -1 2 s e p -1 2 m a y -1 3 ja n -1 4 s e p -1 4 m a y -1 5 ja n -1 6 s e p -1 6 m a y -1 7 ja n -1 8 s e p -1 8 m a y -1 9 0 50 100 150 200 250 300 350 400 450 ja n -1 0 n o v -1 0 s e p -1 1 ju l1 2 m a y -1 3 m a r1 4 ja n -1 5 n o v -1 5 s e p -1 6 ju l1 7 m a y -1 8 m a r1 9 0,36 0,37 0,38 0,39 0,4 0,41 0,42 0 0,1 0,2 0,3 0,4 0,5 0,6 0 2 4 6 8 0 500000 1000000 1500000 2000000 2500000 3000000 3500000 4000000 4500000 2 0 1 0 /1 2 0 1 0 /4 2 0 1 1 /3 2 0 1 2 /2 2 0 1 3 /1 2 0 1 3 /4 2 0 1 4 /3 2 0 1 5 /2 2 0 1 6 /1 2 0 1 6 /4 2 0 1 7 /3 2 0 1 8 /2 2 0 1 9 /1 2 0 1 9 /4 ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│100 (ibs) has a positive relation with gdp. and vice versa on poverty rate, unemployment rate, and gini ratio. but, the assumption doesn’t valid yet. and it requires an evidence by an empirical analysis. so, to clarify the assumption, this research will analyze the relations of those variables empirically. and the analysis will applied triple-stage model of empirical method, that is, ardl and ecm as stated in a further discussion. 4.2. econometrical result this econometrical estimation is aim to asnwer ro2 by estimate the model specifications, which consist of ardl and ecm models. but before it, there are a several testing prerequisites that need to be met. firstly, it is started from stationary test by unit root test. the test works to determine whether the data are stationary or should be differenced to render it (hatanaka, 1995). where in this analysis, this estimation is applied augmented dickeyfuller (adf) test by schwartz information criterion (sic). augmented dickeyfuller (adf) test estimates the hypothesis of time series data in against the alternatives (i(0) to i(1)) (said & dickey, 1984; elliot, et al., 1996). and sic has selected because sic is the best approach to reflect a consistency of ardl model (pesaran & shin, 1995). table 3. unit root test level lntd lntf lngdp lnpr lnur lngr adf test statistic -3.914 -5.265 11.208 -1.687 -1.347 -0.851 1st difference lntd lntf lngdp lnpr lnur lngr adf test statistic -4.472 -15.478 -7.314 -2.382 -7.286 -1.776 2nd difference lntd lntf lngdp lnpr lnur lngr adf test statistic -7.936 -8.617 -10.189 -10.489 -7.718 -9.854 test critical value 1% level -3.486551 5% level -2.886074 10% level -2.579931 table 3 show that the variables has a unit root at level and 1st difference. so, it is requires the other differentiation of a stanionary test. it is causing the election of 2nd difference of stationarity. and the finding show that the data become stationary of 2nd difference. it is shown by adf test statistic value which < test critical value of all level significantions (elliot, et al., 1996). means, the data has met the requirement to estimate by ardl and ecm (alogoskoufis, 1991; pesaran & shin, 1995). after finds the stationarity, then, the lag testing by f-bound test will be applied to seek a best model of ardl. the following are the results; ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│101 table 4. lag determination signif. i(0) i(1) lag length computed f-statistics asymptotic: n=1000 lngdp lnpr lnur lngr 10% 2.63 3.35 1 (1,1,1) 14.98285 3.726793 2.093083 6.924682 5% 3.1 3.87 2 (2.2,2) 7.478574 2.140897 3.416080 4.449665 2,50% 3.55 4.38 3 (3,3,3) 4.904855 1.918977 4.757787 3.364842 1% 4.13 5 4 (4,4,4) 5.377741 1.932132 5.827458 3.203494 consider to table 4, it can be known that the findings are varies on a significance levels. but majority of model are significant on lag lenght 3. in detail, lngdp was significance on lag lenght 3 in 1% level significance. lnpr was significance on lag lenght 1 with 2,5% and 5% level significance. lnur was significance of lag lenghts 2 and 3 on all significance levels but 10%. and the last model is lngr, that significance on all lag lenghts but 1, in 1% and 5% levels significance. so, based on it, the lag lenght 1 and 3 has been selected to estimate the equation (1), that was divided into 4 equation models (2, 3, 4, and 5). because, the lag lenght was the highest significance model of f-statistics. which specifically, lag lenght 3 was used to estimate an model 2, 4, and 5. while, the lag lenght 1 is works to estimate an equation model 3. when the hughest significance of lag lenghts has been found, the estimation will be continued to long run co-integration test by ardl. but to ensure the result, the autocorrelation test is required. so, at this stage, breush-godfrey serial correlation lm test. it is aim to ensure that there are no violations of econometric principles by the selected model and test the suitability of the model that has been selected to be estimated at a later stage. in short, it is used to seek the autocorrelation problem of a data. the result is described on table 5. table 5. breush-godfrey serial correlation lm test lngdp lnpr breusch-godfrey serial correlation lm test: fstatistic 2.260935 prob. f(3,102) 0.0859 obs*rsquared 7.295163 prob. chisquare(3) 0.0631 breusch-godfrey serial correlation lm test: fstatistic 1.278748 prob. f(3,102) 0.2857 obs*rsquared 4.240895 prob. chisquare(3) 0.2366 lnur lngr breusch-godfrey serial correlation lm test: fstatistic 0.775215 prob. f(3,102) 0.5105 obs*rsquared 2.608185 prob. chisquare(3) 0.4561 breusch-godfrey serial correlation lm test: fstatistic 0.771925 prob. f(3,102) 0.5123 obs*rsquared 2.597362 prob. chisquare(3) 0.4580 ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│102 table 6. long-run form of ardl model lngdp (3,3,3) lnpr (1,1,1) lnur (3,3,3) lngr (3,3,3) coefficient prob coefficient prob coefficient prob coefficient prob lntd 1.208674 0.0000 -26.76932 0.8646 -0.086862 0.4785 -0.307593 0.0014 lntf -0.821624 0.0000 28.27025 0.8646 -0.128297 0.3243 0.298745 0.0036 c 5.870713 0.0000 -7.622406 0.8646 0.097103 0.0000 -0.861864 0.0000 table 7. error correction model test result lngdp (3,3,3) lnpr (1,1,1) lnur (3,3,3) lngr (3,3,3) cointeq(-1) -0.069720 -0.002629 -0.124950 -0.044565 prob 0.0000 0.0002 0.0000 0.0003 the result of breush-godfrey serial correlation lm test indicates that the data has no autocorrelation because the value of prob.chi-square > test critical value of 5%. therefore, the requirements for ardl test has been met. the analysis can be continued to the ardl test stage. the result is described on table 6. based on table 6, it was found that lntd and lntf has a significant cointegration to lngdp (3,3,3) and lngr (3,3,3) in a long-term, but not to lnpr (1,1,1) and lnur (3,3,3). with the following specifications; lntd has a positive cointegration to lngdp, lnpr, and lngr, but vice versa on lnur. then, lntf has a negative cointegration to all of models (lngdp, lnpr, lnur, lngr) in a long-run. then, to find the short-run cointegration which has been formulated in equation model (6). and the models will be estimated by error correction model. the ecm result estimation has served in table 7. previously, the long-term cointegration has been interpreted by ardl model. so, at this analysis, the short-term cointegration will be interpreted by ecm as served in table 7. the findings shows there is a significant short-term cointegration of variables. interpreted by cointeq(-1) and prob value that < critical value of 5%. based on the result, it can be concluded that lntd and lntf cointegrate significantly to lngdp (3.3.3), lnpr (1,1,1), lnur (3,3,3), and lnge (3,3,3) in a short-term. then the findings will be reinforced by a robust test as a last stage of this empirical analysis. 4.3. analysis the findings shows the relationship of variables by a several specifications. that are, the relationship that provide the contribution of islamic banking (ibs) indicators to an inclusive growth indicators. where in a long-term, total deposits of islamic banking has a positive contribution to gdp, poverty rate, and gini ratio. and contribute negatively to unemployment rate. while, total ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│103 financing of islamic banking (ibs) contribute negatively into all of inclusive growth indicators. but those indicators was only significant on gdp and gini ratio as represented in table 6 above. then, table 7 has served the result of the islamic banking (ibs) contribution to an inclusive growth indicators in a short-term. and the findings evidence that islamic banking (ibs) has contribute significantly on an inclusive growth in a short-term. it is led the raise of gdp, the decrease of poverty rate and gini ratio by the islamic financing of ibs, and the decline of unemployment rate when a total deposits and financing of ibs increase. means, ibs was contribute significantly in achieve the goals of inclusive growth. and it was parallel with a research assumption of statistical description, but only in a short-term. while in a long-term, the increase of total deposits of ibs causes the gdp increase. but it also causes the increase of poverty rate and gini ratio. even though, ibs’s total deposits decreases an unemployment rate. then, a poverty rate, unemployment rate, and gini ratio will decrease when total financing of ibs increase. but it is only significance on gini ratio in a long-term relationship. so, in a long-term case, it can be concluded that islamic banking indicators was only contribute significantly to gdp and gini ratio, and not to the other inclusive growth indicators. means, the statements was answered the ro2, but it can’t fulfill the assumption of statistical description of the research. v. conclusion and recommendation 5.1. conclusion the research empirically explores the contribution of islamic banking (ibs) to an inclusive growth in a long-term and short-term. by taking a case on indonesia since 2010 to 2019. the analysis applies a trial-stage method to answer the objectives. the methods are a descriptive analysis to describe a statistical data, ardl to answer the contribution in a long-term, and ecm to answer the contribution in a short-term. based on those methods, the research finds a robust conclusion. the conclusion is, a total deposits has a significant positive contribution on gini ratio in a long-term. an increase of poverty caused by an increase of total deposits can be assumed as wealth accumulation. so that the money can’t circulate inclusively among a society. when a total deposits increase without being followed by the allocation of a maximum and inclusive distribution of financing causes money to circulate in one place and can’t touch another class of society, thus causing an increase in the poverty rate. then, a total financing contribute negatively on it. so, it can’t be fulfill the assumption of statistical description. even though, a total financing also ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│104 evidenced contribute negatively on poverty and unemployment rate, but the contribution is unsignificant. whereas, in a short-term, ibs has evidence to has a relationship with inclusive growth. and the relationship or contribution are significance. in this case, the findings of a short-term estimation was in line with a research assumption and a previous research, abd.majid & kassim in term of gdp. while, in a poverty, unemployment, and gini ratio context, the result has rejected the statement of susilo (2015), when it compared by the result in a short-term. but the rejection wasn’t valid in a long-term analytical result. so, as a closing conclusion, ibs has contribute significantly on inclusive growth in a short-term, but it doesn’t roundly applies in a long-term. 5.2. recommendation the findings of this analysis was only evidence the significance contribution of ibs on inclusive growth in a short-term. based on it, a long-term contribution of ibs still cathegorized as the area that requires an extentions in order to accomplish it. and it is consider to refining this analytical literature. specifically, consider to the findings on total financing, to upgrade the contribution of ibs on poverty and unemployment in a long-term, ibs is requires to develop a program that focus on society’s economical improvement and refinement. it can be attained properly if ibs has its own islamic social finance institutions. where, ibs has an authority to manage its own ziswaf funds. therefore, an empowerment and improvement program by ibs will be more focused. besides it, practically and theoritically, zakat, infak, and shodaqoh was focus on a poverty and economic equality. moreover when it is applied in ibs which has a large total deposits and a complete of customer data. so, the practice of islamic social funds management will be implemented maximally through of ibs. by its condition, it will be easier to achieve an inclusive growth in indonesia. and it is an efficient recommendation to upgrade the contribution of ibs in achieve the goals of inclusive growth in indonesia at this time. therefore, the government needs to issue a policy to realize it. so that the banks has the authority to implement this program to support inclusive economic growth in indonesia. ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 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(2019). harga saham, nilai tukar mata uang, dan tingkat suku bunga acuan dalam model autoregressive distributed lag. jurnal penelitian ekonomi dan bisnis vol.4 no.1, 09-22. ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│109 appendix attachment 1 unit root test level lntd lntf lngdp lnpr lnur lngr adf test statistic -3.914 -5.265 -11.208 -1.687 -1.347 -0.851 1st difference lntd lntf lngdp lnpr lnur lngr adf test statistic -4.472 -15.478 -7.314 -2.382 -7.286 -1.776 2nd difference lntd lntf lngdp lnpr lnur lngr adf test statistic -7.936 -8.617 -7.098 -10.489 -7.718 -9.854 test critical value 1% level -3.486551 5% level -2.886074 10% level -2.579931 level null hypothesis: lntd has a unit root exogenous: constant lag length: 1 (automatic based on sic, maxlag=12) t-statistic prob.* augmented dickeyfuller test statistic -3.914580 0.0026 test critical values: 1% level -3.486551 5% level -2.886074 10% level -2.579931 *mackinnon (1996) one-sided p-values. null hypothesis: lntf has a unit root exogenous: constant lag length: 2 (automatic based on sic, maxlag=12) t-statistic prob.* augmented dickeyfuller test statistic -5.265553 0.0000 test critical values: 1% level -3.487046 5% level -2.886290 10% level -2.580046 *mackinnon (1996) one-sided p-values. null hypothesis: lngdp has a unit root exogenous: constant lag length: 2 (automatic based on sic, maxlag=12) augmented dickeyfuller test statistic -11.20885 0.0000 test critical values: 1% level test critical values: 1% level 5% level 5% level 10% level 10% level *mackinnon (1996) one-sided p-values. null hypothesis: lnpr has a unit root exogenous: constant lag length: 7 (automatic based on sic, maxlag=12) t-statistic prob.* augmented dickeyfuller test statistic -1.687943 0.4346 test critical values: 1% level -3.489659 5% level -2.887425 10% level -2.580651 *mackinnon (1996) one-sided p-values. null hypothesis: lnur has a unit root exogenous: constant lag length: 6 (automatic based on sic, maxlag=12) t-statistic prob.* null hypothesis: lngr has a unit root exogenous: constant lag length: 7 (automatic based on sic, maxlag=12) t-statistic prob.* ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│110 augmented dickeyfuller test statistic -1.347866 0.6052 test critical values: 1% level -3.489117 5% level -2.887190 10% level -2.580525 *mackinnon (1996) one-sided p-values. augmented dickeyfuller test statistic -0.851480 0.8000 test critical values: 1% level -3.489659 5% level -2.887425 10% level -2.580651 *mackinnon (1996) one-sided p-values. 1st difference null hypothesis: d(lntd) has a unit root exogenous: constant lag length: 2 (automatic based on sic, maxlag=12) t-statistic prob.* augmented dickeyfuller test statistic -4.472811 0.0004 test critical values: 1% level -3.487550 5% level -2.886509 10% level -2.580163 *mackinnon (1996) one-sided p-values. null hypothesis: d(lntf) has a unit root exogenous: constant lag length: 0 (automatic based on sic, maxlag=12) t-statistic prob.* augmented dickeyfuller test statistic -15.47899 0.0000 test critical values: 1% level -3.486551 5% level -2.886074 10% level -2.579931 *mackinnon (1996) one-sided p-values. null hypothesis: d(lngdp) has a unit root exogenous: constant lag length: 10 (automatic based on sic, maxlag=12) augmented dickeyfuller test statistic -7.314160 0.0000 test critical values: 1% level test critical values: 1% level 5% level 5% level 10% level 10% level *mackinnon (1996) one-sided p-values. null hypothesis: d(lnpr) has a unit root exogenous: constant lag length: 6 (automatic based on sic, maxlag=12) t-statistic prob.* augmented dickeyfuller test statistic -2.382851 0.1489 test critical values: 1% level -3.489659 5% level -2.887425 10% level -2.580651 *mackinnon (1996) one-sided p-values. null hypothesis: d(lnur) has a unit root exogenous: constant lag length: 5 (automatic based on sic, maxlag=12) t-statistic prob.* augmented dickeyfuller test statistic -7.286072 0.0000 test critical values: 1% level -3.489117 5% level -2.887190 null hypothesis: d(lngr) has a unit root exogenous: constant lag length: 12 (automatic based on sic, maxlag=12) t-statistic prob.* augmented dickeyfuller test statistic -1.776506 0.3903 test critical values: 1% level -3.493129 5% level -2.888932 ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│111 10% level -2.580525 *mackinnon (1996) one-sided p-values. 10% level -2.581453 *mackinnon (1996) one-sided p-values. 2nd difference null hypothesis: d(lntd,2) has a unit root exogenous: constant lag length: 10 (automatic based on sic, maxlag=12) t-statistic prob.* augmented dickeyfuller test statistic -7.936952 0.0000 test critical values: 1% level -3.492523 5% level -2.888669 10% level -2.581313 *mackinnon (1996) one-sided p-values. null hypothesis: d(lntf,2) has a unit root exogenous: constant lag length: 4 (automatic based on sic, maxlag=12) t-statistic prob.* augmented dickeyfuller test statistic -8.617001 0.0000 test critical values: 1% level -3.489117 5% level -2.887190 10% level -2.580525 *mackinnon (1996) one-sided p-values. null hypothesis: d(lngdp,2) has a unit root exogenous: constant lag length: 12 (automatic based on sic, maxlag=12) t-statistic prob.* augmented dickeyfuller test statistic -7.098192 0.0000 test critical values: 1% level -3.493747 5% level -2.889200 10% level -2.581596 *mackinnon (1996) one-sided p-values. null hypothesis: d(lnpr,2) has a unit root exogenous: constant lag length: 5 (automatic based on sic, maxlag=12) t-statistic prob.* augmented dickeyfuller test statistic -10.48964 0.0000 test critical values: 1% level -3.489659 5% level -2.887425 10% level -2.580651 *mackinnon (1996) one-sided p-values. null hypothesis: d(lnur,2) has a unit root exogenous: constant lag length: 6 (automatic based on sic, maxlag=12) t-statistic prob.* augmented dickeyfuller test statistic -7.718318 0.0000 test critical values: 1% level -3.490210 5% level -2.887665 10% level -2.580778 *mackinnon (1996) one-sided p-values. null hypothesis: d(lngr,2) has a unit root exogenous: constant lag length: 11 (automatic based on sic, maxlag=12) t-statistic prob.* augmented dickeyfuller test statistic -9.854007 0.0000 test critical values: 1% level -3.493129 5% level -2.888932 10% level -2.581453 *mackinnon (1996) one-sided p-values. ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│112 attachment 2 lag determination signif. i(0) i(1) lag length computed f-statistics asymptotic: n=1000 lngdp lnpr lnur lngr 10% 2.63 3.35 1 (1,1,1) 14.98285 3.726793 2.093083 6.924682 5% 3.1 3.87 2 (2.2,2) 7.478574 2.140897 3.416080 4.449665 2,50% 3.55 4.38 3 (3,3,3) 4.904855 1.918977 4.757787 3.364842 1% 4.13 5 4 (4,4,4) 5.377741 1.932132 5.827458 3.203494 lngdp f-bounds test lag 1 null hypothesis: no levels relationship test statistic value signif. i(0) i(1) asymptotic: n=1000 f-statistic 14.98285 10% 2.63 3.35 k 2 5% 3.1 3.87 2.5% 3.55 4.38 1% 4.13 5 f-bounds test lag 2 null hypothesis: no levels relationship test statistic value signif. i(0) i(1) asymptotic: n=1000 fstatistic 7.478574 10% 2.63 3.35 k 2 5% 3.1 3.87 2.5% 3.55 4.38 1% 4.13 5 f-bounds test lag 3 null hypothesis: no levels relationship test statistic value signif. i(0) i(1) asymptotic: n=1000 f-statistic 4.904855 10% 2.63 3.35 k 2 5% 3.1 3.87 2.5% 3.55 4.38 1% 4.13 5 f-bounds test lag 4 null hypothesis: no levels relationship test statistic value signif. i(0) i(1) asymptotic: n=1000 fstatistic 5.377741 10% 2.63 3.35 k 2 5% 3.1 3.87 2.5% 3.55 4.38 1% 4.13 5 lnpr f-bounds test lag 1 null hypothesis: no levels relationship test statistic value signif. i(0) i(1) asymptotic: n=1000 f-statistic 3.726793 10% 2.63 3.35 k 2 5% 3.1 3.87 2.5% 3.55 4.38 1% 4.13 5 f-bounds test lag 2 null hypothesis: no levels relationship test statistic value signif. i(0) i(1) asymptotic: n=1000 fstatistic 2.140897 10% 2.63 3.35 k 2 5% 3.1 3.87 2.5% 3.55 4.38 1% 4.13 5 f-bounds test lag 3 null hypothesis: no levels relationship test statistic value signif. i(0) i(1) asymptotic: n=1000 f-statistic 1.918977 10% 2.63 3.35 k 2 5% 3.1 3.87 f-bounds test lag 4 null hypothesis: no levels relationship test statistic value signif. i(0) i(1) asymptotic: n=1000 fstatistic 1.932132 10% 2.63 3.35 k 2 5% 3.1 3.87 ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│113 2.5% 3.55 4.38 1% 4.13 5 2.5% 3.55 4.38 1% 4.13 5 lnur f-bounds test lag 1 null hypothesis: no levels relationship test statistic value signif. i(0) i(1) asymptotic: n=1000 f-statistic 2.093083 10% 2.63 3.35 k 2 5% 3.1 3.87 2.5% 3.55 4.38 1% 4.13 5 f-bounds test lag 2 null hypothesis: no levels relationship test statistic value signif. i(0) i(1) asymptotic: n=1000 fstatistic 3.416080 10% 2.63 3.35 k 2 5% 3.1 3.87 2.5% 3.55 4.38 1% 4.13 5 f-bounds test lag 3 null hypothesis: no levels relationship test statistic value signif. i(0) i(1) asymptotic: n=1000 f-statistic 4.757787 10% 2.63 3.35 k 2 5% 3.1 3.87 2.5% 3.55 4.38 1% 4.13 5 f-bounds test lag 4 null hypothesis: no levels relationship test statistic value signif. i(0) i(1) asymptotic: n=1000 fstatistic 5.827458 10% 2.63 3.35 k 2 5% 3.1 3.87 2.5% 3.55 4.38 1% 4.13 5 lngr f-bounds test lag 1 null hypothesis: no levels relationship test statistic value signif. i(0) i(1) asymptotic: n=1000 f-statistic 6.924682 10% 2.63 3.35 k 2 5% 3.1 3.87 2.5% 3.55 4.38 1% 4.13 5 f-bounds test lag 2 null hypothesis: no levels relationship test statistic value signif. i(0) i(1) asymptotic: n=1000 fstatistic 4.449665 10% 2.63 3.35 k 2 5% 3.1 3.87 2.5% 3.55 4.38 1% 4.13 5 f-bounds test lag 3 null hypothesis: no levels relationship test statistic value signif. i(0) i(1) asymptotic: n=1000 f-statistic 3.364842 10% 2.63 3.35 k 2 5% 3.1 3.87 2.5% 3.55 4.38 1% 4.13 5 f-bounds test lag 4 null hypothesis: no levels relationship test statistic value signif. i(0) i(1) asymptotic: n=1000 fstatistic 3.203494 10% 2.63 3.35 k 2 5% 3.1 3.87 2.5% 3.55 4.38 1% 4.13 5 ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│114 attachment 3 blgm test result lngdp lnpr breusch-godfrey serial correlation lm test: fstatistic 2.260935 prob. f(3,102) 0.0859 obs*rsquared 7.295163 prob. chi-square(3) 0.0631 breusch-godfrey serial correlation lm test: fstatistic 1.278748 prob. f(3,102) 0.2857 obs*rsquared 4.240895 prob. chi-square(3) 0.2366 lnur lngr breusch-godfrey serial correlation lm test: fstatistic 0.775215 prob. f(3,102) 0.5105 obs*rsquared 2.608185 prob. chi-square(3) 0.4561 breusch-godfrey serial correlation lm test: fstatistic 0.771925 prob. f(3,102) 0.5123 obs*rsquared 2.597362 prob. chi-square(3) 0.4580 ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│115 attachment 4 long run form and bound test lngdp lnpr lnur lngr coefficient prob coefficient prob coefficient prob coefficient prob lntd 1.754424 0.4202 -26.76932 0.8646 -0.086862 0.4785 -0.307593 0.0014 lntf -1.563738 0.4460 28.27025 0.8646 -0.128297 0.3243 0.298745 0.0036 c -0.474859 0.7705 -7.622406 0.8646 0.097103 0.0000 -0.861864 0.0000 ardl long run form and bounds test dependent variable: d(lngdp) selected model: ardl(3, 3, 3) case 2: restricted constant and no trend date: 20/09/20 time: 08:16 sample: 2010m01 2019m12 included observations: 117 conditional error correction regression variable coefficient std. error t-statistic prob. c 0.409306 0.098830 4.141503 0.0001 lngdp(-1)* -0.069720 0.017404 -4.006034 0.0001 lntd(-1) 0.084269 0.022815 3.693486 0.0004 lntf(-1) -0.057284 0.017260 -3.318855 0.0012 d(lngdp(1)) 0.736592 0.092560 7.957952 0.0000 d(lngdp(2)) -0.045390 0.097630 -0.464923 0.6429 d(lntd) 0.023630 0.028943 0.816427 0.4161 d(lntd(-1)) -0.076626 0.030286 -2.530073 0.0129 d(lntd(-2)) -0.000940 0.027984 -0.033573 0.9733 d(lntf) -0.020204 0.019709 -1.025116 0.3077 d(lntf(-1)) 0.028275 0.023511 1.202619 0.2318 d(lntf(-2)) 0.009717 0.020096 0.483535 0.6297 * p-value incompatible with t-bounds distribution. levels equation case 2: restricted constant and no trend variable coefficient std. error t-statistic prob. lntd 1.754424 0.160304 7.539909 0.0000 lntf -1.563738 0.171570 -4.788861 0.0000 c -0.474859 0.149479 39.27437 0.0000 ec = lngdp (1.2087*lntd -0.8216*lntf + 5.8707 ) ardl long run form and bounds test dependent variable: d(lnpr) selected model: ardl(1, 1, 1) case 2: restricted constant and no trend date: 20/09/20 time: 08:17 sample: 2010m01 2019m12 included observations: 119 conditional error correction regression variable coefficient std. error t-statistic prob. c -0.020042 0.013009 -1.540623 0.1262 lnpr(-1)* -0.002629 0.015395 -0.170792 0.8647 lntd(-1) -0.070386 0.020869 -3.372719 0.0010 lntf(-1) 0.074333 0.021983 3.381450 0.0010 d(lntd) -0.086600 0.051930 -1.667607 0.0982 d(lntf) 0.036124 0.035209 1.025993 0.3071 * p-value incompatible with t-bounds distribution. levels equation case 2: restricted constant and no trend variable coefficient std. error t-statistic prob. lntd -26.76932 156.5999 -0.170941 0.8646 lntf 28.27025 166.4368 0.169856 0.8654 c -7.622406 45.90586 -0.166044 0.8684 ec = lnpr (-26.7693*lntd + 28.2703*lntf -7.6224 ) ardl long run form and bounds test dependent variable: d(lnur) selected model: ardl(3, 3, 3) case 2: restricted constant and no trend date: 20/09/20 time: 08:23 sample: 2010m01 2019m12 included observations: 117 conditional error correction regression variable coefficient std. error t-statistic prob. ardl long run form and bounds test dependent variable: d(lngr) selected model: ardl(3, 3, 3) case 2: restricted constant and no trend date: 20/09/20 time: 08:24 sample: 2010m01 2019m12 included observations: 117 conditional error correction regression variable coefficient std. error t-statistic prob. ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│116 c 0.362018 0.083136 4.354517 0.0000 lnur(-1)* -0.124950 0.029115 -4.291616 0.0000 lntd(-1) -0.010853 0.015544 -0.698243 0.4866 lntf(-1) -0.016031 0.016423 -0.976089 0.3313 d(lnur(-1)) 0.480326 0.089525 5.365278 0.0000 d(lnur(-2)) 0.212724 0.092261 2.305669 0.0231 d(lntd) -0.046361 0.037167 -1.247363 0.2150 d(lntd(-1)) -0.063958 0.038145 -1.676723 0.0966 d(lntd(-2)) 0.043412 0.036260 1.197258 0.2339 d(lntf) -0.024393 0.027084 -0.900641 0.3698 d(lntf(-1)) -0.024828 0.030177 -0.822750 0.4125 d(lntf(-2)) -0.019230 0.026589 -0.723234 0.4711 * p-value incompatible with t-bounds distribution. levels equation case 2: restricted constant and no trend variable coefficient std. error t-statistic prob. lntd -0.086862 0.122118 -0.711292 0.4785 lntf -0.128297 0.129540 -0.990410 0.3243 c 2.897311 0.097103 29.83744 0.0000 ec = lnur (-0.0869*lntd -0.1283*lntf + 2.8973 ) c -0.038409 0.012185 -3.152205 0.0021 lngr(-1)* -0.044565 0.013661 -3.262220 0.0015 lntd(-1) -0.013708 0.005962 -2.299040 0.0235 lntf(-1) 0.013314 0.006094 2.184815 0.0311 d(lngr(-1)) 0.788854 0.093956 8.395960 0.0000 d(lngr(-2)) -0.042026 0.094758 -0.443508 0.6583 d(lntd) 0.007311 0.010456 0.699199 0.4860 d(lntd(-1)) 0.018934 0.010422 1.816758 0.0721 d(lntd(-2)) -0.001731 0.009779 -0.177053 0.8598 d(lntf) 0.005313 0.007379 0.719959 0.4731 d(lntf(-1)) -0.008211 0.008773 -0.935966 0.3514 d(lntf(-2)) -0.002998 0.007485 -0.400585 0.6895 * p-value incompatible with t-bounds distribution. levels equation case 2: restricted constant and no trend variable coefficient std. error t-statistic prob. lntd -0.307593 0.093907 -3.275501 0.0014 lntf 0.298745 0.100210 2.981195 0.0036 c -0.861864 0.077792 -11.07903 0.0000 ec = lngr (-0.3076*lntd + 0.2987*lntf -0.8619 ) ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│117 attachment 5 error correction model estimation lngdp (3,3,3) lnpr (1,1,1) lnur (3,3,3) lngr (3,3,3) cointeq(-1) -2.665390 -0.002629 -0.124950 -0.044565 prob 0.0000 0.0002 0.0000 0.0003 ardl error correction regression dependent variable: d(lngdp) selected model: ardl(3, 3, 3) case 2: restricted constant and no trend date: 06/10/20 time: 13:31 sample: 2010m01 2019m12 included observations: 117 ecm regression case 2: restricted constant and no trend variable coefficient std. error t-statistic prob. d(lngdp(-1)) 0.915627 0.181370 5.048390 0.0000 d(lngdp(-2)) 0.326556 0.101230 3.225876 0.0017 d(lntf) 7.161266 9.356966 0.765341 0.4458 d(lntf(-1)) 10.64442 9.490810 1.121550 0.2646 d(lntf(-2)) 5.951904 8.733188 0.681527 0.4970 d(lntd) -3.650392 12.25156 -0.297953 0.7663 d(lntd(-1)) 13.15083 11.90523 1.104626 0.2718 d(lntd(-2)) -17.75667 11.18937 -1.586923 0.1155 cointeq(-1)* -2.665390 0.241557 -11.03419 0.0000 r-squared 0.801357 mean dependent var 0.006239 adjusted r-squared 0.786643 s.d. dependent var 6.680508 s.e. of regression 3.085766 akaike info criterion 5.165280 sum squared resid 1028.371 schwarz criterion 5.377755 log likelihood -293.1689 hannan-quinn criter. 5.251542 durbin-watson stat 2.121339 * p-value incompatible with t-bounds distribution. ardl error correction regression dependent variable: d(lnpr) selected model: ardl(1, 1, 1) case 2: restricted constant and no trend date: 20/09/20 time: 09:42 sample: 2010m01 2019m12 included observations: 119 ecm regression case 2: restricted constant and no trend variable coefficient std. error t-statistic prob. d(lntd) -0.086600 0.041275 -2.098119 0.0381 d(lntf) 0.036124 0.033604 1.074994 0.2847 cointeq(-1)* -0.002629 0.000672 -3.911902 0.0002 r-squared 0.100743 mean dependent var -0.003553 adjusted r-squared 0.085238 s.d. dependent var 0.013249 s.e. of regression 0.012672 akaike info criterion -5.873998 sum squared resid 0.018626 schwarz criterion -5.803936 log likelihood 352.5029 hannan-quinn criter. -5.845548 durbin-watson stat 0.516116 ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│118 * p-value incompatible with t-bounds distribution. ardl error correction regression dependent variable: d(lnur) selected model: ardl(3, 3, 3) case 2: restricted constant and no trend date: 20/09/20 time: 09:43 sample: 2010m01 2019m12 included observations: 117 ecm regression case 2: restricted constant and no trend variable coefficient std. error t-statistic prob. d(lnur(-1)) 0.480326 0.087803 5.470475 0.0000 d(lnur(-2)) 0.212724 0.090420 2.352609 0.0205 d(lntd) -0.046361 0.033876 -1.368541 0.1741 d(lntd(-1)) -0.063958 0.033437 -1.912774 0.0585 d(lntd(-2)) 0.043412 0.032075 1.353461 0.1788 d(lntf) -0.024393 0.023808 -1.024572 0.3079 d(lntf(-1)) -0.024828 0.026179 -0.948412 0.3451 d(lntf(-2)) -0.019230 0.024421 -0.787420 0.4328 cointeq(-1)* -0.124950 0.028241 -4.424351 0.0000 r-squared 0.449447 mean dependent var -0.003275 adjusted r-squared 0.408666 s.d. dependent var 0.011174 s.e. of regression 0.008593 akaike info criterion -6.602014 sum squared resid 0.007974 schwarz criterion -6.389539 log likelihood 395.2178 hannan-quinn criter. -6.515751 durbin-watson stat 2.058510 * p-value incompatible with t-bounds distribution. ardl error correction regression dependent variable: d(lngr) selected model: ardl(3, 3, 3) case 2: restricted constant and no trend date: 20/09/20 time: 09:43 sample: 2010m01 2019m12 included observations: 117 ecm regression case 2: restricted constant and no trend variable coefficient std. error t-statistic prob. d(lngr(-1)) 0.788854 0.092569 8.521804 0.0000 d(lngr(-2)) -0.042026 0.090267 -0.465570 0.6425 d(lntd) 0.007311 0.009301 0.785993 0.4336 d(lntd(-1)) 0.018934 0.009453 2.002836 0.0478 d(lntd(-2)) -0.001731 0.008916 -0.194201 0.8464 d(lntf) 0.005313 0.006423 0.827129 0.4100 d(lntf(-1)) -0.008211 0.007286 -1.127025 0.2623 d(lntf(-2)) -0.002998 0.006709 -0.446934 0.6558 cointeq(-1)* -0.044565 0.011978 -3.720750 0.0003 r-squared 0.684603 mean dependent var -5.22e-05 adjusted r-squared 0.661241 s.d. dependent var 0.004042 s.e. of regression 0.002352 akaike info criterion -9.193001 ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│119 sum squared resid 0.000598 schwarz criterion -8.980526 log likelihood 546.7906 hannan-quinn criter. -9.106739 durbin-watson stat 2.009723 * p-value incompatible with t-bounds distribution. ibrahim & indra │ an empirical analysis of islamic banking (ibs) contribution to indonesia’s inclusive growth. international journal of islamic economics and finance (ijief), 4(si), 87-120│120 this page is intentionally left blank. 2 may, 2006 hanudin amin, phd labuan faculty of international finance jalan sungai pagar, 87000 labuan federal territory, malaysia editor in chief dr ascarya ijief, international journal of islamic economics & finance dear professor submission to the ijief i am sending herewith a research paper titled “waqif preference of waqf-based qardhul hassan financing in malaysia: an analytic hierarchy process perspective” for your editorial consideration. i hope the paper would draw interest of the referee(s) as well as the editorial board and would be considered for publication in your journal.   sincerely, (hanudin amin) corresponding author copyright transfer agreement form (please sign and attach this form in the supplementary file when you make a new submission) i, the undersigned: full name : wildan munawar affiliation : universitas djuanda active email : wildan.munawar@unida.ac.id address : jalan tol ciawi no 1 kotak pos 35 ciawi bogor 16720 phone number : 085715222529 title of submitted article : islamic economics and politico-legal policy; defining the fundamental role of government in creating prudential business system list of authors : abdillah, ali ridho, jm.muslimin, wildan munawar declare that the article above that: 1. the submission has not been previously published, nor is it before another journal for consideration or currently not in the process of other journal publications. 2. there is no conflict of interest between the authors. 3. the submission is original, not translated. 4. i am willing to be responsible if there are parties who feel disadvantaged privately and/or based on a lawsuit in the future by the publication of this article. i also declare that any and all rights in and to the article including, without limitation, all copyrights are transferred to international journal of islamic economics and finance (ijief). therefore, the copyright transfer hands it the power and authority to edit, reproduce, distribute copies, and to publish the article partly or fully. bogor, 15 november 2022 ______________________________________________ wildan munawar international journal of islamic economics and finance (ijief) vol. 5(2), july 2022, pages 287-304 the role of attitudes toward local product in green marketing strategy: evidence from muslim consumers m qoshid al hadi1*, iman setya budi2 *) corresponding email: qoshid68@gmail.com article history received: april 4th, 2022 revised: june 22nd, 2022 june 30th, 2022 accepted: july 2nd, 2022 abstract the impact of the covid-19 pandemic has increasingly aroused the awareness of companies towards environmental issues. the company began to make changes in energy utility to reduce environmental impacts, including its marketing pattern. in addition, the issue of the government's campaign to love local products has also influenced consumer purchase intention. for this reason, this study aims to examine the impact of green marketing strategy (gms) variables, which are green advertising and green brand image, and the attitudes toward local products as the moderating role, on muslim purchase intention. this study used the partial least square–structural equation modeling (plssem) method. the data collected from 89 muslim consumers in banjarmasin, indonesia, were processed using smartpls. this study uncovered that both gms variables significantly affected the consumers’ purchase intention. however, this study also found that the attitude toward local products did not moderate the relationship between the two previous variables on purchase intention, but it significantly affected consumers’ purchase intention directly. keywords: consumer’s purchase intention, green marketing strategy, local product jel classification: m30, m31;,m37 type of paper: research paper. @ ijief 2022 published by universitas muhammadiyah yogyakarta, indonesia doi: https://doi.org/10.18196/ijief.v5i2.14643 web: https://journal.umy.ac.id/index.php/ijief/article/view/14643 citation: al hadi, m. q., & budi, i. s. (2022). the role of attitude toward local product in green marketing strategy: evidence from muslim consumers. international journal of islamic economics and finance (ijief), 5(2), 287-304. doi: https://doi.org/10.18196/ijief.v5i2.14643. 1,2 study program of islamic economics, faculty of islamic studies, islamic university of kalimantan muhammad arsyad al banjari mailto:qoshid68@gmail.com https://doi.org/10.18196/ijief.v5i2. https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v5i2.14643&domain=pdf al hadi & budi │ the role of attitude toward local product in green marketing strategy: evidence from muslim consumers international journal of islamic economics and finance (ijief), 5(2), 287-304 │288 i. introduction 1.1. background the covid-19 pandemic has exposed the globalization development that demands companies to make changes. the role of industrialization, which increases household gas emissions and global warming, has also changed consumer awareness of the environment (sugandini et al., 2020). while the environmental crisis occurs, human livelihoods also suffer. grant (2008) argued that companies have drastically adjusted their energy and raw materials to reduce environmental impacts. in addition, companies must adopt environmental issues so as not to be left behind by regulations and customer demand. according to barber et al. (2010), environmental issues have influenced marketing patterns driving consumer buying behavior. based on the issues above, marketing becomes crucial in reducing the impact of environmental issues from industrial activities. dangelico & vocalelli (2017) reasoned that marketing could communicate to consumers to create their awareness of the environment and provide information about the benefits of environmentally friendly products. thus, marketing is relevant in encouraging cleaner production and sustainable consumption. along with the increasing global interest in environmentally-safe quality, green marketing is picking up locomotion. concern about green marketing strategy (gms) has become a public issue and has developed into a crucial topic in academic circles (rahbar & wahid, 2011a). several studies on the effect of gms on consumer purchase intentions have also been conducted. the finding of rahmi et al. (2017) showed that green brand image had no effect on purchasing intention, but based on the study of toklu & kucuk (2017), the findings revealed that green brand image positively affected purchase intention. however, the results are still unclear because previous studies have shown inconsistent results (pratiwi et al., 2018; qomariah & prabawani, 2020; vuong & giao, 2020). for this reason, researchers felt it urgent to conduct further studies to provide complete information on how consumers' purchase intentions can be increased. generally, increasing consumers' ecological awareness and increasing demand for green products align with muslims' growing need for halal products. previous research has analyzed the idea of gms and consumer purchase intentions (thanika et al., 2012). nevertheless, they did not mention how muslim consumers were interested in green products. meanwhile, the government's campaign to buy local products has generated consumer awareness (darku & akpan, 2020). therefore, as a case study, this research addresses the gap in the current articles regarding the moderating role of consumer attitudes towards local products on gms and purchase intention al hadi & budi │ the role of attitude toward local product in green marketing strategy: evidence from muslim consumers international journal of islamic economics and finance (ijief), 5(2), 287-304 │289 with muslim consumers at banjarmasin. banjarmasin was the first city in the asia pacific to implement the single-use plastic ban (asia, 2021); thus, researchers selected its locus of study due to the government's commitment to building sustainable green life (walikota banjarmasin, 2016). hence, research findings will afford an advanced encouragement to the result of prior literature on gms and the purchase intentions of muslim consumers. 1.2. objectives the main objective of this study was to investigate the impact of gms (green advertising and green brand image) on muslim consumers’ purchase intention. this study also explored the moderating effect of the attitude toward local products. the study starts with a literature review on consumers' purchase intention based on the theory of reasoned action (tra), followed by model construction based on previous research. moreover, the following section discusses the methodology and research findings. finally, this study closes with a conclusion and some recommendations. ii. literature review 2.1. theory 2.1.1. purchase intention of muslim consumers in general, intentions play an essential role in how people behave. the term "purchase intention" is used to understand consumers' purchasing decisions (vuong & giao, 2020). there are several ways for academics to define purchase intention itself. howard & sheth in ejiofor et al. (2019) specified that purchase intention was the first level to advise consumers to take physical buying certainly. in addition, purchase intention is important in forecasting the buying process. consumers tend to be directed by their desires when they agree to buy a product in a particular market. according to fishbein & ajzen (1975), there are four elements in the intention, namely the behavior to be carried out, the target direction in which the behavior is intended, the situation in which the behavior will be carried out, and the time in which the behavior will be executed. concurrently, metwally (1991) mentioned that muslim consumer behavior is determined by islamic beliefs and rules of life (sharia). the difference can be seen in the utility function and budget constraints of muslim and non-muslim consumers. the concept of maximizing utility is not limited to maximizing the material pleasures of the selfish individual but rather all types of behavior. al hadi & budi │ the role of attitude toward local product in green marketing strategy: evidence from muslim consumers international journal of islamic economics and finance (ijief), 5(2), 287-304 │290 muslim consumer satisfaction is also limited not only to consumption and capital ownership but also expenditures for “good deeds," which are essential to the islamic religion. the theoretical basis conducted in this study is the theory of reasoned action (tra), suggesting that behavioral intentions are formed from attitudes towards behavior and subjective norms, leading to actual behavior by considering resources and opportunities (ajzen, 1988; ajzen & fishbein, 1980; chen et al., 2010). the first formula of tra is the attitude towards behavior based on the likes and dislikes of someone to do something. according to (fishbein & ajzen, 1975), attitudes are determined by salient beliefs about other possible behavior outcomes. after muslim consumers reviewed green products, several factors were discovered to influence muslim consumers' interest. the second tra is subjective norms, explained as perceived public pressures on individuals to act as in a given behavior. suppose muslim consumers believe that the essential reference in their thinking is that the behavior should be performed. in this case, individuals will tend to achieve a certain behavior, meaning that subjective norms must influence their intention to perform that behavior (elseidi, 2018). 2.1.2. green marketing strategy according to polonsky (1994), most people still think green marketing only refers to green advertising products. in fact, the terms recycled, rechargeable, and ozone-friendly are some things consumers associate with green marketing. even though the concept of green marketing is still inclusive, green marketing combines various activities, including product modification, production process changes, packaging changes, and advertising modifications. however, defining green marketing is not a simple task. the first definition of green marketing in dangelico & vocalelli (2017) began in 1976. at that time, hennion and kinnear showed that ecological marketing is "concerned with all marketing activities that have served to help cause environmental problems and that may serve to provide a remedy for environmental problems." for a long time, there have been many definitions presented by academics. the concept has evolved and becomes more structured, as seen from fuller's description of sustainable marketing as "the process of planning, implementing, and controlling the development, pricing, promotion, and distribution of products by a way that satisfies the following three criteria: (1) customer needs are met, (2) organizational goals are achieved, and (3) the process is compatible with the ecosystem.” yet, this research concentrates on the many definitions of internal and external al hadi & budi │ the role of attitude toward local product in green marketing strategy: evidence from muslim consumers international journal of islamic economics and finance (ijief), 5(2), 287-304 │291 marketing aspects. the inner marketing aspect is represented by a green brand image, and the external aspect is represented by green advertisements. based on tra, a gms is conducted to predict purchase intention. in this regard, prior researchers have identified a positive relationship between gms and purchase intention. 2.1.3. green brand image a green brand image is a sign used as a differentiator between goods/services produced by a company by prioritizing environmental sustainability. researchers have been concerned with the issue of consumer behavior towards green brands. papista & krystallis (2013) mentioned in their research that the green brand image has a potential differentiator that can build relationships with its consumers compared to its competitors. studies on the effect of green brands on consumers’ purchasing behavior have also been examined by rahbar & wahid (2011) in malaysia. the study results showed that the green brand was the positively significant variable related to actual purchase behavior. however, their study has not tested specific green brands, so it has not been able to explain the comparison between one green brand and another. 2.1.4. green advertising one of the promotion strategies that use their products in consumers' attention as the green product is called green advertising (eren-erdogmus et al., 2016). a study has tried to evaluate the practice of green advertising due to the emergence of consumers who complain about environmental claims (leonidou et al., 2011). from the study results, it was found that there was a shift in the emphasis on being green from business operations to consumers. it means that green advertising tends to emphasize issues related to consumption rather than production. based on research by agarwal & kumar (2020), studies on green advertising are still minimal. it is evidenced by the research results concentrated in a handful of geographies and universities, so research on green advertising still has vast opportunities. meanwhile, green advertising has been shown to influence one's thoughts on advertising and consumers' desire to be more friendly to the environment (thanika et al., 2012). 2.1.5. attitude toward local product today, one of the impacts of globalization is that many companies offer their products directly to consumers. in indonesia, several international brands got intense attention from the public compared to local products. the al hadi & budi │ the role of attitude toward local product in green marketing strategy: evidence from muslim consumers international journal of islamic economics and finance (ijief), 5(2), 287-304 │292 government's policy to increase consumer willingness to purchase local products is to campaign for buy-local products. local products are well known and have cultural value for the community; this is the principal capital of products to survive. cultural and historical values can be used as identities that distinguish local products from large producers (latu, 2019). apart from the actual economic impact of this campaign, the authors attempt to find attitudes toward local products in the influence between gms and consumer purchase intentions in banjarmasin. previous studies have found that exposure to the buy local promotion campaign did increase consumer ethnocentrism. consumer ethnocentrism also improved the attitude toward purchasing local products (salehudin, 2016). moreover, based on the theory of motivation and emotion developed by weiner (1985), the personality experience can be a causal ascription to the psychological consequences. it assumes that experience on buy-local product campaign became causal of an expectancy to make a purchase decision. 2.2. hypothesis from the description above, the researchers could formulate several hypotheses as follows: h1: there is a relationship between green brand image and consumer purchase intention. h2: there is a relationship between green advertising and consumer purchase intention. h3: attitude toward local-product will moderate the relationship between green brand image and consumer purchase intention. h4: attitude toward local-product will moderate the relationship between green advertising and consumer purchase intention. figure 1. research model green brand green advertising green marketing strategy attitude toward local product product purchase intention al hadi & budi │ the role of attitude toward local product in green marketing strategy: evidence from muslim consumers international journal of islamic economics and finance (ijief), 5(2), 287-304 │293 iii. methodology 3.1. data in this study, the population consisted of muslim consumers in banjarmasin. the researchers used a non-probability sampling technique, particularly purposive sampling, to attain the research goals. the sample was from individuals over 18 years old. the study assumes that they were familiar with shopping activities and could decide and choose the correct items among the many available options, such as environmental and sustainability considerations. the technique sampling of minimum size in this study was referred to by hair et al. (2010), ahmed et al. (2019), and mohammad et al. (2016). based on the rule of thumb, the minimum size of a collection of valid questionnaires was then elaborated to 70 (14 x 5). a total of 118 consumers participated in this study, and only 89 consumer questionaries were complete and 29 questionaries incomplete. then, non-probability sampling was applied with a total sample of 89 consumers, meaning that the data was more than required. moreover, the researchers collected the data directly from consumers using a likert scale of 1-5. respondents were requested to state their responses on a 5-point likert scale ranging from 1 (strongly disagree) to 5 (strongly agree). table 1 describes the profile of the respondents. table 1. respondents’ profile category sample n=89 percentage (%) gender female 56 62.9 male 33 37.1 job self-employed 8 9.0 college student 47 52.8 employee 25 28.1 others 9 10.1 age 18-23 68 76.4 24-29 5 5.6 30-35 13 14.6 36-41 1 1.12 42-48 2 2.25 religion muslim 89 100% 3.2. model development the latent variables of this study were green advertising, measured using indicators developed by alamsyah et al. (2020), rahbar & wahid (2011), and al hadi & budi │ the role of attitude toward local product in green marketing strategy: evidence from muslim consumers international journal of islamic economics and finance (ijief), 5(2), 287-304 │294 rahmi et al. (2017), the green brand image, assessed using indicators developed by alamsyah et al. (2020), qomariah & prabawani (2020), toklu & kucuk (2017), attitude towards local products, determined by four items developed by salehudin (2016), and the consumers’ purchase intention, evaluated by using three items adapted from qomariah & prabawani (2020), rahmi et al. (2017), and toklu & kucuk (2017). table 2. items constructing green advertising no. items constructing green advertising 1 i understand that the product is good for the environment through the advertisements i get. 2 i feel comfortable with green advertising products. 3 green advertising can guide me to decide to buy environmentally friendly products. source: alamsyah et al. (2020); rahbar & wahid (2011); rahmi et al. (2017) table 3. items constructing the green brand image no. items constructing the green brand image 1 i feel that eco-brands are the best measure of commitment to the environment. 2 i feel that an eco-friendly brand is professional in its reputation for the environment. 3 i feel this brand is well established in its concern for the environment. 4 i feel this brand is trustworthy about its environmental promise. source: alamsyah et al. (2020); qomariah & prabawani (2020); toklu & kucuk (2017) table 4. items constructing attitude toward the local product no. items constructing attitude toward the local product 1 i feel that local products have been produced with sophisticated technology. 2 i feel that local products have good prestige. 3 i feel the local products are of high quality. 4 i feel local produce is worth the money i spend. source: salehudin (2016) table 5. items constructing consumer purchase intention no. items constructing consumer purchase intention 1 i am interested in consuming green products because i care about the environment. 2 i hope to consume green products in the new normal because of their environmental performance. 3 overall i feel happy consuming green products. source: qomariah & prabawani (2020); rahmi et al. (2017); toklu & kucuk (2017) al hadi & budi │ the role of attitude toward local product in green marketing strategy: evidence from muslim consumers international journal of islamic economics and finance (ijief), 5(2), 287-304 │295 figure 2. moderating model 3.3. method this study used partial least square structural equation modeling (pls-sem). the pls-sem results were analyzed and calculated through a systematic process. in the pls path model, the objective of pls-sem was to maximize the explained variance of the endogenous latent variables. pls-sem assessment and structural model concentrated on the metric indicators with capabilities as a model predictive. for this reason, pls-sem was selected to support problem research. pls-sem is appropriate if each item’s outer loading exceeds 0.70, ave exceeds 0.50, and composite reliability exceeds 0.70 (hair et al., 2017). three measures were conducted to evaluate the discriminant validity: fornell-larcker criterion, cross-loadings ratio, and correlations criterion. iv. results and analysis the study hypothesis was examined according to structural equations utilizing smart pls. this research applied statistical techniques to accomplish the research objectives, i.e., examine the predictability of gms and augment the relation variance in cpi and alp. then, the researchers used smart pls software type 3 to analyze the data by applying bootstrap to ensure significant factor loading and path coefficients. in line with anderson & gerbing's (1988) two-step procedure for assessing the model, this research assessed the analysis model attended by structural testing. al hadi & budi │ the role of attitude toward local product in green marketing strategy: evidence from muslim consumers international journal of islamic economics and finance (ijief), 5(2), 287-304 │296 4.1. outer model results in this part, an outer model exposes the relationships between unobserved variables and their underlying items. firstly, the reliability scale was examined according to cronbach’s alpha, factor loading of items, and composite reliability. secondly, this study evaluated the convergent validity, determined by the average variance extracted (ave) values. finally, the researchers calculated the discriminant validity by correlating the squared root of ave of the construct with the interaction between another variable. first, after whole items proceeded, their composite reliability values and cronbach's alpha for gbi, ga, alp, and cpi exceeded the cut-off point of 0.70. it means the reliability of each item was sufficient. therefore, all variables fulfilled the necessity of construct reliability. the lowest composite reliability value was indicated by the alp variable of 0.876. table 6. the measurement model’s result constructs/ variables items factor loadings items eliminated cronbach's alpha composite reliability ave green advertising ikl1 0.913 none 0.883 0.928 0.810 ikl 2 0.899 ikl 3 0.887 green brand image mrl1 0.806 mrl4 0.857 0.913 0.779 mrl2 0.915 mrl3 0.923 attitude toward spl1 0.708 none 0.788 0.876 0.702 local product spl2 0.890 spl3 0.909 alp4 0.822 consumer purchase int1 0.826 none 0.855 0.902 0.699 intention int2 0.828 int3 0.859 cut off values: fl > 0.5; ca > 0.7; cr > 0.6; ave > 0.5; ave: average variance extracted second, ave values must exceed 0.5 to set convergent validity (hair et al., 2017). it is argued that every variable could describe more than half variance in its respective indicators. consequently, convergent validity was confirmed based on table 6. finally, table 7 indicates that the square root of ave was greater than correlations between variables in rows and columns, providing adequate support for discriminant validity (fornell & larcker, 1981). al hadi & budi │ the role of attitude toward local product in green marketing strategy: evidence from muslim consumers international journal of islamic economics and finance (ijief), 5(2), 287-304 │297 table 7. discriminant validity ga gbi ga*alp gbi*alp cpu alp ga 0.900 gbi 0.767 0.883 ga*alp -0.510 -0.441 1.000 gbi*alp -0.488 -0.531 0.936 1.000 cpi 0.759 0.768 -0.529 -0.545 0.838 alp 0.623 0.696 -0.426 -0.456 0.690 0.836 4.2. inner model results based on hair et al. (2018), the adjusted r-square value is the coefficient of determination in endogenous construct. adjusted r-square values in this study were categorized into three: strong (0.67), moderate (0.33), and weak (0.19). table 3 shows that r-square (adjusted) was 0.684. it means that the ability of ga, gbi, ga*alp, gbi*alp, cpi, and alp was 68.4%. thus, the model was classified as strong. table 8. r-square r-square r-square adjusted cpi 0.702 0.684 the conclusion from the r-square assessment on the cpi is that the adjusted r-square for the path model using the moderator variable was 0.684. it denotes that the ability of ga, gbi, and alp variables to explain cpi was 68.4%. thus, the model was classified as moderate (medium). 4.2.1 direct effect the direct effect analysis tests the hypothesis of the variable exogenous’s direct effect on the variable influenced (endogenous). for probability/significance value (p-value), if the p-value < 0.05, it is significant, while if the p-value > 0.05, it is not significant. table 9. results of significant testing standard deviation (stdev) t statistics (|o/stdev|) p values decision ga-> cpi 0.143 2.088 0.037 supported gbi-> cpi 0.150 2.223 0.027 supported ga*alp -> cpi 0.134 0.540 0.589 rejected gbi*alp -> cpi 0.130 0.157 0.875 rejected alp-> cpi 0.102 2.110 0.035 supported al hadi & budi │ the role of attitude toward local product in green marketing strategy: evidence from muslim consumers international journal of islamic economics and finance (ijief), 5(2), 287-304 │298 table 9 presents that the ga variable had a significant effect on cpi. also, gbi had a significant effect on cpi. the variable alp had a significant effect on cpi. however, the alp variable was insignificant in the relationship between ga and cpi, or the moderator variable failed. likewise, alp was insignificant in the relationship between gbi and cpi, or the moderator variable failed. 4.2.2 green advertising and consumer purchase intention in this research, it is assumed that green advertising positively impacts consumer purchase intention. this study discovered that green advertising significantly affected consumer purchase intention. table 9 indicates that the p-value was < 0.05, so h1 was accepted. these results are consistent with previous studies (rizwan et al., 2014; alamsyah et al., 2020; pratiwi et al., 2018). d’souza & taghian (2005) said that the functions of advertising are to inform, remind, and persuade. these advertising functions create awareness and a strong tentative attitude towards brands. based on this study, companies could increase their responsibilities for the sustainability of the environment through promoting and advertising. thanika et al. (2012) also advised that the advertisement's emotional level may enhance the customer's consideration of the advertisement. in this case, increasing green advertising by the company will increase consumer purchase intention. likewise, customers ask for more detailed and authentic product endorsements to lead their shopping decisions. as regardless, marketers must ensure the effectiveness of green advertising in driving customers towards more environmentally friendly purchasing patterns by ensuring greater information accuracy in green product advertisements. 4.2.3 green brand image and consumer purchase intention from the statistical test results, the green brand image significantly affected consumer purchase intention. it can be seen clearly with the p-values (0.027) < 0.05, so h2 was accepted. this research, therefore, revealed that a green brand image was significantly correlated with consumer purchase intention. this finding is appropriate to the concept of the prior conclusion, where the green brand image was reflected as one of the bases of gms. it was positively related to the intention of consumers to buy a product (alamsyah et al., 2020 qomariah & prabawani, 2020). in other words, consumers' desire to feel the reputation of green brands is handled professionally. this research is approved by the findings of rizwan et al. (2014) that environmentally friendly brands could direct consumers to buy. this finding has also been developed by tokluoklu & kucukucuk (2017), warning that consumers are becoming more environmentally because of international regulations on environmental protection; therefore, this condition also impacts companies. companies strive to improve their green brands because al hadi & budi │ the role of attitude toward local product in green marketing strategy: evidence from muslim consumers international journal of islamic economics and finance (ijief), 5(2), 287-304 │299 this is an excellent opportunity to differentiate from other companies, and green brands are essential determinants for customer satisfaction with environmental needs and expectations. 4.2.4 the moderation results the moderation effect of alp on the relationship between gms and consumer purchase intention was insignificant. this result is not relevant to the theory of motivation and emotion. the theory was developed to examine the relationship between consumers’ perceived consequences and the corresponding self-motivation (weiner, 1985). this theory assumes that emotional experiences of the local product can moderate gms and purchase behavior. this result also differs from the previous hypothesis, where alp could moderate green advertising and brand image toward purchase intention. disregarding the significant relationship between gms and consumer purchase intention identified, alp is not relevant to the decision in determining this relationship. related to that, darku & akpan (2020) revealed that the efficacy level of buying the local product is highly dependent on the level of ethnocentrism and the nature of the market. it might imply that respondents did not have extreme ethnocentrism toward local products. the study of ethnocentrism has several factors that vary from gender level, education, income, and consumption habits. the contradictory results of the research showed the crucial role of the basic profile variables, i.e., the respondents' age, gender, and income. the explanation age of consumers, 76.4% from 18 to 23 years old, might be one of the aspects why alp could not moderate the relationships between gms and consumer purchase intention. most likely, they were students who did not have an independent income. in addition, although alp failed to moderate the relationships between gms and cpi, alp significantly influenced cpi. it means that alp has a role as a predictor of variable moderation (helm & mark, 2012). a study by salehudin (2016) showed that alp significantly influenced the willingness to buy. based on previous studies, alp is more appropriate as an independent variable directly influencing and not as a moderating variable. v. conclusion and recommendation 5.1. conclusion many articles have presented the concern of gms and its impact on consumer intention variables. moreover, previous research exceedingly has intended on the defined elements of gms and their relationship to purchase intention. al hadi & budi │ the role of attitude toward local product in green marketing strategy: evidence from muslim consumers international journal of islamic economics and finance (ijief), 5(2), 287-304 │300 this study concluded that gms significantly affected cpi, in line with previous research. it means that the study's conclusions provide an important meaning for efforts to increase consumer purchase intention by having good brands and advertising in terms of the environment. in this study, internally, gms is represented by ga and externally by gbi. both variables had a significant effect on cpi. however, the results of this study also revealed that alp could not moderate the relationship between gms and cpi. the results indicate that alp is more effective in influencing cpi than its role as a moderator between gms and cpi. therefore, this research model is more appropriate for alp as an independent variable rather than a moderator variable. 5.2. recommendation the findings of this study can be the basis for improving marketing strategies. this study assists policymakers and practitioners in reviewing consumer interests and the framework for developing their marketing strategies. practically, this study helps managers better understand green marketing and alp elements. the findings of this study can also help overcome the behavior of consumers with weak buying interests. moreover, this study presents tremendous implications for policymakers and practitioners. policymakers must consider the vital role of environmental aspects. considering the potential impact of the environment on business sustainability, it is significant for consumers and producers. this approach might motivate marketing managers and producers to integrate environmental issues and local products into marketing strategies. adherent to the findings, marketing management needs to give high preference to environmental orientation and values in the business 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(1985). an attributional theory of achievement motivation and emotion. psychological review, 92(4), 548–572. https://doi.org/10.1080/08961530.2019.1619115 international journal of islamic economics and finance (ijief) vol. 6(1), january 2023, pages 53-72 indonesian muslim youth factors influencing intention to perform cash waqf anisa syahidah mujahidah1, aam slamet rusydiana2* *corresponding email: aamsmart@gmail.com article history received: february 11th, 2022 revised: november 22nd, 2022 accepted: december 2nd, 2022 abstract this study aims to investigate the intention to donate cash waqf among indonesian muslim youth. additionally, this study explains the theory of planned behavior (tpb) and two additional variables, i.e., islamic religiosity and willingness to donate cash waqf. the partial least square structural equation modeling (pls-sem) method was employed to evaluate the measurement and structural models. online questionnaires then distributed to purposively selected respondents throughout indonesia, consisting of all major islands. in total, 104 respondents participated. this study uncovered that the attitude and willingness variables affected the intention to donate cash waqf among indonesian muslim youth. meanwhile, subjective norms, perceived behavioral control, and islamic religiosity variables were not significantly proven as the determinants to donate cash waqf. with the latest data and variables studied, these findings can be used as guidelines for policymakers, especially waqf regulators and waqf institutions, to innovate and improve the characteristics of cash waqf contributors, primarily among muslim youth, to maintain the waqf instruments’ sustainability and development. keywords: waqf; cash waqf; intention; tpb; muslim youth jel classification: z12; z13; g40 type of paper: research paper @ ijief 2023 published by universitas muhammadiyah yogyakarta, indonesia doi: https://doi.org/10.18196/ijief.v6i1.13964 web: https://journal.umy.ac.id/index.php/ijief/article/view/13964 citation: mujahidah, a. s. & rusydiana, a. s. (2022). perceptions of indonesian muslim youth on factors influencing their intention to perform cash waqf. international journal of islamic economics and finance (ijief), 6(1), 53-72. doi: https://doi.org/10.18196/ijief.v6i1.13964. 1 tazkia islamic university college, indonesia 2 sharia economic applied research and training (smart), indonesia about:blank about:blank https://journal.umy.ac.id/index.php/ijief/article/view/13964 about:blank about:blankhttps://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v6i1.13964&domain=pdf mujahidah & rusydiana │ perceptions of indonesian muslim youth on factors influencing their intention to perform cash waqf international journal of islamic economics and finance (ijief), 6(1), 53-72 │ 46 i. introduction the significance of waqf in islam is a major feature from the time of the prophet (pbuh) until the beginning of the 19th century. waqf has played an essential part in islamic history (kasri & chaerunnisa, 2020). waqf is a voluntary deed advised by the prophet muhammad and widely done in the early islamic period (pitchay, et al., 2015). waqf is the concept of utilizing existing property, and the profits obtained are used to help the poor or for other good intentions. furthermore, waqf might take many forms depending on the goal and nature of the outcomes (rizal & amin, 2017). according to current islamic literature, waqf is a strategy for a fairer distribution of wealth among fellow muslims. waqf also supports spiritual investment to improve the ummah and social welfare (kahf, 1999). most people of islamic faith presently consider waqf confined to land or property used only for religious purposes (iqbal, et al., 2019). some indonesians still invest their waqf assets in idle goods (for example?) rather than productive ones. waqf does not have to be confined to land, buildings, or immovable property; it can also be in the form of finances or moveable goods (mokthar, 2018). since the national shariah board, indonesia ulama council (dsn-mui) issued a fatwa on cash waqf in 2012, and cash waqf has become well-known in indonesia (tanjung, 2020). on the basis of the latest data and re-examining the theory of planned behavior (tpb) with the addition of islamic religiosity and willingness, this research is vital to determine the factors affecting the future sustainability of waqf institutions, which, in turn, will depend on the views of values of muslim youth today. hence, it is crucial to know the characteristics of muslim youth who will become donors in providing cash waqf in the present and the future. research on cash waqf has been widely studied in various countries, such as iran (hosseini, et al., 2014), indonesia (witjaksono, et al., 2019), nigeria (musa & salleh, 2018), malaysia (thaker, et al., 2017), bangladesh (thoarlim, et al., 2017), (saiti & bulut, 2020). these studies showed that cash waqf has become a matter of contention and an essential islamic financial instrument that must be enhanced. researchers have also revealed several factors influencing the intention to donate cash waqfs, such as the social environment (iqbal, et al., 2019), attitude (pitchay, et al., 2015), subjective norms (witjaksono, et al., 2019), perceived behavioral control (zabri & mohammed, 2017), ukhuwah (mokthar, 2018), conscientiousness (zain, et al., 2019), and trust, knowledge, and religiosity (kasri & chaerunnisa, 2020). even so, studies discovered that in indonesia, the willingness of young people to donate cash waqf remains low (aldeen, et al., 2020). as a result, it is crucial to investigate if willingness is one of the elements influencing whether a person would donate a cash waqf. mujahidah & rusydiana │ perceptions of indonesian muslim youth on factors influencing their intention to perform cash waqf international journal of islamic economics and finance (ijief), 6(1), 53-72 │ 47 furthermore, cash waqf influences the growth of waqf instruments and institutions to maintain their sustainability and formation. in addition, cash waqf is also a helpful instrument to meet the united nation’s sustainable development goals (abubakar & rahman, 2021). ii. literature review the qur'an and the hadith emphasize the necessity of donating to waqf. according to the qur'an, money does not belong to a single person since other people also have rights to it (rizal & amin, 2017). since the ottoman empire, the notion of cash waqf has been established. according to saduman and aysun (2009), the notion of cash waqf significantly expanded government revenues and considerably enhanced the socioeconomic situation of muslims throughout the ottoman era. cash waqf also continues to be a viable and relevant method of development. since cash waqf has existed in many muslim nations for centuries, most have made it easier for gift collecting and distribution (karim, 2010). the potential of cash waqf has also been extensively researched, as have related historical documents. it is reported that cash waqf had a relatively significant contribution to the government revenue. cash waqf also helped eliminate the practice of riba (usury (cizakca, 1998)), (ab shatar, et al., 2021), (aldeen, et al., 2020) and (rizal & amin, 2017). further studies investigated cash waqf collection (kasri & chaerunnisa, 2020), online cash waqf (berakon, et al., 2020), the impact of the digital islamic banking system on cash waqf (afroz, et al., 2019), waqf-based islamic microfinance (fajariah et al., 2020), and others. in addition, ahmad & rusdianto (2020), in their research on the intention of cash waqf donation in islamic microfinance institutions, found that the level of trust positively affected the intention to provide cash waqf to islamic financial institutions. meanwhile, alifiandy & sukmana (2020) uncovered that attitude significantly influenced the intention to donate waqf at specific islamic financial institutions. a study by (zain, et al., 2019) also found that prudence of cash waqf significantly affected cash waqf intentions. in penang, malaysia, it was demonstrated that factors which influenced the intention to donate cash waqf were ukhuwah (ukhuwwah is characterized as a fraternity or a connection between individuals), rewards, religious obedience, and awareness of cash waqf (mokthar, 2018). awareness also affected the intention to do cash waqf, while promotion of cash waqf did not influence the intention to perform cash waqf (iqbal, et al., 2019). table 1 provides a summary on previous studies. mujahidah & rusydiana │ perceptions of indonesian muslim youth on factors influencing their intention to perform cash waqf international journal of islamic economics and finance (ijief), 6(1), 53-72 │ 48 2.1. theory of planned behavior (tpb) the evolution of the notion of reasoned action emanates from the theory of planned behavior. this theory integrates numerous vital ideas from the social and behavioral sciences and explains them in a way that allows for predicting and comprehending specific actions in specific situations (azjen, 1991). this idea is commonly utilized in psychology and market research to forecast customer interest and behaviour. furthermore, this theory may identify a person's interest in various social activities connected to a person's desire to share with others, such as making donations, blood donations, and other similar activities (heikal, et al., 2014). the theory of planned behavior has three main variables: attitude, subjective norms, and perceived behavioral control. attitude is a psychological concept conveyed through a scale of likes and dislikes (eagly & chaiken, 1993). attitude is also an indicator of a person's desire to respond and act on something (heikal, et al., 2014). then, the apparent social pressure to do or not do something is referred to as subjective norms (azjen, 1991). subjective norms are also defined as a person's perception of other people's expectations of an upcoming activity. further, subjective assumptions are impacted by one's worldviews and values (huda, et al., 2012). meanwhile, perceived behavioral control is a state in which a person perceives a specific activity as simple or challenging based on previous experiences and barriers (dharmmesta, 1998). studies on the intention to waqf by outlining the tpb have been undertaken in many ways by many researchers in the past, with varying results. the variables of attitude, subjective norms, and perceived behavioral control were found to significantly influence islamic bank consumers in jakarta intending to do cash waqf through islamic banking (witjaksono, et al., 2019). other research (alifiandy & sukmana, 2020) revealed that of the three core variables of the theory of planned behavior, only the attitude variable significantly influenced the waqif's (person who performs waqf) intention to donate waqf. meanwhile, other variables from the theory of planned behavior, i.e., subjective norms and perceived behavioral control, were reported to have no significant effect on the waqif's intention to donate waqf. thus, in this study, the following hypotheses were formed: h1: attitude toward waqf positively and significantly affects indonesian muslim youth's intention to donate cash waqf. h2: subjective norms positively and significantly affect indonesian muslim youth's intention to donate cash waqf. h3: perceived behavioral control positively and significantly affects indonesian muslim youth's intention to donate cash waqf. mujahidah & rusydiana │ perceptions of indonesian muslim youth on factors influencing their intention to perform cash waqf international journal of islamic economics and finance (ijief), 6(1), 53-72 │ 49 2.2. islamic religiosity religious faith is the most potent motivator for people of indonesia to follow religious teachings (syafira, et al., 2020). religion is essential since it is one of the supporting forces based on civilization. at the individual and social levels, these fundamental pillars significantly influence cognitive processes, traits, and behavior. when someone lives in a community, religiosity is the reciprocal attitude of principles and practices in topics cleansed or in everyday life, and it improves comprehension of one another's affiliations and obligations (mukhtar & butt, 2012) according to (carabain & bekkers, 2011), religious people are willing to volunteer or act voluntarily for the betterment of society and fellow humanity. a person’s religious faith is also one of the crucial determinants of volunteering (musick & wilson, 2008). islamic religiosity has been researched by rizal & amin (2017) and uncovered to have a significant effect on the contribution of cash waqf. mokthar (2018), in his research, asserted that religiosity also affected the intention of muslims in penang to perform cash waqf. as a result, the following hypothesis emerged: h4: islamic religiosity positively and significantly affects indonesian muslim youth's intention to donate cash waqf. 2.3. willingness berakon et al., (2020) researched the willingness level of muslim youth to donate cash waqf in indonesia. they revealed that the willingness level that remains is not strong as they preferred other charities, such as donations or others. it was also because they could not explain the cash waqf itself. hence, this study examined willingness as a variable affecting indonesian muslim youth's intention to donate cash waqf. according to the study, willingness influences indonesian muslim youth's intention to give cash waqf. as a result, it was hypothesized in this study: h5: willingness positively and significantly affects indonesian muslim youth's intention to donate cash waqf. iii. research methodology 3.1. data the authors' data in this study were all primary. an online questionnaire was delivered to respondents identified in the study to collect data through online media using google form tools. a five-point likert scale was used to answer the questions in this research questionnaire, starting with one (strongly mujahidah & rusydiana │ perceptions of indonesian muslim youth on factors influencing their intention to perform cash waqf international journal of islamic economics and finance (ijief), 6(1), 53-72 │ 50 disagree) and progressing to five (strongly agree). the likert scale is a type of scale used to gather information in order to understand or quantify information that is both qualitative and quantitative. the information is gathered to ascertain a person's viewpoint, perception, or attitude regarding an occurrence. moreover, pls-sem method was applied in this study, utilizing warppls software. table 1. summary of previous studies author(s) independent variables dependent variable significance +/ ahmad & rusdianto (2020) perception of transparency (x1), perception of accountability (x2), and trust (x3) cash waqf intention on bmt x1 and x2 were significant; x3 was not significant. (+) alifiandy & sukmana (2020) behavior (x1), knowledge (x2), subjective norms (x3), and perceived behavioral control (x4) waqf intention x1 and x4 were significant; x2 and x3 were not significant. (+) mokhtar (2018) religious obedience (x1), rewards (x2), awareness (x3), and ukhuwah (x4) cash waqf intention x4 was significant; x1, x2, and x3 were not significant. (+) iqbal et al. (2019) promotion (x1), social environment (x2), understanding (x3), and awareness (x4) indonesian cash waqf intention x3 and x4 were significant; x1 and x2 were not significant. (+) berakon et al. (2020) subjective norms (x1), perceived behavioral control (x2), perceived usefulness (x3), ease of use (x4), and attitude (x5) cash waqf muslim youth’s decision x1, x2, x3, and x5 were significant; x4 was not significant. (+) rizal & amin (2017) perceived ihsan (x1), islamic egalitarian (x2), and religiosity (x3) cash waqf giving x1, x2, and x3 were significant. (+) additionally, this study utilized purposive sampling, in order to limit the number of respondents to muslims and indonesian nationals to meet the study's aims. the minimum valid number of respondents required in pls-sem research study was 100 persons based on kock (2018). 3.2. method structural equation modeling (sem) is a multivariate analysis technique developed to cover the limitations of previous analytical models that have been widely used in statistical research. the models include regression analysis, path analysis, and confirmatory factor analysis (hox & bechger, 1998). sem is divided into two types, namely covariance-based sem and variantbased sem. covariance-based sem analysis requires a strong and well-defined theoretical foundation. this model requires a large sample, with the starting assumption that the data have a multivariate normal distribution. often the data in the field shows a pattern of data that is not normally distributed, so a free and flexible method of research is needed. the alternative sem method mujahidah & rusydiana │ perceptions of indonesian muslim youth on factors influencing their intention to perform cash waqf international journal of islamic economics and finance (ijief), 6(1), 53-72 │ 51 in question is variant-based sem or often referred to as partial least square (pls). according to vinzi, et al (2010) the basic assumptions of pls are for the purpose of prediction and model exploration but are preferred as model exploration. the model obtained by pls can optimize the predictive relationship between latent variables that are measured indirectly by the indicator. structural equation modeling (sem) using partial least squares (pls) method was used to test measurement and structural models. the reliability and validity of the study constructs were evaluated. pls-sem is a well-established technique used in various studies to estimate path coefficients and investigate the complexity of the relationships built into structural models (ali et al., 2017). the ability to relate the relationship between variables in the examination of measurement model items are two advantages of this method compared with co-variance-based sem (fakih et al., 2016). data were filtered and scanned for valid use cases for data analysis. pls is a variant-based structural equation analysis that can simultaneously test the measurement model as well as test the structural model. the measurement model is used to test the validity and reliability, while the structural model is used to test causality (testing hypotheses with predictive models). the basic difference between pls which is a variant-based sem with lisrel or amos which is covariance-based is the purpose of its use. covariance-based sem aims to estimate models for theory testing or confirmation, while variance sem aims to predict models for theory development. therefore, pls is a causality prediction tool used for theory development (jogiyanto & abdillah, 2009). further, pls can be used for small samples, however a large sample size will increase the precision of estimation. regarding how many samples, pls-sem is not subject to any specific rules. pls does not require that the data distribution be normal. the form of the construct can use a reflective or formative model. the maximum number of indicators is also large, in the order of 1,000 indicators (hair, hult, ringle, & sarstedt, 2014). 3.3. model and hypotheses the exogenous latent variables in this study consisted of five variables:  attitude (ξ1),  subjective norms (ξ2),  perceived behavioral control (ξ3),  religiosity (ξ4),  willingness (ξ5), and endogenous latent variable of intention (η). mujahidah & rusydiana │ perceptions of indonesian muslim youth on factors influencing their intention to perform cash waqf international journal of islamic economics and finance (ijief), 6(1), 53-72 │ 52 referring to these variables can be developed into several indicators described in table 2. table 2. indicator variables latent variable indicator symbol adopted from attitude (ξ1) cash waqf is an innovative idea. att1 (kasri & chaerunnisa, 2020) (berakon, et al., 2020) cash waqf is a wise and appropriate step. att2 i believe that cash waqf is very beneficial. att3 subjective norms (ξ2) the people closest to me encourage me to participate in cash waqf. sn1 (berakon, et al., 2020) the people closest to me do cash waqf. sn2 my family encourages me to do cash waqf. sn3 perceived behavioral control (ξ3) i can participate in cash waqf. pbc1 (zabri & mohammed, 2017) (berakon, et al., 2020) i have sufficient knowledge to participate in cash waqf. pbc2 i can easily participate in cash waqf if i want. pbc3 islamic religiosity (ξ4) in my opinion, all human activities must be done because of allah is1 (kasri & chaerunnisa, 2020) (rizal & amin, 2017) (al-qardawi, 1981) waqf giving is encouraged by islam. is2 prophet muhammad showed and taught the importance of doing good deeds, such as waqf. is3 willingness (ξ5) i have the desire to contribute cash waqf voluntarily. wls1 (aldeen, et al., 2020) in the future, i am interested in contributing cash waqf to specific institution waqf. wls2 cash waqf is my choice of charity. wls3 i have the desire to do cash waqf in the future. wls4 intention (η) i will choose cash waqf over ordinary waqf. int1 (berakon, et al., 2020) (kasri & chaerunnisa, 2020) i intend to do cash waqf. int2 the research framework for this study is as follows, employing the pls-sem model. mujahidah & rusydiana │ perceptions of indonesian muslim youth on factors influencing their intention to perform cash waqf international journal of islamic economics and finance (ijief), 6(1), 53-72 │ 53 figure 1. research framework the following is the research hypothesis. h1: attitude positively and significantly influences indonesian muslim youth's intention to donate cash waqf. h2: subjective norms positively and significantly influences indonesian muslim youth's intention to donate cash waqf. h3: perceived behavioral control positively and significantly affects indonesian muslim youth's intention to donate cash waqf. h4: islamic religiosity positively and significantly affects indonesian muslim youth's intention to donate cash waqf. h5: willingness positively and significantly affects indonesian muslim youth's intention to donate cash waqf. iv. results and discussion a total of 104 people took part in this investigation. male respondents accounted for 36.5% of the total, while female respondents amounted to 63.5%. respondents’’ profile characteristics can be seen in table 3. 4.1. measurement model tests-validity and reliability convergent and discriminant validity are two types of statistical validity tests. generally, the average variance extracted (ave) and loading factor values are used to determine convergent validity. if the item has an ave value larger than 0.5 in each variable and a loading factor value greater than 0.5, it is free of convergence validity flaws. when the correlation value of one variable with other variables is larger than the correlation value of all variables, discriminant validity is achieved. mujahidah & rusydiana │ perceptions of indonesian muslim youth on factors influencing their intention to perform cash waqf international journal of islamic economics and finance (ijief), 6(1), 53-72 │ 54 table 3. respondent characteristics december, 2020 demographic variables n (%) gender male 38 36.5 female 66 63.5 region java island 65 62 sumatera island 26 25 bali and nusa tenggara islands 6 6 kalimantan island 2 2 sulawesi island 3 3 papua island 2 2 age 17-30 years 102 98.1 31-40 years 2 1.9 education junior high school degree 58 55.8 senior high school degree 46 44.2 occupation student 85 81.7 entrepreneur 9 8.7 others 10 9.6 the cross-loading value is another method that may be utilized to pass this test if each question item variable's cross-loading value is larger than the question item variable's correlation value on other variables. if the composite reliability (cr) and cronbach's alpha scores are more than 0.70, the reliability test is considered trustworthy (hair et al., 2014). table 4 illustrates the result of convergence validity and construct reliability. the impact of attitudes on intentions of indonesian muslim youth to donate cash waqf was demonstrated by statistical test findings ( 𝛽 =0.27, pvalue<0.01), implying that h1 was supported. meanwhile, subjective norms (social influences that influence a person to behave) did not affect indonesian muslims' youth desire to donate cash waqf (𝛽= 0.18, p-value = 0.03), so h2 was not supported. perceived behavioral control and islamic religiosity variables were also found to have no significant effect on the intention to donate cash waqf, with the statistical result of each variable (𝛽=0.02, p-value=0.44) and (𝛽=0.07, p-value=0.23), respectively. mujahidah & rusydiana │ perceptions of indonesian muslim youth on factors influencing their intention to perform cash waqf international journal of islamic economics and finance (ijief), 6(1), 53-72 │ 55 table 4. convergence validity and construct reliability results items loadings ave alpha cr attitude 0.821 0.890 0.932 att1 (0.915) att2 (0.937) att3 (0.865) subjective norms 0.752 0.834 0.901 sn1 (0.858) sn2 (0.912) sn3 (0.830) perceived behavioral control 0.717 0.802 0.884 pbc1 (0.834) pbc2 (0.857) pbc3 (0.848) islamic religiosity 0.885 0.935 0.959 is1 (0.936) is2 (0.937) is3 (0.950) willingness 0.758 0.893 0.926 wls1 (0.846) wls2 (0.908) wls3 (0.837) wls4 (0.889) intention 0.877 0.859 0.934 int1 (0.936) int2 (0.936) figure 2 is the pls-sem model along with the results obtained from data processing using warppls software. figure 2. research model mujahidah & rusydiana │ perceptions of indonesian muslim youth on factors influencing their intention to perform cash waqf international journal of islamic economics and finance (ijief), 6(1), 53-72 │ 56 furthermore, the findings demonstrated that indonesian muslim youths’ intention to donate cash waqf was influenced by willingness (𝛽 =0.58, pvalue<0.01), supporting h5. as a result, subjective norms had no bearing on this study. table 5 explains the results of hypotheses testing of the model. table 5. hypotheses testing results path 𝜷 remark attitude  intention 0.27* h1 is supported. subjective norms intention 0.18ns h2 is unsupported. perceived behavioral control intention 0.02 ns h3 is unsupported. islamic religiosity intention 0.07 ns h4 is unsupported. willingness intention 0.58* h5 is supported. notes: *p-value <0.01(significant); ns = not significant this research model was based on the theory of planned behavior with the addition of two variables: islamic religiosity and willingness to donate cash waqf. in the light of the survey data results, two hypotheses were supported, whereas three hypotheses were not supported. the data reveal that the variable resulting from the theory of planned behavior (i.e., attitude) had a significant effect on the intention of indonesian muslim youth to donate cash waqf. this suggests that a person's personality strongly encourages the behavioral intentions of indonesian muslim youth, especially in donating cash waqf activities. this finding corroborates previous research (alifiandy & sukmana, 2020) in the context of the intention to donate cash waqf. also, their study found that the attitude variable significantly affected the waqif's intention to donate waqf at puspas. in addition, the study results revealed that the variable from the theory of planned behavior (i.e., subjective norm) also had no significant effect. it indicates that social pressure from friends, family and the environment was also not a factor influencing the intention of indonesian muslim youth to donate cash waqf. this was possible because the commonly known waqf by indonesian people is waqf in the form of buildings, land, and other fixed assets. education about cash waqf also has not touched all people. therefore, there was no social pressure affecting the intention of muslim youth to donate cash waqf. besides, social pressure was not too influential because, in practice, waqf is voluntary, so performing cash waqf is not obligatory for young muslim people. this is reinforced by a study (alifiandy & sukmana, 2020) in the context of intention to donate waqf in puspas that subjective norms had no significant effect on the intention to donate waqf in puspas. another variable from the theory of planned behavior perceived behavioral control was shown to have no significant effect on the intention of indonesian muslim youth to donate cash waqf. this finding suggests the level ease or difficulty did not affect people doing something, especially in donating mujahidah & rusydiana │ perceptions of indonesian muslim youth on factors influencing their intention to perform cash waqf international journal of islamic economics and finance (ijief), 6(1), 53-72 │ 57 cash waqf among indonesian muslim youth. hence, the ease with which muslim youth can donate to waqf did not affect the intention of muslim youth to donate cash waqf. this result is supported by another study (alifiandy & sukmana, 2020), where perceived behavioral control also had an insignificant effect on the intention to donate waqf in puspas. however, this study's results do not follow ajzen's (2005) tpb. in theory, perceived behavioral control factors have both reinforcing and debilitating characteristics of intentions. if the behavior is perceived as achievable, the intention to give cash waqf will be strengthened. conversely, if the behavior turns out to be difficult or impossible, the intention will be weakened. islamic religiosity control, was also reported to have no significant effect on the intentions of indonesian muslim youth to donate cash waqf. the result differs from the findings of rizal & amin (2017), where islamic religiosity had a significant effect on giving cash waqf. it can then be concluded that among indonesian muslim youth, islamic religiosity did not have a significant effect because, in the case of cash waqf, there are still differences of opinion in the field of fiqh and the opinions of the scholars for example the opinion of imam syafi'i who prohibits waqf with money because of the nature of money that is easily lost and its substance is not eternal. therefore, a person's religiosity level was not a factor affecting cash waqf due to differences of opinion among scholars about the law and whether cash waqf is believed. aside from the attitude variable, a significant variable in this study was the willingness variable which had a significant effect on the intention to donate cash waqf among indonesian muslim youth. it can be interpreted that whether someone wants to or not affects the intention to do something, especially in terms of cash waqf among indonesian muslim youth. when the muslim youth wants to contribute to waqf, it will affect the intention itself. conversely, intention to contribute to waqf is enhanced after contributing to waqf. when muslim youth do not want to do it, it will affect their intention to do so. in berakon, aji, & hafizi’s (2020) research, it was demonstrated that, despite the willingness of muslim youth to donate cash, waqf was still low due to the preference of indonesian muslim youth to perform charity. this was chiefly done through donations or other activities for social betterment. the authors also could not explain what cash waqf was made to others. hence, it can be concluded that to donate cash waqf, willingness of indonesian muslim youth will significantly affect the intention to donate cash waqf. mujahidah & rusydiana │ perceptions of indonesian muslim youth on factors influencing their intention to perform cash waqf international journal of islamic economics and finance (ijief), 6(1), 53-72 │ 58 v. conclusion the objective of this study is to examine, from the insights of indonesian muslim youth, the intention to donate cash waqf. this study also investigates the tpb model, adding islamic religiosity and willingness variables. the results exposed that the willingness variable affected the intention to donate cash waqf among indonesian muslim youth. meanwhile, subjective norms, perceived behavioral control, and islamic religiosity did not significantly influence the intention to donate cash waqf. in addition, the model revealed that the attitude, subjective norms, perceived behavioral control, islamic religiosity, and willingness variables could explain a large majority (79.9%) of the determinants of intentions to donate cash waqf among indonesian muslim youth. the implications of this study as far as existing research is concerned, there have been many marketing concepts such as tpb (theory of planned behavior), tra (theory of reasoned action) and other theories. however, this concept originated from a business and commercial concept. meanwhile, the concept of waqf, zakat and other donations is not a commercial industry but islamic social finance. although in several studies it looks the same, it seems that in the future it is necessary to develop other more appropriate theories. as for the practice of the islamic social finance industry, muslim philanthropists also the nadzhirs need to see and consider the results of this study in the framework of increasing the potential for raising islamic social funds, especially waqf from young muslim millennials. the limitation of this study is that, although the sample was representative of all islands in indonesia, the island of java island dominated the scattered sample. in this regard, reaching respondents far from east to west is a significant challenge. therefore, further research should provide additional knowledge in this area. likewise, the covariance-based sem method, considered relatively more robust, could be used in future analysis. references ab shatar, w. n., hanaysha, j. r., 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(2019). personality factors influencing intention on cash waqf behavior. international journal of business, economics and law, 23-30. mujahidah & rusydiana │ perceptions of indonesian muslim youth on factors influencing their intention to perform cash waqf international journal of islamic economics and finance (ijief), 6(1), 53-72 │ 63 appendix appendix i. cross loading att sn pbc is wls int att1 (0.915) -0.014 -0.070 -0.049 -0.052 0.081 att2 (0.937) 0.075 -0.013 -0.054 0.145 -0.060 att3 (0.865) -0.066 0.089 0.110 -0.102 -0.021 sn1 -0.026 (0.858) 0.171 0.085 -0.353 0.193 sn2 0.016 (0.912) 0.110 0.000 -0.002 0.022 sn3 0.009 (0.830) -0.298 -0.087 0.367 -0.223 pbc1 -0.221 -0.014 (0.834) -0.061 0.015 0.216 pbc2 0.164 -0.099 (0.857) -0.125 -0.237 0.132 pbc3 0.052 0.114 (0.848) 0.186 0.225 -0.346 is1 -0.019 -0.009 0.033 (0.936) -0.005 -0.010 is2 0.012 -0.019 -0.010 (0.937) 0.180 -0.110 is3 0.007 0.029 -0.023 (0.950) -0.172 0.119 wls1 -0.260 -0.009 0.164 0.347 (0.846) 0.024 wls2 0.029 -0.122 0.113 -0.015 (0.908) 0.042 wls3 0.074 0.091 -0.143 -0.276 (0.837) 0.152 wls4 0.148 0.047 -0.137 -0.056 (0.889) -0.208 int1 0.007 0.066 -0.067 0.046 -0.182 (0.936) int2 -0.007 -0.066 0.067 -0.046 0.182 (0.936) appendix ii. square roots of ave att sn pbc is wls int att (0.906) 0.403 0.562 0.619 0.772 0.728 sn 0.403 (0.867) 0.625 0.120 0.406 0.505 pbc 0.562 0.625 (0.847) 0.378 0.561 0.543 is 0.619 0.120 0.378 (0.941) 0.682 0.490 wls 0.772 0.406 0.561 0.682 (0.871) 0.805 int 0.728 0.505 0.543 0.490 0.805 (0.936) appendix iii. inner analysis result att sn pbc is wls int r-squared 0.799 adj. r-squared 0.789 composite reliability 0.932 0.901 0.884 0.959 0.926 0.934 cronbach's alpha 0.890 0.834 0.802 0.935 0.893 0.859 avg. var. extrac. 0.821 0.752 0.717 0.885 0.758 0.877 full collin.vif 2.996 1.905 2.114 2.161 4.562 3.454 q-squared 0.712 mujahidah & rusydiana │ perceptions of indonesian muslim youth on factors influencing their intention to perform cash waqf international journal of islamic economics and finance (ijief), 6(1), 53-72 │ 64 this page is intentionally left blank international journal of islamic economics and finance (ijief) vol. 4(si), page 41-62, special issue: islamic banking the effect of islamic finance on small and medium enterprises and job creation in turkey: an empirical evidence seyf eddine benbekhti, university of abu bakr belkaid, algeria corresponding email: bensifou3@gmail.com hadjer boulila, abdelnacer bouteldja university of abu bakr belkaid, algeria article history received: december 1st, 2020 revised: february 1st, 2021 accepted: march 12th, 2021 abstract the aim of this paper is to investigate and evaluate how can islamic finance participate in job creation through financing small and medium enterprises in turkey in order to solve the problem of unemployment. the paper adopts a vector autoregressive model (var) based on monthly data (2009-2017). the results revealed that islamic finance is a golden opportunity and a sufficient alternative financial source for smes which enhance productivity and reduce unemployment by contributing to the labor market. this study contributes to the existing literature by presenting a promising financing tool to the prospective borrowers of smes (farmers, underserved groups, and small entrepreneurs) which is islamic financing. this alternative can be an effective tool for both muslim and non-muslim countries in regard that conventional finance is more expensive and smes are unable to pay high interest rates. it would also help in establishing low unemployment levels. this paper suggested that islamic banks and islamic financial institutions should converge more on the smes by providing funding to smes which would lead to boost production and economic development keywords: labor market, small and medium enterprises, islamic finance, var jel classification: j45, p13 type of paper: research paper. @ ijief 2021 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.v4i0.10490 web: https://journal.umy.ac.id/index.php/ijief/article/view/10490 citation: benbekhti, s. e., boulila, h., & bouteldja, a. (2021) the effect of islamic finance on small and medium enterprises and job creation in turkey: an empirical evidence. international journal of islamic economics and finance (ijief), 4(si), 41-62. doi: https://doi.org/10.18196/ijief.v4i0.10490 mailto:bensifou3@gmail.com https://doi.org/10.18196/ijief.v4i0.10490 https://doi.org/10.18196/ijief.v4i0.10490 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v4i0.10490&domain=pdf benbekhti, boulila, & bouteldja │ the effect of islamic finance on small and medium enterprises and job creation in turkey: an empirical evidence international journal of islamic economics and finance (ijief), 3(si), 41-62│42 i. introduction 1.1 background small and medium enterprises is considered as the backbone of many economies worldwide and participate in its social development, it has an important role in developing countries as it presents a dominant share of the private sector, and contributes in their respective job markets with more than 50 percent. (ali, 2013; bazza, maiwada, & daneji, 2014; inyang, 2013; li & chen, 2006; ul hassan, 2008), have agreed on its importance, which is mainly reflected in its ability to generate and create jobs, developing skills, providing opportunities, maintaining sustainability an economic growth. in addition, smes is also a good part in the puzzle of promoting international trade and prioritizing its development. smes had and still have a significant role since 1930 crisis and continue to proof its resilience during each economic or financial crisis, where (pasnicu, 2018), had argued that, although the negative impact of the financial crisis of 2008 on smes, but it still function an important role in creating jobs. smes is also effective in reducing poverty and diversifying the economy, attracting foreign investment in order to accelerate economic growth. in addition, kumar (2017), there are other important factors regarding smes which is the rise in youth’s engagement –who significantly participate in in the creation of new firms and start up activities-, in addition to their flexibility and capability of adapting more quickly to changes. however, the main constraint to smes development is its limited access to the conventional financial resources and services such as loans, savings and insurance. according to (ifc, 2017) the market of smes is facing a huge financing gap with us$2.4 trillion where we find around 41% of formal smes in developing countries (131 million) which have not met their funding necessities. smes' financing gap is defined as “the outcome of a mismatch between the needs of the small firms and the supply of financial services, which are typically easier for large firms to access”(veiga & mccahery, 2019). consequently, this paper suggests a promising financing form “islamic finance”, which is no longer related to the religion and to muslims but also used in western countries. smes can be a promising answer to the smes’ financial needs and an effective instrument to facilitate access to finance for smes where islamic finance is characterized with different features and structures that can be efficient in supporting sme financing. according to (elasrag, 2016), islamic finance emphasizes partnership-style financing, which is in it turn beneficial in improving access to finance for the poor and small business. benbekhti, boulila, & bouteldja │ the effect of islamic finance on small and medium enterprises and job creation in turkey: an empirical evidence international journal of islamic economics and finance (ijief), 3(si), 41-62│43 thus, the main objective of this study is to investigate the efficiency of islamic finance through islamic banking in response to the financing needs and to study the level of promoting employment among smes in turkey using a vector autoregressive model (var). additionally, the main contribution of this paper is multiple. it provides a further contribution to the rare empirical literature relative to the effectiveness of the islamic banking on smes’ finance ability and determining the capacity of these enterprises to create job positions with respect to islamic bank financing in turkey. from another side, and to the best of the authors’ knowledge, this paper remains one of the first to use vector autoregressive model and impulse responses in dealing with these two main issues faced by most economies worldwide. this paper comprises of different sections. section 2 includes the review of literature on islamic modes of financing and their role in smes growth. it also provides overview of small and medium enterprise and islamic finance in turkey and finally the discussion of various previous studies. data and methodology is discussed in section 3, while section 4 presents the analysis of results. section 5 is reserved for concludes and recommendations. ii. literature review 2.1. theoretical framework 2.1.1. what is smes it is complicated to achieve a common explanation to the smes as there is various definitions worldwide. according (muriithi, 2017), stated in the words of auciello (1975), that more than 75 definitions of smes in a study conducted on a group of countries (75 country). the main reason behind this variation is that the definition of smes depends on several aspects such as the country itself and the kind of industry, the size of business, assets, employers, and products. according to oecd, smes are defined as “non-subsidiary, independent firms which employ less than a given number of employees”. this number varies across national statistical systems. as in the european union, the most recurrent maximum limit is 250 employees, while, other countries lay the limit at 200 workers. in addition, a limit of 500 employers is set to consider a firm as an sme in the united states. smaller firms are generally constituted of less than 50 employees, while 10 employees is the maximum number in a microenterprise, or in some cases 05 employees. benbekhti, boulila, & bouteldja │ the effect of islamic finance on small and medium enterprises and job creation in turkey: an empirical evidence international journal of islamic economics and finance (ijief), 3(si), 41-62│44 financial assets is another aspect used to define smes. for example, smes in the european union should have an annual turnover of eur 40 million at most and/or a balance-sheet valuation that does not overrun the amount of eur 27 million (oecd, 2000). accordingly, (darren & conrad, 2009) explain that the more reason why sme definition varies particularly from industry to industry; the country to country; size to size and number of employees to a number of employees is to reflect industry, country, size and employment differences accurately (lucky, minai, & rahman, 2013). in addition, ilo stressed that smes have positive contributions in providing and maintaining balanced economic and social development. they also play an important role in decreasing the level of unemployment and creating new employment opportunities and with their flexible production structure, they can follow the changes in the market conditions more effectively. smes make crucial contributions to job creation and income generation; they account for two-thirds of all jobs worldwide (international labour office, 2015). 2.1.2. understanding smes and islamic finance 2.1.2.1. islamic finance for smes the lack of funding is one of the most important constraints faced by smes. marketing and administrative barriers, the lack of an integrated accounting system, shortage of trained manpower, institutional constraints and government legislation are also limitations faced by the smes (mumani, 2014). in addition, high-interest rates and the lack of adequate collateral are the major barriers facing the smes where banks would usually finance large businesses and prefer to deal with them because of the low degree of risk and the ability of these businesses to provide the required guarantees (elasrag, 2016). the finance gap is bigger when considering the micro and informal enterprises as 65-72 percent of all msmes (240-315 million) in emerging markets lack access to credit. in addition, about 55-68 percent of smes in developing countries are either financially underserved or not served at all, resulting in a lost opportunity to realize their full potential (ifc, 2016). according to the world bank statistics, access to finance for formal smes in the emerging markets is described on figure 1. benbekhti, boulila, & bouteldja │ the effect of islamic finance on small and medium enterprises and job creation in turkey: an empirical evidence international journal of islamic economics and finance (ijief), 3(si), 41-62│45 figure 1. smes access to finance source: ifc 2016 the smes financing challenges can come across innovative and diverse financial product contributions such as “islamic finance”. where (kayed, 2012) affirms that the term ‘islamic financial system' is moderately new appearing in the late 1970s and it is defined as a system whose principle underlying its operations and activities are founded in shariah (islamic laws). the islamic financial system is not limited to banking but extends to capital markets, capital formation and all types of financial intermediation. it is expected to go beyond the narrow concept of being an 'interest-free' system and actively participate in achieving the goals and objectives of the islamic economy. although islamic finance is founded on the absolute prohibition of riba (usury), it is supported by other principles of islamic doctrine advocating risk-sharing, entrepreneurship and the absolute prohibition of gharar (preventable uncertainty and ambiguity) maysir (gambling and other speculative behavior). earning a passive return on capital is prohibited because of the islamic perception of hoarding capital as it prevents money from realizing its intended objectives and negates its function as a viable tool for development (kayed, 2012). oic has defined smes as its main target to “develop appropriate policies to accelerate the convergence between islamic finance and sme industries where in this context by promoting the utilization of islamic finance products which are more linked to the real economic activity, to enable smes in the member countries to tap into the rapidly growing pool of shariah-compliant funds. (mohieldin, iqbal, rostom, & fu, 2011), formal smes in emerging markets 27-33 percent do not need a loan 8-10 percent are well-served: have a loan and / or overdraft and no financial constraint 20-25 percent are underserved: have a loan and / or overdraft but financing constraints 35-43 percent are un-served: do not have a loan or overdraft but need a loan benbekhti, boulila, & bouteldja │ the effect of islamic finance on small and medium enterprises and job creation in turkey: an empirical evidence international journal of islamic economics and finance (ijief), 3(si), 41-62│46 therefore, the islamic finance industry is composed of four sectors: banking, sukuk (bonds), equity and funds, and takaful (insurance). the banking sector dominates the industry with approximately 75% of all islamic financial assets under management. the islamic financing options for smes identified below have a fundamental role to play in increasing the financial inclusion. several studies have investigated the link between islamic finance and microfinancing and which are the appropriate islamic forms to finance smes. (shaban, duygun, & fry, 2016b) suggested that murabaha contracts are perfect for financing smes, and they encourage islamic bank managers to be less concerned with the asymmetry of information associated with financing smes while (saad & razak, 2013) claimed that islamic financial institutions should consider musharaka contracts as the main products for financing smes because they are the ideal product. 2.2. smes and islamic finance in turkey 2.2.1. smes in turkey in turkey, and in accordance with the relevant legislation that came into force in 2005 and was first amended in 2012 and then again in 2018, sme is defined as an enterprise that employs less than 250 persons per year and either its annual net sales revenue or balance sheet value does not exceed 40 million turkish liras. turkish smes play an important role in the non-financial business economy, where they provide nearly 79% of the labor force and account for more than half of total value-added. figure 2. basic indicators for smes in turkey (2016) source: turkish statistical institute benbekhti, boulila, & bouteldja │ the effect of islamic finance on small and medium enterprises and job creation in turkey: an empirical evidence international journal of islamic economics and finance (ijief), 3(si), 41-62│47 based on the report of the turkish statistical centre (figure 2 and table 1), small and medium-sized enterprises (smes) represent 99.8% of the total number of enterprises. it also contributes to 73.5% of total employment and 54.1% of wages and salaries. in addition, smes provide 62% of turnover, 53.5% of value added at factor cost and 55% of gross investment intangible goods in 2016. it was also stated form the ocde report in figure 3 that the number of small and medium enterprises active in the industry and services sector exceeds 3 million enterprises, making it the pillar of the turkish economy. most smes (some 36.4) operates in the wholesale and retail trade sector, accounting for more than one-fourth of sme employment and sme valueadded. manufacturing is even more important in terms of value-added, taking up 30 % of total value added (ec.2017), but with fewer companies (around 12.6 % of the total number). transportation and storage 14.7% and construction 7.3%... (oecd,2017) table 1. smes share in turkey and europe source: itc’s sme competitiveness database figure 3. smes sectors source: ocde 2017 benbekhti, boulila, & bouteldja │ the effect of islamic finance on small and medium enterprises and job creation in turkey: an empirical evidence international journal of islamic economics and finance (ijief), 3(si), 41-62│48 2.2.2. islamic finance in turkey islamic finance in turkey started to be active since 1984, starting with the special finance house “zel finans kurumu” which was the first institution of islamic finance in order to attract more capital from the middle east. islamic finance in this period started with the basic banking application. however, these special finance houses were highly regulated by a secular bureaucracy and did not benefit from the same advantages as the conventional banks, where they were not covered by turkish central bank’s insurance scheme and were not allowed to invest in government securities causing them some competitive disadvantages with conventional banks. this situation was improved in 1999 and 2001, when turkey had been hit with a sharp financial crisis, the islamic banking institution has been developing continuously where it registered unprecedented growth rates. an annual growth of 40% for their assets, 53% financing operation growth and 40% deposit growth (egresi & belge, 2015). in 2005, banking law no. 5411 replaced “special finance house” with “participation bank” (“katılım bankacılığı”) while the union of special finance houses became the “participation banks’ association of turkey” (tkbb). also, the state has extended its 50,000 lira guarantees on deposits to participation banks. this encouraged people to invest their money in the participating banks. also, the legislation has been harmonized so that today both islamic and conventional banks operate according to the same law. all these changes created a more favorable regulatory framework for participation banks in turkey with the effect being that islamic finance started to develop more rapidly in the country. today there are 6 participation banks in turkey. table 2. total banking sector overview for turkey source: brsa monthly bulletin benbekhti, boulila, & bouteldja │ the effect of islamic finance on small and medium enterprises and job creation in turkey: an empirical evidence international journal of islamic economics and finance (ijief), 3(si), 41-62│49 figure 4. total financing of the participation banks in turkey source: brsa from table 2 and figure 4, we notice that the total credits of participation banks in turkey have reached try112 billion in 2018 which was only around try6.5 billion in the year 2005. this impressive growth had taken place due to the participation banks’ penetration of retail financing services, especially in the sme segment (pbat, 2017). the figure also evinces the upward trend in the growth of total financing of participation banks. 2.3. previous studies different researchers have adopted different studies in order to investigate and evaluate different tools of islamic finance for smes and to introduce greater opportunities for development and growth of islamic financial system as one of the methods that may help alleviating the problems of financing smes. starting with the study of (naceur, barajas, & massara, 2017) who argued that islamic banking would therefore seem to be an effective avenue for financial inclusion. (hakeem, 2019) also agreed that islamic finance institution can play an important role to increase financial inclusion for smes but are facing criticism for focusing on high net worth individuals and wellserved segments of society. (biancone & mohamed radwan ahmed salem, 2014) argued that even non-muslim countries may adopt islamic finance to reduce the smes financial gap by exploring the feasibility of adapting italian smes to the islamic financial system and verify the possibility of financing them through islamic financial instruments which requires certain aspects to be fulfilled. one of the numerous benefits and opportunities is attracting arab sovereign funds to invest in italy is a huge, the liquidity that could be generated is of a great importance more over the creation of employment opportunities that could be created. (huda, 2012) conducted a study that t u rk is h l ir a / b il li o n s benbekhti, boulila, & bouteldja │ the effect of islamic finance on small and medium enterprises and job creation in turkey: an empirical evidence international journal of islamic economics and finance (ijief), 3(si), 41-62│50 aims to identify a framework in which islamic financing scheme can be used to solve financing problem faced by smes using data for indonesia. (shaban, duygun, & fry, 2016a)) investigate the growth in smes lending approaches by islamic banks by developing a two-stage competition model, where the first stage (bertrand framework) conventional and islamic banks compete with prices while it competes with loans in the second stage (cournot framework). results revealed in first stage that islamic banks would gain market share because of its differentiated products and in the second stage the market share competition had led to the decrease of the amount of lending to smes. another study by (aysan, disli, ng, & ozturk, 2016)examined the bank’ s willingness to finance smes in turkey, using pooled ols, and fixedeffects estimators for a set of 40 commercial banks including participation banks(islamic banks). results showed that the quality of banks’ sme loan portfolio is comparable to that of conventional banks. the results are robust to different bank ownership forms (state owned, private and islamic banks). iii. methodology this study adopts a vector autoregressive (var) model for the turkish islamic financial sector and its effect on smes and job creation using monthly data (from 04/2009 to 12/2017), extracted from thomson reuter’s database. var model is one of the most successful, flexible and easy to use models for the analysis of multivariate time series. it is a natural extension of the univariate autoregressive model to a dynamic multivariate time series. the var model has proven to be especially useful for describing the dynamic behavior of economic and financial time series and for forecasting (zivot & wang, 2006). it describes the evolution of a set of “k” variables (called endogenous variables) over the same sample period (t = 1, ..., t) as a linear function of only their past evolution. the variables are collected in a k × 1 vector yt , which has as the ith element yi , t the time t observation of variable yi (elmor, 2017). a reduced form var expresses each variable as a linear function of its own past values, the past values of all other variables being considered and a serially uncorrelated error term. thus, in our study, the the var involves six equations as follow: benbekhti, boulila, & bouteldja │ the effect of islamic finance on small and medium enterprises and job creation in turkey: an empirical evidence international journal of islamic economics and finance (ijief), 3(si), 41-62│51 𝐼𝐷𝑃𝑡 = ∑ 𝛼1𝑖 𝑆𝑀𝐸 − 𝑉𝐴𝑡−𝑖 𝑃 𝑖=1 + ∑ 𝛽1𝑖 𝐸𝑀𝑃𝑡−𝑖 𝑃 𝑖=1 + ∑ 𝜃1𝑖 𝐼𝑃𝐼𝑡−𝑖 𝑃 𝑖=1 + ∑ 𝛾1𝑖 𝐼𝑡−𝑖 𝑃 𝑖=1 + ∑ 𝛾1𝑖 𝐺𝐷𝑃𝑡−𝑖 𝑃 𝑖=1 + 𝜀𝑡1 𝐸𝑀𝑃𝑡 = ∑ 𝛼2𝑖 𝑆𝑀𝐸 − 𝑉𝐴𝑡−𝑖 𝑃 𝑖=1 + ∑ 𝛽2𝑖 𝐼𝐷𝑃𝑡−𝑖 𝑃 𝑖=1 + ∑ 𝜃2𝑖 𝐼𝑃𝐼𝑡−𝑖 𝑃 𝑖=1 + ∑ 𝛾2𝑖 𝐼𝑡−𝑖 𝑃 𝑖=1 + ∑ 𝛾2𝑖 𝐺𝐷𝑃𝑡−𝑖 𝑃 𝑖=1 + 𝜀𝑡2 𝑆𝑀𝐸 − 𝑉𝐴𝑡 = ∑ 𝛼3𝑖 𝐼𝐷𝑃𝑖𝑡−𝑖 𝑃 𝑖=1 + ∑ 𝛽3𝑖 𝐸𝑀𝑃𝑖𝑡−𝑖 𝑃 𝑖=1 + ∑ 𝜃3𝑖 𝐼𝑃𝐼𝑖𝑡−𝑖 𝑃 𝑖=1 + ∑ 𝛾3𝑖 𝐼𝑖𝑡−𝑖 𝑃 𝑖=1 + ∑ 𝛾3𝑖 𝐺𝐷𝑃𝑖𝑡−𝑖 𝑃 𝑖=1 + 𝜀𝑖𝑡3 𝐼𝑃𝐼𝑡 = ∑ 𝛼2𝑖 𝑆𝑀𝐸 − 𝑉𝐴𝑡−𝑖 𝑃 𝑖=1 + ∑ 𝛽2𝑖 𝐼𝐷𝑃𝑡−𝑖 𝑃 𝑖=1 + ∑ 𝜃2𝑖 𝐸𝑀𝑃𝑡−𝑖 𝑃 𝑖=1 + ∑ 𝛾2𝑖 𝐼𝑡−𝑖 𝑃 𝑖=1 + ∑ 𝛾2𝑖 𝐺𝐷𝑃𝑡−𝑖 𝑃 𝑖=1 + 𝜀𝑡2 𝐺𝐷𝑃𝑡 = ∑ 𝛼2𝑖 𝑆𝑀𝐸 − 𝑉𝐴𝑡−𝑖 𝑃 𝑖=1 + ∑ 𝛽2𝑖 𝐼𝐷𝑃𝑡−𝑖 𝑃 𝑖=1 + ∑ 𝜃2𝑖 𝐼𝑃𝐼𝑡−𝑖 𝑃 𝑖=1 + ∑ 𝛾2𝑖 𝐼𝑡−𝑖 𝑃 𝑖=1 + ∑ 𝛾2𝑖 𝐸𝑀𝑃𝑡−𝑖 𝑃 𝑖=1 + 𝜀𝑡2 𝐼𝑡 = ∑ 𝛼2𝑖 𝑆𝑀𝐸 − 𝑉𝐴𝑡−𝑖 𝑃 𝑖=1 + ∑ 𝛽2𝑖 𝐼𝐷𝑃𝑡−𝑖 𝑃 𝑖=1 + ∑ 𝜃2𝑖 𝐼𝑃𝐼𝑡−𝑖 𝑃 𝑖=1 + ∑ 𝛾2𝑖 𝐸𝑀𝑃𝑡−𝑖 𝑃 𝑖=1 + ∑ 𝛾2𝑖 𝐺𝐷𝑃𝑡−𝑖 𝑃 𝑖=1 + 𝜀𝑡2 table 3. study’s variables variables definitions idp islamic banks deposit. vasmes sme's value-added to gdp. emp employment rate. ipi industrial production. i interest rate. gdp gross domestic product. source: by the authors benbekhti, boulila, & bouteldja │ the effect of islamic finance on small and medium enterprises and job creation in turkey: an empirical evidence international journal of islamic economics and finance (ijief), 3(si), 41-62│52 iv. result and discussion 4.1. result 4.1.1. unit root stationary test unit root test is an essential test to choose which model is appropriate for the study, and to reach this goal we have used adf test. if the variables in the regression model are not stationary, then it can be proved that the standard assumptions for asymptotic analysis will not be valid. in other words, the usual “t-ratios” will not follow a t-distribution, so we cannot validly undertake hypothesis tests about the regression parameters (olweny & omondi, 2011). the null hypothesis of the test is unit root in the series. if the result is statistically significant, the null hypothesis can be rejected which means that data is stationary at level, i(0) or to be integrated of order zero. h0: g = 0, h1 : g = 0. table 4. augmented dickey fuller stationary test from table 4 we notice that all variables are not stationary and have unit root because their probability is higher than the critical value except gdp which, is stationary at level, however at the first difference, all variables became stationary. 4.1.2. johanson co-integration test in order to test if the variables are cointegrated or not this study adopts one of the well-known approaches which is the johansen co-integration test. based on the error correction estimation, this test is used to examine the presence of cointegration under different hypothesis about intercepting or trend parameters, and the number k of cointegrating vectors, and then conducting likelihood ratio tests. (hansen & johansen, 1993). variables adf stationarity test (prob) results level 1st difference 2nd difference va sme 0.7103 0.0001 stationary at first difference ipi 0.6795 0.0000 stationary at first difference idp sukuk 0.4432 0.9603 0.0000 0.0000 stationary at first difference stationary at first difference i gdp 0.5417 0.0147 0.0000 stationary at first difference stationary at level benbekhti, boulila, & bouteldja │ the effect of islamic finance on small and medium enterprises and job creation in turkey: an empirical evidence international journal of islamic economics and finance (ijief), 3(si), 41-62│53 table 5. results of johanson co-integration test statistics source: data processing this step is the main step to know if we can proceed with the estimation of var model or not. to do so, we must test if any long relationship between variables exists because the var model is only used for short-run relations (no cointegration relation must exist). table 5 presents the results based on johanson cointegration test. trace test indicates no cointegration at the 0.05 level since all probabilities are higher than 0.05 which means that there is no long-run relation between our variables. 4.1.2.1. lag selection the akaike information criterion (aic) and schwarz (sc), are usually used to choose the optimal lag length in single-variable distributed-lag models. this step is very important condition to estimate the var model. results shows that we have 1 lag order (* indicates lag order selected by the criterion). once we have been fixed on a vector autoregressive model which includes one lag, is steady with serially uncorrelated errors, we can proceed with the impulse response function after running the estimation. 4.1.2.2. impulse response function after the definition of the lag order, we estimate var model, and one of the most important advantages of var specifications is the computation of impulse response functions (irf) of any endogenous variables to one standard deviation shock in any other endogenous variable in the system. hypothesized trace 0.05 no. of ce(s) eigenvalue statistic critical value prob.** none 0.396565 95.42094 95.75366 0.0527 at most 1 0.212346 51.47583 69.81889 0.5727 at most 2 0.151053 30.70920 47.85613 0.6821 at most 3 0.098746 16.46224 29.79707 0.6794 at most 4 0.078209 7.417010 15.49471 0.5297 at most 5 0.003809 0.331993 3.841466 0.5645 benbekhti, boulila, & bouteldja │ the effect of islamic finance on small and medium enterprises and job creation in turkey: an empirical evidence international journal of islamic economics and finance (ijief), 3(si), 41-62│54 -0.4 0.0 0.4 0.8 1.2 1.6 2.0 2.4 1 2 3 4 5 6 7 8 9 10 response of va_smes to idp innovation using cholesky (d.f. adjusted) factors figure 5. response of smes to islamic banks deposit source: data processing -.20 -.15 -.10 -.05 .00 .05 .10 1 2 3 4 5 6 7 8 9 10 response of emp to idp innovation using cholesky (d.f. adjusted) factors figure 6. response of employment to islamic banks deposit source: data processing figures 5 shows that the impulse response of small and medium enterprises to a shock in islamic finance is positive and continuous response throughout the study period. we note from figure 6 that the impact of the industrial production’s shock on employment is a negative response along the study period. benbekhti, boulila, & bouteldja │ the effect of islamic finance on small and medium enterprises and job creation in turkey: an empirical evidence international journal of islamic economics and finance (ijief), 3(si), 41-62│55 -.8 -.4 .0 .4 1 2 3 4 5 6 7 8 9 10 response of gdp to i -.8 -.4 .0 .4 1 2 3 4 5 6 7 8 9 10 response of gdp to idp -.8 -.4 .0 .4 1 2 3 4 5 6 7 8 9 10 response of gdp to ipi -.8 -.4 .0 .4 1 2 3 4 5 6 7 8 9 10 response of gdp to va_smes figure 7. response of gdp to the study variables source: data processing -1.2 -0.8 -0.4 0.0 0.4 0.8 1.2 1 2 3 4 5 6 7 8 9 10 response of va_smes to i innovation using cholesky (d.f. adjusted) factors figure 8. response of smes to interest rate source: data processing figure 7 shows that the gdp responds negatively to the interest rate shock during the first period and has a negative response at the fourth period and the negative response continues throughout the study period. as for the shock of islamic finance, the gdp response is positive during the first period. the positive response continues throughout the study period. benbekhti, boulila, & bouteldja │ the effect of islamic finance on small and medium enterprises and job creation in turkey: an empirical evidence international journal of islamic economics and finance (ijief), 3(si), 41-62│56 as we notice the gdp response is negative for industrial production over the study period. the gdp is responding positively during the fourth period followed by a negative response over the period. we can see from figure 8 that a shock in the interest rate to which the smes respond negatively during the second period followed by a positive response during the fourth period with a positive and continuous response along the line. 4.1.3. granger causality test granger defined the causality relationship based on two principles: • first, the cause happens prior to its effect. • second, the cause has unique information about the future values of its effect. given these two assumptions about causality, granger proposed to test the following results to identify the causal effect of x on y in the table 6. table 6. granger causality test. model probability decision va_smes emp 0.0655 causal relationship exists gdp 0.0765 causal relationship exists ipi 2.e-06 causal relationship exists idp va-sme 0.0852 causal relationship exists gdp 0.0008 causal relationship exists emp 0.0027 causal relationship exists ipi 2.e-05 causal relationship exists i 0.1045 no causal relationship i va-sme 0.0001 causal relationship exists gdp 0.0399 causal relationship exists idp 0.8402 no causal relationship gdp emp 0.0636 causal relationship exists source: data processing 4.2. discussion based on irf and granger causality results, we found that there is a relative feasibility and effectiveness in the islamic banking services for smes in turkey, which means that when the islamic bank financing improved, it will improve the smes’ performance through the enhancing of the smes ability to provide capital, thus increasing productivity that will provide the need for more benbekhti, boulila, & bouteldja │ the effect of islamic finance on small and medium enterprises and job creation in turkey: an empirical evidence international journal of islamic economics and finance (ijief), 3(si), 41-62│57 working force. moreover, this will offer bigger sales revenue and profit. this results agree with the study of (ellahi, bukhari, & naeem, 2010) that stated that due to religious factors, and the unavailability of funds in conventional sector, smes in pakistan prefer to use islamic modes of financing because these modes are riba-free. our results also concur with the study of (faisol, 2017) who finds that the islamic bank financing has significant influence with a positive direction on the smes’ performances.. islamic finance has also a positive effect on industrial production which comes along with the study of (bougatef, nakhli, & mnari, 2020) which results’ reveal that islamic finance plays an important role in boosting industrial production in the short and the long run. islamic financing likewise has a significant effect with positive direction towards the smes’ welfare, increasing gdp and job positions since the use of islamic banking sector leads to the rise in their earnings, job creation, production and the living level. these findings partly confirm those of (boukhatem & moussa, 2018) who found islamic financial development can boost economic growth, but this positive effect is hindered by underdeveloped institutional frameworks. (manzilati, 2015) puzzle out that islamic finance with “the profit and loss sharing” system is encouraging smes to be more sustainable by reducing internal principles agents, this findings line with our study. in addition, the importance of islamic finance formulas is apparent in their ability to achieve justice between the two parties of the transaction, so that each party obtains its right, rather than the interest-based lending system, which usually guarantees the right of the loan holder at the expense of the borrower. these tools also ensure the use of available finance in real development projects benefit the community. in addition, islamic finance is keen to link financial and real balances and refuse to consider money as assets in their own right. the most important advantages of islamic finance is its contribution in providing capital and strengthening the necessary financial capacity sme necessary for the production of goods and services contribute to justice in the distribution of wealth, the elimination of unemployment and the creation and creation of employment opportunities, the eradication of poverty. v. conclusion as millions of young people join the labor market, the pressure to provide decent jobs will intensify. at the current rate of labor force growth, turkey needs to create new jobs every year to prevent unemployment from rising. benbekhti, boulila, & bouteldja │ the effect of islamic finance on small and medium enterprises and job creation in turkey: an empirical evidence international journal of islamic economics and finance (ijief), 3(si), 41-62│58 this study adopts a vector autoregressive model (var) and granger causality test using monthly data (2009m4-2017m12). based on irf and granger causality results, we found that there is a relative feasibility and effectiveness in the islamic banking services for smes in turkey, which means that when the islamic bank financing improve, it will promote the smes’ performance through the enhancing of the smes ability to provide capital. in addition, our findings stressed that islamic finance may reveal a good boost for the firm dynamism in turkey, particularly for small firms’ chances of transitioning into medium and large firms. the implication is that the dominance of small firms drives down aggregate productivity, particularly in the manufacturing sector, and prevents firms from creating enough high-quality jobs for turkey’s growing labor force. policy implication: • most of existing bank regulations in turkey are based on conventional banking model. therefore, smes get loans from conventional banks on high interest rate which is very difficult for them to repay within stipulated time. so, for the smes, it will be more appropriate that a uniform regulatory and legal framework growth supportive of islamic modes of financing and smes must be developed. • encourage the application of mudarabah and musharakah financing via the setting of special fund or subsidiary to undertake these modes of financing to facilitate smes. • establish a shariah commercial court (scc) dedicated to deal with legal matters of islamic banking and of smes. benbekhti, boulila, & bouteldja │ the effect of islamic finance on small and medium enterprises and job creation in turkey: an empirical evidence international journal of islamic economics and finance (ijief), 3(si), 41-62│59 references elmor, a. m. n. 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(2011). the effect of macro-economic factors on stock return volatility in the nairobi stock exchange, kenya. economics and finance review, 1(10), 34-48. pasnicu, d. (2018). supporting smes in creating jobs. journal of economic development, environment and people, 7(1), 15-22. benbekhti, boulila, & bouteldja │ the effect of islamic finance on small and medium enterprises and job creation in turkey: an empirical evidence international journal of islamic economics and finance (ijief), 3(si), 41-62│61 saad, n. m., & razak, d. a. (2013). towards an application of musharakah mutanaqisah principle in islamic microfinance. international journal of business society, 14(2). shaban, m., duygun, m., & fry, j. (2016a). sme's lending and islamic finance. is it a “win–win” situation? economic modelling, 55, 1-5. ul hassan, m. (2008). microfinance in small and medium-sized enterprises (smes) in pakistan: practices and problems in the prevailing system and prospects for islamic finance. veiga, m. g., & mccahery, j. a. (2019). the financing of small and mediumsized enterprises: an analysis of the financing gap in brazil. european business organization law review, 20(4), 633-664. zivot, e., & wang, j. (2006). vector autoregressive models for multivariate time series. modeling financial time series with s-plus, 385-429. benbekhti, boulila, & bouteldja │ the effect of islamic finance on small and medium enterprises and job creation in turkey: an empirical evidence international journal of islamic economics and finance (ijief), 3(si), 41-62│62 this page is intentionally left blank. international journal of islamic economics and finance (ijief) vol. 5 no. 1, january 2022, pages 89-106 modeling the demand for islamic microfinance services: an application of pls-sem approach mohamed asmy bin mohd thas thaker1*, salina kassim2, md fouad bin amin3, marhanum che mohd salleh4, nadhrah othman5, siti nadhirah kassim6 *) corresponding email: asmy@iium.edu.my article history received: may 20th, 2021 revised: june 17th, 2021 accepted: november 29th, 2021 abstract the access to capital is very crucial for ensuring the financial sustainability of microfinance clients. it is also equally important to determine the demand for microfinance services among the clients. this study aims to identify the factors affecting the demand for islamic microfinance (ismf) services among the women microentrepreneurs in malaysia. this study has collected a total of 250 samples from the field survey on women micro-entrepreneurs who are also the clients of amanah ikhtiar malaysia (aim). in addition, partial least squares (pls) method used to identify the potential factors (4as) i.e., affordability, accessibility, adequacy and awareness affecting the demand for ismf. the results show that only “accessibility” has significant and positive relation with the demand for ismf. besides, the measurements items of accessibility such as distance of ismf institution, collateral requirement, guarantor requirement, application procedure and process, repayment method, service efficiency, advise and consultation, and number of ismf centers are the key factors affecting the demand for ismf services in malaysia. this paper provides some insights for the policy makers of islamic microfinance and recommends that ismf providers should take accessibility factor into greater consideration for the economic upliftment of women in microenterprises in malaysia. keywords: islamic microfinance; women; amanah ikthiar malaysia; 4as jel classification: c83; d02; g21; g23 type of paper: research paper @ ijief 2022 published by universitas muhammadiyah yogyakarta, indonesia doi: https://doi.org/10.18196/ijief.v5i1.11776 web: https://journal.umy.ac.id/index.php/ijief/article/view/11776 citation: thaker, m. a. m., kassim, s., amin, m. f. b., salleh, m. c. m., othman, n., & kassim, s. n. (2022) modeling the demand for islamic microfinance services: an application of pls-sem approach. international journal of islamic economics and finance (ijief), 5(1), 89-106. doi: https://doi.org/10.18196/ijief.v5i1.11776. 1 associate professor, department of economics, international islamic university malaysia, malaysia 2 institute of islamic banking and finance, international islamic university malaysia, malaysia 3 department of economics, king saud university, saudi arabia 4 department of finance, international islamic university malaysia, malaysia 5 institute of islamic banking and finance, international islamic university malaysia, malaysia 6 institute of islamic banking and finance, international islamic university malaysia, malaysia mailto:asmy@iium.edu.my https://doi.org/10.18196/ijief.v5i1.11 https://doi.org/10.18196/ijief.v5i1.11 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v5i1.11776&domain=pdf thaker, kassim, amin, salleh, othman, & kassim│ modeling the demand for islamic microfinance services: an application of pls-sem approach international journal of islamic economics and finance (ijief), 5(1), 89-106│90 i. introduction 1.1. background over the last few decades, the most widely discussed topic across the globe is on the concept of poverty alleviation. there are numerous approaches and tools supported by the government and non-government organizations in least developed and developing countries for poverty alleviation and economic well-being of the underprivileged group who are excluded from the conventional financial services. with the unique idea of poverty alleviation, dr. m. yunus won the noble prize in 2006 to support the poor through microcredit facility. later on, the concept of micro-credit has expanded to microfinance covering a wide range of financial services such saving and insurance. the main goal of establishing microfinance institutions (mfis) is to enhance the accessibility of microfinance products and services to the poor who become the entrepreneurs. the mfis help the clients to strengthen their entrepreneurships, awareness and skills. since poverty alleviation is one of the biggest global concerns and an essential requirement for sustainable development, several efforts have been undertaken to address this issue with the help of education, medical care, economic development via microfinance services. as a factor of production, capital is considered an indispensable condition for economic growth. microfinance services play a pivotal role and appear as an effective tool of improving the economic conditions of the poor and low-income group (khandker, 2003; gertler et al., 2003, and park & ren, 2001). in malaysia, the number of microenterprises has increased significantly in various sectors including, food, craft, textile, and agriculture, which are mainly contributed by the microfinance services. indeed, microenterprises has become one of the alternatives sources to generate income, but microentrepreneurs require small start-up capital, few workers, and good management system. more specifically, the number of women involved in microenterprises have increased remarkably across developing and least developed countries and malaysia is not an exception where many women become economically self-reliant, promising micro-entrepreneurs and outperforming their male counterpart. malaysian government established amanah ikhtiar malaysia (aim) in the 1980s with the aim to assist the poor by improving their living standards. the aim initiated various economic empowerment programs to support microenterprises. inspired by the success story of grameen bank in bangladesh, aim started with a pioneer project in 1986 with 373 clients (known as “sahabat” in bahasa malaysia or “good friend” in english). in due thaker, kassim, amin, salleh, othman, & kassim│ modeling the demand for islamic microfinance services: an application of pls-sem approach international journal of islamic economics and finance (ijief), 5(1), 89-106│91 course of time, malaysian government has extended direct financial support which helped aim to turned into an effective islamic microfinance institution (ismfi). the government used to allocate special fund for aim in every budget, for instance, it has received a fund equivalent to rm2.7 billion in 2018. the main reason of allocating special funds to microfinance institutions (mfis) is because of their outstanding contribution to the national economy. over the last few decades, aim has experienced many reforms in terms of loan diversifications which has changed from subsidies to commercial financing. as of february 2015, aim has sanctioned loans a total of rm 12.2 billion among 356,458 members from 135 different branches whereas this loan was only rm891,488 distributed among 3,220 members from 27 branches in 1990. it is also estimated that the total market share of aim will reach to 50% in 2018 from 40 percent in 2013 (amanah ikhtiar malaysia, n.d.). 1.2. objectives since the capital availability is a pre-condition for ensuring financial sustainability of microfinance clients, it is important to identify the factors affecting the demand for mfis among the clients. this study aims to identify the key factors affecting the demand for islamic microfinance (ismf) among the women micro-entrepreneurs in malaysia by surveying a total of 250 respondents from aim, the largest ismfi in malaysia. the demand factors are categorized into four areas (4as), namely affordability, accessibility, adequacy and awareness. this study intended to identify the most significant factors from 4as. the remaining part of this paper is organized as follow: next section introduces background theory of microfinance with the finding of previous studies followed by methodology and data, analysis and the last section contain conclusions and recommendations. ii. literature review 2.1. background theory microfinance theory is based on the concept of changing the economic lifecycle of the poor who are excluded from formal financial services. the theory is tested by targeting the clients who are either absolute or hard-core poor. the gross monthly household income is measured based on the poverty line income (pli) which is estimated based on the price of basic necessities. households below the pli are considered as “absolute poor” category, whereas households with income lower than half of the pli are categorised as thaker, kassim, amin, salleh, othman, & kassim│ modeling the demand for islamic microfinance services: an application of pls-sem approach international journal of islamic economics and finance (ijief), 5(1), 89-106│92 “hardcore poor” category, where both categories are selected of credit assistance (al-mamun et al., 2011). according to the microfinance theory, poor clients become the members of a microfinance institution and obtain loan for income generating activities, inculcate saving behavior for the repayment of earlier loans and receive the subsequent loan for the extension of their small businesses to microenterprises. the theory describes life changing cycle of the poor who start the journey with small informal loan and end up as successful microentrepreneurs with the financial knowledge, business management and technical skills. this theory is proven as an effective tool to economically empower the poor in all most every part of the world. the concept of islamic microfinance is developed by blending of microfinance theory and islamic principles. based on this, aim was established in 1987 to enhance the economic status of the poor in malaysia through micro-credit and later on extended to microfinance scheme. as of june 2017, aim has extended its outreach to 23 states in malaysia with a total of 136 branches and serving a total of 45,382 clients known as ‘sahabat’ (amanah ikhtiar malaysia, n.d.). the core of microfinance theory is based on group lending without any collateral. the group responsibility acts as the social collateral which is proven successful in terms of loan repayment history. likewise, aim employs the group-based lending mechanism by offering collateral-free loans based on qard-hasan concept with a 10% service charge. other features of microfinance are the mandatory requirements of attending skills upgrading training and weekly meeting programs. fresh applicants are required to take part a one-week training program so that they can gather information on the rules and regulations, ismf schemes, and repayment schedules before receiving the loan as a sahabat. upon passing the certain evaluation criterion, groups of five sahabats are formed and the groups are then assigned to particular center consisting of two to twelve groups per center (amanah ikhtiar malaysia, n.d.). the responsible officers used to conduct review sessions during their weekly meeting on the loan performances as well as participation of sahabats in other social services. of the sahabats. the amount of loan can be varied depending on the microfinance schemes but loan repayment is scheduled on weekly basis. a key to success of microfinance theory lies on the group-based lending mechanism to mitigate the risk of loan default. aim’s rule state that all the sahabats are required to be in a group of five members which is intended to mitigate default risk. this works well as the group members would be vouching for one another throughout the loan disbursement process although it is considered as individual loans. in case of loan default within the group thaker, kassim, amin, salleh, othman, & kassim│ modeling the demand for islamic microfinance services: an application of pls-sem approach international journal of islamic economics and finance (ijief), 5(1), 89-106│93 members, the pooled funds are utilized to assist the defaulting members to repay their weekly loan instalment. mason et al. (2015) advocate that the feeling of this peer pressure and accountability among the sahabats turn into a mechanism of collective responsibility as reflected in the highest loan repayment rate (99.6%). in addition to the conventional microfinancing mechanism, aim sets the objectives in such way that help enhancing the economic condition of the target groups. in this aspect, various benevolent financing schemes are offered: the basic financing scheme is i-mesra scheme (up to rm 10,000) that aims to finance economic projects expected to generate income to the clients; the i-srikandi scheme (up to rm 20,000) that is eligible for individuals with sustainable and successful projects; and the i-wibawa scheme that is specifically designed for individuals taking i-mesra or i-srikandi scheme and providing soft loans to those who are in need of additional capital for the expansion of business to grab seasonal opportunities. aim also offer noneconomic financing schemes such as the i-bistari scheme (education loan), isejahtera scheme (housing/multipurpose loan), i-penyayang scheme (recovery loan for the defaulter) and the i-emas scheme (loan for old people whose age are 75 years and above) (mason et al., 2015). apart from the financing mechanism, aim also gives stresses on the importance of acquiring their clients with appropriate entrepreneurship skill and financial knowledge to ensure that clients can manage their businesses efficiently. some of the programs offered include business development, human capital development and training program. additionally, aim established the charity and welfare fund for sahabat (tabung kebajikan dan kesejahteraan sahabat) in 2006 to reduce their financial burden and mental distress during the emergency situations like chronic illnesses and hospitalisation, funeral ceremony, natural disasters and other calamities. 2.2. previous studies the main purpose of this section is to review literatures that focus on the factors affecting the demand for microfinance product and services. even though many studies are conducted on this area, limited studies are available that focuses on islamic microfinance. despite the fact, we attempt to review the existing literatures as the basis of theoretical underpinning of our structural model which to be empirically tested on the clients of aim. over last two decades, the number of poor people receiving microcredit has increased substantially across the world. many researchers have illustrated the key deriving factors of demands for microfinance and innovative strategies to improve its outreach to the bottom of pyramid (bop). the bop based on the model of four a’s introduced by c.k prahalad and applied in the thaker, kassim, amin, salleh, othman, & kassim│ modeling the demand for islamic microfinance services: an application of pls-sem approach international journal of islamic economics and finance (ijief), 5(1), 89-106│94 area of international marketing (kamande and jarhult, 2013). these four a’s are accessibility, awareness, affordability, and availability (prahalad, 2010). sometimes the term accessibility is replaced by acceptability (anderson and billou, 2007). in our study, we have taken these 4as into account to identify different dimensions of demands factor of islamic microfinance. we have considered the factor adequacy instead of availability. according to selos and mair (2007), the 4as model is receiving rather lackluster recognition due to inadequate researches to validate its relevance, hence resulting in the lack of literature covering its application to cater for the bop segment. london & hart (2011) highlight the importance of the 4as model to ensure the success of people in bop segment. however, a proper theoretical framework on implementing the model has yet to be established. the first concept of 4as model is ‘accessibility’ which is achieved, according to prahalad (2012), when consumers are located in remote and suburban areas with the accessibility of any products and services. in contrast to this, some areas have fragile infrastructures such as poor road conditions where transport of goods and services are extremely difficult particularly for trucks, trailers and lorries. anderson and billou (2007) view that most of the rural markets have the characteristics of poor infrastructures causing a disruption of normal supply chain and distribution channel. the same study also added that the opportunity of various markets i.e., capital, product and labor markets are mostly unavailable in the rural markets. to overcome this situation, it is suggested that the producers and local organizations can work on partnership basis within the bop markets. it is also recommended to set up a close collaboration with local institutions, non-governmental organizations as well as local entrepreneurs so that all the parties involved in this chain can become a part of effective networking system in the bop segment (shah, 2012; soete, 2010; seelos & mair, 2007). the second factor of 4as model is ‘awareness’ that measures the extent of customers’ level of awareness on particular products or services. chikweche and fletcher (2012) assert that creating awareness in the bop segment pose a real challenge for the organizations because their target groups are usually selected from the people in low-income bracket and majority of them have neither access to mass media such as radio, television, internet nor to print media like newspapers. it is important to create ‘awareness’ among the bop consumers and producers. this helps consumers to make the best use of information and grab the optimal benefits from the products and services. this also supports producers to evaluate the market demands of their products. pralahad (2012) emphasizes on the awareness creation program within bop segment with the organizational support that designed for specific target group with diverse needs. thaker, kassim, amin, salleh, othman, & kassim│ modeling the demand for islamic microfinance services: an application of pls-sem approach international journal of islamic economics and finance (ijief), 5(1), 89-106│95 the third factor of 4as model is ‘affordability’ which is one of the most challenging factors for the bop segment due to low-income status of consumers. more specifically, the organization must take into consideration of their products and services with their cash flows which they receive as incomes on a daily basis. thus, the pricing strategy is identified as a key challenging factor in bop segment (anderson & billou (2007). chikweche & fletcher (2012) claim that the researchers attempting to implement a welldeveloped market-price mechanism under any bop segment have a very limited outcome. the last factor of 4as model is ‘availability’ which is measured by the time scale when the customers are able to own and utilize the products or services. it is observed that the bop consumers would only purchase products when they have enough disposable income, and the product is readily available in the market. according to prahalad (2011), an uninterrupted supply chain is key to gain trust and loyalty of customer at bop segment. in light of above literature review, we observed that most of the studies focus on the 4as model in determining the demand for products and services other than microfinance. in this study, we attempt to fill the gaps in existing literatures by analyzing the 4as model in determining the demand factors of islamic microfinance services in malaysia. a few factors have been taken into consideration as potential variables in building a conceptual framework for the research model. as shown in figure 1, the dependent variable for this conceptual framework is the demand for islamic microfinance (ismf) and the independent variables that are identified as the factors affecting the demand for ismf are accessibility, awareness, adequacy and affordability. these four variables described the products and services offered by aim under their ismf schemes. figure 1. research framework source: adopted & adapted from prahalad (2010) accessibility awareness adequacy affordability demand for microfinancing thaker, kassim, amin, salleh, othman, & kassim│ modeling the demand for islamic microfinance services: an application of pls-sem approach international journal of islamic economics and finance (ijief), 5(1), 89-106│96 2.3. hypothesis in line with the objective of this study, which is to identify the factors determining the demand for ismf among women micro-entrepreneurs in malaysia, the following hypotheses are constructed based on the 4a model suggested by prahalad (2009): h1 : accessibility has positive relationship in affecting the demand for ismf h2 : awareness has positive relationship in affecting the demand for ismf h3 : adequacy has positive relationship in affecting the demand for ismf h4 : affordability has positive relationship in affecting the demand for ismf iii. methodology 3.1. data collection procedure and sample in this study, we have collected data directly from the field survey. we distributed structured questionnaires to the clients of amanah ikhtiar malaysia (aim), hulu selangor branch. purposive sampling has used to gather the data from the client of aim. the total of 402 questionnaires were distributed and only a total of 250 used for data analysis. it happened due to missing or incompleteness of data during the process of data cleaning and recoding. 3.2. model development the data are analyzed by using spss statistics version 25.0 and smartpls version 3.2.7. this study adopted partial least square (pls) method because its’ its ability to measure causal relationships among all the latent constructs simultaneously and ability to focus on structural model for dealing with measurement errors (farooq, 2016; hair et al., 2017). since this study is explanatory in nature, the application of pls model show the best fit indices for the current study (hair et al., 2017). as suggested by hair et al. (2017), measurement models are examined separately before evaluating the structural model. before conducting measurement models, we much ensure that there is no common method bias which indicates a certain context where data for dependent and independent variables are gathered from the same respondents using the same instruments. for this purpose, the current study employs harman (1976) one factor test. in conducting the one-factor test, the researchers observed the guidelines and approaches suggested by podsakoff et al. (2003). all the items of measurement scale are entered into a principal component analysis with varimax rotation, so that any signs of single factor can be identified from factor analysis. based on the finding, it showed that the thaker, kassim, amin, salleh, othman, & kassim│ modeling the demand for islamic microfinance services: an application of pls-sem approach international journal of islamic economics and finance (ijief), 5(1), 89-106│97 first factor accounted for 40.42% of variance. this figure meets the threshold level which is less than 50 percent suggested by podsakoff et al. (2003). 3.2.1 research instruments this paper computed the demographic question using a nominal scale as suggested by haque and raihan (2004) and amin et al. (2007). this nominal scale provides a range of values for obtaining the age of respondents. the choice of the answers or items under each construct was based on a five-point likert type scale, ranking as 1 (strongly disagree), 2 (disagree), 3 (neutral), 4 (agree), 5 (strongly agree), which is suggested by bhatti (2007) and amin et al. (2007). using a likert type scale, the respondents choose a point on the scale reflecting his or her position towards the statement. extant literatures have been used to extract the constructs and the items. all the constructs and items are adopted and adapted to serve the purpose of this study. all major scale items are adapted from riquelme & rios (2010) where each construct consists (several items) i.e., adequacy (five items), affordability (six items), awareness (ten 10 items), accessibility (nine items), and demand for islamic microfinance (eight items). iv. results and analysis 4.1. descriptive statistics we have collected the data from aim clients to determine the factors affecting the demand for ismf services. as shown in table 1, most of the respondents were female (51.6%) and followed by male (48.4%). almost many of them were fall under the age category of 40 and below (85.2%) with the dominance of married micro-entrepreneurs (59.2%), while most of them (84%) have an average of more than 3 family members. it is also important to know the educational qualification of respondents because it plays a key role in making the economic decision. thereby, majority of the respondents (81.6%) have diploma and degree level educational qualification. this indicates that aim’s clients are capable of enhancing their financial literacy by attending various training programs. this factor is also very much related to their average incomes. table 1 also demonstrates the respondents’ average monthly income. the respondents were asked about their monthly average income over the last one year and a quarter of (24.4%) and one-fifth of them (19.6%) have monthly average income less than rm 1000 and more than rm 5000, respectively. apart from these two income levels, less the half of the respondents (43%) thaker, kassim, amin, salleh, othman, & kassim│ modeling the demand for islamic microfinance services: an application of pls-sem approach international journal of islamic economics and finance (ijief), 5(1), 89-106│98 have achieved monthly average income with a range between rm 2000-rm 5000. this higher income pattern of the respondents strongly suggests the effectiveness of islamic microfinance program offered by aim. table 1. descriptive statistics of the respondents 4.2. measurement model the convergent validity is tested at the initial stage. during the test of convergent validity, indicator or items loadings, average variance extracted (ave) and composite reliability (cr) are taken into the consideration. based on the results presented in table 2, items’ loading exceeded 0.6 for items, which meet the recommended value suggested by hair et al., (2009). the threshold value of ave is at least 0.50 as recommended by hair et al., (2009) and we obtain the values of ave within a range of 0.547 and 0.706 and cr value ranged from 0.854 to 0.936 which meet the recommended value of 0.7. table 2 shows the results of measurement model with the values of individual item loading, ave and cr. after conducting the test of convergent validity, the next stage is to test the discriminant validity. because of certain limitations of conducting test for discriminant validity under the fornell-larcker (1981) criterion, henseler et demographic factors category frequency percent gender male 121 48.4 female 129 51.6 age 20-30 148 59.2 31-40 65 26.0 41-50 31 12.4 more than 50 6 2.4 marital status single 148 59.2 married 102 40.8 education no education 1 .4 secondary (spm) 29 11.6 diploma 36 14.4 degree 168 67.2 postgraduate (master/phd) 16 6.4 family size 1-3 40 16.0 more than 3 210 84.0 monthly income less than rm1000 61 24.4 rm1001-rm2000 32 12.8 rm2001-rm3000 35 14.0 rm3001-rm4000 40 16.0 rm4001-rm5000 33 13.2 more than rm5000 49 19.6 thaker, kassim, amin, salleh, othman, & kassim│ modeling the demand for islamic microfinance services: an application of pls-sem approach international journal of islamic economics and finance (ijief), 5(1), 89-106│99 al., (2015) have suggested an alternative approach to evaluate discriminant validity by using heterotrait-monotrait ratio of correlations. henseler et al. (2015) also demonstrate the superior performance of this method with the support of monte carlo simulation study. we have adopted this approach to test the discriminant validity as shown in table 3. if the htmt value is greater than htmt0.85 value of 0.85 (kline 2011), or htmt0.90 value of 0.90 (gold et al., 2001), then there is a problem of discriminant validity. in our obtained result, all the values passed the criterion of htmt0.90 (gold et al., 2001) and the htmt0.85 (kline, 2011) as shown in table 3 which indicates that discriminant validity has been ascertained. based on these results, it indicates that measurement model has adequate convergent validity and discriminant validity. table 2. results of measurement model construct items loadings ave cr affordability cd1 0.888 0.682 0.928 cd2 0.888 cd3 0.823 cd4 0.815 cd5 0.782 cd6 0.749 awareness cb1 0.800 0.619 0.936 cb2 0.815 cb3 0.768 cb4 0.769 cb5 0.805 cb6 0.816 cb7 0.763 cb8 0.778 cb9 0.764 accessibility ca2 0.622 0.547 0.905 ca3 0.734 ca4 0.832 ca5 0.739 ca6 0.674 ca7 0.751 ca8 0.787 ca9 0.755 adequacy cc1 0.766 0.706 0.923 cc2 0.807 cc3 0.86 cc4 0.874 cc5 0.888 demand b1 0.638 0.596 0.854 b6 0.834 b7 0.821 b8 0.779 note: b3, b4, b2, b5, ca1 and cb10 were deleted due to low loadings. thaker, kassim, amin, salleh, othman, & kassim│ modeling the demand for islamic microfinance services: an application of pls-sem approach international journal of islamic economics and finance (ijief), 5(1), 89-106│100 table 3. htmt criterion accessibility adequacy affordability awareness accessibility adequacy 0.693 affordability 0.661 0.804 awareness 0.762 0.845 0.783 demand 0.695 0.551 0.591 0.662 4.3. structural model ramayah et al. (2016) have suggested using r2 to observe the goodness of the structural model. according to hair et al. (2011), coefficient of determination and the level of significance of the path coefficients (beta values) can be captured by r2. the r2 for the current research is 0.42, suggesting that 42% of the variance of demand for islamic microfinance can be explained by accessibility, adequacy, affordability, and awareness. subsequently, in order to assess the statistical significance of path coefficients, the current study has calculated the path coefficients of the structural model and performed bootstrap analysis (re-sampling = 500). the results presented in table 3 reveal that accessibility (b = 0.37, p < 0.01), affordability (b = 0.188, p < 0.01) and awareness (b = 0.24, p < 0.01) have a positive and significant relationship with the demand for islamic microfinance. thus, the hypotheses of h1, h3 and h4 are supported. in addition, the results of structural model also indicated that adequacy factor is found to be insignificant. thus, h2 is not supported. table 4. results of structural model hypothesis r/ship std. beta std. error t-value decision h1 acc -> dd 0.37 0.094 3.944 supported h2 adeq -> dd -0.078 0.113 0.697 not supported h3 afford -> dd 0.188 0.097 1.932 supported h4 aware -> dd 0.24 0.115 2.085 supported 4.3. importance-performance map analysis in order the confirm the obtained results, we have conducted importanceperformance map analysis (ipma) as suggested by ringle and sarstedt (2016). the main advantage of ipma is that it can identify predecessors which have a relatively low performance but high importance for the target constructs. ipma becomes a very useful analytical tool in pls-sem. ipma graphically extends the standard path coefficient estimates in more practical way (ringle & sarstedt, 2016). thaker, kassim, amin, salleh, othman, & kassim│ modeling the demand for islamic microfinance services: an application of pls-sem approach international journal of islamic economics and finance (ijief), 5(1), 89-106│101 figure 2. importance-performance map analysis this paper applied importance-performance map analysis (ipma) in order to evaluate the most influencing factors as represented by four predecessors (accessibility, adequacy, affordability and awareness) affecting the demand for islamic microfinance (figure 1). the ipma’s results is presented in table 4 which reveals that the construct adequacy has higher value in performance index but not under importance index in predicting the demand for islamic microfinance. this paper found the higher weights of three other constructs i.e., accessibility, affordability and awareness whereas affordability factor remains in the highest performance domain followed by awareness and affordability. table 5. importance-performance map analysis statistics construct importance (total effect) performance (index values) accessibility 0.461 79.896 adequacy -0.093 79.461 affordability 0.237 82.377 awareness 0.316 81.042 in this study, it shows that certain factors are important that can ensure the higher demand for islamic microfinance. the key items under the accessibility factors that have greater influence on islamic microfinance products and services are: i) the distances of aim’s branches which is related to higher borrowing cost, ii) the loan size is relatively small in amount that the borrowers’ have to incur a higher cost to access the loan, iii) collateral requirements, guarantor requirement, and repayment method which are found to be highly important, iv) efficiency of islamic microfinance service provides like aim provided by the microfinance providers, v) continuous advise and consultation, and vi) easy and simple loan application procedures and process. thaker, kassim, amin, salleh, othman, & kassim│ modeling the demand for islamic microfinance services: an application of pls-sem approach international journal of islamic economics and finance (ijief), 5(1), 89-106│102 the loan size is important for the clients regardless of their status as fresh or old members. most of the members are either involved in micro-enterprises or planning to start new ventures which requires adequate amount of capital. that is why the members of aim consider this item as one of the top priority items affecting their demand for islamic microfinance (ismf). moreover, the cost of borrowing becomes higher if we consider the opportunity cost of access to ismf. sometimes, the borrowers need to attend various meeting and maintain other loan procedures which require them to visit the branches frequently and in most cases they have to spend time, money and give up some other works, which are considered as the opportunity cost. this higher borrowing cost demotivate them to apply for ismf. moreover, the repayment method is important for the borrowers. this is vital because not all the borrowers have same type of businesses and they have different cash-flows. thus, the identical or standard loan repayment schedule for all the borrowers regardless of their business types cannot be justified. other aspects that affect the demand for ismf are the product services including the efficiency of staffs, rules, regulations and procedure of loan approval. sometimes, ismf institution like aim become very rigid on their loan approval procedures. the borrowers who are in urgent need for ismf must follow the same procedures as regular borrowers, and this whole cumbersome loan approval procedures in some cases demotivate borrowers to stick to the ismf. it is also important to increase the efficiency of ismf product and services. this efficiency leads to retain and attract new members which is cost effective for the institution and also beneficial for the borrowers. v. conclusion and recommendation 5.1. conclusion the aim of this study is to identify factors determining the demand for islamic microfinance (ismf) among women micro-entrepreneurs in malaysia. this study has conducted a survey with the clients of amanah ikhtiar malaysia in selangor. this study adopts the partial least squares (pls) method in detecting the potential demand factors of ismf, namely affordability, accessibility, adequacy and awareness. the results show that only “accessibility” factor has significant and positive relationship with the demand for ismf. more specifically, a few measurements items under accessibility such as, distance to microfinance institution, collateral requirements, guarantor requirement, application procedure and process, repayment method, efficiency of services by microfinance providers, continuous advice and consultation, and number of microfinance centers which are significantly affecting the demand for ismf in malaysia. it shows that for the clients of thaker, kassim, amin, salleh, othman, & kassim│ modeling the demand for islamic microfinance services: an application of pls-sem approach international journal of islamic economics and finance (ijief), 5(1), 89-106│103 microfinance, easier accessible and convenience accessible would encourage them to use continuously the services that offered by microfinance institutions. at the same time, ismf institutions can increase their marketing know-how by implementing effective accessibility strategies that generate services availability to the clients. based on the analysis of importance-performance map analysis (ipma), it shows that ismf institutions should not focus much on adequacy as it will possibly reduce the profit of the institution. the three other constructs which are more important are accessibility, affordability and awareness. affordability is already high in performance but awareness is slightly lower, so the microfinance institutions should focus on enhancing affordability matter. in terms of accessibility, it is important for ismf institution to simplify the application and approval process to obtain ismf. 5.2. recommendation in view of above findings, this paper recommends certain aspects of products and services of aim. the ismf institutions like aim need to focus on accessibility factors to ensure that the microfinance product is appealing to the clients. the sufficient number of imf services centres should be established along with the reduction of the cost of ismf products and services. similarly, ismf providers should also take into account of its product’s features including collateral requirements, guarantor requirement, and repayment method which are highly valued by the clients in determining the demand for ismf. the ismf providers need to ensure that these requirements are not set at highest stringent level. we also suggest that ismf providers may adopt innovative risk mitigations mechanism by refining the group lending and weekly repayment methods. this study also suggest that mfis should continue to strive in providing better services to ensure customers retention as well as attraction of new clients for their services. it is expected that adopting the above recommendations can enhance the participation of women in microenterprises and uplift them toward higher economic living standards in malaysia. acknowledgement this paper originates from of a research project approved in 2015 funded by the ministry of higher education (mohe) malaysia under the fundamental research grant scheme (project id: frgs15-230-0471). the authors would like to thank mohe malaysia for generously funding this research project. thaker, kassim, amin, salleh, othman, & kassim│ modeling the demand for islamic microfinance services: an application of pls-sem approach international journal of islamic economics and finance (ijief), 5(1), 89-106│104 references amanah ikhtiar malaysia. 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(2012). business strategies in the emerging markets. journal of asia-pacific business, 13, 4–15. soete, l. 2010. from science and technology to innovation for development. african technology development forum journal, 7(3/4), 9–14. islamic gold dinar: the historical standard ahamed kameel mydin meera 1 abstract lately, there have been questions on what the standards for gold dinar and silver dirham should be. since the dinar and dirham indeed formed the shari’ah monetary standards from the time of the prophet pbuh, our work can, therefore, only involve in the rediscovery of that classical standard. henceforth no parties or organizations can come up with their own standards. since the islamic gold dinar 2 did not come into existence until about 50 years after the prophet’s pbuh demise, it is obvious from history that the solidus of the eastern roman byzantine empire was the monetary basis for the shari’ah. hence the best way to determine the standard is to look at the definition given by its issuer, the byzantine empire. coins unearthed by archeologist cannot be relied upon for this purpose because such coins generally suffer from wear and possible tempering like clipping etc. it was found that the actual historical standard for the dinar to be 4.5gm of pure gold and the dirham to be 3.15gm of pure silver. however, since the role of dinar is simply as a measure of value that depends on the goldcontent of the coin and if zakat is based upon 1-year’s provision of foodstuff and not the physical weight of dinars, then the 4.25gm dinar of pure gold and 2.975gm dirham of pure silver, as those circulated during the prophet’s pbuh era, is the standard since the prophet had said, “the system of weights and measures is the system of the people of medina.” keyword: gold dinar, history of the gold dinar, standard weight 1 international islamic university malaysia, email: akameel@gmail.com 2 islamic in the sense the pagan inscriptions on the dinar and dirham were replaced with inscriptions based on verses from the holy qur’an. mailto:akameel@gmail.com 110 | islamic gold dinar: the historical standard i. introduction undoubtedly, the interest in gold dinar among the public, academics, business community and even governments has increased lately. the turmoil in the us and europe and the ongoing global economic and monetary crisis has added to this interest. capitalism based on interest-based fiat monetary system is indeed collapsing and the world is on the lookout for possible solutions to the crisis. returning back to gold as the international monetary standard has been one suggestion from some quarters. in the case of islamic economics, the call is to go back to the islamic gold dinar that was the monetary standard of shari’ah throughout islamic history till the fall of the ottoman caliphate in 1924. the gold dinar is generally agreed upon as a 4.25gm gold coin, based upon the average weight of the roman solidus that circulated during the times of the prophet pbuh. muslims did not have their own coinage during the time of the prophet pbuh. the gold dinar forms the monetary standard for the shari’ah rulings on muamalat, zakat, hudud and mahr. nonetheless, there are differences in opinion among today’s proponents of gold dinar on the purity and weight of the coin should it be made of 22k gold or 24k fine gold? should it be 4.25gm or more than that? twenty four karat (24k) gold is fine gold, by today’s standard it is 99.99 percent pure. the 22k accordingly contains 91.66% gold 3 , hence known as 916 gold. due to the rounding, some gold dealers make it to be 917, which means that in one thousand parts, 917 parts is gold while the rest is some other metals, normally silver or copper. the question whether the gold dinar is of fine gold or not is important because it is the shari’ah standard and even the zakat, the fifth pillar of islam, is based on it. the nisab for money is 20 dinars. one who had twenty dinar in one’s possession for one year will have to pay a 2½ % zakat on it, i.e. half-dinar. the objective of this paper is to determine using historical facts the standards for the dinar and dirham. section 2 of this paper looks at the early history and functions of the gold dinar in muslim society. section 3 attempts to determine the historical standards of the dinar and dirham. section 4 looks at the softness pure metal coins and the issue of tear and wear, while section 5 briefly discusses the inscriptions on the dinars and dirhams. section 6 discusses the issue of zakat on dinar and dirham. section 7 discusses the modern implementation of the dinar while section 8 concludes. ii. brief history and functions of the gold dinar 3 22/24 gives 91.6666. international journal of islamic economics and finance, volume 1, number 1, july 2018| 111 2.1 history of the gold dinar during the prophet’s era in medina at the time of the prophet pbuh in the early 7 th century, the muslims did not mint the gold dinars or silver dirhams yet. the prophet pbuh accepted the roman byzantine gold solidus, also known as the bezant, and the persian sassanid empire’s silver dirham as the monetary standards for muslims. in this is wisdom because these coins enabled just trade among muslims and with non-muslims as well. it was these coins that circulated among the arabs for decades before the muslims minted their own coins. the prophet would have not accepted if these were not of islamic in nature, i.e. they promote the maqasid al shari’ah. this bimetallism also has to be a standard that was just and stable; and facilitate trade and business even among muslims and non-muslims. the first islamic gold dinars were, however, not minted until about half century after the demise of the prophet pbuh, by the fifth umayyad caliph abd al-malik ibn marwan, in the year 75h (697ce). since the gold coin of the eastern roman byzantine empire, the solidus, was the coin accepted by the prophet pbuh and that circulated among the muslims, it is this coin we need to research and understand. surely the islamic gold dinars minted much later by the muslim rulers must follow this standard. before we go to this, let’s look at the purpose and functions of the gold dinar. 2.2 function of the gold dinar the gold dinar played the role of money in islam. hence it eliminated problems generally associated with barter trades, like double coincidence of wants and the problem of divisibility. however, as money, it also enabled people to specialize in whatever they did best and hence increased their productivity, output and trade; and thereby increased the standard of living of the people. hence among the most important function of the gold dinar as money was as a stable measure of value. by this, people are able to exchange goods and services in a just manner and able to save for future consumption and investments, transact in credit and repay debt in future. al ghazzali and ibn khaldun rightly asserted that allah swt created gold and silver as measure of value. hence gold and silver are the standards by which the values of all things are measured. indeed, the current global monetary system that is based on fiat money has this stable measure of value missing since the collapse of the bretton woods in 1971. hence the system is devoid of a numeraire or an anchor that links the monetary sector to the real economy. we would assert this as the fundamental reason for the current collapsing of capitalism. 112 | islamic gold dinar: the historical standard when anything is taken as a standard of measure, it has to be ‘pure’ and simple so that people can easily relate to it. length, for example, is measured by kilometer. a kilometer is defined as the distance travelled by light in vacuum in 1 ⁄299 792.458 second. the kilogram on the other hand is defined as the base unit of mass in the international system of units and is defined as being equal to the mass of the international prototype kilogram (ipk), which is almost exactly equal to the mass of one liter of water 4 . since international trade and business involves exchange of goods and services, what the world needs today is a stable measure of value against which the value of all things can be measured. iii. determining the standards for dinar and dirham 3.1 the purity of the islamic dinar and dirham this question should not be difficult to answer because the gold dinar had been a historical standard among muslims for centuries. it is not a modern innovation or theoretical construction. the prophet pbuh is reported to have said: the system of weights and measures is the system of the people of medina (sahih bukhari). hence to answer the question on the purity of the gold dinar, one simply has to go back to history, particularly the time of the prophet muhammad pbuh. since the gold dinar that circulated among the arabs was the solidus of the roman byzantine empire, we shall look into its history first. 3.2 the roman aureus and solidus the roman gold coin, the aureus, was among the earliest roman gold coins, issued from the 1st century bc to the beginning of the 4th century. the aureus of julius caesar was struck 40 to the roman libra pound. the libra pound is about 327.4gm. hence, the coin weighed about 8gm. later, the emperor nero reduced the weight of the aureus by minting it 45 to the pound, i.e. about 7.3gm. the aureus was then replaced by the solidus that was first introduced by diocletian around 301 ad, struck at 60 to the roman pound of pure gold, weighing about 5.5gm each. due to its limited quantity its economic effects were minimal. hence, the solidus was reintroduced by constantine i in 312 ad, permanently replacing the aureus as the official gold coin of the roman empire. the solidus of constantine was struck at a rate of 72 to a roman byzantine pound (litra) which 4 the ipk is made of a platinum–iridium alloy and is stored in a vault at the international bureau of weights and measures in sèvres, france. however, the weight of this alloy has been changing over time, and hence the call for a redefinition of the kilogram. http://en.wikipedia.org/wiki/s%c3%a8vres international journal of islamic economics and finance, volume 1, number 1, july 2018| 113 equals 324gm, each coin weighing twenty-four greco-roman carats, or about 4.5 grams of pure gold per coin. analysis of the roman aureus and solidus, regardless of the size or weight, shows the purity level to be near 24 carat gold in excess of 99%. whenever the coin was taken in by the treasury, it was melted down and reissued. this maintained the evenness of the weight of the circulating solidi 5 . hence it is obvious that the gold dinars of the roman solidus that circulated among the arabs during the advent of the prophet pbuh were of fine gold, exceeding 99 percent purity. however, since the solidi circulating outside the roman empire were not used to pay taxes to the emperor they did not get reminted, and hence the soft pure-gold coins became quickly worn 6 . hence, the average weight of the coins in the arab world was about 4.25gm, from the original weight of 4.5gm. regarding the first dinar coins minted by the muslims, bernstein said the following: less than fifty years after the death of prophet muhammad (peace be upon him), the arabs emulated the great rulers of the past with the debut of their own gold coinage – the dinar issued by the caliph abd almalik at damascus in 75h. these coins, 97 percent pure gold and minted in great quantity gradually displaced the bezant as the major international currency, circulating throughout the arab domains and everywhere in christian europe as well 7 . one could attribute this slightly lower purity of the first islamic gold dinar, i.e. 97%, compared to the roman coin to the fact that this was the first attempt of muslims to mint their own coins and hence their relative inexperience in the refining and minting technology compared to the romans who had been doing this for centuries. however, undoubtedly the intention was to get a coin as pure gold as possible. historical evidences show that by the time of the fatimid dynasty in egypt, dinars of fine gold were already in circulation 8 . 3.3 the standard weight of the islamic gold dinar 5 wikipedia 6 porteous, john (1969). "the imperial foundations". coins in history : a survey of coinage from the reform of diocletian to the latin monetary union.. weidenfeld and nicolson. pp. 14–33 7 bernstein, the power of gold – the history of an obsession, p67. 8 all dinars are indeed of pure gold but constrained by mining and refining technologies of the time. by the fatimid period muslims seem to have perfected the technology; something the romans had known much earlier. 114 | islamic gold dinar: the historical standard it was reported on the authority of jabir that the prophet pbuh said, “the weight of the dinar is 24 qirats 9 ”. also ibn khaldun asserted the following in almuqaddimah: know that there is consensus since the beginning of islam and the age of the companions and the followers that the dirham of the shari'ah is that of which ten weigh seven mithqals weight of the dinar of gold... the weight of a mithqal of gold is seventytwo grains of barley, so that the dirham which is seven-tenths of it is fifty and two-fifths grains. all these measurements are firmly established by consensus. the statement by ibn khaldun implies that once we determine the weight of either the dinar or the dirham, the weight of the other can be determined automatically. hence, determining the standard weight should be easy but rather challenging. easy because we are dealing with something that had existed historically, and not developing a theoretical one. one cannot totally rely on coins unearthed by archeologist in this regard because unearthed coins generally would have experienced some tear and wear depending on how long they had been in circulation and also due to some variance in the weight of individual coins themselves. some could have been tempered through clipping and so forth. hence it is best we resort to the definition of the coins as determined by the issuing authorities, like in this case the roman byzantine empire. it is obvious that the islamic gold dinar is based on constantine’s roman solidus which was struck 72 to the roman byzantine pound (litra) used for gold measurement. the litra pound is recorded to be 324 gm, which gives an ounce to be 27gm 10 . hence the weight of the solidus is 4.5 gm as recorded, equals one mithqal, equals 24 greco-roman carats 11 . this coin was frequently melted down and reminted to preserve the weight. however, as mentioned earlier, the coin circulated among the arabs with an average weight about 4.25 gm due to tear and wear. coins of the time of abd al-malik ibn marwan, unearthed by 9 qirat is carat. in today’s jargon, 24k is also used to denominate pure gold. 10 27gm was the old roman-byzantine ounce from which the original solidus standard had been derived. see timothy garrard, akan weights and the gold trade, london 1980, p215. 11 traditionally, 1carat (the mass of a carob seed) equaled the weight of 3 barley grains or 4 wheat grains. international journal of islamic economics and finance, volume 1, number 1, july 2018| 115 archeologists, have the weight of the dinar at about 4.25grammes 12 , matching the weight of the worn solidi that circulated in those areas. therefore the actual mithqal or dinar should weigh 4.5gm of pure gold. however, as the islamic empire expanded and trade flourished, it must have become apparent that the gold dinar was less in weight compared to the roman solidus 13 . the caliph umar ibn abd al-aziz is said to have alerted that the dirhams of abd al-malik ibn marwan were at 7:10.5 to the mithqal instead of the standard at 7:10. hence he corrected the matter and issued, in 99h/717ce 14 , silver dirhams and gold dinars of weight 3.15gm 15 and 4.5gm respectively, i.e. similar weigh to the roman solidus, i.e. 4.5gm 16 . from the above mentioned hadith and historical facts, it can be established that the islamic dinar is of pure gold which equals one mithqal or 24 qirats or 72 grains of barley, that equals 4.5gm in modern weight. accordingly, a barley grain weighs 0.0625gm (4.5gm ÷ 72) 17 , i.e. 62.5mg. see table 1 below. also well-known is the fact that 7 mithqals equal in weight to 10 dirhams. therefore, this also implies that the silver dirham is of pure silver, weighing 3.15gm (0.7 x 4.5gm) that equals grains (3.15 ÷ 0.0625 or 0.7 x 72) as mentioned by ibn khaldun. 12 subhiì, 1976: p427 13 the roman byzantine empire lasted till 1416 ce. however, the persian sassanid dynasty that was responsible for the silver dirham that circulated among the arab, ended much earlier around 644ce. 14 kitab adh-dharaib fi as sawad, p65 as referenced in http://islamhariini.wordpress.com 15 abd al-malik’s dirham was close to 3gm, but the roman solidus weighed 4.5gm. hence umar ibn abd aziz’s remark of the ratio 7:10.5, i.e. 16 archeological gold dinars of this period weighed in the range 4.4gm to 4.6gm. to what weight he corrected the dirham and the dinars depends on what standard dinar he was comparing the dirhams to. we contend it must be the roman solidus, that weighed 4.5gm. 17 this weight of a barley grain is computed based on the above statement by ibn khaldun. barley grains do vary in weight, that is subject to change due to moisture content etc. the international systems of units set the barley grain as equal to 0.06479891 gm http://islamhariini.wordpress.com/ 116 | islamic gold dinar: the historical standard table 3.1 gold weights in roman and eastern byzantine empire roman empire weight roman libra (pound) 327.4gm troy grain 0.06479891gm* grains in one roman pound 5053 grains aureus of julius caesar 1/40 8.185gm (126.31 grains) aureus of nero 1/45 7.2756 gm (112.28 grains) solidus of diocletian 1/60 5.4567 gm (84.21 grains) 1 qirat (carat) 0.1944gm byzantine empire 476ad & islamic caliphate byzantine litra (pound) 324gm barley grain 0.0625gm** grains in one roman pound 5184 grains solidus of constantine i 1/72 4.5gm (72 grains) 1 qirat (carat) – 3 barley grains 0.1875gm 1 dinar (mithqal) – 24 qirat 4.5gm (72 grains) *this definition of troy grain was established in 1958 in terms of units of mass in the international system of units **computed based on ibn khaldun’s statement that there are 72 barley grains in one mithqal that also equals 24 greco-roman carats. iv. softness of 24k gold dinars and the issue of tear and wear the original gold dinar and silver dirham were made from pure gold and pure silver respectively. in the pure form they are soft and therefore can get worn in the process of circulation. nonetheless, gold and silver have the highest ductility and malleability among all metals 18 . the atoms of these metals are strongly 18 ductility is a solid material's ability to deform under tensile stress, i.e. the material's ability to be stretched into a wire. malleability is a material's ability to deform under compressive stress, i.e. the material's ability to form a thin sheet by hammering or rolling. both of these mechanical properties are aspects of plasticity, the extent to which a solid material can be plastically deformed without fracture [wikipedia]. international journal of islamic economics and finance, volume 1, number 1, july 2018| 117 bonded among them but however can move easily around them. therefore even though the gold and silver coins can become worn in the process of circulation, the process is not easy though and rather is slow. to address this issue of tear and wear, the roman empire, as mentioned earlier, would melt down and remint the coins it receives as tax in order to maintain the standard weight of 4.5 grams. some quarters assert that the dinar should not be of pure gold since it would easily get worn out. they say that in about 3 years the coins may lose enough gold to be rejected as dinar. however, the roman solidus that was circulating, for decades, outside the roman empire had a weight of about 4.25 grams 19 and for decades people did accept them as dinars, without ever being recalled or being reminted since the islamic coinage only began in 75h. it is our contention that the islamic government, as the roman empire, should continuously remint the coins to preserve the weight of the coins. v. inscriptions on the islamic gold dinar generally, the islamic gold dinar does not depict pictures of caliphs, rulers, animals or other living things in accordance with shari’ah that discourages such practice. the first islamic gold dinar, i.e. that of abd al-malik ibn marwan, had inscriptions based on quranic verses. one could notice that the earliest coins never had full qur’anic verses on them. perhaps this is because the early learned scholars could have opined that it is highly possible for people to bring coins into impure places like toilets and so forth; and also possible to lose them to the ground. also because coins pass from hand to hand in circulation, one cannot afford to make a mistake in qur’anic verses inscribed on the coins. once circulated it would be extremely difficult to call them back, in case of mistakes. for example the dinar and dirham of abd al-malik ibn marwan had the following inscriptions: the obverse of the coin has as its central legend the kalima shahada, i.e. "there is no god except allah alone, there is no partner with him'. around it, is the mint date formula reading "in the name of allah. this dirham was struck in the year 79 ah". the reverse of the coin has the central inscription based on surah 112 of the quran: "allahu ahad, allahu-samad, lam yalid wa lam yulad wa lam yakul-lahu kufu-an ahad"'. the marginal legend is based on surah 9, taubah verse 33. it states: "muhammad is the messenger of allah, he was sent with 19 that is a loss of about 5.5% t, but we are not sure for how long the coins circulate before losing that much. 118 | islamic gold dinar: the historical standard guidance and the religion of truth to make it prevail over every other religion.” note that these are not full qur’anic verses. vi. zakat on the dinar and dirham it is important to note that the basis for the prophet pbuh fixing the nisab for silver at 200 dirhams and the nisab for gold at 20 dinars was that either of these two sums represented, in prophet’s day, the market price of 5 camel-loads of grain or, in other words, of one year’s provision of essential food-stuffs for an average family. accordingly, the value of one dinar during the prophet’s time was equal to 10 dirhams. hence the basis for the nisab was not the physical count of the dinar but rather the purchasing power of the money 20 . hence it may not matter whether the dinar is 22k or 24k because the value of each will be based on their respective gold content. henceforth, the nisab for silver and gold must be established on the same basis as practiced by the prophet pbuh, i.e. on the proportionate value of the year’s provision of essential foodstuffs in relation thereto, as dictated by the prevailing market price. therefore, nisab for gold and silver must vary from year to year in conformity with the price fluctuations of essential food grain 21 . vii. the modern implementation of the islamic gold dinar when the gold dinar gets implemented in the modern world, it would surely rely heavily on information and communications technology (ict), particularly the internet. gold-based interest-free electronic credit is the most desirable form of money (using cards, internet, mobile phones, computers etc). here, the gold dinar would predominantly play the role as measure of value that involves only the recordings of credit transactions that are periodically net-off. such system is not akin to fractional reserve banking because this system does not create new money and does not involve the transfer of credits for payment purposes. accordingly, the need for physical dinars will be much minimized. the periodic settlements can be done using even gold bars and not necessarily using gold dinar coins. also the system permits real-time electronic audits. such electronic interest-free money is desirable because it fully takes advantage of the concept of money as a measure of value, i.e. as a means for keeping score. hence practically there will be no situations of shortage of money that can plunge an economy into recession and thereby give hoarders of money the advantage to 20 roy jastram proved that price of things relative to gold are relatively constant over long periods of time. see his book the golden constant. 21 zayas, farishta g. de, the law and institution of zakat, the other press, 2003, p74. international journal of islamic economics and finance, volume 1, number 1, july 2018| 119 charge interest on borrowings. since the system does not create new money, it will not create inflation. diagram 7.1 historical time-line viii. conclusion the words dinar and dirham are mentioned in the qur’an. these precious metals are to play the role of measure of value for just economic and business transactions. as islam is pure, its measures of value must be pure too. pure makes it easier for standardization for all nations and people, without ambiguity, forex risk; simply a pure reference point, an anchor, a numeraire. but as for all who lay up treasures of gold and silver and do not spend them for the sake of gods give them the tiding of grievous suffering [in the life to come]: qur’an, surah taubah, 9:34 as allah swt mentions gold and silver in the above verse in the context of money, we read that he means pure gold and pure silver and not with impurities added, like the 917 gold that some quarters asset as the standard for the dinar. hence, with simple deductions using historical facts, we ascertained that the original standard for dinar and dirham are 4.5gm of pure gold and 3.15gm of pure silver. however, the popular standard that is being adopted in most of the muslim world is the abd al malik ibn marwan standard of 4.25gm of gold, hence the nisab for gold being 85 gm. therefore to keep things simple we come to the conclusion that any pure gold coin having the weight between 4.25gm to 4.5gm may defined as dinar. the exchange rates between the dinars would be purely based on the gold content in the alloy coin. in the present time, however, we cannot mint a coin inferior to that of abd al malik ibn marwan. it was clear muslims strived to get coins as pure as possible. 120 | islamic gold dinar: the historical standard hence the wim standard of 4.25gm of 917 gold seems erroneous because the coins would have less gold than the historical standard. the use of 22k dinars would lower the nisab 22 and if people were to pay zakat on it, i guess they would not be punished for lowering the hurdle, but nonetheless 24k is the standard the value of the 22k will be based on the pure gold content of the coin, anyway. however, it may be trivial to argue whether the gold dinar is 22k or 24k since the gold content will determine their respective value, play the role of measure of value. and if the basis for payment of zakat is based upon one-years’ provision of food-stuff, it becomes immaterial whether the gold dinar is 22k or 24k. however, in most parts of the world the zakat is computed based on weight, i.e. the nisab of 20 dinar. nontheless, for defining the dinar standard for gold exchange purposes, we propose 4.25gm of 999 gold. 4.25gm since that is the popular definition today; and 999 gold because to convert 999 gold to 9999 gold the cost is high and involves chemicals that can harm the environment. accordingly the exchange standard for dirham is 2.975gm of 999 silver. islam as inherited by muslims from the prophet pbuh is a complete religion. as the following verse from the holy qur’an asserts. al-maidah, 5:3 this day have i perfected your religion for you, completed my favour upon you, and have chosen for you islam as your religion being a religion that is complete without defects or shortcomings, it needed no human efforts to perfect it, solve or rectify any shortcomings. also, since the prophet pbuh said that the system of measure is the system of medina, we contend that it should be perfectly alright to mint the islamic gold dinar according to that of the time of the prophet pbuh i.e. a 24k (999 purity) gold coin of 4.25 grams in weight and the dirham of 2.975gm 23 of fine silver (999 purity). also since modern electronic payment systems are likely to be the way forward, the 24k fine gold should be the basis of the monetary standard. 22 if zakat is calculated based on weight, i.e. 20 dinars. 23 for the convenient of the people it could be made 3gm since the difference is negligible. international journal of islamic economics and finance, volume 1, number 1, july 2018| 121 reference bernstein, peter l., the power of gold – the history of an obsession, john wiley, 2000 ibn khaldun, al-muqaddimah – an introduction to history, trans. franz rosenthal, princeton university press, 1958. porteous, john (1969). "the imperial foundations". coins in history : a survey of coinage from the reform of diocletian to the latin monetary union.. weidenfeld and nicolson. subhì, salih (1976). al-nuzum al-islamiyya (islamic systems). beirut: dar al-alim kitab adh-dharaib fi as sawad hunwick, john, islamic financial institutions: theoretical structures and aspects fo the application in sub-saharan africa, in credit, currencies and culture – african finanical institutions in historical garrard perspaectiv, ed. endre stiansen and jane i. guyer, elanders gotab, sweden, 1999. p86 timothy, akan, weights and the gold trade, london 1980, jastram, roy, the golden constant,, john wiley, 1977. 122 | islamic gold dinar: the historical standard this page is intentionally blank microfinance-economic growth nexus: a case study on grameen bank in bangladesh md. fouad bin amin 1 shah jalal uddin 2 abstract microfinance is one of the fastest growing sectors in bangladesh and in many parts of the world. over the last few decades, this sector has been supportive in achieving various socio-economic goals in bangladesh. the country has made remarkable progress in sectors like education and health, and most importantly it has contributed significantly in poverty alleviation. although the microfinance mostly concentrates at the micro level, it has direct effect on the macro economy. a forefront microfinance provider like grameen bank has been playing a key role for the socio-economic wellbeing of the people living in the rural areas as well as for the economic development of rural economy. this study aims to investigate the long run dynamic relationship among its loan financing and clients’ deposit and economic growth in bangladesh. by considering annual time-series data of these variables, a widely used cointegration test and granger’s causality test have been applied to examine the long run relationship among these variables. the result shows that both financing and depositing aspects of grameen bank have positive effect on economic growth of bangladesh in the long run. it is recommended that grameen bank should allow its operations without any external pressure for the sake of sound economic growth of the country. keywords: microfinance, loan financing, deposit, economic growth, cointegration, granger causality. 1 assistant professor, department of economics, college of business administration, kind saud university, riyadh, kingdom of saudi arabia. (corresponding author) e-mail: or fbinamin@ksu.edu.sa or fouad_econsu@yahoo.com 2 graduate recruitment scholarship at mathematics department, ohio university, usa mailto:fbinamin@ksu.edu.sa mailto:fouad_econsu@yahoo.com 26 | microfinance-economic growth nexus: a case study on grameen bank on banglades i. introduction for a long period, microfinance institutions (mfis) have been playing a remarkable role in bangladesh. there are only few mfis that are dominating in the sector, and the grameen bank, brac, asa, and proshika are the most popular. this sector provides financial services to around 260 million clients who received various types of loans equivalent to tk.63,400 crore from and deposited tk. 13,541 crore to a total of 697 mfis.3 grameen bank, the most well-known microfinance institution in the world, established in 1983 as a specialized bank. unlike other mfis, it is most the exceptional one where 95% of the total equity are owned by the clients. it also maintains a satisfactory rate of loan recovery (96.67. although grameen bank to some extent relied on foreign donors at the early phase, the bank had moved from its’ donors dependency to depositors savings since 1998. this transformation is largely contributed to the innovation and expansion of various products and services particularly in the rural areas. until 2015, grameen bank distributed loan (cumulative disbursement of all loans) equivalent to usd 18284.37 million among a total of 8.81 million members from the 2,568 branches across the country. there is an up-rising trend in both loan disbursement and number of members over the last ten years of its operation, as can be observed from chart 1. chart 1.1 cumulative disbursement of loans and total number of members from 20052015 3 microcredit regulatory authority (mra), annual report, 2015 international journal of islamic economics and finance, volume 1, number 1, july 2018 | 27 chart 1.2 disbursement of loans from 2005-2015 although it provides four major types of loans, namely, the general loan (used for income-earning activities), housing loan, technology loan, and collective loan by covering the major sectors in bangladesh, there are in total seven categories of loan. agriculture and processing and manufacturing sectors received the highest portion which are 28% and 21%, respectively followed by the livestock and fisheries (18%), trading (18%) and shop keeping (12%) while very little portions were allocated for services (2%) and peddling (1%) business (chart 2). the savings mobilization is an integral part of grameen bank’s lending operation. its mandatory savings scheme is largely supporting towards pooling the fund through the total cumulative savings over the years. besides, the major economic indicators (savings, income, investment) of the grameen bank are found increasing at a rapid rate. for instance, it’s total deposit has increased by 38% (from us$ 1492.02in 2005 to us$ 2405.81 in 2015) whereas its members’ deposit as percentage of total deposit declined from 79% in 2000 to 63% in 2015. its total income has increased by 381% where its investment increased by 582% over the 11 years. moreover, the total numbers of its employees have increased by almost 100 percent during these years. the following table provides overall economic indicators of grameen bank (table 1). 28 | microfinance-economic growth nexus: a case study on grameen bank on banglades table 1.1 economic indicators of grameen bank year 2000 2005 2010 2015 total deposit (mill. us$) 113.24 482.92 1492.02 2405.81 total investments (mill. us$) 96.83 151.80 678.46 total income (mill. us$) 55.70 112.40 252.05 members' deposit as % of total deposit 79% 64% 54% 63% numbers of employees 11,028 16,142 22,255 21,651 numbers of branches 1,160 1,735 2,565 2,568 source: http://www.grameen.com, grameen bank yearly report, 2015 to identify the variables influencing the gdp growth is a complex phenomenon. the study has the limitation of explaining the contribution of mfi in gdp growth in bangladesh. the total financing made by all the mfis is relatively much less than that of banking institution of the country. the banking sector of the country disbursed a total of usd 43.3 billion while it received usd 55.5 billion as deposits whereas mfis had distributed total loan equivalent to usd 1.95 billion with the clients deposit worth of usd 0.853 billion in 2011 (bangladesh bank, 2013; mra, 2011). in other estimates, the financial intermediaries that provide financing to facilitate bridge financing, securitization instruments, private placement of equity etc. constituted 1.85 percent of the gdp in 2011 (bangladesh bank, 2013). the grameen bank is the second largest mfi which has widespread operation across the country. in the macro level, it may have less contribution to the gdp but in micro level, mfi like grameen bank contributes largely, particularly in the rural development. many studies have been conducted in justifying the fact that the mfis have significantly improved the living condition of the rural poor by creating employment opportunities. it enables increase income, saving, expenditures, productivity and growth of the agricultural sector in bangladesh (schuler, hashemi, & riley, 1997; zaman, 2000; yunus & weber, 2007; pitt & khandker, 1998).therefore, theoretically speaking mfi like gb has positive impact on the gdp growth of bangladesh economy. http://www.grameen.com/index.php?option=com_content&task=view&id=39&itemid=430 international journal of islamic economics and finance, volume 1, number 1, july 2018 | 29 ii. literature review the relationship between financial sector and economic growth has been a long debatable issue among the economists. levine (2004) defined five functions of a financial system that influence economic growth: savings mobilization, provision of investment information, monitoring/governance, risk management, facilitation in goods and service exchange. on the other hand, rajan & zingales (1998) argued that financial market may anticipate economic growth rather than the causes of the growth. even though bangladesh economy relies mostly on various agricultural activities, the recent economic trend indicates the slow shifting of economy from agriculture to industry and service sector over the last five years. in 2008, 45% of labor forces were employed in agriculture while 30% and 25% were in industry and service sector respectively 4 . rahman & yusuf (n.d) found that the major constraints of economic growth in the country are low levels of human capital, poor infrastructure, low levels of trade, corruption, and cumbersome regulation. microfinance institution emerged in the market because the poor and assetless clients had no access to the financial institutions. it targeted the poor clients who were excluded from the formal banking system. the institution used to provide basic financial services like small loans, saving accounts, fund transfers and insurance to low-income clients for their various income generating activities. this financial inclusion has significant effect on the economic growth and development through employment and income generation. the past studies that support the relationship between performance of mfi and economic growth in the long run can be divided into three categories. firstly, mfi can affect economic growth in both direct and indirect ways (maksudova, 2010). in the case of direct effect, it helps to decrease the poverty rate, increase the social welfare and add value to the various productive activities. the institutions provide a wide range of services to the society beside the microfinancing. these non-financial services contribute to increasing of self-employment and income level of the poor. mfi can also influence economic growth indirectly via financial sectors, for example, mfis contribute to increase the liquid liabilities through financial deepening and the development of retail banking system which fosters economic activities. 4 https://www.cia.gov/library/publications/the-world-factbook/ 30 | microfinance-economic growth nexus: a case study on grameen bank on banglades secondly, there can be both positive and negative relationship between economic growth and performance of mfi of any country (ahlin, lin, & maio, 2010). it is argued that high growth leads to increase in demand for establishing microenterprises which later on appear to most profitable business ventures. a few factors are considered for the engine of economic growth, namely physical and human capital, better institutions and most importantly technological advancement that enusre the profitability of micro-entreprenuers in the long run. khandker (1996) found that higher economic growth is a necessary condition for the economic prospertiy of both grameen bank and its clients. however, there may be also negative relationship between mfi and other areas of development such as workforce participation, manufacturing share, and industry share. in some cases, it happens if the institution allows clients to substitute for wage labor opportunities. lastly, the performance of mfis and the growth of a country may not be related although a few mfis were affected by the severe global recession in 2008, many of the instituions were survied during the east asian crisis in 1997 and latin american crisis in 2000 (chen, rasmussen, & reille, 2010). these institutions mostly remained unaffected from various finaincal crisies as they had no or very limitedconnections with financial institutions (mcguire & conroy, 1998). another study that adopts the financial performance of mfis’s shows that macroeconomic development has little impact on their perfomrances (gonzalez, 2007). moreover, by using panel data and ols regressions controlling for year and country fixed effects, the author finds no significant correlation between domestic gdp growth and microfinance performance (woolley, 2008). in the light of what has been discussed above the mfis have substantial impact on the economic growth and development and there is a lack of study in examining this relationship from bangladesh perspective. iii. data and methodology 3.1. data set the present study considers yearly data ranging from 1980 to 2016 (37 observations) of the total deposits (dip) of grameen bank’s clients, the total financing (fin) of grameen bank and real gdp of bangladesh. the data set is mainly gathered from world bank data base and grameen bank’s annual report. besides, various annual reports of mfis are also reviewed. international journal of islamic economics and finance, volume 1, number 1, july 2018 | 31 the main purpose of this study is to examine the long-run relationship between the microfinancing by grameen bank and economic growth of bangladesh. the following model is formulated by adopting ols technique: lngdpt= 0 + 1lndep+ 2 lnfin + (1) where: lngdp : natural logarithm of real gdp lndep : natural logarithm of total grameen banks’ clients total deposit lnfin : natural logarithm of total grameen banks’ financing 0 : constant : co-efficients : error term 3.2 unit root test it is the requirement for time series analysis to test the order of integration among the variables. hence, the presence of unit root is detected with the help of two mostly used tests such as, augmented dickey-fuller (adf) and phillipsperron (pp). the lag length is considered while running the adf test to get rid of autocorrelation and to increase the robustness of the model. in relation to estimate adf, the most well-known equation provided by (1995) has been adopted for estimating adf test. the nature of regression equation for the adf test is given below: δyt = β1 + β2t +δyt − 1+αi∑δyt − 1 +et (2) where, εt=error term and δyt − 1 = (yt − 1 − δyt − 2) hypothesis to be tested: h0: δ= 0 (have a unit root and data are not stationary) h1: δ< 0 (do not have unit root and data are stationary) along with adf test, pp test has also been conducted to control the higher-order serial correlation. the advantage of applying pp test is that it adopts non parametric statistical methods by excluding additional lagged difference terms. the pp test takes following form (jeong, fanara and mahone, 2002): δyt = βo + β1t +δyt − 1 +εt (3) 32 | microfinance-economic growth nexus: a case study on grameen bank on banglades hypothesis to be tested: h0: δ= 0 (have a unit root and data are not stationary) h1: δ< 0 (do not have unit root and data are stationary) 3.3 cointegration test the conintegration test has been performed to identify whether the variables of the study follow stationary process for linear combination or not. in other words, this test will facilitate to get the linear combination of variables which are stationary although individually those are nonstationary (gujarati, 1995). to achieve this, the johansen (1991) method of multivariate cointegration has been applied in determining the presence of long-term association among the dependent and independent variables. the basic idea behind cointegration is that if all the components of a vector time series process yt have a unit root, or in other words, yt is a multivariate i(1) process, it is said to be cointegrated when a linear combination of them is stationary, that is if the regression produces an i(0) error term. normally, two types of hypothesis need to be tested to determine the number of cointegrating vectors, as proposed by johansen and juselius (1990), which are: (1) trace test is important where the null hypothesis include that there are “r” or less number of cointegrating vectors in the model/equation. here, it can be shown as: -t å ln(1 l̂ ). a series of null hypotheses will be tested *(r=0, r≤1, r≤2,....., r≤(q-1)] in order to detect the number of cointegrating vectors “r”. (2) under the maximal eigen value test, the null hypothesis includes that there are “r” number of conintegrating vectors against the alternative hypothesis where the number will be r+1. here, the test statistic will follow -t ln (1l̂ ). in the same way, a series of null hypotheses will be tested (r=0, r=1,....., r=p-1) to identify the cointegrating vectors. for instance, we can determine that there are r=q number of conintegrating vectors once r=q, null hypothesis is accepted. thus, this particular type of conintegrating regression will enable to forecast the long run relationship among the variables. the authors also show the maximum likelihood technique by adopting the vector autoregressive (var) model for estimating the cointegration association among the components in vector “k” and variable “yt”. the var model for yt : can be present as follows: a(l) xi = e t (4) international journal of islamic economics and finance, volume 1, number 1, july 2018 | 33 the vector autoregressive error correction mechanism (vecm) has following framework: p -1 dyt = å p i dyt -i + ab yt p + e t (5) i =1 in the above equation, the vector β = (-1, β2, …, βn) includes r cointegration vectors where the adjustment parameter α = (α1, α2, …, αn) assuming that the rank β=r<k, ( k represents number of endogenous variables). once the actual number of cointegrated relations has been identified, we can proceed to conducting hypothesis testing b a s e d on α and β. in our research, we adopt aic and sc criteria to get var equation. iv. result and discussion 4.1 stationary test the following table presents the result of augmented dickey-fuller (adf) and phillips perron (pp) tests to detect the order of integration in the variable. it is found that lngdp, lnfin and lndep have unit root at the level in both adf and pp tests. as usual, all the variable are found stationary at the level i(1). table 4.1 stationary test variable adf phillip-perron level 1st difference level 1st difference lngdp -.08 -6.08*** -.01 -6.48*** lnfin -3.63** -7.57*** -3.72** -9.83*** lndep -4.06** -7.72*** -4.18** -8.92*** note: * significant at 10% alpha; ** significant at 5% alpha; *** significant at 1% alpha. 34 | microfinance-economic growth nexus: a case study on grameen bank on banglades 4.2 cointegration and long run equation after confirming the stationary at the first level, johansen and juselius cointegration test is conducted to identify whether the variables have long relationship or not. by using aic and sc criteria, the optimal lag length is taken 2 for testing the long run relationships trace statistics is used for small number of sample to confirm the relationship among the variables and for the robustness of the test following formula is provided (reinsel & ahn, 1992): trace statistics: (t-pk)/t where, t=sample size p=number of variables k=lag length of the estimated var table 4.2 cointegration test equation hypothesized no of ce(s) no of ce(s) trace statistic 5% critical values reinsel-ahn adjustment lngdp-lnfin r ≤ 0 r ≤ 1 24.198*** 10.323 15.494 3.841 21.173*** 3.365 lngdp-lndp r ≤ 0 r ≤ 1 23.708*** 10.921 15.494 3.841 20.744*** 3.362 note: * significant at 10% alpha; ** significant at 5% alpha; *** significant at 1% alpha. table 3 displays two relationships among the three variables. as the value for reinsel-ahn adjustment is 21.173 (greater than 5% critical value of 15.494), it indicates that economic growth and gb’s financing is conintegrated in the long run. equilibrium. in the same way, economic growth and gb’s clients deposit is cointegrated in the long run equilibrium by confirming the association between the variables. ect = lngdp -0.407381lndep – 17.00302 (6) (-8.16638) ect = lngdp – 0.290650lnfin – 18.86416 (7) (-7.23391) international journal of islamic economics and finance, volume 1, number 1, july 2018 | 35 to find out the direction of association among lngdp, lnfin and lndep, the present study focuses on granger causality and long run models as shown in equation 6 and 7. |these two equations present the long run relationship between lngdp and lndep as well as lngdp and lnfin. in equation (6), it shows that deposit has positive relationship with economic growth where the equation (7) is in favor of the positive association with financing and economic growth. however, only bidirectional relationship between financing and economic growth from the granger causality test is observed as shown in the following table. table 4.3 vec granger causality test independent variable dependent variable lngdp lnfin lngdp 148.3688*** lnfin 15.61449** note: ** significant at 5% alpha; *** significant at 1% alpha. the above result suggests that gb’s both financing (lending) and depositing (client’s saving) have positive effect on the economic growth of bangladesh. gb’s financing stimulates economic growth as it increases the economic activities of the rural people who engaged in real sector (agriculture and trade). on the other hand, gb’s clients deposit also contributes to the growth due to the credit expansion (through savings mobilization) to the existing and new clients. v. concluding remarks the paper examines the contribution of grameen bank on economic growth of bangladesh. over the last few decades, it involves in microfinance activities (lending to and depositing from the clients) in the rural areas. the clients are mainly poor and assetless. the loan is given mainly for productive purposes with close supervision and regulation. the empirical result shows that there exists long run relationship among gdp growth and loan financing and deposits of grameen bank. it offers various microfinance product and services to the poor borrowers who used to acquire adequate skills to run their own businesses. it leads them to be self-employed in wide range of economic activities from agriculture to petty trade which also enhances the productively of the rural economy in particular and national economy in general. it justifies the research findings where both financing and 36 | microfinance-economic growth nexus: a case study on grameen bank on banglades deposit of grameen bank have long run positive relationship with economic growth. besides, a bi-directional relationship between economic growth and gb’s financing has been observed. to sum up, grameen bank is contributing to the economy by creating huge employment opportunities across the country. despite the critics, its lending mechanism and operations makes the institution as a role model. microfinance regulatory authority (mra) caped the interest rate for all the mfis regardless of their size and operational coverage. this, of course, will effect positively on the demand side of microfinance. however, the government needs to initiate necessary policies favorable to the grameen bank and other mfis for enhancing their outreach, and sustainability for the income and employment generation, and above all for the socio-economic development of bangladesh. international journal of islamic economics and finance, volume 1, number 1, july 2018 | 37 reference ahlin, c., lin, j., & maio, m. (2010). where does microfinance flourish? microfinance institution performance in macroeconomic context. journal of development economics. chen, g., rasmussen, s., & reille, x. (2010). growth and vulnerabilities in microfinance. washington, d.c.: cgap. gonzalez, a. (2007). resilence of microfinance institutions to macroeconomic events. washington, d.c. : mix discussion paper, the mix. johansen, s. & juselius, k., (1990). “maximum likelihood estimation and inference on cointegration with applications to demand for money”, oxford bulletin of economics and statistics. khandker, s. r. (1996). grameen bnak: impact, costs, and program sustainability. asian development review, 65-85. levine, r. (2004). fianance and growth: theory and evidence. massachusetts ave., cambridge, usa: nber working paper. maksudova, n. (2010). macroeconomics of microfinance: how do the channels work? prague: cerge-ei. mcguire, p., & conroy, p. (1998). effects on microfinance of the 1997-1998 asian financial crisis. brisbane, australia: foundation for development cooperation. pitt, m. m., & khandker, s. r. (1998). the impact of group-based credit programs on poor households in bangladesh: does the gender of participants matter? journal of political economy, 958-996. rahman, j., & yusuf, a. (n.d.). economic growth in bangladesh: experience and policy priorities. rajan, r., & zingales, l. (1998). financial dependence and growth. american economic review, 559-586. reinsel, g., & ahn, s. (1992). vector autoregressive models with unit roots and reduced rank structure: estimation, likelihood ratio test and forecasting. journal of time series analysis, 353-375. schuler, s., hashemi, s., & riley, a. (1997). the influence of women's changing roles and status in bangladesh's fertility transition:evidence from a study of credit programs and contraceptive use. world development, 563-576. woolley, j. (2008). microfinance performance and domestic gdp growth: testing the resiliency of microfinance institutions to economic change. standford journal of microfinance. yunus, m., & weber, k. (2007). creating a world without poverty: social business and the future of capitalism. new york: publicaffairs. zaman, h. (2000). assesing the poverty and vulnerability impact of micro-credit in bangladesh: a case study of brac. washington d.c.: world bank. 38 | microfinance-economic growth nexus: a case study on grameen bank on banglades this page is intentionally blank international journal of islamic economics and finance (ijief) vol. 6(1), january 2023, pages 151-180 assessing the relationship between customer satisfaction and digital service retention: evidence from indonesian islamic banking muhammad alfarizi1 corresponding email: muhammad.alfarizi@binus.ac.id article history received: november 14th, 2022 revised: december 17th, 2022 december 27th, 2022 accepted: january 2nd, 2023 abstract the indonesian islamic banking sector has been transformed by integrating technology in banking services to satisfy customers for retention and market share post-covid-19. this study, therefore, investigates the impact of islamic banking digital service quality in indonesia on customer satisfaction and retention post-covid-19. this study applied the construction of an electronic service quality model (e-s-qual) and a banking service quality model (bsq) focusing on digital services in islamic commercial banks in indonesia after the covid-19 pandemic. this study also used an explanatory method by collecting survey data from customers of islamic banks in indonesia. pls-sem analysis tool with smartpls tool version 4 was utilized to search for prove the research hypothesis.this study uncovered the effect of ease of use, efficiency, interoperability, privacy security, responsiveness, reliability, service cost, and service portfolio on isbc customer satisfaction. in addition, among the significance of isbc customer satisfaction on customer retention intention, there was a mediating effect of islamic financial literacy. islamic banks, consequently, must maintain a digital service system to meet customers' financial needs through quality control of system infrastructure and continuous network maintenance. moreover, the demand for strategies to strengthen new digital services through adding features and promoting the advantages of digital financial services is needed to gain market share in the indonesian financial market. keywords: covid-19; digital service; customer satisfaction; islamic bank jel classification: g21; o32; q55 type of paper: research paper @ ijief 2023 published by universitas muhammadiyah yogyakarta, indonesia doi: https://doi.org/10.18196/ijief.v6i1.16824 web: https://journal.umy.ac.id/index.php/ijief/article/view/16824 citation: alfarizi, m. (2023). interaction of customer satisfaction and digital service retention: evidence of pls from indonesian islamic banking. international journal of islamic economics and finance (ijief), 6(1), 151180. doi: https://doi.org/10.18196/ijief.v6i1.16824. 1 management department, binus online learning, bina nusantara university, indonesia https://doi.org/10.18196/ijief.v6i1. https://doi.org/10.18196/ijief.v6i1. https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v6i1.16824&domain=pdf alfarizi │ interaction of customer satisfaction and digital service retention: evidence of pls from indonesian islamic banking international journal of islamic economics and finance (ijief), 6(1), 151-180 │ 145 i. introduction the coronavirus outbreak in 2020 captured the world’s attention and much of the policy debate. the apparent effect of covid-19 has been to greatly impact the world economy and social relations. however, the covid-19 pandemic has also become a catalyst for digital transformation, aiding the process of banking and capital transfers. in this regard, islamic banking has been adversely affected by this prolonged pandemic. this moment is the chance for islamic financial and others sectors to contribute to the community’s economy (jawad & christian, 2019; anwar, junaidi, salju, wicaksono, & mispiyanti, 2020). evidence was brought through the issuance of financial services authority regulation (pojk) no.11/pojk.03/2020 concerning credit/financing relaxation for those who had difficulty due to covid-19 pandemic. the pojk statement asserts that this issue can stabilize banking and maintain the financial system so that these policies impact banking performance. however, the islamic banking industry deteriorated before the conventional banking industry (alexakis, izzeldin, johnes, & pappas, 2019; alsharif, nassir, kamarudin, & zariyawati, 2019). the contemporary islamic finance sector also provides usable during the covid-19 pandemic period, and they must continue to control the financial sector in facing the risks by using innovative strategies of the finance sector in unstable conditions (rahmayati, 2021). if islamic banks want to get out of a slump, they should not be able to use old methods or ways to market their products and services. one strategy that islamic banks can carry out is transforming banking services based on digital services (zouari & abdelhedi, 2021a). one of the goals of providing digital services in this bank is to enhance customer satisfaction. customer satisfaction is crucial in all commercial setting and the banking sector is no exception. (ajmal, raza, khan, & fatima, 2018). customers will readily switch to other banks if they do not receive the service they expect, requiring the banking industry to be innovative in creating competitive advantages amid intense competition for customers and maintain their satisfaction and loyalty (bankuoru egala, boateng, & aboagye mensah, 2021a; zhao, tsai, & wang, 2019). therefore, banks must focus on building customer excellence that can provide value and customer satisfaction, strengthening customer loyalty and maintain the bank’s sustainability. (riyadi, 2021). nevertheless, the challenge for islamic banks in developing digital banking is customer reluctance to adopt new technology due to bad experiences (cajetan i. mbama & ezepue, 2018a). in addition, islamic banks must be prepared to adapt marketing and management models in the digital transformation process even if they are holding a new costumer service online machine (kaur, ali, hassan, & al-emran, 2021). it is an effort to alfarizi │ interaction of customer satisfaction and digital service retention: evidence of pls from indonesian islamic banking international journal of islamic economics and finance (ijief), 6(1), 151-180 │ 146 maximize services through digital technology, which can become the primary alternative for customers as users of islamic bank digital services in the modern era. the transformation of islamic banking to digital technology must still be brought readily into effect, even though there are various future risks associated with transitioning to new technology that the industry will face. previous literature has summarized the effort of the coronavirus pandemic in changes in the structure of the world’s islamic banking services (abbas a & ayu frihatni a, 2020; cahyono, rani, & mardianto, 2021; hassan, rabbani, asad, & ali, 2020; mansour, ajmi, & saci, 2022; rabbani, asad, et al., 2021; rabbani, bashar, et al., 2021). customers are currently highly dependent on digital banking services, especially in a situation where the potential for transmission of the covid-19 virus still exists (banna, hassan, ahmad, & alam, 2022; ghani, ali, musa, & omonov, 2022). the preliminary study results also revealed that there had been much research on the effect of post-covid-19 islamic banking digital services on customer satisfaction (fida, ahmed, albalushi, & singh, 2020; thaker, amin, & pitchay, 2019; zouari & abdelhedi, 2021b). nonetheless, very little research has explored further the impact on customer retention intentions. most previous studies directly targeted the consequences of customer-looks technological standards in retention intentions. while customer satisfaction can help customer retention, market presence and positive corporate image are key to commercial sustainably. in their study, bankuoru, boateng & mensah (2021) have attempted to answer the impact of customer satisfaction customer retention, specifically for fully digital service banks, which cannot be equated with conventional banks with digital services (bankuoru egala, boateng, & aboagye mensah, 2021). in addition, no direct studies highlighted the role of customers’ understanding of islamic finance as the basis for their retention intentions in islamic banking. as a result, this study is a bridge for studying islamic finance in digital services and the implications of islamic banking digital services for fulfilling customers and retaining their custom. research question the research, thus, attempts to answer to the research question, “what are the latent factors in islamic banking digital services that affect customer satisfaction and retention?” further, this research investigates the impact of the quality of islamic banking digital services post-covid-19 in indonesia on customer satisfaction and retention. this study applied the construction of the electronic service quality (e-s-qual) model (parasuraman, zeithaml, & malhotra, 2005a) and the banking service quality (bsq) model (bahia & alfarizi │ interaction of customer satisfaction and digital service retention: evidence of pls from indonesian islamic banking international journal of islamic economics and finance (ijief), 6(1), 151-180 │ 147 nantel, 2000a) by focusing on digital services at islamic banks in indonesia after the covid-19 pandemic. the merger of e-s-qual and bsq constructions is expected to encourage a more comprehensive understanding of the qualityof-service information systems and financial banking services and become another novelty of this research. the integration of the two constructs is also based on the opinion that relying on a single theory limits the research field and the knowledge gained to one side. this study is hoped to shape the theoretical, managerial, and public policy implications in encouraging the growth of the islamic banking business in indonesia sustainably through the development of a customer-friendly service digitization strategy and become a means of achieving competitive advantage in the face of strong competition in the indonesian and global banking sectors. ii. literature review 2.1. digital banking services technological developments over recent years and the covid-19 pandemic have significantly advanced banking services’ digital transformation much more than previously (malar, arvidsson, & holmstrom, 2019). the situation will bring about further change with the increase in the volume of digital bank service transactions, either through m-payments, digital banking applications, internet banking, or e-money (rashid h, 2020). in this case, digital financial services are the logical choice needed to improve the operations and cost efficiency of banks, particualry amoing the so-called millennials cohort of customers (windasari, kusumawati, larasati, & amelia, 2022). the effectiveness and efficiency of digital banking services are felt to provide many benefits and aid the millennial generation in meeting financial transaction needs, such as online shopping, credit purchases, and interbank transfers (ghani et al., 2022). the digitalization of services can also help to close the service gap between banks and the community, more efficient, faster, and cost-effective, which is highly favored by the millennial generation (ji, wang, xu, & li, 2021). during the covid-19 pandemic, indonesian financial services' trend in the use of digital transactions experienced a significant increase of four-fold (320%) in march 2020 and almost a six-fold increase (480%) in april 2020. bank indonesia and the financial services authority have issued several regulations regarding digital financial services to increase financial literacy and inclusion in indonesia (hapsari, maroni, satria, & ariyani, 2019). apart from enhanced convenience providing online and mobile banking servicesand, despite the challenge of transformation and transition, digital technology simplifies transactions for users when accessing digital islamic banking services (aisyah, 2018). alfarizi │ interaction of customer satisfaction and digital service retention: evidence of pls from indonesian islamic banking international journal of islamic economics and finance (ijief), 6(1), 151-180 │ 148 2.2. electronic service quality in examining the development of technology in a service company, parasuraman (2005) created a unique servqual framework for digital services with the name e-s-qual model with several dimensions: ease of use, efficiency, interoperability, privacy security, responsiveness, and reliability (parasuraman, zeithaml, & malhotra, 2005b). this model is also supported by dalbehera (2020) in its evaluative literature review that the e-s-qual model has been able to measure the quality of digital services (dalbehera, 2020). many empirical studies have also adopted e-s-qual in evaluating customer satisfaction with a digital banking service (ahmed, romeika, kauliene, streimikis, & dapkus, 2020; dalbehera, 2020; ya’, tijjani, babangida, & yahaya, 2022; ya’u ibrahim et al., 2022; yusfiarto, 2021). the latest study has demonstrated that the e-s-qual dimension variable affected satisfaction with digital account creation services through the cs online engine (murthy, 2022). 2.3. financial banking service quality financial banking service quality (fbsq) model is intended to evaluate the quality of islamic banking financial services (bahia & nantel, 2000b). this model also extends servqual by offering better evaluation results of banking services due to different perception scales and expectations. specifically, the fbsq model is designed to observe the quality of banking services. latest researchers have used fbsq to compare the service quality of islamic banks in malaysia and saudi arabia and found facts about the effect of costs to achieve service and consistency of banking financial service profiles (baber, 2019; saad & alshehri, 2021). 2.4. islamic financial literacy islamic financial literacy is defined as a person’s expertise in utilizing financial knowledge, skills, and behaviors when managing finances under islamic guidance (setiawati, nidar, anwar, & masyita, 2018). this financial literacy is also seen asunderstanding islamic finance by being familiar with islamic financial products and services, and knowing the differences between islamic and conventional banks. this can influence individual behavior to decide matters relating to the economy based on sharia principles (saifurrahman & kassim, 2021).in addition, islamic finance has the principle of trust in allah’s commands, without usury, investing only in lawful things. also, it has no gharar and no maysir (narastri & kafabih, 2020). alfarizi │ interaction of customer satisfaction and digital service retention: evidence of pls from indonesian islamic banking international journal of islamic economics and finance (ijief), 6(1), 151-180 │ 149 2.5. hypotheses development this study integrated the es-qual (electronic service quality) by parasuraman et al. (2005) with dalbehera’s (2020) support and fbsq (financial banking service quality) models by bahia & nantel (2000) with eight variables: ease of use, efficiency, interoperability, privacy/security, responsiveness from es-qual and reliability, service portfolios, and service charges from the bsq model. first, ease of use is defined as the confidence of an individual that learning, utilizing, and using technology is believed to make banking easier for users (davis, 1989; hansen, saridakis, & benson, 2018; tahar, riyadh, sofyani, & purnomo, 2020). if a system is easy to use, it will not require much effort, which is included in the ease of use (setia & indra, 2022). likewise, several previous studies of digital banking services also concluded the effect of the ease and friendliness of using digital services in satisfying customers (lee & lee, 2020; ramesh, jaunky, roopchund, & oodit, 2020). thus, this research derived the first hypothesis as follows: h1: ease of use of islamic banking digital services significantly influences customer satisfaction. efficiency is a comparison between activities and results related to each other (bhatia, basu, mitra, & dash, 2018). to improve the quality of its business, efficiency can be used as a performance parameter of an institution or organization. efficiency in banking technology services is a widely used performance parameter as it answers difficulties in calculating bank performance measures. the efficiency level of banking technology integration can be seen from various measures, one of which is user satisfaction (ramesh et al., 2020). several previous studies have also shown the effect of efficiency in electronic banking services on satisfaction (khan & alhumoudi, 2022; raza, umer, qureshi, & dahri, 2020). hence, the researchers formulated the second hypothesis below: h2: the efficiency of islamic banking digital services significantly influences customer satisfaction. interoperability is the ability of two or more systems or components to share data/information. compatibility cannot guarantee that each system can take advantage of the other systems’ resources (razis & mitropoulos, 2022). previous studies also disclosed interoperability’s positive and significant effect on customer satisfaction (bankuoru egala et al., 2021b; razis & mitropoulos, 2022). as such, this literature analysis puts forward the third hypothesis: h3: the interoperability of islamic banking digital services significantly influences customer satisfaction. alfarizi │ interaction of customer satisfaction and digital service retention: evidence of pls from indonesian islamic banking international journal of islamic economics and finance (ijief), 6(1), 151-180 │ 150 security is the bank’s ability to protect customers‘ personal information and financial data from being stolen and spread (soomro, shah, & ahmed, 2016). meanwhile, privacy in digital banking transactions is the willingness of consumers to provide their personal information to the digital banking service system (gurung, 2006). thus, in several studies, customer privacy security is a crucial factor in customer perceptions of assessing the quality of digital banking service (li, lu, hou, cui, & darbandi, 2021; salem, baidoun, & walsh, 2019; shankar & jebarajakirthy, 2019). ali et al. (2021) concluded that the privacy security offered by the mobile banking platform affected customer satisfaction (ali et al., 2021). likewise, several previous studies also reported a significant relationship between the privacy security of automated banking services and customer satisfaction (altobishi, erboz, & podruzsik, 2018; banu, mohamed, & parayitam, 2019). therefore, the researchers hypothesized: h4: privacy security of digital banking services significantly influences customer satisfaction. responsiveness provides services quickly and responsively (akram, nadarajah, shah, & milano, 2020). from this level of willingness or concern, to what extent is the company is trying to help its customers will be seen (aiello et al., 2020)? the research results by bungatang (2021) and chen et al. (2021) have proven that responsiveness positively influences customer satisfaction (bungatang & reynel, 2021; chen, le, & florence, 2021). in other words, customer satisfaction will increase if the service has good responsiveness (fauzi & suryani, 2019; ramadonna & aziz, 2019). based on the explanation above, the following hypothesis can be put forward: h5: responsiveness of islamic banking digital services significantly affects customer satisfaction. reliability is the flexibility of the application to carry out its functions according to a predetermined design with minimal risk of failure of service output requests (rajini, ramamoorthy, radha rammohan, rajakumar, & niveditha, 2020). reliability in the digital banking service system is defined as the ability of the bank’s digital services to conduct system functions based on user orders to avoid potential failures (kaur & arora, 2021). khatoon, zhengliang & hussain (2020) found that the reliability of a trustworthy remote banking service system encourages perceptions of banking service quality and customer satisfaction (khatoon, zhengliang, & hussain, 2020). in addition, mbama, ezepue, alboul & beer (2018) stated that the optimistic bank's digital services satisfied customers and would remain loyal to the bank’s brand (cajetan ikechukwu mbama, ezepue, alboul, & beer, 2018). this explanation led the researchers to hypothesize: alfarizi │ interaction of customer satisfaction and digital service retention: evidence of pls from indonesian islamic banking international journal of islamic economics and finance (ijief), 6(1), 151-180 │ 151 h6: the reliability of islamic banking digital services significantly affects customer satisfaction. a service charge is a fee that is incurred to obtain services, including digital banking services (broby, 2021). according to eldeeb, halim & kamel (2021) and stanislawski & syzmonik (2021), the nominal amount of business or money spent using digital banking services, including the comparison with the benefits obtained, determines using a sustainable service system (eldeeb, halim, & kamel, 2021; stanisławski & szymonik, 2021). the hypothesis testing of several previous studies uncovered that service charges significantly affected customer satisfaction due to the desire for a return on effort (chien & chi, 2019; lynn & brewster, 2018; nyarku et al., 2018). the researchers, therefore, drew the seventh hypothesis as follows: h7: islamic banking digital service charge significantly affects customer satisfaction. the service portfolio is a description of combined digital products and services consistent with the capabilities of the technology system function (jovanovic, sjödin, & parida, 2021). the competitive power of the digital banking service portfolio has become a new contest in the banking industry. owusu et al. (2021), in their study of mobile banking services in ghanaian banking, stated that the service portfolio affected customer satisfaction amid the convergence of customer-oriented quality digital banking service platforms (owusu, bekoe, addo-yobo, & otieku, 2021). in his study, bankuoru (2021) also affirmed the effect of digital bank portfolios on customer satisfaction (bankuoru egala, boateng, & aboagye mensah, 2021c). hence, this study proposed the eighth hypothesis: h8: digital banking services portfolio has a significant effect on customer satisfaction. currently, the banking sector's digital service program for satisfaction is chiefly done by increasing customer retention through efforts to increase happiness and value to specific customers (li et al., 2021). rantyanti & halim (2020) and rashid, nurunnabi, rahman & masud (2020), in their study, mentioned the impact of bank customer satisfaction in their financial it innovation service program to increase customer retention intentions and encourage long-term growth in the company’s financial performance (rantyanti & halim, 2020; rashid, nurunnabi, rahman, & masud, 2020). in addition, previous studies of banking financial automation services also revealed the effect of satisfaction on customer retention intentions. the above explanation made the researchers hypothesize: alfarizi │ interaction of customer satisfaction and digital service retention: evidence of pls from indonesian islamic banking international journal of islamic economics and finance (ijief), 6(1), 151-180 │ 152 h9: customer satisfaction significantly affects the retention intention of islamic bank digital services in indonesia. based on the previous literature review, customer retention intentions are influenced by customer satisfaction with islamic banks, including their digital services (zouari & abdelhedi, 2021c). furthermore, this islamic financial literacy as islamic financial law moderates customer satisfaction on customer retention intentions at islamic banks (abror et al., 2020). nurhayati & sukesti (2016), in a study of customer loyalty of islamic banks in semarang city, asserted that the higher a person’s level of islamic financial literacy, the variable could moderate satisfaction with retention intentions (nurhayati & sukesti, 2016). consequently, the hypothesis proposed is: h10: islamic financial literacy becomes a moderator variable between the effects of satisfaction on retention intentions for digital islamic banks in indonesia. based on the explanation above, the research construct model is formed as depicted in figure 1. figure 1. research model source: (bahia & nantel, 2000a; daradkah, aldaher, & shinaq, 2020; parasuraman et al., 2005a; rahman, tajudin, & tajuddin, 2018) iii. methodology this research was conducted using a quantitative approach to examine the constructed model formed to evaluate the use of islamic banking digital services and determine the factors influencing their use. this research also sought to determine research approach, the methods, techniques, and instruments used are quantitative. then, the data collection technique to be carried out in this study was a survey method by distributing questionnaires alfarizi │ interaction of customer satisfaction and digital service retention: evidence of pls from indonesian islamic banking international journal of islamic economics and finance (ijief), 6(1), 151-180 │ 153 to islamic banking customer in indonesia. the measurements used in this research questionnaire were likert scale intervals, namely scale 1 (strongly disagree); 2 (disagree); 3 (neutral); 4 (agreed); 5 (strongly agree). in this study, the constructivist study questions were adopted with modifications to suit the research context. therefore, the measurement items from the constructivist survey were rearranged for the context of the study of acceptance of islamic banking technology. the measurement items are presented in table 1. table 1. variable indicator variable indicator statement source scale ease of use eous1 islamic bank digital services are effortless to use. (parasuraman et al., 2005a) likert eous2 navigation of islamic banks' digital services is very friendly for all ages. eous3 there is a clear instruction guide for using the digital services of islamic banks. eous4 convenience at all times in financial transactions using digital services of islamic banks efficiency effi1 islamic bank digital services make me achieve the desire for financial transactions following islamic law. (parasuraman et al., 2005a) likert effi2 islamic bank digital services make me achieve the desire for financial transactions following islamic law. effi3 islamic bank digital services have successfully met my expectations. interoperability inte1 digital services of islamic banks connected to other financial providers (parasuraman et al., 2005a) likert inte2 i can carry out my financial transactions with thirdparty financial platforms with islamic bank digital services. privacy security secui1 i believe in the strength of the infrastructure of islamic banks' digital service security system. (parasuraman et al., 2005a) likert secui2 i believe the provider maintains the security of financial transactions through the digital services of islamic banks. secui3 i believe the application provider does not share my data or transactions with unauthorized parties. responsiveness resp1 islamic bank initiates contact center services to serve digital service problems quickly. (parasuraman et al., 2005a) likert resp2 digital services provide fast responses in the transaction process according to the network connection. alfarizi │ interaction of customer satisfaction and digital service retention: evidence of pls from indonesian islamic banking international journal of islamic economics and finance (ijief), 6(1), 151-180 │ 154 table 1. variable indicator (continue) variable indicator statement source scale reliability reli1 islamic bank digital services serve financial transactions without long waiting times. (bahia & nantel, 2000b) likert reli2 islamic bank digital services provide the right digital transaction features following program promotions. reli3 islamic bank digital services operate 24 hours a day. reli4 islamic bank digital services maintain error-free predicates. service charges scha1 i incur affordable costs in accessing the digital services of islamic banks. (bahia & nantel, 2000b) likert scha2 the cost of using a digital platform for islamic banks is cheaper. scha3 affordable islamic bank digital subscription fee service portfolio sepo1 affordable islamic bank digital subscription fee (bahia & nantel, 2000b) likert sepo2 i always get notifications of application updates to get the latest features of islamic bank digital services. isbc customer satisfaction ics1 i am satisfied with the delivery of islamic banking digital services. (bahia & nantel, 2000b; parasuraman et al., 2005a) likert ics2 i am satisfied with the quality of islamic banking digital services. ics3 overall, i am satisfied with the islamic banking digital service during the post-covid-19 pandemic. islamic financial literacy ifl1 i know the concept of islamic finance. (daradkah et al., 2020; rahman et al., 2018) likert ifl2 i understand that the qur'an, the hadith of the prophet muhammad, and ijma' ijtihad are the basis of sharia economic law. ifl3 i carry out the five pillars of islam. ifl4 i know that one of the islamic financial institutions is an islamic bank. ifl5 islamic bank products follow islamic law. ifl6 islamic bank products are more profitable and blessed. ifl7 islamic bank products are according to my needs. ifl8 islamic bank products provide the convenience of halal financial transactions for muslims. customer retention intention cri1 i will recommend that people around to use islamic banking digital services. (bahia & nantel, 2000b; parasuraman et al., 2005a) likert cri2 i will continue to use islamic banking digital services. cri3 i continue to use the current islamic bank brand because it has succeeded in providing quality digital services. the questionnaire was distributed online by means of google forms. the targets or respondents of the questionnaire were islamic banking customers in indonesia. this study used a purposive sampling technique, with the sample criteria being customers who utilized digital services. the determination of alfarizi │ interaction of customer satisfaction and digital service retention: evidence of pls from indonesian islamic banking international journal of islamic economics and finance (ijief), 6(1), 151-180 │ 155 the minimum sample followed the rule of thumb by hair, matthews and sarstedt (2017), stating that the minimum samples are four or five times the number of existing indicators (hair jr.matthews, matthews, & sarstedt, 2017). 37𝑥5 = 185 therefore, the minimum number of participants in the sample that should be achieved in this study was 185. since this study focused more on explanatory research, quantitative analysis and partial least square structural equation model (pls-sem) were used to develop models calculated with the help of smartpls 4 software. in this case, the pls-sem method has advantages under the research objectives to identify the main determinant variables (rigdon, sarstedt, & ringle, 2017). iv. results and analysis 4.1. respondent’s profile this research received a total of 294 respondents during the data collection period from august 2022 to october 2022. following a data cleansing process, a total of 273 respondents were obtained and for analysis. regarding gender, most respondents were male. concerning age, most respondents were over 40 years old, with a percentage of 62%. moreover, the areas with the most respondents were on java island, as much as 22% (60.26%). also, there was very little difference from bali, which was a response rate of 20% in terms of education, most respondents held a master’s or ph.d. besides, the most respondents’ occupations were academics, with a total of 27%, followed by professionals, 23%, and merchants/business people, with not many different numbers at 21%. in addition, bank bca syariah and bank syariah indonesia had the most respondents, 26% and 23%, respectively. the profile of respondents to the survey can be seen in table 2. 4.2. outer model measurement testing the outer model measurement is a latent construction test of reflective and formative indicators of whether it meets the theoretical and retrieval principles. in simple language, it tests the data's validity and reliability. the following four measurement model evaluations or outer models were obtained by running the pls algorithm in smartpls version 4. this procedure would simultaneously produce r2 and path coefficients values for evaluating the inner model (purwanto & sudargini, 2021). alfarizi │ interaction of customer satisfaction and digital service retention: evidence of pls from indonesian islamic banking international journal of islamic economics and finance (ijief), 6(1), 151-180 │ 156 table 2. respondent’s profile characteristic total percentage gender men 153 56% female 120 44% age 18 to 39 years of age 105 38% 40 years of age and aboveabove) 168 62% region java 60 22% sumatera 47 17% kalimantan 39 14% bali-nusa tenggara 55 20% sulawesi 27 10% maluku 19 7% papua 26 10% educational level junior high school 31 11% senior high school 36 13% bachelor/diploma 92 34% master/ph.d. 114 42% occupation professional (lawyer, doctor, engineer) 64 23% manager/executive 20 7% academician (lecture-professor) 73 27% student 15 6% merchant/business people 57 21% unemployed 36 13% others 8 3% brand bank syariah bank syariah indonesia 63 23% bank bca syariah 71 26% bank muamalat indonesia 56 21% bank mega syariah 34 12% bank bukopin syariah 49 18% (number of respondents = 173) validity testing was measured through the value of outer loadings with a minimum value of 0.6 and average variance extracted with a minimum value of 0.5 (j. f. hair, risher, sarstedt, & ringle, 2019). at the same time, the reliability value was seen through the importance of composite reliability and cronbach's alpha, with a minimum value of 0.7 (j. hair, hollingsworth, randolph, & chong, 2017). the absolute validity and reliability test results in table 3 indicate that the model met the minimum standards of ave, cronbach's alpha, and composite reliability. in addition, the outer loadings scale value for each variable indicator was above the minimum, so the measurement model was declared reliable and accurate for further testing. alfarizi │ interaction of customer satisfaction and digital service retention: evidence of pls from indonesian islamic banking international journal of islamic economics and finance (ijief), 6(1), 151-180 │ 157 table 3. pls algorithm results construct outer loadings scale cronbach‘s alpha rho_a composite reliability ave ease of use 0.747-0.833 0.821 0.882 0.882 0.652 efficiency 0.898-0.900 0.872 0.863 0.922 0.797 interoperability 0.860-0.913 0.732 0.836 0.880 0.787 privacy security 0.685-0.847 0.702 0.852 0.831 0.623 responsiveness 0.907-0.930 0.815 0.831 0.915 0.843 reliability 0.720-0.830 0.798 0.915 0.869 0.625 service charges 0.831-0.903 0.850 0.909 0.909 0.769 service portfolio 0.797-0.895 0.716 0.882 0.836 0.719 isbc customer satisfaction 0.774-0.839 0.739 0.879 0.852 0.657 islamic financial literacy 0.700-0.786 0.877 0.992 0.903 0.537 customer retention intentions 0.882-0.901 0.872 0.864 0.836 0.797 4.3. inner model/structural the evaluation aimed to see the direct or indirect effect between variables. the structural model can be evaluated by looking at the r-square value on the endogenous latent variable and testing the hypothesis by looking at the tstatistic value (j. hair et al., 2017). structural inner model analysis is performed through the bootstrapping procedure in the smartpls application. this study has passed a procedural analysis of the structural inner model with output evidence in figure 2. the coefficient of determination (r2) is a way to assess how much an exogenous construct can explain an endogenous construct. the value of the coefficient of determination (r2) is will lie between 0.0 and 1.0. within these parameters, chin gives the criteria for r2 values of 0.67, 0.33, and 0.19 as strong, moderate, and weak (j. f. hair, risher, sarstedt, & ringle, 2019). the r-square analysis results in table 4 reveal that exogenous variables influenced isbc by 97% with a strong category. meanwhile, customer retention intention was influenced by 77.8% by exogenous variables with a strong category. islamic financial literacy was affected by 71.7% of exogenous variables with a strong category. as for the predictive relevance (q2), results demonstrated a value above 0 with a strong category and were concluded to have predictive relevance. further, hypothesis testing on smartpls was carried out using a sample bootstrapping procedure. the minimum t-statistic value used was a significance level of 5%, and the minimum t-statistic value was 1.96 with a 95% confidence level. the criteria for accepting the hypothesis are also seen alfarizi │ interaction of customer satisfaction and digital service retention: evidence of pls from indonesian islamic banking international journal of islamic economics and finance (ijief), 6(1), 151-180 │ 158 from the p-value of not more than 0.05, according to the role of thumb. based on the analysis results in table 5, all hypotheses were accepted. figure 2. bootstrapping output 4.4. discussion this study succeeded in proving that all hypotheses were accepted because they were above the minimum t-test and p-value with a positive path coefficient. this study also succeeded in achieving its objective of assessing the impact of islamic banking digital service quality post-covid-19 in indonesia on customer satisfaction and retention. this study accepted the first hypothesis, indicating that ease of use positively and significantly affected user satisfaction, in accordance with the p-value and t-test. in other words, the better the islamic digital banking service technology provides the convenience felt by its users, the higher the satisfaction felt by its users. this study aligns with several previous studies (hammoud, bizri, & el baba, 2018; lee & lee, 2020; ramesh et al., 2020). alfarizi │ interaction of customer satisfaction and digital service retention: evidence of pls from indonesian islamic banking international journal of islamic economics and finance (ijief), 6(1), 151-180 │ 159 table 4. hypothesis analysis results hypothesis t-test p-value interpretation r-square qsquare h1 ease of use  isbc customer satisfaction 2.273 0.023 accepted 0.970 0.674 h2 efficiency  isbc customer satisfaction 10.729 0.000 accepted h3 interoperability  isbc customer satisfaction 30.436 0.000 accepted h4 privacy security  isbc customer satisfaction 42.915 0.000 accepted h5 responsiveness  isbc customer satisfaction 2.561 0.010 accepted h6 reliability  isbc customer satisfaction 2.151 0.032 accepted h7 service charges  isbc customer satisfaction 9.050 0.000 accepted h8 service portfolio  isbc customer satisfaction 16.183 0.000 accepted h9 isbc customer satisfaction  costumer retention intention 2.162 0.031 accepted 0.778 0.491 h10 isbc customer satisfaction  islamic financial literacy  costumer retention intention 11.866 0.000 accepted 0.717 0.380 related to that, customers will feel more satisfied using easy-to-operate digital banking services, so they can continue utilizing this technology. as such, islamic banking must provide digital services, both applications and websites, which are easy to use (user friendly) and equipped with full features to provide convenience and not make it difficult for customers. it is also strongly recommended that there is a concise and clear transaction guide for the mbanking application to make it easier to use. systems designed with optimal performance and design are complex in terms of operation will actually hinder usage. therefore, service providers, namely islamic banks in indonesia, can facilitate the brimo application, by offering a well-designed interface system and a navigation system with a fast response for comfortable operation. moreover, this study has also shown the acceptance of the hypothesis, stating the effect of efficiency on customer satisfaction in islamic banking. it suggests maintaining efficiency, such as complete product information, ease to use, customers who can easily find the product they want, can readily load each page with prompt log-in accessibility, thereby enabling customers to complete transactions with minimal difficulty. further, the pandemic situation requires the effectiveness of technology in digital transaction processes alfarizi │ interaction of customer satisfaction and digital service retention: evidence of pls from indonesian islamic banking international journal of islamic economics and finance (ijief), 6(1), 151-180 │ 160 because restrictions on activities outside the home. in this case, m-banking customers expect fast and error-free banking services accessible anytime from anywhere through the m-banking platform. hence, banks must ensure the availability of accurate banking services at all times through the m-banking platform. banks can also make efforts so that m-banking applications can work also on slow internet connections and not be hampered by an overload of internet traffic. the pls-sem analysis results in this study accepted h3, the effect of interoperability on islamic banking customer satisfaction. this related customer satisfaction to digital services measured by the ability of systems or components of islamic digital banking services to share data or process transfers to good third parties companies that partner with banks in transaction processes such as e-money, fintech applications, virtual account institutions etc. this result is consistent with previous studies, which stated that interoperability affected digital service user satisfaction (bankuoru egala et al., 2021b; hobson, anand, yang, & lee, 2011; razis & mitropoulos, 2022). in this regard, interoperability is a complex issue in exchanging data between systems with different platforms, as with e-banking. it is not possible to standardize data formats and schemas across all systems, nor is it possible to standardize systems, let alone use the same vendor. one accepted approach is to standardize the structure of the data exchanged, and xml provides the correct answer. in addition, this study found the effect of privacy and security on customer satisfaction in islamic banking, which is in line with previous studies (altobishi et al., 2018; banu et al., 2019). here, perceived security is consumers’ belief or impression that their personal information will not be seen, stored, and manipulated by other parties during transit and storage, thereby consistently raising their confidence and expectations of good service. this, in turn can enhance customer satisfaction. gurung et al. (2006) stated that protecting privacy is vital to increase satisfaction. technically, the perception of security will guarantee integrity, confidentiality, authentication, and no transaction recording (gurung, 2006). furthermore, since the covid-19 pandemic has been a significant shock on the world economy, customers do not want to compound their problems by poor security and privacy protection. consequently, indonesian islamic banks must ensure that the digital banking service system is based on several layers of security, consisting of various parallel solutions and mechanisms to protect banking applications and customer data, providing identification, authentication, and authorization. the pls-sem analysis also showed that h5 support could be interpreted as consumer satisfaction using islamic bank digital services. it can be said that consumers were satisfied with the service responsiveness provided as alfarizi │ interaction of customer satisfaction and digital service retention: evidence of pls from indonesian islamic banking international journal of islamic economics and finance (ijief), 6(1), 151-180 │ 161 consumer expectations before and after receiving service responsiveness exceeded consumer expectations. this consumer satisfaction was manifested through: 1) responsiveness to consumer activity; 2) willingness to respond quickly to requests for consumer assistance through call center applications; and 3) ease of payment transactions. consumers then became interested and encouraged to use it again and recommending it to other people as a facility. this study is in line with the results of previous studies (fauzi & suryani, 2019; ramadonna & aziz, 2019). based on the study results, the reliability variable positively and significantly affected consumer satisfaction using islamic bank digital services. thus, it can be seen that, because consumer expectations before and after getting reliable services matched or even surpassed those expectations, customers were happy with the reliable services offered by islamic bank digital services. this consumer satisfaction was demonstrated by way of: 1) the speed with which the application responds to service requests, 2) ease of transaction, and 3) there is notification/confirmation of service implementation. it made consumers interested in using it again, and recommended it to people to also use. this result agrees with the previous study (khatoon et al., 2020; cajetan i. mbama & ezepue, 2018b). furthermore, the pls-sem test in this study found the effect of service fees and their portfolio (h7-h8) on consumer satisfaction using islamic bank digital services. these results are consistent with previous studies (bankuoru egala et al., 2021b; chien & chi, 2019; lynn & brewster, 2018; nyarku et al., 2018; owusu kwateng, osei atiemo & appiah, 2019) indicating that prices are increasingly flowing to consumer benefits and savings. , resulting in raised consumer satisfaction with islamic bank digital services. price is a key determinant for buyers in choosing services. the similarity of the price given by the company for the effort to get the service will satisfy the customer. according to nyarku (2018), a certain amount of value or money is needed to get the required chemistry from products and services (nyarku et al., 2018). in addition, the portfolio features in islamic bank digital services are attractive and make it easier for customers in the transaction process, which will facilitate the customer transaction process, triggering satisfaction. the analysis results in this research also revealed the effect of islamic bank customer satisfaction in digital services on retention intentions, and is in line with previous studies (rantyanti & halim, 2020; rashid et al., 2020). in this alfarizi │ interaction of customer satisfaction and digital service retention: evidence of pls from indonesian islamic banking international journal of islamic economics and finance (ijief), 6(1), 151-180 │ 162 regard, customer satisfaction is a measurement metric businesses use in the perceived customer concept. therefore, it is vital for customer retention to satisfy the product needs of customers. since dissatisfied customers can, potentially take little time to switch brands, strengthening digital services' capacity is expected to satisfy customers and increase their retention intentions. this study also attempted to find the influence of the moderating variable of customers' islamic financial literacy on the relationship between islamic bank customer satisfaction in digital services and retention intentions, showing significant results. it indicates that understanding islamic finance is a consideration in retention intentions after obtaining satisfaction using islamic bank digital services. this discovery demonstrates the role of islamic financial law in regulating muslim society's actions, especially in adopting technology in the transaction process. further, for various parties this study provides new insights from theoretical and managerial perspectives. in terms of the academic function, this study adds empirical evidence regarding the effect of islamic banking digital service quality on satisfaction and retention intentions, in the light of the levels of islamic financial literacy of respondents. this study also goes towards filling the void in exploring islamic bank digital services after the covid-19 pandemic, and the profound changes to digital transformation that ensued soon after the onset of the covid-19 outbreak. in managerial terms, strategic demands are in strengthening islamic bank digital services as a new basis for gaining financial market share in indonesia. v. conclusion and recommendation 5.1. conclusion the people of indonesia are positively responsive to adopt technological developments and change. as an extension, the financial business sector must be no exception in also adopting technology to strengthen customer loyalty and commercial success. this study has found that islamic bank customer retention in indonesia is influenced by customer satisfaction in utilizing digital services, most notably after the covid-19 pandemic as an era of digital transformation. this study departed from the context of indonesia as a developing country, which is profoundly thick with the digitalization of all sectors, especially finance. this study requires further development, especially given the limited research samples of islamic bank customers in indonesia. therefore, it is not fully alfarizi │ interaction of customer satisfaction and digital service retention: evidence of pls from indonesian islamic banking international journal of islamic economics and finance (ijief), 6(1), 151-180 │ 163 generalizable to the situation of world islamic banking in the post-covid-19 digital transformation era. also, an expansion of the research framework with consideration of other theories can produce a more comprehensive analysis, including the use preference elicitation techniques to understand the dimensions of feature future? demand and quality preferred by islamic bank customers after the covid-19 pandemic be used in future research. 5.2. recommendation this study highlights managerial and public policy implications in islamic banking digital financial services. a practical and sustainable strategy in digital service integration is needed to provide the best service for customers to get their retention intention. even though the digitization maintenance process requires capital injection, it can be successfully implemented if carried out continuously and with minimal damage . in addition, it is recommended to retain existing customers to get word of mouth (wom) points. later, islamic banks’ digital services can increase gain market share and profitability. moreover, enhancing ‘ease of use’ by displaying islamic bank digital service applications that are efficient for all ages is required to ensure that customers can easily transact by means of digital services. since islamic bank digital services are an integration of various financial transaction features with third parties, ensuring a service operating system ready to process transaction data transfers is needed through network infrastructure control. islamic bank customers are also predicted to have understood islamic sharia law, and their question is, "are long-distance transactions beneficial or harmful?" therefore, the first policy implication for authorized government stakeholders must be improved digital financial literacy and amendemnts to governing sharia law. the evaluation of the features and security attributes of islamic bank digital services is also required, consisting of the possibilities: 1) encryption; 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(2021a). customer satisfaction in the digital era: evidence from islamic banking. journal of innovation and entrepreneurship, 10(1). https://doi.org/10.1186/s13731-021-00151-x alfarizi │ interaction of customer satisfaction and digital service retention: evidence of pls from indonesian islamic banking international journal of islamic economics and finance (ijief), 6(1), 151-180 │ 173 this page is intentionally left blank international journal of islamic economics and finance (ijief) vol. 5(2), july 2022, pages 177-200 the role of islamic religiosity on the relationship between risk, trust, and intention to use digital payments during the covid-19 pandemic yudi sutarso1 corresponding email: yudi@perbanas.ac.id article history received: february 15th, 2022 revised: july 4th, 2022 accepted: july 5th, 2022 abstract there has been limited study on risk perception faced by digital payment customers, particularly during the covid-19 pandemic, motivating this study to analyze the role of risk and trust on the intention and use of digital payments and confirm the moderating role of islamic religiosity in the model. this study used the partial least squares structural equation model (pls-sem) method, including a survey of 270 customers of three digital payment service providers: ovo, gopay, and dana. the key finding revealed that security and operational risks significantly impacted trust, even though they did not affect the intention to continue. another significant result uncovered that islamic religiosity moderated the effect of operational risk on trust. in this case, customers with a lesser religiosity level were more sensitive to the risk's impact. the significant contribution of this study is an expanding theory on the relationship between perceived risk, trust, and the use of digital payments. the study also offers recommendations to practitioners on managing risk and trust to increase the likelihood of using digital payment in the future. furthermore, practitioners must consider religiosity regarding risk management, trust, and consumer protection. keywords: continuance intention, digital payment, islamic religiosity operational risk, security risk, trust jel classification: g21, g41, m31 type of paper: research paper @ ijief 2022 published by universitas muhammadiyah yogyakarta, indonesia doi: https://doi.org/10.18196/ijief.v5i2.13990 web: https://journal.umy.ac.id/index.php/ijief/article/view/ 13990 citation: sutarso, y. (2022). the role of islamic religiosity on the relationship of risk, trust, and intention to use digital payments during the covid-19 pandemic. international journal of islamic economics and finance (ijief), 5(2), 177-200. doi: https://doi.org/10.18196/ijief.v5i2.13990. 1 faculty of economics and business, universitas hayam wuruk perbanas, indonesia mailto:yudi@perbanas.ac.id https://doi.org/10.18196/ijief.v5i1.139 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v5i2.13990&domain=pdf sutarso │ the role of islamic religiosity on the relationship of risk, trust, and intention to use digital payments during the covid-19 pandemic international journal of islamic economics and finance (ijief), 5(2), 177-200 │ 178 i. introduction during the covid-19 pandemic, the role of islamic religiosity has shown its impact on the muslim business world. the functions can be seen in small and medium-sized business studies, where religiosity positively affects firm survival (utomo, 2020). during the pandemic period, religiosity also increases direct worship of allah. this direct worship is reflected by activities such as reading the qur'an, doing sunnah prayers, fasting sunnah, performing fardu prayers on time, and avoiding immorality (syahrir, rahem & prayoga, 2020). these activities indicate the role of religiosity in daily business life. specifically, the marketing phenomenon during the covid-19 pandemic shows various dynamics. in this regard, the coronavirus has changed people's lives, so empathy is essential for customers: focus on caring and giving attention, serve where customers are, pay attention in the post-covid-19 era, and agile buildability (diebner, silliman, ungerman & vancauwenberghe, 2020). in addition, the emergence of social distance directly impacts people's lifestyles, including baby boomers and gen x (santosa, taufik, prabowo & rahmawati, 2021). at its simplest, tourism, for example, showed that perceived risk impacted attitudes towards harmful world activities (sánchezcañizares, cabesa-ramirez, munoz-fernandez & fuentes-garcia, 2020). also, in other tourism, fear arousal negatively moderated the relationship between trust and intensity to fly (hassan & soliman, 2020). these things denote that the covid-19 pandemic has increased risks in business. moreover, fintech (financial technology) in digital payments provides opportunities for business activities, workers, employers, and the overall economy, to face the crisis while encouraging small, medium, and informal enterprises to digitize and formalize their business (smeets & zeisberger, 2020). based on mobile app data from 71 countries, it was estimated that the spread of covid-19 and government lockdowns led to an increase of between 33.1 to 36.6 percent daily download rate of fintech apps during the peak of the pandemic (ramelli, wagner, zeckhouser & ziegler, 2020). digital payments substitute conventional transactions (via paper money) and avoid direct contact in transactions. the increasing use and several developments indicate the development of digital payments. however, poor cellular networks, security issues, service fees, and complaint resolution are the biggest obstacles to adopting and using digital payment (tonuchi, 2020). also, critical issues in digital payment adoption in previous studies consist of agency credibility issues (odoom & kosiba, 2020), fraud (akomea-frimpong, andoh, akomea-frimpong & dwomoh-okudzeto, 2019), anti-money laundering or counter-terrorist financing threats (whisker & lokanan, 2019), consumer protection (bongomin & ntayi, 2020), trust ( bongomin & ntayi, 2019), income and education (amoah, korle, & asiama, 2020; myeni, makate sutarso │ the role of islamic religiosity on the relationship of risk, trust, and intention to use digital payments during the covid-19 pandemic international journal of islamic economics and finance (ijief), 5(2), 177-200 │ 179 & mahonye, 2020), and past-experience with online fraud (shree, pratap, saroy & dhal, 2021). these obstacles indicate that risk and trust in digital payments are still a concern. in indonesia, the potential risks of digital payments are related to consumer data security (security risk) and transaction errors (operational risk) (napitupulu, rubani, khasanah & rachmawati, 2017). the study's gap to be answered is the limited research on digital payments related to risk during the covid-19 pandemic, primarily associated with islamic religiosity and trust. the main research problem is how security and operational risks affect trust, intention, and use of digital payments. moreover, how islamic religiosity affects this relationship. the theoretical contribution generated from this research explains the role of the risk aspect and its effect on trust, intention to use, and use of digital payments, especially during a pandemic. likewise, this study is expected to provide a practical explanation regarding the role of religiosity in the relationship between risk and trust. the managerial implication of this research is to guide practitioners in managing risk, especially in increasing trust, intention, and use of digital payments. also, it is hoped that practitioners can see the difference in user religiosity in advancing trust in digital payments. further, this paper is divided into five-section; the first describes the study background, covering the phenomenon of religiosity in the covid-19 pandemic, digital payment, and identification of the research gap. the second section elaborates on relevant previous research findings in the literature and theory to support the phenomena and research model. the third section explains the methodological aspect of the study. the fourth elucidates the statistical analytical techniques utilized in this study and analysis of the results, and the final section presents the study conclusion and recommendations. ii. literature review 2.1. digital payment risks and the impact of covid-19 studies in the tourism context have shown the types and impacts of customer risk during the covid-19 pandemic. the risk of getting covid-19, which consists of affective and cognitive risks, negatively influences the intention to do tourism, minimizing personal contact (bae & chang, 2021). another study on food delivery apps (food delivery apps) showed that task-technology fit positively impacted service-use intentions (zhao & bacao, 2020). several previous studies can trace the relationship between perceived risk and trust. studies on mobile money revealed that risk (economic, functional, security, privacy, time, service, psychological, and social) had a negative effect on user trust in service providers. however, it did not affect economic-based trust (abdul-hamid, shaikh, boateng & hinson, 2019). the same thing sutarso │ the role of islamic religiosity on the relationship of risk, trust, and intention to use digital payments during the covid-19 pandemic international journal of islamic economics and finance (ijief), 5(2), 177-200 │ 180 happened to online services in china, where the total perceived risk (economic, functional, security, time, privacy, and psychological risk) negatively affected trust (yang, pang, liu, yen & tarn, 2015). studies on mobile shopping also showed that perceived risk was influenced by financial, psychological, performance, and time risks and negatively affected trust in terms of service, vendor, device, and disposition (marriott & williams, 2018). trust also moderated the relationship between risk and intention to use online banking services (kaur & arora, 2020). moreover, studies on green products uncovered that risk negatively affected trust (marriott & williams, 2018). several other studies have also previously indicated the same (d'alessandro, girardi & tiangsoongnern, 2012), although other studies have confirmed the relationship between trust and risk (kaur & arora, 2020; pavlou, 2003; zhang & li, 2019). these findings signify that the higher the perceived risk, the lower the user's trust in digital payments. furthermore, several studies indicate the risk effect on the intention to use a service. studies on e-marketplaces showed increased risk would reduce consumer intentions to transact (wei, li, zha & ma, 2019). internet banking services also confirm the role of risk on intention to use with moderated confidence and acceptance of risk (marafon, basso, espartel, de barcellos & rech, 2018). however, in online purchasing services, financial, product, security, time, and psychological risks negatively affect the intention to use (ariffin, mohan & goh, 2018). meanwhile, perceived risk affected the usage of digital currency electronic payment (wu, an, wang & shin, 2022). these findings indicate that the higher the risk, the lower the intention to use digital payments again. hypothesis 1. the higher a) security risk and b) operational risk, the lower the trust of digital payment users during the covid-19 pandemic. hypothesis 2. the higher a) security risk and b) operational risk, the lower the intention to re-use digital payments during the covid-19 pandemic. 2.2. trust, intention, and use of digital payments covid-19 has influenced trust in banks' payment services (bijlsma, cruijsen & koldijk, 2022). trust is crucial in financial technology (dawood, liew & lau, 2022). the relationship between trust and intention to use can be seen in several studies, including studies conducted on mobile wallet services showing the role of trust in increasing intention to use (singh & sinha, 2020). similarly, previous studies on mobile banking services comparative studies between two countries revealed the consistency that trust is an antecedent of intention to use (merhi, hone & tarhini, 2019). in non-adopters, it has been confirmed that trust determined the intention to use mobile banking in the sutarso │ the role of islamic religiosity on the relationship of risk, trust, and intention to use digital payments during the covid-19 pandemic international journal of islamic economics and finance (ijief), 5(2), 177-200 │ 181 philippines (chiu, ball & chiu, 2017). these findings indicate that the higher the trust, the higher the intention to use digital payments. in addition, trust in its relationship with use shows the same argument: the higher the trust, the higher the use of digital payments. moreover, the effect of intention to use on usage can be traced from several studies, including a study in vietnam on mobile commerce, which showed that intention to use had a positive effect (han, thao nguyen & anh nguyen, 2016). likewise, electronic health record services confirm the role of intention to use (venugopal et al., 2018). based on this, hypotheses related to trust, intention, and use could be formulated below. hypothesis 3: the higher the trust, the higher a) the intention to use and b) the use of digital payments during the covid-19 pandemic. hypothesis 4: the higher the intention to use, the higher the use of digital payments during the covid-19 pandemic. 2.3. the moderating role of religiosity the role of islamic religiosity has been identified in previous studies related to this study. religiosity moderated the relationship between value and satisfaction, especially in islamic attributes, both physical and non-physical (eid & el-gohary, 2015). religiosity is a factor in life satisfaction (krok, zarsycka & telka, 2021). likewise, islamic religiosity had a moderating role in the relationship between intention and the use of internet banking products (soomro, 2019). in addition, the role of perceived behavioral control on the intention to behave ethically differed between those with high and low religiosity. the influence was significant on highly religious people (kashif, zarkada & thurasamy, 2017). these findings indicate that religiosity encourages people to behave more ethically. furthermore, the relationship between religiosity and risk has been identified in previous studies. high religiosity was associated with risk-averse and vice versa with risk-taking (miller & hoffmann, 1995). risk-averse used traditional methods to deal with stress, while risk-takers utilized innovative ways (ferguson & valenti, 1991). religiosity is also related to trust, where trust in others is related to religious activities so that a person will believe more in those who practice religious activities (catholic) (brañas-garza, rossi & zaclicever, 2009). in another study, inter-personal religiosity was positively related to customer trust. however, intra-personal religiosity was inversely associated with trust (alhazmi, 2019). thus, the moderating role of religiosity could be hypothesized as follows. sutarso │ the role of islamic religiosity on the relationship of risk, trust, and intention to use digital payments during the covid-19 pandemic international journal of islamic economics and finance (ijief), 5(2), 177-200 │ 182 hypothesis 5: religiosity moderates the relationship between a) security risk and b) operational risk and trust in digital payment users during the covid-19 pandemic. figure 1 describes the research model relating digital payment use behavior with its antecedents: trust, intention, and risk. this model also includes the moderating role of islamic religiosity on the relationship between risk and trust and intention. figure 1. research framework iii. methodology 3.1. method this study used the pls-sem method as a data analysis tool because the data were not normally distributed. the research data utilizing the normality test using the kolmogorov-smirnova and shapiro-wilk techniques showed that the data were not normally distributed. in the marketing and strategic management literature, the not normally distributed data is the main reason for using pls-sem (hair, sarstedt, hopkins & kuppelwieser, 2014). in pls-sem, there are five main stages of data analysis, including 1) opening or creating work files, 2) raw data reading, 3) data pre-processing, 4) defining variables and their relationships in the sem model, and 5) performing sem analysis and seeing the results (kock, 2010). 3.2. data the researcher used the context of financial technology (fintech) in indonesia's digital payment (ovo, gopay, and dana). the researcher also used security risk customer trust digital payment use behavior continuance intention islamic religiosity h1a (-) β=0.20 h1b (-) β=0.20 h2a (-) β=0.20 h3b (+) β=0.20 h4 (+) β=0.20 operational risk h2b (-) β=0.20 h3a (+) β=0.20 h5a β=0.20 h5b sutarso │ the role of islamic religiosity on the relationship of risk, trust, and intention to use digital payments during the covid-19 pandemic international journal of islamic economics and finance (ijief), 5(2), 177-200 │ 183 a sampling technique with a purposive method, namely an unrestricted nonprobabilistic sampling method (cooper & schindler, 2014; trochim & donnelly, 2008), selecting a number of the sample because they had criteria that were under the set. the criteria to choose sample consisted of digital payment users with the following criteria: muslim; the primary user of mobile payment of ovo, gopay, or dana; aged 17 years and over; and used a car payment at least once in the last month. the description of this research sample is as in the following table 1. based on reviews of studies in different research areas, the median sample size may be about 200 cases (shah & goldstein, 2006), or minimum sample sizes for factor analysis models range from 30 to 460 cases (kline, 2016); therefore, 270 sample was sufficient for this study. table 1. sample description category subcategory frequency percent cumulative gender male 63 23 23 female 207 77 100.0 ages (years) 17-20 102 37.8 37.8 21-30 164 60.7 98.5 31-40 2 0.7 99.4 41< 2 0.7 100.0 occupation employees 28 10.4 10.4 entrepreneurs 6 2.2 12.6 students 219 81.1 93.7 others 17 6.3 100.0 frequency of use in one month (times) 1 81 30.0 30.0 2-3 72 26.7 56.7 4-5 63 23.3 80.0 6-7 16 5.9 85.9 8-9 10 3.7 89.6 10≤ 28 10.4 100.0 digital payment ovo 122 45.2 45.2 gopay 70 25.9 71.1 dana 78 28.9 100.0 total 270 100.0 100.0 3.3. model development the research instrument is the most crucial element in survey research and determines the success of the research. good instrumentation will ensure the collection of the necessary data. this study employed three stages in instrument development (malhotra, 2015). the first stage was the literature study stage, searching for literature related to the research topics: religiosity, risk perception, belief, intention, and use related to theory, their concept, and sutarso │ the role of islamic religiosity on the relationship of risk, trust, and intention to use digital payments during the covid-19 pandemic international journal of islamic economics and finance (ijief), 5(2), 177-200 │ 184 measurement. the second was a preliminary survey. after the theoretical overview was obtained, the researcher conducted initial interviews with users of digital payments as potential respondents. therefore, the theoretical basis obtained in the previous stage could be conformed to the research setting. then, a research instrument was made as an initial questionnaire and discussed with experts or colleagues. the third was the test phase of the questionnaire. in the final stage of instrumentation, the researcher tested thirty respondents and then revised the items so that the research instrument could meet the qualifications of statistically sufficient validity and reliability. the revised instrument results were then used as a final questionnaire and distributed to respondents electronically. this stage was carried out to obtain measurements that met the quality of construct validity, face validity, content validity, and reliability (trochim & donnelly, 2008). the operationalization of constructs (trochim & donnelly, 2008) or operational definitions (zikmund, babin, carr & griffin, 2010) used in this study were based on the previous study. the measurement constructs in this study used statement items adopted from previous research: security risk (lee, 2009; lim, kim, hur & park, 2019; h. s. ryu, 2018), operational risk (lee, 2009; ryu, 2018), trust, intention to use (cao, yu, liu, gong & adel, 2018), use (im, hong & kang, 2011), and religiosity (agag & el-masry, 2016; rahman, asrarhaghighi & rahman, 2015). the overall construct was measured by a likert scale that ranged from "strongly disagree" with a score of one to "strongly agree" with seven. the higher the score, the higher the construct's value level. a 6-point interval scale was used (1,2-3,4-5,6-7,8-9 and 10) for usage. in total, the measurement items for each construct are shown in table 2. iv. results and analysis 4.1. results 4.1.1. measurement model (outer model) before testing the research hypothesis, the researcher examined the measurement model using validity and reliability tests to see its quality. convergent validity and discriminant validity were used to improve the validity. the objective of the convergent validity test is to ensure that items in constructs are integrated. the integration were showed by criteria of the loading factor > 0.6 (p < 0.05) and the average variances extracted (ave) value > 0.5 (hair, anderson, tatham & black, 2018). the results showed that the minimum loading factor was 0.64 (table 3), and the smallest ave value was 0.52 (table 3). it indicates that the evidence satisfied the parameters or that the statement items in each construct converge. sutarso │ the role of islamic religiosity on the relationship of risk, trust, and intention to use digital payments during the covid-19 pandemic international journal of islamic economics and finance (ijief), 5(2), 177-200 │ 185 table 2. construct and items constructs/items mean sd loading security risk there is a potential risk in payments using the dp application. 3.4 1.5 0.85*** there is a potential risk in processing payment transactions with the dp application. 3.4 1.6 0.77*** proof of authenticity of dp application users is not safe. 2.9 1.3 0.77*** proof of authenticity of transactions in the dp application is not secure. 2.9 1.3 0.82*** i am worried about misusing my financial information when using the dp application. 3.6 1.7 0.82*** i am worried that someone can access my financial information using the dp application. 4.0 1.8 0.82*** operational risk the dp application provider does not want to solve the problem if i experience a financial loss. 3.4 1.5 0.82*** the response of dp application providers is prolonged when financial losses occur. 3.4 1.2 0.84*** if a financial loss occurs, i am worried about how the dp application provider will resolve it. 3.8 1.4 0.85*** trust dp application is competent in providing services. 5.3 1.1 0.82*** dp application pays attention to user interests. 5.3 1.3 0.88*** dp application fulfills what it promises. 5.4 1.2 0.89*** dp application can be trusted. 5.6 1.1 0.84*** dp application does not deliver as promised. ® 4.7 1.5 0.82*** intention to use i will continue to use the dp app for the next month. 5.3 1.5 0.94*** i will continue to use the dp app for the next year. 5.2 1.5 0.97*** i will continue to use the dp app in the future. 5.2 1.4 0.92*** religiosity i pay zakat on time. 6.1 1.1 0.65*** i enjoy being with other people in religious relationships. 5.8 1.2 0.69*** i often attend recitations at the mosque. 4.9 1.4 0.64*** i often read religious things. 5.3 1.1 0.80*** i often see religious programs on tv. 5.4 1.2 0.80*** i need to take time to pray. 6.3 1.0 0.67*** i make time to improve my religious knowledge. 5.9 1.1 0.78*** note: dp = digital payment; ***=p<0.001 nevertheless, the amount to which items in one construct differed from others could be determined using a discriminant validity test. the value of the square root ave > correlation with other components in the model was used sutarso │ the role of islamic religiosity on the relationship of risk, trust, and intention to use digital payments during the covid-19 pandemic international journal of islamic economics and finance (ijief), 5(2), 177-200 │ 186 as a statistical test to demonstrate its validity (hair et al., 2018). the square root value of ave (diagonal score) and the correlation of each construct with other constructs are shown in table 3, with the diagonal score being higher than the correlation score with other constructs. as a result, it implies that the items satisfied the criteria or demonstrated disparities between the model's components. table 3. validity and reliability construct code sr or tr ir rg 1. security risk sr 0.806 0.223 -0.314 -0.152 -0.267 2. operational risk or 0.223 0.835 -0.156 -0.137 -0.094 3. trust tr -0.314 -0.156 0.858 0.599 0.365 4. intention to reuse ir -0.152 -0.137 0.599 0.941 0.372 5. religiosity rg -0.267 -0.094 0.365 0.372 0.721 composite reliability cr 0.918 0.874 0.918 0.958 0.883 cronbach alpha α 0.892 0.783 0.880 0.935 0.844 average variances extracted ave 0.650 0.698 0.737 0.885 0.520 fc vif’s vif 1.236 1.092 1.809 1.703 1.391 items 6 3 5 3 7 the degree to which an instrument could deliver consistent data was measured by its reliability. the composite reliability and cronbach alpha values were used in statistical testing, with the cut-off values for these two indicators being 0.7 and 0.6, respectively (hair et al., 2010). table 3 demonstrates that the instrument or statement item met the criteria for composite reliability and cronbach's alpha, indicating that it could produce consistent results. after completing statistical validity and reliability tests, it could be determined that the instrument would likely yield reliable data, allowing hypothesis testing to proceed. 4.1.2. structural model (inner model) structural models test hypotheses in one framework simultaneously. in the structural test, control variables were included to reduce the impact of these variables in the structural model. table 4 shows the effect of these variables in the model: gender (-0.12*), occupation (-0.06ns), age (0.09ns), and type of digital payment (0.12*). variance inflation factor (vif) has also been estimated to avoid collinearity between predictor variables, and the results are as in table 3, revealing a value that met the cut-off-value (vif <3.3) (kock, 2015). figure 2 and table 3 depict this study's hypothesis testing estimation results. sutarso │ the role of islamic religiosity on the relationship of risk, trust, and intention to use digital payments during the covid-19 pandemic international journal of islamic economics and finance (ijief), 5(2), 177-200 │ 187 multiple hypotheses were combined into a single framework for testing in structural models. control factors were included in the structural test to restrict the impact of these variables on the structural model. gender (-0.12*), occupation (-0.06ns), occupation (0.09ns), and kind of digital payment (0.12*) affected the model, as shown in table 4. then, the variance inflation factor (vif) was calculated to avoid collinearity across predictor variables, and the results are presented in table 3, showing a value that met the cut-off value (vif 3.3) (kock, 2015). in this case, estimation results of hypothesis testing are shown in figure 2 and table 4. figure 2. hypothesis test results in this study, the hypothesis testing results in the structural model revealed interesting findings, with most hypotheses being confirmed. it is confirmed that security risk had a negative effect on trust (β = -0.37, p <0.05) but did not affect the intention to use (β = 0.04, p>0.05), meaning that h1a was supported, while h1b was not supported. then, operational risk also had a negative effect on trust (β = -0.13, p <0.05), but it was not confirmed that it had a negative effect on re-use intention (β = -0.03, p > 0.05 or not significant). thus, h2a was supported, but h2b was not supported. the positive effect of trust on intention to use (β = 0.62, p <0.05) and use (β = -0.18, p <0.05) was also confirmed so that h3a and h3b were supported. meanwhile, the intention to use was also confirmed to have a positive effect on use (β = 0.19, p <0.05); in other words, h4 was supported. moreover, hypothesis testing was also carried out on the moderating role of religiosity. tests on the moderating role of religiosity did not confirm the relationship between security risk and trust (β = 0.07, p>0.05) but confirmed the relationship between operational risk and trust (β = -0.13, p<0.05). this result security risk customer trust use (use behavior) continuance intention islamic religiosity -0.37* β=0.20 0.04n -0.13* β=0.20 0.18* β=0.20 0.19* β=0.20 operational risk -0.03 ns β=0.20 0.62* β=0.20 0.07ns β=0.20 -0.14* β=0.20 r2=0.3 9 r2=0.1 3 sutarso │ the role of islamic religiosity on the relationship of risk, trust, and intention to use digital payments during the covid-19 pandemic international journal of islamic economics and finance (ijief), 5(2), 177-200 │ 188 indicates that h5a was not supported, whereas h5b was supported. illustratively, this moderating role is shown in figure 3. the figure depicts that the operational risk’s effect on trust was higher for those with lower religiosity than for higher ones. table 4. summary of hypothesis test results h hypothesis and path vif beta, p-value conclusion h1a security risk → trust 1.026 -0.37** supported h1b security risk → intention to use 1.193 -0.04ns not supported h2a operational risk → trust 1.050 -0.13* supported h2b operational risk → intention to use 1.038 -0.03ns not supported h3a trust → intention to use 1.513 0.62** supported h3b trust → use 1.229 0.17** supported h4 intention to use → usage 1.482 0.17* supported h5a religiosity*security risk → trust 1.123 0.07ns not supported h5b religiosity*operational risk → intention to use 1.116 -0.14** supported control variable gender 1.104 -0.12* n.a occupation 1.128 -0.06ns n.a age 1.044 0.09ns n.a digital payments 1.053 0.12** n.a note: h= hypothesis; ns= not significant; n.a= not available; vif= variance inflation factors; * = p<.05; **=p<0.01. figure 3. the effect of operational risk on trust: the moderating role of religiosity sutarso │ the role of islamic religiosity on the relationship of risk, trust, and intention to use digital payments during the covid-19 pandemic international journal of islamic economics and finance (ijief), 5(2), 177-200 │ 189 4.2. analysis 4.2.1. the impact of digital payment risks the fundamental question of this research is how the role of security and operational risk in digital payment marketing is related to trust and repurchase intention. this study's main findings revealed that, first, security risk had a negative effect on trust (h1a). this finding indicates that the higher the level of security risk, the lower the trust of digital payment users. in this case, the customer felt this risk in the form of risk during payment, transaction processing, authentication of users and transactions, misuse of information, and risk of abuse of access. customers were most concerned about the risk of unauthorized access to customer financial information and irresponsible misuse of customer financial information. the results of this study confirm previous studies, stating that there was a strong relationship between quality, including security, and trust in online banking (aboobucker & bao, 2018; stewart & jürjens, 2018) and m-wallet (hidayat-ur-rehman, alzahrani, reham & akhter, 2022). this study also verifies the study of abdul-hamid et al. (2019) on mobile money, where providers needed to protect customers' money and personal information to maintain trust. second, the different findings of this study uncovered that the security risk was not confirmed to affect the intention to use (h1b), indicating that the higher the security risk did not increase or decrease the customer's intention. the higher risk in payments, transaction processing, and the possibility of misuse of information and access would potentially harm customers, but this potential loss did not affect the desire to re-use digital payment services. this finding is inconsistent with findings on technology services in germany (stewart & jürjens, 2018) and in other contexts, for example, online services (yang et al., 2015), mobile shopping (marriott & williams, 2018), and online banking (kaur & arora, 2020), and m-wallet (hidayat-ur-rehman et al., 2022), although it is consistent with previous studies (rouibah, lowry & hwang, 2016), especially in those with high self-confidence (marafon et al., 2018). in addition, these findings do not confirm the principle that uncertainty to the detriment of customers reduces customer confidence. this confirmation is possible because the security risks faced by digital payment services were still in customers' hands, where the service did not involve large funds, and the use of this service was more of a habitual purchase, so customer involvement was relatively low. third, operational risk had a negative effect on trust (h2a), denoting that the higher the operational risk, the lower the customer confidence. in this regard, operational risks are the uncertainty of how to resolve the problem if a loss occurs and the provider's low willingness and slowness to resolve if a problem sutarso │ the role of islamic religiosity on the relationship of risk, trust, and intention to use digital payments during the covid-19 pandemic international journal of islamic economics and finance (ijief), 5(2), 177-200 │ 190 occurs. this finding verifies the findings of previous studies (aboobucker & bao, 2018; ryu, 2018). it is possible because the risk will cause losses. however, unconfirmed operational risk reducing customer intentions to reuse services (h2b) indicates that this high or low risk did not decrease or increase customer intentions to continue using digital payment services. this result is inconsistent with the study ( ryu, 2017), stating that operational risks include barriers to the intention to use fintech (mobile payment, mobile remittance, peer-to-peer lending, and crowdfunding). also, this result contradicts studies asserting that operational risk (performance risk) is a barrier to the intention to re-use online banking services (kaur & arora, 2020). however, it is consistent with other studies in the context of arab countries, where risk had no impact on intentions (rouibah et al., 2016). these findings are possible because various operational uncertainties were still within customers' tolerance of digital payments and did not cause significant losses. in this case, indonesia's top-up funds for digital payments for standard accounts (unverified member/non-upgraded accounts) are two million rupiahs. 4.2.2. the role of trust and intention to use regarding the role of trust, this study confirms that trust positively affected the intention to re-use (h3a), where the higher the trust, the higher the intention to use digital payments. this result means that, for customers, the extent to which the application is competent, pays attention to user interests, fulfills what is promised, and can be trusted, will be the primary determinant of the intention to re-use the service. it is because these four things will guarantee customers' benefits. this finding is similar to previous results (chiu et al., 2017; liébana-cabanillas , muñoz-leiva, molinillo, & higueras-castillo , 2022; merhi et al., 2019; singh & sinha, 2020). the intention to re-use is also confirmed to increase the use of digital payments (h3b), where the higher the intention to re-use, the higher the usage of digital payments. this finding is also consistent with findings in previous studies (han et al., 2016; qu, wei & zang, 2022; venugopal et al., 2018). 4.3.3. the moderating role of religiosity in this study, the moderating role of religiosity was not confirmed to impact the relationship between security risk and trust (h5a). this finding showed no difference in the effect of security risk on trust in customers with high and low religiosity. however, religiosity moderated the relationship between operational risk and trust (h5b). the level of religiosity (high and low) distinguished the effect of operational risk on the intention to re-use digital payment. also, it has been shown that the impact of operational risk on sutarso │ the role of islamic religiosity on the relationship of risk, trust, and intention to use digital payments during the covid-19 pandemic international journal of islamic economics and finance (ijief), 5(2), 177-200 │ 191 intention to use was lower for customers with higher religiosity. these findings indicate that customers with low religiosity were more sensitive to operational risk. 4.3. implication 4.3.1. digital payment risk management risk management is essential to maintain and increase trust and intention to re-use digital payment customers. things that can be done for security risk are reducing the potential risk of payment, being concerned about financial information that unauthorized persons can access and reducing customer concerns over misuse of financial information for irresponsible interests. these three things need management attention because they are the most important for customers, but the risk is still relatively high. another important thing is that management needs to reduce risk in the transaction process, which can be done by providing guarantees and confirmations through various communications to customers. even if customers feel the risk is not high enough for user authentication and transaction authenticity, these two things are crucial for management attention. operational risk reduction can be made by paying attention to aspects of solving operational problems, showing a desire and commitment to solving problems in the event of a financial loss and providing a quick response when there is a customer loss. in addition, the most important thing customers consider is how the provider solves the problem regarding operational risk, while this risk is the highest perceived risk. management also needs to communicate on clearer, more detailed, and intensive problem-solving methods so that this aspect reduces the perception of operational risk. further, an essential factor that needs to be communicated is management's desire and commitment to solving problems if customers experience difficulties and problems. quick response is also a necessary concern for customers, where management needs to maintain a fast response, especially when customers experience problems. 4.3.2. trust management trust is also a concern for digital payment management because it is directly related to the intention to re-use, which is then at the level of digital payment usage. efforts to maintain and increase trust are recommended by fulfilling the promises and commitments that have been delivered, paying attention to users' interests and increasing the competence of the service. this effort must be pursued with consistent implementation of these aspects and intensive customer communication. sutarso │ the role of islamic religiosity on the relationship of risk, trust, and intention to use digital payments during the covid-19 pandemic international journal of islamic economics and finance (ijief), 5(2), 177-200 │ 192 4.3.3. managing customers based on religiosity the level of customer religiosity, which is muslim, is essential in managing the intention and use of digital payments. regarding security risks, management does not need to differentiate the treatment of customers based on religiosity. customers with high or low islamic religiosity make no difference in the impact of this risk. however, management needs to provide different treatment regarding operational risk, where those with low islamic religiosity are more sensitive to operational risk. thus, management needs to pay more attention to managing operational risk. identification of customers with this level of islamic religiosity can be made by knowing through indicators of several customer activities. for example, they often see religious programs on tv, read spiritual matters, provide time to increase religious knowledge, have fun with other people in religious activities, participate in recitations at the mosque, pray, and pay zakat. more often, those who do these show a lower effect of operational risk in influencing trust. 4.3.4. consumer protection implications consumer protection is crucial so customers feel safe and comfortable and increase financial inclusion (bongomin & ntayi, 2020). from a consumer protection perspective, this study recommends that security and operational risks are essential to be considered and protected by providers and policymakers in indonesia, especially for users of digital payment services. important aspects that need to be done related to security risks are the payment aspect, concerns about the misuse of financial information, authenticating transactions, and user authentication. operational risk is also crucial to pay attention to, especially to solve, respond to, and solve customer problems. the principle of consumer protection must be implemented, especially in reliability, confidentiality, and security of consumer data/information and handling consumer complaints quickly (otoritas jasa keuangan [ojk] 2013). v. conclusion and recommendations 5.1. conclusion the main objective of this study is to identify the effect of security and operational risks on trust and re-use intention, which in turn on the use of digital payments. the main findings of this study confirm the negative influence of security and operational risks on trust in digital payments. however, this risk was not guaranteed to have a negative impact on the intention to re-use. in this case, trust is essential in increasing the intention to re-use and, simultaneously, determining the use of digital payments. in sutarso │ the role of islamic religiosity on the relationship of risk, trust, and intention to use digital payments during the covid-19 pandemic international journal of islamic economics and finance (ijief), 5(2), 177-200 │ 193 addition, intention to use positively impacted the re-use of digital payments confirming previous findings in the literature. the difference in religiosity level verifies operational risk's distinguishing effects on trust. customers with a low level of religiosity were more sensitive to the impact of this risk. for this reason, the management of digital payment providers needs to pay attention to efforts to reduce risk, increase trust, and consider aspects of religiosity in managing digital payment customers. this study is subject to several limitations. first: the sampling technique using purposive sampling reduced the generalizability of the study results. second, the risk in this study ignored the types of social, financial, and other risks. third, the types of services in digital payments and collection during the covid-19 period limited the risk selection in this study. third, situational factors in this study were limited to using religiosity factors only. fourth, the role of gender and the impact of digital payments companies were ignored in this study, so further research needs to test the role of this aspect. 5.2. recommendations for risk, practitioners need to pay attention to and reduce the negative effects of the most security concern by a customer, such as payment, access, misuse, transaction process, and authenticity. operational risk needs to be handled, including attention and commitment to solving problems and responding. customer trust must also be maintained by fulfilling customer expectations, commitment, interest, and service competence. in addition, religiosity is vital to be considered, specifically for those with low islamic religiosity having more sensitive to the risk. hence, practitioners need to promote operational aspects, and how to reduce them is essential for this type of customer. for regulations, the government must ensure that customers are protected from mobile payment security and operational risks. in addition, some issues need to be regulated by the government, such as provider obligation to protect the customer, problem-solving protocol to mitigate risk, and providers' commitment to fulfilling customer rights. there are four recommendations for further research. first, to increase the generality of findings, the study recommends using random sampling and a sample from customers above 30 years old. second, this study suggests examining the role of other risks, such as economic, functional, privacy, time, psychological, social, and financial risks (abdul-hamid et al., 2019). third, further studies can use other factors, such as self-confidence and level of risk acceptance (marafon et al., 2018). finally, further research needs to test the role of gender and digital payments difference. sutarso │ the role of islamic religiosity on the relationship of risk, trust, and intention to use digital payments during the covid-19 pandemic international journal of islamic economics and finance (ijief), 5(2), 177-200 │ 194 references abdul-hamid, i. k., shaikh, a. a., boateng, h., & hinson, r. e. 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(eighth edi). cengage learning. international journal of islamic economics and finance (ijief) vol. x(x), january 2023, page 133-150 the role of zakat in alleviating multidimensional poverty siectio dicko pratama1 corresponding email: siectio@hotmail.com article history received: december 1st, 2022 revised: december 22nd, 2022 january 23th, 2023 january 31st, 2023 accepted: january 31st, 2023 abstract the potential of zakat is too huge to be ignored by the world. recently, the notion to integrate zakat on the sustainable development goals has grown rapidly. nevertheless, the impact of zakat in indonesia has not been pronounced and could doubt the adoption of zakat as a global tool. this paper aims to investigate the impact of zakat on monetary and multidimensional poverty by using the national zakat index developed by baznas. two components of the index that cover the environmental and impact of zakat are employed to sharpen the analysis. the main method used is multiple linear regression with control variables to identify the impact of zakat on multidimensional and monetary poverty. the analysis is also conducted to evaluate the performance and development of zakat in indonesia. the result informed that the environment for zakat to grow in indonesia still needs to be improved, particularly in java. meanwhile, the micro nzi that represents the performance of institution and impact of zakat on mustahik is the only variable that is significant to multidimensional poverty. thus, it is recommended for the government to adopt a mandatory system of zakat in the country as it can hasten the alleviation of poverty and achieving sdgs by 2030. keywords: monetary poverty, multidimensional poverty, national zakat index. jel classification: i31, d63, h31 type of paper: research paper @ ijief 2023 published by universitas muhammadiyah yogyakarta, indonesia doi: https://doi.org/10.18196/ijief.v6i1.17006 web: https://journal.umy.ac.id/index.php/ijief/article/view/17006 citation: pratama, s. d. (2023) zakat suitability assessment to alleviate multidimensional poverty and achieving sdgs. international journal of islamic economics and finance (ijief), 6(1), 133-150. doi: https://doi.org/10.18196/ijief.v6i1.17006 1 master candidate of wageningen university and research, netherland https://doi.org/10.18196/ijief.v6i1. https://doi.org/10.18196/ijief.v6i1. https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v6i1.17006&domain=pdf pratama │ the role of zakat in alleviating multidimensional poverty international journal of islamic economics and finance (ijief), 4(1), 133-150│ 126 i. introduction 1.1. background the concern about zakat as an effective tool to alleviate poverty has grown globally. the united nations of development programme (undp) has tried to integrate zakat into sustainable development goals (sdgs) (noor & pickup, 2017) as a way to achieve the goals. the yearly global zakat potential is relatively high, reaching $550 to $600 billion (widadio, 2021). another study even reveals that the potency of zakat is sufficient to fulfil the shortfall needed to alleviate poverty (world bank & islamic development bank group, 2016). even during the covid-19 crisis, the zakat donation increased by 12.5 percent (unhcr, 2021). this great potential is hard to be ignored in an effort to alleviate poverty and achieved sdg goals. zakat is an islamic financial tool that is designed to empower the poor. the idea is to allocate the wealth from the rich to the poor as instructed in alqur'an surah al-hashr verse 7 and strengthened by many verses in al-qur'an. it is mandatory for all muslims who have the required wealth to pay zakat. the distribution of zakat is also systematic and limited to only eight recipients, prioritising the poor and the needy (sabiq, 2013). therefore, if zakat had been well implemented, the poor would be reduced drastically as occurred in the two periods in islamic state (the period of hazrat umar bin khattab (r.a) in 634-644 and during the era of umar bin abdul aziz in 717-720) (arif, 2017). nevertheless, the impact of zakat is not adequately pronounced even in indonesia, the most muslim country in the world. a study on the effect of zakat in aceh showed that even though 60 percent of zakat's recipients are the poor and the needy, it did not reduce poverty significantly. (pratama & rahadiana, 2020). other recent studies about zakat reinforced the notion since they revealed the insignificance of zakat in reducing poverty (r. r. aziz, 2018; nurjanah et al., 2019; tawakkal & sapha, 2018). poor distribution and mismanagement of zakat may not the main reasons for this low impact since several studies revealed that baznas had performed well on management of zakat (lubis et al., 2018; nurhayati et al., 2018; syamsul bahri et al., 2017). the definition of poverty, which employs an economic lens, could contribute to the reason for zakat's lacklustre effect. the poor may utilise the zakat fund to meet their non-economic needs. for example, because the recipients are susceptible to health issues, they use the money to purchase vitamins or medications. it can assist them in keeping their health so they can work every day. in this sense, their wages could be increased due to their ability to work more than before. hence, the impact of zakat was not pronounced if poverty was measured from an economic perspective. pratama │ the role of zakat in alleviating multidimensional poverty international journal of islamic economics and finance (ijief), 4(1), 133-150│ 127 1.2. objective most studies about zakat and poverty nexus used the income approach to define the poor even though poverty is multidimensional. from the economic lens, the concept embodied in zakat theoretically could eliminate poverty if the distribution and management are perfect. nevertheless, if poverty is viewed as a multidimensional issue, the effectiveness of zakat mechanism could be doubted. therefore, this research focused on the efficacy of zakat on multidimensional poverty. we aim to address two primary inquiries: how zakat performs and develops across indonesia and what aspects of zakat development affect both monetary and multidimensional poverty. while the first question gives insight into how zakat could relate to poverty, the second question would reveal whether zakat is valuable regardless of how poverty is perceived. as most research on zakat focuses on alleviating monetary poverty, this research gives a new insight into the impact of zakat. it could contribute to the limited knowledge of whether the impact of zakat is multidimensional. in a larger stage, the result of this research could clarify the suitability of zakat as a global tool to eradicate poverty and achieve sdgs, considering that multidimensional poverty is addressed in the first goal of sdgs. that would be the novelty that could be brought into this study. ii. literature review 2.1. background theory theoretically, zakat could be regarded as the best tools to alleviate poverty. the mechanism which obliged the rich who has reached the nisab (the minimum amount of muslim's wealth that is obliged to pay zakat) to allocate around 2.5 percent of their wealth to the poor is a good way to alleviate the poor and improve the equality. interestingly, the form of wealth must not come only from savings or gold, but also from business, shares, livestock and crops (sabiq, 2013). as the current poverty emphasises more on the economic aspect, the increase on the income should be able to lift the poor above the poverty line. therefore, the poverty in indonesia should be approximately 8.47 percent in march 2019 as simulated by pratama & yuni (2020) and should be none if the amount of zakat reached the estimation conducted by firdaus et al. (2012). it is difficult to deny that poverty is multidimensional as even the poor themselves admitted that their deprivation is beyond the economic aspect (santos, 2019). the participatory survey conducted by undg in 88 countries to listen to the voices of the poor revealed that education and health are the pratama │ the role of zakat in alleviating multidimensional poverty international journal of islamic economics and finance (ijief), 4(1), 133-150│ 128 most constraint that they faced and want the government to make it as a priority (undg, 2013). the multidimensional poverty is introduced to move the perspective of poverty beyond the income approach. poverty should address broader dimensions, so the poor is not only about the lack of basic need, but also lack of health, education, basic services, safety, and inadequate living standards. this growing definition led to the new approach to measure the poverty to capture the comprehensive depiction of the impoverished. as the poverty definition and measurement evolved, could zakat still be an efficient tool to reduce it? zakat was proven as an effective financing tool to address the poverty during the islamic era especially the reign of prophet muhammad, the caliph of abu bakar and the second caliph of umar ibn khattab. zakat was implemented very well so it is capable to empower the community and enable the poor to participate the economic activities. in umar ibn abdul aziz era, zakat was used for the infrastructure because there is no poor anymore and all people have the basic facilities (arif, 2017; y. aziz et al., 2020). this fact underlines the success of zakat in eliminating the poverty in multidimensional form because the fact that the citizens have the basic facilities prove that the poverty issue is not only economic. the actual power of zakat is the mechanism which is effective in distributing the wealth. zakat ensure that the richest will have to give some of their money to the poorest. so, it emphasises the aspect of sustainability on the available resources. this mechanism is in line with the concept of sustainable development which has the mission to progress without disturbing the capability of the future generation to fulfil their own needs. the sustainable development also pays much attention to the sustainability of the resources and needs the very effective and efficient procedure to distribute wealth (olanipekun et al., 2015). therefore, zakat is one of the effective tools to achieve sdgs and eliminate the multidimensional poverty. the sustainable income that is affected by the great wealth circulation provided by zakat could make the people invulnerable to the poverty in all its form. 2.2. previous studies zakat has been found to be effective in reducing the multidimensional poverty. y. aziz et al. (2020) investigated the role of zakat in alleviating the multidimensional poverty and achieving other sdgs goals in pakistan. as the zakat is used to fund education, health and poverty, the impact of zakat is examined on the outcome. the results show that zakat not only reduce the multidimensional poverty, but also contribute to the three sdgs. another study from kasri (2014) also revealed that zakat can improve the multidimensional wellbeing of the people which cover the health, education, pratama │ the role of zakat in alleviating multidimensional poverty international journal of islamic economics and finance (ijief), 4(1), 133-150│ 129 spiritual, economic and social. both studies using the regression model. therefore, the findings that the multidimensional poverty is successfully reduced by zakat is sufficiently strong. in relation to the sdgs, zakat is also proven to be an effective tool to stimulate the human development and could play a vital role to achieve sdgs. the research conducted in malaysia to examine the effect of zakat fund into the human development programs revealed that zakat has positive and significant impact on them both in short run and long run. zakat is eligible to be the fiscal tool to stimulate the human development and economic growth (suprayitno eko et al., 2017). other studies in some countries that adopted islamic finance to assess the role of zakat on sdgs also provided the similar results especially in pakistan. the combine work of governmental and non-governmental organisations is the reason behind the promising results (yusuf & raimi, 2021). despite the impact of zakat in addressing the sdgs, zakat could potentially fails to eradicate multidimensional poverty. hasan (2019) studies the impact of zakat and found that there is only small but significant impact of last year zakah (lyz) on the poverty. the result indicated that the coverage of zakah may be only on the income-poor, not multidimensional poor. further, a study conducted by saniff et al. (2019) found that zakat may not be feasible to incorporate on the sdgs framework because the incorporation should include the redefinition of all concepts in the analysis. the study then suggested that zakat and sdgs should remain independent. however, the downplayed of islamic feature on the policy conducted in nigeria resulted in a failure to achieve the millennium development goals (adebayo 2020). the impact of zakat in some areas in nigeria was proven to be effective. therefore, the study concluded that zakat can only be the veritable tool only if properly harnessed. therefore, the weakness and failure of zakat may lie on the poor implementation and management of the zakat. iii. methodology 3.1. data the most challenging aspect of research on zakat is the availability of data in the regency or province level, though available and accessible at the national level. therefore, this research combines the data from various reliable resources from the same year and all the provinces in indonesia. the key publication to obtain data about zakat is the national zakat index (nzi) (2018) as well as the national zakat statistics by baznas (2019). as nzi is an indicator to assess the performance and development of zakat, the higher the index reflects the better the performance and development of zakat (baznas pratama │ the role of zakat in alleviating multidimensional poverty international journal of islamic economics and finance (ijief), 4(1), 133-150│ 130 center of strategic studies, 2016). thus, nzi is used as a measure to show the impact of zakat on poverty. nevertheless, we employed the component of nzi to broaden the analysis. nzi comprises two main dimensions (micro and macro) that provide the information to evaluate zakat performance and development in terms of institution, government support, community participation, and impact on the recipients (baznas center of strategic studies, 2016). while the macro dimension captures the contribution of the government and society on zakat development, the micro dimension pays more attention to the performance of zakat institutions and the impact on the mustahik. using these two dimensions will enable the analysis of not only the impact of zakat but also the environment that could affect poverty eradication. the data about poverty used are multidimensional poverty and official poverty. aidha et al., (2020) could be the first group of researchers that construct the indonesia multidimensional poverty index (mpi). they initiated the calculation of the mpi from 2015 to 2018 until the regency level. thus, we use the data to describe multidimensional poverty. for the poverty-based income, we certainly used the official data from statistics indonesia (2018). considering the condition of the data availability, we decided to use the crosssectional data covering all provinces in indonesia in 2018. dimensions of nzi are employed to represent the zakat condition in indonesia. meanwhile, we use mpi constructed by aidha et al. (2020) to cover the multidimensional aspect of poverty and official poverty produced by bps-statistics indonesia to describe monetary poverty. in addition, the data, which is human development index (hdi), unemployment rate, and economic growth, is also used as the control variable in constructing the model. all those data are obtained from bps-statistics of indonesia (2020). 3.2. model development previous research suggested that zakat has an impact on reducing poverty both on poverty-based income and multidimensional poverty. the study in pakistan revealed that zakat is effective enough in eradicating multidimensional poverty (y. aziz et al., 2020). so does the poverty-based income; many studies found that zakat has a significant impact on reducing poverty (ayuniyyah et al., 2018; herianingrum et al., 2020; rini et al., 2020). therefore, we hypothesised that zakat has a negative and significant impact on both income and multidimensional poverty. to test the hypothesis, we develop two models as follows: ln 𝑌1𝑖 = 𝛼 + ln 𝛽1𝑋1𝑖 + ln 𝛽2𝑋2𝑖 + 𝛾1𝑍1𝑖 + 𝛾2𝑍2𝑖 + 𝛾3𝑍3𝑖 + 𝜀𝑖 … (1) ln 𝑌2𝑖 = 𝛼 + ln 𝛽1𝑋1𝑖 + ln 𝛽2𝑋2𝑖 + 𝛾1𝑍1𝑖 + 𝛾2𝑍2𝑖 + 𝛾3𝑍3𝑖 + 𝜀𝑖 … (2) pratama │ the role of zakat in alleviating multidimensional poverty international journal of islamic economics and finance (ijief), 4(1), 133-150│ 131 notes 𝑌1𝑖 : monetary poverty in province 𝑖 𝛼 : constant 𝑌2𝑖 : multidimensional poverty in province 𝑖 𝜀𝑖 : error term 𝑋1𝑖 : macro component of nzi in province 𝑖 𝛽1 : regression coefficient of 𝑋1𝑖 𝑋2𝑖 : micro component of nzi in province 𝑖 𝛽2 : regression coefficient of 𝑋2𝑖 𝑍1𝑖 : hdi in province 𝑖 𝛾1 : regression coefficient of 𝑍1𝑖 𝑍2𝑖 : unemployment rate in province 𝑖 𝛾2 : regression coefficient of 𝑍2𝑖 𝑍3𝑖 : economic growth in province 𝑖 𝛾3 : regression coefficient of 𝑍3𝑖 model (1) and (2) are constructed by referring to how rini et al. (2020) developed the model to investigate the impact on zakat. the study built two models to examine the impact of the collection of zakat on the zakat distribution and the impact of the distribution on poverty reduction. as for the model specification, we use the study from pratama & rahadiana (2020) as a reference since they used natural logarithm transformation in their model. the natural logarithm transformation is necessary to preserve the linear model when there is a non-linear relationship (benoit, 2011). that kind of relationship is possible since the data is from different sources. furthermore, the use of control variables is useful to enhance the internal validity of the model. they function to limit the influence of confounding and other extraneous variables so the causal relationship between the dependent and independent variables of interest can be established. then, the result for the independent variable can be more accurate. 3.3. method the main method of this paper is multiple linear regression with ordinary least squares (ols) as an estimation method. the method enables us to find out the influence of the independent variable on the dependent variable more accurately. since the linear relationship was maintained due to the use of logarithm natural, ols can provide best linear unbiased estimator (blue) if all the necessary assumption is fulfilled (dougherty, 2016). hence, this method could give the best result to represent the impact of zakat on poverty. accordingly, the following assumptions need to be fulfilled. first, the error term in the model must be normally distributed. it also needs to be constant across all values of the independent variable (homoscedasticity). then, the observation value is independence, and the last is no collinearity across independent variables (dougherty, 2016). the normality could be figured out by conducting the shapiro-wilk test, while the homoscedasticity could be identified by using the breusch pagan test for heteroscedasticity. if the null hypothesis from both tests cannot be rejected, all assumptions are fulfilled. in pratama │ the role of zakat in alleviating multidimensional poverty international journal of islamic economics and finance (ijief), 4(1), 133-150│ 132 addition, non-multicollinearity is examined by calculating the variance inflation factor (vif), where no collinearity exists if the value is below five. another method used in this study is a digital map with natural breaks classification. this method supports the descriptive analysis to respond to the first research questions. provinces in indonesia are divided into three levels (low, medium, and high) by their level of poverty and zakat performance. the classification method uses jenks' natural breaks, which seek to minimise each class's average deviation from the class mean while maximising each class's deviation from the means of the other classes (jiang, 2012). in other words, the method seeks to reduce the variance within classes and maximise the variance between classes. iv. results and analysis 4.1. results according to the calculation of nzi conducted by baznas, the average index of all provinces in indonesia shows that the performance and development of zakat in indonesia are quite good (baznas center of strategic studies, 2016). the score is 0.55, which is still in the middle and needs more effort to reach the stage where the zakat impact is excellent. however, the micro dimension of nzi is better as the score is 0.67, categorised as good. so, the factor that may inhibit the impact of zakat lies in the macro aspect, which covers the institutional support from the regulation, state budget, and the database in the zakat institutions. considering indonesia is the biggest muslim country in the world, the government should pay more attention to this by improving the regulation that supports the implementation of zakat and increasing the budget to support the operation of zakat institutions. figure 1. distribution of the macro component of nzi in 2018 source: baznas (2019) pratama │ the role of zakat in alleviating multidimensional poverty international journal of islamic economics and finance (ijief), 4(1), 133-150│ 133 in terms of distribution, the provinces with a lot of muslims tend to have a less supportive environment for zakat. java island, which is the largest muslim population in indonesia, was dominated by the colour red. it indicates that the regulation and the state budget were less supportive. in addition, the macro nzi also noted that the database at the zakat institution was not good. it can lead to the ineffective distribution of zakat. it is not very reassuring since provinces on the island have great potential for zakat. in contrast, only four provinces have a supportive environment for zakat. although they are not a lot, they could be a model to optimise the zakat potential. figure 2. distribution of the micro component of nzi in 2018 source: baznas (2019) turning to the micro component of nzi, the pattern displayed a contrary distribution to the previous figure. there were only a few provinces with low indexes, while the high index dominated. the figure brings the notion that the impact of zakat on mustahik and the performance of zakat institutions have been good across indonesia. even in the provinces with a low muslim population, the value of micro nzi was categorised as high. this is a positive proposition on the impact of zakat on poverty because zakat has been proven to have a considerable impact on most provinces in indonesia. pratama │ the role of zakat in alleviating multidimensional poverty international journal of islamic economics and finance (ijief), 4(1), 133-150│ 134 figure 3. distribution of nzi in 2018 source: baznas (2019) the distribution of nzi, as demonstrated in figure 3, did not seem to be dominated in certain areas. both western and eastern indonesia have provinces with high values of nzi. accordingly, the development and performance of zakat are still varied across indonesia. in this condition, the focus to develop the zakat performance should be on the provinces with a high potency of zakat. hence, provinces in java are needed to be improved, particularly on the aspect of the environment that cover the regulation in the provinces. on top of that, attention should be paid to papua since the province is categorised as having a high value of nzi. according to the data, papua has high poverty both in terms of monetary and multidimensional. accordingly, if zakat had been distributed well, it would have reduced poverty in papua. the possible reason it did not work well could be that the distribution of zakat was only meant for muslims. because non-muslims are dominant in papua, it would not be effective if the recipients were only muslim. nevertheless, further research is needed to uncover this phenomenon and study in more detail whether zakat has impacted poor people in papua. the result of the regression showed that both equations have performed well even though the model with multidimensional poverty is better. while the overall test of both equations are significant, the adjusted r-squared in the multidimensional poverty model is higher. it indicated that the independent variables could explain 72.63 percent of the variation in the multidimensional poverty. the value is reduced to 43.65 percent when the dependent variables is the monetary poverty. considering the component of the independent variables, it is shown that the causal relationship of the welfare indicators pratama │ the role of zakat in alleviating multidimensional poverty international journal of islamic economics and finance (ijief), 4(1), 133-150│ 135 (means hdi, unemployment and economic growth) is correlated stronger with multidimensional poverty. in partial test, micro nzi is the only variable that gave significant impact on the multidimensional poverty at 95 percent confidence level. the impact is relatively high since every improvement on micro nzi for one percent could reduce the poor for 0.76 percent. in contrast, none of the independent variables gave significant impact in the monetary poverty model. table 1. the regression result on monetary poverty and multidimensional poverty monetary poverty (𝒀𝟏𝒊) multidimensional poverty (𝒀𝟐𝒊) macro nzi (𝑿𝟏𝒊) 0.1636 (0.1029) 0.1666 (0.1058) micro nzi (𝑿𝟏𝒊) 0.613 (0.3292) -0.7655* (0.3387) hdi (𝒁𝟏𝒊) -0.0846* (0.0179) -0.1580* (0.0184) unemployment rate (𝒁𝟐𝒊) -0.0301 (0.0426) 0.0530 (0.0438) economic growth (𝒁𝟑𝒊) 0.0142 (0.0211) 0.0226 (0.0217) constant 8.7172 (1.2578) 12.8383 (1.2940) r-squared 0.5219 0.7678 adjusted r-squared 0.4365 0.7263 p-value of f-test 0.0006 0.0000 notes: * significant at alpha 0.05, value in () is standard errors. the findings confirmed the notion delivered in the introduction of the paper that zakat did not give significant impact on poverty due to the fund was utilised for multi dimension that help the life of the poor and it is beyond the economy. the report from baznas which revealed that the zakat fund was used for five aspect programs, those are economy, da'wah, education, health and social/humanity support the findings. it is reasonable that the impact of zakat was pronounced as multidimensional as the disbursement also involves many aspects. in addition, the robustness of both equation is good as it has fulfilled all the assumption on multiple linear regression. the shapiro wilk test which is meant to check the normality shown that there is no issue of it on both equations. so do the homoscedasticity, the breusch pagan test concluded that the null hypothesis could not be rejected so we must accept that homoscedasticity is not exist on the error term. the p-value clearly showed that zakat has not significant impact on both monetary and multidimensional poverty). in terms of multicollinearity, the vif values are under five, showing the multicollinearity does not occur on both equations. the detailed result of the assumption test can be seen in table 2. pratama │ the role of zakat in alleviating multidimensional poverty international journal of islamic economics and finance (ijief), 4(1), 133-150│ 136 table 2. the result of assumption test on both models monetary poverty multidimensional poverty normality (shapiro wilk test) z-score = -0.682 p-value = 0.7525 z-score = -1.100 p-value = 0.8644 homoscedasticity (breusch-pagan test) chi-score = 1.69 p-value = 0.1934 chi-score = 0.06 p-value = 0.8068 vif 1.09 1.09 this convincing result could trigger the opportunity and open the potency that zakat is capable to greatly contribute to attain all sdgs. eradicating the poverty which is the first sdgs emphasise not only the importance of poverty than other goals, but also its possible relation to other sdgs. sdgs indicators which also involve dimensions related to other goals further strengthen the potential of zakat to help achieve all the sdgs. the indication that the object of the goals in all sdgs is mostly experienced by the poor support zakat as an effective and appropriate financing tool to realise the sustainable development in 2030. most studies showed that zakat could impact on achieving sdgs due to the wealth allocated for the poor is used to address the dimensions of sdgs. a study conducted by aziz et al., 2020 which examine the impact of zakat on multidimensional poverty argued that zakat could also impact the sdgs on the first (end poverty) and the tenth goals (reduce inequality), but also 3, 4, 6 and 7. the notion was constructed according to the indicators that used for the multidimensional poverty index that address all of those goals. in the end, they concluded that zakat could impact not only the multidimensional poverty, but also the sdgs number 3 and 4 because the government allocated the zakat fund mostly for education and health, in addition to poverty. in line with that, adebayo (2020) revealed that zakat could capture sdgs number 4, 6, 7, 8, 9, 11 and 12 for the same reasons. nevertheless, he also argued that the form of zakat that is not only money could give direct impact on achieving sdgs. for example, the agricultural zakat that required the zakat payers to pay in the form of the agricultural or livestock yield could help end hunger (the second goals). he also added that zakat empowers the women because it did not discriminate the women and even make widows as major recipients. the rest of the goals were addressed indirectly by the performance of zakat institutions, the commonalities of zakat characteristics and the spirituality improvement caused by zakat so that people were motivated to do the kindness (adebayo, 2020; mubarokah et al., 2018; noor & pickup, 2017). pratama │ the role of zakat in alleviating multidimensional poverty international journal of islamic economics and finance (ijief), 4(1), 133-150│ 137 4.3. analysis the best thing of zakat is the mechanism that enforce the wealth of the rich to be allocated directly to the poor. moreover, the involvement of the religion makes the misappropriation of the fund for the poor reduced and increase the religious spirit to pay zakat as the executant will get reward from the god. one of the challenges of poverty alleviation policy in indonesia is corrupt practices at some levels. thus, with support from the result, zakat could be an aptly and effective policy instrument to alleviate poverty especially multidimensional poverty. the characteristic of the poor in indonesia is unique as people could move in and out of poverty easily, even over the three years, a quarter of indonesian people could live in poverty at least once (alatas et al., 2012). it is possible that there is various poverty trap mechanism that is exist in indonesia as the people is quite hard to be out of poverty. as zakat is proven to be effective on multidimensional poverty, the utilisation of zakat could break the trap. hence, it is also important to manage the utilisation of zakat by the mustahik to free them from all forms of poverty. all this time, the management of zakat is only about how to collect more and distribute it correctly, but the notion to discuss how the mustahik use the fund is still less. a combine effort to detect the possible poverty trap in the community or a region with the correct instruction to use the fund would possibly destroy the poverty mechanism and prevent the people to be easily dropped into the poor life. the significance of micro nzi on the multidimensional poverty could answer on why the zakat has no effect on the monetary poverty. it encourages the notion that the poor use zakat for things they think it is important. more importantly, those things are not always about the economic aspects. accordingly, it opens the new potency of zakat to not only eliminate poverty, but also other issues as pointed by sdgs. one way to improve the zakat management is the utilisation of zakat on food security. it could invite the integration to give more attention and focus on the agricultural and livestock zakat. this form of zakat requires the muzakki to allocate some of their agricultural and livestock (when the nisab is reached) to the poor and the needy. giving food to the ones that need it the most is the best way to end hunger and alleviate poverty. in addition, the potential of agricultural zakat is high in ntt (pratama & yuni, 2020) which is the province experienced quite severe poverty and hunger. integrating and implementing the zakat as a mandatory system there may provide a significant impact on pursuing the first and second sdgs. pratama │ the role of zakat in alleviating multidimensional poverty international journal of islamic economics and finance (ijief), 4(1), 133-150│ 138 v. conclusion and recommendation 5.1. conclusion the zakat performance and development in indonesia have developed well. the development is generally categorized as quite good, and the distribution varies across provinces in indonesia. nonetheless, the supportive environment for zakat, as meant by macro nzi, is needed to improve since the condition is still poor. moreover, the distribution analysis of zakat management gave insight into the potency of zakat in papua since the performance is good, and papua is one of the poorest provinces in terms of monetary and multidimensional poverty. the essential part of zakat is not only the collection and distribution but also the utilization of the funds. zakat can affect multidimensional poverty, not monetary poverty, because the fund received by the mustahik may be used to empower their poor life in other aspects, not only the economy. in this regard, the one percent improvement in the performance of zakat institutions and the impact of zakat on the mustahik can reduce multidimensional poverty by 0.76 percent. further, the significance of zakat on multidimensional poverty shed light on the potential future of zakat to be integrated into sdgs because the poverty goals in sdgs that also involves the indicator from other goals reveal that most people to be empowered on sdgs are the poor. therefore, this result brings the good news of the zakat suitability and appropriateness in attaining sdgs. 5.2. recommendation this study has shown that zakat has a larger impact than only empowering the poor’s economy. it then opens the opportunity for zakat as the solution to a multidimensional issue, including achieving sdgs. however, there is a need to create a convenient environment for zakat to grow, particularly in the areas with a high potency and impact of zakat implementation, such as java island. a supportive environment can be created by increasing awareness of the importance of zakat so that it can encourage community participation. meanwhile, the government can support zakat by establishing pro-zakat rules or policies. in addition, the government can obtain more benefits by integrating zakat into the government system. if zakat becomes mandatory for indonesian people, like implemented in some muslim countries, poverty alleviation and achieving sdgs in 2030 can potentially be accelerated. it can possibly happen considering the large population of muslims in indonesia and the impact of zakat that can be felt in many aspects of welfare. the government's focus is pratama │ the role of zakat in alleviating multidimensional poverty international journal of islamic economics and finance (ijief), 4(1), 133-150│ 139 on how to support the zakat and how the recipients utilize the fund according to their needs. instead of all the results, it is interesting to see the causal relationship between the zakat implementation in papua and how it contributes to poverty eradication. the analysis, showing that papua has good performance of zakat and worse condition for the poor, provides the mutual correlation between zakat and poverty. theoretically, zakat should eliminate poverty. however, the condition of papua, which is dominated by 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(2022). salam as banking financing for agriculture in developing countries: lessons from sudan. international journal of islamic economics and finance (ijief), 5(2), 305-334 doi: https://doi.org/10.18196/ijief.v5i2.13750. 1 faculty of business studies, university of gezira, sudan. visiting professor, muslim university of morogoro, tanzania 2 faculty of business administration, muslim university of morogoro, tanzania mailto:issasmohd@mum.ac.tz https://doi.org/10.18196/ijief.v5i1. https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v5i2.13750&domain=pdf moh’d & mualley │ salam as banking financing for agriculture in developing countries: lessons from sudan international journal of islamic economics and finance (ijief), 5(2), 305-334│306 i. introduction 1.1 background agriculture plays a vital role in economic development and has features that make it a unique instrument for development. it contributes to development as an economic activity, as a livelihood, and as a provider of environmental services, making the sector a unique instrument for development (the international bank for reconstruction and development, 2007). in subsaharan africa, more than 750 million people who live in dire poverty (earning less than us$1 per day) rely on subsistence agriculture as their primary source of food and income, and about two-thirds (2/3) of the people depend on farming for their livelihood (havnevik, bryceson, matondi, & beyene, 2007; rosegrant & hazell, 2000). in practice, agriculture in most african countries is the backbone of their economy, considered a key sector for african development. it is also deemed a driving sector for improving income and purchasing power (havnevik et al. 2007). for example, ahmed and elsaied (2017) argued that agriculture plays a particularly crucial role in the sudan economy, where more than 70% of the population is engaged directly or indirectly in agricultural activities. sudan also earns 45% of its gdp from agriculture. they presented an evolution of agricultural statistical activities since 1903 and found that, although all professionals and beneficiaries of agricultural information in sudan understood its vital role, there is still a gap between understanding, adoption, and application in practices. kanu et al. (2013) also revealed that over the years, agriculture in sudan has been exposed to heavy direct and indirect taxes and has become the primary government revenue source. however, the sector faces high marketing costs, tax fees caused by the intermediaries, and the long distance with poor rural infrastructure. in addition, the central bank of sudan's annual reports (central bank of sudan [cbos], 2019) asserted the importance of the agricultural sector in terms of plants and animals and traditional and mechanized agriculture in the sudanese economy. it is because the sector provides the country with food, such as millet, corn, wheat, and many oilseeds like peanuts, sesame, and sunflower. besides, the sector also provides cash crops, such as cotton and gum arabic. similarly, the sector provides various animal products, such as meat, dairy, leather, eggs, and others. according to these central bank’s annual reports, the sector contributed, on average, 30% to sudan's real gross domestic product (gdp) from 2001 to 2019. in this study, figure 1 summarizes the agricultural sector's importance to sudan's economy in terms of its annual percentage average on the real gross domestic product from 2001 to 2019. moh’d & mualley │ salam as banking financing for agriculture in developing countries: lessons from sudan international journal of islamic economics and finance (ijief), 5(2), 305-334│307 figure 1. sudan agricultural sector annual percentage share in gdp in % source: cbos (2019) according to its importance, agricultural advancement is necessary for improving the supply of raw materials for agro-based industries, especially in developing countries. the shortage of agricultural goods impacts industrial production and a consequent increase in the general price level (praburaj, 2018). hence, modern agriculture is possible when farmers are provided credit for purchasing modern inputs (schultz, 1964; zuberi, 1989; saleem and jan, 2011). moreover, sudan has adopted islamic banking and financing since 1984 and has vast experience in financing the agricultural sector using the salam mode of finance as a suitable mode for the agricultural sector. it has also pushed the authors to study this experience. for example, the central bank of sudan (2001 -2019) revealed that the salam finance for agriculture was very low compared with the total bank financing; it varied between 0.75% and 4.99% from 2001 to 2019. figure 2 displays the general overview of the total bank financing for sudan's agricultural sector via salam during this period. figure 2. the ratio of salam mode of finance for agriculture to the total commercial bank finance in sudan (2001 -2019) few empirical studies have covered the impact of islamic finance on sudanese agricultural production. mohammed elameen (2021) found that the 0 10 20 30 40 50 p e rc e n ta g e a v e ra g e o f g d p year 98% 2% sudan's total commercial bank financing(2001 -2019) total finance by salam mode of finance moh’d & mualley │ salam as banking financing for agriculture in developing countries: lessons from sudan international journal of islamic economics and finance (ijief), 5(2), 305-334│308 agricultural bank of sudan (abs) positively influenced the agricultural rotation’s crop from 2010 to 2020. mohammed, mawhubi, and gondi (2021) also uncovered that bank financing only positively impacted sudan's agricultural production in the long run. these studies either covered the impact of part of the sudanese commercial banks on agricultural production or dealt with the impact of bank financing on agricultural production. also, these studies were general and did not focus on the impact of the specific mode of finance on agricultural production . for this reason, this study attempts to cover the previous studies' gap. 1.2 objectives therefore, the main objective of this study is to examine the impact of commercial bank financing via the salam mode of finance for the agricultural sector in sudan from 2001 to 2019. however, the specific objectives of this study are as follows: 1. to identify whether salam mode of finance is a suitable mode for agriculture in sudan or not 2. to analyze the real contribution of the bank financing to the sudan agricultural sector 3. to determine the relationship between agricultural production and bank financing 4. to investigate the opportunities and challenges facing the agricultural sector in sudan and those facing banking financing for agriculture as well the study will help the policymakers in sudan to adopt the right, relevant, effective, and productive policies to support the agricultural sector as the backbone sector of the economy. in addition, commercial banks may benefit by providing more finance based on the salam mode to the agricultural sector. it will also help farmers increase their production, employment, gdp, and economic revenues to the sudanese. further, this study focuses on the impact of bank financing by salam mode of finance on agricultural production in sudan to determine whether it is an appropriate mode for financing agriculture or not, and therefore it is more specialized than the previous studies . also, it will be additional literature on islamic finance and economics empirical studies. the rest of the study is organized as follows. while section two reviews the literature, section three highlights the methodology adopted in the study, and section four emphasizes the results and analysis. finally, section five summarizes the conclusion. moh’d & mualley │ salam as banking financing for agriculture in developing countries: lessons from sudan international journal of islamic economics and finance (ijief), 5(2), 305-334│309 ii. literature review 2.1 agriculture and economy agriculture is vital for human welfare and economic growth (bravo-ortega & lederman 2005; ghosh et al. 2010). according to de soysa, gledditsch, gibson, & sollenberg (1999), agriculture has a significant global economic contribution. rosegrant & hazell (2000) and m. ahmed & lorica (2002) noted that agriculture significantly impacted employment, income, purchasing power improvement, and development, transforming the rural economies of many countries, especially developing ones. on the same note, gollin, parente, & rogerson (2002) argued that agricultural productivity substantially contributed to industrialization. in fact, even in big nations like america, agriculture plays a vital role in industrialization (lobao & meyer, (2010). it is similarly true that increasing agricultural output needs adopting modern ways. in addition, employing modern agriculture is possible when farmers are provided with credit for purchasing modern inputs (schultz, 1964; saleem and jan, 2011). therefore, maximizing agricultural production is a function of financing and how it flows from investors, cooperative societies, and financial institutions to agricultural production units that need money (okwuchukwu, 2022). furthermore, affordable and accessible financial services are necessary to improve the productivity of the agricultural sector (zakaria, junand, and khan, (2019). moreover, agricultural credit appears to be an essential input along with modern technology for higher productivity (das, senapati, and john, 2009). hence, access to rural financial services can make a difference in agricultural productivity, food security, and poverty reduction (stephen,1995; tenaw and islam, 2009). in this case, agricultural financing refers to providing funds necessary to carry out production and finance all related activities, such as storage, transportation, marketing, selling, and others. alternatively, it means using limited financial resources to meet unlimited agricultural needs and is concerned with the development of agriculture and the improvement of the farmer's standard of living (ali, 2022; irungu, 2013). on the other hand, banks are one of the credit sources for agriculture and other investment activities. banks in the modern financial industry are of two types: conventional and islamic. both types provide banking activities. apart from the traditional banking activities that are also accepted within islamic guidelines, islamic banking provides a wide range of modes of finance that include modes based on sales, such as murabaha, salam, istesnaa, moqawla, and share-based modes of finance, such as musharakah, mudarabah, muzara'ah, and https://www.sciencedirect.com/science/article/abs/pii/016951509190021c#! moh’d & mualley │ salam as banking financing for agriculture in developing countries: lessons from sudan international journal of islamic economics and finance (ijief), 5(2), 305-334│310 musaqah. specifically, salam is one of the appropriate and relevant modes of financing for the agricultural sector. literally, salam and salaf have similar meanings, but salaf also means a loan (al-harawi, 270 ah; al-samarkandi, 540 ah). however, with regards to the islamic fiqh of transactions, salam means the sale of a deferred commodity at an immediate price; the deferred is the commodity, and the immediate is the capital [(ibn abidin, 252 ah), (ibn qudamah al-maqdisi, died: 620 ah), (al dhareer, 1967)]. in addition, buying debt is not a type of salam selling (alhattab (died 925 ah). salam is also permissible in the qur’an and sunnah of the prophet (s.a.w.). for example, allah says in the qur-an: “……. oh, you who believe! when you contract a debt for a fixed period, write it down…) (2:282). in the interpretation of this verse, ibn abbas said, “i bear witness that the guaranteed advances for a specified term have been permitted by allah.” from the sunnah, ibn abbas also said, “the prophet, may allah bless him and grant him peace, came to madinah and they were offering dates for advances two and three years, and he said: whoever advances in something, then it is in a known measure, and a known weight, for a known term)” (al-bukhari, 2240 (. ْم ُيْس ُ َوه َ ة َ َم الَمِدين ه ْيِه َوَسل َ هللُا َعل ه ُّ َصَّل ي ب ِ َّ ِدَم الن َ اَل: ق َ ُهَما، ق ْ َعن ُ ه َ اَّلل ي ِ اٍس َرض ْمِر َعِن اْبِن َعبَّ َّ ِبالت َ ون ُ ِلف وٍم، ُ ٍن َمْعل ْ وٍم، َوَوز ُ ْيٍل َمْعل َ ي ك ِ ف َ ٍء، ف ْ ي َ ي ش ِ َف ف َ ْسل َ اَل: »َمْن أ َ ق َ ، ف َ ث َ ال َّ ِ َوالث َتي ْ َ ن ا السَّ َ ن َ ث َّ وٍم«، َحد ُ َجٍل َمْعل َ أ َ ِإَل َجٍل َ أ َ وٍم، ِإَل ُ ْيٍل َمْعل َ ي ك ِ لُيْسِلْف ف َ اَل: »ف َ ِجيٍح، َوق َ ي ن ب ِ َ ي اْبُن أ ِ ب َ ث َّ اَل: َحد َ ، ق ُ َيان ْ ا ُسف َ ن َ ث َّ ، َحد ٌّ وٍم« َعَِّلي ُ " َمْعل (. 2240البخاري، apart from the general conditions of sale, salam has special conditions that can be summarized as the capital and the sale be what is valid for deferment, postponed the sale or muslam fihih, specifying the weight, quantity, number, and character of muslam fihi. in addition, there is the presence of the muslim fihi at the time of delivery. moreover, there is the delivery of the capital (muslam) at the time of the contract or not delayed for a long time [ibn rushd, (died, 595 ah) and al-dhair, 1967]. more conditions have been stated by aaiofi (2001), such as that salam must be for fungible goods under the general condition; no riba (usury) ensues, and it is not permitted for anything specific like “this car.” it is also not for anything for which the seller may not be held responsible, like land, buildings, or trees; or for articles whose values change according to subjective assessment, like jewelers and antiques. besides, it is not permissible to stipulate that al-muslam fihi must be from a specific piece of land. however, on the delivery date, the seller has to deliver to the buyer the muslam fihi, according to the specified specifications, without stipulating that it must be a product of his farm or factory. overall, salam is a permissible sale, exempted from the prohibition of selling what one does not have because of the need for it and its necessity for each one of the contracting parties (al-nawawi (died: 676 ah), ibn muflih (884 ah), moh’d & mualley │ salam as banking financing for agriculture in developing countries: lessons from sudan international journal of islamic economics and finance (ijief), 5(2), 305-334│311 sabiq (1365 a.h), and the supreme authority for sharia supervision of banks and financial institutions (1997)). according to mualley (2019), the salam mode of finance should strongly link financing with the real sector and clearly direct the funding to the actual activities and productive sectors in the economy. these conditions aim to prevent usury and the consequent injustice in transactions. in addition, the contract creates excellent opportunities for investment and labor absorption, thus contributing to economic and social stability. 2.2 sudan's agricultural sector according to african development bank (1996), agriculture in sudan provided (80 90%) of the population's livelihood (55%) of gdp and supplied (100%) of raw materials for the industrial sector in the 1980s. in addition, the sector employed about (76%) of the sudanese labor force and secured about (95%) of the exported commodity, which is crucial for the payments of the imported good. on the same note, ahmed and elsaied (2017) emphasized that, since 1903, agriculture has significantly contributed to the sudanese economy. it occupied more than 70% of the population directly or indirectly and contributed 45% of the sudanese gross domestic product. in addition, suleiman (2013) and mualley (2020) also stated that sudan owns vast agricultural lands with an estimated area of about 84 million hectares, of which only 18 million hectares have been exploited for use. the agricultural lands in sudan are also fertile, have good forest distribution, and have diverse climatic environments with rich sources of water, which allow the production of various agricultural products. on this note, ahmed (2018) pointed out five agricultural systems in sudan: traditional rain, mechanized rain, irrigation, livestock and fisheries, and the jungle system. here, about (92%) of the cultivated area is in the traditional and mechanized rain-fed sector. this importance has been indicated by the central bank of sudan's annual reports (2001 to 2019). these reports showed that the sector contributed on average (30%) to real gross domestic product (gdp). according to ahmed and elsaied (2017), the source of irrigation also comes from the rivers and their tributaries using pumps, gravities, floods, and seasonal streams and rain. moreover, kanu et al. (2013) revealed that over the years, agriculture in sudan has been exposed to heavy direct and indirect taxes and has become the primary government revenue source. however, the sector is hindered by the high marketing cost, which, besides the tax fees, is caused by the intermediaries and the long distance with poor rural infrastructure. in addition, ahmed et al. (2017) mentioned reasons that led to low productivity and weak agricultural returns in sudan, such as poor use of agricultural inputs, moh’d & mualley │ salam as banking financing for agriculture in developing countries: lessons from sudan international journal of islamic economics and finance (ijief), 5(2), 305-334│312 fertilizers, and improved seeds. besides, the weakness and complexities of agricultural financing are limited to one bank. moreover, the lack of clarity of vision, the agricultural plan for crops, and the state's neglect of this vital sector led to a lack of crop diversity. lastly, neglecting irrigation canals and not using modern agricultural technology has also been considered a contributing factor to the low agricultural production in sudan. 2.3 the practice of applying salam mode of finance in sudan despite the wide range of islamic modes of finance applied by sudanese banks, salam mode financing was initially used as a financing mode for agriculture but was extended over time to cover most areas of investment, such as industry, trade, and services (central bank of sudan, 2018). based on the jurisprudential guidelines, the process of bay'a al-salam starts from 'muslam ilayhi,' who has to submit a financing request via the mode of salam to the bank in a specific commodity, price, and the collaterals he provides. then, the bank studies the customer, commodity, price, and collaterals and decides. in case of acceptance, the two parties sign the contract according to the form prepared by sudan’s supreme sharia supervisory board. according to abdullah (2015), salam can be used even for manufactured goods, but most sudanese banks use salam mode in the agricultural sector. theoretically, several types of risks are faced in the salam mode of finance. these include the risk of commodity prices, the risk of damage or loss of the “delivered” commodity, the credit risk of not delivering the 'muslam fihi' in time, and ethical risks related to the customer’s unwillingness to deliver the commodity (khan and ahmed, 2003). salam financing may also be exposed to the profit margin risk (abdullah, 2002). these risks may be caused by the climate, the customer, general economic conditions, changes in consumer preferences, or sharp price fluctuations (bougheri, 2005). in this respect, sudan has pioneering experience in financing agriculture using salam; however, the banks are exposed to several types of risk in their experience of using salam. these risks comprise markup, liquidity, and operational risks due to the complex process of collecting, storing, and marketing the crops, quality, and credit risks (adam, 2003; abdullah, 2015; mustafa and ndir, 2019). according to mohammed elameen (2021), the agricultural bank of sudan (abs) has a positive role in financing the agricultural rotation’s crop from 2010 to 2020. in addition, mohammed, mawhubi, and gondi (2021) investigated the impact of internal and external financing on sudan's agricultural production in the short and long run (1998-2018). they found that bank financing only positively impacted agricultural production in the long run. moh’d & mualley │ salam as banking financing for agriculture in developing countries: lessons from sudan international journal of islamic economics and finance (ijief), 5(2), 305-334│313 2.4 previous studies bamakhramah (2003) examined the experience of agricultural finance in sudan (1991-2001) using islamic finance. based on extracted information from a sample survey of ten banks, four specialized and six commercials. he was also particularly interested in how successful the islamic modes of finance in this sector were. he then concluded that islamic finance offered great opportunities for developing sudan’s agriculture. however, factors like the nature of islamic financing modes and structural, institutional, and organizational problems resulted in a relatively deficient performance of agricultural financing schemes over the period. although this study, based on a survey, covered the supply side, it neglected the demand side to give the perspective of the two parties: financial institutions and the farmers. on the same line, abdel aziz (2004) applied the descriptive analytical approach to data from a sample that covered seven commercial banks to investigate the reasons for the reluctance of commercial banks to finance the agricultural sector in sudan. he found that the salam mode of finance, due to its high risks, was not a preferred mode for commercial banks, and despite the decline ratio, it contributed significantly to the growth of sudanese agriculture. similar results were mentioned by ibrahim (2006), rahma (2008), youssef (2009), and musnad (2012). therefore, they recommended the need for the central bank and the ministry of finance to devise a policy that motivates and encourages banks to finance the agricultural sector. in addition, determining a fair price for the two parties is necessary. moreover, the creation of specialized channels for the sale of salam, the establishment of a guarantee fund for agricultural lending, and advanced agricultural financing institutions at a possible cost, in addition to the provision of infrastructures, such as transport, communications, electricity, and water in the countryside, and the development of markets to link these areas with internal and external markets, are needed. in addition, abdullah (2015) identified the problems of agricultural financing by salam mode in sudan and ways to solve them, and he concluded that the most important problem of the salam contract faced by the sudanese banks was a significant fluctuation in the prices of agricultural crops in one year, which resulted from selling in the harvest season, even at unremunerative prices for the farmer. moreover, the difference between the salam price and the general prices for some agricultural crops in the same year is enormous, reaching in some years to (200%). along with the above studies, he recommended the need for direct government intervention in the marketing of agricultural crops through a public institution for marketing agricultural crops. nevertheless, this study neglected the role of salam in agricultural output. moh’d & mualley │ salam as banking financing for agriculture in developing countries: lessons from sudan international journal of islamic economics and finance (ijief), 5(2), 305-334│314 then, ogunbado and ahmed (2015) and mohammed, ogunbado, and aziz (2016) theoretically investigated salam's financial instrument and assessed how it could achieve agricultural sustainability in nigeria and kano states, respectively. by applying a qualitative research methodology, they explored the origin of bay’salam, its legality from sharia, and justified its usefulness in enhancing agricultural production standards in this most populous african country. they then revealed that before discovering petrol, nigeria was predominantly agriculturist. in their seeking to contribute to the development of islamic finance and banking in the country, they expected that the adoption of salam would sustain agricultural production in nigeria, improve farmer's income and standard of living, boost food security, and enhance exportation, which all will consequently benefit the country economy in general. nevertheless, these two studies only reviewed the literature and based all their expectations on the theoretical foundation of the salam contract. as such, these theoretical arguments need to be proven through applied studies . moreover, in their attempt to understand the bankers’ view to solve the limitation problem that faces farmers' access to agricultural finance, kaleem and ahmad (2016) stated that easy access to formal credit is vital in reducing poverty in agricultural societies. thus, it improves the farmers’ overall productivity and social indicator in the long run. they also argued that agricultural financing, generally and in pakistan, is described as risky and lowreturn finance. therefore, by the end of 2002, it was only about (3.5%) of the total bank financing in pakistan. in addition, they revealed that bankers were more comfortable with credit facilities than with forwarded contracts. due to that, by the end of 2009, salam's mode of finance ratio to the total islamic financing was only (3.6%); despite this low rate, they argued that salam could help government and local donor agencies to reduce poverty in pakistan. the conclusion of this study was also based on theory more than practical investigation. besides, saiti, afghan, and noordin (2018) explored the potential of adopting salam-based crowdfunding to finance the agricultural sector in afghanistan. they adopted a triangulation approach, consisting of several methods to gather relevant information about afghanistan’s agricultural sector, the concept of crowdfunding, and salam (forward sale) contracts. their findings uncovered that salam-based crowdfunding is a viable sharia-compliant investment platform, which may offer some advantages for both potential investors and farmers or entrepreneurs. in their study, they also mentioned some concerns for future studies; like the treatment of investors and investors’ protection against fluctuations of commodity market prices, credit and liquidity risk management, and related sharia issues, investigating the public acceptance and perception of salam-based crowdfunding in afghanistan to gain further insights on its feasibility. https://www.researchgate.net/publication/profile/ahamad-ogunbado https://www.researchgate.net/publication/profile/umar-ahmed-7 moh’d & mualley │ salam as banking financing for agriculture in developing countries: lessons from sudan international journal of islamic economics and finance (ijief), 5(2), 305-334│315 in indonesia, hudaifah, tutuko, and awarjuwono (2019) also studied the implementation of the salam contract for agriculture financing through islamic-corporate social responsibility, a case study of paddy farmers in tuban regency. they argued that salam financing was designed especially for agriculture. however, it faced many problems in its implementation, especially concerning risk management for financial institutions, and concluded that the key to the implementation of the salam contract regarding improving the welfare of farmers in tuban regency is through the availability of cost-effective and flexible funds, which must be managed professionally and productively through the sharia economic institutions that are actively functional. they also recommended that more detailed and measurable experimental research is needed so that funds can be examined with the involvement of real funds as the pilot project. when a conceptual experiment is conducted in a given period involving limited funds within a year, which is 2-3 times the planting season, possible obstacles can further be identified. on the same line, rahma (2020) attempted to construct a new model of salam sales for agricultural development finance based on the structural equation model and the descriptive statistical data analysis results. she concluded that farmers preferred cash financing via the traditional salam mode of finance rather than the other modes, but that harmed the societies with many different risks, such as increasing inflation rates, high unemployment rates, default, and difficulty in paying cash debts in its exact time. it then pushed the banks, other financial institutions, and input suppliers to stop their leading role in agricultural financing. therefore, she suggested a new model of salam for developing agricultural finance, thus by granting producers real production inputs instead of cash loans. in summary, although it faces several problems and risks, all these studies have unanimously agreed that banking financing for agriculture by the salam mode of finance is a crucial factor in improving agriculture, and therefore, it is not preferred as a financing form for banks. many of these studies have also theoretically indicated the positive impact of salam on agricultural production, but they did not investigate this role from an empirical point of view. in addition, the empirical ones investigated salam's problems rather than their impact on agricultural output and its comfortability for agriculture; hence, the current study bridges this gap. iii. methodology 3.1 data the data in this study covered sudan's agricultural sector output’s annual market value from 2001 to 2019 (see appendix 1) and the sudanese bank's total financing for the agricultural sector by salam mode of finance for the moh’d & mualley │ salam as banking financing for agriculture in developing countries: lessons from sudan international journal of islamic economics and finance (ijief), 5(2), 305-334│316 same period (see appendix 2). hence, the agricultural production value included parts, plants, and animals. meanwhile, financing data comprised the salam financing flowing from all commercial banks operating in sudan to the agricultural sector. both variables were from the central bank of sudan’s annual reports from 2001 to 2019. 3.2 model development an econometrics two-variable linear model or simple regression analysis was used for testing hypotheses about the relationship between a dependent variable y and an independent or explanatory variable x and prediction ( 2001, salvatore and reagle ) ). in such models, it is assumed implicitly that causal relationships, if any, between the dependent and explanatory variables flow in one direction only, i.e., from the explanatory variables to the dependent variable in the (two-variables) classical normal linear regression model. it is also a model that assumes that the random dependent variable follows the normal probability distribution (gujarati, 2004). in addition, a random disturbance, error, or stochastic term must be included under the following assumptions; normally distributed, with zero expected value or mean—besides a constant variance. further, the error terms are uncorrelated or unrelated to each other, and the explanatory variable assumes fixed values in repeated sampling (so that xi and ui are also uncorrelated) (salvatore and reagle (2001 ) . table. 1 data and variables variables description source dependent variable, atp the annual total market value of agricultural production cbos annual reports independent variable, tbsa the total annual market value of bank financing for agriculture in salam mode cbos annual reports according to gujarati & porter (1978) and salvatore and reagle (2001), if the expected value of the dependent variable e(y | xi ) is assumed to be linear in the explanatory xi, it may be written as yi =e(y|xi) + ui = β1+β2xi +ui (1) hence, the term (ui) is a surrogate or proxy for all the omitted or neglected variables that may affect y but are not (or cannot be) included in the regression model. a set of empirical studies has linked agricultural output with the credit for agriculture, like malik, mushtaq, and gill (1991). they argued that, traditionally, the agricultural production function is a function of the credit moh’d & mualley │ salam as banking financing for agriculture in developing countries: lessons from sudan international journal of islamic economics and finance (ijief), 5(2), 305-334│317 provided by various financial institutions used in all agricultural production operations. ogbuabor and nwosu (2017) also indicated that most empirical literature showed a positive relationship between agric credits and agric productivity in nigeria, tanzanian, pakistan, ghana, south africa, and chile, though sometimes not significant. moreover, ammani (2012) developed an empirical aggregate crop sector’s output credit model to capture the effects of credit on the nigerian aggregate agricultural production of the various sub-sectors, consisting of capital, labor, management practices, and technical progress as factors of production. then, he took credit as the variable of interest for his study and dropped the other variables from his equation. assuming that capital consists essentially of savings and credit, he also assumed the absence of savings for most farmers; therefore, credit was taken as the only form of capital available for agricultural production. then, his function became as follows: gdpct = β0 + β1crct+ μt (2) where gdpct is the aggregate output of the crop sector of nigerian agriculture in year t (in millions of naira), and crct is the total amount of formal credit made available to the crop sector in year t (in millions of naira). in addition, udoka, mbat & duke (2016) specified agricultural production as a linear function of credit disbursed by commercial banks to the agricultural sector. moreover, florence and nathan (2020) specified a linear empirical model relating commercial bank credit and agriculture output. in the model, the researchers also controlled for two (interest rates and inflation) factors affecting agriculture production. following amanni (2012), udoka, mbat, and duke (2016), and florence and nathan (2020), the interest of this study was to investigate the impact of sudanese bank financing by salam on agricultural output. based on that, the setting of the variables is described in table 1 in a simple linear regression model, which can be presented in the following equation: 𝑨𝑻𝑷𝑖𝑡 = β0 + β1𝐓𝐁𝐒𝐀𝒊𝒕 + µ𝒊 (3) 𝑤ℎ𝑒𝑟𝑒, β0 & β1  0 (4) where equation (2) suggests that the dependent variable; the sudanese total agricultural production annual market value (𝑡) is a function of the bank's total annual financing for agriculture; equation (3) reflects the intercept β0 and the slope β1 of the bank financing to represent the effect of the bank financing on agricultural output. moh’d & mualley │ salam as banking financing for agriculture in developing countries: lessons from sudan international journal of islamic economics and finance (ijief), 5(2), 305-334│318 besides, equations 1 and equation 2 are econometrics's linear population regression function. some alternative expressions used in the literature are linear population regression models or simply linear population regression. also, β0 and β1 are unknown, but fixed parameters are known as the regression coefficients. β1 and β2 are also known as intercept and slope coefficients, respectively, and the researchers must estimate their values based on the given data for the dependent and independent variables to analyze the exact relation (gujarati, 2004). 3.3 method one of the data types in econometrics is time series data, a set of observations on the values that a variable takes separately. such data may be collected at regular time intervals, such as daily, e.g., stock prices, weather reports, weekly, e.g., money supply figures, monthly, e.g., the unemployment rate, the consumer price index (cpi), quarterly (e.g., gdp), annually (gujarati, 2004). according to gujarati and porter (1978), the gauss–markov theorem states that, given the assumptions of the classical linear regression model, an (ols) estimator βˆ2 is said to be the best linear unbiased estimator (blue). therefore, based on this study’s time series data and the developed model, the ordinary least-squire method (ols) was utilized to estimate the impact of banking finance via salam on the sudanese agricultural output. iv. results and analysis 4.1 results this section aims to analyze the data and variables used to investigate the impact of the sudanese banks' salaam financing on their agricultural output from 2001 to 2019. econometricians usually use plots for the observations of dependent, and independent variables in scatter diagrams to show the linearity between the two variables (salvatore and reagle (2001 ) ). therefore, figure 3 summarizes approximately the linearity between the sudanese annual total agricultural production market value as a dependent variable and the total annual bank financing via salam mode of finance as an explanatory variable over the study period. thus, most points fell on or near the linearity line, indicating that the two variables were linearly correlated. following the value of r2 [ 91%), there was a high positive linear correlation between sudan's agricultural output and bank financing by salam mode over this period. therefore, the linear model was the appropriate function to show the impact. moh’d & mualley │ salam as banking financing for agriculture in developing countries: lessons from sudan international journal of islamic economics and finance (ijief), 5(2), 305-334│319 figure 3. linearity between the model variables in table 2, about the residual statistics for the two variables in terms of their mean, minimum, maximum, and standard deviation, the study investigated the data’s goodness and ensured some outliers on the explanatory variable. thus, the data were transformed into the natural logarithm to avoid the outlier’s leverage. however, outliers were not removed because their removal could dramatically affect the regression line, as suggested by gujarati (2004). table 2. residuals statisticsa of the model variables minimum maximum mean std. deviation n predicted value 9.7505 12.7999 11.0322 0.93637 19 residual -.53146.61222 .00000 0.28319 19 std. predicted value -1.3691.888 .000 1.000 19 std. residual -1.8242.101 .000 0.972 19 a. dependent variable: lnatp source: authors' calculations. table 3. the model summaryb model r r square adjusted r square std. error of the estimate durbinwatson 1 0.957a 0.916 0.911 0.29140 1.757 a. predictors: (constant), lntsbs b. dependent variable: lnatp moh’d & mualley │ salam as banking financing for agriculture in developing countries: lessons from sudan international journal of islamic economics and finance (ijief), 5(2), 305-334│320 in table 3, the durban watson test showed the independence of the observations by examining the independence errors. therefore, table 3 shows the model summary, the (d.w) statistics in the table close to (1.8), which lies between 1; thus, the observations were independent. figures 4, 5, and 6 reveal the normality of the variables. figure 4 depicts the normality of residuals because the dots were generally distributed around the 45 lines. figure 5 displays the dependent variable of the market value of the annual total agricultural output, which was normally distributed, while figure 6 presents that the scatter plots of the standard residuals against the predicted values of the dependent variable were elliptical. figure 4. normal p-p plot of regression standarized residual the correlation value shown in table 4 shows the correlation between the sudanese agricultural output as a dependent variable on the one hand and the bank financing by salam mode of finance as an independent variable on the other hand, over the period (2001 -2019). the result indicated a strong and positive correlation between the two variables used to be about (96%). moh’d & mualley │ salam as banking financing for agriculture in developing countries: lessons from sudan international journal of islamic economics and finance (ijief), 5(2), 305-334│321 figure 5. histogram figure 6. scatterplot moh’d & mualley │ salam as banking financing for agriculture in developing countries: lessons from sudan international journal of islamic economics and finance (ijief), 5(2), 305-334│322 table 4. correlations between the model variables lnatp lntsbs pearson correlation lnatp 1.000 .957 lntsbs .957 1.000 sig. (1-tailed) lnatp . .000 lntsbs .000 . n lnatp 19 19 lntsbs 19 19 table 5. anovaa analysis model sum of squares df mean square f sig. 1 regression 15.782 1 15.782 185.856 .000b residual 1.444 17 .085 total 17.226 18 a. dependent variable: lnatp b. predictors: (constant), lntsbs table 5 presents the summary of the anova analysis used as a part of the linear regression analysis. thus, with (5%) degrees of freedom, the value of (f) calculated according to its significance (0.000) indicated that the model was more appropriate for calculating the relation between the two variables than using the mean. it is also noted that there was a significant linear relationship between sudanese agricultural annual production and bank financing by salam. on the same line, the model calculated (f) ration confirms this fact because it was found to be greater than the reported one at (5%) with (1) and (17) degrees of freedom. table 6 represents the estimated coefficients of the model; hence, it represents the intercept and slope of the sudanese agricultural marginal productivity regarding the bank financing by salam mode of finance. similarly, it was observed that there was a positive relationship between the two variables. exactly, the value of the slope of the bank financing was found to be (0.745). it signifies that if the sudanese bank financing increased by one unit, their agricultural production would increase by (0.745) accordingly. in addition, the standardized coefficients beta for the bank financing by salam mode of finance, again with the same value of pearson correlation, showed a high correlation between the variables (.957). it denotes that when the standard deviation of the bank financing via salam increased by one, the sudanese agricultural production standard deviation would increase by (0.957). regarding the statistical significance of the intercept and the slope (b0 and b1), the significance reported in table 6 shows that both were statistically significant. moh’d & mualley │ salam as banking financing for agriculture in developing countries: lessons from sudan international journal of islamic economics and finance (ijief), 5(2), 305-334│323 moreover, their significance was specific by comparing their calculated (t) ratios, as shown in table 6. in addition, the tabular one for both under (17) degrees of freedom showed that the calculated (t) was more significant than the tabular one, which was found to be (1.74). finally, the values of r square and adjusted r square [0.916 and 0.911) respectively showed that the change in the annual total of bank financing from sudanese banks in the salam mode of finance explained (92%) and (91%) of the change in the annual total market value of sudanese agricultural production during the period (2001-2019). according to this study’s data transforming into the natural log, the sudanese agricultural production was highly elastic to bank financing facilities during this period. table 6. estimated coefficients model unstandardized coefficients standardized coefficients t sig. 95.0% confidence interval for b b std. error beta lower bound upper bound 1 (constant) 1.456 .706 2.064 .055 -.0322.945 lntsbs .745 .055 .957 13.633 .000 .630 .860 notes: dependent variable: lnatp 4.2 analysis based on the regression results in previous sections and discussion, sudan's agricultural production was susceptible to the commercial banks' islamic financing. in other words, the sudanese commercial banks play a significant role in sudan's agricultural production. on the other hand, despite all the problems and challenges facing the agricultural sector in sudan, the low ratio of commercial banks using the salam mode of finance, and the wide range of risks exposed to the use of the salam mode of finance during the study time, salam mode of finance and the commercial banks financing had outstanding contributions and a positive impact on the sudanese agricultural sector production as suggested by abdullah (2002), adam (2003), bougheri (2005 (, abdullah (2015), central bank of sudan (2018), mustafa and nadir (2019), mohammed elameen, 2021), and mawhubi and gondi (2021). in addition, the regression results are consistent with the economic theory, stating that credit accessibility for farmers is crucial for transforming traditional agriculture into modern to increase productivity since agricultural production is a function of credit and financing (schultz, 1964; saleem and jan, 2011, stephen, 1995, das, senapati, and john, 2009, tenaw and islam, 2009, okwuchukwu, 2022, zakaria, jun and khan, 2019). the reason behind this result of the high response to the agricultural production by banks financing the agricultural sector via the salam mode of https://www.sciencedirect.com/science/article/abs/pii/016951509190021c#! moh’d & mualley │ salam as banking financing for agriculture in developing countries: lessons from sudan international journal of islamic economics and finance (ijief), 5(2), 305-334│324 finance is that financing by salam in sudanese banks has been used to finance the agricultural sector and no other production sectors in the economy. therefore, one can conclude that, over the time series period of this study, the salam mode of finance is a prorate mode for financing agriculture in sudan, and to maximize agricultural production, more resources are needed from the banks. this mode of finance also addresses all the obstacles and challenges facing the banks and agriculture in the country. v. conclusion and recommendation 5.1. conclusion based on the simple linear regression, empirical results of this study indicated that the sudanese commercial banks' total annual financing via the salam mode of finance affected their agricultural sector production’s total annual market value, with a significant and strong positive relationship. commercial bank financing flowed by salam mode of finance ratio to the total bank financing was also found to be very low during the study time. therefore, salam was not the preferred mode for commercial banks in sudan. in addition, the procedures for obtaining bank financing were complicated. moreover, commercial banks in sudan faced several risks in dealing with the salam mode of finance. on the other hand, despite the several problems and challenges hindering the agricultural sector in the country like heavy direct and indirect tax, high marketing costs, the long distance with poor rural infrastructure, weak agricultural returns, poor use of agricultural inputs and modern agricultural technology, the lack of clarity of vision and the agricultural plan for crops, and the state's neglect of this vital sector and complexities of agricultural financing limited to one bank, sudan agricultural sector highly contributed to the country economy during the study period. also, the agricultural production in sudan was highly positive, elastic to bank financing by the salam mode during the study period. furthermore, despite all these challenges and problems, bank financing was the most important explanation for changes in agricultural output over the study period. 5.2 recommendations the results of this study require relevant policy implications for both the agricultural sector and bank financing. due to its importance in financing the agricultural sector, commercial banks are required to increase the provision for financing via salam mode. in addition, reducing the tax burden on the agricultural sector is necessary to achieve more success and more attention to constructing new roads and maintaining old ones between markets and production areas. moreover, maximizing interest in maintaining irrigation moh’d & mualley │ salam as banking financing for agriculture in developing countries: lessons from sudan international journal of islamic economics and finance (ijief), 5(2), 305-334│325 canals and infrastructure for agricultural projects is needed. increasing bank financing for agriculture and simplifying the procedures for granting financing are also required. finally, more research and empirical studies are needed to reach the best ways and optimal financing for this vital sector and investigate the real reasons behind the decreasing ratio of the salam mode of finance to the overall bank financing. moh’d & mualley │ salam as banking financing for agriculture in developing countries: lessons from sudan international journal of islamic economics and finance (ijief), 5(2), 305-334│326 references abdel aziz, s. a. 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(2019): impact of financial development on agricultural productivity in south asia. agricultural economics – czech. 65, 232–239. moh’d & mualley │ salam as banking financing for agriculture in developing countries: lessons from sudan international journal of islamic economics and finance (ijief), 5(2), 305-334│333 appendixes appendix a: sudan's agricultural output value and (2001–2019) million pounds share in gdp no. year (1) agricultural sector output annual market value (2) agricultural sector output annual real value (3) agricultural sector annual share in gdp% 1 2001 14,547.9 6.1 46.6 2 2002 17,986.3 6.1 46 3 2003 21,411 6.3 34.4 4 2004 23,369.4 6.2 32.1 5 2005 28,454.7 6.5 31.8 6 2006 31,190.8 6.9 30.8 7 2007 32,985.5 7.5 30.2 8 2008 37,480.6 7.7 31 9 2009 44,969.6 6.79 31.1 10 2010 54,456 7.59 31.3 11 2011 58,221 8.05 28.9 12 2012 76,626 8.77 30.4 13 2013 92,990 8.54 30.6 14 2014 143,775 9.36 28.5 15 2015 161,599 9.38 27.9 16 2016 146,931.4 9.18 28.9 17 2017 184,059.4 9.90 29 18 2018 298,430.8 10.30 23.9 19 2019 394,499.6 10.18 28.1 source: central bank of sudan annual reports (2001 – 2019). moh’d & mualley │ salam as banking financing for agriculture in developing countries: lessons from sudan international journal of islamic economics and finance (ijief), 5(2), 305-334│334 appendix b: sudan’s total banks financing and total financing via salam in million pounds no. year (1) total banks financing (2) total financing flow in the salam mode (3) the ratio of salam mode to the total financing (%) 1 2001 1,463,820 72,990 4.99 2 2002 2,067,810 68,560 3.32 3 2003 2,819,256 135,211 4.80 4 2004 4,290,696 126,526 2.95 5 2005 6,953,683 145,157 2.09 6 2006 10,394,920 132,993 1.28 7 2007 12,587,285 145,157 1.15 8 2008 14,681,294 290,650 1.98 9 2009 15,659,786 349,618 2.23 10 2010 22,107,438 257,586 1.17 11 2011 23,329,187 174,806 0.75 12 2012 24,102,842 459,838 1.91 13 2013 33,822,488 665,257 1.97 14 2014 38,678,626 1,464,257 3.79 15 2015 54,193,276 1,622,869 2.99 16 2016 83,355,303 2,499,694 3.00 17 2017 125,091,319 728467 0.58 18 2018 144,686,256 2,030,221 1.40 19 2019 260,206,808 4,111,990 1.58 source: columns (1) and (2) central bank of sudan annual reports (2001-2019). column (3) own calculations based on columns 1 and 2. 129 international journal of islamic economics and finance (ijief) vol. 5(1), january 2022, pages 129-150 islamic fintech: archaeology of a discourse 1azak belabesrabder corresponding email: abelabes@kau.edu.sa article history received: march 2nd, 2021 revised: june 25th, 2021 october 30th, 2021 accepted: november 9th, 2021 abstract the objective of this paper is to present an archaeology of the discourse on islamic fintech to highlight its mimetic character, i.e. the desire to imitate globalized finance to obtain the same thing in terms of prestige. the archaeology of the discourse revealed the following: (i) the difference between the classic islamic conception of finance and islamic fintech lies in the mobilization of digital technology innovation in the field of finance. (ii) the difference between islamic fintech and conventional fintech lies in the compatibility of islamic financial products and services with maqāṣid al-sharīʿah. after shedding light on the themes of social innovation and slow technology, the study recommends paying special attention to the notion of design thinking in the sense that it offers the opportunity to imagine solutions through the intersection of analysis, intuition, experimentation, and human connection. it is imperative to invest in local startups to innovate solutions that meet both the needs of users and the ambitions of organizations, while taking care not to destroy social structures, and allowing each person to develop its own specific world (milieu, umwelt, fûdo 風土). keywords: archaeology of knowledge; islamic fintech; innovation; design thinking jel classification: a13; g10; o33; o35 type of paper: research paper @ ijief 2022 published by universitas muhammadiyah yogyakarta, indonesia doi: https://doi.org/10.18196/ijief.v5i1.11248 web: https://journal.umy.ac.id/index.php/ijief/article/view/11248 citation: belabes, a. (2022). islamic fintech: archaeology of a discourse. international journal of islamic economics and finance (ijief), 5(1), 129-150, doi: https://doi.org/10.18196/ijief.v5i1.11248 1 king abdulaziz university, saudi arabia mailto:abelabes@kau.edu.sa https://doi.org/10.18196/ijief.v5i1.11 https://doi.org/10.18196/ijief.v5i1.11 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v5i1.11248&domain=pdf belabes │ islamic fintech: archaeology of a discourse international journal of islamic economics and finance (ijief), 5(1), 129-150 │ 130 i. introduction 1.1. background for those who are in regular contact with islamic finance circles and meditate their discourse without preconceived ideas or ideological bias under the effect of mirror game, the more time goes by, the more this discourse seems to be assimilated to something light, i.e., empty of substance, meaning, and difference worthy of interest. some actors are on the lookout for trending topics to add the adjective ‘islamic’ or the word ‘from islamic perspective’. with a wave of a magic wand, everything becomes islamic: development, competitiveness, wealth, social finance, cryptocurrency, crowdfunding, benchmarking, e-commerce, fintech. this fever, even if it gives the impression of unequaled success or a stroke of genius, will sooner or later fade away like all fashions. allah says in the qur’ān: )the worthless residue is then cast away, but what benefits people remains on the earth) sourat 13, verse 17. above all, it reveals a level of reading that is limited to form without rising to the quest for the substance to explore the underlying epistemological presuppositions. in this context, the study draws the attention of researchers and practitioners to rise to this level of meditation of what is fashionable in islamic finance circles with their feet on the ground without fascination or rejection. to this end, it proposes an archaeology of knowledge having for object the discourse on islamic fintech. this leads in filigree to the need to question the status of islamic finance as an academic discipline, its history as a field of knowledge that claims to be islamic, and the concepts that structure it as a system on both a theoretical and practical level. in this little game of imitating the products and services of mainstream finance, customers will not be fooled for long. sooner or later they will turn to the conventional, as people generally prefer the original to the copy. in this case, it will not be easy to regain the trust and loyalty of customers. the stakes are momentous, it is therefore important not to take lightly. in 1952 and 1953, the famous english historian arnold toynbee gave two lectures at the gifford lectures on the historian's approach to religion. they have been grouped into a book an historian's approach to religion, published in 1956 by oxford university press. in this fascinating book, he develops the idea that technology, first conceived as a substitute for religious fanaticism, has finally taken the place of religion (toynbee, 1963, p.215). in another book a study of history, he has often defended the idea that “religion is a permanent reality that cannot be extracted from human nature” (toynbee, 1978, p.503). the need to believe is inherent in human nature regardless of the form of religious sentiment. for the american historian george dyson belabes │ islamic fintech: archaeology of a discourse international journal of islamic economics and finance (ijief), 5(1), 129-150 │ 131 (2016), who considers himself more as a historian of people who have a connection with technology than as a historian of technology, technology has the qualities that human beings seek in religion. far from having disappeared, the latter has been metabolized in faith in technological progress, as noted by the critical technology historian david f. noble (1999) in his book the religion of technology. these insightful analyses show the limits of slogans that circulate on social networks like: the impact of the digital revolution on religion, how religion and technology coexist in a digital age, religion in the age of digitalization. in this context of restructuring, where secularization does not mean the end of religiosity (simmel, 19121998, p.153), how can we explain that people who proclaim themselves as muslims believe that technology will have the answer to everything concerning their field of activity, in this case: finance? in workshops and seminars dedicated to islamic fintech, the merits of crowdfunding, blockchain, cryptocurrencies, disruptive technology are often praised. this question of the interpenetration of beliefs reveals the coexistence of two worlds in everyday life: that of worship (dīn) and that of business (dunyā). it raises an underlying question about the real effect of ritual practice on the conduct of personal affairs. the interweaving of religion and economy through digital technology remains to be studied beyond fashionable themes such as the new spirit of capitalism (boltanski & chiapello, 1999) or market islam (haenni, 2006), which have been overtaken by events due to lack of lucidity. 1.2. objective the aim of the study is to invite researchers not to jump on the fashionable discourses, which are comparable to bubbles that always end up deflating. from my humble experience as an economic analyst and my background as an electronic engineer, i have found that most people who use the word islamic fintech do not understand its true meaning or its real significance in terms of non-neutrality of technique, despite the good intentions and fine declarations regularly expressed. fintech, the marketing abbreviation for financial technology, refers to new technologies that aim to improve and automate financial services. in a more down-to-earth manner, when talking about fintech, for a long time there was a tendency to consider, on the one hand, many innovative startups looking for users and, on the other hand, large financial players, well established in the market but lacking innovation. this dichotomous vision should gradually be blurred as the two worlds come together, which may restrict competition through tacit agreements and further increase inequalities that most islamic finance players are not paying attention. belabes │ islamic fintech: archaeology of a discourse international journal of islamic economics and finance (ijief), 5(1), 129-150 │ 132 after the literature review which shows that this study is the first of its kind and denotes the difficulty of the task, it is about presenting an archaeology of the discourse on islamic fintech as a practice that systematically forms the object of which it speaks. the aim is not to neutralize the discourse but to maintain its consistency, to make it emerge in its own complexity. this archeology allows us to grasp the epistemological presuppositions that work in people's minds like a religion, because the discourse on fintech promises paradise on earth, constantly improving the future of mankind, offering new services, more accessible, of better quality, and at a lower cost. the study then critically analyzes mit's engineering equation of innovation, which is used as an authoritative reference in the specialized literature. the study then proposes a deconstruction of the notion of innovation, discusses the importance of the notion of social innovation and that of slow technology. the conclusion outlines the main results of the study in terms of exploring the underlying epistemological presuppositions before presenting the recommendations. ii. literature review 2.1. background theory the archaeology of the knowledge, as a critical method of discourse (foucault, 1969), consists in an uncovering of the conceptual strata of a knowledge perceived as constituted (belabes, 2001), under the effect of the cartesian dualism of the subject and the object (descartes, 2008, p.38-39). it leads to the deciphering of texts to detect a plurality of levels, and to the interrogation of discourses to discover the secret movements of thought, and to put the finger on the unspoken or the background of the discursive context beyond the smokescreen formed by conceptual intermediaries (notions, dichotomies, classifications) and technical tools (mathematics, statistics, probabilities, artificial intelligence, big data) (belabes, 2019a). these intermediaries and tools are elements of the discourse rather than means to elaborate a picture of reality in a rigorous way (bouleau, 2014). they are oriented towards control, quantitative, and reductionism rather than towards the invention and construction of understandings (supiot, 2015). this deficiency is evident in the design of master programs dedicated to fintech and islamic fintech. designers would still need to have the means to grasp the subtleties to distinguish the substance from the form and the essential from the accessory (belabes, 2021). belabes │ islamic fintech: archaeology of a discourse international journal of islamic economics and finance (ijief), 5(1), 129-150 │ 133 2.2. previous studies in view of the above, it appears that this is the first study of its kind ever undertaken, not only because of the difficulty of the subject, the archaeology of knowledge, which requires extensive and specific knowledge of epistemology, in the broadest sense of the term: how do we know what we think we know? but also because of the difficulty to step back from what is fashionable: fintech. if a subject becomes fashionable, it is a disaster in terms of knowledge. the reason is that fashion is the false intelligence that spoils everything original in human and social sciences that are essential for a better understanding of the world and of oneself, in particular literature, history, anthropology, ethology, and mesology. taking care not to artificially separate these fields of knowledge, all related to the academic world, which wants distinctions everywhere. iii. methodology 3.1. data the term data designates here something crude which serves as a basis for reasoning, examination, or research. in this sense, the data has been collected from various sources that are part of the discourse on islamic fintech, including recent publications most of which only repeat what is said on the internet and on social networks. 3.2. method in islamic finance circles, the major problem in the discourse on fintech is the lack of knowledge and the lack of technical mastery. that is a problem when people do not even understand what they are trying to promote apart from what is circulating on the internet and on social networks. this explains why i resigned myself to deal with discourse and not with in-depth knowledge. archeology of knowledge practiced as a method of approaching the discourse on islamic fintech strives to raise the level of analysis for the benefit of those who will be interested in the subject in the future with a real desire to deepen their knowledge. iv. result and discussion 4.1. archaeology of the discourse on islamic fintech at the end of his speech “enabling the fintech transformation: revolution, restoration, or reformation”, delivered on 16 june 2016, mark carney, the belabes │ islamic fintech: archaeology of a discourse international journal of islamic economics and finance (ijief), 5(1), 129-150 │ 134 governor of the central bank of england, and chairman of the financial stability board (fsb) which promotes international financial stability, said: “with time, fintech could mean a more open, more transparent, and more democratic global financial system” (carney, 2016, p.11). but what is fintech in the eyes of regulators? it is innovation in financial services (de vauplane, 2015, p.29). this is evidenced by the words of gérard rameix, president of the french financial markets authority, in a speech to the fintech forum, organized by the financial markets authority (amf) and the prudential supervision and resolution authority (acpr): “we are living in a period of extraordinary financial innovation, perhaps even unprecedented” (rameix, 2016). the portal of the french ministry of economy (2018) notes in a thematic note entitled fintech, digital technology serving the financial sector of the economy that fintech “refers to small enterprises (start-ups and smes) that provide financial services through innovative solutions. the fields of application are varied: mobile payment, crowdfunding, savings management, insurance and credit, online financial advice, decision support using algorithms”. the discourse on islamic fintech is in line with the same approach, under the influence of mimetic rivalry, despite the argument that the implementation of digital technologies within the spirit of maqāṣid al-sharī’ah should stimulate the development of islamic finance by increasing the accessibility of banking and other financial services in islamic communities around the world and by making it easier to access investment opportunities in different sectors (ali et al., 2021). at the same time, digital technologies will increase financing opportunities and facilitate asset management for companies that consider islamic business ethics (sánchez fernández, 2021). the same remark is true for the argument that refers to the effects and implications of rapidly evolving digital technologies on islamic finance in terms of swot analysis (strengths, weaknesses, opportunities, and threats) (billah, 2021). this denotes a glaring lack of underlying epistemological presuppositions of both digital technology and swot analysis. indeed, in strategic management there are three major strategies: adapt to the market, influence the market, create a new market. swot analysis is part of the first strategy, which is to adapt to the market. in contrast, the digital world refers to disruptive technology that replaces a dominant technology in a market. in this sense, associating digital technology with swot analysis is an oxymoron that aims to bring together two terms that their underlying epistemological presuppositions should keep apart. discourse, thus conceived, is not the majestically unrolled manifestation of a subject that thinks, knows, and says it. on the contrary, it is an ensemble where the dispersion of the subject and its discontinuity with itself can be determined (foucault, 1969, p.74). but it is belabes │ islamic fintech: archaeology of a discourse international journal of islamic economics and finance (ijief), 5(1), 129-150 │ 135 still necessary that this in-depth analysis is within the reach of the understanding of the followers of the discourse on fintech who usually just copy and paste what is in vogue, especially in the covid-19 period (rabbani et al, 2021), without a critical mind. the value of a technique is not measured by its ability to solve a problem posed by an event phenomenon of which no one is able to really understand the ins and outs. despite the most sophisticated risk management models, the history of the technique shows that men remain prisoners of the boxes they make to enclose the ailments that appear to them to be the most dangerous. hence the need for an approach to maqāṣid under the prism of the non-neutrality of technique (belabes, 2021a). if in the mainstream fashion discourse in silicon valley a disruptive technology is an innovation that significantly changes the way the existing market operates, the question here is: why the discourse on digital technology is more typically associated with innovation by excluding “other forms of enunciation” (foucault, 1969, p.40)? this archeology of discourse leads to exploring the meaning of innovation in engineering schools with reference to the mit, massachusetts institute of technology, which has a place in the ranking of the world's best-known and most prestigious universities specializing in science and technology. 4.2. criticism of the mit's engineering equation of innovation in the mit’s classrooms, edward b. roberts taught his students for many years the equation (1) innovation = invention + commercialization …………………….. (1) in his paper managing invention and invention, widely published in the literature on the subject, roberts (1988, p.12-13) wrote: “innovation is composed of two parts: (1) the generation of an idea or invention, and (2) the conversion of that invention into a business or other useful application. using the generally accepted (broad) definition of innovation—all of the stages from the technical invention to final commercializationthe technical contribution does not have a dominant position (3). this leads me to a simple definition of my own, but nonetheless, one i feel is critical to emphasize: innovation = invention + commercialization” equation (2) is used in the introductory courses on innovation at mit (aulet, 2013) and the mit history and observations on entrepreneurship and innovation (estabil, 2012, p.5). for kenneth morse (2013), founder and ceo of the mit entrepreneurship center for thirteen years, “innovation is invention plus commercialization. it’s very important to understand that creating new ideas and new technologies is important, but we also need commercialization”. belabes │ islamic fintech: archaeology of a discourse international journal of islamic economics and finance (ijief), 5(1), 129-150 │ 136 this gives an idea of the definition of invention at mit: invention = new ideas + new technologies …………………………. (2) some researchers prefer to define innovation as the commercialization of a new idea (fagerberg, 2003, p.3), or the conversion of a new idea into revenues and profits (lafley, charan, 2008, p.21), on the basis that an idea is the original elaboration of thought, for responding to a situation, to be at the origin of an original action, work, or invention. for others, innovation is the creation of a new product-market-technology-organization-combination (boer, during, 2001, p.84). in the academic circles, inventions as intellectual assets are generally transformed into intellectual property, via such mechanisms as patents, licenses, copyrights, and trademarks. equation (3) is written as follows: innovation = intellectual property + commercialization …………………. (3) innovation and invention are concepts that one might think are synonymous, but that cut across different realities. thus, it is inventions that can be protected by intellectual property rules and not innovations, hence the term patent. often associated with the term innovation, the invention is nevertheless a very different notion since many inventions do not reach economic value. innovation is based on invention, but not all inventions lead to innovations. commercialization is the process by which an idea or invention is transformed into a product or service. but on closer examination, equation (4) should be written as follows: innovation = invention x commercialization ……………….….. (4) because, as summarized in table 1, if there is an invention and no commercialization, there is no invention. just as there is no invention if there is commercialization and no invention. table 1. value of innovation as a product of invention and commercialization invention commercialization innovation 0 0 0 1 0 0 0 1 0 1 1 1 equation (1) is not free from criticism as evidenced by the following points: first, we must not systematically adopt what is new for the simple reason that it is new, just as we must not categorically reject what is old for the simple reason that it is old. in other words, the obsession with the new reflects a belabes │ islamic fintech: archaeology of a discourse international journal of islamic economics and finance (ijief), 5(1), 129-150 │ 137 rejection of the old, just as the obsession with the old reflects a rejection of the new. the obsession with novelty brings to light hannah arendt's idea ([1954]1972, p.43-45) that there is an end to tradition because there is a crisis of modernity. in fact, modernity is not in crisis, it is a crisis (guillaud, 2005, p.77). then, contrary to the statement of the philosopher bernard stiegler (2009) that “there is no innovation without invention, but there are many inventions that produce no innovation”, there can be innovation without invention, not all inventions have to be translated into innovations, and few innovations are pure inventions. most of the time, it is a combination of pre-existing elements. as gabriel tarde (1899, p.36) pointed out, “our innovations are mostly combinations of previous examples”. so, when steve jobs launches the iphone, all its components are already there: radio, programming, computer, battery, telephony, touch screen, icon interface. the success came from apple's ingenious and seductive way of mixing these elements to create the desire of many customers. however, there is a common set of these two notions. moreover, innovation is temporary, lasts only a limited time, and is eventually popularized. as gabriel tarde (1890, p.328) points out: “it is because the innovations, brought about by the fashion trend have harmonized, that they have set themselves as a custom”. he also writes: “there is no literary innovation that, when generalized, does not take on a classical air, i. e. traditional” (tarde, 1900, p.369). in the frantic race to win market share, one innovation replaces another. as gabriel tarde (1902, p.157) pointed out, before joseph schumpeter ([1942]1984, p.116-117), through his notion of the creative destruction process, “the root cause of war-crises is an invention, an improvement, an innovation that has just hatched and which, to grow, must drive back any industry based on an old invention”. the more rivalry for market share becomes fierce, the more insignificant the innovation tends to become. what really counts is knowing how to sell the product. it is not certain in these conditions that the product will always be profitable for the consumer, unlike the time when gabriel tarde (1895, p.137) lived, according to which “if competitors are harmed by these innovations, consumers will be favored”. finally, the equation clearly refers to a classical vision of the market as a space where seller's offers and buyer's requests meet to carry out exchanges. it does not consider the progress of scientific research relating to the notion of market, in particular through the notion of “market arrangements”, which emphasizes the temporal and longitudinal aspect of market activities (callon, 2017, p.54), and leads, regarding the epistemological posture of observation and analysis, to consider the goods themselves as processes, which should be belabes │ islamic fintech: archaeology of a discourse international journal of islamic economics and finance (ijief), 5(1), 129-150 │ 138 followed throughout their development. but has innovation always been associated essentially with the commercialization of new technologies? 4.3. deconstruction of the notion of innovation innovation as a practice that reflects the idea of renewal and change has existed for centuries, but as far as the notion is concerned, it is something else. indeed, initially, the notion of innovation has a very different connotation from that commonly accepted today: innovation would be necessary, a good thing in itself. however, the history of the notion shows that this has not always been the case. until the 18th century, innovation was a contested word or at least one that aroused a certain reservation. it is not considered good in itself, it can be both profitable and “harmful” (mondon, 1817, p.3). this also applies to the word invention and what it covers. as lao-tzu rightly says, “the one who invented the boat also invented the shipwreck”. originally, the word used was the verb “innovate”, which dates to the 14th century. it derives from the word “innovare” which means “to renew, to change” in the lower latin as indicated in the dictionnaire universel françois et latin (1752, 7, p.320). it then pointed to the idea of “introducing new things” (boyer, 1768, 2, p.320). this verb was first used by lawyers, in the sense of adding a clause to an already established contract. this does not apply to the marriage contract because “one cannot innovate anything to one's prejudice” (duperray, 1761, p.139). in the legal field, “an innovation must be agreed by all” (boutry, 1836, p.10) because it is never accepted “without resistance” (le fèvre, 1816, p.1). the first use of the word innovation goes back to francis bacon (1841, p.32) in 1625: “surely every medicine is an innovation, and he that will not apply new remedies must expect new evils; for time is the greatest innovator; and if time, of course, alters things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?”. in the political field, innovation is associated with a questioning of the prince's power, the established order, in particular of the political constitutions. in his essay on the revision of the charter, gabriel gabet (1819, p.4) refers to the obligation “to swear obedience to the constitution, to defend it against any attack, any innovation, any change, and to maintain it finally in all its integrity”. in the religious field, innovation is often associated with what is opposed to “tradition” (lamartine, 1843, p.11), i. e. the questioning of the teachings set out in the sacred texts. in his book the canons of ecumenical councils: their publication in france, adolphe tardif (1872, p.13) writes: “ecumenical councils do not create new dogmas; they only acknowledge traditional and universal beliefs, their canons are therefore only declarative of the faith of catholicity, belabes │ islamic fintech: archaeology of a discourse international journal of islamic economics and finance (ijief), 5(1), 129-150 │ 139 they do not introduce any innovation into the church, any change in its faith or its practices”. until the 19th century, there were objections to the use of the word innovation. as jean-augustin barral (1875, p.7) points out, “the word innovate means literally to bring an innovation, a change, and this innovation can be true or good, as false or bad, i renounce to use it”. most often, the word innovation is used for polemical purposes. those who aspire to change in the political, religious, or social order are most often described as innovators. little by little, innovation is gradually gaining in popularity. the dictionary of the french academy defines the word as follows: “introduction of something new in government, laws, an act, a belief, a use, a science” (académie française, 1835, 2, p.39). in his book il est un, pavie (1879, p.4) refers to the emulation that has led nations “down the path of progress and progress to innovation”. in his book l'art de bien voter, sincère (1884: 5) mentions that “science benefits from innovation”. innovation is seen as a source of economic progress because it is associated with science and its technical effects. in his study of german patent law, joseph bonnet (1902, p.77) notes that the notion of technical effect “refers to the new and particular or unforeseen result of a new innovation or application”. hence the word “technical innovation” (bonnet, 1902, p.78). for his part, eugène van overloop (1920, p.22) notes about lace: “the only technical innovation consisted in the application of a more flexible and delicate method to the implementation of old processes”. this semantic evolution leads to questions about what innovation is, the inducing factor, how to theorize it (sweezy, 1943) in reference to schumpeter, to whom the notion of innovation is attributed in economic analysis. it is because of the existence or otherwise of innovation that schumpeter ([1911]1935, p.102) explains the cyclical alternation of phases of economic growth or depression. at the same time, governments are putting in place economic policies, of which technological innovation is a major element, based on the idea that innovation is a new technology that finds a market. if innovation has become a slogan, generally accepted as necessary and good for all humanity, what would happen if it were critically analyzed? implicitly when most researchers are interested in innovation, their thinking is oriented in one way or another. this is reflected in questions such as these: why has it become urgent to innovate? how to learn to innovate in an uncertain world? how to co-innovate with customers and suppliers? how to engage in open innovation? how to establish more effective innovation policies? innovation benefits from a positive bias that stems from a widely shared ideological construction. it is at the heart of national economies, the european union, and international organizations like the oecd. without it, no new belabes │ islamic fintech: archaeology of a discourse international journal of islamic economics and finance (ijief), 5(1), 129-150 │ 140 products, services, or processes, and enterprises struggled to gain market shares, reduce costs, and increase profits. the question “innovate or disappear” replaced william shakespeare's question “to be or not to be”. each slogan has borne the marks of its era. hence the need to approach the notion of innovation with critical thinking, but that is not as simple as it sounds. first of all, it should be noted the performative character of the statements containing the word innovation that led to changes in the reality and practices they designate. innovation has become the solution to any societal problem, to the point that very rarely is there any question about the real nature and origin of these problems. once the word innovation is pronounced as if everything had been said or almost said. but is innovation really necessary to solve all problems? certainly not because change can take place in several ways and in particular through reform (islāh), refinement (tahdhīb), revision (tanqīh), adjustment (taqwīm), purification (tasfiyah) (belabes, 2019b, p.60). then, it is important to be careful about the representations, symbols, and signs that the word innovation conveys. is it not associated with what is best for the whole of humankind through the use of disruptive technologies? moreover, it is often added that true innovation is that of the first market introduction. the others are just imitations. in the collective memory, the real innovators are those who innovate first. hence the dichotomy 'leader/followers'. there is therefore a dominant economic dimension behind the notion of innovation, which is the notion of competitiveness to occupy a dominant position on a given market. this is evidenced by the competitiveness and innovation framework program (2007-2013) of the european commission which is meant to improve the competitiveness of european companies through innovation. finally, let us not forget that behind this keyword, there is an ideology that does not say its name (miles et al., 2007). the intelligentsia has participated in the creation of such an ideology that innovation is understood in one way rather than another. however, an analysis of the notion over a long period shows that innovation has covered a diversity of meanings. it has only been a few decades since it became a watchword, an irreplaceable horizon, a panacea for solving all problems (bontems, 2014). a first step in the right direction would be not to associate innovation solely with technology, because many innovation initiatives are organizational, social, civic, related to uses and applications. this leads to an exploration of the notion of social innovation, like food cooperatives or fair trade, that have brought about a systemic change in the life of local communities, and that of low tech or slow tech which is characterized by the implementation of simple and inexpensive technologies, accessible to all and easily repairable, using common and locally belabes │ islamic fintech: archaeology of a discourse international journal of islamic economics and finance (ijief), 5(1), 129-150 │ 141 available means, including the reuse or recycling of objects and/or common materials. 4.4. the importance of the notion of social innovation social innovation consists of developing new responses to new or poorly met social needs under current market and social policy conditions, involving the participation and cooperation of relevant actors, including users and users. these innovations concern the product or service, as well as the mode of organization and distribution, in areas such as aging, early childhood, housing, and health, the fight against poverty, exclusion, and discrimination. all these new forms of innovation are poorly considered in the support and financing measures to innovation. social innovation is situated in this context and must be associated with all the measures that advocate a broader vision of innovation that is most often played out in proximity. these may sometimes include structural issues such as employment or housing, or emerging issues such as: the aging of the population (health, dependency), new forms of social exclusion (fuel poverty), environmental protection (management of water, waste, energy). it is important to support the development of social innovation to meet the growing social needs that cannot be met by the market or public authorities alone that showed their limits during the covid-19 pandemic. social innovation can be one of the levers for developing the creation of activities, employment, social cohesion, and meeting new social needs. it can also be a lever for changing the scale of social and solidarity economy policies. this brings up to date the importance of the principle of subsidiarity which aims at privileging the exercise of competencies in matters of organization of human life at the lower level as long as the higher level cannot act in a more effective way. if a problem cannot be solved with the same type of thinking that created it, there is a need to vary the solutions so that the use of the same tool does not become counterproductive. the history of the awqāf since the construction of the ka'aba, the mosque of qubā', then that of the prophet muḥammad (peace be upon him) in medina (zarka, 1947, 1, p.7) shows with hindsight that the future of human societies is in the genius of simplicity, the power of creativity, and the elegance of sobriety. while the creation of a waqf responds to a social need to improve the quality of life of creatures beyond the human species, the development of the solution does not necessarily involve technology, nor does it necessarily require funding. as noted by steve jobs: “focus and simplicity. simple can be harder than complex; you have to work hard to get your thinking clean to make it simple”. belabes │ islamic fintech: archaeology of a discourse international journal of islamic economics and finance (ijief), 5(1), 129-150 │ 142 moderation in everything is the source of the greatest advancements for human beings to allow everyone to build his own world (milieu, umwelt, fûdo 風土) (berque, 2014). in its relation to the environment, the being is not an object, but a subject that actively interprets the environment to elaborate its own milieu. by dint of abstracting himself from the object-world, a modern man comes to risk suppressing himself. it has begun to do so by ravaging the environment that forms the basis of its own world for the benefit of a virtual world shaped for him by the giants of silicon valley. the one who does not take care of building his world leaves it to others to shape a world of their own in accordance with their vision of life. 4.5. towards slow technology technological performance, pursued in principle, has gone a long way to eclipsing the reasons and purposes that justified it. however, it cannot in itself be sufficient to solve the problem of resources in the broad sense of the word and to restore the usefulness of islamic finance, which, according to its theorists, is supposed to have the role of transforming savings into the financing of the real economy. fintech must be thought of in terms of its longterm effects on the life of societies, but above all in the light of the goals set by these same societies, in particular the fight against inequalities in the distribution of wealth. if technological performance constitutes a competitive advantage, as the prevailing discourse stipulates, it must be contained below its own counterproductivity in the sense of ivan illich ([1973]2009, 1, p.551-552): “the tool can grow in two ways, depending on whether it increases man's power or replaces it. in the first case, the person leads his own existence, takes control and responsibility for it. in the second case, it is finally the machine that wins”. this calls into question the dehumanizing and alienating character of technology. the concept of counter-productivity marks a considerable advance in the social sciences, and probably far beyond what illich imagined. because, if he saw the 'macro-social' importance of this – the fact that, in a society, the more important the means used, the further away from the desired result, instead of to move towards it – he underestimated its 'micro-social' fertility, particularly within the economic analysis itself. while the realization that well-being is not so much linked to economic growth highlights the counter-productivity of economic growth, the shift to diversified lifestyles, where autonomy would play an increasing role at the expense of heteronomy, is neither raised nor discussed in islamic finance circles, which continue to highlight the role of islamic finance in economic development in its generally accepted meaning, despite successive criticisms belabes │ islamic fintech: archaeology of a discourse international journal of islamic economics and finance (ijief), 5(1), 129-150 │ 143 since the appearance of the rome group's report the limits to growth (meadows et al., 1972) which made it possible to question with a new eye how to meet needs: why produce? what to produce? how to produce? this leads to a rethinking of innovation, orienting it towards the economy of resources, the preservation and restoration of ecosystems, access to vital everyday things by the greatest number of people. this 'low tech' approach encourages a new look at old techniques and know-how which, in their vast majority, were based on natural materials and required, under duress, little energy to serve local needs. it also allows us to take a different look at the solutions developed in the countries of the south, where the context requires finding solutions that are sober, robust, simple, repairable, and accessible to the greatest number of people (bihouix et al., 2018, p.6). v. conclusion and recommendation 5.1. conclusion if the archeology of the discourse on innovation in islamic finance (belabes, 2019b) has revealed a tautology, i.e. a repetition of the same meaning in different words, that is as follows: (1) islamic financial engineering consists of innovating new products compatible with maqāṣid al-sharī'ah, (2) innovation plays a major role in the development of islamic financial engineering. in the introduction to his essays in positive economics, milton friedman (1953, p.11) noted that tautological formulas, as a language, “have an extremely important place in economics”. the deconstruction of the discourse on islamic fintech revealed the following: (1) the difference between classical islamic finance and islamic fintech lies in the mobilization of technological innovation in the field of finance, (2) the difference between islamic fintech and conventional fintech is in the compatibility of islamic financial products with maqāṣid al-sharī'ah. both discourses are based on the same postulate: islamic finance is based on innovation, the essence of which is islamic financial engineering closely linked to maqāṣid al-sharī'ah. this is a ready-made tautological assertion that highlights a lack of intellectual rigor under the effect of the mimetic rivalry. if the discourse claims to be based on a specific world view (spezifische weltanschauungen as the germans say), what drives it is not different from what is commonly called conventional finance. on the contrary, it is driven by an exacerbated desire for convergence and similarity. competition here refers to the desire to imitate the other to achieve the same thing or nearly so. this is reflected in the words of sheikh salah kamel, founder of the al baraka belabes │ islamic fintech: archaeology of a discourse international journal of islamic economics and finance (ijief), 5(1), 129-150 │ 144 banking group, during a visit to the islamic economics institute at king abdulaziz university in jeddah on 12 june 2014: “we imitate them simply so that they say that we are developed like them”. in addition, the archeology of the discourse raised a major theoretical pitfall where innovation is fundamentally associated with technology while the discourse on islamic fintech often refers to two fashionable topics: corporate social responsibility (csr) and sustainable development goals (sdgs). to ensure some conceptual coherence, it would have been more appropriate to use the notion of social innovation, which can take original forms in addressing social problems (defining the problem, identifying causes and solutions), and in implementing change processes, as they incorporate new practices and forms of assessment focused on improving quality of life and preserving biodiversity rather than on the growth of the gross domestic product. activities that strengthen social cohesion and non-market economic activities should be encouraged for learning to live as well or better with fewer material resources and less technology local-structure-adapted. hence the usefulness of another notion, to deepen common reflection and stimulate exchanges, that of 'low technology' where it is not a question of eliminating technology, but rather of thinking differently so that human beings do not become slaves to technology, in the same way, that they should free themselves from the servitude of debt. therefore, any subjection by technology, debt, or any other means, or technique to use a term dear to the engineering sciences, could only be unfair. however, if injustice can only reign where good men have given up, injustice calls for injustice. technology must be held accountable for its actions and the consequences of its actions, which requires an ethical commitment from society as a whole. 5.2. recommendation islamic finance actors can no longer confine themselves to waiting for what is in vogue in the world of finance to copy it by perfecting the form without upsetting the substance, ignoring the non-neutrality of digital technology that disrupts epistemological key features and creates new risks. this requires the development of a proactive approach that focuses on eliminating problems before they have a chance to appear beyond the dominant thinking patterns, around dichotomies such as east/west, islamic/non-islamic, economics/fiqh, ḥalal (permissible)/ḥaram (forbidden), maqāṣid (purposes)/aḥkām (injunctions). in the humanities and social sciences, not everything is black and white. as the riemann (1858) hypothesis states, some facts are neither true nor false, but undecidable. this means that in our relationship with the fields of knowledge made by humans, including mathematics, we are not confronted with a ready-made truth, but rather with questioning in constant belabes │ islamic fintech: archaeology of a discourse international journal of islamic economics and finance (ijief), 5(1), 129-150 │ 145 movement to break the circle as was done by johannes kepler who discovered that the planets travel about the sun in elliptical orbits. what is important is to create connections with living milieus in all their diversity. it is imperative to invest in local startups to innovate solutions that meet both the needs of users and the ambitions of organizations, in order of priority, while taking care not to destroy social structures, and allowing each person to develop its specific world. the method of design thinking will be welcome because it offers the opportunity to imagine solutions through the intersection of analysis, intuition, experimentation, and human connection. the design thinking process enhances empathic creativity to the benefit of everyone away from the mainstream culture of the zero-sum game conveyed by the obsession with competitiveness: what one side wins is lost by the other side. in any case, the future remains open and there is no path traced by disruptive technology, as the engineers of silicon valley believe. to paraphrase the spanish poet antonio machado (1875-1937): "the path is made by walking" (se hace camino al 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(1947). ahkām al-awqāf. damascus: matba’at al-jāmi’a al-sūriyyah. belabes │ islamic fintech: archaeology of a discourse international journal of islamic economics and finance (ijief), 5(1), 129-150 │ 150 this page is intentionally left blank. promoting a sharing economy in the islamic finance industry: a study of selected oic countries dzuljastri abdul. razak 1 abdul-hamid abdul-wahab 2 abstract islamic finance has been in existence for the past centuries. nonetheless, the realization of the real objectives of the industry is still a dream yet to be true. the goal of islamic finance is to promote a sharing economy whereby money is not concentrated in the hands of a few individuals. this purpose of this study is to investigate the application of mudarbah and musharakah concepts which facilitate a sharing economy where profit and loss is shared between the bank and customer compared to debt financing that utilizes murabahah concept. the methodology is based on secondary data obtained from central banks of five selected oic countries. the results indicated that indonesia, sudan and bangladesh recorded the highest amounts in terms of mudarabah financing while malaysia, indonesia and pakistan recorded the highest amounts in terms of musharakah financing. the results also indicated that murabahah financing is high in malaysia, bangladesh, indonesia and sudan. pakistan registered the lowest amount in terms of murabahah financing. keywords: sharing economy, mudharabah, musharakah islamic finance industry, oic countries 1 kulliyyah of economics and management sciences, international islamic university malaysia, jalan gombak, selangor, email: dzuljastri@iium.edu.my 2 kulliyyah of economics and management sciences, international islamic university malaysia, jalan gombak, selangor, email: hamid.wahab@ymail.com 60 | promoting a sharing economy in the islamic finance industry: a study of selected oic countries i. introduction prior to the commencement of the islamic finance industry, there was a wide spread market failure in the conventional financial system since the 1920s. this triggered a substantial unfulfilled demand for alternative financial products that are free from the innate crisis-prone features of the conventional financial sector. the islamic financial system, with its shari’ah compliant or ethical financial practices, has emerged as an ideal alternative financial system and developed substantially to meet this demand (simkovic, 2013; mirakhor and bao 2013). according to abdullah (2016) islamic finance is the efficient and effective mobilization of resources for the benefit of the real economy. the focus here is the real economy. in order to undertake economic activities that will bring benefit to the real sector, the instruments of mudarabah and musharakah cannot be ignored. there are always some arguments against the modern islamic financial system that the system has been in operation since last three decades, nevertheless it did not bring any noticeable change in the real economic set-up. not even in the arena of financing. this is due to the fact that islamic banks pay more attention only to debt financing and less attention to equity financing which has the potential to promote distributive justice. this is an indication that the claims of islamic finance to create distributive justice will remain unachieved until risk sharing contracts are given more significance (usmani, 1998). this paper argues that mudarabah and musharakah are among the ideal contracts that will help promote sharing economy and instill justice and fairness as well as stability in the islamic finance industry. nevertheless, the application of the above-mentioned contracts in the modern islamic finance, especially among islamic banks, continues to dwindle. in several islamic finance jurisdictions such as malaysia, mudarabah and musharakah financing are still less accepted by islamic banking institutions. going forward, this paper seeks to examine the application of mudarabah and musharakah as compared to murabahah in the islamic banking sector of the five selected oic countries. secondly, the paper determines the possibility of promoting a sharing economy through the islamic banking sector. the next section of the paper discusses the literature review followed by the methodology of the study. the final part focuses on the discussion of findings and conclusion. international journal of islamic economics and finance, volume 1, number 1, july 2018 | 61 ii. literature review according to al-ghazali (1937), the prime objective of the shariah is to promote the welfare of the people, which lies in safeguarding their faith, life, intellect, posterity and wealth. focusing on the wealth aspect, one of the goals of islamic economics is to ensure equal distribution of wealth by removing disparity created through mass exploitation of resources to obtain maximum profit (chapra, 1985). following the above, the concept of financing in islam differs from that of conventional financing as islamic economic principle share risk and rewards in wealth creation by means of equity rather than debt. as a result, the society becomes more entrepreneurial and creative. this differs from the modern capitalism where profit maximization is the sole motive and banks are content with interest income on the loan regardless of the financial and social implications on the business. in contrasts, the islamic banks should also provide financing in adherence to shariah, which is to ensure overall wellbeing of the society (abdul razak, 2011). in order to provide financing in adherence to shariah, early muslim scholars who wrote about the development of the islamic financial system did not only give emphasis on the elimination of riba contracts but rather, they urged and promoted the use of risk-sharing instruments such as musharakah and mudarabah in islamic finance so as to achieve the real objectives of the industry. practitioners on the other hand are keen on murabahah whereby they are assured of profit similar to conventional finance that is bench marked to interest rate. while the early muslim scholars place emphasis on profit-loss sharing (pls) in islamic finance transactions, islamic finance practitioners in the modern time are most often concerned about increasing their profit share and minimizing risk by replicating the conventional finance products in an attempt to meet shariah compatibility. in the end, they are trapped in the same scenario of risk shifting and risk transfer just as in the case of the conventional finance (mirakhor and bao, 2013). in the opinion of many scholars, the islamic banking system by nature is supposed to be a model of equity finance. according to akacem and gilliam (2002) a good example of the significance of equity finance can be seen in the case of japan. the financial structure of the japanese demonstrates a remarkable combination of both debt-based and equity-based financial structures. the readiness of japanese banks in the postwar period to lend money as well as assume equity stakes in the manufacturing and industrial sector of japan had greatly enhanced the growth of the economy of japan (akacem and gilliam, 2002). the ideal islamic finance 62 | promoting a sharing economy in the islamic finance industry: a study of selected oic countries instruments that will help promote equity finance or a sharing economy and instill justice and fairness in the islamic finance industry are therefore mudarabah and musharakah. musharakah is an agreement between two or more individuals who carry out a specific business so as to share the profits as well as losses that arise in the investments (abdul-rahman and nor, 2017). mudarabah on the other hand is a contractual arrangement between two or more parties in which one party serves as the financier (rabul mal) of the other party who is the entrepreneur (mudarib), whereby the entrepreneur manages the business enterprise and the profits made are shared among the parties, while the losses are borne by the financier of the project (cerovid et al., 2017). the legitimacy of mudarabah and musharakah application can be traced back to the time of the prophet (pbuh). mudarabah for instance was used in the business enterprise between the prophet (pbuh) and a business woman who later became his first wife, khadijah. this is regarded as one of the first instance in the application of mudarabah concept which happened more than 15 years even before the prophet (pbuh) started to receive the revelation. in the makkan society, mudarabah was a common practice. this was because madinah was an agricultural society and thus the practice of crop sharing in the form of muzara'ah and musaqah were common. muzara’ah involves open fields used for farming crops while musaqah has to do with orchards of palm trees (kahf and khan, 1992). in this practice of crop sharing, land together with trees in the case of musaqah and land only in the case of muzara’ah are considered as fixed assets contributed by the rab al mal (the financier) or fund provider and put at the disposal of the mudarib (the entrepreneur) or the working partner in the mudarabah contract. with these arrangements, the mudarib has the opportunity to use the land to do business without having to actually pay for it and this is equivalent to financing. the profit made in terms of output is then shared among the parties based on the agreed profit and loss sharing ratio. however, losses made will be borne by the rabul mal. these arrangements ensure the use of assets without actually paying for them which is tantamount to financing. both muzara'ah and musaqah require sharing the gross output and allow for limited flexibility in the contractual distribution of operational expenses (kahf and khan, 1992). past literature revealed that there have been a number of studies on musharakah and mudarabah. most of those studies demonstrated the significance as well as the challenges of these two instruments. for instance, al-suwailem (1998) international journal of islamic economics and finance, volume 1, number 1, july 2018 | 63 believes that musharakah has a great potential as a venture capital tool for islamic financial institutions to raise funds and this will help boost growth in muslim countries. even though the author has the opinion that musharakah venture capital could fail or face some challenges just like any other type of venture capital, yet it represents an attractive alternative to the debt-based financing especially in muslim investors. in a similar disposition, the standing committee for economic and commercial cooperation (comcec) (2017) documented that, in many jurisdictions such as malaysia, indonesia, pakistan and sudan, murabahah based financing products are dominant in the islamic banking industry. the committee therefore recommended that institutions in the islamic finance industry should be encouraged to use equity-based financing principles such as mudarabah and musharakah. the committee is of the opinion that equity-based financing principles will help promote the development of the real economic sector through financing in infrastructure development, agriculture, smes and corporate project financing. also, the central bank of malaysia encourages the institutions in the islamic banking industry to work towards diversifying their range of islamic products to comprise not only debt-based structures such as murabahah but more importantly equity-based structures such as musharakah and mudarabah instruments. this is in line with the bank’s objective to meet the progressively sophisticated and diversified demand from the market (bnm, 2010). similarly, according to ahmad et al (2013) most scholars of islamic banking and finance are of the opinion that in order for the banking sector to promote risk-sharing, mutual assistance and co-operation, financial activities ought to reflect the principle of profit-loss sharing (pls) that is exemplified in musharakah and mudarabah. the authors believe that these should ideally be the foundation stone of islamic banking. the authors also have the conviction that islamic banks need to achieve socioeconomic objectives through the use of musharakah and mudarabah contracts. with the goal of understanding the needs of shariah instruments, noraziah (2010) reviewed the parameters set by bnm by means of specific definition in ascertaining significant characteristics. among the parameters included were musharakah covering capital as well as pls partnership. the author believes that the features recognized in the parameters could assist financial institutions in the industry to classify, comprehend, offer as well as differentiate these instruments from other contracts existing in the industry. the shariah parameters in these two 64 | promoting a sharing economy in the islamic finance industry: a study of selected oic countries instruments are meant to contribute to socioeconomic development especially in supporting small entrepreneurs. also, amelia and hardini (2017) studied about the determinants of mudarabah financing in indonesian islamic rural banks. the study discovered that most of the islamic rural banks prefer to use mudarabah financing because of the demand from customers. hence, an increase in islamic rural financing leads to an increase in mudarabah financing in indonesia. ahmed and barikzai (2013) documented that islamic banks involve in investment activities based on a number of instruments such as equity participation which is known as musharakah and agency activities in the form of mudarabah or qirad, cost-plus sale in the form of murabaha, post-delivery sale in the form of bai' salam, or leasing arrangements especially for equipment. the authors further discussed that it would be quite one-sided to limit islamic banking to the elimination of riba only. this makes sense as only focusing on elimination of riba without paying attention to risk sharing, will make islamic finance never to achieve its objectives. in terms of challenges in the application of mudarabah and musharakah instruments, abdul-rahman and nor, (2017) recently assessed the application as well as the modus operandi of profit and loss sharing instruments in an attempt to ascertain the challenges in the application of mudarabah and musharakah instruments. in their study, the authors conducted an in-depth interview with personnel from islamic banks in malaysia. the results disclosed that there are a number of challenges in terms of profit and loss sharing financing which include difficulty in selecting the appropriate partners, high risk of investment, lack of capital security, and the issue of demand mostly from customers with low credit worthiness. moreover, mirakhor and bao (2013) for instance did an extensive literature review with the goal of highlighting, explaining, and discussing an ideal islamic and conventional financial system. the study found that the modern islamic finance actually developed from the conventional financial system in order to provide solutions to the market failures in conventional finance in terms of the unfulfilled demand for products of islamic finance. the authors argued that, due to the fact that most of the practitioners in islamic finance came from the conventional finance background, thus majority of the products developed in islamic finance are mimicking the conventional finance. accordingly, the authors believe that the focus is mainly on avoiding riba without paying attention to exchange instruments as stated in the first part of the qur’an verse 275, “…but allah has permitted trade and has forbidden interest.” it is therefore suggested to move towards more risk international journal of islamic economics and finance, volume 1, number 1, july 2018 | 65 sharing instruments such as mudarabah and musharakah in islamic finance should be developed to create a robust financial system and help achieve a sharing economy. notwithstanding the above significance of mudarabah and musharakah, murabahah financing still dominates the islamic banking industry. a number of studies such as dixon (1992) and kayed (2012) are of the opinion that murabahah has been the most used islamic financial instrument in islamic banks. yet, this instrument is also claimed to be the most controversial and much criticized mode of islamic banking instrument (rosly, 2010). kayed (2012) for instance revealed that the use of murabahah is controversial as its procedures are similar to conventional debt financing which may lead customers into indebtedness which is unethical. kayed (2012) further contended that the use of this instrument is not in line with the shariah because the bank does not take the risk of ownership and liability in the case of property financing. to offer further understanding about the concept of murabahah, kayed (2012) asserted that murabahah is based on cost plus contract that provides a fixed rate of return to the banks and that this concept is one of the most widely used instruments in islamic banks around the globe. the utilization of this concept offers the bank a guaranteed fixed return, which is similar to conventional financing. fasih (2012) believed that sales can be based on three diverse categories and the general type of it is what is known as murabahah which is a cost-plus transaction is. dixon (1992) documented that murabahah provides prearranged earnings and it is mostly practiced by islamic banks as compared to other concepts such as mudarabah and musharakah. there are arguments that islamic banks are practicing “artificial murabahah” (kayed, 2012). this is because they give profit-bearing financing to their customers and charge a pre-arranged mark-up under different labels such as service charge and administrative fee. meanwhile, the prearranged mark-up amount is most often equal to the current interest rate and thus synonymous to riba. islamic banks have also been accused of promoting the culture of consumerism by means of murabahah financing to facilitate the purchase of consumer goods rather than entrepreneurial activities through instruments such as musharakah and mudarabah (kayed, 2012). murabahah can also be in the form of commodity murabahah which is based on the concept of tawarruq. in the market today, the common term used to denote tawarruq is ‘commodity murabahah transaction’ (dusuki et al., 2013). tawarruq is technically purchasing of a commodity on credit by the mutawarriq (seeker of 66 | promoting a sharing economy in the islamic finance industry: a study of selected oic countries cash) and selling it to a person other than the initial seller (3rd party) for a lower price on cash (dusuki et al., 2013). iii. methodology the methodology employed in this study is mainly secondary research on existing literature of the topic. accordingly, secondary data has been used as the main source of data and a simple descriptive statistic, in the form of charts, is utilized to analyze the data collected from the central banks of the selected countries. the countries selected are bangladesh, indonesia, malaysia, pakistan and sudan. these countries were chosen because they are among the top countries with large muslim population and they have a systemically important islamic finance industry. availability of data was also taken into consideration in the selection of these countries. thus, only those jurisdictions with more information about mudarabah, musharakah and murabahah financing were included in this study. the data selected consisted of semi-annual data of mudarabah, musharakah and murabahah financing for the period of fourth quarter 2013 (2013q4) to second quarter 2017 (2017q2). all the data are in millions of usd. table 1 in the following page shows the data collected for the analysis. international journal of islamic economics and finance, volume 1, number 1, july 2018 | 67 table 3.1 muḍārabah, mushārakah and murābahah data by country from 2013q4 – 2017q2 2013q4 2014q2 2014q4 2015q2 2015q4 2016q2 2016q4 2017q2 bangladesh total financing 13,422.2 14,989.8 16,354.4 17,570.3 18,683.1 20,078.0 21,368.5 22,423.2 muḍārabah 255.6 277.0 355.8 373.2 436.9 460.4 206.4 559.3 mushārakah 275.0 256.4 280.8 229.5 313.2 305.9 330.1 332.4 murābahah 8,538.4 9,141.7 9,915.9 10,744.3 11,744.8 12,809.7 12,762.6 15,059.6 indonesia total financing 11,261.60 11,973.90 11,892.60 11,304.30 11,161.10 11,998.70 13,067.40 13,932.70 muḍārabah 741.4 765.8 677.1 642.5 578.4 639 557.9 582.3 mushārakah 2,761.80 3,140.20 3,199.80 3,237.10 3,343.30 3,614.50 3,775.40 3,979.90 murābahah 6,966.9 7,354.8 7,384.8 6,917.4 6,788.1 7,233.8 8,103.6 8,515.9 malaysia total financing 85,471.9 93,844.9 95,463.9 95,746.9 90,257.5 100,721.6 96,226.3 105,273.9 muḍārabah 44.5 24.0 22.1 20.3 18.1 17.9 15.9 15.4 mushārakah 4,891.7 5,918.5 6,424.7 6,626.7 6,643.9 8,113.4 8,965.7 10,276.7 murābahah 17,347.0 20,208.6 24,033.9 27,220.9 27,499.5 34,714.1 35,343.5 39,971.7 pakistan total financing 2,030.8 2,283.4 2,763.3 3,530.4 4,421.1 4,705.7 5,556.2 6,254.1 muḍārabah 4.8 5.4 2.3 2.3 2.1 2.1 0.8 0.0 mushārakah 93.8 183.3 294.8 321.1 681.2 525.4 867.8 1,155.2 murābahah 620.1 552.0 614.5 609.3 792.3 806.8 645.4 913.0 sudan total financing 7812.42 8428.97 8875.21 9993.67 10521.93 11768.22 11166.77 13143.14 muḍārabah 286.23 464.71 425.73 475.37 456.01 473.41 479.20 516.98 mushārakah 489.37 515.22 469.28 579.52 453.22 523.80 483.75 448.75 murābahah 2948.79 3238.05 3530.71 4743.31 4324.20 4808.77 5109.72 6004.19 source: psifis, ifsb 68 | promoting a sharing economy in the islamic finance industry: a study of selected oic countries iv. analysis 4.1 mudarabah financing mudarabah financing is presented in chart-1below. it can be seen that in general, indonesia recorded the highest value in terms of mudarabah financing. this result is not surprising as mudarabah financing is the common mode of financing in rural areas of indonesia (amelia and hardini, 2017). thus, this is most probably the reason for the high mudarabah financing in indonesia as compared to the rest of the countries under the study. the result of indonesia is followed by sudan and then bangladesh, while malaysia and pakistan registered the lowest mudarabah financing during the period. specifically, indonesia recorded an increase from about $741,400 in 2013q4 to about $765,800 in 2014q2. there was however a continuous decline from about $765,800 in 2014q2 to about $578,400 in 2015q4 before a slight increase to about $639,000in 2016q2. this fluctuation ended up with about $582,300 in 2017q2. sudan also demonstrated similar fluctuations throughout the period, starting with about $286,230 in 2013q4 and increased slightly, to about $464,710 in 2014q2 before declining again in 2014q4.mudarabah financing in sudan continued to fluctuate and finally recorded about $516,980 in 2017q2. bangladesh registered about $255,630 in 2013q4 but increased, even though not consistently, to about $559,350 in 2017q2. despite the fact that malaysia is a key player in the islamic banking industry, its mudarabah financing demonstrated a continuous decline throughout the period from about $44,480 in 2013q4 to about $15,420 in 2017q2. therefore, in general, the countries with the highest mudarabah financing in this study are indonesia, sudan and bangladesh. international journal of islamic economics and finance, volume 1, number 1, july 2018 | 69 chart 4.1 mudarabah financing by country 4.2 musharakah financing the analysis of data on musharakah are presented in chart 2below.among all the countries under consideration, malaysia has registered a steady improvement in musharakah financing throughout the duration of the study in terms of value of financing, which grows from about $4,891,650 in 2013q4 to about $10,276,720 in 2017q2. similarly, indonesia recorded a continuous increase in musharakah financing from about $275.03 in 2013q4 to about $3,979.90 in 2017q2. this is followed by pakistan which also recorded a growth in musharakah financing of about $93.81 in 2013q4 to about $1,155.22 in 2017q2. based above, the country with the largest musharakah financing in the islamic banking sector is malaysia. thus, overall, malaysia, indonesia and pakistan recorded the highest amounts in terms of musharakah financing. notwithstanding the fact that malaysia, indonesia and pakistan showed some improvement in musharakah financing, when compared to murabahah financing, musharakah financing is still very small in all the countries under the study as we shall see in the next section in chart 2. $ 2 5 5 ,6 3 $ 2 7 6 ,9 8 $ 3 5 5 ,8 4 $ 3 7 3 ,2 3 $ 4 3 6 ,8 8 $ 4 6 0 ,4 1 $ 2 0 6 ,3 8 $ 5 5 9 ,3 5 $ 7 4 1 ,4 0 $ 7 6 5 ,8 0 $ 6 7 7 ,1 0 $ 6 4 2 ,5 0 $ 5 7 8 ,4 0 $ 6 3 9 ,0 0 $ 5 5 7 ,9 0 $ 5 8 2 ,3 0 $ 4 4 ,4 8 $ 2 4 ,0 2 $ 2 2 ,1 2 $ 2 0 ,3 1 $ 1 8 ,1 3 $ 1 7 ,9 5 $ 1 5 ,9 1 $ 1 5 ,4 2 $ 4 ,7 9 $ 5 ,4 0 $ 2 ,3 0 $ 2 ,2 8 $ 2 ,0 5 $ 2 ,1 5 $ 0 ,7 6 $ $ 2 8 6 ,2 3 $ 4 6 4 ,7 1 $ 4 2 5 ,7 3 $ 4 7 5 ,3 7 $ 4 5 6 ,0 1 $ 4 7 3 ,4 1 $ 4 7 9 ,2 0 $ 5 1 6 ,9 8 2 0 1 3 q 4 2 0 1 4 q 2 2 0 1 4 q 4 2 0 1 5 q 2 2 0 1 5 q 4 2 0 1 6 q 2 2 0 1 6 q 4 2 0 1 7 q 2 m u ḍ ā r a b a h bangladesh indonesia malaysia pakistan sudan 70 | promoting a sharing economy in the islamic finance industry: a study of selected oic countries chart 4.1 musharakah financing by country 4.3 murabahah financing murabahah financing is claimed to be one of the widely used financing instruments among islamic banks around the globe. this is clearly confirmed in this study as shown in chart-3below. all the countries under the study have demonstrated a continuous upsurge in murabahah financing with malaysia being the highest in terms of value of murabahah financing, followed by bangladesh and then indonesia. in the case of malaysia for instance, there was an increase in murabahah financing from about $17,346,950 in 2013q4 to about $39,971,750 in 2017q2.in bangladesh, murabahah financing increased from about $8,538,420 in 2013q4 to about $15,059,610 in 2017q2. indonesia recorded about $6,966,920 in 2013q4 which increased to about $8,515,920 in 2017q2. sudan and pakistan on the other hand, recorded less murabahah financing though in an increasing fashion with the lowest being pakistan. thus, among all the countries considered in this study, murabahah financing constitutes the largest portion in malaysia, bangladesh, indonesia and sudan. this outcome is not surprising as several studies demonstrated a similar outcome. for instance, the standing committee for economic and commercial cooperation (comcec) (2017) shared the same opinion that, murabahah based financing products are dominant in the islamic banking industry in many jurisdictions including malaysia, indonesia, pakistan and sudan. these findings are also consistent with the arguments of dixon (1992) and kayed (2012) who both claimed that murabahah is the most widely used instrument in the islamic banking industry. islamic banks in general, just like the conventional banks, prefer instruments with less risk such as murabaha financing. $ 2 7 5 ,0 3 $ 2 5 6 ,4 2 $ 2 8 0 ,8 0 $ 2 2 9 ,5 4 $ 3 1 3 ,1 6 $ 3 0 5 ,9 2 $ 3 3 0 ,0 9 $ 3 3 2 ,3 7 $ 2 .7 6 1 ,8 0 $ 3 .1 4 0 ,2 0 $ 3 .1 9 9 ,8 0 $ 3 .2 3 7 ,1 0 $ 3 .3 4 3 ,3 0 $ 3 .6 1 4 ,5 0 $ 3 .7 7 5 ,4 0 $ 3 .9 7 9 ,9 0 $ 4 .8 9 1 ,6 5 $ 5 .9 1 8 ,5 3 $ 6 .4 2 4 ,6 7 $ 6 .6 2 6 ,7 3 $ 6 .6 4 3 ,8 9 $ 8 .1 1 3 ,4 2 $ 8 .9 6 5 ,6 9 $ 1 0 .2 7 6 ,7 2 $ 9 3 ,8 1 $ 1 8 3 ,2 5 $ 2 9 4 ,7 9 $ 3 2 1 ,0 6 $ 6 8 1 ,1 5 $ 5 2 5 ,3 7 $ 8 6 7 ,8 2 $ 1 .1 5 5 ,2 2 $ 4 8 9 ,3 7 $ 5 1 5 ,2 2 $ 4 6 9 ,2 8 $ 5 7 9 ,5 2 $ 4 5 3 ,2 2 $ 5 2 3 ,8 0 $ 4 8 3 ,7 5 $ 4 4 8 ,7 5 2 0 1 3 a 2 0 1 4 q 2 2 0 1 4 q 4 2 0 1 5 q 2 2 0 1 5 q 4 2 0 1 6 q 2 2 0 1 6 q 4 2 0 1 7 q 2 m u s h ā r a k a h bangladesh indonesia malaysia pakistan sudan international journal of islamic economics and finance, volume 1, number 1, july 2018 | 71 chart 4.2 murabahah financing by country v. discussion bangladesh is a country with predominant muslim population of 160 million where islamic finance has been growing faster attributed to its intrinsic value, uniqueness of distinctive banking, and sustainability. in this study amongst the five countries bangladesh showed the second highest in mudarabah financing after sudan. however, this is not significant against the prospect of huge market of bangladesh where the economy is based on agriculture. possible reasons could be almost no governmental support to implement islamic financing policies, annual report of most islamic banks does not define or explain the products and how it works. moreover. because of insignificant marketing efforts, customers are unaware of the equity-based financing products. however, like other countries murabahah is still the dominant financing product in bangladesh. this is because of the consumer preferences to commodity murabahah which is similar in practice generating consumer loan of conventional banks (md. sarker, 2013). indonesia plays a minor role in the global islamic banking industry despite having the world’s largest muslim population and forming a dynamic emerging economy. the study revealed indonesia showed high in terms of both musharakah and murabahah financing. it has been realized that the equity financing modes like mudarabah and musharakah can replace the debt financing such as murabahah and tawarruq. people are still utilizing the later modes of financing in indonesia due to its similarity with conventional financing. although. indonesia is having highest muslim population the growth of islamic banking industry of five percent $ 8 .5 3 8 ,4 2 $ 9 .1 4 1 ,7 1 $ 9 .9 1 5 ,9 3 $ 1 0 .7 4 4 ,2 6 $ 1 1 .7 4 4 ,7 8 $ 1 2 .8 0 9 ,6 9 $ 1 2 .7 6 2 ,6 5 $ 1 5 .0 5 9 ,6 1 $ 6 .9 6 6 ,9 2 $ 7 .3 5 4 ,7 5 $ 7 .3 8 4 ,7 9 $ 6 .9 1 7 ,4 2 $ 6 .7 8 8 ,1 1 $ 7 .2 3 3 ,7 5 $ 8 .1 0 3 ,5 9 $ 8 .5 1 5 ,9 2 $ 1 7 .3 4 6 ,9 5 $ 2 0 .2 0 8 ,5 9 $ 2 4 .0 3 3 ,9 3 $ 2 7 .2 2 0 ,8 5 $ 2 7 .4 9 9 ,5 4 $ 3 4 .7 1 4 ,1 1 $ 3 5 .3 4 3 ,4 5 $ 3 9 .9 7 1 ,7 5 $ 6 2 0 ,0 8 $ 5 5 1 ,9 8 $ 6 1 4 ,4 5 $ 6 0 9 ,3 1 $ 7 9 2 ,2 9 $ 8 0 6 ,8 2 $ 6 4 5 ,4 4 $ 9 1 2 ,9 7 $ 2 .9 4 8 ,7 9 $ 3 .2 3 8 ,0 5 $ 3 .5 3 0 ,7 1 $ 4 .7 4 3 ,3 1 $ 4 .3 2 4 ,2 0 $ 4 .8 0 8 ,7 7 $ 5 .1 0 9 ,7 2 $ 6 .0 0 4 ,1 9 2 0 1 3 a 2 0 1 4 q 2 2 0 1 4 q 4 2 0 1 5 q 2 2 0 1 5 q 4 2 0 1 6 q 2 2 0 1 6 q 4 2 0 1 7 q 2 m u r ā b a h a h bangladesh indonesia malaysia pakistan sudan 72 | promoting a sharing economy in the islamic finance industry: a study of selected oic countries (www.indonesia-investments.com) was very slow compared to other muslim counties. one of the major issues in indonesia’s banking sector is the low financial literacy of the indonesian population causing poor level of penetration. based on data obtained from the world bank, only 36.1 percent of indonesia’s adult population owned a bank account in 2014. another obstacle is that islamic banks or banking units are unevenly distributed across indonesia. islamic banking in indonesia has also had difficulty to expand due to weak government support(www.indonesia-investments.com). malaysia shows a continuous decline in mudarabah financing during the period of study despite the fact that it is the key player in islamic banking and finance. in malaysia, the bai bithaman ajil (bba), tawarruq and commodity murabahah concepts are the most popular financing concepts practiced by the islamic banks. hence, murabahah which reflects the debt nature of bba is the second most popular financing mode in malaysia. mudarabah and musharakah indicated insignificant market share. this could be due to the lack of knowledge of banking officials to adopt equity financing. in addition, there is also lack marketing and promotion for products like mudarabah and musharakah which has higher risks compared to debt based murabahah. islamic banking industry in pakistan has achieved tremendous growth after its establishment in the decade of 2000 parallel to the conventional banks. the study demonstrates pakistan as high in both musharakah and murabahah financing whereas low in mudarabah financing compared to other countries. data showed that the islamic banking sector in pakistan is also heavily dependent upon murabahah as a mode of financing. this is because its operations are similar to conventional financing and bankers are familiar with various types of murabahah financing structures. in pakistan investors do not get a tax concession for investing in shariah compliant investments. absence of tax incentive could be another reason for the low performance in mudarabah financing mode. in addition, insignificant use of media in creating awareness in islamic equity products has affected its usage in the agricultural sectors and small and medium enterprises (smes) which have a large potential in pakistan (m., ashraf, 2013). in sudan there is more extensive use of mudarabah due to the agriculture background of the country. the study showed, sudan has the highest amount of financing in terms of mudarabah with an increasing trend over the past years. however, the use of murabahah is also widely use in the retail sector due to its application has made it easier to market the product. http://www.indonesia-investments.com/ http://www.indonesia-investments.com/ international journal of islamic economics and finance, volume 1, number 1, july 2018 | 73 vi. conclusion the purpose of this study is to investigate the application of mudarbah and musharakah concepts which facilitate a sharing economy where profit and loss is shared between the bank and customer compared to debt financing that utilizes murabahah concept. based on the findings, it is evident that indonesia, sudan and bangladesh utilize more mudarabah financing among the five countries under the study. malaysia and pakistan registered the lowest in terms of mudarabah financing. in indonesia, sudan and bangladesh, rural microfinance by means of mudarabah financing is very common and this is could be the reason for these countries recording the highest in mudarabah financing structure. in terms of musharakah financing, malaysia, indonesia and pakistan recorded the highest amounts while bangladesh the lowest. on the other hand, among all the five countries considered in this study, murabahah financing constitutes the largest portion in almost all the countries with the highest being in malaysia, bangladesh, indonesia and sudan. pakistan recorded the lowest in terms of murabahah financing. this study also revealed that musharakah and mudarabah financing concepts were the lowest in the islamic banking sector of all five countries under the study compared to murabahah financing which constitute a larger portion. therefore, considering the low level of equity-based financing (musharakah and mudarabah) as compared to the high level of debt-based financing (murabahah)in the islamic banking sector of all the countries under the study, revealed that the current islamic banking system is still far from achieving its real objective of promoting a sharing economy. steps should be taken by the government to address the issues mentioned and take the remedial steps by introducing policies and incentives for the effective usage of the equity concept to ensure a fairer distribution of profit in the economy. 74 | promoting a sharing economy in the islamic finance industry: a study of selected oic countries references abdullah, d. v. 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(2013). competition and crisis in mortgage securitization.ind. lj, 88, 213. usmani, t. (1998). an introduction to islamic finance.arhamshamsi. https://www.indonesia-investments.com/business/industriessectors/islamic-banking/item6131? https://www.indonesia-investments.com/business/industries-sectors/islamic-banking/item6131 https://www.indonesia-investments.com/business/industries-sectors/islamic-banking/item6131 international journal of islamic economics and finance (ijief) vol. 4(2), page 293-314, july 2021 accounting for waqf institutions: business, not-for-profit or hybrid entities? umar habibu umar universiti brunei darussalam, brunie darussalam corresponding email: uhumar21@gmail.com md harashid haron school of management, universiti sains malaysia, malaysia article history received: may 8th, 2021 revised: july 9th, 2021 accepted: july 28th, 2021 abstract despite the tremendous religious and socio-economic contributions of waqf institutions to muslim communities across the globe, there was no universal accounting standard to adopt by such institutions until 15 rabi’ii (equivalent to 30th november 2020) when the accounting standard for waqf institutions (fas no. 37) was approved by the board of accounting and auditing organization for islamic financial institutions (aaoifi) for adoption with effect from 01 january, 2022. hence, the objective of this study is to analyze the nature of waqf institutions with a view to establishing whether their appropriate financial accounting and reporting practices should be for business, not-for-profit or both. the documentary research method was applied to achieve the aim of this study through a systematic analysis of relevant accounting and shariáh standards. findings and views of earlier studies were also used. the study reveals that though waqf institutions operate like charitable organizations, they are mandated to undertake or attach to commercial activities in order to generate income for the sustainability of their activities. this signified that they are hybrid and as such, they are supposed to report both waqf and commercial activities in their annual reports and accounts. hence, the study calls on islamic countries to provide regulations, guidelines and more importantly accounting standards that will compel or motivate waqf institutions to prepare annual reports and accounts showing both their charitable and commercial activities. keywords: waqf, waqf institutions, waqf accounting, aaoifi jel classification: m41, i31 type of paper: research paper @ ijief 2021 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.v4i2.11734 web: https://journal.umy.ac.id/index.php/ijief/article/view/11734 citation: umar, u. h. & haron, m. h. (2021). accounting for waqf institutions: business, not-for-profit or hybrid entities?. international journal of islamic economics and finance (ijief), 4(2), 293-314. doi: https://doi.org/10.18196/ijief.v4i2.11734 https://doi.org/10.18196/ijief.v4i2.11734 https://doi.org/10.18196/ijief.v4i2.11734 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v4i2.11734&domain=pdf umar & haron │ accounting for waqf institutions: business, not-for-profit or hybrid entities? international journal of islamic economics and finance (ijief), 4(2), 293-314 │ 294 i. introduction 1.1. background waqf (pl. awqaf) is an unincorporated trust established under the shari’ah by a living man /woman in order to provide designated social services in perpetuity (kuran, 2001). it is an islamic endowment, which has been a common practice in muslim society right from the time of the prophet (peace be upon him) (yaacob and nahar, 2017). nowadays, the idea of waqf is popular and practiced across the globe and north america and operates under the name of foundations (kahf, n.d). the name “foundation” has been extended to the rest of the world. waqf has gained the special attention and interest of the muslim community because of the critical role it plays in the provision of a wide range of public goods (mahata, jaaffara and abdul rasoola, 2015; yaacob, petra, sumardi and nahar, 2015). during the period of the ottoman empire, waqf institutions contributed significantly to the provision of social amenities in muslim countries free of charge in various forms, such as education, healthcare and other social amenities for a lot of muslim countries (zarqa, 1994; miran, 2009; yaacob et al., 2015; yaacob and nahar, 2017). therefore, the significance of waqf institutions is very profound, as they perform an essential role in taking care of the needs of the family and society members at large (umar, 2019). in recent years, many efforts to revitalize waqf institutions were witnessed for a better and just society (ihsan, sulaiman, alwi and adnan, 2017). for example, in 2017 the islamic development bank through its research wing, the islamic research and training institute (irti), jeddah, collaborated with the islami bank bangladesh and the center for zakat management, bangladesh and organized an international research workshop, entitled “revival of waqf for socio-economic development". this workshop took place in dhaka, bangladesh, from 4-5 november, 2017 and provided an avenue for scholars and practitioners from eleven (11) countries, including bangladesh, brunei, indonesia, japan, kingdom of saudi arabia, malaysia, new zealand, nigeria, thailand, the united kingdom and the united states of america, who presented well-researched papers on the various aspects of waqf towards its revival for socio-economic development. the revitalization of waqf institutions justified the need for the establishment of a good accounting system for them (ihsan and adnan, n.d.; masruki and shafii, 2013; talib, latiff, aman and palil, 2018). perhaps, prior to the last decade academics had paid little attention to waqf accounting (ihsan and adnan, n.d.). extant review of awqaf literature in malaysia reveals poor accountability of waqf properties for some reasons, such as incompetent personnel and inadequate resources to maintain and develop waqf assets as well as the mismanagement and misappropriation of waqf funds (yaacob, umar & haron │ accounting for waqf institutions: business, not-for-profit or hybrid entities? international journal of islamic economics and finance (ijief), 4(2), 293-314 │ 295 petra, sumardi and nahar (2012). besides, the institutions’ financial accounting and reporting practices are diverse (masruki and shafii, 2013; azmi and hanifa, 2015; yaacob et al., 2015; talib et al., 2018). many waqf institutions exist in islamic countries mostly in the form of foundations. lack of waqf accounting standards contributed to the poor accountability and transparency in these institutions and consequently jeopardized their sustainability. moreover, attributing commercial undertakings to waqf institutions creates confusion as to whether their accounts should be prepared as public or private entities. some suggest adapting the accounting framework of for-profit entities (like azmi and hanifa, 2015) while others are of the view of applying that of not-for-profit entities (like hamdan, ramli, jalil and haris, 2013). previous studies have failed to clearly establish a unanimous view on what waqf institutions should present in their annual reports and accounts. in order to mitigate the impact of the covid-19 pandemic on the ummah, waqf is one of the islamic social finance instruments that have been found viable (umar, 2021). several calls were made for special publications on the role of islamic finance during the covid-19 and beyond in both islamic and conventional journals as well as book chapters, such as the international journal of islamic and middle eastern finance and management, eurasian economic review, jurnal ekonomi malaysia, international journal of zakat, journal of islamic monetary economics and finance, journal of economic and administrative sciences, european journal of islamic finance and covid-19 and islamic social finance (edited books), among others, with a view to soliciting expert views on various ways of applying waqf to enhance the socioeconomic development of the ummah. however, a survey made in the already published papers/chapters and recent call notifications have shown that accounting and reporting practices for waqf institutions have not been discussed though these institutions have been established to alleviate poverty and enhance socio-economic development during the covid-19 and beyond. hence, this study believes that waqf institutions would not achieve their objectives efficiently and effectively during the pandemic and beyond without proper accounting and reporting practices. lack of proper accountability and transparency through the preparation of relevant annual reports and accounts could easily lead to the collapse of waqf institutions irrespective of the value of the assets contributed to them. hence, this study is expected to contribute to the provision of how and what should be prepared and disclosed in such institutions annual reports and accounts. currently, there is only one waqf accounting standard issued by aaoifi. this standard was approved on 15 rabi’ii, 1442 a.h (equivalent to 30th november, 2020) and is expected to be adopted after 01 january 2022. at this juncture, umar & haron │ accounting for waqf institutions: business, not-for-profit or hybrid entities? international journal of islamic economics and finance (ijief), 4(2), 293-314 │ 296 it is important to note that in most oic member countries the adoption of aaoifi’s standards is not compulsory. this study analyzes the provisions of this standard with a view to suggesting additional financial statements not provided in the waqf accounting standard but are important to be prepared and disclosed in their annual reports and accounts. 1.2 . objectives this study has three objectives: 1. to establish the nature of the waqf institution, whether profit, not for profit or hybrid. 2. to analyze the financial statements required to be prepared by waqf institutions with effect from 1st january, 2022 as contained in the waqf accounting standard (fas no. 37) developed by the aaoifi. 3. to suggest additional financial statements to be prepared by waqf institutions in order to enhance accountability and transparency responsibilities in such institutions. the remainder of this paper is organized into four sections. section 2 accommodates the literature review. section 3 explains the methodology used. findings and discussion are provided in section 4. finally, section 5 shows a conclusion and recommendations. ii. literature review in this section, previous studies related to the waqf were reviewed. the fact is that there is no universal accounting standard specially developed for waqf institutions until when the accounting and auditing organisation for islamic financial institutions (aaoifi) issued a waqf accounting standard, which is expected to be adopted effectively from 2022. this signifies that prior to 2022 no universal waqf accounting standard had existed to be complied with by waqf institutions. consequently, the lack of clear guidelines or accounting standards for waqf institutions attracted the attention of a few researchers who proposed accounting for waqf institutions to ensure accountability and transparency in the institutions (talib et al., 2018). some studies discovered the non-uniformity of accounting practices by waqf institutions (such as ihsan and hameed, 2011; yaacob et al., 2012; talib et al., 2018; azmi and hanifa, 2015; ihsan et al., 2017; yaacob and nahar, 2017). for example, yaacob et al. (2012) examined the awqaf accounting and reporting practices of awqaf s. it was found that the accounting and reporting of awqaf s were regulated by several acts and the annual financial statements prepared by the institutions. azmi and hanifa (2015) assessed whether the financial reporting practices of umar & haron │ accounting for waqf institutions: business, not-for-profit or hybrid entities? international journal of islamic economics and finance (ijief), 4(2), 293-314 │ 297 waqf institutions conformed to aaoifi’s sharia standard no. 33 (ss 33) on waqf. the study revealed that though the institutions applied different accounting procedures and practices they conformed to the provisions of ss 33. however, aaoifi’s sharia standard no. 33 (ss 33) is not an accounting standard but the shariáh. therefore, compliance with it does not mean accounting compliance. similarly, yaacob et al. (2015) applied semistructured interviews and archival documentation review and analyses to assess the awqaf financial reporting and management of waqf-s. the study found the financial reporting and management of waqf-s very admirable, as its annual reports and accounts are published online on time. similarly, talib et al. (2018) discovered that waqf accounting and reporting practices across the malaysian states are diverse in terms of their guidelines, recognitions, measurements (valuation of waqf assets) and disclosure because each state islamic religious councils (sirc) is independent in discharging its constitutional duties. ihsan and hameed (2011) assessed the accounting practices of two selected named abc and xyz in indonesia through interviews, documentary evidence and direct observations. the findings showed that xyz provided better accounting information and has more qualified employees than abc. in addition, weaknesses in the accounting, reporting and investment of the waqf activities, more especially on waqf properties, were also found in malaysia (yaacob and nahar, 2017). variations in waqf institution annual reports and accounts were noticed even in malaysia despite being among the prime movers of the contemporary waqf practices in the muslim world. this is because each malaysian state has a state islamic religious council (sirc), a government agency that is saddled with the responsibility of developing legislations and procedures for the administration of waqf assets (mansor, jamil and bahari, 2017). this signifies that sircs are independent in discharging their constitutional responsibilities, including issuing guidelines for waqf accounting and reporting practices in their respective states. talib et al. (2018) examined the accounting and reporting practices of waqf institutions in eleven malaysian states. the study found the waqf accounting and reporting practices across states diverse because each state has its own independent sirc headed by the sultan (the ruler) with his board members, who regulate the activities of waqf practices in the state. moreover, talib et al. (2020) sought to explore the understanding of the effects of institutional pressures on the intention to apply accounting and reporting by waqf institutions in malaysia. the data were generated through semi-structured interviews and documentary reviews. one of the key findings indicated that the challenges faced in adopting waqf accounting and reporting are attributed to coercive pressure like government regulations. besides, normative pressures became key factors hindering the standardization of umar & haron │ accounting for waqf institutions: business, not-for-profit or hybrid entities? international journal of islamic economics and finance (ijief), 4(2), 293-314 │ 298 waqf accounting and reporting. also, mimetic pressure made it difficult to compare waqf accounting and reporting practices among the malaysian state islamic religious councils. yusof (2021) used semi-structured interviews and document analysis methods to explore the need to have a specific accounting standard for waqf institutions. the study indicated how waqf institutions tried their best to comply with the prevailing standards that were specifically developed for them. it also showed the importance of issuing a specific accounting standard to be adopted by waqf institutions. briefly, based on the reviewed previous studies it is notable that the accounting and reporting practices of waqf institutions were not uniform, as they were prepared in various ways (habidin, hussin, muhammad, janudin and fuzi, 2017). this is because the institutions were found to have no uniform waqf accounting standard to adopt in the preparation of their financial statements. this has made the annual reports and accounts of waqf institutions across the globe unworthy of comparability. in other words, it becomes very difficult to compare the financial accounting and reporting practices of waqf institutions, particularly in different countries, as there is no standard basis. the quality of waqf accounting information might also be compromised because of the application of different accounting and reporting practices by waqf institutions (mansor et al., 2017). another observed limitation of the previous studies is that they are mostly on an interview method, which is not believed to be a better in assessing the accounting and reporting practices of waqf institutions. the best way to assess the financial accounting and reporting practices is to look directly into the contents of their annual reports and accounts. another limitation of using the interview method is the limitation of sample size. it is observable that most of these studies covered only one or two waqf institutions. moreover, these studies failed to clearly show whether waqf institutions should be classified as business, nonprofit or hybrid entities with a view to establishing what should be prepared and presented in their annual reports and accounts. the current study does not intend to assess the accounting and reporting practices of any waqf institution but rather provide a basic comprehensive package for the preparations of the financial statements of waqf institutions. it is expected to contribute toward enriching the contents of their annual reports and accounts with the relevant and needed financial information. consequently, their performance could be assessed and compared. umar & haron │ accounting for waqf institutions: business, not-for-profit or hybrid entities? international journal of islamic economics and finance (ijief), 4(2), 293-314 │ 299 iii. methodology as earlier indicated, the aim of this study is to establish the appropriate class of waqf institutions in order to suggest what appropriate accounting information should be disclosed in the annual reports and accounts of such institutions. hence, to achieve this objective documentary research method was applied as adapted from earlier studies like umar, abubakar, baita, kademi and haron (2021), who explored the contributions of academic and professional institutions to the promotion of awareness and knowledge of islamic banking and finance in nigeria. documentary analyses entails a systematic procedure for reviewing or evaluating documents, both printed and electronic materials, and are obtainable in libraries, newspaper archives, historical society offices and organizational or institutional files (bowen, 2009). this research method is frequently referred to as content analysis. according to ahmed (2010), this method is widely used in all disciplines like anthropology, communications, economics, education, medicine, political science, social work and sociology. thus, this study intends to systematically analyze relevant accounting and shariáh standards, such as aaofi’s waqf accounting standard (fas no. 37), aaoifi’s mushārakah standard (fas no. 4) and bank negara malaysia mushārakah standard. the views and findings of previous relevant studies were also utilized. further, these documents were subjected to quality control tests, such as authenticity (genuineness and of unquestionable origin of the document), credibility (evidence-free from error and distortion of the evidence), representativeness (whether the studied documents could serve as a representative of the entirety of the relevant documents) and meaning (clarity and comprehensibility of the evidence) suggested by scott (1990). the documents used were found to have satisfied these requirements, as they are officially published by reputable government agencies and professional associations, such as the bank negara malaysia and the accounting and auditing organization for islamic financial institutions. iv. result and analysis 4.1 the nature of waqf institutions basically, institutions could be broadly divided into two classes: public and private. public institutions primarily provide essential goods and services to the public or members of the society whereas the major objective of private institutions is to maximize the wealth of shareholders. hence, government ministries, departments, agencies and parastatals as well as nongovernmental organizations (ngos) are considered as public institutions, as they primarily exist for the welfare and socio-economic development of umar & haron │ accounting for waqf institutions: business, not-for-profit or hybrid entities? international journal of islamic economics and finance (ijief), 4(2), 293-314 │ 300 society members. on the other hand, companies, partnership businesses and one-man businesses are private institutions, whose major objective is to make a profit. according to kahf (2012), a waqf institution does not connote a legal entity on its own, but it is seen as a legal institution. waqf institutions are synonymous with charitable bodies and in the eyes of the shariáh they are created for charitable, pious and religious purposes (yaacob et al., 2012). therefore, waqf institutions are like philanthropic entities, which are also called not-for-profit organizations (ngos) (kamaruddin and ramlia, 2015). the essential features of a not-for-profit organization, according to the united nations include an organizational structure, not-for-profit motive, institutionally separate from government, self-governing and non-compulsory (yaacob et al., 2012). these features are almost attributed to waqf institutions. today, many charitable organizations, commonly known as foundations, exist in both muslim and non-muslim countries across the globe. almost every renowned successful entrepreneur in the world has established his/her foundation through which he/she carries out philanthropic activities, particularly in the areas of education, healthcare and poverty alleviation programs. for example, in the muslim world, the contribution of sulaiman bin abdul aziz al rajhi, a saudi arabian businessman, would never be forgotten. al rajhi dedicated his 19.7% shareholdings at one of the largest islamic banks in the world as waqf. therefore, all dividends and other benefits attributed to such shareholdings are solely used for discharging religious and philanthropic activities through sulaiman bin abdul aziz al rajhi endowments holding company (umar, 2021). similarly, bill gates together with his wife established the bill and melinda gates foundation, azim premji has azim premji foundation, etc. hence, waqf institutions are charitable or non-governmental organizations (ngos), as they are not primarily established as profit-oriented organizations, but the provisions of social amenities are their core objective. waqf institutions are mandated to continue to exist forever based on one of their essential features, known as perpetuity. perpetuity enables the waqf property to continue to exist continuously for the intended purpose without being lost or sold. it has a perpetual existence if it continues to provide endless assistance to beneficiaries even when the endower is dead (yalawae and tahir, 2008). this is possible if the waqf property is used to generate a profit or a sustainable source of income is attached to it. hence, waqf involves the process of relocating an asset from the depletion to the appreciation side for the sustainable welfare of the intended users (umar, 2019). moreover, kahf (2003) states that the formation of a waqf institution is similar to that of a business entity that is expected to remain perpetual in order to umar & haron │ accounting for waqf institutions: business, not-for-profit or hybrid entities? international journal of islamic economics and finance (ijief), 4(2), 293-314 │ 301 generate income for the welfare of future generations. similarly, the waqf institution would not perpetually exist if the confined assets don’t generate revenue continually (umar, 2019). in other words, waqf properties themselves cannot give sustainable benefits to the intended beneficiaries unless they are used to undertake commercial operations (salarzehi, armesh and nikbin, 2010). this shows the presence of the element of business undertakings in waqf institutions for their sustainability. a good example of modern waqf that is fully integrated with various going concern businesses is the one made by sulaiman bin abdulaziz alrajhi. alrajhi waqf has three major investment centers, such as financial and real estate investment, food and agricultural investment and industrial investment that continuously provide income to execute the waqf activities (umar, 2021). however, since the key objective of waqf is to improve the welfare of the ummah, it is recommended that the social enterprise waqf fund model (sewf) should be applied by the institutions in carrying out their business, so that the gap could be bridged between the business and benevolence (shulthoni and saad, 2018). in other words, adopting the social enterprise waqf fund model (sewf) would enable the waqf institutions to earn reasonable profits by selling their products to the public at fair and affordable prices. briefly, based on the above discussion and in the view of the authors, waqf institutions are hybrid entities, as they have both philanthropic and business entity features. but we believe that philanthropic activities dominate commercial activities, as they are primary and secondary raison d’etre, respectively. 4.2 the accounting for waqf properties/assets waqf entails the dedication of properties for the benefit of intended beneficiaries perpetually. they should neither be sold nor inherited (osman, 2012). these properties may be providing services to the ummah (like schools that provide free education to needy students) or earn incomes (e.g. a shopping center declared as waqf by its owner, so that its rental income would be used to maintain the school) (zarqa, 1994). there are two types of waqf assets: immovable assets and movable assets (ibrahim and ibrahim, n.d.). under normal circumstances, waqf is attributed to non-perishable assets, so that their benefits and usufruct would be enjoyed by the beneficiaries without consuming the property itself (talib et al., 2018). specifically, real estate (like land) is the most suitable asset for waqf (zarqa, 1994; kahf, 2003; abdullah and ismail, 2015). this is because it is less likely be prone to misappropriation and embezzlement (zarqa, 1994). besides, they are durable assets that have a long lifespan. umar & haron │ accounting for waqf institutions: business, not-for-profit or hybrid entities? international journal of islamic economics and finance (ijief), 4(2), 293-314 │ 302 however, some muslim jurists permit the use of movable property as waqf assets, if there are valid texts or sound reasoning, for instance, horses are permitted to be used as waqf assets by a sound ḥadīth and the use of trees and buildings are allowed by the hanafi and shafi’i schools because they are annexed to land (abdullah and ismail, 2015). similarly, imam shafi’i, imam malik and imam ibn habali permited the use of any movable property provided that it satisfies the requirement of perpetuity (ibrahim and ibrahim, n.d.). in addition, in the fifteenth and sixteenth centuries, that is, during the ottoman period, cash waqf was initiated for catering social and pious needs (sait and lim, 2006). cash waqf entails the collection of money or funds for investment, so that the returns would be used to cover operating costs and distribute the excess (if any) among the beneficiaries in accordance with the waqf deeds (yaacob et al., 2012). in order to validate the validity of cash waqf, rusydiana and devi (2018) stated the following: […] imam bukhari states that ibnu syihaab az-zuhri allows dinar and dirham waqf by making that dinar and dirham as business capital and distributing the profit for waqf (p. 2). also, the fatwa released by the world fiqh council (majma’ al-fiqh) in muscat, sultanate of oman, 6-11 march, 2004, validated the creation of cash waqf for investment in sharīʿah -compliant modes of investment, such as mushārakah, mudarabah, murabahah and istisna, among others (abdullah and ismail, 2015). consequently, today, cash waqf is universally accepted provided that it is invested in a going concern sharīʿah-compliant business. therefore, as long as the business continues to exist, the profit on the invested cash would be used to carry out the intended waqf activities. thus, assets like cash, shares, etc., could be used as waqf properties if all necessary measures are put in place to ensure their perpetual existence. according to abdullah and ismail (2015), ordinary shares of companies that have a perpetual existence could be used as waqf property provided that they have legal backing. the share waqf was practiced by sulaiman bin abdul aziz al rajhi in 2013 when he endowed his19.7% shareholdings in al rajhi bank as waqf for religious and socio-economic development of the ummah. similarly, according to paragraph 8 of the financial reporting standard for waqf institutions (fas no.37) developed by the aaoifi, contribution to the waqf equity can be done in cash or in-kind. briefly, contemporary waqf practices involve both cash and non-cash properties. in other words, the endowment could be either in cash or in-kind. concerning the initial recognition of the waqf asset, the standard (fas no.37) provided the following: umar & haron │ accounting for waqf institutions: business, not-for-profit or hybrid entities? international journal of islamic economics and finance (ijief), 4(2), 293-314 │ 303 • waqf assets should be recognized at their fair values (paragraph 10) • waqf assets that are not expected to generate incomes (like mosques) should be recognized at their nominal values (paragraph 12) subsequently, the assets should be measured as follows: • the waqf assets should be measured at their fair values and any gain or loss recognized directly in waqf equity, irrespective of the provisions of any aaoifi’s financial accounting standards. hence, no depreciation or amortization should be charged on such assets (paragraph 14). • the waqf assets that are not expected to generate incomes (like mosques) should be carried at their originally assigned values (paragraph 16). valuation of contribution in-kind corresponds with the earlier provisions of aaofi’s musharakah standard (fas no.4). aaoifi’s musharakah standard (fas no. 4) provides that: the islamic bank’s share in musharakah capital provided in kind (trading assets or non-monetary assets for use in the venture) shall be measured at the fair value of the assets (the value agreed between the parties) […] (para.5, p. 233). similarly, bank negara malaysia (2010; 2015) required that for a musharakah business to be valid, the contribution in-kind should be measured in monetary terms either based on an agreement between the partners or by a third party, such as experts, valuers or any other competent person, before the business is commenced. this signifies that any capital contribution to the partnership other than cash should be revalued at a market price or a price agreed between the partners. this is because the contribution in-kind can be in form of various assets, such as a motor van, furniture and fittings, land and buildings, livestock, machinery, etc., which all have money as a common unit of their measurements. similarly, this principle of the revaluation of the contribution in-kind at the market price could be adapted by waqf institutions in the revaluation of the waqf assets. therefore, as soon as a waqif (endower) donates his/her property for waqf, such an asset should be revalued at its market (or fair) value. the valuation of an asset at its market value is a common practice in islam in a number of cases. for example, if a muslim deceased left a business, its assets are required to be revalued at their current market prices and then total liabilities and legacies must be subtracted therefrom in order to arrive at the equity (or residue) to share among the heirs (umar and kurawa, 2019). umar & haron │ accounting for waqf institutions: business, not-for-profit or hybrid entities? international journal of islamic economics and finance (ijief), 4(2), 293-314 │ 304 briefly, in line with the literature, the contribution to waqf asset can be made in both cash and in-kind. if the asset is expected to provide economic benefits, it should be initially and subsequently measured at its fair value. however, if the waqf asset is not expected to provide economic benefits, like a mosque, it should be initially and subsequently measured at its nominal value. 4.3 waqf institutions’ financial statements 4.3.1 the need for accounting information accounting information is the processed transactions and events of an organization presented in its annual reports and accounts for decision making by various stakeholders that have either direct or indirect relationships with it. the stakeholders in an organization include customers, employees, local communities, suppliers and distributors and shareholders (fontaine, haarman and schmid, 2006). the main source of information of any organization (whether profit, non-profit organization or government) is its annual reports and accounts (kamaruddin and ramlia, 2015). the information needs of users of the annual reports and accounts increase and change with the increase in the categories of users (aaoifi, 2015). this is because each user has a diversified reason for accessing the annual reports and accounts. for example, shareholders are primarily after the maximization of their wealth in a business, but credit suppliers look for the ability of the business to pay them as at when due. similarly, in the case of waqf institutions accounting information is equally needed. in fact, in the view of mansor et al. (2017), accountability in the waqf institutions is more demanding than in both private and public sectors, as the donors of waqf assets have no equity or personal stake in the institutions. this is because in general terms the diversity of the users of islamic accounting information is more than that of its conventional counterpart (yaacob et al., 2012). the relationship between donors and managers can be explained by the agency theory, which is normally used to explain governance in the context of a principal-agent relationship in a profit-making entity (abdullah and ismail, 2015). therefore the agency theory explains the relationship between a donor and a manager (kamaruddin, masruki and hanefah, 2018). more clearly, since the waqf property is entrusted to a manager, conflict of interest may arise between the intentions of the donor and the interests of the trustee (yaacob et al., 2012; abdullah and ismail, 2015). umar & haron │ accounting for waqf institutions: business, not-for-profit or hybrid entities? international journal of islamic economics and finance (ijief), 4(2), 293-314 │ 305 further, in consideration of the complexity of waqf institutions comprising various stakeholders, the stakeholder theory is found to be worthy applicable. it demands managers to manage the organization for the benefit of its stakeholders as well as act in such a way as to ensure the entity’s survival so that the long-term stake of each group is safeguarded (fontaine et al., 2006). the stakeholder theory also supports the treatment of all stakeholders with fairness, honesty and even generosity (harrison, freeman and sá de abreu, 2015) one of the ways by which waqf managers demonstrate fairness and honesty to all their stakeholders is to provide accounting information. communicating true and fair view accounting information to users via annual reports and accounts could serve as a strong instrument for minimizing the conflict of interests not only between managers and endowers but also other stakeholders to the waqf institution. hence, trustees are required to disclose adequate information related to the management of waqf funds (kamaruddin et al., 2018). a good accounting report is expected to provide information that meets the expectations of its users (masruki, hussainey and aly, 2016). therefore, the accounting information prepared and communicated by the trustees to the users is expected to show their actions and inactions (masruki et al., 2016). the institution of waqf has many users for accounting information, such as waqif, beneficiaries, regulators and the community at large, among others (ihsan and adnan, n.d.; ihsan and hameed, 2011; munuswamy and mohamed, 2016). the endower (if alive) would make use of the accounting information to establish whether his/her intended objectives (as contained in the waqf deeds) are achieved. the waqif may continue to provide financial support to the institution (mansor et al., 2017) if he/she is impressed by the way and manner waqf assets are managed and administered. in addition, the accounting information would be useful to potential donors, i.e., those who have intentions to have their foundations, particularly if the contributions of the waqf to the socio-economic development of the society are adequately disclosed in annual reports and accounts. the trustees themselves need the accounting information to measure their performance in terms of achieving waqf objectives efficiently and effectively. in a situation where deviations are found, managers would change their earlier plans and put in place appropriate control measures for better performance in the future. beneficiaries of waqf assets also need accounting information. they can be the general public or an identified group of persons (say, a family) who must be clearly defined in the waqf deed (osman, 2012). the beneficiaries would make use of the accounting information to evaluate whether the trustees provide goods or services to them as intended by the donor or provided in the waqf deeds. umar & haron │ accounting for waqf institutions: business, not-for-profit or hybrid entities? international journal of islamic economics and finance (ijief), 4(2), 293-314 │ 306 moreover, the government or relevant waqf regulatory agencies need accounting information. these agencies could make use of it to make policies as well as take necessary action (including punishment) where misappropriations or deviations from the intended objectives of the waqf are found. this is to improve waqf practices for the perpetual contribution to the socio-economic development of the ummah. other stakeholders need waqf accounting information as obtainable in profitoriented entities, such as employees, customers, tax authorities and journalists, among others. this is because waqf institutions as an endowment entity also engage in commercial undertakings for their perpetual existence by transacting and having relationships with such stakeholders. these stakeholders to a business entity play vital roles to its survival and success (freeman, 2004). this is because if they are well treated, they are likely to reciprocate with positive attitudes and behaviors to the entity (harrison et al., 2015). briefly, in accordance with the authors’ view, the users of waqf accounting information are complex than those of private (business) and the public sector since the waqf institutions have the features of both sectors. from the public sector perspective, it primarily aims at the socio-economic development of the islamic society through the provisions of what is normally provided by the government, such as education, healthcare, water and other infrastructural facilities. on the other hand, the institutions are tied up to the private sector since they engage in businesses with a view to earning incomes for the sustainable welfare of beneficiaries. in conducting the business, the waqf institutions have relationships with suppliers, creditors, tax authorities and other private-sector regulatory agencies. 4.3.2 the preparation of the financial statements of waqf institutions the management of any organization (whether public or private) is mandated to prepare annual reports and accounts with the view to providing stewardship of the resources it is entrusted with. in specific, the preparation of annual reports and accounts by trustees of waqf institutions becomes necessary. normally, the preparation of financial statements is guided by accounting standards. nowadays, most private entities across the globe adopt international accounting standards/ international financial reporting standards (ias/ifrs) in the preparation of their financial statements. on the other hand, the international public sector accounting standards (ipsass) is the global accounting standards widely used for the preparation of umar & haron │ accounting for waqf institutions: business, not-for-profit or hybrid entities? international journal of islamic economics and finance (ijief), 4(2), 293-314 │ 307 government accounting in the world. in addition, islamic financial institutions (ifis) are required to comply with aaoifi’s standards as well as adapt the conventional standards (ias/ifrs) in the preparation of their financial statements. as mentioned earlier, though waqf is a topical issue in islamic finance, there was no universal accounting standard to adopt by such an institution until 15 rabi’ii, 1442 a.h (equivalent to 30th november, 2020) when the board of the aaoifi approved the accounting standard for waqf institutions (fas no. 37) for adoption with effect from the beginning of 2022. briefly, one could point out from the above that waqf institutions apply different accounting policies and practices, whereby some institutions are found to be more accountable than others. discharging poor accountability functions in the past by some waqf institutions could be attributed to the lack of universal accounting standards to adopt by such institutions. besides, to prepare comprehensive annual reports and accounts, enhance the uniformity of accounting and reporting as well as minimize the incidences of the diversity of waqf accounting and reporting practices, scholars have different views. for example, some suggest the application of the accounting framework for business organizations while others recommend the adaption of the accounting frameworks of not-for-profit entities. azmi and hanifa (2015) studied two waqf organizations whose accounts are audited and published annually for public accessibility. these waqf institutions were found to have been applying accounting frameworks for profit-entities. the study also established that their financial reporting practices did not contravene the provisions of aaoifi under shariʿah standard for waqf no. 33 (ss 33). more so, hamdan et al. (2013) argued that financial reporting practices for business entities are not suitable for adaption by mosques, as their nature resembles not-for-profit organizations. however, fas no. 37 (to be adopted from 1st january, 2022) provides a comprehensive list of financial statements to prepare by waqf institutions as follows: a. statement of financial position as at the end of the period; b. statement of financial activities for the period; c. statement of ghallah for the period; d. statement of changes in waqf equity for the period; e. statement of cash flows for the period; and f. notes to the financial statements (paragraph 26). from the above, it is understandable that the statement of ghallah is uncommon among such statements. according to the standard (fas no. 37), it is presented in a similar way to the statement of cash flows. it basically umar & haron │ accounting for waqf institutions: business, not-for-profit or hybrid entities? international journal of islamic economics and finance (ijief), 4(2), 293-314 │ 308 reflects the real nature of the waqf institution by showing the extent to which the objectives of waqf are achieved for the welfare of the intended beneficiaries. however, fas no. 37 fails greatly to consider accounting issues for the commercial activities undertaken by waqf institutions in order to sustain their operations. these commercial activities are major sources of income to the waqf institutions. hence, the need to account for their transactions is very profound. normally, a not-for-profit entity is required to prepare the income statement when it engages in any business activity to earn a profit in order to provide additional income for carrying out the main purpose of the organization (wood and sangster, 2012). for example, the association, in addition to its core activities, maintains a bar/restaurant where food, snacks and drinks are sold to members and other people (institute of chartered accountants of nigeria, 2009). hence, income statements must at least be prepared for the commercial activities of waqf institutions. briefly, waqf institutions operate like charitable organizations and undertake commercial activities concurrently. in addition to the financial statements for their waqf activities they are expected to show at least show income statements for their commercial activities, though the annual reports and accounts of the waqf institutions may be voluminous, it would be better if income statement, statement of financial position, statement of changes in equity and statement of cash flows for the commercial activities of the institutions are integrated into their annual reports and accounts, being hybrid entities. this is more practicable in the case of small and medium-sized waqf institutions. v. conclusion and recommendations 5.1 conclusion accounting is one of the essential aspects of the institutions which plays a significant role not only in its sustainability but also ensures it is intended objectives are achieved efficiently and effectively. for a long-time, lack of universal waqf accounting standards also bring about variations in financial accounting and reporting practices of waqf institutions not only across the globe but in the same countries, like malaysia. this greatly contributed to the poor accountability of waqf institutions which leads to underperformance and even the collapse of some of them. however, on 15 rabi’ii, 1442 a.h (equivalent to 30th november, 2020) the board of the aaoifi approved the accounting standard for waqf institutions (fas no. 37) for adoption effective umar & haron │ accounting for waqf institutions: business, not-for-profit or hybrid entities? international journal of islamic economics and finance (ijief), 4(2), 293-314 │ 309 from 01 january, 2022. hence, the objective of this study is to establish whether waqf institutions should be classified as nonprofit, private or hybrid entities with the view to providing the contents of their annual reports and accounts. analysis of the waqf institutions showed that they are hybrid entities even though they are primarily established for religious and socioeconomic development purposes, commercial undertakings are mostly attached to them so that they continue to exist perpetually. therefore, they are expected to prepare and report both waqf and commercial activities in the annual reports and accounts. however, aaoifi’s fas no.37 which is believed to be the first universal accounting standard for waqf institutions largely focused on accounting and reporting issues for charitable activities. in other words, pays little or no attention to commercial activities undertaken by waqf institutions. 5.2 recommendations based on the findings of the study, the study provides three key recommendations. first, there is a need to develop regulations, guidelines and more importantly a waqf accounting standard that will oblige or motivate waqf institutions to adequately disclose both waqf and commercial activities in their annual reports and accounts. second, aaoifi should consider the possibility of including commercial undertakings in the next amendment of the standard (fas no. 37). third, there is a need to create awareness and knowledge of financial accounting and reporting on the sustainability of waqf institutions among potential and actual donors. this could be achieved through collaborations among relevant government agencies, professionals and academics. acknowledgment this is to acknowledge that this paper was presented at the conference jointly organized by the international center for education in islamic finance (inceif) and the international shariáh academy for islamic finance (isra), malaysia, held between 25th -26th november, 2019 at the intercontinental hotel, kuala lumpur, malaysia. umar & haron │ accounting for waqf institutions: business, not-for-profit or hybrid entities? 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(2012). awqaf accounting and reporting for accountability: a case study of awqaf s. proceedings of 19th international business research conference. available at: ssrn: https://ssrn.com/abstract=2175459 or http://dx.doi.org/10.2139/ssrn.2175459 . https://doi.org/10.18326/ijims.v8i1.57-86 https://doi.org/10.1108/jiabr-11-2016-0132 https://doi.org/10.4324/9781003121718 https://doi.org/10.1007/978-3-030-18449-0_4 https://doi.org/10.1108/ijif-06-2018-0059 https://doi.org/10.1108/jiabr-05-2020-0171 https://ssrn.com/abstract=2175459 https://dx.doi.org/10.2139/ssrn.2175459 umar & haron │ accounting for waqf institutions: business, not-for-profit or hybrid entities? international journal of islamic economics and finance (ijief), 4(2), 293-314 │ 314 yaacob, h., petra, s., sumardi, a., & nahar, h. s. (2015). accountability through accounting and reporting lenses. humanomics, 31(3), 299 – 313. http://dx.doi.org/10.1108/h-07-2013-0049. yalawae, a., & tahir, i. m., (2008). the role of islamic institution in achieving equality and human development : waqf or edowment. paper presented at the 5th annual conference of the hdca, 10-13 september 2008, new dehli, india. retreived august 10, 2019, from https://hd-ca.org/publications/. yusof, n. (2021). specific accounting standards for waqf institutions. journal of emerging economies and islamic research, 9(1), 29-42. zarqa, m. a.(1994). financing and investment of awqaf projects: a nontechnical introduction. islamic economic studies, 1, 55-62. http://dx.doi.org/10.1108/h-07-2013-0049 https://hd-ca.org/publications/ international journal of islamic economics and finance (ijief) vol. 4(2), page 207-232, july 2021 the role of religiosity in explaining the intention to use islamic fintech amongst msme actors rifaldi majid universitas airlangga, indonesia corresponding email: rifaldimajid@gmail.com article history received: may 30th, 2021 revised: july 26th, 2021 accepted: july 28th, 2021 abstract islamic fintech is growing rapidly and has become a new alternative of financing for micro, small, and medium enterprises (msme) which are the backbone of the national economy. this study aims to examine the role of religiosity level of msmes actors on the intention to use islamic fintech. this research employed partial least square structural equation modeling (plssem) method. the data collected using an online questionnaire adapted from previous research, then distributed to 100 indonesian msme actors and analyzed using smart pls. the main result indicated religiosity plays a positively significant role in explaining the intention to use islamic fintech. in addition, perceived usefulness (pu), perceived ease of use (peou), and subjective norm (sn) were also found to be influential, while both, attitude toward behavior (atb) and perceived behavioral control (pbc), have no significant effect on behavioral intention. this research implicates the need for collaboration between the financial services authority (ojk) as the regulator with islamic fintech institutions to improve literacy, providing incentives, strengthening consumer data protection, as well as integrating the values from the religious anglein the concept and practice of fintech product and services that are based on islamic guideline in order to attract the users from msme actors. keywords: msmes actor’s intention; pls-sem; islamic fintech; religiosity jel classification: l81, m51, o14 type of paper: research paper @ ijief 2021 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.v4i2.11833 web: https://journal.umy.ac.id/index.php/ijief/article/view/11833 citation: majid, r. (2021). the role of religiosity in explaining the intention to use islamic fintech amongst msme actors. international journal of islamic economics and finance (ijief), 4(2), 207-232. doi: 10.18196/ijief.v4i2.11833 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v4i2.11833&domain=pdf majid│ the role of religiosity in explaining the intention to use islamic fintech amongst msme actors international journal of islamic economics and finance (ijief), 4(2), 207-232 │208 i. introduction 1.1. background in the rapid development of information technology, fintech has penetrated and become an alternative means of solutions from innovative financial service transactions as a solution of traditional banking, insurance, and asset management. fintech is defined as an innovation in the use of digital technology to compete and at the same time to solve financial intermediation problems (aaron, rivadeneyra, & sohal, 2017; fenwick, mccahery, & vermeulen, 2017). compared to other types of financial institutions, the fintech industry is among the fastest and largest-growing economic sectors (chemmanur, imerman, rajaiya, & yu, 2020; niswah, mutmainah, & legowati, 2019) including fintech which operates with sharia principles. islamic fintech can become a large global industry, especially in the midst of the potential development of the world's muslim population, which is estimated to reach 26.4% of the world's total population in 2030 (the world bank, 2020), where indonesia is predicted to be the country with the secondlargest muslim population in the same year namely as many as 238 million people (pew research center, 2011). based on a report from the global islamic fintech report in 2021 published by dinarstandard, the market size of islamic fintech in indonesia will reach $ 2.9 billion in 2020 and is predicted to reach $ 8.3 billion in 2025. indonesia is ranked 4th after saudi arabia, malaysia, and the united arab emirates as the country with the largest total volume of transactions with a total score of 66 global islamic fintech index (gift) which is an accumulation of 32 indicators covering 5 categories, namely islamic fintech market & ecosystem, talent, regulation, infrastructure, & capital (dinarstandard, 2021). the rapid development of islamic fintech in indonesia, apart from being driven by the legal protection of the financial services authority (pojk) number 77/pojk.01/ 2016 concerning information technology-based borrowing and lending services, is also due to support from the sharia-legal compliance side which refers to the fatwa of the national sharia council of the indonesian ulema council (dsn-mui) no.117/dsn-mui/ii/2018 regarding information technology-based financing services based on sharia principles. in the fatwa, islamic fintech or technology-based financing services with sharia principles is defined as the operation of financial services in accordance with sharia principles that bring together or connect a financing provider with a financing recipient whose purpose is to carry out financing transactions through an electronic system (dsn-mui, 2018). majid│ the role of religiosity in explaining the intention to use islamic fintech amongst msme actors international journal of islamic economics and finance (ijief), 4(2), 207-232 │209 the presence of islamic fintech is a momentum that opens great potential for new alternative financing in accordance with sharia principles outside the banking sector which is intended to increase transactions, fulfill market needs, and financial inclusion, both for individuals and especially for business actors, namely micro, small and medium enterprises (msmes) which are the backbone of the indonesian economy. this is in line with the reality faced by msmes -which amount to 62.8 million (of which 98.7% are micro-businesses) with a contribution to a gross domestic product (gdp) of 57.8% in 2018 (kementerian koperasi dan usaha kecil menengah, 2018) that are still struggling and faced with fundamental classic problems, namely limited capital and access to finance as well as business operational management such as low quality of human resources (hr), marketing capabilities, business networks, and market analysis, as well as limited infrastructure and use of information technology and facilities (badan pusat statistik, 2019; bank indonesia & lembaga pengembangan perbankan indonesia, 2015). thus, a variety of islamic fintech services and products are expected to not only solve the problem of limited access of msme but also the problem of managing business operations that are in line with sharia principles and as a form of efforts to achieve financial inclusion for msme players (international monetary fund & world bank, 2019; pricewaterhousecoopers, 2019) as the majority in indonesian business ecosystem. in the academic literature, research examining the specific intentions of msme players in using islamic fintech products and services is still limited. even so, there have been several studies examining the determinants of the intention to use islamic fintech, including the willingness to do transactions both for commercial or social motives using digital platforms. for social and donation purposes, niswah, mutmainah & legowati (2019), sulaeman & ninglasari (2020), aji et al. (2020), and kasri & yuniar (2021) each of them examines the empirical factors that influence willingness to distribute zakat or donate sadaqah and infaq using digital platforms. the intention to donate cash waqf digitally was also investigated by amin, rahim, ramayah & supinah (2014) and kasri & chaerunnisa (2020). meanwhile, research on the intention of using fintech and digital platforms for commercial purposes was conducted by shaikh, qureshi & noordin (2020) and thaker et al. (2019) examined the determinants factors of investment intention in fintech p2p lending platform for malaysian users.in more detail, yuspita, pebruary & kamala (2019), darmansyah, fianto, hendratmi & aziz (2020) and purwantini, athief, & waharini (2020)empirically test the factors that influence the intention to use islamic fintech with the respondents from indonesian people using technology acceptance model tam, theory of planned behavior (tpb), and the unified theory of acceptance and use of technology (utaut) model. majid│ the role of religiosity in explaining the intention to use islamic fintech amongst msme actors international journal of islamic economics and finance (ijief), 4(2), 207-232 │210 however, the previous research above has not yet tested empirically the intention of using islamic fintech to directly focus and target the segment of msme actors as the majority of businesses in indonesia, but still targeting the segment in general. in addition, the majority of previous studies have not integrated tam, tpb, or utaut with other variables. on the basis of this, this study fills the gap in previous research by analyzing the factors that influence the intention to use islamic fintech by msmes using the theory of tam and tpb which are integrated with the variable of religiosity of msme actors towards the intention to use islamic fintech products and services. 1.2. objective this study aims to test empirically whether the religiosity level affects the intention to use islamic fintech services and products. this paper starts with conducting a literature review on tam, tpb, and decomposed theory of tpb followed by model construction based on previous research. furthermore, the next section discusses the methodology and research model using plssem and tested using the smart-pls tool. the next section is the results and analysis. this research closed with a conclusion, future research recommendation, and followed by limitations of this study. ii. literature review 2.1. background theory 2.1.1. technology acceptance model (tam) tam was introduced by davis (1989) as an adaptation from theory of reasoned action (tra). furthermore, tam is expected to be able to predict individual attitudes and acceptance of technology and can provide the basic information needed regarding factors that motivate individual attitudes in accepting new technology (venkatesh, morris, davis & davis, 2003; venkatesh & bala, 2008). there are two main factors that influence the adoption and use of technology by individuals. first, perceived usefulness namely the extent to which individuals believe that using it will affect improving their job performance. second, perceived ease of use namely the extent to which individuals believe that using it will make it easy to get work done (venkatesh & davis, 2000; venkatesh & bala, 2008). majid│ the role of religiosity in explaining the intention to use islamic fintech amongst msme actors international journal of islamic economics and finance (ijief), 4(2), 207-232 │211 figure 1. theoritical framework of tam source: venkatesh & bala (2008) 2.1.2. theory of planned behavior (tpb) tpb is a popular theory that is commonly used to know intentions in doing something that is developed by icek ajzen and martin fishbein (ajzen & fisbhein, 1980). tpb is extended and developed from tra, based on the assumption that humans generally behave wisely, take into account information and consider the implications for the actions taken (ajzen, 2005). in tpb, the individual's intention to take an action/behavior is the main factor. the intention is assumed to capture the motivational factors that influence behavior. the stronger the intention to engage in an action, the greater the possibility of a given performance (ajzen, 1991). figure 2. theoritical framework of tpb source: (ajzen, 1991) perceived usefulness perceived ease of use behavioral intention use behavior perceived behavioral control attitude toward the behavior subjective norm intentio n behavior majid│ the role of religiosity in explaining the intention to use islamic fintech amongst msme actors international journal of islamic economics and finance (ijief), 4(2), 207-232 │212 intention and behavior in tpb are a function of three basic determinants. first, personal in nature which is known as the term "attitude toward behavior" (atb). secondly, a reflection of social influence (reflecting social influence) on the behavior to be carried out is known as the term "subjective norm" (sn). thirdly, is related to control issues namely a sense of ease or difficulty or ability to carry out an action known as "perceived behavioral control" (pbc) (ajzen, 1991, 2005). 2.1.3. the decomposed theory of planned behavior (tpb) this tpb decomposition model was introduced by taylor & todd (1995) which refers to the construction of the characteristic innovation literature and more fully explores the dimensions of subjective norms (i.e. social influence) and perceived behavioral control (pbc) by breaking them down into certain belief dimensions. this decomposed tpb model has advantages similar to that of tam in terms of identifying certain important beliefs that can influence the use of information technology (it). according to this theory, it usage behavior is actually influenced by intention, which in turn is also influenced by attitudes towards behavior (which are decomposed into perceived usefulness, perceived ease of use, and compatibility), subjective norms, and the influence of perceived behavioral control (taylor & todd, 1995). 2.2. previous studies empirical research on the intention of using islamic fintech products and services is still very limited, especially by focusing on research on the intention of msme actors as the backbone of the national economy. darmansyah et al.(2020) comprehensively examine the intention of using islamic fintech society in general in indonesia by using three competing models consist of the tam, tpb, and the utaut. the results showed that the latent variables of tam, tpb, and utaut have a significant impact on encouraging behavioral intentions using islamic fintech, where tam latent variable is the most influential factor. ali, raza, khamis puah & amin (2021) examined the determinants of the perceived benefit and the perceived risk of islamic fintech and the influence of the perceived benefit, perceived risk, and user trust on the intention to use islamic fintech to 321 respondents in pakistan which was tested using smartpls. the results showed that the perceived benefit and perceived risk significantly influenced by their factors. meanwhile, perceived risk had a negatively significant impact on trust. in addition, this study also finds majid│ the role of religiosity in explaining the intention to use islamic fintech amongst msme actors international journal of islamic economics and finance (ijief), 4(2), 207-232 │213 empirically that there is a significant positive relationship between trust and intention to adopt islamic fintech. marzuki & nurdin (2020) was examined the influence of halal product expectation, social environment, and fiqh knowledge on intention to use islamic fintech products for 80 muslim consumers who use sharia fintech. the results of this research indicate that halal product expectations and knowledge about fiqh have significantly affect indonesian muslim consumers to use islamic fintech products. meanwhile, the social environment shown through the representation of friends or well-known muslim figures has no effect on the intention to use islamic fintech products. thaker, amin, thaker & pitchay (2019) examined the important factors that affected the intention to use islamic mobile banking services by malaysian islamic banking users. using primary data from a survey of 250 respondents, this research found that the continuance intention of using islamic mobile banking services was affected by the usability, customer service, customer satisfaction, and trust of the customer. the same study was also conducted by thaker, thaker, khaliq, pitchay & hussain (2021) using a larger sample of 319 in the two main states in malaysia, namely kuala lumpur and selangor. by using utaut2, this study found that variables such as performance expectancy, effort expectancy, price value, facilitating conditions, and habit have a positive significant influence over the behavioral intention. meanwhile, social influence and hedonic motivation were found negatively related and insignificant to behavioral intention. with a wider range of respondents, namely in southeast asia, sun, goh, fam & xue (2012) explored the role of religious affiliation and commitment to adopt islamic mobile phone banking. this study found that both religious affiliation and commitment were effective as segmentation strategies due to the difference in intention to adopt islamic mobile phone banking were found between muslim and non-muslims, as well as devout. usman, projo, chairy & haque (2021) proposed an extended model of the tam by including sharia compliance (sc), knowledge of sc, and confidence in sc, then examine their effect on satisfaction in using e-banking of indonesian islamic banking. the results of this study indicate that sc, knowledge about sc, and belief in sc have a significant positive effect on customer satisfaction of e-banking intention of indonesian islamic banking users. in addition, these three variables also have a significant to moderate the relationship between pu and peou on customer satisfaction. in addition, this study highlights the importance of sharia compliance in the extended tam model. shaikh et al. (2020) in his research was examined the determinants of bank users in malaysia to use islamic fintech service using the tam approach. the majid│ the role of religiosity in explaining the intention to use islamic fintech amongst msme actors international journal of islamic economics and finance (ijief), 4(2), 207-232 │214 results of this research on 205 respondents indicated that perceived ease of use, perceived usefulness, and consumer innovativeness (ci) were factors that influenced the intention to use islamic fintech in the malaysian context. on the other hand, self-efficacy and subjective norms have no effect on islamic banking users' intention to use fintech. based on the results of the previous research above, it is known that tam and tpb indicators affect the intention to use islamic fintech. however, specifically, social influence and subjective norm were found to be influential in other studies, but also in some studies they were found to not affect. in several studies using the variable of sharia compliance knowledge or knowledge about fiqh, it was found that these variables were empirically proven to affect the intention to use islamic fintech. however, interestingly, there has been no research that specifically uses the religiosity variable as one of the determinants that affect the intention to use islamic fintech, especially for msme actors. 2.3. rationalization of theory and hypothesis development 2.3.1. perceived usefulness (pu) and perceived ease of use (peou) in this study, atb is described (decomposition) into perceived usefulness and perceived ease of use. pu tries to measure how the perception of people who use technology will improve their job performance. the intention to use islamic fintech is based on the benefits received by consumers (darmansyah et al., 2020). in simply, if the consumer's view of services using fintech is increasingly useful, then the general attitude towards using fintech services will increase (kim, choi, park, & yeon, 2016). in many empirical studies, it has been found that pu is consistently a strong determinant of intention to use information technology (venkatesh & davis, 2000). in relation to the determinants of intention in using islamic fintech, pu includes specific relevant components. darmansyah et al. (2020) found that pu, which is a component of tam, has a significant positive effect on behavioral intention to use islamic fintech in indonesia. the same resulted was stated by niswah et al. (2019) that pu is a factor that encourages good acceptance of a technology system, especially in donating through fintech. this means that using fintech in donating is very beneficial because the donation process is faster, more effective, and easier, thereby increasing the interest in using fintech. h1: perceived usefullness (pu)of msme actors effect on attitude toward behavior (atb) of using of islamic fintech h2: perceived usefullness (pu)of msme actors effect on behavioral intention (bi) of using of islamic fintech majid│ the role of religiosity in explaining the intention to use islamic fintech amongst msme actors international journal of islamic economics and finance (ijief), 4(2), 207-232 │215 perceived ease of use (peou) influences the intention, perceived usefulness, attitude, and actualization of using technology (davis, 1989). this means that the ease of use of technology will increase an individual's ability to use internet applications and services (purwantini et al., 2020). kazemi, nilipour, kabiry & hoseini (2013) in their research empirically found that all attributes related to innovation, namely the decomposition of pu and peou on atb, had a significant effect on atb. in this study, the easier the work done, the more benefits of using islamic fintech, the higher the behavior and intention of msme actors to use islamic fintech. h3: perceived ease of use (peou) of msme actors effect on attitude toward behavior (atb) of using of islamic fintech. h4: perceived ease of use (peou) of msme actors effect on behavioral intention (bi)of using of islamic fintech. 2.3.2. attitude towards behavior attitude towards behavior (atb) refers to the extent to which a person has an evaluation or assessment of the likes or dislikes of the behavior being asked (ajzen, 1991). atb is a specific component that is relevant and has a positive and significant effect on the intention to use sharia-based fintech as has been proven in previous studies. kasri & chaerunnisa (2020) found that attitude toward behavior has a positive significant effect on the intention of millennials in indonesia to donate cash money digitally. the same thing is also found in empirical research conducted by yuspita et al. (2019) and darmansyah et al. (2020) that tested people's perceptions of using fintech services provided by islamic financial institutions found that atb has a positive influence. h5: attitude toward behavior (atb) of msme actors effect on the intention of using islamic fintech. 2.3.3. subjective norm social factors in the form of subjective norms (sn) refer to the social pressure that is felt to do or not do a behavior. generally, the more preferred subjective attitudes and norms, the greater the individual's intention to carry out the considered behavior (ajzen, 1991). darmansyah et al. (2020) in their research found that sn has a significant effect on the intention to use islamic fintech in indonesia. the same thing is also found in the research of jerene & sharma (2020) that subjective norms significantly positively affect the adoption of banking customers in ethiopia to use fintech services. similarly, kasri & chaerunnisa (2020) found a significant majid│ the role of religiosity in explaining the intention to use islamic fintech amongst msme actors international journal of islamic economics and finance (ijief), 4(2), 207-232 │216 effect of subjective norms on millennial intentions to digitally to donate cash waqf. h6: subjective norm (sn) of msme actors effect on the intention of using islamic fintech. 2.3.4. perceived behavioral control pbc refers to the perceived ease or difficulty in carrying out behavior and is assumed to reflect past experiences and the obstacles that have been anticipated. in general, the higher the behavior control, the higher the intention to do the desired action(ajzen, 1991). pbc was found empirically to be the strongest factor influencing millennial intentions in indonesia to donate cash waqf digitally (kasri & chaerunnisa, 2020). other than that, darmansyah et al. (2020) in their research found that pbc has a significant positive effect on the intention to use islamic fintech in indonesia. h7: perceived behavioral control (pbc) of msme actors effect on the intention of using islamic fintech. 2.3.4. religiosity religiosity is the individual's ability to commit to religious beliefs by obeying what can and should not be done including values and practices in everyday life (johan, hussain, mohd, & kamaruddin, 2020). in contemporary life, religion basically plays a significant ethical role in which the entire life it lives is shaped by divine law in religion. ajzen & fishbein (1970)stated that attitude was found to be highly correlated with how much confidence in what aspects of evaluation a person believes. a person who has held a certain value of his religion will influence their actions and decisions in doing something (alam, janor, zanariah, wel, & ahsan, 2012). on this basis, commitment to religiosity is considered a relevant and strong determinant in shaping motivation and behavioral intention (sun et al., 2012). correspondingly, alam et al. (2012)in their research found that religiosity is the most important factor and plays an important role in the intention to finance islamic homes in malaysia's klang valley. the same thing was found in research conducted by kasri & chaerunnisa (2020)that religiosity is the most powerful factor affecting the intention to donate cash waqf digitally in indonesia. h8. religiosity of msme actors effect on the intention of using islamic fintech. majid│ the role of religiosity in explaining the intention to use islamic fintech amongst msme actors international journal of islamic economics and finance (ijief), 4(2), 207-232 │217 iii. methodology 3.1 data the data were obtained through filling out online questionnaires in indonesian through google form which were answered directly by respondents. the qualifications of respondents in this study include msme actors who have run business operations in indonesia for at least two years and include as an active internet user as well as being able to operate islamic fintech platforms/applications and services. respondents who do not meet the above requirements cannot fill out the research questionnaire. the questions in the questionnaire are divided into two parts, namely the demographics of the respondents and closed questions to measure the perceptions of msme actors on the intention of using islamic fintech. this study uses purposive sampling (judgement sampling), which is a sampling technique based on the characteristics assigned to the elements of the target population that are adjusted to the objectives or research problems. in this study, the respondents come from msme actors who are the backbone of the national economy. msmes consists of micro, small and medium enterprises. based on law no. 20 year 2008 concerning micro, small and medium enterprises (msmes). table 1 explains the difference among them. table 1. the difference between micro, small, and medium enterprises type of enterprises total of assets (excluding land and buildings) sales results (per year) micro enterprises up to idr 50 million up to idr 300 million small enterprises idr 50 million – idr 500 million idr 300 million – idr 2,5 billion medium enterprises idr 500 million – idr 10 billion idr 2,5 billion – idr 50 billion source: law no. 20 year 2008 of republic of indonesia (2008) table 2 shows the geographic information of respondents. a total of 100 samples were collected consisting of 54 micro-enterprises actors (54%), 31 small-enterprises (31%), and 15 medium-enterprises (15%). respondents did not only come from one location/region but consisted of all regional representatives in indonesia who were from several major islands in indonesia. the number of respondents in this study was considered enough for a research method using pls-sem due to pls-sem can be used for nonnormal data and small sample sizes (hair, sarstedt, hopkins, & kuppelwieser, 2014; hair, sarstedt, ringle, & mena, 2012; khan et al., 2019). majid│ the role of religiosity in explaining the intention to use islamic fintech amongst msme actors international journal of islamic economics and finance (ijief), 4(2), 207-232 │218 table 2. respondent information demographics variable description frequency percentage sex male 80 80% female 20 20% age <20 years old 1 1% 20-30 years old 47 47% 31-40 years old 34 34% 41-50 years old 15 15% >51 years old 3 3% education senior high school 10 10% diploma 11 11% bachelor degree 64 64% master degree 15 15% business category micro-enterprises 54 54% small-enterprises 31 31% medium-enterprises 15 15% duration of business activity 1-5 years 73 73% 5-10 years 16 16% 10-20 years 10 10% > 20 years 1 1% business location sumatera 8 8% java 81 81% nusa tenggara-bali 1 1% sulawesi 4 4% kalimantan 5 5% maluku-papua 1 1% types of islamic fintech that respondents have used, both for social and commercial purposes, include dana syariah, kitabisa.com, linkaja syariah, global sadaqah, qazwa, kapital boost, koperasi 212, asy-syirkah muamalah indonesia cooperative, hsip, tamwyl, ternaknesia, and the dompet madani. 3.2 model development study was adapted from previous relevant research topics which used the basic framework of tam and tpb. each variable is measured using a fivepoint likert scale to see respondents' opinions ranging from "strongly disagree" (scale 1) to "strongly agree" (scale 5). the majority of survey questions were adapted from research conducted by (davis, 1989; venkatesh & davis, 2000). likewise, the construction of indicators on variables in tam and tpb was adapted from research by (davis, 1989; pikkarainen, pikkarainen, karjaluoto & pahnila, 2004; venkatesh & davis, 2000), while indicators in the decomposed theory of planned behavior (tpb) were adapted from (chuang, liu, & kao, 2016; taylor & todd, 1995). majid│ the role of religiosity in explaining the intention to use islamic fintech amongst msme actors international journal of islamic economics and finance (ijief), 4(2), 207-232 │219 meanwhile, the religiosity indicators is adapted from (alam et al., 2012). all research questions have been adjusted based on the research topic. the kinds of variables and indicators used in this study are explained in table 3. table 3. measurement items construct indicator (s) source (s) pu accelerates the work/project (davis, 1989) makes the work more effective (davis, 1989; pikkarainen et al., 2004; venkatesh & davis, 2000) makes the work easier (davis, 1989; pikkarainen et al., 2004) useful (davis, 1989; pikkarainen et al., 2004; taylor & todd, 1995;venkatesh & davis, 2000) peou easy to learn (davis, 1989; pikkarainen et al., 2004) clear and easy to understand (davis, 1989; pikkarainen et al., 2004; viswanath， venkatesh & davis, 2000) flexible in use (davis, 1989; pikkarainen et al., 2004) easy to use (davis, 1989; pikkarainen et al., 2004; taylor & todd, 1995; viswanath， venkatesh & davis, 2000) atb convenient to use (chuang et al., 2016; taylor & todd, 1995) good ide to use it (chuang et al., 2016; taylor & todd, 1995) like the idea of using (chuang et al., 2016; taylor & todd, 1995) sn influential people can influence somenone’s behavior (alam et al., 2012; davis, 1989; viswanath， venkatesh & davis, 2000) important and meaningful people can influence somenone’s behavior (alam et al., 2012; taylor & todd, 1995; viswanath， venkatesh & davis, 2000; viswanath venkatesh & bala, 2008) people whose opinions are important and strong can influence someone’s behavior (alam et al., 2012; taylor & todd, 1995; venkatesh & bala, 2008) pbc willingness to use (alam et al., 2012; taylor & todd, 1995) do the behavior without coercion/compulsion (alam et al., 2012; taylor & todd, 1995) there are available resources, ability, and knowledge to use. (alam et al., 2012; taylor & todd, 1995) religiosity regularly to perform sholah (alam et al., 2012) regularly perform fasting in the holy month of ramadan (alam et al., 2012) regularly read the holy qur'an (alam et al., 2012) follow the islamic rules in dailylife (alam et al., 2012) trying to avoid big and small sins (alam et al., 2012) participation in the mosque in order to increase islamic knowledge (alam et al., 2012) bi intention to use in near future (alam et al., 2012; taylor & todd, 1995) intention to use (alam et al., 2012; taylor & todd, 1995) intention to using it repeatedly (onwards) (alam et al., 2012; taylor & todd, 1995) majid│ the role of religiosity in explaining the intention to use islamic fintech amongst msme actors international journal of islamic economics and finance (ijief), 4(2), 207-232 │220 the structural model (figure 3) specifies the relationship between the exogenous and endogenous constructs. the structural model also answers how constructs are hypothesized to have mutual causality (henseler, hubona, & ray, 2016). figure 3. research model 3.3 method the research design used in this study is a quantitative approach. measurement of research will be easier to understand with quantitative methods through filling out questionnaires by msme actors as a tool to find out respondents' perceptions of the intention of using islamic fintech in carrying out their business operations. the research method used in this research ispartial least squares – structural equation modelling (pls-sem). pls-sem is a type of structural equation method based on variance, which is appropriate for explanative and predictive research (hair et al., 2012). the author used pls-sem due to this method can accommodate a small number of samples/respondents as in this study. hair et al. (2014) explained that the most prominent justifications for using pls-sem are attributed to three reasons namely non-normal data, small sample sizes, and type of constructs used are formative. in this study, the research model was tested using smartpls 3.0 software. pls-sem can work effectively on the use of samples with small values even for complex models. pls-semis conducted in two stages namely examination of the measurement model (outer model) and assessment of the structural model (inner model). the measurement models are used to evaluate and religiosity perceived behavioral control perceived ease of use perceived usefulness subjective norm behavioral intention attitude toward behavior h1 h3 h2 h4 h6 h7 h8 h5 majid│ the role of religiosity in explaining the intention to use islamic fintech amongst msme actors international journal of islamic economics and finance (ijief), 4(2), 207-232 │221 assess the relationship between the indicators of each variable used and their corresponding construct (hair et al., 2014, 2012). this test consists of the validity and reliability test. the validity test itself comprised convergent and discriminant validity. this study uses factor loading (fl), average variance extracted (ave), cronbach's alpha values and composite reliability (cr) to assess convergent validity. the fls and ave values are greater than or equal to 0.5, while the recommended cr and cronbach's alpha values are greater than or equal to 0.7 (hair et al., 2014). testing on structural models is assessed based on the r-square (r2) value which indicates a goodness-fit test model. the r2 value explains how many exogenous variables in the model are possible to explain endogenous variables. the higher r2 value indicates the better of the model in the study. iv. results and analysis 4.1. result 4.1.1. measurement model table 4. analysis of factor on all measurement items constructs items fl α cr ave subjective norm sn1 sn2 0,862 0,848 0,737 0,852 0,660 sn3 0,719 perceived behavioral control pbc1 0,901 0,839 0,903 0,757 pbc2 0,884 pbc3 0,824 perceived usefullness pu1 0,934 0,955 0,968 0,882 pu2 0,958 pu3 0,929 pu4 0,936 perceived ease of use peou1 0,840 0,856 0,902 0,698 peou2 0,816 peou3 0,792 peou4 0,891 attitude toward behavior atb1 0,794 0,783 0,873 0,697 atb2 0,875 atb3 0,834 religiosity r1 0,896 0,950 0,959 0,798 r2 0,903 r3 0,884 r4 0,876 r5 0,918 r6 0,882 behavioral intention bi1 0,898 0,938 0,956 0,844 bi2 0,939 bi3 0,934 bi4 0,903 majid│ the role of religiosity in explaining the intention to use islamic fintech amongst msme actors international journal of islamic economics and finance (ijief), 4(2), 207-232 │222 based on testing on convergent validity, all items meet the required value. fl and ave values support convergent validity and so do cr and cronbach's alpha values which also support the reliability of each question item. this can be seen from table 4 which the value of cr (> 0.70), cronbach's alpha (α> 0.70), lf (> 0.50), and ave (> 0.50) i which were more than the recommended value. 4.1.2 structural model the value of r2 is the determinant coefficient in the construct of endogenous variables, namely attitude toward behavior (atb) and behavioral intention (bi) in this study. table 5. r-square (r2) test results r-square r-square adjusted atb 0,653 0,646 bi 0,655 0,633 based on the table above, it is showed that atb has an r2 value of 0.653 which means that atb is an endogenous variable that can be explained by the exogenous variables, namely pu and peou of 65.3%, and the remaining 34.7% is explained by other variables outside of the model. another result showed that bi has r2 of 0.655 which means that the endogenous variables of bi can be explained by exogenous variables, namely: sn, atu, pu, peou, pbc, and religiosity of 65.5%, and the remaining 34.5% is explained by other variables outside of the model. this shows that the research model is considered good. based on the results of statistical tests using bootstrapping analysis, it was found that 6 out of 8 hypotheses had a significant effect. in table 5, it can be seen that h5 and h7 have a p-value that is more than 0.05 so that attitude toward behavior (atb) and perceived behavioral control (pbc) have no significant impact on the intention to use sharia fintech. meanwhile, h1, h2, h3, and h6 empirically have a significant effect on the model at 5% alpha, while h4 and h8 have a significant effect on alpha 10%, it can be seen in table 6. majid│ the role of religiosity in explaining the intention to use islamic fintech amongst msme actors international journal of islamic economics and finance (ijief), 4(2), 207-232 │223 table 6. direct relation of structural model hipotesis original sample t-statistics p-values result h1: pu → atb 0,371 3,131 0,002* supported h2: pu →bi 0,309 3,154 0,002* supported h3:peou→atb 0,519 5,671 0,000* supported h4: peou → bi -0,187 1,721 0,086** supported h5: atb →bi 0,195 1,496 0,135 not supported h6: sn →bi 0,453 5,579 0,000* supported h7: pbc →bi 0,082 0,933 0,351 not supported h8: r → bi 0,106 1,695 0,091** supported note: *significant at level 1%, **significant at level 10% 4.2. analysis based on the findings, perceived usefulness (pu) has a significant impactboth on the will (attitude toward behavior) and behavioral intention to use islamic fintech by msme players. this means that the presence of islamic fintech provides convenience in accelerating the completion of msme business operations, is not only limited to a will/action but is followed by inclusiveness to use fintech services and products. for example, islamic fintech categorized as the peer-to-peer lending such as dana syariah, dompet madani, and ternaknesia can be an alternative to new financing schemes outside banking that can help resolve msmes capital constraints so that business expansion can be carried out. in addition, the presence of fintech categorized as digital financial innovations can be a solution of payment, especially for commercial business activities like payment for water, electricity, telephone, pulses, and so on, also helps complete daily, weekly or monthly msme business operational. these results are also consistent with the previous studies conducted by (chuang et al., 2016; darmansyah et al., 2020; jerene & sharma, 2020; purwantini et al., 2020; shaikh et al., 2020). perceived ease of use (peou) of msme actors also has a significant influence both on the will/action (attitude toward behavior) as well as behavioral intention to use islamic fintech. this means that ease of daily transaction payments, the effectiveness of transaction settlement, both for internal msmes, or those involving consumers and third parties are the driving force for using islamic fintech such as easy access that makes user friendly to donate or pay company zakat or employees through the fintech platform. these results also support the previous studies by (amin et al., 2014; chuang et al., 2016; darmansyah et al., 2020; niswah et al., 2019; purwantini et al., 2020; shaikh et al., 2020) the next result shows that attitude toward behavior (atu) and perceived behavioral control (pbc) both do not affect the intention of using islamic majid│ the role of religiosity in explaining the intention to use islamic fintech amongst msme actors international journal of islamic economics and finance (ijief), 4(2), 207-232 │224 fintech by msme actors. this shows that the services provided by islamic fintech to accelerate business operations of msmes are still limited to a willingness and has not been continued as an intention to adopt it. this may be due to the high literacy of islamic fintech but it has not been accompanied by islamic financial inclusion. this may due to the presence of islamic fintech as an alternative source of financing for msmes is still yet no effect on the intention of msme players to use it. there are many msme players who still use other types of financing, both from conventional financial institutions or individual capital. this finding is in line with the results of research by kim et al. (2016) that excessive attention to the privacy of the information on fintech services types of payment has a negative effect on usage intentions, where it diverts people to donate directly to the intended community without going through fintech. in addition, problems such as fraud, hacking, identity theft, and other cybercrimes are also the main reasons that reduce the trust of many people to use fintech (niswah et al., 2019). however, this study supports the result of a previous study conducted by (niswah et al., 2019; purwantini et al., 2020) and contrasts to research findings by yuspita et al. (2019). subjective norm (sn) has a significant influence on the intention of using islamic fintech by msmes. this finding indicates that important figures, business environment such as work partners, employees of msme actors also support and provide recommendations to use islamic fintech services and products. further, encouragement and recommendations from these influential people will affect msme actors to use fintech to make donations and/or use other islamic fintech features. this finding is in line with the previous research by (darmansyah et al., 2020; jerene & sharma, 2020; kasri & chaerunnisa, 2020; kim et al., 2016; niswah et al., 2019). the important role of religiosity level in influencing the behavioral intention of msme acts to use islamic fintech services and products, which is in line with the last hypothesis, shows that there is a positive and significant relationship between the variables. these results indicate that the higher the level of religiosity of msme actors, the more they will encourage their intention to use islamic fintech. almost all respondents believe that using islamic fintech will bring more blessings in running their business. this is because for them by using islamic fintech products and services, it means that they have tried to follow islamic rules in gathering and trying to avoid prohibited transactions such as riba, gharar, and maysir, especially in terms of the need for venture capital, investment, and other financing schemes.these results indicate that religiosity is a shield for an individual to commit to what he believes in an act whether it is permissible or not based on what has been outlined by religion(johan et al., 2020). in addition, religiosity is the main drivers to attract intention in case of using new or majid│ the role of religiosity in explaining the intention to use islamic fintech amongst msme actors international journal of islamic economics and finance (ijief), 4(2), 207-232 │225 novel products (ateeq-ur-rehman & shabbir, 2010; mansori, sambasivan, & md-sidin, 2015). thus, highlighting the religious aspect can encourage more participation of msme actors to interact with islamic fintech products and services. this finding is also in line with those of some previous studies conducted by (amin et al., 2014; kasri & chaerunnisa, 2020). v. conclusion and recommendation 5.1. conclusion this study examined to analyze the factors that influence the intention of msme actors to use islamic fintech by integrating both tam and tpb approach as well as the role of religiosity in the conceptual model. based on the results, this research found that both pu and peou are significant influence both on the attitude toward behavior (atb) and also behavioral intention (bi) of using islamic fintech services. however, atb and pbc were found to have no significant effect on the intention to use islamic fintech by msme actors. the main findings suggest that religiosity plays an important role in explaining the behavioral intention of using islamic fintech by msme actors. furthermore, subjective norm is found to be empirically influential on bi and is the strongest influential determinant factor under the tpb framework of using islamic fintech. 5.2. recommendations based on the results and analyzes, it is suggested that the regulator of fintech institutions namely the financial service authority (ojk) can do more collaborate with the indonesian islamic fintech association (afsi) and the fintech institutions themselves to increase socialization and literacy regarding services, types of products, the advantages of features and security as well as report transparency, as well as other things that can increase the inclusiveness of msme players, especially in terms of fulfilling access to finance and accelerating the resolution of business operational challenges. increasing literacy, providing incentives, strengthening consumer data protection, and making transactions easier using islamic fintech. in particular, islamic fintech institutions can incorporate religious values that contain guidelines and strategies in doing business to achieve blessings. in addition, literacy regarding the types of transactions that are prohibited, such as riba, gharar, and maysir which is a sin if done can be included in the display and content of platforms or social media as well as messages, whether in the form of quotations from the qur'an, hadith, the words of islamic scholars, and influential figures. majid│ the role of religiosity in explaining the intention to use islamic fintech amongst msme actors international journal of islamic economics and finance (ijief), 4(2), 207-232 │226 this study has limitations in the case of the limited number of samples. in addition, the majority of the sample is concentrated on java island, which in terms of access to information disclosure is much better than in non-java areas. thus, it is hoped that the next research can increase the sample size capacity of each type of business (micro, small, and medium) and the wider distribution area of respondents. subsequent research is also suggested to use and combine the model development by integrating the variable of sharia-compliant knowledge, either as an independent variable or as a mediating variable. acknowledgements the author is grateful to lembaga pengelola dana pendidikan (lpdp) ministry of finance for sponsoring my master's study in islamic economics science, faculty of economics and business, airlangga university as well as fully supporting me to complete this research. majid│ the role of religiosity in explaining the intention to use islamic fintech amongst msme actors international journal of islamic economics and finance (ijief), 4(2), 207-232 │227 references aaron, m., rivadeneyra, f., & sohal, s. 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(2019). the society’s perceptions on the use of fintech services in sharia financial institutions. jurnal ekonomi & keuangan islam, 5(2), 87–92. doi:10.20885/jeki.vol5.iss2.art6 majid│ the role of religiosity in explaining the intention to use islamic fintech amongst msme actors international journal of islamic economics and finance (ijief), 4(2), 207-232 │232 this page is intentionally left blank. ijief:international journal of islamic economics and finance vol. 1 (2), pg 165-186, january 2019 the effect of macroeconomic and bank-specific variables to risktaking of islamic bank in indonesia * faaza fakhrunnas universitas islam indonesia, indonesia, fakhrunnasfaaza@uii.ac.id article history received: december 19, 2018 revised: january 1, 2019 accepted: january 4, 2019 abstract this study aims to delineate the relationship between macroeconomic factors and bank-specific variables to risk-taking of islamic bank. adopting panel co-integration approach, this study posits macroeconomic and bank-specific factors as exogenous variables consisting to interest rate, exchange rate, inflation, bank size and equity to asset ratio. risk-taking as endogenous variable has proxies non-performing loan or financing and bankruptcy risk. by using quarterly data from 2010-q4 to 2017-q4, this study finds the risk-taking behavior of all banks has long-term relationship with macroeconomic factors. in terms of bank specified characteristic, bank size becomes substantial factor for the bank’s risk mitigation. when the samples are grouped based on islamic bank’s size, the big size of islamic bank has no long-term co-integration to macroeconomic variables. as opposed to that, the middle and small size of islamic bank have long-term relationship to macroeconomics factors and all macroeconomic variables affect the risk-taking of islamic bank. it concludes that the medium and small size of islamic banks are more vulnerable from external shock. keywords: risk-taking, macroeconomic variable, bank-specific variable jel classification : e00, g33,g32 @ ijief 2019 published by universitas muhammadiyahyogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.129 web: http://journal.umy.ac.id/index.php/ijief/article/view/129 citation: fakhrunnas, f. (2019). the effect of macroeconomic and bank-specific variables to risk-taking of islamic bank in indonesia. international journal of islamic economics and finance (ijief), 1(2), 165-186. doi: https://doi.org/10.18196/ijief.129. *i gratefully acknowledge the support from direktoratpenelitiandanpengabdianmasyarakat (dppm) universitas islam indonesia for providing research grant to this study. mailto:fakhrunnasfaaza@uii.ac.id http://journal.umy.ac.id/index.php/ijief/article/view/ fakhrunnas| the effect of macroeconomic and bank-specific variables to risk-taking of islamic bank in indonesia ijief: international journal of islamic economics and finance, 1(2), 165-186|166 introduction since the regulation number 7 of 1992 about indonesian banking system was released, indonesia experienced the new era where the government opened its hands to the operation of islamic bank in indonesia. it was a history, when the indonesian society erected bank muamalat indonesia as the first islamic bank in indonesia (rosylin & bahlous, 2013). by having an impressive growth, islamic bank attracts its counterparty which is conventional bank to open the same business model as performed by islamic bank. then within one decade after, numerous conventional banks have been unfolding islamic bank window to response the growing of the islamic finance market. this step was also followed by the main player of banking industry in indonesia such as bank mandiri that launched bank syariah mandiri as its islamic bank subsidiary in 1999. currently, indonesia has 13 islamic banks and 21 islamic banks business unit (ojk, 2017). the achievement of islamic banking development was tested with the financial turmoil in indonesia during 1997-1998. this crisis was caused by several factors such as the weakening of indonesian rupiah, unstable economic growth, uncontrolled inflation and other macroeconomic factors (nursechafia & abduh, 2014). this reason is also an evidence that macroeconomic factors have strong relationship to the financial condition. nursechafia and abduh (2014) conclude that the bank which perform as financial intermediary institution amid fully uncertainty condition faces difficulty to conduct business as usual. nonetheless, this condition did not happen in indonesia during crisis. islamic banks remained untouchable from the effect of macroeconomic turbulence. it was caused by two arguments in which firstly islamic bank had unique business model including its product variation and operation. then secondly, islamic bank was described as less cost-effective but productive as intermediary institution compared to its counterparty (karim, et al., 2016). as opposed from indonesian experience, different evidence comes from turkey during financial distress in 2000-2001 when ihlas finans house, a special purpose islamic bank for house financing, was declared bankrupt (kanten & ulker, 2013). at that moment, the macroeconomic indicator was shaking up the banking industry. gross domestic product (gdp) moved downward, inflation rate increased dramatically and currency weakening were the factors that weakened the economic condition (ali, 2007). this circumstance confirms that islamic bank also has the same exposure to the macroeconomic indicator. several researchers have been conducted to understand the exposure of islamic bank to macroeconomic variables. considering the bank-specific fakhrunnas| the effect of macroeconomic and bank-specific variables to risk-taking of islamic bank in indonesia ijief: international journal of islamic economics and finance, 1(2), 165-186|167 factor that focuses on islamic bank size, ibrahim & rizvi (2017) opine that a big size of islamic bank is more beneficial than the small size of islamic bank in terms of financial stability. this thought stresses that a big bank will manage risk exposure in the right manner. it is also supported by fakhrunnas, dari, & mifrahi (2018) who state that islamic bank size will mitigate the risk from unstable macroeconomic situation. it is exhibited by the ability of islamic bank to manage risk-taking behavior comprising of credit and bankruptcy risk. this paper aims to review all related finding about the effect of macroeconomics factors and bank-specific variable to risk-taking of islamic banks in indonesia. moreover, this research provides a new evidence and methodology to capture the long-terms effect of external shock and bankspecific factors to risk-taking of islamic banks. this study consists of several parts which is begun by literature review after introduction part. then, methodology, result and discussion will be delineated in the next part. furthermore, it ends with conclusion to sum-up the research discussion and suggest for further research. literature review islamic bank in indonesia the regulation of islamic bank in indonesia develops following the development of banking industry. at the first time, the regulation stipulates in national act number 7 of 1992 about indonesian banking system, indonesia employs dual banking system comprising conventional and a bank with profit-sharing system. that regulation was amended by national act number 10 of 1998 where the name of “islamic bank” was firstly introduced at the first time in the act. then the new regulation was issued by the government in national act number 21 of 2008 about islamic bank which specifically regulates islamic bank in indonesia. in the latest regulation, islamic banks have several functions such as supporting for national development, lending-funding activity, acting as nadzir of waqf and collecting islamic philanthropy funds for social purposes activity (act as baitul maal). islamic bank is also stated to have prohibited activities which is against to sharia law. therefore, islamic bank has different characteristic from its counterparty in terms of its foundation and business operation (zarrouk, ben jedidia, & moualhi, 2016). zarrouk, et al. (2016) delineates that islamic bank has several uniqueness that firstly islamic bank must comply to shariah rule that is derived from islamic teaching. hence, all fakhrunnas| the effect of macroeconomic and bank-specific variables to risk-taking of islamic bank in indonesia ijief: international journal of islamic economics and finance, 1(2), 165-186|168 business activities are prohibited from interest (riba), huge uncertainty (gharar) and gambling (maysir). secondly, all financial transactions must be real asset based. it means that islamic bank tend to promote real market rather than financial market separately. thirdly, islamic bank will not allow any investment in impermissible elements such as pork, alcohol and related area. the permissible and impermissible elements will refer to islamic principle. fourthly, islamic bank promotes profit and loss-sharing based. in the current development of islamic bank in indonesia, based on financial service authority or otoritas jasa keuangan(ojk) in quarter 1 2018, the number of islamic bank in indonesia is 13 banks with 21 islamic business unit owned by the conventional bank (ojk, 2018). compared to the conventional bank, the number of the banks are 115 banks in 2018. this number indicates the domination of conventional bank in indonesia remains high. in terms of the asset, the conventional bank reach idr 7,429,891 billion in quarter 1 2018 meanwhile islamic bank is still under idr 294,267 billion in total asset. the lower accumulative size of islamic bank asset also appoints that the islamic bank must struggle to compete in the banking industry. risk exposure in islamic bank in banking business, uncertainty has a potency to make a profit as well as loss. because of uncertainty, the bank will face risk. the risk can make the bank suffer loss but without taking risk, the bank cannot earn a high return. in the conventional viewpoint, there are methods to mitigate the risk where it can be transferred to the other parties such as the insurance company. another method to manage risk is by diversifying the investments (nadeem & khalil, 2014). islamic finance believes that the bank is not allowed to engage in lending money; the bank has to be based on risk-sharing (chazi & syed, 2010). in addition to facing the same risks as those faced by conventional banks such as murabahah which uses deferred payment, islamic banks follow fiqh muammalat which prohibits interest and restricts its operations to certain products (abedifar, et al., 2013). for managing the islamic bank objective to reach maslahah, islamic bank have to practise prudential supervision and information disclosure to the public. khan and ahmed (2001) explain considerable risks faced by an islamic bank. the first is a credit risk. this risk happens when there has deferred payment in deliverability of cash or asset by the counterparty to the bank. this particular risk mainly occurs in salam, istishna and murabahah. in the context of musharakah and mudarabah which are mainly based on the pls model, the risk is in the profit sharing fakhrunnas| the effect of macroeconomic and bank-specific variables to risk-taking of islamic bank in indonesia ijief: international journal of islamic economics and finance, 1(2), 165-186|169 mechanism given by the mudharib. sometimes, it has some asymmetric information where the islamic banks do not have adequate information relating to how much profit was made by the mudharib. regarding murabahah which is mainly based on debt, the risk can appear from the non-performing business activity experienced by trading partner. because of that, the bank will not earn money returned by customers. even though credit risk can affect islamic bank significantly, that risk can be mitigated by stringent requirements implemented by the bank (rosly & zaini, 2008). the second is withdrawal risk. islamic banks have many clients who deposit their money in a wa’diah account or investment account. by having a source of funds from the public, an islamic bank will manage that fund to finance products that are shariah compliant. however, islamic bank has to anticipate when the customers withdraw their money from the bank. the withdrawal activity can be conducted by many reasons such as loss of confidence, weak economic conditions and so on. the third is a fiduciary risk which can arise when islamic bank cannot meet its fulfil their obligations in the transaction contract. for example, when the islamic bank can give the investment return to the customers which is below the expected return provided in the prior agreement. afterwards, if the bank has mismatch in managing the fund and cannot pay their obligation to the customers, customers will lose their confidence in the bank. this condition can be called the fiduciary risk encountered by islamic banks with where the bank cannot give competitive return to the customers or account holders compared to other banks. due to that reason, the account holders are likely to withdraw their money from the bank to move to another bank which is more profitable. fourth, market risk can be caused by an economic condition at a macro level that affects to the market condition. market risk can also be called systematic risk that is typically a risk which is unavoidable. on the other hand, unsystematic risk is located inside the company and can be managed by the company independently. the fifth is liquidity risk which emerges when the bank does not have sufficient liquidity to operate. liquidity risk is the most important risk that has to be managed well (ben selma mokni, echchabi, azouzi, & rachdi, 2014). liquidity risk affects the bank performance because the bank cannot fulfil its liability. a failure to fulfil islamic bank obligation may lead to face bankruptcy risk. fakhrunnas| the effect of macroeconomic and bank-specific variables to risk-taking of islamic bank in indonesia ijief: international journal of islamic economics and finance, 1(2), 165-186|170 previous studies some studies about the influence of macroeconomic variables toward risktaking of islamic bank had been conducted by numerous researchers. fakhrunnas et al.( 2018) argue that macroeconomic variables have longterm relationship with risk-taking behavior in banking industry in indonesia during 2010-2017. fakhrunnas, et al.(2018) conclude prove islamic bank more resilience to macroeconomic shocks. in addition, adebola, et al., (2011), klein (2013), and lin, farhani, & koo (2016) found that risk-taking in banking industry represented by credit risk has significant relationship to macroeconomic factors such as interest rate, exchange rate and inflation rate. furthermore, karim, et al. (2016) attempted to analyze the long rung effect of bankruptcy risk to macroronomic factors by adopting time-series data. their research found that bankruptcy risk has long run relationship to macroeconomic variables including gdp in indonesia. a firm with higher ratio of equity capital, however, shows a negative and significant result for banks. a bank with higher equity on hand tends to have more prudent risk-taking behavior and thus, has lower loan-loss reserve (saurina, et al., 2007; berger, et al., 2009). this is true for islamic banks where the banks hold more equity due to the practice of profit and loss sharing contracts and high risks can be offset by higher equity capital. furthermore, the higher loan risks received by banks will be offset by higher equity capital engaged by banks. banks holding more equity capital allow them to mitigate loan risks as they are backed by this equity capital as stated by berger, klapper& turk-ariss (2009). total asset can be used as a proxy of islamic bank size. banks with large asset have the possibility to provide large amounts of credit. the greater the asset or assets owned by a bank, the greater the volume of credit that can be extended by the bank. the greater the volume of credit provides an opportunity for the bank to reduce the level of spreads, which in turn will lower the level of lending rates (interest rate credit) so that banks will be more competitive in providing services to clients who need credit. the size of a company according to ranjan & dhal (2003) will affect its ability to bear risks that may arise due to a variety of situations faced by companies associated with its operations. it implies that the greater the level of bank size reflects the level of quality to better management in the analysis and evaluation of the credit agreement and allows greater diversification opportunities, so as to reduce the level of npl. in addition to that, several studies conducted by louhichi & boujelbene (2016) and xiong, et al. (2010) also suggest a negative relationship between these two variables of bank size and risk-taking behavior. such a relationship fakhrunnas| the effect of macroeconomic and bank-specific variables to risk-taking of islamic bank in indonesia ijief: international journal of islamic economics and finance, 1(2), 165-186|171 is justified by the most natural argument that is diversification by size. indeed, larger banks are expected to have lower risks because they have the capability of holding more diversifiable portfolios. they explain this result by the fact that larger banks are likely to be more skilled in risk management and have also better diversification opportunities. thus, we expect to find that the bank size is negatively related to the level of risk. in line with that, ibrahim & rizvi (2017)reveal that the larger a bank the greater should be its potential to diversify its asset risk. bigger islamic bank will promote financial stability to the bank performance and risk mitigation. conducting research in 45 of islamic banks in 13 countries, ibrahim & rizvi result that bigger islamic bank will obtain more benefit from its size. moreover, the larger the banking firm the more information that is likely to be collected by financial analysts and the lower the information risk from holding its stock. finally, investors may believe that regulators are unwilling to let larger banks fail, in which the value of implicit failure guarantees rise with bank size. each of these three effects suggests that size (measured here by total assets) and risk should be negatively related. nicolo (2000)and trad, et al. (2017)relate negatively indicators of bank failure probabilities to bank size. in the case of fixed bankruptcy costs, the key reason behind the reversal of the risk shifting effect is the dependence of the risk-shifting choices on bank size. such dependence arises from fixed bankruptcy costs whenever the average size of banks is decreasing in n. as bank size increases, banks’ bankruptcy costs are rising at the margin, inducing banks to take on less risk, ceteris paribus. thus, the benefits of risk shifting will eventually be offset by bankruptcy costs, once the number of banks in a market passes some critical threshold. methodology data and variables to fully capture the research’s aim, 10 islamic banks in indonesia are observed in this study by using balanced panel quarterly data from 2010q1, as the year when islamic banks started to be mostly established (ojk, 2018), to 2018q1. from that period the observation consists of 300 quarterlyobservation. the data is collected from the islamic bank quarterly report attached in indonesian central bank’s website. furthermore, macroeconomics data was retrieved from the central bureau of statistic. the reason behind choosing indonesia as the focus of study due to its fakhrunnas| the effect of macroeconomic and bank-specific variables to risk-taking of islamic bank in indonesia ijief: international journal of islamic economics and finance, 1(2), 165-186|172 recognition as the most numerous islamic bank account in the world (ernst & young, 2016). based on the previous studies, this research employs several variables to assess the effect of macroeconomic variable and bank-specific factor to risktaking of islamic banks in indonesia. the proxy of risk-taking consist of non performing financing (npf) and zscore. npf is measured by the ratio of non-performing financing to total financing in islamic bank while z-score is defined by the mean return on assets plus the capital ratio divided by the standard deviation of asset return. risk-taking will be posited as dependent variable in the research model. afterwards, the number of bank indonesia rate in the end of each quarter (bi_rate) will represent interest rate in indonesia, the number of inflation rate in the end of each quarter (inf), the log of gdp number in quarterly base (ln_gdp) and the log of number of exchange rate in the end of each quarter (ln_er) are treated as independent variables. the equity to asset ratio of the bank based on quarterly data (eta) and the log of the bank based on quarterly data (ln_size) are also exogenous variables in which the data analysis will group the result based on big, medium and small size of islamic banks. the dissemination of the data analysis will elaborate the size effect as the bank-specific variable to the risk-taking of islamic bank. research method and empirical model by adopting panel data, time series and cross-section data will be combined together it is able to assess some quantity of the phenomenon in certain time (brooks, 2008). this research adopts general model as a follow; + + (1) where, risk-takingit = non performing financing (npf) and bankruptcy risk (z score) for bank i in year t bi_rateit = bi rate for bank i in year t infit = inflation rate for bank i in year t ln_gdpit = gross domestic product for bank i in year t ln_erit = economic growth for bank i in year t etait = equity to asset ratio for bank i in year t ln_sizeit = size for islamic bank i in year t = error-term fakhrunnas| the effect of macroeconomic and bank-specific variables to risk-taking of islamic bank in indonesia ijief: international journal of islamic economics and finance, 1(2), 165-186|173 in the beginning, unit root test will be conducted to measure whether the variables have stationarity at level or in the first level. unit root test can be held by performing im, pesaran and shin w-stat (ips), adf-fisher and ppfisher whereby the non-stationary for all unit roots test is the null hypothesis (zulkhibri, naiya, & ghazal, 2015). if the result of unit roots test is stationary in the first level, panel co-integration test can be applied to understand the long-terms effect of exogenous variables to endogenous variables. pedroni panel co-integration method can be adopted that allows individual effects across different cross-section performing the types of heterogeneous panel test (pedroni, 2004). pedroni tests consist of panel rho-statistic, panel pp-statistic and panel adf-statistic. moreover, pedroni test has the second type which the result of the test can be compared to the group mean of the panel test. the general formula for pedroni tests are as follow; panel rho-statistic: (∑ ∑ ̂ ̂ ) ∑ ∑ ̂ ( ̂ ̂ ̂ ) panel pp-statistic: ( ̂ ∑ ∑ ̂ ̂ ) ∑ ∑ ̂ ( ̂ ̂ ̂ ) panel adf-statistic: ( ̂ ∑ ∑ ̂ ̂ ) ∑ ∑ ̂ ( ̂ ̂ ) group rho-statistic: ̂ ∑ (∑ ̂ ) ∑( ̂ ̂ ̂ ) group pp-statistic: ̂ ∑ ( ̂ ∑ ̂ ) ∑( ̂ ̂ ̂ ) group adf-statistic: ̂ ∑ (∑ ̂ ̂ ) ∑ ̂ ̂ after panel co-integration analysis, fully modified ordinary least square (fmols) and dynamic ordinary least square (dols) are applied to measure the relationship of each variable. panel data with the considerable fakhrunnas| the effect of macroeconomic and bank-specific variables to risk-taking of islamic bank in indonesia ijief: international journal of islamic economics and finance, 1(2), 165-186|174 heterogeneity across individual members can be accommodated by adopting those test (pedroni, 2000). result and analysis to examine the long-term relationship between exogenous variables and risk-taking of islamic bank in indonesia, at the beginning, unit root test will be applied. from the unit root test result, each variable in the model has stationarity in the first level. this result is exhibited by tabel.1 which is not only when applying individual intercept but also individual intercept and trend. this stationarity utilizes im, pesaran and shin (ipm), augmented dickey-fuller (adf) dan philips-perron (pp). moreover, when the characteristic of the sample that refers to bank size separation are applied, from the table 2 to table 4, all variables in each size group are stationary in the first level. even though the general conclusion that all variable has long-term relationship, some unit root measurement method has different result. for instance, this result happens in islamic bank that has big asset whereby npf is not stationary at the first level based on ipm test in individual intercept and trend. ln_gdp also faces the same result which is not stationary at the first level based on pp test. in the small size islamic bank, z-score is not stationary at the first level based on ipm test. basically, non-stationary at the first level reflects the statistical score in which the result is not significant. thus the h0 of unit root test hypothesis is not able to be rejected which means the long-run relationship does not exist for above-mentioned variables. surely, this non stationary results do not change the general conclusion due to in other test methods in individual intercept as well as individual intercept and trend the results remain stationary in the first level. fakhrunnas| the effect of macroeconomic and bank-specific variables to risk-taking of islamic bank in indonesia ijief: international journal of islamic economics and finance, 1(2), 165-186|175 table 1. panel unit root of islamic banks variable individual intercept individual intercept and trend at level 1 st difference at level 1 st difference ipm adf pp ipm adf pp ipm adf pp ipm adf pp npf -1.91 39.24*** 40.20*** -17.57*** 227.90*** 211.74*** -0.86 33.96 35.57 -16.58*** 206.00*** 701.98*** z-score -3.49*** 47.07*** 47.30*** -20.65*** 253.23*** 260.78*** -2.94*** 41.85*** 42.53*** -20.00*** 339.80*** 577.314*** bi_rate 4.47 1.69 3.48 -8.44*** 102.533*** 102.53*** 5.31 0.88 1.67 -6.71*** 75.21*** 74,76*** ln_gdp 7.93 0.19 0.08 -8.88*** 108.54*** 50.314*** -2.54*** 32.63** 46.59*** -7.03*** 78.87*** 27.65* ln_er 2.04 5.57 5.33 -12.67*** 162.71*** 164.35*** 2.43 4.58 5.65 -11.15*** 129.28*** 146.33*** inf -2.65** 33.48** 35.72** -20.01*** 264.18*** 264.18*** -0.89 19.97 22.67 -18.40*** 224.58*** 224.58*** eta -15.09*** 199.50*** 266.27*** -19.82*** 257.97*** 319.75*** -14.17*** 170.22*** 368.24*** -18.05*** 227.02*** 1146.45*** ln_size -1.44* 29.88* 81.30* -13.32*** 171.08*** 172.98*** 1.57 11.45 16.63 -14.76*** 179.94*** 639.33*** notes: the optimal lag length is based on schwarz information criteria which are automatically selected. the null hypothesis for all tests is non-stationary in which *, ** and*** denote as significant at 1% level, significant at 5% level and significant at 10% level table 2. panel unit root tests for big asset size of islamic banks variable individual intercept individual intercept and trend at level 1 st difference at level 1 st difference ipm adf pp ipm adf pp ipm adf pp ipm adf pp npf 0.08 5.53 13.09 -1.92** 17.90** 49.52*** 1.10 2.45 7.54 -0.82 12.96* 45.29*** z-score 0.47 3.98 4.91 -4.21*** 39.63*** 63.74*** -0.28 9.34 24.72*** -1.99** 29.42*** 296.36*** bi_rate 0.42 7.07 24.70*** -3.62*** 30.26*** 30.17*** 1.56 1.04 0.68 -2.22** 25.03*** 40.98*** ln_gdp 3.81 0.19 0.01 -10.14*** 86.13*** 11.11 -0.965 13.22* 7.39 -9.76*** 103.07*** 2.89 ln_er 0.02 5.90 7.58 -4.52*** 40.94*** 41.35*** -0.55 11.01 34.68*** -2.42*** 31.98*** 36.29*** inf -1.58* 12.86* 14.99* -12.15*** 89.42*** 87.42*** -0.15 7.29 7.08 -6.78*** 69.99*** 68.80*** eta -6.39*** 55.91*** 86.22*** -7.75*** 66.79*** 103.93*** -3.45*** 43.48*** 87.68*** -4.24*** 51.96*** 262.64*** ln_size 1.29 12.38 17.41** -5.39*** 50.54*** 48.47*** 0.33 7.78 10.01 -3.78*** 55.10*** 52.60*** notes: the optimal lag length is based on schwarz information criteria which are automatically selected. the null hypothesis for all tests is non-stationary in which *, ** and*** denote as significant at 1% level, significant at 5% level and significant at 10% level fakhrunnas| the effect of macroeconomic and bank-specific variables to risk-taking of islamic bank in indonesia ijief: international journal of islamic economics and finance, 1(2), 165-186|176 table 3. panel unit root tests for medium asset size of islamic banks variable individual intercept individual intercept and trend at level 1 st difference at level 1 st difference ipm adf pp ipm adf pp ipm adf pp ipm adf pp npf -1.58* 26.28** 27.79** -11.49*** 125.73*** 343.92*** -1.10* 26.13** 30.43*** 11.33*** 99.92*** 119.67*** z-score -1.98** 26.818** 26.92** -11.21*** 133.59*** 142.23*** -1.48* 33.34*** 45.79*** 12.00*** 99.63*** 109.40*** bi_rate 2.36 3.80 7.20 -4.38*** 49.83*** 49.68*** 1.68 2.95 3.29 -3.88*** 34.66*** 34.67*** ln_gdp 3.30 4.03 4.67 -5.13*** 58.88*** 50.63*** -1.18 25.69** 34.30*** -4.65*** 40.75*** 35.51*** ln_er 1.04 9.09 12.05 -7.44*** 85.35*** 94.01*** 0.16 14.70 16.64 -7.28*** 63.16*** 80.81*** inf -1.68*** 21.27* 20.87* -11.37*** 129.46*** 130.72*** -0.52 16.70 16.96 11.18*** 99.46*** 100.54*** eta -8.29*** 98.41*** 98.41** -10.71*** 129.43*** 381.48*** 4.16*** 75.21*** 163.12*** 11.67*** 103.00*** 293.67*** ln_size -1.85** 27.88** 74.92*** -6.46*** 68.86*** 71.73*** 1.10 5.44 7.74 -6.95*** 61.07*** 309.02*** notes: the optimal lag length is based on schwarz information criteria which are automatically selected. the null hypothesis for all tests is non-stationary in which *, ** and*** denote as significant at 1% level, significant at 5% level and significant at 10% level table 4. panel unit root tests for small asset size of islamic banks variable individual intercept individual intercept and trend at level 1 st difference at level 1 st difference ipm adf pp ipm adf pp ipm adf pp ipm adf pp npf -5.94*** 33.10*** 32.24*** -10.58*** 59.27*** 58.88*** -3.44*** 21.52*** 21.48*** -5.30*** 50.65*** 53.81*** z-score -1.36** 13.25* 13.59* -5.77*** 58.28*** 61.70*** 0.47 6.94 6.93 -2.80*** 46.59*** 49.34*** bi_rate 2.04 1.09 1.51 -2.80*** 26.90*** 27.93*** 1.31 2.05 3.88 -0.93 18.92** 21.23*** ln_gdp 1.92 2.06 2.17 -4.53*** 44.09*** 45.47*** 1.12 21.74*** 28.14*** -1.87** 34.28*** 274.05*** ln_er 1.99 1.25 1.12 -4.42*** 42.38*** 47.65*** -0.29 8.64 19.88** -1.41* 29.25*** 30.67*** inf -0.78 10.81 12.21 -4.54*** 47.31*** 47.39*** 0.414 5.78 6.06 -2.31*** 39.39*** 41.13*** eta -4.15*** 37.25*** 49.78*** -5.68*** 52.80*** 74.99*** -2.26** 32.82** 77.13*** -2.36*** 38.89*** 277.89*** ln_size 0.62 4.89 7.89 -5.48*** 47.43*** 59.17*** -0.60 11.90 20.41*** -2.53*** 37,47*** 47.77*** notes: the optimal lag length is based on schwarz information criteria which are automatically selected. the null hypothesis for all tests is non-stationary in which *, ** and*** denote as significant at 1% level, significant at 5% level and significant at 10% level fakhrunnas| the effect of macroeconomic and bank-specific variables to risk-taking of islamic bank in indonesia ijief: international journal of islamic economics and finance, 1(2), 165-186|177 table 5. co-integration tests for all models notes: all tests utilize pedroni tests which have null hypothesis as no co-integration in which *, ** and*** denote as significant at 1% level, significant at 5% level and significant at 10% level in order to examine long-term relationship, co-integration test become a suggested method to analyze the research model (pedroni, 2004). this research accepts the suggestion to perceive the relationship between independent and dependent variables in each model. model one represent the use of npf as dependent variable and model two utilizes bankruptcy risk as dependent variable. according to table 5, when the level of size is not separated, cointegration exist in all models. this finding is showed by four out of seven tests which represent the level of significance. it means the hypothesis of cointegration method as proposed by pedroni is accepted which states the existence of long-terms relationship among the variables. this finding is supported by karim, et al. (2016) stating that long run relationship is exist between risk-taking and macroeconomic variable. when the size is grouped, the finding of this study exhibits the characteristic of islamic bank in terms of size effect in each level. in the big size group, model one has no significance relationship in each type of test while model two has only two significance relationship in panel pp-statistic test and group ppstatistic test but it does not adequate to justify the existence of long-term relationship. this finding concludes that islamic bank in the big size group has no long-term relationship to macroeonomic variables. the finding may indicate that the larger bank is more resilience to the external shock. the advantage of islamic bank which has big asset may experience higher economic of scale in business activity and it may give better opportunity to diversify its portfolio in financing and investing activity louhichi & boujelbene (2016), xiong, et al., & chen (2010) and ibrahim & rizvi (2017)). as opposed to the big size group of islamic bank, in the medium and small size group have different result. for all models in those asset group, four out of seven co-integration test display significance level of co-integration test pedroni tests all size big asset size medium asset size small asset size model 1 model 2 model 1 model 2 model 1 model 2 model 1 model 2 within dimension panel v-statistic -2.28 -0.99 -0.17 -0.82 0.33 -0.07 -0.22 -0.77 panel rho-statistic 0.40 1.38 0.99 -0.21 1.73 0.96 1.95 1.19 panel pp-statistic -7.35*** -1.81** 0.19 -2.26** -1.4* -1.96** -1.87** -3.36*** panel adf-statistic -7.02** -2.18** -0.64 0.38 -1.79** -1.94** -1.42* -1.58* between dimension group rho-statistic 2.99 1.45 1.79 0.271 3.04 1.86 2.11 1.66 group pp-statistic -4.94*** -1.78** 0.83 -2.29* -2.47*** -2.42*** -2.49*** -6.30*** group adf-statistic -4.45*** -2.65*** -0.10 0.75 -2.51*** -2.45*** -3.19*** -2.14*** fakhrunnas| the effect of macroeconomic and bank-specific variables to risk-taking of islamic bank in indonesia ijief: international journal of islamic economics and finance, 1(2), 165-186|178 including in panel pp-statistic, panel adf-statistic, group pp-statistic and group adf-statistic. the statistical findings conclude that islamic bank in the medium and low size group has long-term relationship to macroeconomic variable. it indicates islamic bank faces an exposure to external shocks that may danger islamic bank’s performance to generate expected return and mitigate the risk. this bank-specific effect delineates that a bank with lower size is worse to manage risk management especially in tackling credit risk problem (ranjan& dhal, 2003). nicolo (2000) appends that the bank having lower size will encounter higher bankruptcy cost which explain the smaller size of the bank will have higher exposure to bankruptcy risk. the use of fully modified ordinary least square (fmols) and dynamic ordinary least square (dols) is to enlighten the effect of a variable to another variable. based on table 6., it appoints the explanation of fmols and dols result for all islamic banks. from that table, bankruptcy risk in the model two has negative and significance relationship to bi_rate. it indicates that if the z-score of islamic bank is higher, islamic bank will have less exposure to interest rate risk. this evidence may be caused by internal resilience of islamic bank due to a good governance in risk management including its mitigation (fakhrunnas et al., 2018). in terms of exchange rate risk, npf has positive and significance relationship while z-score has negative and significance relationship. that relationship explains that islamic bank in indonesia may have international transaction due to it has an exposure to exchange rate. this condition can be understood whereby islamic bank in indonesia possesses several financial products that have relation to foreign currency such as hajj saving account and time deposit account in foreign currency. fakhrunnas| the effect of macroeconomic and bank-specific variables to risk-taking of islamic bank in indonesia ijief: international journal of islamic economics and finance, 1(2), 165-186|179 table 6. fmols and dols result for all islamic banks variables fmols dols model 1 model 2 model 1 model 2 bi_rate 0.19 (0.85) -0.97 (0.33) 0.39 (0.70) -1.70* (0.09) ln_gdp -0.97 (0.33) 0.01 (0.99) -0.85 (0.39) -1.38 (0.17) ln_er 2.87*** (0.004) -3.08*** (0.00) 3.35*** (0.00) 1.33 (0.19) inf -1.22 (0.22) 0.75 (0.46) -1.43 (0.15) -0.57 (0.57) eta 1.73*** (0.08) 1.63* (0.10) 0.67 (0.50) 0.20 (0.84) ln_size -1.85* (0.07) 3.23 (0.00)*** -2.19** (0.029) 0.94 (0.35) adjusted r-squared 0.171 0.75 0.18 0.78 no. of observation 300 300 300 300 notes: all tests utilize panel dynamic analysis tests which have null hypothesis as non-significant in which *, ** and*** denote as significant at 1% level, significant at 5% level and significant at 10% level fakhrunnas| the effect of macroeconomic and bank-specific variables to risk-taking of islamic bank in indonesia ijief: international journal of islamic economics and finance, 1(2), 165-186|180 table 7. fmols and dols result for small-big islamic banks variables big asset size medium asset size low asset size fmols dols fmols dols fmols dols model 1 model 2 model 1 model 2 model 1 model 2 model 1 model 2 model 1 model 2 model 1 model 2 bi_rate 3.20*** (0.00) -1.66* (0.10) 2.26** (0.03) -0.21 (0.83) -27.00*** (0.00) -4.57*** (0.00) -0.65 (0.52) -0.79 (0.45) 0.49 (0.62) -1.82* (0.07) 0.69 (0.48) -1.57 (0.12) ln_gdp 1.13 (0.26) -1.13 (0.26) 0.34 (0.73) 0.86 (-0.17) 75.05*** (0.00) -5.81*** (0.00) -1.61 (0.13) -0.12 (0.90) -4.12*** (0.00) 2.42** (0.02) -3.55*** (0.00) 1.98*** (0.05) ln_er 3.89*** (0.00) -61.68*** (0.00) 3.92*** (0.00) -7.08 (0.00)*** 308.93*** (0.00) 9.31*** (0.00) 1.74* (0.09) -0.01 (0.99) 6.62*** (0.00) -3.79*** (0.00) 5.96*** (0.00) -3.45*** (0.00) inf -1.36 (0.18) -1.55 (0.13) -1.23 (0.22) 1.67* (0.10) 0.03 (0.98) -1.51 (0.13) 1.76* (0.09) -1.05 (0.32) -3.87*** (0.00) 3.86*** (0.00) -3.96 (0.00) 3.16*** (0.00) eta -1.16 (0.25) -2.41*** (0.01) -0.09 (0.93) -0.43 (0.67) -9.18*** (0.00) 7.33** (0.00) 0.58 (0.57) 2.1* (0.07) -1.96** (0.05) 1.66* (0.10) -1.61 (0.11) 1.57 (0.12) ln_size -1.73* (0.09) 12.08*** (0.00) -1.19 (0.93) 0.66 (0.51) -40.27*** (0.00) 35.31** (0.00) 0.23 (0.82) 2.49** (0.03) -3.99*** (0.00) 1.25 (0.22) -3.46*** (0.00) 1.75* (0.08) r-squared 0.64 0.61 0.66 0.87 0.14 0.76 0.93 0.92 0.61 0.89 0.61 0.89 adjusted rsquared 0.59 0.55 0.62 0.85 -0.03 0.72 0.55 0.41 0.56 0.87 0.56 0.87 no. of observation 75 75 75 75 150 150 150 150 75 75 75 75 notes: all tests utilize panel dynamic analysis tests which have null hypothesis as non-significant in which *, ** and*** denote as significant at 1% level, significant at 5% level and significant at 10% level furthermore, eta also has significant relationship to risk taking of islamic bank as well as the size of the bank. specifically, npf has negative relationship to the size of islamic bank and positive to z-score which represents bankruptcy risk. the bigger size of islamic bank will encounter less credit risk (trad et al., 2017). in the perspective of a relationship between variable, this result may imply the aggressiveness of islamic bank to finance the customer which is compensated by the circumspection of risk management. moreover, islamic bank with higher asset is able to diversify financing activity. this diversification can be applied due to bigger islamic bank has a choice to create financing portfolio with manageable risk. however, this advantages may not be held in small size islamic bank due to its limited source of fund (ibrahim & rizvi, 2017). in the table 7, it describes the result of fmols and dols in separated size of islamic banks. in the big size of islamic bank, it had been analyzed that there is no long-term relationship. however, short-term relationship may happen among the variables. in the short-term, npf is negatively influenced by size and size has positively significant relationship to bankruptcy risk. this condition explains that the higher size of islamic bank, the more resilience in risk mitigation in the short-term circumstance. moreover, macroeconomic variables such as bi_rate, exchange rate have negative relationship to bankruptcy risk. eta as proxy of capital structure has also negatively significant relationship to the same dependent variable in which the higher of the ratio of equity to total asset, the higher exposure to bankruptcy risk. it elucidates that in the big size of islamic banks, bankruptcy risk is well managed from the external shocks. ibrahim & rizvi (2017) predict that it may be due to the ability or islamic bank to diversify its financing and investing activity to tackle bankruptcy risk in the short-term. actually, in the big size of islamic bank which has high ratio of eta will drive the bank to be more prudent in risk-taking behavior (berger, et al., 2009). nonetheless, in the big size of islamic bank having higher equity to total asset, the bank may be too prudent in giving financing which may result not optimum of resource allocation to deficit unit of customer. it makes islamic bank may not able to generate optimum return from deficit unit. as a result, islamic bank may not able to fulfill its obligation to provide expected return to the surplus side. then, bi_rate and exchange rate are positive and significant to npf which mean that if the rate of bi_rate and exchange rate high, the credit risk faced by islamic bank will high as well. this evidence reveals that islamic bank in the big size group may finance the customer in international transaction by using fakhrunnas| the effect of macroeconomic and bank-specific variables to risk-taking of islamic bank in indonesia ijief: international journal of islamic economics and finance, 1(2), 165-186|182 foreign currency and it still applies interest rate as a benchmark to determine profit generated from that financing activity (fakhrunnas,et al., 2018) in the medium and low size of islamic bank, bank size affects significantly to risk-taking of islamic bank in the long-term. it is exhibited by statistical result which explains that bank size has negative and significant relationship to npl then positive and significant relationship to bankruptcy risk. it emphasizes the previous finding in this research that the bigger size of islamic bank, the better risk mitigation performed by the bank (ranjan & dhal, 2003; nicolo, 2000; trad, trabelsi, & goux, 2017)equity to total asset has significant and negative relationship to npl but significant and positive relationship to z-scroe. it defines a condition whereby the higher of equity to total asset possessed by islamic bank, the better risk mitigation performed by islamic bank. in the medium and low size of islamic bank, owning the higher ratio of equity to total asset may lessen the bank to fulfill its financial obligation. as a result, the bank can utilize the source of funds to finance profitable business activity and generate more return in desirable risk. in addition, all macroeconomic variables including bi_rate, gdp, exchange rate and inflation affect risk-taking of islamic bank. this finding demonstrates that the medium and low size of islamic bank are susceptible to macroeconomic turmoil. for instance is a change in bi_rate will negatively influence bankruptcy risk. when the interest rate is low, the bankruptcy risk will be less. adebola,etal. (2011) predict that the relationship to the interest rate in the low and medium islamic bank deduce that those group of islamic bank has strong relationship to interest rate in operating the business. islamic bank tends to adopt interest rate model in determining cost of borrowing from the surplus unit and deciding profit sharing rate when financing deficit unit. moreover, in the medium size of islamic bank, inflation has positive and significant relationship to npf. it may occur due to inflation will add cost of financing from the deficit unit (fakhrunnas et al., 2018). some financing product of islamic bank such as ijarah, will consider inflation rate to determine the cost of renting. if the inflation is higher, the renting price may be considered to be risen. the impact of an increase of renting cost will cause the lessee as deficit unit pays more cost to the bank. as opposed to that situation, the small size of islamic bank tends to possess negative and significant to npf. when the inflation is high, the npf will be low. this circumstance explain that the small size of islamic bank may be more prudent to provide financing when inflation rate is high. thus, it may insist npf rate to the low level. this circumspection fakhrunnas| the effect of macroeconomic and bank-specific variables to risk-taking of islamic bank in indonesia ijief: international journal of islamic economics and finance, 1(2), 165-186|183 may be taken by the islamic bank management due to the consideration of the bank size which has not been able make diversification in financing activities (nicolo, 2000; trad, trabelsi, & goux, 2017; ibrahim & rizvi, 2017). therefore, the small size of islamic bank requires screening process to select the most eligible customer who will be financed when the rate of inflation remains high. conclusion & recommendation conclusion risk-taking of islamic bank in indonesia are influenced by many factors including macroeconomic and bank-specific variables. from the above-mentioned analysis, risk-taking of islamic bank in indonesia generally exposes to macroeconomic variables like interest rate, gross domestic product (gdp), exchange rate and inflation. when the bank-specific variable which is focused in the bank size is applied, the islamic bank is grouped into big, medium and small size. in the big size of islamic bank, there is no long-term relationship to macroeconomic variables to risk-taking of islamic bank. this finding confirms that the bank has no exposure to macroeconomic turbulence in the long-term effect. due to a well-managed risk mitigation process and diversification, the big size of islamic bank is more resilience. on the other hands, the medium and small size of islamic bank has long-term relationship to risk-taking in operating the business process. in the fmols and dols finding, the bank is proven to be vulnerable to macroeconomics turmoil. hence if there is any change in macroeconomic condition consisting of interest rate, gdp, exchange rate and inflation, the performance of islamic bank will be influenced especially in credit and bankruptcy risk as proxies of risk-taking. the susceptibility of the small and medium size of islamic bank can be inflicted by the ability of the bank to diversify the risk-taking which means the bank has no sufficient capability to manage financial risk. recommendation according to the finding, several suggestions may be proposed to create islamic bank more resilience in managing risk. firstly, islamic bank is more resilience if the bank has bigger asset. this evidence is a signal to the owner of islamic bank, which can be private or state-owned bank, to enlarge the bank asset by inviting the promising investors to put the money as a capital for the bank. secondly, fakhrunnas| the effect of macroeconomic and bank-specific variables to risk-taking of islamic bank in indonesia ijief: international journal of islamic economics and finance, 1(2), 165-186|184 the authority such as central bank or government may encourage medium and small size of islamic bank to merge. this suggestion can provide merged islamic bank to benefit from larger economic of scale and better management in risk mitigation. thirdly, the authority must give more attention to medium and small size of islamic bank in terms of risk management activity. it has to be fully monitored due to the bank is vulnerable to external economic shocks. fakhrunnas| the effect of macroeconomic and bank-specific variables to risk-taking of islamic bank in indonesia ijief: international journal of islamic economics and finance, 1(2), 165-186|185 references abedifar, p., molyneux, p., & tarazi, a. 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(2015). strcutural change and economic growth in selected emerging economics. international journal of development issues, 14 (2), 98–116. https://doi.org/10.1108/mbe-092016-0047 international journal of islamic economics and finance (ijief) vol. 4(2), page 347-374, july 2021 zakat intermediaries and its impact to industry growth: growth accelerators or cost center? yaser taufik syamlan, tazkia islamic institute, indonesia corresponding email: yasersyamlan@tazkia.ac.id hadi riyanto, baitul maal tazkia, indonesia asfa asfia tazkia islamic institute, indonesia article history received: may 29th, 2021 revised: july 3rd, 2021 accepted: july 29th, 2021 abstract this study aims to determine the effect of islamic bank’s activity as a zakat intermediator on profitability, efficiency, market share, and growth of islamic banks in indonesia. this research also analyses from the literature the possibility of zakat as the funding or financing product. the method used is the panel data method and granger causality. the independent variable external zakat collection while the dependent variables are roa, bopo, market share, and growth. the samples of the research are five islamic bank who has done the external zakat collection. the data used are quarterly data with a period from 2013 to 2020. the results of this study indicate that this divine role increase the cost of operation and in the same time decreasing the profitability. the result also stated that the intermediating activities of zakat collection is not significant to push the bank market share, profitability as well as the bank growth. however, although in terms of regulation bank cannot be the amil, in the future, there is potential of zakat can push the islamic market share and bank growth since the zakat collection, islamic bank can offer third party funding product as the intermediation between the zakat payer and the amil zakat whose eligible to collect zakat according to the government regulation. jel classification: a13, g21, g24 keywords: social finance, islamic banks, zakat, efficiency type of paper: research paper @ijief 2021 published by universitas muhammadiyah yogyakarta all rights reserved doi: https://doi.org/10.18196/ijief.v4i2.11827 web: https://journal.umy.ac.id/index.php/ijief/article/view/11827 citation: syamlan, y. t., riyanto, h., & asfia, a. (2021). zakat intermediaries and its impact to industry growth: growth accelerators or cost center?. international journal of islamic economics and finance (ijief), 4(2), 347-374. doi: https://doi.org/10.18196/ijief.v4i2.11827 mailto:yasersyamlan@tazkia.ac.id https://doi.org/10.18196/ijief.v4i2.11 https://doi.org/10.18196/ijief.v4i2.11 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v4i2.11827&domain=pdf syamlan, riyanto, & asfia │ zakat intermediaries and its impact to industry growth: growth accelerators or cost center? international journal of islamic economics and finance (ijief), 4(2), 347-374 │ 348 i. introduction 1.1. background islamic banks in indonesia who operated under the law no. 21 of 2008 is established to support the indonesian muslim by providing services which do not contain elements of gharar, maysir, usury, dzolim, and other elements that are haram. islamic banks, both bus, and uus, are allowed to perform social finance functions law establishing their social finance wing in form of baitul maal and collecting the zakat, infaq, sadaqah, or other types of social funds. moreover, based on article 4, paragraph 3, ibs can act as the lks-pwu who acts as intermediaries between the waqif and the nadzir. the role of islamic banks in intermediating the zakat, which is a component of one of the pillars of islam has also been explained in the verses of the qur’an, and the hadith, one of the verses of the qur’an that explains about the virtues of zakat is the surah at-tawbah verse 103 which means: “take alms from a portion of their property, with that alms you cleanse and purify them and pray for them. verily, your prayers (become) peace of mind for them. and allah is allhearing again, all-knowing’’ (q. at-taubah: 103). and also in the other part of the qur’an, it has been explained how important the zakat intermediary, which explained in the following verse, which means: “indeed, the best person you take to work (with us) is a strong person who can be trusted again.” (q.s al-qashash: 26). in the above verse, it has been stated that an amil zakat is a person or entity that is strong and can be trusted as well as being appointed by the authority. thus, in this case, the islamic bank, their duties mainly on mediating the zakat collection by acting as intermediaries of the fund and distribute it to the laz/baz who is appointed to organize the fund. the islamic bank role is a mere of providing a payment point system that allows the muzakki to pay their obligation. syamlan, riyanto, & asfia │ zakat intermediaries and its impact to industry growth: growth accelerators or cost center? international journal of islamic economics and finance (ijief), 4(2), 347-374 │ 349 year zakat collection figure 1. ib external zakat from its payment point (in million) source: audited report of 5 ibs (2020) based on the figure 1, ojk (2020) data, the zakat intermediary trend is increasing from 2013 to 2019. in 2013, the collection amount is idr 25,6 billion and increased to the idr 38.8 billion in 2019. however, due to covid19, the 2020 data was decreased to idr 29.913 billion. using the bank level data during 2013 to 2020 on 5 islamic banks who have been active reporting their collection, bsm contribute 37% of the zakat collection while bank muamalat give 32%, and bni syariah come next with 26,69%. both bri syariah and bca syariah only contribute 3,4% in total. again, based on the islamic banking act 21 – 2008, the zakat that was collected by the bank is mere intermediation before rendering it to the lazs or bazs, which have signed an mou with them. in the case of bsm and bank muamalt, both banks have been formed their social finance wing namely laz bsm as well as baitul maal muamalat (bmm) so it can be concluded that the percentage of zakat collection that belong to laz and baz thru islamic bank is still very small when compared with the acquisition of zakat funds by baznas, and it can be hypothesized that banks might support the zakat collection of laz or baz or even being having new role beyond the existing intermediary role. according to rahman (2012), the islamic banking institution should become a better zakat manager and not just collecting it and dispense to the poor and needy. moreover, choudhury & harahap (2008) assert that the islamic bank has the central role in optimizing the resource mobilization to achieve the social and economic objectives. this research will close the gap that wahab & rahman (2012) and choudhury & harahap (2008) argue by assuming that islamic bank being the amil zakat, although the regulation strictly said that ibs only act as intermediaries. this research will analyse the cost and benefit that will be attached to islamic banks and give additional considerations for future role. syamlan, riyanto, & asfia │ zakat intermediaries and its impact to industry growth: growth accelerators or cost center? international journal of islamic economics and finance (ijief), 4(2), 347-374 │ 350 1.2. research objectives based on above data, the zakat collection via islamic bank still limited to average idr 32 billion during 2013 to 2020. this figure is quite small compared to ibs asset as well as how they serve the customers using existing capabilities. the islamic bank basically has all it takes to manage the zakat more seriously. however, being the zakat intermediator will impact the performance of the islamic bank since they will bear the cost. besides the cost, when assuming the role of islamic bank as amil zakat, it is also related to the opportunity to grow the industry by utilizing the zakat fund. again choudhury & harahap (2008) pointed out that islamic bank plays its role to provide the shariahcompliant product for zakat fund, assuming that ibs being the amil of the zakat. to that extent, this research will try to solve the problem below: 1. what is the relationship between the collection of external zakat and the level of profitability of islamic banks in indonesia? 2. how is the relationship between the collection of external zakat and operational costs (bopo) in indonesia? 3. what is the relationship between the collection of external zakat and the market share of islamic banks in indonesia? 4. what is the relationship between the collection of external zakat and the growth of islamic banks in indonesia? 5. how is the zakat based product can be implemented in the islamic bank? ii. literature review 2.1. background theory 2.1.1. islamic bank – the intermediation theory the vocal point of the theory of intermediary is on fund allocation. banks, in this case, transform the asset of the surplus unit to become the asset of the deficit unit. interest or profit loss sharing is the sweetener that is shared by banks to the surplus unit. in order to transfer the asset as it has been stipulated above, banks are using the concept below (darsono et al., 2017, p. 58). according to darsono et al. (2017), the poof of fund allocation is basically defined as a comingling the demand deposit (current account & saving account) with the term deposit. from the pool, the proceed from the depositors is channelled into some asset like reserve requirement in the central bank, financing/credit, short term paper investment, as well as a fixed asset. the diagram the pool of fund explained by figure 2. syamlan, riyanto, & asfia │ zakat intermediaries and its impact to industry growth: growth accelerators or cost center? international journal of islamic economics and finance (ijief), 4(2), 347-374 │ 351 figure 2. the pool of fund vs allocation of fund source: (darsono et al., 2017, p. 59 with some modification) basically, the pool of fund is the main concept that is used in fractional banking according to bagus et al., (2016a), block & garschina (1996), chari & phelan (2014), cochran (2012), cochran & call (1998b) de soto (1995), gertchev (2013); mallett (2011, 2015), rothbard (2008), sanches (2016), werner (2016). all of the writers that have been cited previously stated that the usage of the demand deposit to be united with the term deposit to make credit would result in a severe economic crisis since the demand deposit basically is for saving purposes and should be available at any time in short term basis while the credit characteristically has a long period of time and at the end, a mismatch would happen. the pool of fund also resulted in an irregular deposit as it is also opined by bagus & howden (2009, 2012), de soto (1998), hulsmann (2004), rahamim (n.d.), yeager (2010), whereas the demand deposit, which mainly for saving purpose is unable to be used by the bank for financing to prevent the further mismatch. morover, according to darsono et al. ( 2017), there are another type of fund management which are the conversion of funds or allocation of fund. this should be introduced to cater the weakness of pool of fund which might result the liquidity mismatch. the allocation of fund is basically classified the source of fund based on its rate of return, tenure, as well as the liquidity needs. unlike the pool of fund, the conversion of fund pushed the bank to seek and select the prime credit customer before raising a third party fund to finance the customer’s project. theoretically, the conversion of fund ask the bank to be syamlan, riyanto, & asfia │ zakat intermediaries and its impact to industry growth: growth accelerators or cost center? international journal of islamic economics and finance (ijief), 4(2), 347-374 │ 352 conservative in operating their business since the project must exist in advance before offering the funding product to customer based on the project needed. here is the diagram of allocation of fund below. refer to figure 2the diagram above is close to the concept of 100%rbs since it attempts to minimize the deposit – loan maturity mismatch (bagus & howden, 2009, 2012). however, the austrian school proponents such as bagus & howden, (2009, 2012), de soto (1998), hulsmann (2004), yeager (2010) whereas the demand deposit should not be used for financing since it is mainly for saving purpose to prevent the further mismatch. for the purpose of this research, the future zakat based deposit product will use the conversion of fund so that the fund can be channeled properly to the mustahiq. 2.1.2. the integration of islamic commercial finance and social finance social finance according to cornée et al., (2018), has important role not only to support the economic thinking but also the economics of the poor. it basically combines the grant and the soft loans according. it also channelling fund from prosocial funder to the needy receiver to full fill their daily needs. there are several studies that have proposed some blending of social finance into commercial finance. among such studies include rogers & clarke (2016) who write on the social finance aspect of peer to peer lending (p2p). the p2p basically denotes as the platform that support to the poor to access the credit for daily needs. nevertheless, the poor got the higher cost of fund than financing form bank. the integration between the social and commercial finance actually has been happened in the islamic financial institution namely the baitul maal wa tamweel. according to ascarya (2018), the bmt according to ascarya (2018) basically has two side of business which are the baitul maal (bm)and baitul tamweel (bt). the baitul maal (bm) will record and register the waqif that gives their asset for the sake of allah thru waqaf. on the other hand, the bt will have a duty to collect the cash waqf and zakat and distribute it to finance the consumptive as well as productive financing. the rise of consumptive financing is essential since the market that bmt serviced is lower grass root that don’t have any wealth even to fulfill their daily food needs. in this case, the financing for consumptive purpose such as the education, health, as well as cloth financing will be paid by the debtor using the profit that they get from productive financing. bmt also should provide technical assistance to the debtor both for 8 ashnaf debtors and msm-e to actually escalate their living hood. again, the profit that bmt get from this operation should be plowback to the pool of fund. syamlan, riyanto, & asfia │ zakat intermediaries and its impact to industry growth: growth accelerators or cost center? international journal of islamic economics and finance (ijief), 4(2), 347-374 │ 353 most of the research actually propose waqf model to finance a project such as mohsin (2013) and tanjung (2018) as well as hamber & haneef (2017). mohsin (2013) proposes the waqf fund to be used for financing a project both commercial as well as the social project. furthermore, the waqf fund also can be used to buy a share of commercial company so that every dividend that paid by company will be given to the receiver of the waqf fund. the potential of waqf is huge to fund education, infrastructure, healthcare as well as for the religious purposes like building mosque. hamber & haneef (2017) proposed unique structure of integrating icf into venture capital. they called it as the waqf based social micro ventures fund (wsmvf). the source of fund of wsmvf are from the baitul maal, the voluntary giving from the community, and also from the corporation by means of grant or csr. tanjung (2018) agreed on the proposal of wsmvf as well as the modus operandi. the point of concern that tanjung (2018) highlight is on the balance sheet position of waqf fund in the wsmvf financial report. tanjung (2018) asserts that the waqf fund should be clearly recorded and suggesting three form of isf integration which are the (1) waqf fund posted on the equity (2) recorded as third party fund of the ventures (3) put it on both equity and the third party fund. the ownership integration of isf to icf happened on the first alternative as well as the third alternative. on the other hand, the operational integration will be occurred on the second and the third alternatives. moreover, all alternatives will end up with the bottom line integration. there is also research that touch on the zakat to be commingle with the commercial finance. sloane-white (2017) explain the transformation of zakat since it beyond the teaching of islam, it’s a power house to boost the muslim society as whole thru the establishment of zakat based hospital, universities, etc. 2.2. zakat and islamic bank allah azza wajalla in his verse, said that: “the example of a person who gives up his wealth in the way of allah is like a seed growing seven stalks. in each stalk, there are one hundred seeds. allah multiplies for whoever is desired, and allah is all-knowing and knowledgeable (qs al-baqarah: 261). in ibn kathir’s tafsir it is explained that in surah al-baqarah verse 261, there is a parable made by allah subhanahu wa ta’alam illustrating that the reward will be doubled for someone who has given or given his treasure in the way of allah to seek his mercy and pleasure, and where every charity the goodwill be multiplied to tenfold to seven hundred times. based on the above verse, syamlan, riyanto, & asfia │ zakat intermediaries and its impact to industry growth: growth accelerators or cost center? international journal of islamic economics and finance (ijief), 4(2), 347-374 │ 354 researcher believe that if islamic bank helps ummah by collecting and disbursing zakat to the mustahiq. moreover mannan (2018) propose three sector banking that has been done by the social islamic bank of bangladesh (sibl) by cover the formal sector, microfinance as well as the social finance sector thru the application of cash waqf certificate. the model will impact two side of the sibl internal and external. the internal impact is the increase of cost since covering up the grass root need more personnel as well as the considerable amount of profit from financing the grass root. moreover, the idea of three banking sector promote growth for the islamic financial institutions that do it. the external impact of the model basically will increase the market share of islamic banking. based on the mannan (2018), this research is exploring whether the existing external zakat collection impact more to the expense of the bank or otherwise give more benefit to the islamic bank. thus, in this research, we use a ratio that introduced by regulator which is operational expense operational revenue (bopo) to state whether the collection impact the expense of bank on the other hand, return on asset will be used to know the future possibility that the external zakat collection will give more benefit to the ibs assuming that bank get more fee based income that can be recorded as the revenues (harfiah et al., 2018). 2.3. previous studies there is few research which related to the topic that this research offered. thus only two main research from choudury and harahap (2008) and rahman (2012) which has closest topic to support the argument that is established by this research. first is from choudury and harahap (2008) that use quantitative approach of linear regression. the results of this study conclude that the potential relationship to be obtained between zakat and other expenditure variables, in accordance with islamic principles in the important role of islamic banks as a resource mobilization institution for the achievement of welfare aided by social and economic systems becomes an important point to be observed in the strategy development. second articles from rahman (2012) which use literature study approach. among the reading materials referenced are materials related to the poor and needy, the policy from selected islamic banks in malaysia as well as zakat statistical reports of islamic banking institutions. the results of this study, as a general guideline in building a framework, through zakat distribution management whose method refers to the policies and regulations of islamic banking institutions. in addition to islamic banking institutions in malaysia helping the poor and poor in improving their lives in the forms of charity assistance provided. syamlan, riyanto, & asfia │ zakat intermediaries and its impact to industry growth: growth accelerators or cost center? international journal of islamic economics and finance (ijief), 4(2), 347-374 │ 355 above past studies have the same consensus which stated that the role of islamic bank as zakat orchestrator is indispensable since they have the system and resource to mobilize it. however, none of these research analyse using the bank level data. this paper will close the gap using the bank level data to measure the impact of zakat collection to profit, cost, market share and growth. iii. methodology 3.1. data this research is a quantitative study with a descriptive study approach, which uses the financial statements of islamic banks that have been registered at bank indonesia (bi), and the financial services authority (ojk), the population of banks used is 14 islamic commercial banks and 20 islamic business units, and the sample used is five islamic banks, because there are only five banks that carry out activities as amil zakat, namely syariah bank mandiri (bsm), bank negara indonesia syariah (bnis), bank rakyat indonesia syariah (bris), bank muamalat indonesia (bmi) ), and central asia syariah bank (bcas). the data used are quarterly data with a period from 2013 to 2020. data analysis techniques used are panel data regression and granger causality. 3.2. model development in this study, there are four models that will be run separately using panel data regression which are: model 1 relationship between zakat collection with profitability: 𝑅𝑂𝐴𝐼𝐵𝑡 = 𝛼 + 𝛽1𝑍𝐶𝑡 + 𝜀𝑡 𝑅𝑂𝐴𝐼𝐵𝑡 = profitability of islamic bank (dv1) 𝑍𝐶𝑡 = external zakat collection 𝛽1 = 𝐶𝑜𝑒𝑓𝑓𝑖𝑐𝑒𝑖𝑛𝑡 𝑅𝑒𝑔𝑟𝑒𝑠𝑠𝑖𝑜𝑛 𝑜𝑓 𝑒𝑎𝑐ℎ 𝐼𝑛𝑑𝑒𝑝𝑒𝑛𝑑𝑒𝑛𝑡 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝑠 𝜀𝑡= error term 𝛼 = 𝐶𝑜𝑛𝑠𝑡𝑎𝑛𝑡𝑎 model (1) indicates that as zakat intermediaries, islamic banks can increase profitability, by actively contributing to zakat collection in indonesia. in the study of harfiah et al. (2018) explained that zakat can be one of the factors driving increased profits in islamic banking. thus the first hypothesis is: h1: zakat has a positive and significant relationship to the level of profitability of islamic banks in indonesia. syamlan, riyanto, & asfia │ zakat intermediaries and its impact to industry growth: growth accelerators or cost center? international journal of islamic economics and finance (ijief), 4(2), 347-374 │ 356 model 2 relationship between zakat collection bopo: 𝐵𝑂𝑃𝑂𝐼𝐵𝑡 = 𝛼 + 𝛽1𝑍𝐶𝑡 + 𝜀𝑡 𝐵𝑂𝑃𝑂𝐼𝐵𝑡 = operation cost to operating revenue of islamic bank (dv 2) 𝑍𝐶𝑡 = external zakat collection 𝛽1 = 𝐶𝑜𝑒𝑓𝑓𝑖𝑐𝑒𝑖𝑛𝑡 𝑅𝑒𝑔𝑟𝑒𝑠𝑠𝑖𝑜𝑛 𝑜𝑓 𝑒𝑎𝑐ℎ 𝐼𝑛𝑑𝑒𝑝𝑒𝑛𝑑𝑒𝑛𝑡 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝑠 𝜀𝑡= error term 𝛼 = 𝐶𝑜𝑛𝑠𝑡𝑎𝑛𝑡𝑎 model (2) indicates that as zakat intermediaries, it can affect the operational costs of operating income contained in islamic banks. according harfiah et al. (2018) as well as the 2017 annual financial statements of bank syariah mandiri and bank muamalat indonesia, which have formed their own laz, the management of zakat is still using the operational costs of the bank itself to run laz which has been formed by the islamic bank. thus the second hypothesis is h2: zakat has a negative and significant relationship to the operational costs of operational income (bopo) of islamic banks in indonesia model 3 relationship between zakat collection market share: 𝑀𝑆𝐼𝐵𝑡 = 𝛼 + 𝛽1𝑍𝐶𝑡 + 𝜀𝑡 𝑀𝑆𝐼𝐵𝑡 = market share of islamic bank (dv 3) 𝑍𝐶𝑡 = external zakat collection 𝛽1 = 𝐶𝑜𝑒𝑓𝑓𝑖𝑐𝑒𝑖𝑛𝑡 𝑅𝑒𝑔𝑟𝑒𝑠𝑠𝑖𝑜𝑛 𝑜𝑓 𝑒𝑎𝑐ℎ 𝐼𝑛𝑑𝑒𝑝𝑒𝑛𝑑𝑒𝑛𝑡 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝑠 𝜀𝑡= error term 𝛼 = 𝐶𝑜𝑛𝑠𝑡𝑎𝑛𝑡𝑎 model (3) indicates that as zakat intermediaries, islamic banks can increase market share growth or islamic banking market share in indonesia. according to data from islamic banking statistics in 2015, in the 2009 to 2015 period the market share of islamic banking in indonesia continued to increase, but the level of islamic banking market share was still below the 5% level. in a study conducted by rahman (2012) and choudury and harahap (2008) which mentioned the level of market share in islamic banks in malaysia could increase with the activity of islamic banks in malaysia in their activities as amil zakat. thus the third hypothesis is: h3: zakat has a positive and significant relationship to the market share of islamic banks in indonesia model 4 relationship between zakat collection growth: syamlan, riyanto, & asfia │ zakat intermediaries and its impact to industry growth: growth accelerators or cost center? international journal of islamic economics and finance (ijief), 4(2), 347-374 │ 357 𝐺𝑟𝑜𝑤𝑡ℎ𝐼𝐵𝑡 = 𝛼 + 𝛽1𝑍𝐶𝑡 + 𝜀𝑡 𝐺𝑟𝑜𝑤𝑡ℎ𝐼𝐵𝑡 = growth of islamic bank (dv 3) 𝑍𝐶𝑡 = external zakat collection 𝛽1 = 𝐶𝑜𝑒𝑓𝑓𝑖𝑐𝑒𝑖𝑛𝑡 𝑅𝑒𝑔𝑟𝑒𝑠𝑠𝑖𝑜𝑛 𝑜𝑓 𝑒𝑎𝑐ℎ 𝐼𝑛𝑑𝑒𝑝𝑒𝑛𝑑𝑒𝑛𝑡 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝑠 𝜀𝑡= error term 𝛼 = 𝐶𝑜𝑛𝑠𝑡𝑎𝑛𝑡𝑎 model (4) indicates that as l zakat intermediaries, it can influence the growth of islamic banks in indonesia. in the research of nyin and wee, et.al (2014) which states that zakat has an influence on the growth of the total assets of islamic banks, where if the total collection of zakat increases, the total assets of the bank will decrease, and if the total collection of zakat decreases, the total assets will increase. thus the fourth hypothesis is: h4: zakat has a positive and significant relationship to the growth of islamic bank assets in indonesia. 3.2. operational variables there are 5 indicators used to answer the research problem as well as explaining above four models, which are shows in table 1. table 1. operational variable variable indicator references zakat is funds obtained by banks as amil zakat obtained from the public (x1) zakat received by banks from outside (external) rahman (2012) profitability is one of the ratios used in measuring financial performance (y1) roa = net profit total assets × 100% harfiah et al. (2018) operational costs operational income is the comparison between operational costs and operating income in measuring the level of efficiency and the ability of banks to carry out their operations (y2) bopo = operating expenses operating income × 100% harfiah et al. (2018) market share is a percentage of the overall market for a certain product or service category issued by a company in the same category (y3) ms = total assets of bus or uus total islamic banking assets bus and uus) (bus dan uus) jumono et al. (2015) growth of islamic banks in indonesia (y4) growth rate = (current year’s total assets previous year’s total assets) choudury dan harahap (2008) syamlan, riyanto, & asfia │ zakat intermediaries and its impact to industry growth: growth accelerators or cost center? international journal of islamic economics and finance (ijief), 4(2), 347-374 │ 358 3.3. method 3.3.1. the data panel regression data analysis method used in this study is panel data, which is a combination of cross-section data with time-series data, where cross-section units are measured differently, panel data regression is used to know and measure variables of profitability, bopo, market share, and bank growth islamic in indonesia is influenced by external zakat variables obtained by islamic banks as amil zakat in indonesia. the data processing is carried out using eviews10 software. in the panel data regression estimation model according to baltagi & liu (2019) can be done with 3 approaches, namely as follows: common effect or pooled least square (pls) it is the simplest panel data model approach because it only combines time series data and cross sections and do not pay attention to the dimensions of time or individuals so it is assumed that the behaviour of islamic bank data in various time periods. this method can use the ordinary least square (ols) approach or small squares technique to estimate panel data. fixed effect model (fem) this model assumes that differences between individuals can be accommodated from their intercept differences. the fixed effect model is a technique for estimating panel data using dummy variables to capture intercept differences. intercept between banks, intercept differences can occur due to differences in work culture, managerial, and incentives. besides that, this model also assumes that the regression coefficient is fixed between banks and time. this approach with dummy variables is known as least square dummy variables (lsdv). random effect model (rem) this model estimates panel data where interruption variables may be interconnected between time and between individuals. in the random effect model, the intercept difference model is accommodated by the error terms of each bank. the advantage of using random effects is that it eliminates heteroscedasticity. this model is also called the generalized least square (gls) technique and the next step to analyse the panel data model is to select the best model using several tests, namely (batalgi & liu, 2019): hausman test hausman test is a test used to choose the best model between the fixed effect model or random effect model. this thirst test is based on the idea that least squares dummy variables (lsdv) in the fixed effect and generalized least (ols) syamlan, riyanto, & asfia │ zakat intermediaries and its impact to industry growth: growth accelerators or cost center? international journal of islamic economics and finance (ijief), 4(2), 347-374 │ 359 methods in the common effect method are inefficient. namely, by testing the hypothesis form: h0: random effect model ha: fixed effect model hausman test statistics follow the chi-square distribution with degrees of freedom (df) equal to the number of independent variables. the null hypothesis is that the right model for panel data regression is the random effect model, and the alternative hypothesis is the right model for panel data regression is the fixed effect model. chow test chow test is a test to determine what model will be chosen between the common effect model or fixed effect model. the chow test hypothesis is: h0: common effect model (pooled ols) ha: fixed effect model (lsdv) the null hypothesis in this test is that the intercept is the same or in other words, the right model for panel data regression is the common effect model and the alternative hypothesis is the intercept is not the same or the right model for panel data regression is the fixed effect model. lagrange multiplier test the lagrange multiplier test is a general principle for testing hypotheses about parameters in likelihood framework. this test is carried out with the aim of determining the best method of panel data regression, whether to use common effect or random effect. thus, the hypothesis constructed is (baltagi et al., 2002): h0: common effect model ha: random effect model as the hypothesis above, the null hypothesis in this test is that prob. beuschpagan is the same or in other words, the right model for panel data regression is the common effect model and the alternative hypothesis is the prob. beusch-pagan is not the same or the right model for panel data regression is the random effect model. 3.3.2. granger causality test granger causality test is an analysis model that explains whether a variable has a two-way relationship or only one direction only. granger causality test is basically looking at past effects on current conditions so that the data used syamlan, riyanto, & asfia │ zakat intermediaries and its impact to industry growth: growth accelerators or cost center? international journal of islamic economics and finance (ijief), 4(2), 347-374 │ 360 is the data series, so that the hypothesis formulation of granger causality is (horváth et al., 2014): ho: x is not granger cause y ha: x granger cause y and, ho: y is not granger cause x ha: y granger cause x the granger casualty test will be used in the case that data panel regression cannot show the significances of the external zakat collection to the roa, bopo, market share, and the growth of islamic banks. iv. results and analysis 4.1. results 4.1.1. classic assumption test multicollinearity test table 2. multicollinearity test results the model that can be classified as no multicollinearity happened when the vif value below 10 and the value of 1 / vif (tolerance) is more than 0.1. thus below is the result of multicollinearity test. from the table 2 it can be seen that the vif values of all variables are below 10 and the value of 1 / vif is above 0.1. then it can be concluded that there is no multicollinearity relationship between independent variables in this study. heteroscedasticity test before entering to the model selection, the data should be tested with the heteroscedasticity test through the breusch-pagan / cook-weisberg test. when the test result is below 0.05 (probability) it indicates heteroscedasticity. the results of running data for the heteroscedasticity test for roa (y1) prob.> chi2 was 0.1805, bopo (y2) prob.> chi2 was 0.7905, market share (y3) prob.> variable vif 1/vif roa 1.00 1.000000 bopo 1.00 1.000000 market share 1.00 1.000000 pertumbuhan 1.00 1.000000 mean vif 1.00 syamlan, riyanto, & asfia │ zakat intermediaries and its impact to industry growth: growth accelerators or cost center? international journal of islamic economics and finance (ijief), 4(2), 347-374 │ 361 chi was 0.000, and growth (y4) prob.> chi2 was 0.0032. from the results of running the data it is known that the roa (y1), and bopo (y2) variables have values greater than the significance value of 0.05. this indicates that the data detected no heteroscedasticity. and for market share (y3) and growth (y4) variables which have a value smaller than the 0.05 significance value, this indicates that there are indications of heteroscedasticity symptoms. as an alternative to the common effect / pls or fixed effect / fem model that still contains symptoms of heteroscedasticity, it can use the generalized least squared (gls) approach that accommodates auto-corellation and heteroscedasticity in the model. selection of the best model 1) hausman test for testing the best model using the hausman test, it can be seen from the probability value is 0.05, if the value is greater than 0.05 then ho is accepted and the model chosen is rem, but if the value is less than 0.05 then the model chosen is fem. table 3. hausman test results: rem vs. fem model prob. > f best model roa (y1) 0.0287 fem bopo (y2) 0.0526 rem market share (y3) 0.6614 rem growth (y4) 0.1100 rem from the table 3, it can be seen that the prob. value of each variable sequentially are y1 is 0.0287<0.05, y2 is 0.0526>0.05, y3 is 0.6614>0.05, and the y4 is 0.1100>0.05 indicating that y1 is significant at the 5% level, therefore the null hypothesis (ho) is rejected and the regression model chosen is fem while y2, y3 and y3 accept the null hypothesis, meaning that the regression model chosen is rem. this paper directly jumps to the lm test since the chow test test pls vs fem, while the results of haussmann test are all in favor of rem. 2) lagrange multiplier test for selecting the best model using the lagrange multiplier test, it can be analysed from the probability value for prob. beusch pagan is 0.05, if the value is greater than 0.05 then h0 is accepted and the model chosen pls, but if the value is less than 0.05 then the model selected is rem. from the table 3 it can be seen that the prob. value of the variable y1 is 0. 5368>0.05, as its result is not significant at the 0.05 level, the null hypothesis syamlan, riyanto, & asfia │ zakat intermediaries and its impact to industry growth: growth accelerators or cost center? international journal of islamic economics and finance (ijief), 4(2), 347-374 │ 362 (ho) is accepted which means the best model chosen is pls. then, the prob. value of y2 is 0.0000<0.05, prove that it is significant at the 0.05 level, then ho is rejected so that the regression model chosen is rem. the prob. value of y3 is 0.0000<0.05, the same as prob. y4 value is 0.0000<0.05, which means that it is significant at the 0.05 level, then ho is rejected so the regression model chosen is rem. table 4. lagrange multiplier test result (cem vs. rem) model test prob. beusch pagan best model roa (y1) lm 0.5368 pls bopo (y2) lm 0.0000 rem market share (y3) lm 0.0000 rem pertumbuhan (y4) lm 0.0000 rem table 5. selection of the best model model test best model hausman: fem vs. rem chow: fem vs. pls lm: rem vs. pls roa (y1) fem fem pls fem bopo (y2) rem fem rem rem market share (y3) rem fem rem rem growth (y4) rem fem rem rem in conclusion, based on the classical assumption test conducted, two variable which do not pass the heteroscedasticity. as an alternative, for market share and growth, suwardi (2011) stated the data can be analysed using generalized approach least squared (gls) or commonly called random effect model (rem) which accommodates the existence of autocorrelation and heteroscedasticit in the model. so the best model used is the random effect model (rem). it shows in table 4 and table 5. 4.1.2. panel data results the hypothesis of this study was tested using panel data regression analysis. hypothesis testing is done in 2 ways: the coefficient of determination test (goodness of fit) and the partial significance test (t-test) based on the results of data processing table 6 shows the results of hypothesis testing for the following models. from the table 6, only hypothesis 2 has been accepted since the value p-value below 0,05. hypothesis 2 is measuring the relationship between zakat collection and the bopo. based on the literature review, the relationship between two variables in hypothesis 2 is negative since the more zakat syamlan, riyanto, & asfia │ zakat intermediaries and its impact to industry growth: growth accelerators or cost center? international journal of islamic economics and finance (ijief), 4(2), 347-374 │ 363 collection, the cost also will be raised. as per table 6, the probability value of h2 is 0,0258 while the t statistic is 2,211. the r square of h2 is 2,3% meaning that the zakat only can explain 2,3% variance of the bopo while the rest is measured by other variable. the other hypothesis which are h1, h3, and h4 is rejected due to the p-value above the 0,05. table 6. roa hypothesis test results hypotesis coeffient p-value t-statistic f-stat p-value (ftest) r-square result h1 -0.002137 0,56888889 -0.541703 2,201 39,70% reject h2 0.165355 0,02588 2,2111 4,805 0.029836 2,30% accept h3 0.021978 0,2358 1,1902 1,423 0,230 2,60% reject h4 0.09439 0,2924 1,06 1,105 0.294725 0,01% reject 4.1.3. granger causality results as seen from the table 7, the causality of external zakat to roa is 0.9825 which is not significant, but the roa to external zakat is significant (0.0023). therefore, external zakat does not cause roa, while roa causes external zakat. furthermore, there are no significant causes between external zakat to bopo (0.921) and the bopo to external zakat (0.0015), thus, external zakat do not cause bopo, otherwise bopo causes external zakat. similar thing happened to the last two variables as the causality of external zakat to market shares (0.9042) and market share to external zakat (0.3083), then the causality of external zakat to growth (0.6944) which means there is no reciprocal causality. however, the growth to external zakat (0.0035) means growth causes external zakat. table 8 are the granger causality test result: table 8. granger causality test results granger test f. statisitic prob external zakat to roa 0.01761 0.9825 roa to external zakat 6.35564 0.0023 external zakat to bopo 0.08238 0.921 bopo to external zakat 6.82916 0.0015 external zakat to market shares 0.10073 0.9042 market share to external zakat 1.18629 0.3083 external zakat to growth 0.36564 0.6944 growth to external zakat 5.88975 0.0035 syamlan, riyanto, & asfia │ zakat intermediaries and its impact to industry growth: growth accelerators or cost center? international journal of islamic economics and finance (ijief), 4(2), 347-374 │ 364 4.2. analysis 4.2.1. the effect of collecting external zakat on the level of return on assets (roa) of islamic banks in indonesia the results of this study indicate that the collection of external zakat has no significant influence on the roa level of islamic banks in indonesia. this study contradicts several research that have been conducted. yohani and yusuf (2014), explained that zakat can affect the profitability of islamic banking. likewise, nyin and wee, et.al (2014), stated that the total income and total collection of zakat has a positive relationship, which if the total collection of zakat increases, the total income of islamic banking will also increase, and vice versa if the total income increases, the total collection of zakat will also increase. however, firmansyah and rusydiana (2013) states that roa can affect zakat on islamic banks. these is accordance with the results of the granger causality test between the roa to the collection of external zakat which assert there is significant relation. 4.2.2. the effect of collecting external zakat on operational costs operational income (bopo) of islamic banks in indonesia the results of this study indicate that the collection of external zakat has significant influence on the level of bopo in indonesian islamic banks. the result of this study in line with the fact that several islamic banks in indonesia which already have their own zakat collection units or institutions such as baitul mal muamalat (bmm) owned by bank muamalat indonesia and amil zakat institution of prosperous partners umat (laz bsm umat) owned by bank syariah mandiri. as the laz payroll and operations owned by the two islamic banks are still borne by themselves, hence zakat has a positive effect on the bopo of islamic banks in indonesia. it is better for banks that already have laz to issue ziswaf-based funding products so that assets in general can increase, or work together with upz that already exists around the banking environment. therefore this study shows that there is no significant influence between collection of external zakat and operational costs of operational income (efficiency) of islamic banks in indonesia according to the results of the granger test. 4.2.3. the effect of collecting external zakat on islamic bank market share in indonesia the results of this study indicate that the collection of external zakat has no significant effect on the level of market share in indonesian islamic banks. the results of this study are not in line with research conducted by rahman (2012) and choudury and harahap (2008) which states that the level of market share syamlan, riyanto, & asfia │ zakat intermediaries and its impact to industry growth: growth accelerators or cost center? international journal of islamic economics and finance (ijief), 4(2), 347-374 │ 365 in islamic banks in malaysia increase through the activity of islamic banks in malaysia as amil zakat. moreover, the results of granger causality test show that zakat has no significant relationship to the overall market share of islamic banks in indonesia, because the collection of zakat can increase market share and with that the market value of islamic banks in indonesia will increasingly have an impact on the overall market share value of banks in indonesia, therefore if islamic banks in indonesia are more active in activities as amil zakat, then the market share level will definitely increase if zakat collection activities increase due to a significant relationship in granger between zakat and islamic bank market shares in indonesia. 4.2.4. the effect of collecting external zakat on the growth of islamic bank assets in indonesia the results of this study indicate that the collection of external zakat has no significant influence on the growth rate of assets in indonesian islamic banks. this study contradicts the research conducted by nyin and wee, et.al (2014) which states that zakat has an influence on the growth of total assets of islamic banks, where if the total collection of zakat increases, the total assets of the bank will decrease, and if the total collection zakat decreases then total assets will increase. if the total collection of zakat increases, the operational expenses in the zakat collection activities will also increase, such as payroll for amil or employees and other operational expenses used in activities as amil zakat. therefore, this study shows that zakat has no a significant influence on the growth rate of islamic bank assets in indonesia 4.2.5. the implementation of zakat based product in islamic banking as a result from this study and previous research done by firdaus et al. (2012), stated that indonesia’s potential national zakat reached idr217.60 trillion, which equivalent to 3.40% of gdp. afterwards, asfarina et. al (2019) asserted the calculation of zakat potential in indonesia up to idr216.54 trillion or equal to 1.75% of gdp , whilst the actual amount of zakat collected for 2018 (not including infaq) amounted to only idr 8.10 trillion, or 0.05% of gdp. it indicates that the role of zakat has no been significant in improving welfare. to maximize zakat, the conceptual work of ascarya (2018) can be referred in this case. islamic bank according to ascarya (2017), has a role in mobilizing the fund from surplus unit and channeling it to the deficit unit. nevertheless, islamic banks in several countries have another divine role as per instructed in the indonesian islamic banking act no. 21 – 2008 which stated in the article 4; the islamic banks could collect the fund from zakat and waqf. by that end, basically the indonesian islamic banks have done their islamic social finance syamlan, riyanto, & asfia │ zakat intermediaries and its impact to industry growth: growth accelerators or cost center? international journal of islamic economics and finance (ijief), 4(2), 347-374 │ 366 part by virtue of collecting and distributing the zakat, waqaf, infaq, shadaqah (ziswaf). ascarya (2017) proposed an integration of islamic social finance into the banking business by adding the ziswaf linked product on the balance sheet with special requirement. before linking the social and commercial finance, ascarya (2018) pointing some issues that need to be solved before integrating the islamic social finance to the commercial finance such as fractional reserve banking (frb), the liquidity-driven business, and the pooling of fund. the fractional reserve banking will delay the integration since its create a bubble and instability of the bank business. moreover, the frb basically drives the bank to deploy the pooling of fund system by way of uniting the term deposit, saving, and current account in a blend and exploit it into financing. the pool of fund will not fit to the social finance scheme like zakat. if one islamic banks open zakat deposit on their liabilities side; it can only be used for the 8 ashnaf of zakat financing. meaning to say, this kind of product should be separated using allocation of fundschemese to ensure that it not mingle with the third party fund. ascarya (2018) also illustrated the islamic bank balance sheet which taking into account the islamic social finance below: figure 3. balance sheet of an islamic bank: current and proposed one source: ascarya (2018) assets liabilities cash wadia/mudharabah ca central bank placement wadiah/mudharabah sa interbank placement zakat saving deposit receivables (buy and sale finnancing, qard) mudharabah time deposiit syirkah financing other liabilities fee based waqf long term deposit inventories waqf equity fixed asset reserves equity future ib balance sheet with social finance assets liabilities cash wadiah/mudharabah ca central bank placement wadiah/mudharabah sa interbank placement mudharabah time deposit receivables (murabahah, ijarah, qard) other liabilities syirkah financing fee based inventories reserves fixed asset equity current ib balance sheet syamlan, riyanto, & asfia │ zakat intermediaries and its impact to industry growth: growth accelerators or cost center? international journal of islamic economics and finance (ijief), 4(2), 347-374 │ 367 as reflected on figure 3 of balance sheet, based on ascarya (2018) thoughts, the existing liabilities side of islamic bank is fulfilled by wadiah and mudharabah based current account and saving account plus the plain vanilla mudharabah time deposit as well as other liabilities like interbank money market, sukuk, as well as mtn. alongside the liabilities, the islamic bank has equity and reserves. after introducing ziswaf based product like zakat saving deposit, waqf long term deposit as well as the waqf equity, it will change the funding structure of ib since the cost of fund will be reduced and diminishing the liability mismatch due to the irrevocable waqf long term deposit. the change in financial position will correspondingly affect the islamic bank business. to maximize the social finance side of banking business by establishing the baitul maal to control the distribution of ziswaf through the social program. to actually deliver new product that is based on the zakat contract, some regulations need to be considered to be amended. the regulations are below: 1. this study proposes that zakat based products are not included in the calculation of statutory reserves based on pbi 20/3 / pbi / 2018 related to statutory reserves in rupiahs and foreign currencies for conventional commercial banks, bus & uus. this proposal was given based on the following considerations: a. the definition of third party funds is in accordance with bank indonesia regulation no. 20/3 / pbi / 2018 is defined as “unrestricted savings / investment funds entrusted by customers to islamic banks based on wadiah / mudharabah agreements in the form of demand deposits, deposits, certificates of deposit or other equivalent forms”. while the zakat characteristics that are alms that cannot be withdrawn by the depositors. b. if the reserve requirement is applied, the is does not receive islamic bank might face the islamich issues since the zakat fund should be channelled to the 8 ashnafs, c. at the operational level, the zakat based product management account must use a shelter account and the pool of funds must be separated from the dpk account in general. 2. this study proposes that zakat-based products are not included in the calculation of financing to deposit ratio (fdr) with the following considerations: a. referring to pojk no. 8 / pojk.03 / 2014 related to bus-uus soundness rating, that in the financing to deposit ratio (fdr) formula of financing divided by dpk. in accordance with the explanation related to the definition of dpk above, because this new product model is bound either to the project or to a particular portfolio, the transactions recorded by the bank for this product syamlan, riyanto, & asfia │ zakat intermediaries and its impact to industry growth: growth accelerators or cost center? international journal of islamic economics and finance (ijief), 4(2), 347-374 │ 368 are not included in the health component of islamic banks since the receiver is the mustahiq. b. there is no liquidity gap because the assets and liabilities are balanced due to the non-revocable feature zakat funding product. 3. law of the deposit insurance agency no. 24 of 2004 concerning lps states that lps will guarantee the meet below requirment: a. in savings products, banks act as mudarib who bear the risks b. on deposit products, banks act as investment manager who bear the risks c. deposits based on other islamic principles determined by lps after obtaining lps consideration from the explanation above basically opens wide opportunities for islamic banks to make product innovation specifically in products that are bound zakah fund. the product has an opportunity to be guaranteed by lps through consideration given from dsn, ojk, and lps. v. conclusions and recommendation 5.1. conclusion external zakat collection by islamic banks in indonesia has no significant influence on the profitability (roa) of islamic banks in indonesia, nor on the market share and asset growth of islamic banks in indonesia. however, the collection of external zakat conducted by islamic banks has a significant influence on the operational costs of operating income (bopo) of islamic banks in indonesia. the results of the causality test suggest that external zakat collectors may have a relationship with islamic bank market share if external zakat collecting activities continue. in a nutshell, it is not suitable for islamic bank to acts as amil, hence the collection of zakat from external should be channelled directly to laz / baz. thus, the product that is offered to the customer is a mere of intermediaries of muzakki and laz. 5.2. recommendation there are still a multitude of discussion in this paper that may need to be improved, hence the authors suggest for further research to examine the variables in this research using different method to find the alternative. for instance, the previous study on social islamic bank ltd. by referencing cash waqf for monetizing islamic voluntary sector, accumulation of social capital and national wealth, and implementing strategic social investment program (mannan, 2018). it could be adding islamic business units as research objects syamlan, riyanto, & asfia │ zakat intermediaries and its impact to industry growth: growth accelerators or cost center? international journal of islamic economics and finance (ijief), 4(2), 347-374 │ 369 or comparing islamic banks in indonesia with islamic banks in malaysia as research objects using different variables with monthly or quarterly financial data to find a better discussion. as for islamic banks, we hope that they could more active in the collection of external zakat activities by forming zakat collection units or institutions themselves or working with existing zakat collection units or institutions. increase the socialization of zakat to customers and the public in order to attract customers and the public to channel their zakat through islamic bank services and published a new product, ziswaf-based funding product. furthermore, all of these efforts would not have been possible without the help of regulators and the government. thus, they need to provide more facilities for islamic banks conducting activities as amil zakat, speed up and simplify the approval process for issuing new products for islamic banks that want to make ziswaf-based funding products, reducing the tax since this is some alms that used for poverty alleviation as well as giving more incentives for those islamic banks that collecting the zakah. syamlan, riyanto, & asfia │ zakat intermediaries and its impact to industry growth: growth accelerators or cost center? 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(2010). bank reserves : a dispute over words and classification. december 2009, 183–191. https://doi.org/10.1007/s11138-009-0102-8 syamlan, riyanto, & asfia │ zakat intermediaries and its impact to industry growth: growth accelerators or cost center? international journal of islamic economics and finance (ijief), 4(2), 347-374 │ 374 this page is intentionally left blank. international journal of islamic economics and finance (ijief) vol. 6(1), january 2023, pages 73-104 cash waqf acceptance among entrepreneurs in kano metropolis, nigeria aliyu dahiru muhammad1, jibril lawan alkassim2, sagir muhammad sulaiman3 corresponding email: sageeerala@gmail.com article history received: november 28th, 2022 revised: december 21st, 2022 january 5th, 2023 january 16th, 2023 accepted: january 27th, 2023 abstract cash waqf was introduced as an alternative for individuals who do not have an immovable asset but rather have the cash to donate as waqf. it can be observed, however, that muslims in kano state narrow their perception of waqf only to be in the form of a kind but not in cash. it is to say that public awareness and understanding of cash waqf are insignificant. therefore, this study aims to assess factors influencing the intention to accept cash waqf among entrepreneurs in the kano metropolis with particular reference to singer market. the study employed partial least square–structural equation modeling (pls-sem) and was theoretically guided by the theory of planned behavior (tpb). structured survey questionnaires were administered to 379 respondents whom were registered entrepreneurs in singer market based on a convenience non-probability sampling technique. descriptive statistics using charts and tables were employed to analyze the demographic information, while data collected from the respondents were analyzed utilizing amos, version 21. the study uncovered that perceived behavioral control and religiosity significantly influenced the intention to accept cash waqf among entrepreneurs in singer market in kano metropolis, while awareness and attitude did not. this paper recommends that the management of the kano state zakat and hubsi commission (kszhc) should establish sensitization programs to create awareness and promote cash waqf for the public to mobilize more potential waqf donors in the state. keywords: cash waqf; structural equation modeling; theory of planned behavior; waqf acceptance; nigeria jel classification: z12; m39; g41; z12 @ ijief 2023 published by universitas muhammadiyah yogyakarta, indonesia doi: https://doi.org/10.18196/ijief.v6i1.16966 web: https://journal.umy.ac.id/index.php/ijief/article/view/16966 citation: muhammad, a. d., alkassim, j. l., & sulaiman, s. m. (2023). cash waqf acceptance among entrepreneurs in kano metropolis, nigeria. international journal of islamic economics and finance (ijief), 6(1), 73104. doi: https://doi.org/10.18196/ijief.v6i1.16966. 1 department of economics, bayero university kano, nigeria 2,3 international institute of islamic banking and finance (iiibf), bayero university kano, nigeria mailto:sageeerala@gmail.com https://doi.org/10.18196/ijief.v6i1. https://doi.org/10.18196/ijief.v6i1. https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v6i1.16966&domain=pdf muhammad, alkassim, & sulaiman │ cash waqf acceptance among entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 6(1), 73-104│ 66 i. introduction 1.1. background kano state is historically well known for centuries as a commercial center, and the caravan terminus of the saharan trade and is, therefore, recognized as very rich in terms of industrial activities, such as local crafts, leather works, dyeing, embroidery and agriculture, and manufacturing companies that make textiles, foods, and beverages as a way of promoting employment. moreover, kano state had passed its zakat and hubsi commission law on 7th november 2003 by the state house of assembly, where the council was recognized as an official zakat and waqf/endowment body in charge of collection and disbursement of zakat and waqf in the state (kani, 2012). this institution or council was named kano state zakat and hubsi commission (kszhc). historically, waqf practices have been proven to create and provide many benefits for the founder/donor (al-waqif) in the sense of earning rewards here in the world and hereafter. further, numerous qur’anic verses strongly encourage donation in the cause of allah and for assisting less privileged and disadvantaged muslims in resolving their educational, financial, moral, medical, and religious needs, such as in surah al-baqarah (2:261 and 271), ali imran (3:92 and 134), and al-hadid (58:18). furthermore, waqf funds may be real property or assets in the form of land, personal property, such as physical possessions, or intellectual properties, such as patents, trademarks, or goodwill. in addition, waqf assets can be moveable, such as cash waqf, or immovable, such as land waqf. specifically, cash waqf has not been extensively discussed by classical jurists, although the word maal (asset) is covered in the definition of waqf (kahf, 2008). moreover, after long debates by the ulama from the renowned islamic schools of law, especially the maliki school, the organization of islamic countries (oic) fiqh academy issued a collective fatwa on the validity of cash waqf. later, the contemporary jurists justified and validated the introduction and implementation of the cash waqf system for the interest of the waqf itself, the beneficiaries, and society as a whole. similar recent advances in waqf have given rise to novel ideas like cash waqf, which is being utilized to stimulate economic growth in several modern societies, like malaysia, singapore, and saudi arabia, among others. however, in northern nigeria, awareness of this waqf device is still quite limited (ahmad, 2019). cash waqf is described as the founder's donation of a sum of money and commitment of its usufruct to an ongoing, predetermined use (abdel mohsin, 2008). identical to today, in the early days of islam, religious and social activities were successfully carried out thanks to the widespread participation of everyone, even the muslim communities' sections of the underprivileged. muhammad, alkassim, & sulaiman │ cash waqf acceptance among entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 6(1), 73-104│ 67 although wealth was utilized to build mosques, hospitals, libraries, and schools, it was only made feasible by the enormous number of ordinary people giving small, ongoing gifts out of a sense of altruism (chowdhury, ghazali, & ibrahim 2011). it can be observed, however, that many muslims cannot participate in the practice of waqf endowment because of the wrong perception that waqf may only be on land but not cash. furthermore, cash waqf, according to saifuddin et al. (2014), is not well known as in the case of land or property waqf, but it slowly attracts the public due to its flexibility in nature; in view of mannan (1998), it allows distribution of the waqf’s potential benefit to the poor anywhere. particularly among the ottomans, cash waqf became institutionalized early in the 17th century. despite the disagreement among jurists on the validity of the cash waqf system, cash waqf continued to be endowed. the ottoman sultans actually favored and endorsed the concept of cash waqf because the money was used to subsidize the spread and dissemination of islam in the european nations. more so, in the 18th century, imam zufar gave legitimacy to the idea of monetary waqf. as a result, it was first applied there in the history of the islamic world. meanwhile, many people, including the have-nots section of society, will have the ultimate chance to participate in the process of waqf endowment through the introduction of cash into the process of waqf donation, even if they do not have a fixed land or tangible asset to donate. as such, cash waqf may be seen as another alternative for people who do not have tangible land to endow the minimum cash they have for the development of society. moreover, there is apprehension that cash waqf is more productive than any other category of waqf, such as land, building, books, or cattle, as it inclusively provides a chance for the whole people to participate in the process of waqf, irrespective of one’s financial status. it is also not explicitly meant for well-up individuals in the community (chowdhury et al., 2011). it denotes that anybody can stand as a waqf founder/donor through the payment of a certain amount of capital, so long as the sharia recognizes the person as legally capable. similarly to this, anwar, aziz, and sabri (2017) investigated the causes and effects of muslims' attitudes regarding taking part in the cash waqf practice in malaysia. meanwhile, haron, kamaruddin, fauzi, ariff, and zainuddin (2016) evaluated the trend and factors influencing cash waqf collection to provide explicit knowledge of implementing cash waqf in malaysia. furthermore, johari, alias, aziz, kefeli, ahmad, wahab, hussin, and ibrahim (2015) examined malaysia's demographic and socio-economic profiles of frequent cash waqf donors. nonetheless, it could clearly be seen from the abovementioned studies that a study of this nature is also needed in nigeria and kano metropolis, in particular, to fill in the literature gap and enable waqf muhammad, alkassim, & sulaiman │ cash waqf acceptance among entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 6(1), 73-104│ 68 institutions to identify factors influencing the intention to accept cash waqf among entrepreneurs. it is further expected to place the intention of the public, especially entrepreneurs, as potential waqf donors in the state. for that reason, this study aims to assess the factors influencing store owners' decisions to accept cash waqf in singer market in kano metropolis. the study also attempts to look into how awareness, attitude, perceived behavioral control, and religion affect store owners' intentions to accept cash waqf in kano metropolis' singer market. 1.2. objectives this study's primary objective is to assess the factors affecting store owners' decisions to accept cash waqf in kano metropolis' singer market. in addition, the following specific purposes are what the investigation focuses on achieving. a. analyze whether awareness has a substantial impact on business owners' intentions to accept cash waqf in kano metropolis' singer market b. examine whether attitude has a substantial impact on business owners' intentions to accept cash waqf in kano metropolis' singer market c. determine whether perceived behavioral control has a substantial impact on business owners' intentions to accept cash waqf in kano metropolis' singer market d. explore whether religiosity has a substantial impact on business owners' intentions to accept cash waqf in kano metropolis' singer market ii. literature review 2.1. background theory in this study, the theory of planned behavior (tpb) serves as the theoretical foundation for assessing the elements influencing enterprises in kano metropolis' singer market's intention to accept cash waqf. then, the following is a succinct explanation of this theory: 2.1.1 the theory of planned behavior (tpb) one of the theories most frequently used in the literature to examine proenvironmental behavior is the tpb, which also covers transportation choices, energy use, water conservation, food preferences, and ethical investing (stern, 2000; staats, 2003). in 154 instances, armitage and conner (2001) muhammad, alkassim, & sulaiman │ cash waqf acceptance among entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 6(1), 73-104│ 69 found it to be employed. according to ajzen's theory of planned behavior, the easiest way to forecast someone's behavior is to ask them if they desire to act in a particular manner (1988). it is essential to stress that no action will be taken if it is physically impossible to do so or if unanticipated obstacles get in the way. how can behavior be described if the purpose can do so? according to azjen (1998), three factors explain the behavioral purpose: attitude, subjective norm, and perceived behavioral control. the literature generally details three major models often used to examine intention, including the technology acceptance model (tam) (daves, 1986). although this study could have used either the theory of reasoned action (tra) or the (tpb) as its theoretical foundation, it chose to use the latter. 2.2. previous studies al-harethi (2019) investigated the determinants of cash waqf participation among students at kolej insaniah universiti malaysia. three variables were employed in the study to identify the characteristics influencing malaysians' willingness to participate in cash waqf. the three factors being measured were attitude, subjective norm, and religion. the information was gathered by distributing questionnaires to 100 kolej insaniah universiti malaysia students. moreover, the study used multiple regression analysis and other statistical techniques. this study's findings showed a significant relationship between religiosity, subjective norm, attitude, and intention to participate in cash waqf. however, the study should have collected data from more participants so that findings might have been more reliable. a study by dennis, qoyum, and sakti (2018) explored the factors influencing monetary waqf contributions from muslim students. through mobile cash waqf nu btn in indonesia, the study evaluated how attitudes, islamic religiosity, islamic egalitarianism, and perceptions affected muslim students' intentions to make monetary waqf contributions in indonesia. then, 115 muslim students who applied to mobile cash waqf nu btn were given questionnaires as the primary source of data collecting. structural equation model (sem) was another data analysis technique used in the study. as a result, the study discovered that religiosity favored behavioral intention, attitude, and islamic egalitarianism. islamic egalitarianism really had a negative impact on intention as a mediating variable. as a mediating factor, it is acknowledged that perceived ease of use positively influenced intention. thus, it accepted that perceived ease of use positively impacted intention. the study's findings also indicated that islamic egalitarianism had no discernible effect on muslim students' behavioral intentions regarding cash waqf participation. however, the study might have been more successful if, for instance, it had used a large sample of respondents to ensure the reliability of the findings. muhammad, alkassim, & sulaiman │ cash waqf acceptance among entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 6(1), 73-104│ 70 additionally, mokthar (2018) investigated variables affecting muslims in penang's inclination to perform monetary waqf. a total of 395 penang cash waqf donors provided the data, which were then statistically examined using descriptive statistical analysis utilizing the statistical program for social sciences (spss). the study's primary conclusions demonstrated that the ukhuwah (brotherhood) factor is thought to significantly influence more muslims in penang's intention to execute cash waqf. rewards, religious observance, and awareness are further crucial elements. therefore, it can be inferred that the penang muslims' motivation for doing financial waqf is to aid others. however, this study's primary focus on cash waqf was made possible via salary deduction, and online payment was one of its shortcomings. thus, to achieve high waqf donor mobilization, the study may have been more effective if it, for instance, included non-salary income earners considering the people. concerning cash waqf, rizal and amin (2017) sought to develop a conceptual framework that would elucidate muslims' motives for charitable contributions. using the theoretical altruism paradigm, their study investigated the effects of perceived ihsan, islamic egalitarianism, and islamic religiosity on monetary waqf contribution. a survey methodology was employed to acquire data from respondents who used islamic banking. the sample used in the analysis consisted of 264 completed surveys. an exploratory factor analysis revealed that the constructs had a high level of nomological validity. structural equation modeling (sem) utilizing path analysis was also performed to assess the proposed study framework. the model testing findings showed that perceived ihsan, islamic equality, and islamic religiosity significantly impacted cash waqf giving. however, shakor, anwar, aziz, and sabri (2017) analyzed the causes and effects of muslims' attitudes toward malaysia's cash waqf practice. a total of 400 questionnaires for the survey were given out to people in the malaysian klang valley region. there were three primary sections to the survey questionnaire. general inquiries on respondents' involvement in cash waqf made up the first section. questionnaires on antecedent variables (religiosity, awareness of waqf, practicality, informative influence, and faith in waqf institutions), consequence factors (intention), and attitudes toward monetary waqf involvement made up the second component. respondents were questioned about each issue using a likert scale with a five-point scale, ranging from "1" (strongly disagree) to "5" (strongly agree). then, the data analysis was done utilizing spss software version 20. the third portion also determined the respondents' demographic makeup. the data were also subjected to descriptive analysis, exploratory factor analysis, reliability analysis, and regression analysis. according to the study, a muslim's attitude toward participating in cash waqf and the subsequent intention was predicated on muhammad, alkassim, & sulaiman │ cash waqf acceptance among entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 6(1), 73-104│ 71 their personal religiosity, faith in waqf organizations, and ease of donation. the study continued to serve as a valuable source of knowledge for waqf institutions as they implemented their effective plan to support cash waqf and encourage systematic collection practices that can be advantageous to the community. furthermore, duasa and thaker (2016) examined the factors causing the choice of micro-enterprises to use internal funding rather than external funding. the study also observed the probability of choosing micro-enterprises for cash waqf funds as an alternative source. the study used primary data. the data analysis was conducted using (sem). the model validated its acceptance in the field by adopting the theory of reasoned action (tra). however, the study found various factors for the micro-enterprises to use internal findings instead of external findings, such as strict collateral requirements by commercial and financial institutions, high cost of financing, and business track record. the study revealed that most micro-enterprises could not access finance facilities as they could not fulfill those conditions. moreover, the study developed a viable cash waqf investment model to support microentrepreneurs, enhance their skills, and improve their access to finance. their research revealed that micro-entrepreneurs intention to accept and implement the model as a source was effective. nevertheless, the study may have been more helpful if it had examined the effectiveness of the developed model and the influence of the analyzed factors in mobilizing waqf donors to generate more proceeds. meanwhile, the institution of waqf may successfully carry out its activities. similarly, haron et al. (2016) created better knowledge regarding cash waqf implementation and studied the trend and factors affecting cash waqf collecting. the study chose three states based on non-probability sampling, which was purposeful selection. microsoft excel was used for the trend study, showing the percentage of cash waqf contributions made in each state between 2006 and 2013. through a semi-structured interview with the employees that oversaw cash waqf collection in these three states, the study also used a qualitative approach to learn more about the trends in cash waqf collection. in addition, the study engaged in a telephonic interview. the finding from this study uncovered that implementing the cash waqf system will provide more comprehensive sources of funds regarding the objective of islamic economics and help to develop. therefore, a cash waqf is a potential tool for developing every muslim economy. the study also found that the factors influencing cash waqf collection comprised promotion and resources. as such, the study suggests increasing promotion efforts to achieve a higher collection of cash waqf proceeds. however, the study may have been more applicable if it had taken into account other factors likely to motivate people's intention to donate cash waqfs, such as attitude, subjective norm, and muhammad, alkassim, & sulaiman │ cash waqf acceptance among entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 6(1), 73-104│ 72 perceived behavioral control, instead of limiting the factors on promotion which has nothing to do with many other groups of people, such as entrepreneurs. moreover, the issue of cash waqf donation is not limited to well-off individuals in society. hence, although some people may have the resources, the need to assess their awareness, attitude, perceived behavioral control, and religiosity toward the intention to accept cash waqf is also essential. iii. methodology 3.1. data the population of this study covered the entrepreneurs in singer market in kano metropolis, comprising 25,355 registered and 35,000 unregistered entrepreneurs as of september 2020. as indicated, the total population of entrepreneurs in singer market is 60,355 (yakasai, 2020). therefore, the population for this study was the 25,355 registered entrepreneurs in singer market and were the targeted respondents. however, in line with krejci and morgan (1970), 379 can serve as the sample size of a population of 30,000. besides, the use of a self-administered questionnaire was adopted in this study. with the help of research assistance, 362 respondents out of 379 responded to the questions, representing 96% of the sample size and legitimizing the study representation. 3.2. model development 3.2.1. behavioral intention the term "behavioral intention" describes the subjective likelihood of someone engaging in any behavior (ajzen, 1925). the probability of a behavior being carried out increases with the strength of the behavioral intention. when investigating individual behavior using the theory of planned behavior, researchers frequently substitute behavioral intention for actual behavior assessment because the association between behavioral intention and the execution of the behavior is so strong (ajzen, 1980). ajzen (2014) submits that intention is assumed to be the immediate antecedent of behavior. conner and armitage (1998) also assert that intention represents a person's motivation in the cognitive decision to exert effort to carry out the behavior. it is clear from the model that awareness, attitudes, perceived behavioral control, and religiosity all influence intention. the four behavioral and purpose determinants are thought to be influenced by background variables, such as demographic characteristics. before the behavior occurs, the behavioral purpose is explained by awareness, attitude, perceived behavioral control, and muhammad, alkassim, & sulaiman │ cash waqf acceptance among entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 6(1), 73-104│ 73 religiosity. the actual conduct can be reasonably predicted from the goal. according to the theory, the ability to express behavior and the likelihood of overcoming obstacles are both estimated by perceived behavioral control. as a result, it is assumed that perceived behavioral control directly affects behavior. for feedback on the actual behavior results from the behavior’s expectations, the following hypotheses were formulated in the null form to be tested in the study. h01: between awareness and the intention to accept cash waqf among business owners in the kano metropolis's singing market, there is no significant influence. h02: between attitude and the intention to accept cash waqf among business owners in the kano metropolis's singer market, there is no significant influence. h03: between perceived behavioral control and the intention to accept cash waqf among business owners in the kano metropolis's singer market, there is no significant influence. h04: between religiosity and the intention to accept cash waqf among business owners in the kano metropolis's singer market, there is no significant influence. figure 1. research framework source: adopted from ajzen (1988) and modified by the researchers awareness attitude perceived behavioral control controlcontrol intention to accept cash waqf religiosity muhammad, alkassim, & sulaiman │ cash waqf acceptance among entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 6(1), 73-104│ 74 table 1. the variable of the study variables items 1 awareness (i) i am fully aware of cash waqf. (ii) i feel that i have learned enough about cash waqf now. (iii) i have learned about the advantages of cash waqf. (v) information about cash waqf was sent to me by a media source. (vi) i know somebody who participates in cash waqf giving. 2 attitude (i) taking a cash waqf course is advantageous. (ii) taking a cash waqf course is advantageous. (iii) i have a favorable opinion about cash waqf. (iv) it is a good idea to accept cash for waqf courses. (v) cash waqf is my favorite. 3 perceived behavioral control (i) i have the financial means to make a cash waqf. (ii) i am competent in doing cash waqf. (iii) i know how to perform cash waqf. (iv) it is under my control to accept waqf in cash. 4 religiosity (i) every action a person takes must be done for allah's sake (s.w.t). (ii) all creatures' necessities are met by allah (s.w.t.). (iii) when someone makes a kind gesture, i feel happy. (iv) doing nice things for the benefit of others is essential to me. (v) my interactions with people are influenced by my religious ideas. 5 intention to accept cash waqf (i) as a method for my charitable giving, i will use cash waqf. (ii) overall, i intend to perform cash waqf. (iii) to my friends, i will suggest cash waqf. (iv) my overall objective is to do waqf using cash. (v) i will consider choosing cash waqf. (vi) if any waqf institution around my place of business collects cash waqf, i will patronize it. source: adapted from pikkarainen et al. (2004), amin hasbullah et al. (2015), shih and fang (2004), hasbullah et al. (2015), faiz, omar, and amin (2015), ramayah et al. (2009), and gopi and ramayah (2007) 3.3. method this study used sem (chin 1998; gefen, straub, & boudreau 2000). statistical package for social sciences (spss version 22) was utilized to evaluate the demographic data using descriptive statistics, employing charts and tables, and information from section b would be studied using analysis of moment structures (amos version 21). by imposing specific constraints or assumptions on an analysis, structural equation modeling is a statistical technique that generalizes and extends earlier generation procedures. this analysis may resemble methods like canonical correlation, multiple regressions, multiple discriminate analysis, variance or covariance, or principal components analysis. concerning this study, the researchers used three category indices to test models’ goodness of fit, incremental fit, and parsimony fit. to determine muhammad, alkassim, & sulaiman │ cash waqf acceptance among entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 6(1), 73-104│ 75 whether the model had an absolute fit, chi-square (ᵡ) and root mean square error of approximation (rmsea) were employed. then, the reliability and variable validity tests were also carried out. the variable’s reliability was determined based on composite reliability. according to churchill (1979), convergent and discriminate validity should be employed to verify the variables. iv. results and analysis 4.1. descriptive statistics the respondents were to answer five demographic questions, i.e., gender, age group, marital status, highest education level, and years in business. a total of 362 respondents out of 379 responded to the questions. they represented 96% of the sample size and legitimized the study representation, as presented in the tables. in addition, this section summarizes the general frequency distribution of respondents on different demographic items, as shown in table 2. the descriptive summary in table 2 above shows that 358 (99%) of the respondents were male and four (1%) were female, signifying the majority of male respondents. it was due to the culture, norms, and values of the environment where the study was conducted, in which females participated less in business activities, especially in the marketplace. in terms of respondents' age group, 44 (12.2%) were less than 25 years, 219 (60.5%) were between 26-35 years, 89 (24.6) were between 36-50 years, and ten (2.8%) were 51 years and above, who responded to the study instrument. consequently, in terms of marital status, 76 (21%) of the respondents were single, while 286 (79%) were married. however, regarding the highest educational level, 141 (39%) of the respondents obtained the primary certificate, and 75 (20.7%) received the secondary certificate. similarly, 61 (16.9%) held a diploma and an advanced diploma, while 43 (11.9%) of the respondents were nce holders, and nine (2.5%) were hnd holders. also, among the respondents, six (1.7%) were degree holders, while only two (0.6%) furthered their educational qualification to a master’s degree and above. lastly, 25 (6.9%) obtained only other certificates, i.e., islamiya education, respectively. however, when looking at the analysis of years in business, table 2 reveals that 58 (16%) of the respondents had 6-11 years in business, compared to 172 (47.5%) of the respondents who had 0–5 years. in a similar vein, 66 (18.2%) of the respondents had experience in the business between 12 and 17 years, 40 muhammad, alkassim, & sulaiman │ cash waqf acceptance among entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 6(1), 73-104│ 76 (11%) had experience in the business between 18 and 23 years, and only 26 (7.2%) had experience in business for 24 years or more. table 2. respondents' profile frequency percentage gender male 358 99% female 4 1% total 362 100.0% age group less than 25 years 44 12.2% 26-35 years 219 60.5% 36-50 years 89 24.6% 51 years and above 10 2.8% total 362 100.0% marital status single 76 21.0% married 286 79.0% total 362 100.0% highest education level primary 141 39.0% secondary 75 20.7% diploma/advanced diploma 61 16.9% nce 43 11.9% hnd 9 2.5% bachelor’s degree 6 1.7% master’s degree and above 2 0.6% others 25 6.9% total 362 100.0% years in business 0-5 years 172 47.5% 6-11 years 58 16.0% 12-17 years 66 18.2% 18-23 years 40 11.0% 24-above 26 7.2% total 362 100.0% 4.1.2 exploratory factor analysis's findings discussions on the exploratory factor analysis (efa) findings are conveyed in this section to assess the applicability of the instruments used in the study. muhammad, alkassim, & sulaiman │ cash waqf acceptance among entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 6(1), 73-104│ 77 table 3. test of kmo and bartlett intention to accept cash waqf the measure of sampling adequacy by kaiser-meyer-olkin 0.773 bartlett’s sphericity test approx. chi-square 326.044 df 15 sig 0.000 awareness the measure of sampling adequacy by kaiser-meyer-olkin 0.611 bartlett’s sphericity test approx. chi-square 108.438 df 10 sig 0.000 attitude the measure of sampling adequacy by kaiser-meyer-olkin 0.730 bartlett's sphericity test approx. chi-square 258.189 df 10 sig 0.000 perceived behavioral control the measure of sampling adequacy by kaiser-meyer-olkin 0.776 bartlett’s sphericity test approx. chi-square 538.039 df 6 sig 0.000 religiosity the measure of sampling adequacy by kaiser-meyer-olkin 0.651 bartlett's sphericity test approx. chi-square 73.318 df 10 sig 0.000 table 3's exploratory factor analysis (efa) results on the intention to accept cash waqf uncover that the research data were suitable for structure detection because the kaiser-meyer-olkin measure (kmo), quantifying the proportion of variance in the items that underlying factors might cause, had a high value of 0.773 (hair et al., 2006). therefore, factor analysis could benefit from the data. it is corroborated by the results of bartlett's test of sphericity, demonstrating the relevance of the variables' connections and their suitability for structure identification (2: 326.044, df: 15, sig.: 0.000) (zainudin, 2014). in addition, bartlett's test of sphericity result on awareness was significant, according to table 3 (chi-square = 108.438, p-value 0.000). the kaiser-meyerolkin (kmo) indicator of sample adequacy was 0.611, and it increased above 0.6. bartlett's test significant value and a kmo value near 1.0 indicate that the data at hand were sufficient to move on with factor analysis (zainudin, 2014). muhammad, alkassim, & sulaiman │ cash waqf acceptance among entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 6(1), 73-104│ 78 it is positive that the attitude kmo score of 0.730 (table 3) was higher than the advised value of 0.6. the data, thus, were appropriate to move forward with its reduction method, according to the two measures (kmo value near 1.0 and bartlett's test significant value close to 0.0) (hair et al., 2006; zainudin, 2014). running the factor analysis technique came next. moreover, according to the perceived behavioral control result (table 3; chisquare = 538.039; p-value 0.000), bartlett's test of sphericity was significant. the kmo score increased by over 0.6, and the sampling adequacy score was 0.776. the kmo value near 1.0 and the significance value of bartlett's test at 0.0 denote sufficient available data to move forward with factor analysis (hair et al., 2006; zainudin, 2014). the bartlett's sphericity test on religiosity was also significant, according to the results shown in table 4.2 (chi-square = 73.318, p-value 0.000). the kaisermeyer-olkin (kmo) indicator of sample adequacy was 0.651, and it increased above 0.6. bartlett's test significant value and a kmo value near 1.0 show that the data at hand were sufficient to move on with factor analysis (zainudin, 2014). 4.1.3 confirmatory factor analysis the main goal of this study was to use structural equation modeling (sem) to determine what characteristics influenced business owners' intentions to accept cash waqf in kano metropolis' singer market. to ensure the data met the criteria for sem analysis, the exploratory data analysis and reliability tests were carried out as described before moving further with the sem study. first, four indices were considered when examining the overall fit measurements. finally, standardized residuals were checked to see if any part of the model did not properly match the data. the second step was to inspect latent factor correlations (dilalla, 2000; emmoglu, 2011). figure 2 depicts the evaluated measurement model. muhammad, alkassim, & sulaiman │ cash waqf acceptance among entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 6(1), 73-104│ 79 figure 2. confirmatory factor analyses (measurement model) source: computed from field survey (2020) using amos version 21 figure 2 displays the cfa results of five variables related to intention, awareness, attitude, perceived behavioral control, and religiosity. it also illustrates the factor loading and r2 for each item. except for icw2 with a value of 0.42, awn3 with a value of 0.14, att1 with a value of 0.43, and rlg1 with a value of 0.15, all the loading factors were over the advised value of 0.50. thus, they should be removed before moving on to the subsequent analysis. it should also be emphasized that item deletion should not account for more than 30% of a construct's total items, provided that the minimum criteria for the goodness fit indexes are met (hair et al., 2006). muhammad, alkassim, & sulaiman │ cash waqf acceptance among entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 6(1), 73-104│ 80 table 4. model for fitness index measurements name of category name of index index value comments absolute fit rmsea 0.049 attained the required level gfi 0.902 attained the required level incremental fit cfi 0.862 the needed level is not attained. parsimonious fit chisq/df 1.868 attained the required level the cfa outcome supports that the model was rejected for further examination. the results revealed that three fitness indexes for the constructs met the necessary threshold, but one fitness index, cfi=0.862, was not fulfilled, and the suggested model did not provide a good fit for the data. overall, the assessment of the measurement model's results did not provide strong support for its unidimensionality, convergent validity, or discriminant validity. to obtain the fitness indices of the measurement model, the model should be modified such that any factor loading with a value less than 0.50 was eliminated. additionally, item deletions should not account for more than 30% of a construct's total items, provided that the minimal conditions of the goodness fit index are met (hair et al., 2006). the updated model is illustrated in figure 3. figure 3's cfa results indicate the rmsea = 0.038 and gfi = 0.935. in addition, chisq/df was 1.520, and cfi was 0.938. according to the fitness indices, as depicted in figure 3, the measurement model implied a good match for the data, and the sum of all the fit indices produced a good fit. overall, the evaluation of the measurement model's performance revealed strong support for its unidimensionality, construct validity, reliability, and discriminant validity. since the model was unquestionably fit, the researchers could move on to the study's next step. muhammad, alkassim, & sulaiman │ cash waqf acceptance among entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 6(1), 73-104│ 81 figure 3. the new measurement model source: computed from field survey (2020) using amos version 21 table 5. the new model for fitness index measurements name of category name of index index value comments absolute fit rmsea 0.038 attained the required level gfi 0.935 attained the required level incremental fit cfi 0.938 attained the required level parsimonious fit chisq/df 1.520 attained the required level note: following the change in the measurement model, the fitness index increased. muhammad, alkassim, & sulaiman │ cash waqf acceptance among entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 6(1), 73-104│ 82 table 6. results of the measurement model for each construct (after modification) variable items factor loading cronbach’s alpha (above 0.60) c.r. (above 0.60) ave (above 0.50) intention to accept cash waqf icw1 0.462 0.691 0.671 0.621 icw2 0.423 icw3 0.665 icw4 0.553 icw5 0.551 icw6 0.593 awareness awn1 0.690 0.710 0.687 0.534 awn2 0.523 awn3 0.774 awn4 0.407 att1 0.424 attitude att2 0.673 0.679 0.612 0.511 att3 0.611 att4 0.534 att5 0.451 perceived behavioral control pbc1 0.713 0.819 0.745 0.675 pbc2 0.895 pbc4 0.570 pbc5 0.39 religiosity rlg2 0.381 0.654 0.612 0.522 rlg3 0.601 rlg4 0.369 rlg5 0.390 based on table 6 presenting cronbach's alpha, composite reliability, and average variance extracted values, the model had adequate measurement qualities for each single factor model. besides, the two missing elements (i.e., pbc3 and rlg1) were removed due to low factor loading, and the model was then sufficiently fit for further analysis. 4.1.4 the evaluation of the data's normality before modeling the structural model, it was necessary to look at the normalcy assessment for the available data after reaching the fitness indices. every component of the measuring model's normalcy assessment is displayed in table 7. muhammad, alkassim, & sulaiman │ cash waqf acceptance among entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 6(1), 73-104│ 83 table 7. evaluation of normality variable min max skew kurtosis rlg2 1 5 -0.934 0.778 rlg3 1 5 -0.428 1.333 rlg4 1 5 -0.55 0.387 rlg5 1 5 0.79 1.766 pbc1 1 5 -0.466 -1.035 pbc2 1 5 -0.327 -1.019 pbc4 1 5 0.027 -1.008 pbc5 1 5 -0.457 -1.033 att1 1 5 0.231 1.231 att2 1 5 -0.898 0.182 att3 1 5 -0.87 0.331 att4 1 5 -0.874 -0.142 att5 1 5 -1.174 0.865 awn1 1 5 -0.382 2.329 awn2 1 5 -0.925 2.658 awn3 1 5 -1.174 1.054 awn4 1 5 -0.607 0.565 icw1 1 5 -1.653 1.92 icw3 1 5 -0.719 2.908 icw4 1 5 -0.579 1.256 icw5 1 5 -1.37 2.833 icw6 1 5 -0.347 2.349 multivariate 114.556 the results in the table 7 showed that the skewness and kurtosis were within the acceptable ranges of -3 to +3 (skewness) and -3 to +3 (kurtosis), respectively (joanes & gill 1998). this outcome demonstrates unequivocally that the study's data were regularly distributed and that normalcy was attained. as a result, the data could move forward with structural equation modeling (sem)/structural model analysis. muhammad, alkassim, & sulaiman │ cash waqf acceptance among entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 6(1), 73-104│ 84 4.1.5 structural model figure 4. the structural model's standardized estimate for each path table 8. the model's standardized path coefficients dependent variable path independent variable estimate intention to accept cash waqf <--awareness -0.02 intention to accept cash waqf <--attitude 0.03 intention to accept cash waqf <--perceived behavioral control 0.70 intention to accept cash waqf <--religiosity 0.28 the results in table 8 denote that when awareness increases by 1%, the intention to accept cash waqf decreases by 2%. when attitude goes up by 1%, intention to accept cash waqf goes up by only 3%, and when perceived behavioral control goes up by 1%, intention to accept cash waqf goes up by only 70%. lastly, when religiosity increases by 1%, the intention to accept cash waqf increases by 28%. the result on the intention to accept cash waqf shows that among the indicators that explained the intention to accept cash waqf, all muhammad, alkassim, & sulaiman │ cash waqf acceptance among entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 6(1), 73-104│ 85 the items had the minimum factor loading (i.e., 4.0), as stated in hair et al. (2006). table 9. the estimated correlation for each pair of exogenous constructs dependent variable path independent variable estimate correlation attitude <--> awareness 0.27 perceived behavioral control <--> awareness 0.11 religiosity <--> awareness -0.10 attitude <--> perceived behavioral control 0.00 attitude <--> religiosity -0.09 perceived behavioral control <--> religiosity 0.57 according to outcomes in table 9, there was an estimated 0.27 association between awareness and attitude. the calculated connection between awareness and perceived behavioral control was 0.11, while the estimated correlation between awareness and religiosity was -0.10, or 0.000. however, the estimated correlation between perceived behavioral control and religiosity was 0.57, the estimated correlation between perceived behavioral control and attitude was -0.09, and the estimated correlation between attitude and religiosity was 0.57. the full results revealed a respectable correlation between the variables less than 0.85. table 10. the squared multiple correlation (r2) variable estimate (r2) intention to accept cash waqf 0.79 according to table 10 about the r-squared finding, 79% of the intention to accept cash waqf’s variance could be explained by its predictors. in other words, there was a 21% error variance in the intention to accept cash waqf. muhammad, alkassim, & sulaiman │ cash waqf acceptance among entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 6(1), 73-104│ 86 4.1.6 regression weights for the model figure 5. the structural model's unstandardized estimate for each path table 11. the significance of each path estimate's regression weights hypothesized path beta coeffi cients c.r. p-value result decision intention to accept cash waqf <--awareness -0.02 5.101 0.786 not significant not accepted intention to accept cash waqf <--attitude 0.03 0.465 0.704 not significant not accepted intention to accept cash waqf <--perceived behavioral control 0.70 0.309 0.000 significant accepted intention to accept cash waqf <--religiosity 0.28 3.533 0.039 significant accepted notes: ***p<0.001; **p<0.01; *p<0.05 the path (arrow) and its coefficient are shown in bold in table 11 to show the influence of each independent variable on its corresponding dependent muhammad, alkassim, & sulaiman │ cash waqf acceptance among entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 6(1), 73-104│ 87 variable. four research questions were devised to accomplish the goals of this study, and they were addressed or analyzed below: 4.1.7. discussion of findings this study aims to evaluate the variables impacting business owners' intentions to accept cash waqf in kano metropolis' singer market. therefore, the particular goals of this study are to determine whether awareness, attitude, perceived behavioral control, and religiosity significantly affects business owners' intentions to accept cash waqf in kano metropolis' singer market. according to the study's objectives, the findings showed that all the proxies for the intention to accept cash waqf among entrepreneurs at singer market in kano metropolis had sufficient explanatory power, or their factor loadings were higher than the minimum criterion of 0.6. the influence of awareness on intention to accept cash waqf to what extent does awareness influence the intention to accept cash waqf among entrepreneurs in singer market in kano metropolis? according to question one, asking the extent to which awareness influences intention to accept cash waqf among entrepreneurs in singer market in kano metropolis, the result in table 4.10 shows that the influence of awareness on intention to accept cash waqf was weak (-0.02) and statistically insignificant (p=0.786). therefore, the beta coefficient for the influence of awareness on intention to accept cash waqf was only -2%, meaning that, for each unit of increase in awareness, the intention to accept cash waqf decreases by -0.02. in addition, the coefficient was very weak and negative, and the p-value was more significant than 0.05. hence, the question was answered, and the objective of this study was also achieved. in other words, awareness did not significantly influence the intention to accept cash waqf among entrepreneurs in singer market in kano metropolis. thus, entrepreneurs in singer market in kano metropolis were unaware of cash waqf. it is consistent with the findings of siswantoro and dewi (2007), laldin (2008), osman, htay, and muhammad (2012), johari et al. (2015), and shukor et al. (2017) and contradicts amin et al. (2014). the influence of attitude on intention to accept cash waqf to what extent does attitude influences intention to accept cash waqf among entrepreneurs in singer market in kano metropolis? according to question two, asking the extent to which attitude influences intention to accept cash waqf among entrepreneurs in singer market in kano metropolis, the result in table 4.10 reveals that the influence of attitude on intention to accept cash waqf was weak (0.03) and statistically insignificant muhammad, alkassim, & sulaiman │ cash waqf acceptance among entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 6(1), 73-104│ 88 (p>0.05). therefore, the beta coefficient for the influence of attitude on intention to accept cash waqf was 0.03, which means that for each unit of increase in attitude, intention to accept cash waqf also increases by only 3%. hence, the coefficient was very weak, and the p-value was more significant than 0.05, i.e. (0.704). it aligns with the findings of hasbullah, khairi, and aziz (2015), fa’iz, muhammed, and amin (2015), and dennis, qoyum, and sakti (2018) and contradicts that of abduh et al. (2011), amin et al., (2010), osman, mohammad and amin (2021), and al-harethi, (2019). the influence of perceived behavioral control on intention to accept cash waqf to what extent does perceive behavioral control influences intention to accept cash waqf among entrepreneurs in singer market in kano metropolis? according to question three, asking the extent to which perceived behavioral control influences intention to accept cash waqf among entrepreneurs in singer market in kano metropolis, the results in table 4.10 uncover that the influence of perceived behavioral control on intention to accept cash waqf was strong and positive (0.70) and statistically significant (p<0.05). therefore, the beta coefficient for the influence of perceived behavioral control on intention to accept cash waqf was 70%, which means that for each unit of increase in perceived behavioral control, intention to accept cash waqf also increases by 0.70. hence, the coefficient was strong, and the p-value was less than 0.05. therefore, the question was answered, and the objective of this study was also achieved. thus, perceived behavioral control significantly influenced the intention to accept cash waqf among entrepreneurs in singer market in kano metropolis. it is consistent with the findings of hasbullah, khairi & aziz (2015) and osman, mohammad & amin (2021) and inconsistent with that of fa'iz, muhammed, and amin (2015) and shukor et al. (2017). the influence of religiosity on intention to accept cash waqf to what extent does religiosity influence the intention to accept cash waqf among entrepreneurs in singer market in kano metropolis? according to question four, which asks the extent to which religiosity influences intention to accept cash waqf among entrepreneurs in singer market in kano metropolis, the result in table 4.10 shows that the influence of religiosity on intention to accept cash waqf was positive (0.28) and statistically significant (p<0.05). therefore, the beta coefficient for the influence of religiosity on intention to accept cash waqf was 28%, which means that for each unit of increase in religiosity, intention to accept cash waqf also increases by 0.28. muhammad, alkassim, & sulaiman │ cash waqf acceptance among entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 6(1), 73-104│ 89 therefore, the question was answered, and the objective of this study was also achieved. thus, religiosity significantly influenced the intention to accept cash waqf among entrepreneurs in singer market in kano metropolis. hence, this finding is in line with the characteristics of the respondent's educational level, where most of them acquired a minimum of islamiyyah school education, equipping them with some skills and knowledge to be more adherents to the religious teachings and enabling them to perform good deeds and charitable activities for their fellow humankind. it is consistent with the findings of osman, mohammad & amin (2021), fa'iz, muhammed, and amin (2015), amin et al. (2015), mokthar (2016), shukor et al. (2017), dennis, qoyum, and sakti (2018), and al-harethi (2019). v. conclusion and recommendation 5.1. conclusion the primary goal of this study is to evaluate the variables influencing business owners' intentions to accept cash waqf in kano metropolis' singer market. therefore, the study's particular goals are to determine whether awareness, attitude, perceived behavioral control, and religion substantially impact business owners' intentions to accept cash waqf in kano metropolis' singer market. as a result, pertinent data were gathered and examined to solve this issue. afterward, the outcomes were determined and discussed. however, the following inferences were made after consulting the findings: this survey’s findings revealed that among business owners in singer market, there was little correlation between awareness and inclination to accept cash waqf. this study’s results also showed that awareness did not significantly affect business owners' intentions to accept cash waqf in kano metropolis' singer market. this study concludes that business owners in singer market in kano metropolis did not know about cash waqf and that knowledge did not change their intentions to accept cash waqf to a greater level. however, the result of this study exhibited that attitude also did not influence the intention to accept cash waqf among entrepreneurs in singer market in kano metropolis. therefore, this study concludes that attitude did not improve the extent to which entrepreneurs in singer market in kano metropolis intended to accept cash waqf. furthermore, the result of this study uncovered that perceived behavioral control positively influenced the intention to accept cash waqf among entrepreneurs in singer market in kano metropolis. thus, this study concludes that perceived behavioral control improved the extent to which singer market in kano metropolis entrepreneurs intended to accept cash waqf. muhammad, alkassim, & sulaiman │ cash waqf acceptance among entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 6(1), 73-104│ 90 similarly, the result of this study showed that religiosity positively influenced the intention to accept cash waqf among entrepreneurs in singer market in kano metropolis. hence, this study also concludes that religiosity improved the extent to which entrepreneurs in singer market in kano metropolis intended to accept cash waqf. 5.2. recommendations the following recommendations are given to provide suitable means to supplement the assessment of the elements impacting intention to accept cash waqf among enterprises in singer market in kano metropolis based on the findings from the data analysis and the conclusions therein. (i) kano state zakat and hubsi commission (kszhc), through the help of islamic clerics and media outlets, should create awareness programs on the importance of accepting and donating cash waqf as a devotional act of worship. (ii) the concept of waqf should be incorporated in teaching and learning curricula from primary up to higher institution levels due to its significance in developing the socio-economic well-being of every society. (iii) the market organization leaders should liaise with kano state zakat and hubsi commission (kszhc) to provide waqf offices in each market so that more potential waqf donors may be influenced to accept and donate cash waqf. (iv) the market organization leaders should promote cash waqf in mosques and/or at various religious events, given that ''religious individuals are more likely to be involved in religious activities'' (worthington jr. et al., 2003). 5.3. future research directions this study evaluated the variables affecting business owners' intentions to accept cash waqf in singer market in kano metropolis. however, this study's focus needs to be expanded to include additional marketplaces inside and outside kano state, particularly in areas where muslim entrepreneurs predominate. moreover, there is a need to conduct a similar study to investigate individuals’ motivation to endow cash waqf from salary income and, most importantly, the promotion of an online waqf system, which may also motivate salary earners and the existing internet banking users to facilitate e-charities. it may enhance the generation of more funds and verify, compare, and contrast the findings from this study. it may also enable the proper generalization of results. muhammad, alkassim, & sulaiman │ cash waqf acceptance among entrepreneurs in kano metropolis, nigeria international journal of islamic economics and finance (ijief), 6(1), 73-104│ 91 it is also possible to introduce new independent, mediating, or moderating variables, such as convenience and trust in waqf institutions, which should be employed by testing its effect on the already used model by analyzing its reliability and validity. according to shukur et al. 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(2014). a handbook on structural equation modelling, bandar bangi, selangor, mpws rich resources. international journal of islamic economics and finance (ijief) vol. 6(1), page 21-46, january 2023 bridging islamic and conventional finance through integration of knowledge (iok): a potential third sector jasmin omercic1 corresponding email: omercic_jasmin@hotmail.com article history received: may 14th, 2022 revised: june 20th, 2022 october 4th, 2022 october 20th, 2022 november 10th, 2022 accepted: december 9th, 2022 abstract the global financialized system shaped development in the past few decades and proved inherently inconsistent, perpetuated indebtedness and greater inequality among other issues. the islamic financial (if) alternative offers solutions and with the contemporary appraisals of the integration of knowledge (iok) methodology, it represents a novel approach to current conventional financial practice. hence, our paper’s objectives are to propose an iok model of islamic and conventional financial (cf) convergence with leverage to fintech and to demonstrate the potential, revival and reform of the waqf sector for such convergence. this paper is a methodological contribution. library research, critical content analysis, and heterodox methods of concretization, synthesis, and transdisciplinary analytical reasoning substantiate the paper’s methodology. islamic sources of knowledge, namely, the qur’an, justify this study’s unorthodox methodology. the background highlights cf problems and persistent issues that justify alternative financial approaches. we rationalize ie development via iok to attain convergence between if and cf. an iok model for ie development is schematically demonstrated as novel findings wherewith to bridge the gap between if and cf. appraisal to leverage upon awqaf potential roles helps to visualise the model’s institutionalization in the if ecosystem. together with fintech innovations as indicators of digitalization, the iok model implies purposive attainment of defined maqāṣid and genuine ie development. a summative conclusion lists actionable recommendations that facilitate reform of extant if and conventional practice based on sound islamic philosophical foundations and maqāṣid-oriented envisioning of ie development. keywords: integration of knowledge (iok), islamic economics (ie), islamic finance (if), waqf, maqāṣid, sdgs. jel classification: b59, o10, q01, p49. @ ijief 2023 published by universitas muhammadiyah yogyakarta, indonesia doi: https://doi.org/10.18196/ijief.v6i1.14712 web: https://journal.umy.ac.id/index.php/ijief/article/view/14712 citation: omercic, j. (2022). bridging islamic and conventional finance through integration of knowledge (iok): the potential of the third sector economy. international journal of islamic economics and finance (ijief) , 6(1), 21-46. doi: https://doi.org/10.18196/ijief.v6i1.14712 1 assistant professor, department of economics, kulliyyah of economics and management sciences, international islamic university malaysia about:blank omercic│ bridging islamic and conventional finance through integration of knowledge (iok): the potential of the third sector economy international journal of islamic economics and finance (ijief), 6(1), 21-52 │22 i. introduction economics has always been directly related to human welfare and the efficient use of scarce resources. throughout history, the fate of civilizations has hinged on financial managements and power struggles (alatas, 2014; omercic, 2021). samuel huntington conceptualized this as the “clash of civilizations” and the perpetual pattern of the history. the contemporary world has increasingly financialized much in our lives and daily conduct. the primary motivation for this study to investigate and contribute to alternative approaches to development, whereby the author accepts beneficial extant economic experience and bodies of knowledge but bridges islamic and conventional economics and finance through the iok methodological approach. this research also intends to exemplify the iok potential in bridging islamic and conventional economics. repeated appraisal of the ie system due to rootedness in the islamic legacy (turāth) was hijacked by islamic finance (if) that perpetuated replication of conventional finance (cf) (siddiqi, 2014). subsequent sections of this paper identify contemporary problems with conventional finance (cf) and its perpetual issues more clearly and rationalize the ie development via iok and the if reform. in addition, the author shows how the adopted iok approach and a constructed iok model foster a synthesis of if and cf bodies of knowledge. the author also indicates the potential impact of the third sector economy or waqf sector to bridge the if and cf divide as one of this study’s objectives. linking this research’s contributions to the sdgs agenda and maqāṣid shariah further reveals the nature and aspirations of the iok methodological model for ie development. after a narrative smoothing section, the author concludes with a list of actionable recommendations linked to the proposed iok model of this paper. 1.1. background as a unique heterodox economic approach, ie was developed to address exploitative, unfair, and unsustainable conventional economic and financial practice. its development and use in the muslim world commenced in the early 1960s, while its roots are traceable to the seventh-century times of prophet muhammad, peace be upon him (pbuh). following that, reform (iṣlāḥ) and renewal (tajdīd) movements sparked much creativity and innovation that made waqfs (islamic philanthropy), as the third sector of ie, comprising two-thirds of the late osmanli caliphate economy (cizakca, 2000; omercic, 2018). this fact reveals that the significance, sustainability, and practicality of ie reasoning enables one to study perpetual economic and financial crises, dire poverty and unemployment rates, and environmental omercic│ bridging islamic and conventional finance through integration of knowledge (iok): the potential of the third sector economy international journal of islamic economics and finance (ijief), 6(1), 21-52 │23 degradation (i.e., climate change) alternatively. if it could assure intercontinental stability in the past, it can be replicated today. this rationale of this approach lies in the parallel rise of ie during the 1960s with the reform and renewal movement of islamization of knowledge (iok) that, at its most fundamental, fostered iok. although perceived as separate developments in the muslim world, ie is usually perceived as the best practical example of iok (sardar, 1996; omercic, 2021; haneef, 2014). unfortunately, if has compromised its sound foundations for the pursuit of profit and growth. nevertheless, it remained and proved to have features of a more stable and resilient economic and financial system compared to its conventional counterpart. the significant features of the ie are avoidance of interest (riba), excessive uncertainty, and surreal or speculative ventures (isra, 2018). moreover, greater insight into the 2008 financial crisis uncovers how if institutions were less shaken by the systemic risks due to asset-backed or actual economic activity. it was claimed that the size of the if industry contributed to such stability. therefore, the if grew faster than the cf institutions and continues to attract attention globally. factors like greater environmental consciousness, real economic growth, impact, and ethical, holistic, and sustainable development characterize such trends (hassan, saraç & khan, 2021). it proved to be a viable alternative economic and financial approach to development. the convention navigated and overwhelmed the course of development and growth in the last few centuries indeed, but it proved inherently inconsistent and led to multiple issues, i.e., immense socioeconomic disorder. according to mahomedy (2016, 2017) and irfan (2015), the current if approach even perpetuates extant practices, problems, and challenges and causes critique from within due to the apparent breaches of fundamental operational principles, i.e., prohibition of riba or speculative activities. thus, camouflage within the present if industry must be eliminated, and genuine development should be promoted through the already appraised iok methodological approach to ie development. omercic et al. (2020) and omercic (2021) appraised the iok approach as the new paradigm, which assures the rootedness of economic and financial practice on sound foundations. auda (2021) and bakar (2022) also perceived such studies as the universally appealing future maqāṣid (objectives) al-shariah-oriented approach to sustainable socio-economic development. hence, the iok approach is motivational and purposive or maqāṣid oriented and contributes to the contemporary un sdgs, corporate esg, or eu greed deal agendas. the core benefit of this study’s approach is the potential resolution of pressing human issues, of social and economic inequalities, poverty, unemployment, crises, and environmental sustainability. essentially, a renewed and reformed omercic│ bridging islamic and conventional finance through integration of knowledge (iok): the potential of the third sector economy international journal of islamic economics and finance (ijief), 6(1), 21-52 │24 if development via the iok methodological approach is the novelty of this paper due to its universally appealing nature and assurance to muslims that the practice is genuinely sharia-compliant. highlighting this through the historical and extant waqf practice exemplifies how practitioners can scale up genuine if operations. 1.2. objectives this paper will endeavor to bridge the islamic and conventional finance divide by means of an iok-based development of ie and a reference to the potential role of the waqf sector. the main objectives of this paper are to propose an iok model as a platform of islamic and conventional financial convergence with leverage to fintech and to demonstrate the potential of the third sector economy, namely, the waqf sector role for such convergence and its equivalent revival and reform along such methodologically operationalized contours. thus, this research shall answer why it is a viable model to bridge the divide between islamic and conventional financial practice. in addition, the author aims to answer why and how waqf practice demonstrates the potential of this study’s model. it should be noted that the operationalization of the iok model in our paper directly impacts the economic and financial development approach. ii. literature review the idea of knowledge integration is historical as civilizations, throughout the centuries, have exchanged knowledge and scientific findings. koehler (2014) claimed that trade facilitated growth and development in the arabian peninsula centuries before the revelation to the prophet pbuh. trade among nations also used to be the practice of ancient civilizations and a means to exchange knowledge. according to toynbee (1987), the islamic civilization nurtured knowledge more than any other civilization, integrated best practices, and improved as well as innovatively developed new bodies of knowledge . in the view of saliba (2007), islamic civilization also preserved and enhanced the greek and roman civilizational heritage and transferred it to the west. according to mahomedy (2016), western civilization nurtured the absorbed knowledge from the islamic civilization and developed new bodies of knowledge based on their foundations, yet proved inconsistent with practice over decades. . it revealed a stark difference between approaches to growth and development. the western approach developed financial practices that, in contemporary times, have threatened environmental sustainability the omercic│ bridging islamic and conventional finance through integration of knowledge (iok): the potential of the third sector economy international journal of islamic economics and finance (ijief), 6(1), 21-52 │25 planet and pressed governments to seek alternative sustainable approaches like if (hassan et al., 2021). alternative financial development like if undoubtedly also requires reforms and renewal yet is undeniably sounder and growing faster than the conventional counterpart, in the view of furqani (2012). appraisals of the iok methodological approach to ie development have become more frequent recently, which the author suggests as the model for bridging if and cf in this paper. understanding the iok model in the following development review precedes greater discourse on how integration is most efficiently accomplished. in essence, the author must justify why iok is the proper model to bridge the divide between if and cf. haneef (2014) found that any integration process requires a sound basis or philosophical foundation. integration movements like ‘iok’ are impossible without an appropriate paradigm or platform representing integration's greater vision and mission. hence, integrating different bodies of knowledge necessitates criteria guiding individuals to obtain the necessary knowledge for specific objectives. malkawi (2014) conceptualized this kind of integration as “epistemological.” it denotes that iok shall have a solid epistemological foundation derived from the sources of knowledge in islam which for omercic et al. (2020) and acikgenc (2014) are the genuinely defined islamic ontology, epistemology, axiology, and methodology. further development of ie or the reform of existing practices of islamic banking and finance or if necessitates a redirection or link with such sound philosophical foundations, according to furqani (2012) and omercic (2021a). it would ensure greater justice, fairness, and general social welfare. hence, the iok model is an alternative to not only cf but also the extant practices of if. chapra (2016) claimed that ie could not be a serious alternative to the perpetual replication of conventional economics and finance. therefore, this paper will endeavour to bridge and improve if and cf practice through the iok methodological approach to ie development, as appraised by omercic (2021). such ie development assures higher sharia compliance and genuine if development, as mirakhor (2020) and omercic (2022) asserted. in view of omercic (2018), it also represents the basis upon which the third sector, like waqfs or waqf-like institutions (foundations, endowments), could play a leading role in sustainable socio-economic development. in addition, alshater, hassan, rashid, and hasan (2022) bibliometrically reviewed the most recent studies on waqf which systematically identified trends of awqaf studies from 1914 until 2022. indicative is awqaf’s most significant potential in strengthening islamic social finance, governance, accountability, and cash waqf. these appeal to this study’s objectives to appraise and develop an iok model for ie and if genuine development and bridge the divide with its conventional counterpart. interestingly, abdullahi (2022) perceived that such branding of waqf’s role commences with properly comprehending waqf and omercic│ bridging islamic and conventional finance through integration of knowledge (iok): the potential of the third sector economy international journal of islamic economics and finance (ijief), 6(1), 21-52 │26 its historical and contemporary potential. the iok model guides toward such an understanding of waqf concerning sound philosophical foundations. further, the iok methodological approach appraised by omercic et al. (2020) is a contemporary scholarly consensus pioneered by the international institute of islamic thought (iiit) to correct the islamization of knowledge (iok) efforts that remains puzzled. nevertheless, according to the survey of haneef (2014) and malkawi’s (2014) (“epistemological integration”) iok emphasizes the necessity for genuine integration upon sound foundations like iok. therefore, even omercic (2021) explained that iok methodology is based upon iok due to common foundations. haneef’s (2014) survey on iok also implied that its initial idea was knowledge integration, yet poor understanding of the foundational ideas of al-attas, al-fārūqī, and abdulhamid abu sulayman puzzled the movement. similarly, ie diverged from its genuine course of development, according to siddiqi (2014). however, sardar (1996) claimed that iok writings were only at the inception, while later writings were aimed at a more significant impact. along with this view, sardar and henzell-thomas (2017) appraised the idea of “from islamization to integration” based on sound foundations. their emphasis on ie as the best example of such practice implies the need for further reforms of the ie practice through ensuring integration on sound foundations. even ramadan (2009) appraised ie development as an idea, yet criticized the practice of ie without honoring the islamic principles or foundations. therefore, iok methodological reasoning is a sound basis upon which ie development can take place and resolve extant issues caused by conventional economics and finance (mahomedy, 2017; omercic, 2021a, b). ie can significantly leverage technological advancements to digitalize its operations and services and scale up. acar and citak (2019) named it the fintech integration in the socio-economic and financial institutional ecosystem. it is the technological leveraging and fintech applications that have the potential to amplify the universally appealing nature of iok as the natural model to reform and renew economic and financial practices. in this case, the third sector, or waqf sector of ie, has only a chance to unleash the potential within such a reformed if development in view of cizakca (2000), kahf (2022) and shafiq (2022). hence, the sound foundations and this research’s iok methodological approach are genuine and reliable to redirect ie development along sdgs and other global agendas. moreover, referred literature commended that reforms within ie, namely if, and its counterpart, can bridge the divide and become the basis for sustainable development. in this paper is the synthesis of diverse literature criticizing conventional practice and appraising alternatives such as iok. references to fintech integration to promote iok appeal to stakeholders and shareholders omercic│ bridging islamic and conventional finance through integration of knowledge (iok): the potential of the third sector economy international journal of islamic economics and finance (ijief), 6(1), 21-52 │27 promise greater concerns about genuine compliance with sound ie philosophical foundations. only such foundations have the potential to address the plethora of pressing global issues. in view of omercic (2020, 2021, 2021b), iok is a methodological model with wide-ranging possibilities to shape economic and financial operations to attain sdgs and maqasid shari’ah. equally so, bibliometric studies like alshater et al. (2022) revealed the popularity and potential of waqfs in attaining iok in reality. therefore, the iok model appraised in this paper is the platform to bridge the divide between islamic and conventional finance while the waqf sector plays a significant role in its actualization. iii. methodology library research and critical content analysis, along with heterodox methods of concretization from the general to the particular, synthesis, were adopted in efforts to demonstrate potential ways to bridge if and cf. sources of knowledge such as the qur’an (allah’s revelation to the last messenger muhammad pbuh) and the sunnah (the sayings, actions, and examples of muhammad pbuh) justify this unorthodox methodology of this paper (hadzic, 2005). as a novel ie methodological approach based on sound foundations, iok depicts this paper as a methodological contribution that eases the resolution of inconsistencies between if and cf practice. in this study, the library research synthesized diverse literature criticizing conventional practice and appraised alternatives like ie by means of iok, enabling the author to adopt a transdisciplinary approach to genuine ie development and if reforms. moreover, bernstein (2015) perceived transdisciplinary work as an intriguing and invigorating intellectual inquiry into pressing issues, enabling the convergence of diverse workable theories and practices. nicolescu (2014) also found that transdisciplinarity prepares individuals for a new renaissance. acting as a reliable catalyst to bridge the divide between islamic and conventional practice. furthermore, qualitative approaches like this study are among the most effective in highlighting the vital role of the iok methodological approach in bridging if and cf and appraising the past role of waqfs today. this erudite approach addresses not only pressing human issues but also the thought processes of individuals their worldviews. bakar (2021) also viewed this as a novel maqāṣid approach where everyone can contribute regardless of educational background. thus, this study is easily comprehendible and universally appealing and facilitates the determination of meeting the objectives to bridge the divide between if and cf practices and leverage the waqf sector’s potential to attain iok genuinely. omercic│ bridging islamic and conventional finance through integration of knowledge (iok): the potential of the third sector economy international journal of islamic economics and finance (ijief), 6(1), 21-52 │28 this paper is a blueprint methodology affecting the philosophical foundations of the inquirer, as explained by omercic (2021). it also represents a methodological pluralism to easily understand the various sources of knowledge in islam and appraise ie development on sound foundations (haneef, 1997). therefore, the iok maqāṣid methodological approach and appraised model of this paper indeed facilitates genuine ie development and application in the world of if and reforms its extant practice. it also appeals to global agendas like sdgs. iv. results and analysis 4.1. iok framework: integrating islamic and conventional finance and other knowledge the idea of the iok approach is the integration of different bodies of knowledge (malkawi, 2014). most scholars referred to these bodies as legacy (turāth) and modern knowledge. while the former requires erudite review and relevantization in contemporary times, the latter demands a thorough information dissection in line with sound islamic philosophical foundations. renown intellectuals (i.e. mohamedy, 2016), found that modern knowledge like economics and finance proved to have questionable foundations what greatly perpetuated inequalities, crises, unethical and sheer positivistic orientation. hence, the iok methodological approach to bridging if and cf practice commences with ideas of islam (peace), iman (faith), and ihsan (perfection) (chapra, 2016; omercic, 2021a). islam within if enables people to understand the islamic worldview or weltanschauung as rooted in two types of knowledge sources: aqlī (rational) and naqlī (revelational or transmitted). naqlī could also be termed as wahyī or revealed as a source of knowledge shown in figure 1. bakar (2019) explained how great scholars of islam classified knowledge based on rational and revelational or transmitted due to such dichotomization as universally appealing to muslim and non-muslim legacy or transmitted traditions. in that light, bakar (2019) elucidated how islam recognizes and accepts the authentic traditions of other people as far as those do not interfere with genuine islamic teachings. however, such traditions may exist parallel to islam, considering tolerance and freedom of religious expression (bakar, 2018). in this paper, it is integral to the iok methodological approach and represents the core towards which cf and even if practices must converge as indicated in figure 1. scaling up is possible by greater technological leverage. it would enable it to unleash its potential and universal appeal globally. furthermore, ever greater understanding the islamic ontology in light of the tawhidic (unity of being and belief in one god) paradigm, the islamic omercic│ bridging islamic and conventional finance through integration of knowledge (iok): the potential of the third sector economy international journal of islamic economics and finance (ijief), 6(1), 21-52 │29 epistemology with revelation (qur’an), and reason as legitimate sources of knowledge along other naqlī or transmitted genuine traditions or practices and the islamic axiology or ethical, moral, and value-based intermediation in life impacts the individual’s worldview within the iok approach or framework (omercic, 2021a; furqani, 2012). while methodology is a distinct philosophical foundation, it greatly depends on ontology, epistemology, and axiology. methodology was even frequently categorized under epistemology as shown in figure 1 (machlup, 1978; malkawi, 2014; sardar, 2022). these wholistic philosophical foundations broaden the scope of action and participation in discipline development and convergence of if and cf (bakar, 2016). understanding the nuances of the islamic worldview also enables individuals to unite efforts through a dialogue of text (nusus) and context (waqi’) experts in the processes of eliminating aspects of divergence (ramadan, 2009; auda, 2021; omercic, 2021, 2021b). figure 1. integration of knowledge (iok) model for ie development moreover, greater leverage on technological advancements can develop the required iok fintech platforms with such algorithmic foundations and shape the informal and formal financial and banking ecosystems (murinde, rizopoulos, & zachariadis, 2022; senyo, gozman, karanasios, dacre, & baba, 2022). it can facilitate eliminating practices and issues that led if to replicate cf or the latter to bring the world to a worse financial collapse than the 2008/2009 great recession. (hassan et al., 2021). renown economist, nouriel roubini, already warned against such a scenario in his book ‘megathreats’ (roubini, 2022) it is why this research’s iok model requires a particular islam aqlī (rational) ontology epistemology others’ traditions ihsan axiology methodology iman naqlī/wahyī (transmitted/revealed) worldview worldview ontology epistemology axiology methodology economicsislamic economics islamic financewaqf conventional finance multidisciplinarity transdisciplinarity multidisciplinarity transdisciplinarity methodological principles maqasids al-sharia omercic│ bridging islamic and conventional finance through integration of knowledge (iok): the potential of the third sector economy international journal of islamic economics and finance (ijief), 6(1), 21-52 │30 visionary exercise to identify, understand, and resolve issues in light of the higher objectives (maqāṣid) while rooted in sound foundations and gauge the nuances of bridging the divide and integrating beneficial contributions of if and cf as depicted in figure 1 (sardar & henzell-thomas, 2017; askari, iqbal & mirakhor, 2014; ebrahim, 1999; omercic, 2021a). since economics and finance fall under islam's realm of mu’amalat (daily transactions), other fields such as psychology, sociology, information and communications technology should also be integrated into analyses of economics and finance because of the interrelatedness of all fields and multidisciplinarity trends in the 21st century. transdisciplinarity, however, is a greater trend whereby new disciplines emerge (bernstein, 2015; nicolescu, 2014). thus, the future era is an intertwined one in which digitalization, blockchain, artificial intelligence (ai), and the internet of things (iot) shape people’s worldviews and, unfortunately, have already brought many postnormal phenomena that cause unparalleled emergence of new epistemologies without proper base (sardar, 2022). for this reason, genuine contours of islamic philosophical foundations depicted in figure 1 must become integral to new developments (i.e., fintech, ai, iot). economics is also crucial in this regard as money largely directs the focus and efforts of humanity. suppose such contours perpetuate the philosophical foundations of cf or even extant if. the future of sustainable development is bleak. it is even factual that such an approach will perpetuate global issues of social inequality. vives (2017) considers this problematic, yet any affirmative action is vital when fintech or the role of technology in finance intensifies and challenges accustomed ways of conducting business everywhere. in the view of auda (2021), even the standardized understanding and scope of islam’s maqāṣid definition revolutionized to become more inclusive not only for muslims but also non-muslims. bakar (2021) appraised maqāṣid studies through transformation and generation of data and embedded the maqāṣid analysis concerning sources of knowledge in islam to ai and data analytics. therefore, this research’s iok model promotes such an approach to reforming if concerning current practices, critique, and dealing with issues of cf. figure 1 illustrates the need for interaction with cf at greater economic and worldview levels since the conventional practice stems from traditions other than islam, from which learning is continual. these disruptive and transformational aspects in the contemporary world justify methodological pluralism. within such a realm, iok methodological approach integrates methods from diverse disciplines to wholistically understand contexts and problems with theory before proposing practical solutions. it emanates from omercic│ bridging islamic and conventional finance through integration of knowledge (iok): the potential of the third sector economy international journal of islamic economics and finance (ijief), 6(1), 21-52 │31 the transdisciplinary nature of this model guided by sound foundations and directed to a purpose or maqāṣid. however, this model’s methodological approach requires certain principles which guide this study's inquiry about specific objectives or purposes and represent the criteria upon which the author determines the fitness or degrees of if and cf convergence. moreover, these principles ensure genuine disciplinary development in the multi-disciplinary and transdisciplinary learning processes of figure 1. scholars like furqani and haneef (2012), furqani (2012), and malkawi (2014) have appraised and attempted to identify specific criteria upon which the author may assure compliance of findings with islamic philosophical foundations and objectives of the inquiry. while their efforts were more general, omercic (2021a, b) operationalized specific principles like permissibility (ibāhah), acceptability (maqbūliyyah), legality (shar’iyyah), authenticity (sihhah), authority (sultah), compliance (iltizām), and contextual adaptability (takyīf al-wāqi’ī). these iok methodological principles guide the collective ijtihad reasoning for developing ie and filter the other traditions’ bodies of knowledge (i.e., cf) to eliminate conflicting and unnecessary information. figure 1 also indicates the role of these principles in this study’s iok model for ie development. therefore, the author should always inquire whether particular financial activity is permissible according to islamic teachings and faith. its permissibility shall not necessarily imply acceptability because of contextual circumstances or the timing of the execution of an act. likewise, the legality of certain financial activities or products should align with islamic philosophical foundations or what is commonly known in if as sharia compliance. the quest for more authentic sources of reference, such as hadith of the prophet pbuh or practices of his companions and followers, substantiates the compliance. this can be viewed as “higher order sharia compliance.” in addition, reference to certain authorities, whether textual or institutional in the past or present, renders certain products or practices officially endorsed. furthermore, fintech, the role of it in all spheres of life, is a universal product and practice that all ecosystem participants endorse and leverage. such practices appeal to the general population and have been screened for potential attainment of objectives or purposes. besides all, adapting to contextual circumstances could render ineffective certain otherwise acceptable, legal, compliant products or practices. . in that case, the author should suspend its application until circumstances permit normal operational conduct. ramadan (2009) perceived such suspending of islamic rulings (aḥkām) as in line with islamic tradition or legacy. omercic│ bridging islamic and conventional finance through integration of knowledge (iok): the potential of the third sector economy international journal of islamic economics and finance (ijief), 6(1), 21-52 │32 it becomes apparent that the proposed iok model for bridging the divide between if and cf is a dynamic and collective problem-solving process requiring thorough planning and execution. the process is gradual rather than instant. it is greatly entrepreneurial, and start-ups could leverage upon more than two billion muslims globally, above a quarter of the world’s population of 8.02 billion (see timesprayer, 2023), through the iok methodological approach. digitalizing iok’s philosophical foundations would further facilitate start-ups to scale up operations globally. thus, future studies could devise concrete applications and problem-solve through the iok methodological approach involving government, municipal, industrial, and academic national and international stakeholders and shareholders. 4.2. potential of the third sector economy: waqf revival via the iok approach the blueprint structure of an iok methodological model to bridge the divide between if and cf facilitates appraisal of the third sector's potential role to attain is shown in figure 1. for sustainable socio-economic development, collective capital represents the firm basis and rationale why all stakeholders would be interested in contributing. appraisal of the reform and revival of the waqf sector through the iok methodological approach also brings people in touch with the islamic legacy of waqf practices. the early decades of islamic development, namely 632ac-661ac (23ah-41ah), were of particular significance when the first and second caliphs, abu bakr al-siddiq and umar al-khattab, and peace be upon them, invested and surrendered personal properties for the universal welfare of society, muslims, and non-muslims. renown economist and ardent awqaf researcher, murat cizakca, highlighted about the islamic civilizational impact and significance of awaqf studies since 2000s what ignited greater scholarly interest in their potential roles today (cizakca, 2000). although whole civilizations were not necessarily run through waqfs, they did represent a major portion of regional and intercontinental development. stories of colonial appropriations of waqf properties are also common in all parts of the muslim world and reveal the colonizers’ perception of waqfs as crucial properties or sectors of an economy (cizakca, 1998; de bellaigue, 2017). these indicators of waqfs as targets by european colonizers and a major source of financing personal colonial agendas, identify the waqf sector as the solution to pressing socio-economic issues (omercic, 2018). at the time of writing, waqf institutions or ministries of awqāf manage properties under the auspices of constitutional legal structures. these ministries significantly challenges the autonomy and preservation of of waqfs authenticity as ultimate properties of god. importantly, once a property has been endowed as a waqf, the ownership rights are ceased. waqfs serve their omercic│ bridging islamic and conventional finance through integration of knowledge (iok): the potential of the third sector economy international journal of islamic economics and finance (ijief), 6(1), 21-52 │33 intended cause and benefit the public, and only god is the owner of waqfs within the islamic worldview (ali, 2014). while the nature of waqf must be understood as sacrosanct, its management determines to a great extent whether such nature will be preserved. excellent management of waqfs or properties can, therefore, impact and shape economic affairs whereby the preservation of such capital resources becomes sacrosanct. in addition, waqf revival is actually commensurate to compliance with the islamic worldview of practices with islamic philosophical foundations. since waqfs are an integral part of ie and means of if growth, the developments of ie and if promise the revival of the genuine waqfs’ role and purpose. waqfs are linked with if and ie, meaning their historical role can be the basis for greater socio-economic and financial development (see figure 1). this study’s appraised iok methodological model (figure 1) establishes a new practice in light of islamic foundations. the methodological principles greatly facilitate the model’s operationalization and ie development. for instance, the principle of permissibility is the starting methodological analysis of particular financial activity’s impact on a respective waqf capital; namely, the use of cash waqf for agricultural produce. however, the principle of acceptability can declare such activity inappropriate or untimely. this because of costly market resources needed to foster the development of waqf capital, and such costs exceed the marginal benefits of its execution in agricultural and other sectors’ projects. similarly, legality may determine that such market operations are acceptable by law while illegal concerning islamic philosophical foundations and higher objectives of sharia. for example, land on which agricultural produce should grow becomes the subject of legal arbitration, or neighboring landowners oppose such agricultural activity. more comprehensive insight shall guide the author to accommodate people’s activity in such a way as to increase mutual welfare. similarly, a thorough study of and rational adherence to the authentic prophetic pbuh practice guides people to ensure the proper use of waqfs and obliges waqf authorities to review whether the usage of awqaf is in accordance with the waqeef’s will. the principle of authority extends such study and rational adherence to institutional representatives that may further guide individuals to critically review and decide whether to adopt suggestions of respective source of authentic information and expedite the execution of awqaf projects. the multidimensional analysis of financial activities through the principles of the iok model in this paper is subjected to higher-level sharia compliance with philosophical foundations and spirit of sharia instead of its word and technicalities only. lastly, cash waqf investments in agriculture or other uses adapt to the context and enable one to opt for the most beneficial scenario while developing strategies to improve the condition in future omercic│ bridging islamic and conventional finance through integration of knowledge (iok): the potential of the third sector economy international journal of islamic economics and finance (ijief), 6(1), 21-52 │34 investment cycles. this mechanism of operational review in waqf-based socioeconomic development is integral to bridging the divide between if and cf practice. it encourages gradual analysis and decision-making with a purposiveoriented vision and consciousness of the islamic worldview. furthering financial development via the developed iok model for ie development is commensurate to providing a solid basis upon which waqfs can unleash their potential and genuine role. waqf management and development are not limited to people of muslim faith, although it is a distinct islamic institution. omercic (2018) demonstrated how waqfs in different countries. countries of malaysia, turkey, and qatar, each adopted contemporary management knowledge and leveraged technology. the qatar foundation, for instance, is not a classical waqf but a waqf-like institution, yet its management and socio-economic impact outpaces that of many waqf properties worldwide. its preservation and development became sacrosanct like waqf properties. the vital lesson to adopt from such practices for waqf development need not be restricted to muslim understanding and contribution. such lessons can integrate nonmuslim expertise that ensures the best management and use of waqf properties to attain, among other things, certain maqāṣid, the united nations’ sustainable development goals, and nurture a healthy ecosystem. the alternative reasoning the iok methodological approach and this study’s model impart to people is inclusive, universally appealing, and appreciative of diversity. simultaneously, it facilitates stakeholders and shareholders to deal more systematically and wholistically with recurrent unemployment, poverty, inequality, inflation, and perpetual financial and banking crises. people then witness the potential of a reformed and renewed if on sound foundations to sustainably develop economies, raise social welfare, and potentially reduce threats to overall world security. 4.3. narrative smoothing and synthesis of the iok framework the potential of the third sector economy greater scholarly discourse on the international arena reveals how multidisciplinary and transdisciplinary reasoning is commendable, as promoted with this research’s iok methodological maqāṣid-oriented approach and model to ie development, reform, and convergence of if and cf. reforms of extant international financial practices and focus on sustainability, environmental welfare, and governance relevantizes this study’s iok model and, as such, render it a significant benefit to humanity. integration of if and cf bodies of knowledge on sound ontological, epistemological, axiological, and methodological foundations also fosters a comprehensive understanding of omercic│ bridging islamic and conventional finance through integration of knowledge (iok): the potential of the third sector economy international journal of islamic economics and finance (ijief), 6(1), 21-52 │35 the real-time phenomena and objective or maqāṣid-oriented affirmative action. in addition, engagement with experts in texts and contexts on an international level enables a synthesis of best practices and lessons that respective authorities could adopt anywhere. moreover, leveraging technological advancements and real-time online communication makes such engagement highly valuable and worthwhile. hence, iok model applications to integrate if and cf bodies of knowledge greatly depends on intellectual awareness, willingness, responsibility, and determination. enrichment of the discourse and convergence of the most successful, workable practices of digitalization of this research model to ie that can assist people to identify aspects of if and cf. this can contribute to perpetual replication, crises, failed impact, and welfare-diminishing solutions. besides, software with an algorithm of this study’s iok model has accurate definitions of the islamic philosophical foundations and a plethora of potential maqāṣid. current islamic economic scholarly contributions, as reviewed in this paper, point out that rigorous principles-based approaches can potentially redirect economic, financial and industrial development with the likelihood of a greater if’s sharia compliance. principally, such compliance would fulfill legal requirements and those of the islamic philosophical foundations. any contradictory or apologetic approaches that compromise clear islamic (economic) principles or foundational teachings for short-term benefits would be eliminated for the longer-term vision of a genuine ie system. such a reformed if would benefit from integrating best cf practices as well as fostering product and service compliance with the word and spirit of the sharia. such if development also promises a genuine and sustainable development with targeted objectives or maqāṣid as final outputs or outcomes such as the united nations’ sustainable development goals . however, the reformed if through the iok methodological maqāṣid-oriented approach emphasizes the transcendental or spiritual aspects crucial for muslims in particular. while adherents of other traditions are welcome to contribute to the reform of ie and if development, the iok methodology within this model should consistently appraise theories. this could be achieved by the proposed methodological principles of permissibility, acceptability, legality, authenticity, authority, compliance, and contextual compatibility and adaptability. more specifically, everyone can participate in the reforming of if development under the pretext of fulfilling the criteria of the principles. as earlier exemplified, these unique principles need to be applied in future case scenarios to revive and develop waqfs. waqfs represent the initial capital used to experiment and foster the adoption of the proposed iok model. while waqfs’ historical significance and role are unquestionable, features of contemporary waqf and its institutional structures necessitate reforms along omercic│ bridging islamic and conventional finance through integration of knowledge (iok): the potential of the third sector economy international journal of islamic economics and finance (ijief), 6(1), 21-52 │36 the iok methodology within the model. ths will require greater risk-taking, risk sharing, and pursuit of ownership of resources to generate income and new waqf assets. the proposition of waqf projects and their verification is viable if an analysis through these principles is successful. hence, if specific projects fulfill the permissibility principle, perhaps they would not be currently acceptable or as urgent compared with other projects. further executive planning is necessary, or a modified project can be proposed to meet the criteria of acceptability followed by legality in national, regional, and global grounds, and from a sharia perspective. in addition, the principle of authority can be attained from islamic textual sources of knowledge (nusus) and institutional representatives (namely, mufti, councils, regulators). authenticity, meanwhile, is gained in the sense of genuine textual references and endorsed views by authorities. the compliance principle requires this sharia compliance fulfillment and philosophical foundations. lastly, contextual adaptability and compatibility facilitate ease and widen the map of executive opportunities concerning circumstances, suitability, relevance, need and unexpected changes, and others. a systematization of waqf development efforts by means of the iok methodological model, with integral principles in this paper, represents a major opportunity for reform. it also provides an opportunity for revival of best islamic legacy practices and their integration with the existing knowledge and quality standards. while it is urgent, it does has the potential to attain all the sdgs and required maqāṣid as well as preserve the sacrosanct nature of waqf. this way, its role and impact in society are ongoing, sustainable and inviolable. the comprehensive impact of the iok methodological model can potentially open new opportunities to bridge if and cf practice. this could be by way of identifying eliminating un-important, apologetic, and contradictory reasoning and development of products and services, greater appreciation of waqf legacy successes, and its development today. as a result, this research model reflects an idealism-realism dialectic of reasoning with universal appeal to humanity whereby original islamic teachings and a maqāṣid-oriented vision are set as the practice benchmark. technological advancements are proposed as platforms upon which this study’s iok model can be programmed and used to measure higher sharia compliance in the light of islamic philosophical foundations and worldviews. while its comprehension and application are dynamic and demanding, its output, outcomes, and impact are welfare-enriching. in this regard, the this paper attempted to envisage the comprehension of reality (haqiqah) through the proposed iok model for ie development. this could, ultimately, bring omercic│ bridging islamic and conventional finance through integration of knowledge (iok): the potential of the third sector economy international journal of islamic economics and finance (ijief), 6(1), 21-52 │37 about an alternative avenue of if and cf convergence with the potential to lead people to the truth (haqq). v. conclusion and recommendation 5.1. conclusion interaction between civilizations as the general philosophical outlook has been the historical islamic civilizational practice and the basis upon which this research appraised the iok methodological model for ie development (omercic, 2020, 2021, 2021a, b). undeniably, the current western capitalist and neoclassical economic and financial practices pose significant challenges to future living standards and hopes. while alternatives like ie and the greater practical if failed to significantly change the established practice and, unfortunately, fell prey to replicating the convention partially, it acted with reference to sound islamic philosophical foundations since inception. thus, the ie development of the iok contained in this study is a proposition to bridge the divide between if and cf. this study’s highlight of collaboration and exchange of knowledge among civilisations is genuinely intrinsic to this paper's constructed iok model for ie development. it contrasts the conventional conceptualization of a constant competition between civilizations which fostered excessive competition and rivalry with zero-sum outcomes. hence, the historical inception of ie and the if industry-wide branching represent a revival of the civilizational exchange of knowledge as the wisdom of humanity. its reform is central, and the paper showed how the rising appraisal of the iok approach to ie development represents an opportunity to transform the if based on sound islamic philosophical foundations. in addition, a sound understanding of islamic ontology, epistemology, axiology, and methodology as research foundations enables the conception of a visionary iok methodological model as shown in this paper. this can take place within dialogue, debates, or collective ijtihad among experts of texts and contexts. this model is an idealism-realism dialectical depiction of reality (haqiqah) that, if adequately applied, guides toward truth (haqq). more generally, ie development and reform of if by way of the beneficial use of conventional contributions is practical through this paper’s iok model. this model's ultimate outcomes or purposes are always certain defined maqāṣid, which is undeniably in line with the islamic philosophical foundations of the model. the model also incorporates the third sector ie, namely waqf, and enables waqf to reclaim its historical glory. waqf properties would always maintain omercic│ bridging islamic and conventional finance through integration of knowledge (iok): the potential of the third sector economy international journal of islamic economics and finance (ijief), 6(1), 21-52 │38 their distinctive identity within the iok model and foster ie development alongside the reform of extant if and cf practices. critical to this study’s model of bridging the divide between if and cf via the beneficial use of conventional economic and financial bodies of knowledge are methodological principles like permissibility, acceptability, legality, authenticity, authority, compliance, and contextual adaptability. these are equally relevant in using waqf capital to foster ie development and genuine integration between the best practices of if and cf. the sacrosanct nature of waqf properties indeed instills an awareness about the islamic worldview and more comprehensive philosophical foundations and, as such, truly has the potential to shape the future ie in theory and practice. this paper's focus will assist to guide the processes of ijtihad to bridge the divide between if and cf and assure genuine practice with higher sharia compliance and maqāṣid attainments (omercic, 2022). the implications of this research are apparently comprehensive and systematic because of its distinct methodological nature. the iok model fosters transdisciplinary analytical reasoning, utilizing beneficial contributions from conventional economics, politics, psychology, sociology, and others. it also enables a synthesis of best practices to develop an ie that eruditely considers all the nuances of reality. in addition, this study’s iok model can bridge the divide between if and cf. nevertheless, leveraging the historical role of waqf in the islamic civilization times is only a promising gateway to ensure socio-economic welfare until established applications provide further data for analysis and construction of sub-models that underpin the general iok model of this study. the crux of such modeling lies in the undeniable need to ensure future economic models are rooted in sound islamic philosophical foundations but are universally appealing and inclusive. as such, the trajectory for future research is clear and could be central to addressing many extant issues and maqāṣid. 5.2. recommendations the author puts forward that all policymakers, investors, and communities unite efforts and devise ways to utilize the iok model of this paper. this will help bridge the divide between if and cf and leverage the potential of waqf with further research and affirmative practice. the following actionable recommendations stem from this research and may form the basis for further research.  communicating this research’s iok model for ie development to bridge the divide between if and cf generally, and waqf, particularly omercic│ bridging islamic and conventional finance through integration of knowledge (iok): the potential of the third sector economy international journal of islamic economics and finance (ijief), 6(1), 21-52 │39 to the government and industry, including the community, is commendable. this will raise awareness and, potentially, innovation. this could, then, engender creativity that may automatically enhance the operationalization of this study’s iok model’s applications.  harnessing new data from the community through the earlier recommendation and then communicating particular needs to authorities could be accomplished as well. these are the attainable maqāṣid via the iok model and demonstrate how to bridge the extant practice of if and cf.  leveraging the potential of waqf properties to meet such maqāṣid promotes the model as the benchmark to attain greater socioeconomic welfare. respective authorities can then develop executive plans in collaboration with experts in texts and contexts in universities and industry. it will surely define projects attainable by way of the iok model for ie development. further data collection, such as feedback, can be obtained by technological means, (i.e., surveys and online conferencing, embedded digitalization, and fintech) as suggested in the paper.  the iok model can become the source of innovative regulatory procedures on all levels of a country and internationally to ensure genuine ie development and bridge the extant divide between if and cf. distinct regulation based on the iok model will be a genuine check and balance benchmark. the model can equally be used as the basis for legislative challenges to restore trust via arbitration and joint resolutions instead of court proceedings. arbitration is indeed a trendy commendable option for conflict resolution in if institutions. thus, future studies can 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(2017). the impact of fintech on banking. european economy, (2), 97105. omercic│ bridging islamic and conventional finance through integration of knowledge (iok): the potential of the third sector economy international journal of islamic economics and finance (ijief), 6(1), 21-52 │44 this page is intentionally left blank ijief:international journal of islamic economics and finance vol. 1 (2), pg 229-248, january 2019 the efficiency of indonesian islamic rural banks: a stochastic frontier analysis dian agustina universitas gadjah mada, indonesia, dian.agustina123@mail.ugm.ac.id mahfud sholihin universitas gadjah mada, indonesia, mahfud@ugm.ac.id annisa fithria universitas ahmad dahlan, indonesia, annisa.fithria@act.uad.ac.id article history received: december 17, 2018 revised: january 4, 2019 accepted: january 5, 2019 abstract banking plays an important role in economy acting as an intermediation institution and funding sources for business. when a bank is inefficient in the use of cost, there will be improperly used input, hindering the bank to realize its roles, functions, and objectives. therefore, analysis of bank efficiency is strongly required. this study aims to measure and analyze the technical efficiency of indonesian islamic rural banks by using balanced panel data of indonesian islamic rural banksfromquartile i 2011 to quartile iv 2016. the sample includes 58 islamic rural banks with total 1,392 observations. by using stochastic frontier analysis,the result shows that the average technical efficiency of indonesianislamic rural banksreached 86 percent and there are still 14 percent that can be optimized. overall, the average efficiency of indonesian islamic rural banksincreases over the research period. in addition, this study also finds that big banks are more efficient than small banks. keywords: islamic rural bank, technical efficiency, stochastic frontier analysis, panel data. jel classification: g21 @ ijief 2019 published by universitasmuhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org//ijief.1212 web: http://journal.umy.ac.id/index.php/ijief/article/view/1212 citation: agustina, d., sholihin, m., & fithria, a. (2019). the efficiency of indonesian islamic rural banks: a stochastic frontier analysis. international journal of islamic economics and finance (ijief), 1(2), 229-248. doi: https://doi.org//ijief.1212. http://journal.umy.ac.id/index.php/ijief/issue/archive agustina, sholihin, & fithria|the efficiency of indonesian islamic rural banks: a stochastic frontier analysis. ijief: internationaljournal of islamic economics and finance, 1(2), 229-248| 230 introduction banking plays an important role in economy in indonesia. banking industries constitutes the main institution acting as an intermediation institution and funding sources for developing countries (fase & abma, 2003). in indonesia particularly, banking functions as a collecting and distributing institution for social funds that supports national development implementation to improve equitable development, economic development, and national stability, leading to the improvement of living standards in indonesia (ojk, 2016). as one of financial institution, bank has both short-term and long-term objectives that should be achieved. the short-term objective is to maximize profits; while the later one is to maximize the owners’ welfare. one of the strategies to manifest the objectives is by enhancing operational efficiency (rose & hudgins, 2013). bank’s operational efficiency is correlated to company ability to achieve the highest possible level of output by a number of inputs and certain technology. such efficiency is well-known as technical efficiency (farrel, 1957). when a bank is inefficient in the use of cost, there will be improperly used input, hindering the bank to realize its roles, functions, and objectives. therefore, analysis of bank efficiency is strongly required. bank efficiency can be measured by using the ratio approach and frontier approach. ratio approach measures the level of banking efficiency by using the comparison between operational cost and operational income. it is an approach that is relatively easy in calculation. however, as the weakness, it excludes the bank output (muazaroh, 2013). frontier approach functions to measure efficiency value with various measurement types and methods. according to farrel (1957), there are three types of efficiency at company, i.e. technical efficiency, allocative efficiency, and economic efficiency. operational efficiency is the ability to produce an optimum output by a certain input number. allocation efficiency is the ability to select the optimum input number from a certain number of production factor cost. finally, economic efficiency, also known as cost efficiency, is the sum of operational efficiency and allocation efficiency. in terms of method, there are two methods measuring efficiency: parametric and non-parametric. non-parametric method consists of data envelopment analysis (dea) and free disposal hull (fdh); while the parametric method consists of stochastic frontier analysis (sfa), distributionfree analysis (dfa), and thick frontier analysis (tfa) (berger & humphrey, 1997). dea and fdh approaches do not depend on the functional form of the relationship between input and output (holod & lewis, 2011). nonagustina, sholihin, & fithria|the efficiency of indonesian islamic rural banks: a stochastic frontier analysis. ijief: internationaljournal of islamic economics and finance, 1(2), 229-248| 231 parametric (dea and fdh) method possesses weakness, it assumes that there is no random error existing (berger & humphrey, 1997). sfa approach stipulates functional form for the relationship between input and output. sfa approach shows an advantage that is the assumption of random error. contrastively, dfa and tfa approaches come with no strong assumption of random error. therefore, this research applied the parametric method that was sfa approach. this research focuses on islamic rural banks in indonesia. it is a part of banking system that plays a role for national economy, providing financing for low-income people. often, it competes with other financing institutions, obliging it to operate efficiently in order to face competition within industries. unfortunately, information regarding its efficiency is still limited, as the previous research of banking efficiency more focused on big banks, not on islamic banks (tahir & haron, 2008; hasan, kamil, mustafa, & baten, 2012; bhattacharyya & pal, 2013; parinduri & riyanto, 2014; manlagnit, 2015; zhang & kang, 2015). research of islamic rural banks’ efficiency was conducted by hosen & muhari (2013) and sadono (2017). however, both research is still limited, because the research done by hosen & muhari (2013) only employed the data collected from june 2011-december 2012, and sadono (2017) only analyzed islamic rural banks in east java, so that data generated could not represent the population of islamic rural banks in indonesia for a long period. in that, this research intends to broaden and complement literatures of small bank efficiency, or islamic rural bank, as one of the considerations to make decision for policy makers. this research sets aim to measure and analyze the efficiency of indonesian islamic rural banks for the 2011-2016 periodby implementing the stochastic frontier analysis (sfa) approach. this research finds that the average technical efficiency of islamic rural banks in indonesia 2011-2016 achieves 86 percent; while there is the other one by 14 percent that can be optimized. in overall, the average efficiency of indonesian islamic rural banks increases during the research period. additionally, this study also finds that big banks are more efficient than small banks. the next part of this article explains the literature review continued by research method and results. this article ends by conclusion and recommendation for future researchers. agustina, sholihin, & fithria|the efficiency of indonesian islamic rural banks: a stochastic frontier analysis. ijief: internationaljournal of islamic economics and finance, 1(2), 229-248| 232 literature review islamic rural banks islamic banking is everything related to islamic banks and sharia business units including institution, business activities, and strategies and processes in carrying their business activities. in running their business activities, islamic banks refer to sharia principles. according to the types, there are two islamic banks, i.e. sharia commercial banks and islamic rural banks. the main characteristic of islamic rural banks is carrying out its activities without any service provision in the payment traffic (law number 21 year 2008). the first islamic rural banks in indonesia was founded in 1991 in west java that were pt bpr dana mardhatillah, pt bpr berkahamal sejahtera, and pt bpr amanahrabbaniyah. until june 2018, the number of islamic rural banks in indonesia was 168 (ojk, 2018). after having a trend of slowing economic growth in 2010-2015, indonesia’s economy in 2016 began to show improvement, as clarified by the economic growth rate by 5.02 percent. in line with the improvement, national banking industries, still in the same year, also improved by 10.4 percent; while it was only 8.6 percent in 2016(ojk, 2017). in the end of 2016, indonesian islamic banking consisting of sharia commercial banks, sharia business units, and islamic rural banks experienced asset improvement, with funding provided by the third-party funds were 20.28 percent, 16.41 percent, and 20.84 percent each (yoy). efficiency efficiency is one of the performance indicators of an entity. there are two approaches to estimate efficiency value, i.e. ratio approach and frontier approach. ratio approach is the comparison between operational cost and operational income (bopo). ratio approach is one of the approaches usually used to measure the bank efficiency. however, ratio approach (bopo) contains a weakness of not considering the relationship between input and output, hence being unable to represent the true bank condition(qurniawati, 2013). in addition to the ratio approach, frontier approach calculates bank efficiency to produce a better value. efficiency measurement is performed by focusing on both output and input(hadad, et al., 2003). frontier approach consists of various types and measurement. stochastic frontier approach (sfa) is one of the parametric methods to measure efficiency value. it was agustina, sholihin, & fithria|the efficiency of indonesian islamic rural banks: a stochastic frontier analysis. ijief: internationaljournal of islamic economics and finance, 1(2), 229-248| 233 proposed byaigner, et al. (1977) andmeeusen & broeck (1977), confirming that error term consisted of two independent components: .viis the two-sided error term defining statistical noise, and ui is the one-sided error term describing technical inefficiency. farrel (1957)argues that technical efficiency is the ability of a company to achieve the highest possible level of output by a certain number of input and technology. it is measured by employing an index, broadly known as technical efficiency score. the index ranges from zero to one. when the technical efficiency score is closer to one, company is said to produce more efficiently. however, when it is closer to zero, company is said to produce more inefficiently. meanwhile, technical analysis consists of estimation of the best frontier(kumbhakar & lovell, 2000). previous studies research of efficiency by using stochastic frontier analysis (sfa) had been conducted. tahir,et al. (2008) investigated operational efficiency by sfa approach in 22 commercial banks consisting of nine domestic banks, and 13 foreign banks in malaysia by using imbalanced panel data 2000-2006. the research used input variables of total deposits (deposits from customers and deposits from other banks) and total overheard expenses (salary expenses and other operating expenses) and output variable that was total earning asset (financing, security investment, and placement with other banks). the findings confirmed that technical efficiency of 22 commercial banks was 81 percent, and that domestic commercial banks in malaysia were more efficient than foreign commercial banks by the difference of 15.7 percent. furthermore, efficiency value continued to increase within the periods. aysan, karakaya, & uyanik (2011)examined the efficiency and its relation to profitability in turkish banking sector by employing panel stochastic frontier approach in the post crises period. in theirstudy, both cost and profit efficiency measures were estimated for the panel data consisting of 32 banks between 2002-2007. their results suggested that there is cost efficiency gain and convergence in the efficiency levels of banks. in addition, foreign banks are less efficient and state banks are more efficient. hasan,et al. (2012) observed technical efficiency in six commercial banks in malaysia by using data of 2005-2010. the research used input variables total deposits (deposits from customers and deposits from other banks) and total overheard expenses (salary expenses and other operating expenses) and time; while the output variables was total earning asset (financing, security agustina, sholihin, & fithria|the efficiency of indonesian islamic rural banks: a stochastic frontier analysis. ijief: internationaljournal of islamic economics and finance, 1(2), 229-248| 234 investment, and placement with other banks). the findings conveyed that technical efficiency of commercial banks in malaysia was 94 percent. bhattacharyya & pal (2013) analyzed technical efficiency in 48 commercial banks in india by using data of 1989-2009. the research applied an approach of bank as an intermediating institution to determine both input and output. input included deposits, labors (compensation for labors; such as salary, training, and bonus), and capital (the amount of expenditure for electricity, fuel, water, payment of indirect taxes, and depreciation). output covered investment and loan. the findings defined that technical efficiency of commercial bank in indonesia was 64 percent. hosen & muhari (2013) investigated operational efficiency in 59 islamic rural banks by using data of june 2011-december 2012. the research employed price of labor and price of fund as inputs, total financing and placement with other banks as output, and equity over total assets and non-performing financing as variables of environmental factor. the findings described that operational efficiency of islamic rural banks in june 2011-december 2012 was 81.41 percent. bokpin (2013) examined the effect of ownership structure and corporate governance on bank efficiency in the ghanaian banking industry. the study applies both accounting data and efficiency measures fromthe period19992007via paneldata analysis. efficiencyismeasuredbycomputing distances from the stochastic frontiers of estimated translog cost and profit functions. the results suggested that foreign banks are more cost-efficient than domestic banks, but not necessarily more profit-efficient. parinduri & riyanto (2014) observed cost efficiency in 144 commercial banks in indonesia during december 2000-june 2005. research input included price of labor (ratio of salary expenses and total assets), price of fund (ratio of interest expense and interest-bearing debt), and price of capital (ratio of non-labor expense and the number of fixed assets); while the output included total bank loan, government obligation ownership, security ownership, and other assets. the findings explained that the most efficient banks were regional banks by 66 percent; while the most inefficient banks were the state banks by 55 percent. zuhroh, et al. (2015) investigated cost efficiency in islamic banks by implementing the stochastic frontier analysis and factors affecting inefficiency. research sample consisted of three islamic banks and 19 commercial banks admitted in indonesia stock exchange by using quartile iii 2004-quartile iv 2014 data. variables used in the research were cost efficiency (technical efficiency and allocative efficiency), competition, firm’s size, equity of output, liquidity, and institutional structure. findings indicated agustina, sholihin, & fithria|the efficiency of indonesian islamic rural banks: a stochastic frontier analysis. ijief: internationaljournal of islamic economics and finance, 1(2), 229-248| 235 that cost efficiency of islamic banks was lower than that of commercial banks; while its operational efficiency was higher than that of commercial banks. cost efficiency of islamic banks was 17 percent; while that of commercial banks was 29 percent. the research also found out that technical efficiency of islamic banks was higher by 66 percent; while that of commercial banks was 46 percent. zhang & kang (2015)observed cost efficiency of government banks and jointstock banks in china by applying the stochastic frontier analysis. data were analyzed by using panel date of banks in 2000-2011 in china. research sample involved eight commercial banks in china. there were two inputs, i.e. average cost of loan fund and average cost of business investment. besides, there were three outputs, i.e. outstanding loans, non-interest income, and investment by securities. research findings proposed that banking in china had grown more efficient by 86 percent. however, banks with joint shares were proven to have lower efficiency than the government banks with a relatively small difference. manlagnit (2015) examined the impacts of basel ii on cost efficiency of 17 commercial banks in philippines in 2001-2011. approach implemented to assess cost efficiency was stochastic frontier analysis. manlagnit used the intermediating approach to determine both input and output. based on the approaches, as a monetary intermediary, bank employed labors, capital, deposits, and other loan funds to produce earning assets. dependent variable in the research was lntc, the sum of operating and financial expenses. there were three outputs that were total loans, securities, and contingent accounts. there are three inputs that were wage rate (ratio of salary expense and total asset), physical price of capital (ratio of occupancy expense from fixed asset), and price of fund (ratio of interest expense on total fund). the research revealed that higher capital needs tended to fix efficiency and more authorized supervisor could influence bank efficiency. other potential variables that could help explain bank efficiency was risks, asset quality, and specific variables of the bank. the research confirmed that cost efficiency of commercial banks in philippines in 2000-2011 was 75 percent. khalib, et al. (2016) analyzed cost efficiency of banking in malaysia. they used data collected from 16 islamic banks and 27 conventional banks in 1994-2014. analysis of efficiency was done by implementing the stochastic frontier analysis method. dependent variable used in the research was lntc. components of input hired were labor price, physical price of capital, labor price; while components of outputs consisted of the amount of loan and acquisition of other assets (securities, deposits with other banks). their research findings confirmed that islamic banking had a higher efficiency agustina, sholihin, & fithria|the efficiency of indonesian islamic rural banks: a stochastic frontier analysis. ijief: internationaljournal of islamic economics and finance, 1(2), 229-248| 236 value that was 99.7 percent; while conventional banking had an efficiency value of 96.9 percent. the value difference was not too distant, that was 2.8 percent. aiello & bonanno (2016) investigated 104 small mutual-cooperative banks’ (bbc) cost in 2006-2011. efficiency was measured by using stochastic frontier analysis. variables used in the research consisted of loans from customers, commission income, securities (total loan, direct and indirect funding), deposits, labor price (ratio of salary expenses on the number of labors), capital cost (ration of other expenses on capital), and deposit cost (ratio interest expense on customers). their research findings conveyed that bbc had performed better than other banks by 80 percent, exceeding the average percentage that was 72 percent. hardianto & wulandari (2016) compared the efficiency of conventional banks vs islamic banks in indonesia for the 2011-2013 period. they used stochastic frontier approach and found the differences in the level of efficiency between islamic banks and conventional banks. islamic banks have worse efficiency levels compared to conventional banks. sadono (2017) observed technical efficiency on islamic rural banks in east java in 2011-2016 by implementing stochastic frontier analysis and unbalanced panel data. sadono used the bank approach as an intermediary to determine input. input consisted of total deposits (saving deposits, mudharabahsavings, and mudharabahdeposits) and total operating cost; while output consisted of total earning assets (placement with bank indonesia, placement with other banks, murabahahfinancing, istishna’ financing, mudharabahfinancing, musyarakahfinancing, ijarah, qardh, and multijasa). the research findings conveyed that islamic rural banks in east java in 2011-2016 realized technical efficiency by 90.12 percent in overall. jatmiko (2017) examined the effect of ownership structure on technical efficiency of both islamic and conventional rural banks in indonesia. his study estimated the efficiency score of islamic and conventional rural banks using stochastic frontier analysis. the findings suggested that the gap of efficiency level holds among the islamic rural banks, yet unobservable in the case of their conventional counterparts. stochastic frontier analysis documented that inefficiency does matter in the case of islamic rural banks only, while it seems not the case for conventional rural banks. moreover, the inefficiency of islamic rural banks is getting worse over time. agustina, sholihin, & fithria|the efficiency of indonesian islamic rural banks: a stochastic frontier analysis. ijief: internationaljournal of islamic economics and finance, 1(2), 229-248| 237 methodology data table 1. sample criteria sample observation irb admitted in financial service authority 2018 168 4,032 irb without complete quartile financial reports during 2011 i quartile i 2011-quartile iv 2016 (110) (2.640) sample used in testing 58 1.392 source: author this research uses financial report data of islamic rural banks (irb) in indonesia in 2011-2016. research sample is presented in table 1. the number of islamic rural banks presented in table 1 as research sample is 58 islamic rural banks, out of the total 168 islamic rural banks in indonesia. the sample is determined by applying the purposive sampling method. islamic rural banks criteria as sample included islamic rural banks reporting complete quartile financial reports during quartile i 2011quartile iv 2016. this research is quantitative research. data used in this research are balanced panel data gathered from financial reports of islamic rural banks in indonesia in quartile i 2011-quartile iv 2016 available and accessible on the financial service authority (ojk) website. although several financial report data had not been audited, we had compared the financial report before being audited and financial report data after being audited for some islamic rural banks. comparison results defined audited report was not different from non-audited report. method efficiency is measured by using the parametric method applying stochastic frontier analysis (sfa), because sfa approach has a specific, functional form for the production relationship between input and output, making the derived result more accurate. additionally, sfa approach permits random errors. technical efficiency refers to the ability of producing optimum output by certain inputs (output-oriented) or the ability of using minimum input to gain a certain output (input-oriented) (tahir,et al., 2008). this research agustina, sholihin, & fithria|the efficiency of indonesian islamic rural banks: a stochastic frontier analysis. ijief: internationaljournal of islamic economics and finance, 1(2), 229-248| 238 implements the output-oriented measurement that measures efficiency value upon costs incurred by banks while they altered input to be output. efficiency value is compared to the best practice that generating similar output with a similar condition as well. this research uses the sfa approach proposed bybattese & coelli (1992)by applying this following equation: ( ) ( ) ; (1) is the variable indicating output for banki during t, is the vector whose value was input function for banki during t, is the unidentified parameter vector, is assumed as independent and identically, distribution of random error has a normal distribution and is independent on , is the unobservable non-negative random variable related to technical ineffienciency of production. technical inefficiency of banki during t can be defined by implementing the stochastic frontier model: ( ) (2) is the variable indicated the model inefficiency. initial step to estimate efficiency is by determining functional form for production function. the research implements the form of cobb douglas production function model and the input consists of capital and labor with fix technological assumption. determining input and output size of a bank is important. accurate input and output size are important in bank production model. there are two common approaches applied to determine bank input and output measurement, i.e. production approach and intermediaries approach. referring to the production approach, each bank activity producing true resources is categorized as bank output(de, 2004). benston, hanweck, & humphrey (1982) believed that output had to be measured when bank was doing activities resulting in incurred cost. in terms of production approach, output should have been measured based on the number and types of transaction or account; while input could be measured by only using physical units as labors and capital(hasan, et al., 2012). intermediaries approach defined output as financial intermediary between obligation holders and parties receiving fund from banks (de, 2004). according to research performed by sealey & lindley (1977), loans and other assets were bank outputs, since able to give direct profits to the banks; while deposits and other obligations were inputs for intermediation process as the main material of investment fund. this research implemented the intermediaries approach. in it, banks as a financial intermediary combined deposits, labor, and capital to produce loans and investments(tahir,et al., 2008). agustina, sholihin, & fithria|the efficiency of indonesian islamic rural banks: a stochastic frontier analysis. ijief: internationaljournal of islamic economics and finance, 1(2), 229-248| 239 the stochastic frontier model in this research is the modified cobb douglas model: ( ) (3) description: 1. total earning assets (total productive active), is the total sum of islamic bank fund investments in either rupiah or foreign currencies in forms of mudharabahfinancing, musyarakahfinancing, murabahahloan, salamloan, istishna’ loan, multi-service loan, ijarah, qardh, and placement with other banks. 2. total deposits, is the total sum of deposits from wadiahsaving account, mudharabahsaving, and mudharabahdeposit. 3. total operating expenses, is the total sum of operational expenses from personal load account and other operational expenses. 4. statistical noise, is random error from factors unexplainable by data. 5. technical inefficiency described by the size variable. this research measures efficiency value by applying the frontier approach, sfa. technical efficiency is measured by implementing the cobb douglas model. variables used are total earnings assets, total deposits, and total operating expense. sfa measurement is conducted by using the maximumlikelihood estimates (mle) calculation to measure the sfa model parameter by using the stata software. when the efficiency value is one, then bank has completely, efficiently operated. on the contrary, when the efficiency value is closer to zero, then bank operates more inefficiently. results and analysis descriptive statistics table 2 shows descriptive statistics of the value of variables used in the research that are total earnings assets, total deposits, and total operating expenses. the number of observations used is 1,392 for each variable. total earning assets has the mean of idr30,001,140,000; minimum value of idr942,053,000; maximum value of idr503,819,900,000 with standard deviation of idr51,736,460.000; total deposits has the mean of agustina, sholihin, & fithria|the efficiency of indonesian islamic rural banks: a stochastic frontier analysis. ijief: internationaljournal of islamic economics and finance, 1(2), 229-248| 240 table 2. descriptive statistics(in billion rupiahs) variable observation mean standard deviation minimum maximum tea 1392 30.00114 51.73646 0.942053 503.8199 td 1392 21.49659 42.91089 0.427875 429.6731 toe 1392 1.131709 1.610528 0.046766 19.11921 description: tea is total earnings assets, td is total deposits, toe is total operating expenses idr21,496,590,000; minimum value of idr427,875,000; maximum value of idr429,673,100 with standard deviation of idr42,910,890. total operating expenses has the mean of idr1,131,709,000; minimum value of idr46,766,000; maximum value of idr19,119,210,000 with standard deviation of idr1,610,528,000. results this research measures efficiency by using the parametric method by stochastic frontier analysis. table 3 presents estimated results of stochastic frontier analysis. based on frontier estimated results in table 3, the total deposit variable and the total operating expense variable give a positive and significant effect on the total earnings asset variable. it implies that when total deposits increase by 1 percent, then total earnings assets will increase by 0.652 percent with assumption ceteris paribus. moreover, when total operating expenses increase by 1 percent, then total earnings assets will also increase by 0.183 percent with assumption ceteris paribus. table 3. estimated result of stochastic frontier analysis description: bracketed numbers indicated the standard error, * indicates significance at , ** indicates significance at , and *** indicates significance at . variable lntea constanta 1.519*** (0.038) lntd 0.652*** (0.011) lntoe 0.183*** (0.111) agustina, sholihin, & fithria|the efficiency of indonesian islamic rural banks: a stochastic frontier analysis. ijief: internationaljournal of islamic economics and finance, 1(2), 229-248| 241 analysis mean of quartile i 2011-quartile iv 2016technical efficiency table 4. mean of technical efficiency variable observation mean standard deviation minimum maximum technical efficiency 1,392 0.8616744 0.1046564 0.4313468 0.9931033 table 4 presents the mean of islamic rural bank efficiency by using the data of quartile i 2011-quartal iv 2016efficiency values. seen in table 1, the mean of islamic rural bank technical efficiency in 20112016 is 86 percent. islamic rural bank might achieve a perfect operational efficiency level by enhancing technical efficiency by 14 percent. technical efficiency of each bank table 5 indicates that the mean technical efficiency score of each islamic rural bank is derived by using data of quartile i 2011quartile iv 2016efficiency with the total bank sample of 58. table 5. mean of technical efficiency for each bank no. bank mean of technical efficiency (q1 2011-q4 2016) ranking 1 pt bprs hartainsankarimah 0.9903076 1 2 pt bprs amanahummah 0.9775620 2 3 pt bprs dinar ashri 0.9745926 3 4 pt bprs cilegonmandiri 0.9716299 4 5 pt bprs al ma'soemsyariah 0.9708430 5 6 pt bprs suriyah 0.9618235 6 7 pt bprs baiturridhapusaka 0.9571605 7 8 pt bprs amanah sejahtera 0.9551929 8 9 pt bprs lampung timur 0.9446097 9 10 pt bprs arthakarimahirsyadi 0.9437721 10 11 pt bprs mentari 0.9436749 11 12 pt bprs barokah dana sejahtera 0.9429855 12 13 pt bprs haji miskin 0.9354644 13 14 pt bprs bumirinjanikepanjen 0.9291878 14 15 pt bprs dana moneter 0.9282244 15 16 pt bprs amanahrabbaniah 0.9271457 16 17 pt bprs barkahgemadana 0.9268467 17 18 pt bprs binaamanahsatria 0.9203029 18 agustina, sholihin, & fithria|the efficiency of indonesian islamic rural banks: a stochastic frontier analysis. ijief: internationaljournal of islamic economics and finance, 1(2), 229-248| 242 no. bank mean of technical efficiency (q1 2011-q4 2016) ranking 19 pt bprs tanggamus 0.9181809 19 20 pt bprs gunungslamet 0.9152225 20 21 pt bprs hikmahwakilah 0.9137967 21 22 pt bprs patuhberamal 0.9132491 22 23 pt bprs karyamugisentosa 0.9119772 23 24 pt bprs berkahramadhan 0.9050992 24 25 pt bprs bumirinjanibatu 0.9049591 25 26 pt bprs artaleksana 0.9044609 26 27 pt bprs dana hidayatullah 0.9023322 27 28 pt bprs situbondo 0.8971646 28 29 pt bprs sarana prima mandiri 0.8923969 29 30 pt bprs indo timur 0.8858325 30 31 pt bprs muamalahcilegon 0.8840127 31 32 pt bprs bumiarthasampang 0.8783557 32 33 pt bprs artha mas abadi 0.8662432 33 34 pt bprs cempaka al amin 0.8625025 34 35 pt bprs caranakiatandalas 0.8601880 35 36 pt bprs dana mulia 0.8564126 36 37 pt bprs al washliyah 0.8531617 37 38 pt bprs hareukat 0.8487097 38 39 pt bprs insancitaartha jaya 0.8475308 39 40 pt bprs dayaarthamentari 0.8438110 40 41 pt bprs mitraharmoni kota semarang 0.8424659 41 42 pt bprs al hijrahamanah 0.8388393 42 43 pt bprs khasanahummat 0.8386914 43 44 pt bprs amanahinsancita 0.7989681 44 45 pt bprs ummu 0.7920750 45 46 pt bprs ikhsanulamal 0.7892894 46 47 pt bprs hasanah 0.7871073 47 48 pt bprs dana amanah 0.7801200 48 49 pt bprs binaamwalulhasanah 0.7716451 49 50 pt bprs kota juang 0.7591875 50 51 pt bprs al-yaqin 0.7549073 51 52 pt bprs syariatfajar sejahtera bali 0.7425735 52 53 pt bprs merusankara 0.7286158 53 54 pt bprs madinah 0.7182041 54 55 pt bprs surya sejati 0.6568281 55 56 pt bprs unawibarokah 0.6307738 56 57 pt bprs al ihsan 0.6270243 57 58 pt bprs bhakti haji 0.5725660 58 agustina, sholihin, & fithria|the efficiency of indonesian islamic rural banks: a stochastic frontier analysis. ijief: internationaljournal of islamic economics and finance, 1(2), 229-248| 243 based on table 5, the most efficiently operating islamic rural bank is pt bprs hartainsankarimah with the mean technical efficiency score of 0.9903076; while the islamic rural bank with the lowest mean technical efficiency score is pt bprs bhakti haji with the mean technical efficiency score by 0.5725660. in general, technical efficiency of islamic rural banks in indonesia in 20112016 is 86 percent, suggesting that there is still technical inefficiency of 14 percent that can be optimized. irb efficiency based on the size category table 6. mean of irb efficiency based on the size category category i category ii category iii category iv 0.724911012 0.852968906 0.909206199 0.959979383 table 6 is irb efficiency table based on the bank size category. bank size can be observed from the total irb assets categorized into four. category i is 25 percent of the lowest total assets; while category iv is 25 percent of the highest total assets. such categorization is to analyze the difference between big bank efficiency (category iv) and small size bank (category i). based on table 6, category i and category iv have different mean of irb efficiency that is by 23 percent, explaining that big irbis more efficient than small irb. annual efficiency of islamic rural banks table 7 indicates the mean of annual efficiency of islamic rural banks. based on the analysis results, the trend of annual irb efficiency increases. table 7. mean of annual irb efficiency year efficiency 2011 0.826318345 2012 0.849861588 2013 0.865558973 2014 0.871349735 2015 0.876179081 2016 0.880778553 agustina, sholihin, & fithria|the efficiency of indonesian islamic rural banks: a stochastic frontier analysis. ijief: internationaljournal of islamic economics and finance, 1(2), 229-248| 244 conclusion and recommendation conclusion this research aims to investigate the efficiency level of islamic rural banks (irb) in indonesia in 2011-2016. to achieve the aim, this research focuses on the analysis of islamic rural bank efficiency using the stochastic frontier analysis (sfa) approach. based on the sfa estimated result, the technical efficiency of indonesian islamic rural banks in 2011-2016 is 86 percent, so there is 14 percent of technical inefficient that can be optimized. top three islamic rural banks in indonesia are pt bprs hartainsankarimah, pt bprs amanahummah, pt bprs dinar ashri with the mean technical efficiency scores of 0.9903076, 0.9775620, and 0.9745926 respectively. meanwhile, bottom three islamic rural banks in indonesiaare pt bprs unawibarokah, pt bprs al ihsan, and pt bprs bhakti haji with the mean technical score are 0.6307738, 0.6270243, and 0.5725660. recommendation the research results are expected to be one of the considerations in decision-making for policy holders to assess efficiency.this research has several limitations in terms of data access. there are some irb financial reports remaining unpublished on the financial service authority website particularly in 2017, restricting this research to include data collected in 2017. future research can be focused on factors causing the inefficiency of islamic rural banks. agustina, sholihin, & fithria|the efficiency of indonesian islamic rural banks: a stochastic frontier 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(2015). cost efficiency of islamic banks in indonesia – a stochastic frontier analysis. procedia social and behavioral sciences, 211, 1122–1131. https://doi.org/10.1016/j.sbspro.2015.11.150 agustina, sholihin, & fithria|the efficiency of indonesian islamic rural banks: a stochastic frontier analysis. ijief: internationaljournal of islamic economics and finance, 1(2), 229-248| 248 this page is intentionally left blank international journal of islamic economics and finance (ijief) vol. 4(2), page 315-346, july 2021 inflationary dynamics of consumer and producer financing: a comparative banking analysis arslan manzoor institute of islamic banking and finance, university of management and technology, pakistan noman arshed department of economics, university of management and technology, pakistan corresponding email: noman.arshed@umt.edu.pk article history received: march 24th, 2021 revised: june 26th, 2021 accepted: july 29th, 2021 abstract one of the macroeconomics objectives is to stabilize purchasing power for the masses, which remains a leading economic problem in pakistan for years. economists are convinced about some degree of inflation in the economy to mobilize economic resources, with the condition to keep it to a minimum. currently, islamic finance is setting its firm footing in pakistan and competing with the conventional financial system. under this scenario, this study compares the shari’ah compliant financing provided by islamic financial institutes, and human made standards of conventional financial institutions. this study explores the effect of consumer financing and producer financing of islamic and conventional banks on the inflation of pakistan. quarterly secondary data between 2009q2 to 2019q2 extracted from the state bank of pakistan reports and international financial statistic. arch model is used to estimate the model. empirical results displayed that islamic consumer financing, as expected in theory, helps to control inflation. the preaching of moderation in islamic finance makes islamic consumer financing less inflationary, and asset-based islamic producer financing will perform better in reducing inflation. islamic consumer financing is well participating in the management of inflation. however, islamic producer financing lacks inflation curtailing ability. the small share in the financial market, and lack of long-term investment plans, are the few reasons why islamic producer financing is not managing inflation. keywords: islamic financing, asset based, inflation, financial sector development. jel classification: g21, g28 type of paper: research paper @ijief 2021 published by universitas muhammadiyah yogyakarta all rights reserved doi: https://doi.org/10.18196/ijief.v4i2.11372 web: https://journal.umy.ac.id/index.php/ijief/article/view/11372 citation: manzoor, a. & arshed, n. (2021). inflationary dynamics of consumer and producer financing: a comparative banking analysis. international journal of islamic economics and finance (ijief), 4(2), 315-346. doi: https://doi.org/10.18196/ijief.v4i2.11372 mailto:noman.arshed@umt.edu.pk https://doi.org/10.18196/ijief.v4i2.11372 https://doi.org/10.18196/ijief.v4i2.11372 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v4i2.11372&domain=pdf mansoor & arshed │inflationary dynamics of consumer and producer financing: a comparative banking analysis international journal of islamic economics and finance (ijief), 4(2), 315-346 │ 316 i. introduction 1.1. background 1.1.1. macro-economic pillars inflation, growth, and employment are the three macroeconomic pillars (mankiw, 2016), managing them is the major goal of any policymaker. their interconnection makes economic policy articulation difficult in isolation. the first objective is growth, which measures how well an economy has performed with respect to production in one year (mankiw, 2016). economists proposed that a country have a stable growth rate say 3 to 5 percent, which helps plan other goals. the second pillar is inflation, which denotes general prices (shazad et al., 2012). many economists believe that a little inflation of 2-3% is healthy for economic growth as it promotes sellers to produce for deferred sale at a premium of 2-3% each time period. the third pillar is unemployment rate, denoting proportion of workforce who are not engaged in a paid job. empirically it has been suggested that a growth rate above 2.5% will decrease the unemployment to 0.5% for every percentage increase (known as okun's law). however, there is a catch that demand may supersede supply at low unemployment, leading to inflation (as per philips curve) (phelps, 1967; mankiw, 2016). thus the complex dynamics are evident, requiring the need for developing models to manage these pillars. 1.1.2. contribution of inflation to the economy this study aims to relate islamic finance with inflation. it refers to a condition of an economy where there is a rise in the general price level of goods and services. inflation forces fiat money to lose its value rapidly. here, fixed income people have to spend more on their daily living expenses, and stocking goods and services to avoid future inflation, thus motivating excessive consumption and hoarding. due to this excessive consumption and hoarding, inflation accelerates; this condition could result in hyperinflation. after world war 1 (1919-1923) and hungary after world war 2 (1945-1946), germany has faced such type of hyperinflation (amadeo, 2019). 1.1.3. inflation and social injustice mises (1920) explained that inflation is a tool used by the government to collect funds, which it could not collect by taxes. inflation is undoubtedly the mansoor & arshed │inflationary dynamics of consumer and producer financing: a comparative banking analysis international journal of islamic economics and finance (ijief), 4(2), 315-346 │ 317 greatest swindle humanity have ever witnessed (harwood, 1974). he explained that swindle is a term that refers to accruing someone’s property or money unlawfully, fraudulently and without his explicit concern (stringham, 2018). pelerin (2012) explained that inflation in an economy is a governments choice rather than an economic phenomenon (for example, the case of seigniorage). to support his statement, he argues that the government has control over money, allowing them to spend money beyond their budget. he explains that inflation is harmful to everyone in the economy except for the political class and is a tool of theft and fraud used by the government to steal the common person’s wealth. the loss in buying power of money reflects its impact on people who have placed their faith in the currency. the cash value of all types of funds, bonds, saving deposits, mortgages, and insurance plans decreases. after world war 2, the inflationary periods started in the united states. by the end of 1974, the estimated losses to these funds were 1.1 trillion dollars (harwood, 1974). a press release in 1997, by the central bank of turkey explained that during the period from 1991 to 1996, inflation had robbed 30% of the purchasing power of citizens despite huge salary increments during the same period (hoffman pr). hewlett (1977) explained that the correlation between inflation, political upheaval and social injustice is neither arbitrary nor coincidental. this correlation exists due to the impact of inflation on wealth distribution to the various classes in society. the role of inflation in an economy can be cruel as it muddles the existing pattern of income distribution and creates inequality. he explained that the discriminatory aspect of inflation is “it affects different classes differently”. brokers and middle man stock the goods, expecting that the prices will rise in future, a slowdown in economic activity creates social unrest (polleit, 2008; zoellick, 2011). it suffers the general public, and investors that is why economists try to keep inflation as low as possible (chapra, 2008). keynesians and monetarists are of the view that at least in short-run inflation can boost economic growth. however, they claim that this channel works because an unexpected increase in prices fools a few producers and workers. earlier, inflation was not associated with price but a phenomenon of paper money currency and a specific description of monetary policy (bryan, 1997). monetary school of thought believed that the excessive supply of money causes inflation. at constant level of goods and services, an increase in money supply will allow people to spend more and hence raises the general prices level (kemmerer, 1918; grauwe & polan, 2005). this increased spending is because of the illusion of higher growth (kia, 2008). during the inflationary periods, the capital holder, who owns trade stocks and property, will get richer by earning more profit due to the persistent rise mansoor & arshed │inflationary dynamics of consumer and producer financing: a comparative banking analysis international journal of islamic economics and finance (ijief), 4(2), 315-346 │ 318 in stocks and property prices. moreover, the fixed income and unemployed class get poorer due to the loss in purchasing power (sprinkel, 1971). this shows the interaction of financial system with inflation whereby the financial sector plays an important role in the money supply. to regulate money supply in monetary phenomena, the effective tool to be used is the interest rate. it has been found by kia (2008, 2010) that a predetermined interest rate has a positive impact on inflation. shaikh (2013) believes that the interest rate creates market imperfections, leading to a slump in an economy via cost-push inflation (shazad et al., 2012). a renowned scholar mufti muhammad taqi usmani, discussed some other factors that can influence inflation in the conventional economic system. he explained that the cruel practices (i.e. gambling, speculative transactions, and futures contracts) and the use of financial market derivatives result in few hands holding the majority of society's wealth. the uncurbed lust for profit and unnatural practices as business strategies to earn profit creates an imbalance in the economy and leads to inflation (usmani, 2004). islamic preaching strongly prohibits unlawfully accruing any one's property. allah s.w.t has declared war with one who practices riba (interest) in any financial transaction. one reason for prohibiting riba is that it affects the fair distribution of wealth in society. 1.1.4. research gap sulaiman, arshed and mushtaq (2016) and sulaiman, arshed and hassan (2016) explored the role of banking sector development (using broad money) on the inflation for saarc countries. both studies narrated that banking sector leads to inflation. dhungana and pradhan (2017) studied the relationship between bank lending and inflation in nepal. using panel data of twenty-four banks from 1996 to 2015 found a positive relationship between two variables. several studies like these did not did not distinguish between conventional & islamic and consumer & production financing as they are expected to have different effects. this study is comparing the differences between islamic and conventional financing in consumer and producer sector in inflation using arch/garch model. 1.1.5. research questions this study examines the impact of both islamic and conventional banks financing and its impact on inflation under the light of maqasid al-shari’ah. mansoor & arshed │inflationary dynamics of consumer and producer financing: a comparative banking analysis international journal of islamic economics and finance (ijief), 4(2), 315-346 │ 319 as islamic economics promises zero or minimum inflation. we will find out the banking sector is fulfilling the objectives of islamic economics. • is there any difference between the effect of consumer financing on inflation for the case of islamic and conventional banking in pakistan? • is there any differences between the effect of producer financing on inflation for the case of islamic and conventional banking in pakistan? 1.1.6. significant of the study this study will explain a new dimension of conventional and islamic financing and their impact on inflation. we will analyze the data of consumer and producer financing of both islamic and conventional financial institutions and their impact on inflation. it will help make a new point that why islamic financial system better in the management of inflation then the conventional system (mohieldin, 2012). 1.2. objective under this scenario, this study compares the asset-based and shari’ah compliant financing provided by islamic financial institutes and humanmade standards of conventional financial institutions. this study will explore the effect of consumer financing and producer financing on the inflation of pakistan. this study explores the theoretical differences between conventional and islamic consumer and production theories by reviewing the discussions and theories by scholars and economists on this matter. this study helps in concluding the point that whether or not the islamic financial system is full filling the theoretical objectives of islamic economics (minimizing inflation). mansoor & arshed │inflationary dynamics of consumer and producer financing: a comparative banking analysis international journal of islamic economics and finance (ijief), 4(2), 315-346 │ 320 ii. literature review 2.1. background theory 2.2.1. financial system, economic growth and inflation there is a long debate available in the literature that discusses how financial market growth supports economic development. majority of the researchers believe that over the long sweep of history, financial markets contribution towards economic growth has been “too obvious for a serious discussion” (miller, 1998). however, previously, lucas (1988) argued that academic discussions on the role and importance of the financial market in economic development are severely exaggerated. where it is not clear whether growth leads to financial development or the other way around. levine (1997) found a first-order positive relation between economic growth and financial development based on theoretical reasoning and empirical evidence. moreover, he found that the level of financial development is a good predictor of future economic growth rate. petkovski and kjosevski (2014) stated that empirical studies have concluded that a growing financial sector influence economic growth positively. most recently, popov (2017), after reviewing the notable number of empirical works of the past quartercentury on the relationship of financial growth and economic development, founded a first-order positive relationship between these two. financial intermediaries (including banks) provides four broad group functions and services, which are (1) mobilizing savings, (2) allocation of savings, (3) diversifying of risk and (4) monitoring the allocations of managers (petkovski & kjosevski 2014). each of these functions can influence the investment and saving decision and hence and influences economic growth. in short, banks and financial intermediaries allocate funds to such projects where the marginal product of capital is highest. this function of banks increases capital productivity which results in higher growth (pagano, 1993). mansoor & arshed │inflationary dynamics of consumer and producer financing: a comparative banking analysis international journal of islamic economics and finance (ijief), 4(2), 315-346 │ 321 figure 1. a theoretical approach to finance and growth source: aghion and howitt (1992) figure 1 theoretical model is being established by aghion and howitt (1992), which explains the importance of financial intermarries (banks) and how the functions of financial institutions help in economic growth. the relationship between economic growth and inflation is a tricky business as it changes its nature by changing the intensity of inflation. recent studies revealed nonlinearity in their relationship. low inflation is associated with high economic growth, and high inflation is associated with low economic growth. the keynesian model (ad & as curve) displays a positive relationship between growth and inflation in short-run. however, it did not imply, inflation itself is a growth enhancer. it explains that if the increase in aggregate demand leads to economic growth, then the emergence of little inflation is an unharmful by-product (rutayisire, 2015). fischer (1993) reviewed literature and discussed that high inflation decreases investment, which decreases the productivity of the economy. the channel through which inflation affects long run economic output is market frictions information costs transaction costs financial markets and intermediaries financial functions mobilize savings allocate resources exert corporate control facilitate risk management ease trading of goods, services, contracts channels to growth capital accumulation technological innovation growth mansoor & arshed │inflationary dynamics of consumer and producer financing: a comparative banking analysis international journal of islamic economics and finance (ijief), 4(2), 315-346 │ 322 financial sector repression. boyd, levine, and smith (2000) explained that growing literature in the financial sector and inflation relationship explained that even predictable high rates of inflation influence effective fund allocation of the financial sector. high level of inflation disturbs the price signaling mechanism of the market. theories that explain the importance of asymmetric credit market information explain how high inflation impacts financial sector performance and subsequently long-run economic growth (boyd et al., 2000; azariadas, & smith, 1996). azariadis and smith (1996) and boyd, choi and smith (1997) explained that a shallow rate of inflation does not disturb the information flow of market and allocation of the resource of the financial sector, as the at low rate credit market friction may not be binding. these models further explain that with the rise in inflation, credit market friction may become binding, decreasing financial sector performance. as soon inflation reaches a higher level, it already had damaged the financial sector (boyd, levine, & smith, 2000). 2.2.2. impact of financial intermediaries on inflation a key indicator of economic growth in a developing country is a smoothly operating, robust financial system. as, banks are institutions that collect excessive liquidity from the general public and channelize it to the person, state and business, which require these funds, either for consumption purposes or for business (production purposes) (korkmaz, 2015). figure 2. bank as an intermediary source: author figure 2 explains that that bank receives the deposit from customers on which it pays interest or profit. also, from these deposits, a bank lends money to customers who need these funds and receive profit or interest against this facility. in a dual banking system, where conventional and islamic banks are actively operating in the same financial market, the client can choose either of the modes of financing for consumption purposes or for business purposes. deposit financing for production bank consumer financing mansoor & arshed │inflationary dynamics of consumer and producer financing: a comparative banking analysis international journal of islamic economics and finance (ijief), 4(2), 315-346 │ 323 figure 3. categories of bank financing source: author korkmaz (2015) explained that the banking role in an economic sense is a facilitator of economic activity. hence, its function is to lend more liquidity. lending money will increase investment and economic growth. banking lending impacts both the supply and demand side of good and services market differently. the framework of ludwig von mises explains that a bank creates money in the shape of credit which finances investment beyond savings (cochran & call, 2000) at the cost of future expenses. based on figure 3, the bank facilitates a person to spend more via consumer financing. bank provides facilities like credit cards, leasing finance, and overdraft balances, increasing the demand directly. furthermore, the bank provides discount offers on different brands of consumable goods like clothing, food restaurants, and departmental stores, which, in turn, motivate individuals to spend more money. the banks are more concerned about the creditworthiness of a client rather than where he will spend this money (faizulayev, 2011). moreover, the loan compounds if the client is unable to pay. the promotion of credit card debt by offering a discount on different brands, restaurants, markets ends up in overspending and wasteful consumption. conventional banks have framed people into expensive mortgage loans (equitymaster, 2010; majaski, 2019). there are millions of people who have lost everything; some of them even end up committing suicide. on the other hand, islamic banking is based on the principles of shari’ah, whereby debt for consumption purposes is discouraged (sahi albukhari, ch 38, hadith no. 500; sahi bukhari, hadith no. 6375). hence islamic customers will either avoid consumer financing or avoid wasteful consumption (sunan ibn majah, book 1, hadith 425). first and most importantly, islamic banks finance consumers on interest-free mode. they provide a facility by buying an asset for the customer to either sell him on lumps sum future payments or in instalments or leases it on a rental basis. secondly, islamic banks issue consumer finance based on diminishing musharaka, ijarah, and murabaha. hence, the bank is directly or indirectly involved in the purchasing of the consumed asset. this creates an oversight for the utilization of the funds. hence, islamic consumers are saved financing conventional consumer production islamic mansoor & arshed │inflationary dynamics of consumer and producer financing: a comparative banking analysis international journal of islamic economics and finance (ijief), 4(2), 315-346 │ 324 from impulse buying, which reduces the positive effect of islamic consumer financing compared to conventional consumer financing. dar and akram (2004) explained that the consumption habit of society directs the direction of all economic sectors. and if people are wastefully spending on unproductive things like fun and frolic. then the capital for productive means will become scarce. hence islamic consumer finance works as a moderator to restrict the apparent utility-maximizing behavior of the consumer (chapra, 1992: 20). the concept of moderation in consumption is discussed in islam in several instances like (quran 2:172, 25: 67, 17:26-27) and (sahi al-bukhari, hadith 6463). hence the controlling mechanisms at lender and borrower end ensure lower inflationary pressures with consumer financing. the banking sector can fulfill the capital requirement in financing to the business sector to increase production. it can be done by running financing, plant and machinery leasing, and loan for other operational needs. it leads to an increase in supply, reducing cost push inflationary pressures. however, if this financing is interest-based, it is counted within the total cost of compounding interest, increasing cost-push inflation (dar & akram, 2004; kia, 2013; shazad, ahmad & rehman, 2012; bashir, yousaf & aslam, 2016). since bank is performing as a debtor and earns interest, it focuses on creditworthiness of customer rather than the utilization of lending (faizulayev, 2011). on the other hand, islamic financing is either assetbacked or asset-based. it is contractually based and works either on partnership bases like mudarabah and musharaka contracts or sales like murabaha, salaam and istisna contracts. so the amount of money/credit created by the bank is channelized in asset creation and productive means. money is treated as a risk bearing factor of production, so it is entitled to a profit share which can either be positive or negative (dar & akram, 2004). moreover, islamic bank finance on trade base, partnership base, and rental base, so a physical asset and economic activity are involved in the contract. so, this production promoting activity leads to a decrease in market prices while conventional producer financing may or may not increase production and decrease prices. siddiqi (1996) explained that the replacement of debt financing by equity financing ensures zero or minimum inflation. kia (2008) interest-free financing reduces the cost of production, which in turn increases the business activity and encourages people to contribute to the economy on profit and loss sharing basis. kia and darat (2007) explained that no other demand for money is more stable than the demand for profit sharing money. kia (2014) explained that the negative supply effect does not exist under a partnership agreement because the profit and loss is the residual of mansoor & arshed │inflationary dynamics of consumer and producer financing: a comparative banking analysis international journal of islamic economics and finance (ijief), 4(2), 315-346 │ 325 total income. however, predetermine interest rates have a negative supply effect as it will push the cost schedule up. the goals and purpose of a firm under the islamic economic framework is the attainment of falah (welfare). scholars have explained the motive or objective of a firm under the islamic framework. it is to produce such goods and services that allows human to live a prosperous life and dignify its existences as the vicegerents of allah (s.w.t) on this earth (chapra, 1984). the ultimate objective of a firm engaged in production should be the achievement of falah (sattar, 1988; abbas, 1995; siddiqi, 1979). a precise definition of falah is all-sided wellbeing of this worldly life and the life hereafter (saddiqi, 1979). abbas (1995) explained that falah as the attainment of happiness in both material and spiritual content were the goals to create social wellbeing in the material world and spiritual salvation (abubakar, 2016). the classification of factors of production in conventional economics is arbitrary and has no scientific sanctity attached to it (khan, 1990). many economists themselves consider this classification to be arbitrary (samuelson, 1983). usmani (2004) explain that islamic production theory recognizes 3 actual factors of production. these are capital, land, and labor (khan, 1990). khan (1990) classified these factors of production into 2 broad groups hired factors of production and entrepreneurial factors of production. the hired factors of production provide a definite service in the production process and for which they are rewarded in the shape of wage and rent. entrepreneurial factors bear the entrepreneurial risk in the project rather than having a fixed return in the form of wage and rent. the award of such factor to engage in production is the profit. this theoretical composition of islamic firms tends to be more productive and less inflationary than conventional firms. 2.2. empirical review earlier economic experts like schumpeter discussed the role of banks as intermediaries helping in technological innovation. as a result, the banking sector plays a role in the effective allocation of saving resources to an entrepreneur who has the best chance of growth (oluitan, 2012). fry (1988), mckinnon (1973), king and levine (1993) and shaw (1973) emphasized the above statement regarding the role played by the banks in economic development. findings of popov (2017) while investigating the relationship between economic growth and financial development. he explained that the past mansoor & arshed │inflationary dynamics of consumer and producer financing: a comparative banking analysis international journal of islamic economics and finance (ijief), 4(2), 315-346 │ 326 quarter-century data supports a first-order positive relationship between these two economic variables. similarly, shumpeter (1934), goldsmith (1969), shaw (1973), greenwood and jovanovich (199), and bencivenga and smith (1991) supported the statement that a developing financial sector contributes to economic growth. levine (1997) explains that a good predictor of economic growth is financial development. empirical studies on banking credit and economic growth have proven that there is a linear relationship. a study of yakubu and affoi (2014) examined nigeria using data set from 1992 to 2012. ordinary least square method found that bank credit has a significant impact on economic growth. bank credit help in economic development (odedokun, 1998; beck et al., 2005; king & levine, 1993; levine, 2002). boyreau-debray (2003) found a negative relationship between bank credit and growth because chinese banks were mobilizing their investments and pouring these funds in weak leashes of chinese state enterprises. studies like beck et al. (2005) and crowley (2008) explained that bank credit to the private sector is a good indicator of economic growth. onuorah and chi-chi (2013), after studying the bank credit and economic growth in nigeria. they concluded that total production bank credit and total general bank credit positively impact economic growth. bayoumi and melander (2008) found that a 2.5% reduction in banking credit can lead to a 1.5% decrease gdp growth. švigir and miloš (2017) explained that the relationship between inflation and growth has no clear cut definition. different studies have found a different relationship, some of which are even controversial to each other. sidrauski (1967) found that there is no relationship between inflation and growth. mamo (2012), mallik and chowdhury (2001) in their study found a positive relationship. levine (1993) in his study, explained that a negative relationship exists between these variables. this explained that different levels of inflation impact growth differently. the question arises which level of inflation hurt growth and has a positive impact (švigir, & miloš, 2017). barro (1995) explained that a high rate of inflation decreases the level of investment and can negatively affect growth. ghosh and phillips (1998) studied the relationship of growth and inflation for 145 countries and found a positive relationship with a low level of inflation, and this relationship turns to negative for a high level of inflation. the empirical literature and studies that investigated the relationship between the found different results in different studies. paul, kearny and chowdhury (1997) conducted a study that explains that in 40% of countries, there is no causality between these economic variables. a bidirectional casualty existed in 20% of countries. in the rest of the countries, unidirectional causality was found. more a negative relationship was found mansoor & arshed │inflationary dynamics of consumer and producer financing: a comparative banking analysis international journal of islamic economics and finance (ijief), 4(2), 315-346 │ 327 in industrial and developed countries, and a positive relationship between growth and inflation was found in developing countries. boyd, levine and smith (2000) explained that a high level of inflation interferes with the price signalling mechanism of the financial market. it disturbs the active and accurate fund distribution of financial intermediaries, resulting in low economic output. the lending operation of banks is a key factor in economic growth. however, there is a risk that bank irrational lending practices can lead to inflation. on the one hand, excessive lending to speculative and unproductive ventures can lead to an increase in the money supply and hence can result in inflation. also, if the bank restricts its lending operations, the result will be low production also, empirical studies have proven that excessive bank lending to the private sector can lead to inflation from the demand side (huang & xu, 1999; corsetti et al., 1999; antzoulatos, 1996; ludvigson, 1999). bacchetta and gerlach (1997) explain that the reduction in the banking credit can decline the overall consumption level and growth of the economy, and the same it will do to inflation. ghosh and phillips (1998) found a positive relationship between these two. debelle (2004) explains that the efficiency of monetary policy can be weakened by the uncontrolled lending of banks to the private sector due to inflationary pressures. younus (2004), in her study using var and granger causality test, found that banks credit to the private sector is inflationary. now while explore the studies related to islamic credit, a study by shahzad, ahmed and rehman (2012) explored the different characteristics of islamic financing in which it connects the increase in demand and increase in assets. under this framework increase in islamic financing is expected to be less or no inflationary. ayuniyyah, beik and arsyianti (2013) provide an insignificant effect of islamic financing on inflation for the case of indonesia. a recent study by selim and hassan (2019) assessed the role of interest-free monetary policy on the misery index. and for the case of 12 countries, the results showed a negative effect of interest free financial expansion on misery index, which includes a decrease in inflation. further, cham (2019) confirmed no effect of islamic financing on inflation in gcc countries, and individual country estimates show that 5 out of 7 countries show the deflationary effect of islamic financing. since modern economics has not considered inflation as compared to what islamic economics has mentioned. hence previous studies have not opened up to the fact that the usurious and speculative effects of conventional banking system lead to more inflation than growth. this mechanism increases the income inequality among rich and the poor. this study explores the comparative role of islamic and conventional financing in mansoor & arshed │inflationary dynamics of consumer and producer financing: a comparative banking analysis international journal of islamic economics and finance (ijief), 4(2), 315-346 │ 328 consumer and producer financing in inflation. previous studies also ignored the fact that the financing provided by the islamic banks follow variable returns to scale, like other inputs. the size effect in certain cases explains the coefficient direction (hayes, 2017). this study incorporates this phenomenon using the square form of financing. iii. methodology 3.1. data a quantitative research technique using secondary data of economic variables extracted from the international financial statistics, state bank of pakistan annual reports and state bank of pakistan islamic banking bulletin for analysis. the time period of the study is 2009q2 to 2019q2. table 1 reports the variables used in the study. the dependent variable is cpi with base year 2010, and the independent variables are islamic consumer financing (icf) and islamic producer financing (ipf) both are in relative form with respect to total islamic financing. similarly, conventional consumer financing (ccf) and conventional producer financing (cpf) are in relative form with respect to total conventional financing. the control variables include oil prices for cost of production, industrial production index shows the total production effect and exchange rate is the effect of trade. table 1. variables and data sources variable (symbol) units sources inflation (cpi) general prices (2010 = 100) (natural log) ifs islamic consumer financing (icf) islamic consumer financing to total islamic financing sbp islamic banking bulletin conventional consumer financing (ccf) conventional consumer financing to total conventional financing sbp annual reports islamic producer financing (ipf) islamic producer financing to total islamic financing sbp islamic banking bulletin conventional producer financing (cpf) conventional producer financing to total conventional financing sbp annual reports oil prices (oil) crude oil prices (natural log) fred. st. louis industrial production index (ipi) index of industrial manufacturing (natural log) ifs exchange rate (er) annual average rupee per usd (natural log) ifs mansoor & arshed │inflationary dynamics of consumer and producer financing: a comparative banking analysis international journal of islamic economics and finance (ijief), 4(2), 315-346 │ 329 3.2. model development 3.2.1. estimated equation in order to compare the effect of conventional and islamic financing on inflation, this study has built multiple regression models comparing both forms of consumer and producer financing in separate models. following are the parameterization version of the estimation equation, which are estimated in this study. this study has proposed that the financing size also influences the marginal effect of that particular financing on inflation (hayes, 2017). this study has used the square form of the financing as proposed by (haans et al., 2016) to incorporate these dynamics. 𝐶𝑃𝐼𝑡 = 𝛼1 + 𝛼2𝐼𝐶𝐹𝑡 + 𝛼3𝐼𝐶𝐹𝑡 2 + 𝛼4𝐶𝐶𝐹𝑡 + 𝛼5𝐶𝐶𝐹𝑡 2 + 𝛼6𝑂𝐼𝐿𝑡 + 𝛼7𝐼𝑃𝐼𝑡 + 𝜇𝑡 (1) 𝐶𝑃𝐼𝑡 = 𝛽1 + 𝛽2𝐼𝑃𝐹𝑡 + 𝛽3𝐼𝑃𝐹𝑡 2 + 𝛽4𝐶𝑃𝐹𝑡 + 𝛽5𝐶𝑃𝐹𝑡 2 + 𝛽6𝐸𝑅𝑡 + 𝜀𝑡 (2) the advantage of this model is that it can explore the quadratic role of all forms of financing in inflation in pakistan. this specification can help in financing the optimal value or range in between the particular type of financing is achieving the objectives set by the policymakers. 3.3. method empirical literature investigating the relationship between banking credit and economic growth find a linear relationship between these 2 economic variables. studies like king and levine (1993) used cross country growth regression technique. demetriades and hussein (1996), demetriades and andrianova (2004), ghirmay (2004), tang (2003), used time-series data set. rioja and valev (2003) used the panel data technique. ghirmay (2004), tang (2003), demetriades and hussein (1996) explains that time series data technique is more applicable for the single country analysis. since the data is in a quarterly form comprising of 10 years, estimating the commonly used ardl model cannot control from the conditional heteroscedasticity. this study has used the arch/garch methodology to estimate inflation as proposed by (brunner & hess, 1993; payne, 2008; nyoni, 2018) on the limited/small sample while reducing the number of lags can avoid over-restrictive estimates. further, this study adds the quadratic transformation of consumer and producer financing of islamic and conventional banks as proposed by (arshed, anwar, kousar & bukhari, 2018; mansoor & arshed │inflationary dynamics of consumer and producer financing: a comparative banking analysis international journal of islamic economics and finance (ijief), 4(2), 315-346 │ 330 iqbal, kalim & arshed, 2019; arshed, anwar, hassan & bukhari, 2019; hanif, arshed & aziz, 2019). iv. results and analysis 4.1. results table 2 displays the result of descriptive statistics of all the variables. total number of observations of date set is 42 quarters. other than the financing variables, all the variables are normally distributed as their jarque bera values are insignificant at 10%. this study assumes that the financing variables are asymptotically normal using central limit theorem. all the variables have a mean value higher than the standard deviation, indicating that they are under dispersed whereby the individual observations are distributed near the mean value. hence regression analysis approach that uses the mean as a center can be appropriate. table 2. descriptive statistics ipf ccf cpf cpi er icf ipi oil mean 4.452 2.131 4.516 4.874 4.600 2.605 4.737 4.310 std. dev. 0.050 0.130 0.012 0.205 0.143 0.277 0.133 0.346 skewness -0.946 0.806 -1.151 -0.624 0.720 0.686 0.425 -0.239 kurtosis 2.421 3.196 4.042 2.339 3.531 2.021 2.511 1.908 jarque-bera 6.858 4.616 11.18 3.492 4.128 4.975 1.684 2.483 probability 0.032 0.099 0.003 0.174 0.126 0.083 0.430 0.288 observations 42 42 42 42 42 42 42 42 source: data processed by author table 3. correlation coefficient ipf ccf cpf cpi er icf ipi oil ipf 1 -0.453 0.490 0.965 0.819 -0.993 0.685 -0.220 ccf -0.453 1 -0.995 -0.337 -0.123 0.359 -0.025 -0.515 cpf 0.490 -0.995 1 0.388 0.169 -0.399 0.063 0.486 cpi 0.965 -0.337 0.388 1 0.907 -0.971 0.719 -0.262 er 0.819 -0.123 0.169 0.907 1 -0.845 0.698 -0.252 icf -0.993 0.359 -0.399 -0.971 -0.845 1 -0.726 0.301 ipi 0.685 -0.025 0.063 0.719 0.698 -0.726 1 -0.451 oil -0.220 -0.515 0.486 -0.262 -0.252 0.301 -0.451 1 mansoor & arshed │inflationary dynamics of consumer and producer financing: a comparative banking analysis international journal of islamic economics and finance (ijief), 4(2), 315-346 │ 331 based on correlation coefficients in table 3, it can be seen that there is high correlation of cpi with all the variables except for the conventional consumer financing and oil prices. while one of the variables have high correlation, which comes as an independent variable in the same model. this avoids the presence of multicollinearity. figure 4 shows the line plots comparisons of cpi with islamic and conventional producer financing. it can be observed here that the increase in islamic producer financing is positively associated with the increase in general prices in pakistan. while there seem little or no association between cpi and conventional producer financing. figure 5 shows that there seems a negative correlation between islamic consumer financing and cpi. while there is a mixed correlation between conventional consumer financing and cpi. it is negative between 2009 and 2013 and positive between 2013 and 2019. 4.32 4.36 4.40 4.44 4.48 4.52 4.56 4.4 4.5 4.6 4.7 4.8 4.9 5.0 5.1 5.2 5.3 09:1 10:1 11:1 12:1 13:1 14:1 15:1 16:1 17:1 18:1 19:1 conv. producer financing islamic producer financing cpi cpi and producer financing c o n su m e r fi n a n ci n g c p i cpi and producer financing c o n su m e r fi n a n ci n g c p i figure 4. cpi and producer financing line plots mansoor & arshed │inflationary dynamics of consumer and producer financing: a comparative banking analysis international journal of islamic economics and finance (ijief), 4(2), 315-346 │ 332 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 4.4 4.5 4.6 4.7 4.8 4.9 5.0 5.1 5.2 09:1 10:1 11:1 12:1 13:1 14:1 15:1 16:1 17:1 18:1 19:1 conv. consumer financing islamic consumer financing cpi cpi and consumer financing c o n su m e r fi n a n ci n g c p i cpi and consumer financing c o n su m e r fi n a n ci n g c p i figure 5. cpi and consumer financing line plots since the series does not constitute 30 years of data, it is small to consider a non-stationary series. and the standard unit root tests do not have the power to test the small series. this study has used two approaches to test the data series stationarity: the hegy seasonal unit root test and the second group unit root test. both tests conclude that the cpi is seasonally stationary and the data set is stationary as a group. hence arch/garch model can be applied on the level of cpi data. 4.1.1. arch model of consumer financing table 4 reports the estimates of arch model for the consumer financing variables. here using the sample of 41 quarters, the r square explains that 98% of the variation in the cpi is explained by the independent variables and the variance equation. for controlling variables, a 1% increase in the exchange rate will lead to a 0.41% increase in the general prices in pakistan. this is because devaluation of exchange rate makes imports expensive and increases the debt burden. hence inflation increase because of two phenomena, imported inflation and debt based inflation. at the same time, ma(1) component is negative significant, indicating that pakistan is facing negative random shocks in general prices. mansoor & arshed │inflationary dynamics of consumer and producer financing: a comparative banking analysis international journal of islamic economics and finance (ijief), 4(2), 315-346 │ 333 for the case of conventional consumer financing, a 1% increase in conventional consumer financing with respect to total consumer financing will lead to an increase in general prices by 6.64%. the squared coefficient of conventional consumer financing is negative, indicating that for every percent increase in the financing, there will be a 1.49% decrease in the marginal effect of conventional consumer financing on general financing. thus forming an inverted u shaped relationship, whereby a small proportion of conventional consumer financing is inflationary, while high levels of consumer financing tend to reduce inflation. this prompts that consumer financing at high levels may transform the economy to consumer economy, where the seller meets the demand. for islamic consumer financing, a1% increase in the financing will lead to a 2.48% increase in the general price level. here the squared coefficient of islamic consumer financing is negative, which means that for every percentage increase in financing will lead to a 0.52% decrease in the marginal effect of islamic consumer financing on the general prices. thus forming a u-shaped relationship, whereby a small proportion of islamic consumer financing is inflationary and high levels of financing may reduce inflation. table 4. estimates of consumer financing model arch model of consumer financing indep. variables coefficient z stat (prob.) ccf 6.641 2039.8 (0.00) ccf2 -1.493 -111.5 (0.00) icf 2.489 8.15 (0.00) icf2 -0.518 -8.57 (0.00) er 0.411 24.86 (0.00) c -7.251 -15.76 (0.00) arma coefficients ar(1) 0.893 0.09 (0.92) ma(1) -0.626 -5.84 (0.00) variance equation c 0.000 0.09 (0.92) arch(1) 2.288 2.71 (0.01) regression statistics r squared 0.98 sample 41 heteroscedasticity arch test 0.187 (0.66) normality jarque bera test 1.327 (0.51) autocorrelation q statistic insignificant (10 lags) mansoor & arshed │inflationary dynamics of consumer and producer financing: a comparative banking analysis international journal of islamic economics and finance (ijief), 4(2), 315-346 │ 334 4.1.2. arch model of producer financing table 5 reports the estimates of arch/garch model for the consumer financing variables. here using the sample of 42 quarters, the r square explains that 97% of the variation in the cpi is explained by the independent variables and the variance equation. for controlling variables, a 1% increase in the oil prices will lead to a 0.04% increase in the general prices in pakistan. this is because oil prices constitute in cost of production, hence it will create cost push inflation. for the case of conventional consumer financing, a 1% increase in conventional consumer financing with respect to total consumer financing will lead to an increase in general prices by 1695%. the squared coefficient of conventional consumer financing is negative, indicating that for every percent increase in the financing, there will be a 188.2% decrease in the marginal effect of conventional consumer financing on general financing. thus forming inverted u shaped relationship. here a small proportion of conventional consumer financing is inflationary, while high levels of consumer financing tend to reduce inflation. this prompts that very high financing to the production sector will assist in the production process; hence inflation will fall. table 5. estimates of producer financing model arch model of producer financing indep. variables coefficient z stat (prob.) cpf 1695.2 52.98 (0.00) cpf2 -188.2 -48.21 (0.00) ipf 19.76 1017.2 (0.00) ipf2 -1.800 -145.9 (0.000 oil 0.045 3.77 (0.00) ipi 0.061 1.31 (0.18) c -3865.3 -34.81 (0.00) variance equation c 0.000 0.846 (0.397) arch(1) 0.764 1.431 (0.152) garch(1) -0.108 -0.266 (0.789) regression statistics r squared 0.97 sample 42 heteroscedasticity arch test 0.154 (0.69) normality jarque bera test 1.835 (0.40) autocorrelation q statistic insignificant (10 lags) for islamic consumer financing, a 1% increase in the financing will lead to a 19.76% increase in the general price level. here the squared coefficient of islamic consumer financing is negative, which means that for every mansoor & arshed │inflationary dynamics of consumer and producer financing: a comparative banking analysis international journal of islamic economics and finance (ijief), 4(2), 315-346 │ 335 percentage increase in financing will lead to 1.8% decrease in the marginal effect of islamic consumer financing on the general prices. thus forming a ushaped relationship, whereby a small proportion of islamic consumer financing is inflationary and high levels of financing may reduce inflation. 4.2. robustness the development of the arch/garch model is based on the box jenkins methodology comprising of acf, and pacf tests to determine the appropriate lags of ar and ma model. further, the arch lm test has been used along with the aic / sic criteria to ensure the order of arch and garch models. this approach makes the development of the model robust to other competing specifications. 4.3. analysis after estimating the equation 1 and 2 using the arch/garch method. here this study will be providing the visualization of the effects of all selected financing types with inflation. comparing figure 6 and figure 7, it is evident that based on the current incidence, conventional consumer financing is not high enough to reduce inflation while the highest value islamic consumer financing has been able to reduce inflation at a higher rate. this conforms to the moderation hypothesis that islamic consumer financing is deflationary while conventional consumer financing is inflationary. this outcome achieves the first objective by providing evidence of a net deflationary effect of islamic consumer financing figure 6. regression fit of conventional consumer financing mansoor & arshed │inflationary dynamics of consumer and producer financing: a comparative banking analysis international journal of islamic economics and finance (ijief), 4(2), 315-346 │ 336 figure 7. regression fit for islamic consumer financing while comparing figure 8 and figure 9, shows that conventional financing successfully promotes the production, leading to a decrease in inflation. while based on the data, the incidence of islamic producer financing is not high enough compared to conventional financing that may promote production, so it is inflationary. this outcome provides evidence for the second objective whereby islamic financing in pakistan are not successful in reducing inflation more than conventional financing. figure 8. regression fit of conventional producer financing mansoor & arshed │inflationary dynamics of consumer and producer financing: a comparative banking analysis international journal of islamic economics and finance (ijief), 4(2), 315-346 │ 337 figure 9. regression fit of conventional producer financing v. conclusion and implication 5.1. conclusion this research is based on the idea of empirically and theoretically comparing islamic and conventional financing against inflation. as inflation is a common problem in most economies, economists are striving to create a system that can manage and control inflation. after world war 2, inflation-free economy became a dream for the economist. there is vast literature available on the finance and inflation relationship. however, no such study compares the different mode of financing and their impact on inflation. the financial system can extend credit to the economy in two major categories, first is the consumer credit, and second is the producer credit. the revival of islamic finance has been a beacon of hope that inflation-free economy can be achieved. pakistan currently has a dual banking system in which conventional banks has a major share in the financial market. on the other hand, an islamic bank is still a minor part with at most 16% share in the financial market. the main reason for this setback is the lack of public awareness and knowledge of islamic economics and some other factors. the theoretical finding of this paper is that the concept of wealth in islam is that all things belong to allah. and man on earth is a trustee of his resources and subject to be judged on the day of resurrection. that is why islamic preaching’s promote moderation and discourage wasteful consumption, self-centring, and hedonism. same as this, islamic consumer financing can mansoor & arshed │inflationary dynamics of consumer and producer financing: a comparative banking analysis international journal of islamic economics and finance (ijief), 4(2), 315-346 │ 338 only be used for shari'ah-compliant products, which are permitted. the consumer modes of financing are asset-based or asset-backed, which minimize the waste of resources and helps in promoting trade. for this reason, the demand for the only useful product will rise in the economy and demand for unproductive goods and services will decrease. conventional consumer financing is based on loans that pay interest. the consumer can use that loan anywhere he wants. this point is established on this finding that conventional banks are more concerned about the creditworthiness of the customer. moreover, the bank encourages (credit card) customers to use more credit by giving discounts on different brands. the empirical finding of the consumer financing model matches the theoretical finding of this paper. results explain that there is a more positive impact of consumer financing of conventional banks on inflation. on the other hand, islamic consumer financing help in reducing inflation. reason for such results is that islamic banks can only provide consumer financing on a real asset. and the underlying asset must be shari’ah compliant. this, in turn, reduces the chance of wasting resources and quantity of money created in the form of credit used to obtain a real asset. the producer financing theoretical model explains that money as a factor of production is present in both islamic and conventional economic models. popular belief of the conventional economic framework is that money is traded as capital, or some consider it a separate factor that is used to acquire capital goods. in both cases, the cost of using money interests. islamic economics, however, differ its opinion as allah s.w.t strictly prohibits interest. they consider money as an entrepreneur or risk baring factor of production the cost using, which is profit. now from inflation, financing for production can impact inflation from the supply side (cost-push). by increasing the financing, the supply will also increase, which help in reducing the gap between supply and demand and hence can reduce inflation. this condition holds for both islamic and conventional financing; both will help in reducing the gap by increasing supplies. however, it was hypothesized that on the supply side of the inflation impact of both financings will be different. here interest-based financing will increase production and increase the cost of production. hence their relative size explains cost-push inflation. on the other hand, in islamic financing, there is no impact of interest rate on the cost. so we can conclude that islamic financing for production will be more helpful in reducing inflation. however, the empirical finding of producer financing display results that are partially not under the theoretical concepts. the result implies that conventional financing for production has a slightly negative effect on mansoor & arshed │inflationary dynamics of consumer and producer financing: a comparative banking analysis international journal of islamic economics and finance (ijief), 4(2), 315-346 │ 339 inflation. moreover, the results of islamic producer financing is insignificant in showing deflationary effect. a possible explanation of its nonperformance is that the size and participation of islamic banks are very small compared to conventional banks. despite the market share size, other factors include the immature mudarabah market with only 4% share in islamic financing. lack of risk assessment agencies that can assess the risk of business for investment purposes. lack of mature short term islamic investment market. due to these issues, islamic banks to compete with the conventional bank have to offer pseudo-islamic products to the customer, which mimic conventional banking products. 5.2. recommendation the comparison of theoretical model and empirical finding of this study suggested that islamic consumer financing helps reduce inflation. conventional consumer financing causes inflation more than islamic consumer financing. so the government should promote consumer financing through islamic mode and facilitate islamic banking for its expansion. more islamic banks should make new ways and modes to promote their consume financing department, optimizing the target of curbing inflation in the economy. the development of risk assessment agencies is essential for facilitating and promoting equity-based financing. it will also help in the growth of mudarabah companies and will have a positive impact on economic growth. it will also help in the development of the short term islamic financial market. all these factors will help in increasing the growth of the economy can contribute to managing inflation. mansoor & arshed │inflationary dynamics of consumer and producer financing: a comparative banking analysis international journal of islamic economics and finance (ijief), 4(2), 315-346 │ 340 references abbas, a. r. 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(2004, june). the impact of monetary policy on the bank portfolio in bangladesh. bank parikrama. zoellick, r (2011). food prices close to alert status. le figaro, with afp. https://www.aier.org/article/bourbon-exports-casualty-trade-war https://hrcak.srce.hr/financije-i-pravo https://hrcak.srce.hr/financije-i-pravo international journal of islamic economics and finance (ijief) vol. 5(1), january 2022, pages 1-30 maqasid-based consumer preference index for tawarruq personal financing hanudin amin1*, dwi suhartanto2, muhammad ali3, mohd fahmi ghazali4, hamid rizal5, dzuljastri abdul razak6 *) corresponding e-mail: hanudin@ums.edu.my article history received: may 29th, 2021 revised: june 13th, 2021 september 17th, 2021 accepted: july 29th, 2021 abstract relatively, maqasid al-shariah is a missing dimension element in the available tawarruq personal financing, resulting in a convergence of this facility and its traditional counterpart. this work examines the consumer preference of tawarruq personal financing using the maqasid-based consumer preference index (mcpi). drawing upon the mcpi, the present study examines consumer preference on the offered tawarruq personal financing by 7 islamic banks in malaysia based on valid 456 usable questionnaires. the primary findings obtained indicate that all banks somewhat have a moderate mcpi. these include bank islam malaysia berhad (bimb), bank muamalat malaysia berhad (bmmb), maybank islamic, cimb islamic, rhb islamic, kuwait finance house and al-rajhi bank. this study examines a new approach to measure consumer preference using the mcpi. our contributions are confined to these particular variables – educating customer, establishing justice and promoting welfare. our study also limits its perspective on the general context of tawarruq personal financing. future works may provide different perspectives on these interrogations. this study provides a new index for islamic banks to manage tawarruq personal financing products according to maqasid al-shariah effectively. this study introduces a new measure of consumer preference of tawarruq personal financing namely the mcpi in the context of malaysia. keywords: consumer; maqasid al-shariah; islamic financing; malaysia jel classification : d11, d12, d14 type of paper: research paper @ ijief 2022 published by universitas muhammadiyah yogyakarta, indonesia doi: https://doi.org/10.18196/ijief.v5i1.11823 web: https://journal.umy.ac.id/index.php/ijief/article/view/11823 citation: amin, h., suhartanto, d., ali, m., ghazali, m. f., rizal, h., &razak, d. a. (2022). maqasid-based consumer preference index for tawarruq personal financing. international journal of islamic economics and finance (ijief), 5(1), 1-30. doi: https://doi.org/10.18196/ijief.v5i1.11823. 1 universiti malaysia sabah, malaysia 2 bandung state polytechnic, indonesia 3 institute of business management, pakistan 4 universiti kebangsaan malaysia, malaysia 5 universiti malaysia sabah, malaysia 6 international islamic university malaysia, malaysia mailto:hanudin@ums.edu.my https://doi.org/10.18196/ijief.v5i1.11823 https://doi.org/10.18196/ijief.v5i1.11823 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v5i1.11823&domain=pdf amin, suhartanto, ali, ghazali, rizal, & abdul razak │ maqasid-based consumer preference index for tawarruq personal financing international journal of islamic economics and finance (ijief), 5(1), 1-30│ 2 i. introduction 1.1. background providing financial assistance to needy and poor people is an act of virtue that shapes camaraderie among muslims in return a true brotherhood is built. of course, every good deed done is compensated by allah (swt) and every bad deed is chastised. since helping needy and poor people financially is a good deed, hence it is rewarded by the almighty. on top of that, tawarruq personal financing becomes one of the islamic banking products that contribute to strengthened profitability to islamic banks as well as its contribution that leads to an increased number of bank customers for an improved customer base. this also articulates to us that islamic banking has been ingenious in developing new financial products – meeting the shariah compliancy expectation, where benefits are superior to their cost. from 1983 till today, malaysian islamic banks keep on improving their performance and public image through extended financial engineering (iqbal and mirakhor, 2011) and tapping into shariah governance’s potential (muneeza, hassan and wisham, 2011; hassan, 2014). consequently, islamic banks remained resilient, competitive and somewhat better than their conventional peers relatively – implying islamic banks are offering financial innovations, which are safe, secured and profitable – competitive when comparing with their conventional counterparts. although tawarruq personal financing earned improved shariah compliancy and being innovative, still there are misconceptions sourced from poor mindsets by laymen who are steering the facility flaws and associated them with the earlier practice of bay al-inah – sale and buy-back arrangement (ali and hassan, 2016). firstly, there is a negative word of mouth, which are somewhat shared on social media platforms and even worse, they were suggesting a total improvement in terms of products' novelty – to be novel without mimicking their conventional peers even this is claimed to be a sentiment and being groundless to be taken. secondly, there is also a fallacy suggesting that tawarruq personal financing is just a rebranding of bay al-inah personal financing, even though these two are not in tandem in terms of modus operandi and the validity of shariah compliance. thirdly, there is also a poor mindset by laymen claiming tawarruq personal financing is similar to its conventional peer, personal loan – claiming this occurs as far as the two have an "increased implication" in terms of the selling price associated with tawarruq personal financing and in terms of unjustified increase with a personal loan. even, in reality, they are not alike. without any measures for improvement, these issues can become bigger when the social circle of the laymen become bigger, which lead to poor public image and in turn poor receptiveness. to date, tawarruq personal financing is now not only amin, suhartanto, ali, ghazali, rizal, & abdul razak │ maqasid-based consumer preference index for tawarruq personal financing international journal of islamic economics and finance (ijief), 5(1), 1-30│ 3 competed with its conventional peer but also qardhul hassan financing, which is available in some particular states in malaysia. to compete better, islamic banks should acknowledge the importance of welfare and justice in their offered tawarruq personal financing to be concerning qardhul hassan financing (ahmed, 2011). these elements somewhat are fallen short, which warrants further attention to improve its marketability. in general, the bank serves two roles in the tawarruq masrafi (organised tawarruq). the bank serves two functions, firstly, as the customer’s purchasing agent, and secondly the customer’s selling agent. the problem here is the authenticity of these roles, whether it is existed in reality or only in theory. to ensure tawarruq personal financing occurs islamically, the transacting commodity must be made available and accessible among the transacting parties to ensure deliverability can take place. if the availability and accessibility are not met, the financing product is invalid. full ownership should take place before the seller can sell the commodity to the buyer. these issues are only some issues that are drawn from tawarruq personal financing. the selling point here is (1) these issues have a great likelihood to repeat not only to the one bank but also to many banks, when human errors are taken into account (2) these issues are important to be avoided to ensure the shariah compliancy can be upheld accordingly. islamicity, transparency, availability and accessibility are deliberately the key. many studies in islamic financing have considered islamic home financing (md-taib, ramayah and abdul razak, 2008), qardhul hassan financing (amin, ghazali and supinah, 2010) and ar-rahnu financing (amin and chong, 2011), to mention some. relatively, studies pertinent to tawarruq personal financing are fallen short. shreds of evidence pertinent to the factors influencing tawarruq personal financing are somewhat limited, and the best we can share is a study by amin and abdul hamid (2018), which examines factors contributing to the receptiveness of tawarruq home financing though a focus has deviated from the present work. moreover, earlier works have considered conventional theories in examining factors contributing to the receptiveness of islamic financing products (md taib et al., 2008; ali, raza, puah and karim, 2017). the theories employed include the theory of reasoned action (tra), the theory of planned behaviour (tpb), the diffusion of innovations theory (dit) and the triandis interpersonal behaviour theory (tib). the theories employed include the theory of reasoned action (tra), the theory of planned behaviour (tpb), the diffusion of innovations theory (dit) and the triandis interpersonal behaviour theory (tib). though valid, these theories are developed in the framework of capitalist norms, which meets one’s unrestricted needs in any consumption at the expense of public interest (khan, 2014) and therefore it is not sufficient to reflect maqasid al-shariah in amin, suhartanto, ali, ghazali, rizal, & abdul razak │ maqasid-based consumer preference index for tawarruq personal financing international journal of islamic economics and finance (ijief), 5(1), 1-30│ 4 the context of tawarruq personal financing. the present study is conducted to close the gap that existed. 1.2. objective this work is aimed at assessing consumer preference of tawarruq personal financing in malaysia. for that purpose, we apply maqasid al-shariah to our current context, and we call it the maqasid-based consumer preference index (mcpi). at best, three reasons why maqasid al-shariah is considered as the theory that leads to the development mcpi. firstly, maqasid al-shariah ranks preference according to the hierarchy of basic needs and considering wants is only made when all the magnitude of basic need is met. secondly, maqasid al-shariah offers consumption and spending according to islamic worldview elements, where overspending and wastages are prohibited in any halal decision related to consumption and spending. thirdly, past studies have proven empirically that maqasid al-shariah is somewhat valid in examining consumer preference (amin et al. 2014) and islamic banking performance (mohammed, abdul razak and md taib, 2008). hence, the maqasid theory is selected. the mcpi developed here is essentially different from other previous studies' findings in three ways. we first attempt to extend the applicability of hwang and yoon’s (1981) approach, which is on simple additive, weighting method to the mcpi. it is yet employed in the context of tawarruq personal financing. we second make an effort to employ an interplay approach where the integrations between abu zahrah’s (1997) theory and hwang and yoon's (1981) approach are made possible. the last one is in terms of the development of rare battery items related to the current dimensions' items (educating the public, establishing justice and promoting welfare). in all, this study adds to the very limited knowledge available for literature in the mcpi, and the results obtained can provide a general direction to improve the planning of tawarruq personal financing. the rest of the paper is organised as follows. in the second section, the background of tawarruq and related previous studies are presented. the third section discusses the research methodology, which outlines the description of the theory used, sample and data collection. the fourth section presents the empirical results, which are aimed at answering the research objective developed earlier. the last section concludes this work. amin, suhartanto, ali, ghazali, rizal, & abdul razak │ maqasid-based consumer preference index for tawarruq personal financing international journal of islamic economics and finance (ijief), 5(1), 1-30│ 5 ii. literature review 2.1. background theory tawarruq is normally broken down into two categories. category #1: tawarruq haqiqi (tawarruq fardi). in this type of tawarruq, it is assumed that four parties are get involved namely the seller, the bank, the customer and the buyer. the bank purchases commodity xyz from the seller, and then the bank resells it to the customer (at a mark-up), the customer later will resell it to the buyer for cash. the purpose is for cash or liquidity. no interaction exists between the bank and the last buyer. this is of a classical type. category #2: tawarruq munazzam. two types of tawarruq derived from it are al-masrafi and reverse tawarruq. regardless of these types, tawarruq munazzam assumed that four parties are get involved namely the seller, the bank, the customer and the buyer. the bank purchases commodity xyz from the seller, and then the bank resells it to the customer (at a mark-up), the customer later will appoint the bank to resell it to the buyer for cash. the purpose is for cash or liquidity. there is an interaction between the bank and the last buyer. this is an organised type of tawarruq and it is widely offered by malaysian islamic banks as depicted in table 1. table 1. the offered islamic personal financing in malaysia no islamic bank tawarruq bay al-inah 1 affin islamic berhad yes no 2 al rajhi bank yes no 3 alliance islamic berhad yes no 4 ambank islamic no yes 5 bank islam malaysia berhad yes no 6 bank muamalat malaysia berha yes no 7 cimb islamic yes no 8 hong leong islamic yes no 9 hsbc amanah yes no 10 kuwait finance house yes no 11 maybank islamic berhad yes no 12 mbsb bank yes no 13 ocbc al amin na na 14 public islamic berhaad no yes 15 rhb islamic bank yes no 16 standard chartered saadiq yes no note: na = not available to explicate tawarruq personal financing, an example that is derived from bank islam malaysia berhad (bimb) is provided. it is denoted as bimb personal financing. by definition, bimb personal financing facility is a financing facility in which it is extended to customers to fulfil their genuine financial need, amin, suhartanto, ali, ghazali, rizal, & abdul razak │ maqasid-based consumer preference index for tawarruq personal financing international journal of islamic economics and finance (ijief), 5(1), 1-30│ 6 where the purposes are identified to shariah-compliant like for umrah, marriage and visiting family members. the rate used is known as base rate (br) and it is optionally – be it fixed or floating. it is termed “unsecured financing” since there is no requirement for guarantors or items attended as collateral security. the bank relies on 5cs in reimbursing cash out of the personal financing to the customer. the modus operandi of the bimb personal financing has occurred at least at 7 stages. the details are provided as follows: s1: the customer applies and completes the form and the necessary documents. the customer signs the agreement offer to purchase (otp) to buy a commodity that is sold to him without knowing the quantity and type of commodity. the completed form is considered ijab to complete the rukun sighah in a sale transaction. this takes a minimum of 3 days and a maximum of 14 days; s2: the bank will buy the commodity in bundle from broker a in the international market to meet the financing application which includes murabahah transaction in its 130 branches. this includes personal financing product, business financing etc. it is noted the bank is only allowed to own the commodity for a maximum of 2 hours; s3: once it is bought, the bank immediately sells the commodity to the customer on a murabahah basis (mark-up); s4: the customer, in turn, appoints the bank as an agent through the appointment of the bank as a sale agent (absa) to sell back the commodity to broker b. the appointment is important because the customer is unable to find a new commodity purchaser. the appointment is done at the first stage to facilitate customers from not approaching the bank frequently; s5: the bank as a representative of the customer will sell the commodity to broker b at the purchase cost. the transactions involving stage 3 to stage 5 should be done in a period of a maximum of 2 hours; s6: the proceeds (i.e. equal to the amount applied for personal financing) from broker b will be credited to the customer's account after the customer signs the acceptance of purchase (aop) which is viewed qabul. this process is done within a minimum of 24 hours and a maximum of 3 days. at this stage, the customer will identify the selling price of the commodity he bought from the bank; and s7: the customer pays the selling price on a monthly instalment until maturity. amin, suhartanto, ali, ghazali, rizal, & abdul razak │ maqasid-based consumer preference index for tawarruq personal financing international journal of islamic economics and finance (ijief), 5(1), 1-30│ 7 the abovementioned happened in practice for shariah compliance and marketability of the product. likewise, compounding interest is forbidden in tawarruq personal financing. this type of riba is best known as riba aljahiliyyah out of penalty or extra payment once a debtor is unable to service the loan on time. in our context, however, accumulated ta’widh is allowed out of compensation issue at a fixed rate of 1 per cent. 2.2. previous studies studies in the area of islamic personal financing including tawarruq personal financing have been developed in four primary topics but are not limited to the practical context, theory testing and market survey and maqasid-based consumer behaviour, to mention some. the details are provided. 2.2.1. practical perspectives dusuki (2010) offers a point of view analysis pertinent to tawarruq financing products through the introduced bursa suq al sila in 2009 in which is a platform that facilitates islamic financial transactions mainly tawarruq financing products including personal financing. the market provides genuine commodity transactions where possession and delivery of the commodity can take place without any hindrance, as opposed to the controversial practice of tawarruq using the london metal exchange. bursa suq al sila provides improved shariah compliance which leads to a declaration by oic fiqh academy deems as impermissible. unlike ab rahman, mohamad and salleh (2010), this study is the first of its kind to provide a macro perspective of the tawarruq practices in malaysia. ab rahman et al. (2010) examine bay al-tawarruq and its application at bank islam malaysia berhad’s (bimb) personal financing. the practice is built based on tawarruq munazzam or organised tawarruq. unlike mahyudin and che seman (2014; 2018) and alkhan and hassan (2019), ab rahman et al. (2010) offer three interesting rulings pertinent to the permissibility of bay altawarruq. first, bay al-tawarruq is viewed to be permissible (harus), second it is reprehensible (makruh) and thirdly it is reprehensive nearing prohibited (makruh closes to haraam). detail differences between bay al-inah and bay al-tawarruq are offered significantly. one of the differences is that the number of parties involved for the former is only two persons whilst the latter considers three parties and more. generally, this study influences other authors, in explaining the practical use of bay al-tawarruq (abdullah thaidi et al., 2014; mahyudin and che seman, 2014; 2018; alkhan and hassan, 2019). abdul rahman and ab manan (2014) examine tawarruq as a useful instrument to finance retail the halal (permissible) way. any types of business running are considered halal not only in terms of the products and services sold to amin, suhartanto, ali, ghazali, rizal, & abdul razak │ maqasid-based consumer preference index for tawarruq personal financing international journal of islamic economics and finance (ijief), 5(1), 1-30│ 8 consumers but also in how they are funded. if the funds obtained are emanated from halal financing, then it is considered shariah-compliant. generally, speaking the efforts taken by abdul rahman and ab manan (2014) are relatively comparable to other works (ab rahman et al., 2010) and nothing new offered but sufficient for public reading. though limited, this work intends to promote tawarruq personal financing as a financing method for helping muslim businesses to strengthen their businesses in terms of customer base and profit earned. this notion has influenced ahmad, shihama, mohamad tarmizi, jibril, djama and muneeza (2017) who acknowledge that bay al-inah has a problem due to legal stratagem, and for that tawarruq is introduced as a replacement. detail descriptions about bursa suq al sila are offered meticulously which helps improve our understanding concerning its practice and application. influenced by ab rahman et al. (2010), abdullah thaidi, ab rahman and ab rahman (2014) provide further exposition pertinent to tawarruq personal financing, where the emphasis is given on the existence of uncertainty (gharar) in each stage of transactions. this focus if we compare with other works (e.g. alkhan and hassan, 2019), has been distinct in divulging the beauty of shariah compliance of the facility. using library observation and qualitative interviews, this study finds out that there is a gharar element in the practice of tawarruq personal financing. it is permitted out of gharar yasir termed as little or small gharar. the first gharar is on the exact details of the transacting commodity for the selling transaction when a customer is applying for the facility. the second is about the selling price that is determined at the beginning of the transaction, which is not informed to the customer in the ijab process. the third is about the running of the aqad (ijab and qabul), which is done simultaneously in one session. this has happened when a customer signs offer to purchase (otp) at the beginning and then the qabul takes place after at least a minimum of three days when the customer signs the acceptance of purchase (aop). ijab and qabul are done separately and not in one session. these details are missing in other works (mahyudin and che seman, 2014; 2018; alkhan and hassan, 2019) out of considered different research scope and paradigm. drawn from mahyudin and che seman (2018), specific information pertinent to bay al-tawarruq in bank muamalat malaysia berhad (bmmb) is provided. in more detail, they examine the original principles and current application of the tawarruq in the context of bmmb. tawarruq has been adopted as an alternative to the bay al-inah in financing products offered by bmmb. it was departed in 2006 at the bank and unlike bay al-inah it is considered a less controversial contracts. all bmmb financing products including personal financing followed tawarruq have been executed properly according to the sequences in tandem with the shariah committee but somehow such amin, suhartanto, ali, ghazali, rizal, & abdul razak │ maqasid-based consumer preference index for tawarruq personal financing international journal of islamic economics and finance (ijief), 5(1), 1-30│ 9 practices may vary for deposit products accordingly. earlier, the same authors also made an attempt pertinent to bay al-tawarruq at the same bank. mahyudin and che seman (2014) find bay al-tawarruq has replaced bay alinah in operationalising financing products of the bank and such a finding is emanated from interview among staff to support the study’s library research. jointly, due to legal trick (hilah), tawarruq personal financing is viewed as the best to replace bay al-inah personal financing which has acute problem pertinent to hilah, which is reported inconvenience and unislamic. unlike mahyudin and che seman (2014; 2018), alkhan and hassan (2019) provide an interesting debate pertinent to the permissibility of the product. generally, they report that the practice of organised tawarruq as found in the context of personal financing might be permissible according to shariah. furthermore, four main mistakes drawn from the engaged organized tawarruq are but not limited to. the client delegates the islamic bank to sell the commodity on his behalf, the islamic bank appointing an agent on behalf of the client – so that the agent may sell the commodity on behalf of the client, lack of existence of a commodity and selling the same commodity to multiple islamic banks simultaneously. the study discovers the practice of organised tawarruq has been in adherence to shariah and according to aaoifi shariah standards, especially when organised tawarruq transactions are executed for islamic personal financing. 2.2.2. theory testing past works in islamic financing products have rotated in three main theories, the theory of reasoned action (tra), the theory of planned behaviour (tpb) and the rogers’ innovation diffusion theory (idt), to mention some. a study by amin et al. (2010) examines factors determining qardhul hassan financing acceptance using the tra and discovers subjective norm, pricing and attitude influence the acceptance. unlike amin et al. (2010), amin, abdul rahman and abdul razak (2014) examine factors determining islamic home financing using the tpb. they managed to discover the significant relationships between attitude, subjective norm, perceived behavioural control, islamicity of product and acceptance. besides, marital status, ethnicity, occupation and religion are also instrumental in determining acceptance. such demographic items are untapped in amin et al. (2010) due to different research scope and objective. unlike amin et al. (2010) and amin et al. (2014), amin, abdul rahman and abdul razak (2013) examine islamic home financing acceptance using an integrative approach, through a combined framework sourced from the tpb and the idt. this integrative approach helps improve the explanatory powers emanated from the factors concerned and provides more rich empirical results, which are strengthened if compared with one theory used. amin, suhartanto, ali, ghazali, rizal, & abdul razak │ maqasid-based consumer preference index for tawarruq personal financing international journal of islamic economics and finance (ijief), 5(1), 1-30│ 10 amin et al. (2013) report that attitude, compatibility, subjective norm, reliability advantage simplicity and perceived behavioural control affect islamic home financing acceptance. it is worth mentioning that the factors determining the acceptance are relatively broad that may justify the importance of amalgamating theories to have an extended result. earlier work in islamic home financing acceptance like md taib et al. (2008) only examine attitude and subjective norm drawn from the tra and found both are statistically significant. their findings however confined our abilities to observe what are other factors determining the behavioural intention. all these reviewed studies provide a point of departure pertinent to the theoretical framework and how it is relevant to the current context. first, consumer theories used when studying consumer acceptance, consumer behaviour are driven by conventional theories which have a different definition of worldviews in consumption and spending – limited to the worldly needs only. second, limited efforts have forwarded by these studies in examining tawarruq personal financing, perhaps it is a replacement product that is still at the infancy stage in malaysia. the only study-related is by amin and rizal (2018) who examine tawarruq but from the context of islamic mortgages, and due to this considered outcome, the current work is extending to void the research gap found. 2.2.3. market survey ali and hassan (2016) examine the issue of shariah non-compliant events in islamic banks in the practice of tawarruq financing in malaysia. drawing from a qualitative methodology, they managed to elicit responses from 16 malaysian islamic banks pertinent to the shariah non-compliance issue. they report that some practices of tawarruq financing have been at an alarming rate and may need corrective measures to ensure its shariah compliance. in more detail, the study discovers an improper sequence of sale contracts, improper facility disbursement, improper disclosure of price, the absence of wakalah agreement, inappropriate imposition of ta’wid (compensation and delivery restriction, among others, contribute to the shariah non-compliant events. importantly, non-halal income sourced from these events is channelled to the poor, underserved, da’wah (islamic propagation) and school-related activities. on the same note, ali and hassan (2020) examine determinants of shariah non-compliant events in islamic banks in malaysia, where tawarruq financing comes into play. unlike ali and hassan (2016), ali and hassan (2020) offer further elaborations on tawarruq through the presentation of the determinants, which are untapped in ali and hassan (2016) though emanated from the same authors. they discover that lack of understanding and knowledge, inadequate control mechanism, ineffective functional structure, amin, suhartanto, ali, ghazali, rizal, & abdul razak │ maqasid-based consumer preference index for tawarruq personal financing international journal of islamic economics and finance (ijief), 5(1), 1-30│ 11 incompatibility of system, improper document execution and inadequate internal policies have led to shariah non-compliant events. without any measure, shariah non-compliant events can accelerate negative perception, which in turn can create new sentiment to reject tawarruq personal financing, for instance. 2.2.4. maqasid-based consumer behaviour ahmed (2011) provides a relevant argument pertinent to the maqasid alshariah quality for the offered islamic banking products available around the world. the important contribution of his work is the proposal of exposing three types of islamic financial products sourced from two sets of shariah requirements built, one legal and other social obligations. the first product is a shariah-based product that is meeting both legal and social obligations. the second product is a shariah-compliant product that is meeting the only legal requirement at the expense of social obligations. the third product is a pseudo-islamic product that meets the form but not the substance of islamic law. maqasid is related to islamic financial products in two dimensions. first, ssb is responsible to ensure the maqasid is achieved at the contract level by fulfilling the form and substance of islamic law. second, bod determines whether the products are shariah-based or shariah-compliant – along with the line, the ssb observes and ensures the products are not pseudo-islamic to attain maqasid al-shariah. unlike ahmed (2011), a study by amin (2017) examines consumer behaviour from a standpoint of the islamic theory of islamic consumer behaviour (itcb) and one of the variables used is perceived maqasid. the study finds a significant relationship between perceived maqasid and consumer behaviour, sourced from unbiased respondents' feedbacks as well as the proper process involved in developing their battery items reflecting the maqasid. influenced by khan and ghifari (1992), amin (2017) develops a framework for prediction and applications in future work of any prospective researchers. khan and ghifari (2017) assert that the consumption which is driven by maqasid al-shariah is potentially conducted according to hierarchy – ranging from essential (daruriyyat), complementary (hajiyyat) and embellishment (tahsiniyyat). one is meeting first the essential before the second two follow. the issue of maqasid al-shariah in ensuring the shariah compliancy of islamic banking products including tawarruq personal financing has been also addressed by bakar (2016) in his published work shariah minds in islamic finance. following bakar (2016), maqasid al-shariah does not invalidate the shariah contracts used in islamic financing products and is not considered a ruling in justifying the modus operandi of the products. maqasid al-shariah provides new perspectives about the products' fulfilment based on the elements of life, religion, intellect, property and lineage, and therefore it is amin, suhartanto, ali, ghazali, rizal, & abdul razak │ maqasid-based consumer preference index for tawarruq personal financing international journal of islamic economics and finance (ijief), 5(1), 1-30│ 12 reasonable to consider its relevance to the offered tawarruq personal financing and surely it does not invalidate the product when it is not applied. further, amin (2019) examines consumer acceptance using a maqasid alshariah approach. unlike khan and ghifari (1992) and amin (2017), amin (2019) explains the behaviour based on three factors sourced from the maqasid stance, namely education, welfare, justice and debt policy. these factors are instrumental in determining the receptiveness hence extending the applicability of the maqasid al-shariah to include consumer receptiveness of mortgage-based islamic social finance. this study develops a source of funding drawn from zakat, waqf and sadaqah for promoting affordable mortgage financing. earlier, a work by amin and abdul hamid (2018) learn to promote tawarruq home financing, where the source of funding derived from islamic banks’ shareholder funds as well as reserves. their finding is in tandem with amin’s (2017) findings obtained – demonstrating the quality of maqasid compliance is nothing but a significant predictor. bank customers' intent to patronise tawarruq home financing should the incentives of justice, welfare and education are established for a formation of willingness to accept. all in all, three important summaries are drawn from the studies reviewed. firstly, past studies have addressed tawarruq personal financing from the context of permissibility of the offered at the marketplace (alkhan and hassan, 2019; mahyudin and che seman, 2014; 2018; ahmad et al., 2017; abdul rahman and ab manan, 2012). this issue, so far, has been settled when bursa suq al sila introduced in 2009 to overcome that issue, where shariah compliance is brought into play. secondly, we acknowledged that limited efforts are documented on how existing theories relevant to tawarruq personal financing in terms of public perception and receptiveness (amin et al., 2013; md-taib et al., 2008). this also another question, which warrants an empirical investigation as evidently found in the present study. thirdly, what remains a puzzle is on how maqasid al-shariah can really useful to gauge consumer preference and for that purposes we attempt to develop constructs’ items to close the gap (ahmed, 2011; khan and ghifari, 1992). iii. methodology our index is called maqasid consumer preference index (mcpi) consists of educating customer (ec), establishing justice (ej) and promoting welfare (pw) and the intra-attributes are the 20 elements and the 20-consumer behaviour measure (cbm). the weights for the 3 dimensions of the mcpi and the 20 elements are evaluated by five shariah scholars. the evaluation for the cbm is based on consumers’ response to the 7 sampled islamic banks in malaysia. the model specification involving the four indexes is described as follows: amin, suhartanto, ali, ghazali, rizal, & abdul razak │ maqasid-based consumer preference index for tawarruq personal financing international journal of islamic economics and finance (ijief), 5(1), 1-30│ 13 v (01-03) = 𝑊 1 1 x 𝐸 1 1 x 𝑅 1 1 + 𝑊 1 1 x 𝐸 2 1 x 𝑅 2 1 + 𝑊 1 1 x 𝐸 3 1 x 𝑅 3 1 + 𝑊 1 1 x 𝐸 4 1 x 𝑅 4 1 + 𝑊 1 1 x 𝐸 5 1 x 𝑅 5 1 or 𝑊 1 1 (𝐸 1 1 x 𝑅 1 1 + 𝐸 2 1 x 𝑅 2 1 + 𝐸 3 1 x 𝑅 3 1 + 𝐸 4 1 x 𝑅 4 1 + 𝐸 5 1 x 𝑅 5 1 )……………. (1) where, 01-03 denote the dimensions involved 𝑊 1 1 is the weight assigned to the dimensions 𝐸 1 1 is the weight assigned to the 1st element of the dimensions 𝐸 2 1 is the weight assigned to the 2nd element of the dimensions 𝐸 3 1 is the weight assigned to the 3rd element of the dimensions 𝐸 4 1 is the weight assigned to the 4th element of the dimensions 𝐸 5 1 is the weight assigned to the 5th element of the dimensions 𝑅 1 1 is the weight assigned to the 1st cbm to the 1st element of the dimensions 𝑅 2 1 is the weight assigned to the 2nd cbm to the 2nd element of the dimensions 𝑅 3 1 is the weight assigned to the 3rd cbm to the 3rd element of the dimensions 𝑅 4 1 is the weight assigned to the 4th cbm to the 4th element of the dimensions 𝑅 5 1 is the weight assigned to the 5th cbm to the 5th element of the dimensions the weightage assigned to each component of mcpi is based on the five shariah scholars’ feedback pertinent to the level of relevance of the components involved in the context of tawarruq personal financing. the first component, educating customer rated 33 per cent and the same score extended to establishing justice. promoting welfare is rated 34 per cent. the categorisation of the mcpi into three categories (low, moderate and high) is based on its maximum value of 5. the categories are broken down into three groups namely low (< 3.00), moderate (3.00 – 3.75), and high (3.76 and above) and these categories are agreed by the shariah scholars the total of the consumer measures for the mcpi for each bank formed the mcpi, implying that the mcpi for the individual bank is the sum of its cbm of ec, ej and pw, thus: mcpi = ec (01) + ej (02) + pw (03) ………………………………………………. (2) as noted earlier, the score obtained by an individual bank is defined as follows: low (< 3.00), moderate (3.00 – 3.75), and high (3.76 and above). 3.1. data the present study conducts a pilot test involving 30 actual bank customers drawn from malaysian public universities to elicit their responses to the research instrument. given the outcome of the test, a revision is made to the research instrument in terms of clarity, format, and presentation. the amin, suhartanto, ali, ghazali, rizal, & abdul razak │ maqasid-based consumer preference index for tawarruq personal financing international journal of islamic economics and finance (ijief), 5(1), 1-30│ 14 participants in this study are university employees who are also bank customers. they are selected using judgmental sampling method. in malaysia at least, university staff are asked by their finance department to open savings account for salary crediting, making them part of the customer base of islamic banks. university employees are diverse according to their grade, age and position, to mention some. such differences are also found among bank customers, hence, representing the actual composition of islamic bank customers. following cochran (1963), the present study employs the minimum sample size of 384 with a 5 per cent margin of error and a 95 per cent confidence level. a 5 per cent margin of error is an acceptable margin of error in social studies such as consumer behaviour. in our study, however, customers are derived from a diverse economic background and for that, larger sample size is needed to reflect the heterogeneity of a population. of the 500 questionnaires, this collects 456 usable questionnaires, which are sufficient at attaining the robust findings. the data collection process is explained as follows: step 1: distributing 500 samples there are at least two reasons for selecting 500 samples. first, with a large sample, a small error, which could be generated by some respondents, would have only a small effect on the overall sample results. second, the sample is more representative of a population, which, in turn, can generate significant outcomes. step 2: selecting labuan and kota kinabalu the tawarruq personal financing is also developed obviously in labuan and kota kinabalu in east malaysia. labuan is an offshore financial centre whilst kota kinabalu is the heart of the domestic banking market in the region. step 3: selecting respondents the respondents of this study are drawn from universities located in the selected geographies. university employees are a worthy blend of professional and non-professional groups to represent the actual composition of islamic bank customers. this study proposes three criteria when selecting the respondents as follows: (1) the respondents are existing islamic banks’ customers; (2) the respondents chosen are aged between 25 to 45 years old; and (3) the respondents are familiar with the offered tawarruq personal financing. amin, suhartanto, ali, ghazali, rizal, & abdul razak │ maqasid-based consumer preference index for tawarruq personal financing international journal of islamic economics and finance (ijief), 5(1), 1-30│ 15 3.2. model development the following are two steps taken to develop the mcpi: step #1 – literature analyses after careful consideration, abu zahrah’s (1997) dimensions are employed due to the growing empirical support as proven by mohammed et al.’s (2008) research. the authors propose an innovative method to gauge islamic banks’ performance using the maqasid approach, which is found to be empirically valid and reliable. following mohammed et al.’s (2008) research, the present study extends the maqasid approach to examine consumer preference and to rank 16 islamic banks according to customers’ feedback based on the mcpi. step #2 – operationalisation the present study’s battery items are identified in the literature and subsequently verified by shariah scholars for face validity to produce better items’ operationalisation. table 2 presents the final research instrument. this study defines the dimensions used as follows, including an explanation of their importance: (1) educating customer refers to a consumer’s belief that an islamic bank educates its customers on the offered tawarruq personal financing. with better financial knowledge, bank customers will have improved confidence and willingness to patronise the facility; (2) establishing justice refers to a consumer’s belief that an islamic bank promotes fair dealings in its products. justice assures that the transactions involving the products are impartial and leave bank customers with peace of mind; and (3) promoting welfare refers to a consumer’s belief that an islamic bank provides affordable financing products to the needy and poor people. welfare ensures that people can own houses to improve their well-being. based on five series of interviews, the shariah scholars are asked to assign weights to the dimensions and evaluate whether the cbm measures are acceptable. table 3 presents the details of the average weights given by scholars. table 3 displays that the allocation of weight for each dimension is found to be equal. this denotes that all dimensions tested have similar importance towards the mcpi. besides, all elements under the dimensions are weighted equally, implying that they have a similar role in representing the mcpi. based on this finding, it is noted that islamic banks should rely on multi-dimensional measures rather than individual measure when operating maqasid al-shariah in their tawarruq personal financing. besides, our mcpi is best captured by the following visual framework, figure 1. amin, suhartanto, ali, ghazali, rizal, & abdul razak │ maqasid-based consumer preference index for tawarruq personal financing international journal of islamic economics and finance (ijief), 5(1), 1-30│ 16 table 2. operationalisation concepts dimensions elements the mcpi data educating customer (amin et al., 2014; mohammed et al., 2008) knowledge dissemination vivid fatwa i believe that islamic banks provide clear fatwa information for tawarruq personal financing products survey clear adverts i believe that islamic banks provide clear adverts for tawarruq personal financing products survey publicity continuous publicity i believe that islamic banks provide continuous publicity for tawarruq personal financing products survey islamic consumerism consumer education i believe that islamic banks provide a consumer education for tawarruq personal financing products survey product disclosure sheet i believe that islamic banks provide sufficient disclosure for tawarruq personal financing products survey establishing justice (mohammed et al., 2008; muneeza et al., 2011) unfairness avoidance of conflict i believe that islamic banks have avoided unfair conflicts with customers of tawarruq personal financing products survey fair price fairness in pricing i believe that islamic banks have practised price fairness for tawarruq personal financing products survey shariahcompliant islamic contract i believe that islamic banks have offered a fair contract of tawarruq personal financing products survey shariah ruling i believe that islamic banks have considered shariah as a comprehensive law for tawarruq personal financing products survey free negative elements i believe that islamic banks have practised tawarruq personal financing products that free from negative elements like riba survey promoting welfare (haniffa & hudaib, 2007; mohammed et al., 2008) customer service welfare through an improved customer service i believe that islamic banks have guarded the welfare of customers via effective customer service survey ummah benefit offering profitable islamic home financing products i believe that islamic banks have offered tawarruq personal financing products that benefit the public more survey amin, suhartanto, ali, ghazali, rizal, & abdul razak │ maqasid-based consumer preference index for tawarruq personal financing international journal of islamic economics and finance (ijief), 5(1), 1-30│ 17 table 2. operationalisation (continue) concepts dimensions elements the mcpi data promoting welfare (haniffa & hudaib, 2007; mohammed et al., 2008) (continue) wealth redistribution via mortgages affordable financing i believe that islamic banks provide a financing facility where the funds are drawn from zakat and waqf survey competitive package i believe that islamic banks have met the requirement of basic need via an offer of competitive products survey shareholder investment i believe that islamic banks have protected the interest of shareholders through the competitive offered tawarruq personal financing survey table 3. average weights for the four and 20 elements given by shariah scholars concepts dimensions elements weight (100%) educating customer 33% e1.vivid fatwa 20 e2.clear adverts 20 e3.continuous publicity 20 e4.consumer education 20 e5.product disclosure sheet 20 establishing justice 33% e1.avoidance of conflict 20 e2.fairness in pricing 20 e3.islamic contract 20 e4.shariah ruling 20 e5.free negative elements 20 promoting welfare 34% e1.welfare through an improved customer service 20 e2.offering profitable tawarruq personal financing products 20 e3.affordable financing 20 e4.competitive package 20 e5.shareholder investment 20 amin, suhartanto, ali, ghazali, rizal, & abdul razak │ maqasid-based consumer preference index for tawarruq personal financing international journal of islamic economics and finance (ijief), 5(1), 1-30│ 18 figure 1. research model 3.3. method the data collected are analysed using the statistical package for the social sciences (spss) 21 due to its flexibility and aptitude to key in large data systematically as a dataset. spss is useful for data transformations, particularly when converting data obtained from microsoft excel and online questionnaire feedbacks into a readable spss dataset. the responses obtained are keyed in by stages to include five battery items for each dimension. the procedures employed are described as follows: (1) we begin by keying in the items representing ‘educating customers’, followed by ‘establishing justice’, and ‘promoting welfare’. all items keyed in are obtained from consumer feedbacks. then, we multiply the weight of 20% for each item tested based on the equation noted earlier (e*cbm) using a special feature of “compute variable” found in the spss; and (2) the outcome obtained would be multiplied by 33% weight as identified in the interview, referring to 33% (20%*cbm). the last stage is the generation of the overall mean scores for the three dimensions to compare the rank of the 7 islamic banks involved to allow an inference. iv. results and analysis 4.1. results the present study conducts a factor analysis using principal component analysis (pca) to confirm the constructs’ item validity (sekaran & bougie, educating customer establishing justice promoting welfare mcpi amin, suhartanto, ali, ghazali, rizal, & abdul razak │ maqasid-based consumer preference index for tawarruq personal financing international journal of islamic economics and finance (ijief), 5(1), 1-30│ 19 2010). the kaiser-meyer-olkin (kmo) test shows a value of 0.944, indicating that the sampling adequacy is greater than 0.5, and therefore, is deemed acceptable. table 4 displays that all constructs’ items are loaded greater than the threshold value of 0.6 in the dimension, confirming construct validity. concerning cronbach’s alpha, all factors tested have values exceeding the threshold of 0.6, clarifying that all constructs’ items are reliable. the results are as follows: educating customer 0.880 (5), establishing justice 0.883 (5) and promoting welfare 0.904 (5). to meet the research objective, the mcpi results are presented in table 5. concerning educating customer, it is reported that bank islam malaysia berhad has an index score of 3.83 for the first spot, followed by cimb islamic, bank muamalat and al-rajhi bank, to mention some. the reasons are twofold. first, the banks have disseminated their product information consistently through brochures and bunting; and second, the banks have offered improved customer services to enhance customer satisfaction and patronage. educating customer serves as an opportunity to convert customers’ request on tawarruq personal financing into actual demands as affirmed by amin et al. (2014), who report a positive impact of education on consumer acceptance of the facility. hence, banks might work on improving education platforms through the inclusion of related literacy programmes of the products. besides, banks might share their product offerings via social media platforms to breed awareness for adoption. amin, suhartanto, ali, ghazali, rizal, & abdul razak │ maqasid-based consumer preference index for tawarruq personal financing international journal of islamic economics and finance (ijief), 5(1), 1-30│ 20 table 4. factor analysis and reliability test battery items f1 f2 f3 i believe that islamic banks provide clear fatwa information for tawarruq personal financing products .870 i believe that islamic banks provide clear adverts for tawarruq personal financing products .855 i believe that islamic banks provide continuous publicity for tawarruq personal financing products .800 i believe that islamic banks provide a consumer education for tawarruq personal financing products .782 i believe that islamic banks provide sufficient disclosure for tawarruq personal financing products .753 i believe that islamic banks have avoided unfair conflicts with customers of tawarruq personal financing products .851 i believe that islamic banks have practised price fairness for tawarruq personal financing products .831 i believe that islamic banks have offered a fair contract of tawarruq personal financing products .825 i believe that islamic banks have considered shariah as a comprehensive law for tawarruq personal financing products .807 i believe that islamic banks have practised tawarruq personal financing products that free from negative elements like riba .733 i believe that islamic banks have guarded the welfare of customers via effective customer service .770 i believe that islamic banks have offered tawarruq personal financing products that benefit the public more .755 i believe that islamic banks provide a financing facility where the funds are drawn from zakat and waqf .726 i believe that islamic banks have met the basic need of homeownership via an offer of competitive products .712 i believe that islamic banks have protected the interest of shareholders through islamic investment in the area of tawarruq personal financing products .698 eigenvalue 6.145 4.342 2.978 variance explained 38.22 22.10 11.711 kaiser-meyer-olkin measure of sampling adequacy 0.944 bartlett's test of sphericity x2=11614.679 (df 190, sig. 0.000) cronbach’s alpha 0.880 0.883 0.904 amin, suhartanto, ali, ghazali, rizal, & abdul razak │ maqasid-based consumer preference index for tawarruq personal financing international journal of islamic economics and finance (ijief), 5(1), 1-30│ 21 table 5. maqasid consumer preference index (mcpi) for tawarruq personal financing no. islamic banks ec ej pw mcpi ranking cbm �̅� cbm �̅� cbm �̅� 1. al-rajhi bank 1.1748 3.56 1.1484 3.48 1.1594 3.41 3.4826 5 2. bank islam malaysia berhad 1.2639 3.83 1.1946 3.62 1.2104 3.56 3.6689 1 3. bank muamalat 1.1781 3.57 1.1781 3.57 1.1594 3.41 3.5156 3 4. cimb islamic 1.1781 3.57 1.1781 3.57 1.1662 3.43 3.5224 2 5. kuwait finance house 1.1286 3.42 1.1253 3.41 1.1492 3.38 3.4031 7 6. maybank islamic 1.1748 3.56 1.155 3.50 1.1730 3.45 3.5028 4 7. rhb islamic 1.1517 3.49 1.1319 3.43 1.1560 3.40 3.4396 6 table 5 reports that three banks are committed to establishing justice to gain loyalty among their customers to improve the customer base and later their profit. the banks are bank islam malaysia berhad (3.62), followed by bank muamalat (3.57) and cimb islamic (3.57). mohammed et al. (2008) and amin et al. (2014) assert that justice is imperative for islamic banks to establish fair dealings with their customers. in the present study's context, however, banks might develop a code of conduct to promote fair dealings, affordable financing packages, and the elimination of injustices. as for promoting welfare, it is found that bank islam malaysia berhad, maybank islamic, and cimb islamic are ranked first, second, and third, respectively. this finding is following earlier works by chapra (2000) and dusuki (2008) who assert the significance of socio-economic justice and the public’s welfare in islamic banks to actualise the maqasid al-shariah for shariah compliance. the banks prioritise welfare through effective customer services, safeguarding the banks’ profit without compromising social obligation, offering affordable financing products drawn from endowment funds, the fulfilment of basic needs, and the protection of the banks’ shareholders through permissible profit generation via tawarruq personal financing. going forward, it is suggested that bank managers should consider the poor and needy groups when offering the facility and for that, waqf-based personal financing can be proposed to meet the group’s needs. given the mcpi, a total of 7 islamic banks have been examined equally in this study. bank islam malaysia berhad is relatively better as compared to other banks, followed by cimb islamic, bank muamalat and maybank islamic, among others. other banks are mapped within the moderate mcpi score. amin, suhartanto, ali, ghazali, rizal, & abdul razak │ maqasid-based consumer preference index for tawarruq personal financing international journal of islamic economics and finance (ijief), 5(1), 1-30│ 22 4.2. analysis generally speaking, this study has proven that the maqasid approach is valid and relevant when explaining consumer behaviour of tawarruq personal financing. the current work has extended the applicability and the generalisation of the abu zahrah (1997) in which the three maqasid al-shariah namely education, justice and welfare are confirmed significant in defining their perceptual behaviours on tawarruq personal financing. the basis of the theoretical framework sourced from the theory has helped improve our understanding pertinent to the factors that influence consumer behaviour of tawarruq personal financing. earlier works by amin et al. (2014) and amin (2017) have demonstrated the significance of the maqasid al-shariah as essential to determine the receptiveness of islamic home financing products. though interesting these studies have confined and narrowed their perspectives on the product whilst the consideration of tawarruq personal financing is limited. though ahmed (2011) argues that tawarruq personal financing does conform to the legal form and not meeting the substance of the shariah or serve social needs. ahmed (2011) asserts it as a pseudo-islamic product. his argument is somewhat in tandem with the current finding indicating that the scores obtained are relatively moderate, ranged from a low of 3.00 to a high of 3.75. this product is somewhat only able to meet the need of bank customers who possess consistent monthly income, civil officers and affluent folks, to mention some. the considered objectives of maqasid al-shariah are still minimal and poorly established. in short, pseudo-islamic products are only meeting the legal form, whilst social needs are relatively lacking. tawarruq personal financing has viewed to meet the need of a certain group of people who has the aptitude of permanent income cash inflow whilst those needy and poor folks are unable to do so owing to poor employment and lack of creditworthiness. moreover, three constructs’ items are developed properly with the help of 5 interviews with shariah scholars, who are also lecturers at a public university in malaysia. we have confirmed that churchill jr (1979) is relatively relevant in our context, proving the five items extracted for each factor are fruitful in explaining consumer behaviour of tawarruq personal financing. two approaches introduced by churchill jr (1979) are found valid in the present work in divulging the five items for each dimension or factor. in more detail, we have developed new items that capture the specific context of tawarruq personal financing, which is yet studied in earlier works of islamic financing in the context of islamic banking products in malaysia (md taib et al., 2008). educating customer, establishing justice and promoting welfare that describe maqasid al-shariah for tawarruq personal financing are valid and justified in amin, suhartanto, ali, ghazali, rizal, & abdul razak │ maqasid-based consumer preference index for tawarruq personal financing international journal of islamic economics and finance (ijief), 5(1), 1-30│ 23 the current context. the current study reveals that these four concepts are imperative, consistent with the finding of mohammed et al. (2008) who use maqasid al-shariah when measuring the actual objectives of islamic banks, so lengthens the application of the maqasid theory to include consumer behaviour of tawarruq personal financing. our results indicate that the 7 examined banks have placed a minimal effort in the inclusion of maqasid al-shariah in their business operations including tawarruq personal financing. though maqasid al-shariah is not a requirement to validate the tawarruq personal financing transactions (bakar, 2016), relatively it is still important to ensure the offered can promote the inclusion of educating public pertinent to the facility, the formation of the shaped justice and importantly the development of welfare that benefits the many. the findings suggest all banks involved have a moderate score for the mcpi, implying there is a need to proactively promote maqasid al-shariah in their offerings. the current efforts are still minimal and for that changing the product landscapes through proper research and collaboration can be thought of to acknowledge maqasid al-shariah in their offerings. following chapra (2000), maqasid al-shariah is one of the ingredients in ensuring the successful offered tawarruq personal financing and because of that critical applications of the approach is of utmost importance. consequently, it helps improve the competitive advantage of tawarruq personal financing, at least. 4.3. implication this section consists of a critical discussion on the contributions – broken down into three sections. the details are provided. 4.3.1. theoretical implications this study offers a new approach in measuring consumer behaviour of tawarruq personal financing by the establishment of a pragmatic approach to guide theory development and to provide a common frame of reference which to integrate various research streams in the context of tawarruq personal financing. our study has adopted the abu zahrah (1997) theory in our attempts to explain consumer behaviour. even though this approach is relatively new and provides interesting results, revealing educating customer, establishing justice and promoting welfare are explicitly significant to determine consumer behaviour, driven from the examination of the details directed in introducing the approach in the context of tawarruq personal financing. our empirical findings add new knowledge to the limited body of knowledge presently available in the context of tawarruq personal financing. amin, suhartanto, ali, ghazali, rizal, & abdul razak │ maqasid-based consumer preference index for tawarruq personal financing international journal of islamic economics and finance (ijief), 5(1), 1-30│ 24 4.3.2. methodological implications to our knowledge, this study is the first of its kind to extend the applicability of the mcpi to capture tawarruq personal financing. previous research has reflected a limited theoretical perspective and has overlooked important theories from islamic perspectives owing to the difficulty in the conceptualisation and operationalisation of the dimensions capturing mcpi. the current work contributes to the literature in two ways. first, we propose that the dimensions’ items are multidimensional to capture different property of knowledge by respondents addressed in the current study. second, applying maqasid al-shariah through the mcpi that leads to improved operationalization of the dimensions’ items is valid and therefore extending the applicability of maqasid al-shariah to include tawarruq personal financing. 4.3.3. practical implications in terms of practical implications, the results can be employed to guide managers whose objective is to promote consumer selection of tawarruq personal financing in their islamic banks. first, it has been shown that the three dimensions related (education, justice and welfare) are predictors of consumer behaviour. thus, managers might consider new etiquette related to maqasid al-shariah, as one of the common procedure needed to ensure the offered tawarruq personal financing is of value in providing new knowledge to bank customers along with proper assistance of justice and welfare if necessary. second, it has been shown in this study, results obtained for all banks are typically moderate. though their influence is somewhat marginal, the impact can be greater if certain formality is established and facilitated. it might be possible to inculcate maqasid al-shariah through the publication of the merits drawn from the dimensions embedded to tawarruq personal financing. third, managers are also guided to ensure the resources related can be optimized to ensure the offered successfully. these include effective personnel for customized services and an online information centre to support potential and repeat customers. v. conclusion and recommendation 5.1. conclusion it is worth noting that the present study proves the applicability of the maqasid al-shariah to explain consumer behaviour of tawarruq personal financing, through the formation and development of mcpi, specifically capturing the current’s context. we have confirmed the validity of the mcpi in the current context through the positivism approach, where the questionnaire survey is brought into play. a total of 7 islamic banks have been amin, suhartanto, ali, ghazali, rizal, & abdul razak │ maqasid-based consumer preference index for tawarruq personal financing international journal of islamic economics and finance (ijief), 5(1), 1-30│ 25 included in the analysis via their customers, who have a bank account at least a normal account. all banks under contemplations have a moderate score of the mcpi, implying the maqasid al-shariah has been applied but a formal effort that makes it mandatory is still at an infancy stage. there is no such requirement to claim 'islamic banking is islamic', sufficient only when islamic banks have met the shariah compliance as outlined by the national shariah advisory council (nsac) of bank negara malaysia. at the same time, if such a need is established, the fearing part of individual banks is the costs sparked from the compliance towards maqasid al-shariah that may erode their profit amount sourced from the offered tawarruq personal financing. 5.2. recommendation the results obtained provide some actions plan for practitioners’ mainly islamic banks and regulators to design the better offered tawarruq personal financing. besides, the results offer a new idea to academicians who are eager to undertake an extended study of tawarruq personal financing covering different geographies, countries and the new proposed variables to extend the findings. concerning islamic banks, the results indicate that the banks shall develop tawarruq personal financing, where the maqasid “implications” are found and for that better action plans through the enhanced shariahcompliance practices are developed. these include proper documentation and better advertisement to the targeting customers. besides, offering tawarruq personal financing funded via sadaqah funds should be prioritised to those poor and needy folks, where the discounted profit rate is offered for improving value-based intermediation, as well as an ummah, improved wellbeing. concerning the regulator, the outputs obtained from this work can be employed as a general guideline in developing a directive, which is holistic and effective in inculcating the importance of maqasid al-shariah as another competitive weapon of islamic banks – complementing the importance of shariah compliance. besides, this study can provide important characteristics that can be employed when permitting islamic banks to arrange their mortgages based on maqasid al-shariah. in turn, this effort if it is directed properly can lead to the introduction of the maqasid al-shariah home financing facility, and this is something beautiful in reducing the gaps between shariah compliancy and shariah-based products for the industry, at least. as for academicians, this study offers two perspectives that guide future researchers who are interested to extend our research setting and model. firstly, our study introduced a new way of gauging consumer preference, where the score rating approach found in the mcpi is introduced and evaluated empirically. future researchers are expected to extend this approach in different geographies for application and generalisation purposes. secondly, our study proved the applicability of the maqasid alamin, suhartanto, ali, ghazali, rizal, & abdul razak │ maqasid-based consumer preference index for tawarruq personal financing international journal of islamic economics and finance (ijief), 5(1), 1-30│ 26 shariah, when explaining islamic banking products’ receptiveness as found in the current study, specifically on tawarruq personal financing. we report two research drawbacks, thought to have an impact on future research direction. first, the current study only examines three dimensions emanated from abu zahrah (1997) theory of maqasid al-shariah. future studies are encouraged to extend new dimensions and integrated them with abu zahrah (1997) for application and generalisation. second, our geographies are confined to labuan and kota kinabalu in east malaysia whilst evidence from west malaysia is still minimal about the research setting and the stored of empirical results. hence, future studies may consider the inclusion of new cities from west malaysia and be compared with cities in east malaysia to extend the research findings. acknowledgement this study is funded by the fundamental research grant scheme (frgs): frg0438-ss-1/2016, ministry of higher education (mohe), malaysia. many thanks to sister z. anis for her research assistance. our grateful is also extended to the editor, dr ascarya, the managing editor, dr dimas bagus wiranatakusuma and the editorial team of the journal for their brilliant publication supports. amin, suhartanto, ali, ghazali, rizal, & abdul razak │ 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(2010). research methods for business: a skill building approach (5th edn.), west sussex: john wiley and sons. amin, suhartanto, ali, ghazali, rizal, & abdul razak │ maqasid-based consumer preference index for tawarruq personal financing international journal of islamic economics and finance (ijief), 5(1), 1-30│ 30 this page is intentionally left blank. ijief:international journal of islamic economics and finance vol. 1 (2), pg 187-208, january 2019 why do indonesian islamic banks take the risk?: the case of two major islamic banks yaser taufik syamlan stei tazkia, indonesia, yasersyamlan@tazkia.ac.id ar rizal azinuddin stei tazkia, indonesia, ar.azinuddin@student.tazkia.ac.id article history received: december 15, 2018 revised: january 3, 2019 accepted: january 4, 2019 abstract this study aims to analyze the effect of bank size, deposit guarantee system, number of competitors, leverage, and bank age on the risk-takingbehavior of islamic banks in indonesia at the period of 2001-2016. risk taking is projected to financing to asset ratio (far). the deposit guarantee system is proxied by deposit guarantee using a dummy variable. the number of competitors is proxied by the market value of islamic banking. leverage is proxiedbythe total of third party funds. bank age is proxied by bank age according to the 2001-2016 period of study. this study uses secondary data from published financial reports and uses panel data regression methods. the samples are two pioneers of islamic bank in indonesia, namely bank muamalat indonesia and bank syariah mandiri. the results of this study show that bank size has a positive effect on risk taking. as a result also applies to the number of competitors and bank age. only deposit insurance variable that has a positive but not significant influence and leverage variable has the significant negative effect. in conclusions, the islamic bank takes the risk due to the tight competition, the age of bank, the amount of third party fund collected and the asset of the bank. keywords: risk taking, islamic banking, bank size, leverage, deposit insurance jel classification:c23, g21, g32, g41 @ ijief 2019 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.1210 web: http://journal.umy.ac.id/index.php/ijief/article/view/1210 citation: syamlan, y. t., & azinuddin, a. (2019) why do indonesian islamic banks take the risk? : the case of two major islamic banks. international journal of islamic economics and finance (ijief), 1(2), 187-208. doi: https://doi.org/10.18196/ijief.1210. mailto:yasersyamlan@tazkia.ac.id mailto:ar.azinuddin@student.tazkia.ac.id syamlan & azinuddin| why do indonesian islamic banks take the risk?:the case of two major islamic banks ijief:international journal of islamic economics and finance, 1(2), 187-208 |188 introduction bank as an intermediary institution from surplus unit to deficit unit, has an important role in the community. it takes a careful consideration to run the bank business because it will always be tangent to the risks that will be faced by the bank(werner, 2016). public trust in banking is the key to maintain national banking stability,and this can be achieved through the existence of legal regulations, bank supervision, and deposit guarantees for bank customers to keep the bank business healthy. one of the factors in which risks arise in bank activities is the risk-taking by bank management (hussein, 2010). the event of the crisis that occurred in indonesia in 1997-1998 is a history and an important lesson that shows trust is the main key in the relationship of banks with the public. one of the 1997 crisis impacts is that bank indonesia was assisted by the imf to liquidate 16 unsecured banks. this led to bank runs that occurred in some private banks and loss that reached half the gdp of indonesia. but bank muamalat indonesia as the only islamic bank was relatively strong to withstand the crisis. although it only operates without progress, at least the bank did not go bankrupt. this multidimensional crisis caused a decline in the value of rupiah, the liquidation of 16 banks, and the decline in public trust toward the national banking system. to that end, the indonesian government issued a blanket guarantee policy governing the government guarantee of all obligations (third party funds) of commercial banks and rural banks (nasution, 2000). this policy is also intended as an effort to improve banking performance and strengthen the bank's capital structure and reduce the negative impacts caused by bank runs events. blanket guarantee is granted without limitation on the amount of customer deposits in the bank and implemented by the indonesian bank restructuring agency (1998-february 2004) in cooperation with the ministry of finance through the government guarantee implementation unit (since 27 february 2004). based on the paradigm, as well as the existence of empirical reality that shows many conventional banks are not able to survive in the financial and monetary crisis struck, the government hence amend law number 7 year 1992. there are changes on some matter content act number 7 of 1992 set forth in law number 10 year 1998. this law reinforces the existence of islamic banking in indonesia (anshori, 2008) blanket guarantee shows a positive implication in restoring public trust in the banking system, but on the other hand the guarantee causes a financial burden for the state and more moral hazard potential for banks. therefore, the government of indonesia through the banking act no. 10 year 1998 section 37 b reduces the scope of underwriting by changing the policy of the syamlan & azinuddin| why do indonesian islamic banks take the risk?:the case of two major islamic banks ijief:international journal of islamic economics and finance, 1(2), 187-208 |189 blanket guarantee to a limited guarantee. for the sake of the underwriting, the government established the deposit insurance agency (lps) on september 22, 2004, legalized through law no. 24 year 2004. lps is a deposit guarantor institution form based on the law number 24 year 2004 regarding deposit insurance agency as amended by act number 7 of 2009. past research has proved that the implementation of the deposit guarantee system raises the moral hazard in the form of increased bank decisions in adding risky assets or in this case the loan to asset ratio (lar) ratio. increased lar is a sign of decreasing the quality of bank assets through higher risk taking (chernykh& cole, 2011). the birth of law no. 10 of 1998 on amendment to law no. 7 of 1992 concerning banking, has enabled the islamic bank to operate fully as an islamic (bus) commercial bank or by opening an islamic business unit (uus). bank syariahmandiri was born (a conversion from bank susila bakti) and uus bank ifi. at the end of 1999, the total assets of islamic banks in indonesia only reached rp1.12 trillion or about 0.11% compared with the conventional bank assets (anshori, 2008).then, there were several other islamic banks, in december 2002 there were 2 bus and 6 uus, with total assets reaching rp4.05 trillion. on december 16, 2003, the indonesian council of ulama (mui) issued a fatwa on the haram of bank interest that caused the inorganic growth. as of december 2004, the total of islamic banks reached 3 bus and 15 uus with total assets of rp15.33 trillion (mukhlisin, et al., 2015). banks that have high leverage, have a high risk as well. this explains when banks are fully secured by the government, banks tend to seek more assets with the aim of increasing return on equity by using third-party collected funds (kunt & detragiache, 2002). based on above background, the research questions are as follows: 1. does bank size have a significant effect to risk taking? 2. does deposit insurance have a significant effect to risk taking? 3. does bank competition have a significant effect to risk taking? 4. does leverage have a significant effect to risk taking? 5. does bank age have a significant effect to risk taking? syamlan & azinuddin| why do indonesian islamic banks take the risk?:the case of two major islamic banks ijief:international journal of islamic economics and finance, 1(2), 187-208 |190 literature review theory of risk taking many researchers that discussed the theory of risk taking cited the work of the boyd and nicollo (2005) whereas the propose new terms “fundamental risk-incentive mechanism” that happened in banking industry; or in this case conventional and islamic bank system. above mechanism exist on the asset side of banking whenever bank channeled their deposit that taken from depositors to the credit (boyd & nicolo, 2005). in the case of islamic bank, this mechanism also occurred whenever ibs approved new financing proposal from customer by way of equity based financing of musyarakah and mudharabah, debt based of murabaha, as well as the lease based financing of ijarah or ijarah muntahiyya bit tamleek. the risk taking that befalls in the asset side is basically driven by the deposit market competition according to boyd and nicollo (2005). the bad side of deposit market competition that stated by boyd and nicollo (2005) is a resultant of the government policy that impose the deposit insurance to gain and maintain the depositors trust on the banking system. to that extent, the term risk – incentive mechanism is rooted from the decision of government to give guarantee over the deposit product such as current account, saving account as well as the term deposit. furthermore, deposit guarantee at the end pushed banks including the islamic bank to take more risk which also create the moral hazard. the risk taking process is also happened in islamic bank. alam & tang, 2012 has observed that according to the prospect theory. islamic bank in the context of prospect theory still has rational in making their risky financing decisions but unveil different level of risk takingsubject to the target of outcome. moreover, the investment of islamic bank mainly on the financing the customer either on the productive sector that improve the economy or financing the consumptive sector to cater personal client necessity need like housing, car, or even education cost. alam & tang ( 2012) used net loans to total asset ratio (nltar) which calculate the net financing derived from equity based, debt based and leased based financing divided to the total islamic bank asset. this ratio also can be called as financing to asset ratio (far). syamlan & azinuddin| why do indonesian islamic banks take the risk?:the case of two major islamic banks ijief:international journal of islamic economics and finance, 1(2), 187-208 |191 variables that influence risk taking there are some variables that influence the risk taking namely bank size, deposit guarantee system, bank competition, leverage and bank age with below literature: 1. bank size according to hakenes & schnabel (2011) and hughes, et al. (2001) the bank size or in this case the economic scale of the bank havestrong relationship to the risk – taking. bigger bank size may add more risk-taking behavior since they have more fund than the smaller bank. moreover, it proved that there is a significant positive influence between bank size on the risk taking preference. the higher the assets or assets owned by a bank, the higher the volume of credit that can be channeled by the bank, in other words the tendency of banks to take greater risks. however, internally he big banks have tendencies to diversify their financing portfolio than smaller size banks due to their stronger capital structure. hypothesis 1: "there is a positive influence between bank size on risk taking" 2. deposit guarantee based on boyd & nicollo (2005) the birth of deposit guarantee system may cause asymmetric condition of information, bank managers and or shareholders tend to prefer higher levels of risk with the expectation of higher returns. this situation will get worse when public guarantees of third party funds are available either explicitly or implicitly which will lead to moral hazard issues(ngalawa, et al., 2016). the government guarantee program has indeed had a positive effect on the banking sector as seen from the flow of public funds that gradually re-entered the banking sector, the panic that has occurred has been eased. hypothesis 2: "there is a positive influence between deposit insurance on risk taking" 3. bank competition according to cubillas & gonzález (2014) the financial liberation will affect the bank behavior to take risk or in this case giving more financing to the customer. financial liberation that is represented by the number of banks in banking industry will promote the sturdier bank rivalry. by that, the stiffer competition will make banks (both conventional and islamic bank) try harderto select and analyze more prospective clients before giving finance to syamlan & azinuddin| why do indonesian islamic banks take the risk?:the case of two major islamic banks ijief:international journal of islamic economics and finance, 1(2), 187-208 |192 them. in conjunction to that,cetorelli & peretto (2012) stated that more banks in a country will result more finance that can be given to the customer or in this case will boost the ratio that used in this research; net loans to total asset ratio (nltar). all in all, we can conclude the next hypothesis that relates to the competition below: hypothesis 3: "there is a positive influence between bank competition on risk taking" 4. leverage according to the werner (2016) banks including the islamic banks operated under the intermediation theory where bank collected leverage from depositor to be channeled into the debtor in form of productive or consumptive financing. the leverage; in the islamic banking context current account& saving account based on wadiah/mudharabah as well as mudharabah term deposit(ismal, 2014) have positive relationship to the on financing to asset ratio or far(cubillas & gonzález, 2014; hamidah, et al., 2015; niţescu & duna, 2016). this means when leverage rises, banks are more likely to take risks by extending excessive credit. banks with high leverage ratios have a high risk when the bank is fully secured by the deposit insurance agency. hypothesis 4: "there is a positive influence between leverage on risk taking" 5. bank age past research proves that the experience or the age of the running company triggers risk taking by way of making investment for better company performance in the future. the age of the company is one of the most important factors that determines the growth of the company, the diversity of growth of the company and the possibility of the company can be dissolved. the age of the company is one of the important attributes on the company's performance, because it explains the experience owned by the company in managing the company (yildiz, et al., 2013). in the case of banking business, according to bouwman & malmendier, 2015, the bank tend to take more risk whenver the economy is on the boom cycle and take less risk when the bust economy happened. in the context of this researrch, two banks that selected as the sampel have passed both boom and bust economic cycle and fit to be scrutinize in the matter of risk taking behavior. hypothesis 5: "there is a positive influence between bank age on risk taking" syamlan & azinuddin| why do indonesian islamic banks take the risk?:the case of two major islamic banks ijief:international journal of islamic economics and finance, 1(2), 187-208 |193 previous studies boyd and nicollo (2005) made some mathematical model that derived from an assumption that the government policy at the end will affect the banking competition. the kind of policy that might influence it is deposit guarantee. the deposit guarantee will provide an asymmetric information where bank will utilize the proceed from third party fund to expand their balance sheet by giving financing to the debtors. the exploitation thru credit drawdown done by bank due to the guarantee that government provide to the depositors or in other word, government will handle the depositors fund even if the loan that disburse to financing customer default. alam and tang (2012) introduced a ratio that called net loan to total asset ratio (nltar) to measure the risk taking behavior that islamic bank have taken during the observe period. the nltar or in this research termed as financing to asset ratio ( according to hamidah,et al., n.d.)is the amount of loan both productive as well as consumptive loan in any segment divided the total asset. the credit data that used by authorare financing by way of equity based, debt based and lease based contract. the research used prospect theory as analysis approach and found that islamic bank are averting the risk. it is also found that 99 islamic bank over the world who had higher nltar or far tend to take lower risk. hamza & saadaoui (2013), which studied 59 banks all over the world between period of 2005 – 2009, found that the risktaking might be lowered when islamic banks offered the profit sharing investment account (psia). psia has value proposition of risk sharing as well as more dislcolsure to hinder the assymetric information. this research used gmm method and recommend that islamic bank should operate under the profit and loss sharing system to normalize the risk-taking behavior. hamidah,et al., (n.d.) studied 4 stated owned bank using linear regression and found that the deposit guarantee and bank size have positive and significant impact to the risk taking or in this case financing to asset ratio (far) syamlan & azinuddin| why do indonesian islamic banks take the risk?:the case of two major islamic banks ijief:international journal of islamic economics and finance, 1(2), 187-208 |194 methodology data this research uses quantitative research method in the form of data processing through annual report of islamic bank to get complete and accurate data in research target. the object of this research is islamic banking which is registered in financial services authority or ojk and bank indonesia and has a complete financial report from 2001 to 2016 period. this study applies the panel data regression to scrutinize, as well as to prove, the hypotheses development. based on stipulated criteria, the sample of the research are bank muamalat indonesia(bmi) and bank syariahmandiri (bsm). this paper will use 5(five) variables which have proxy as follows: a. bank size; bank size measure using natural logarithm total asset; b. deposit insurance; 0 = blanket guarantee & 1 = limited guarantee; c. bank competition; comparison of islamic bank asset in the study to market share in the concerned period; d. leverage; natural logarithm proportion of total third party funds received by the bank (current account, saving account, time deposit) in idr; and e. bank age; the age of bank in year. the panel data regression this research is processed using the panel data analysis due to the cross section data. data regression panel is a combination of cross section data and time series data, where the same cross section unit is measured at different times. so in other words, panel data is data from several of the same individuals observed in a given period of time. in the data panel regression analysis method, the model equation using time series data can be described in detail as follows: models with time series data "yt = α + βxt + εt; t = 1,2, ..., t " n: number of time series data while the model equation using cross section data can be described in detail as follows: models with cross section data "yi = α + βxi + εi; i = 1,2, ..., n " n: number of cross section data syamlan & azinuddin| why do indonesian islamic banks take the risk?:the case of two major islamic banks ijief:international journal of islamic economics and finance, 1(2), 187-208 |195 because the panel data regression analysis method is a combination of data between time series data and cross section data, the model can be described in detail as follows: "yit = α + βxit + εit; i = 1,2, ...., n; t = 1,2, ..., t " info: n: number of observations q: number of times n x t: number of data panels result and analysis results 1. the chow test the chow test is conducted to estimate the most suitable model between fixed effect model and fixed coefficient (pooled least square). the hypothesis submission of chow test is as follows: h0: pooled least square h1: fixed effect model in the best model test using chow test, it can be seen from the probability value (prob.) for cross-section f. if the prob. value> 0.05 then h0 is accepted and the selected model is pls, if the prob. value <0.05 then the selected model is fem. thus, these are the results of data processing from panel data regression with chow test table: table 1.the chow test result prob. > f 0,1474 source: processed data. in table 1 above, note that the prob.value is 0.1474> 0.05 which means significant at the 5% level, then h0 is accepted and h1 is rejected. the chow test result selected model is pooled least square (pls). 2. the hausman test the hausman test aims to estimate the most suitable model between the fixed effect model and the random effect model (rem). the hypothesis submission of hausman test is as follows: h0: fixed effect model syamlan & azinuddin| why do indonesian islamic banks take the risk?:the case of two major islamic banks ijief:international journal of islamic economics and finance, 1(2), 187-208 |196 h1: random effect model if the value (prob. > chi2) is greater than the significance level (5%) then the received h0 or random effect model is more appropriate than the fixed effect model. however, if the value (prob. > chi2) is less than the significance level (5%) then the received h0 or fixed effect model is more appropriate to use than the random effect model. the result of data processing from panel data regression with hausman test is as follows: table 2.the hausmantest result prob. >chi2 0,3890 source: processed data. based on table 2 above, it can be seen that prob. > chi2 0.3890> 0.05 which means not significant from 5% of real level. from hausman's test results, it is known that the value (prob. > chi2) is 0.3890. from this result it can be concluded that random effect model is more appropriate than fixed effect model. the next step is to test whether pooled least square or random effect model is better to use by performing the lagrange multiplier test (lm test). 3. the lm test after passing hausman and chow test, researchers still have to do the lm test because there is no prominent model. this test is performed to select the right model for this research, between pooled least squareor random effect model with the following hypothesis: h0: pooled least square h1: random effect model if the value (prob. > chi2) is greater than the significance level (5%) then the accepted h0 or pooled least square is more appropriate to use than the random effect model. however, if the value (prob. > chi2) is less than the significance level (5%) then the received h0 or random effect model is more appropriate to use than the pooled least square. from the results of lagrange multiplier (lm test), it is known that the value (prob. > chi2) is 1,000. from this result it can be concluded that pooled least square (pls) is more appropriate to use than the random effect model (rem). to see the complete statistical result of these test, please refer to the appendix 1, appendix 2, and appendix 3. syamlan & azinuddin| why do indonesian islamic banks take the risk?:the case of two major islamic banks ijief:international journal of islamic economics and finance, 1(2), 187-208 |197 4. the determination coefficient test (r2) tabel 3.the determination coefficient test (r-square) effects specification r-squared 0.414250 mean dependent var 0.749025 adjusted r-squared 0.301605 s.d. dependent var 0.055127 s.e. of regression 0.052573 sum squared resid 0.071861 f-statistic 3.677502 durbin-watson stat 1.806623 prob(f-statistic) 0.011938 source: author (2018) the following test results coefficient of determination or r-square can be seen in table 3. the coefficient of determination can be known by looking at r-square. the coefficient of determination shows the proportion of variation of the dependent variable which can be explained by the independent variable. based on table 3 above, it can be seen that the r-square in this study amounted to 0.414250 or 41%. these results indicate that the dependent variable of risk taking is 41% influenced by independent variables, while the rest is 59% influenced by variables or factors outside the model of this study. 5. the simultaneous significance test (f-test) f test is performed to find out whether the variable of bank size, lps, bank competitor, leverage, bank age simultaneously have an effect on the specified variable that is risk taking. tabel 4.f-test prob. (f-statistic) 0.011938 based on table 4 above, note that the prob value (f-statistic) is 0.011938 to the value of significance <0.05 of real level, then h0 is rejected, so in conclusion there is an influence from bank size, deposit insurance, bank competitors, leverage, bank age simultaneously towards risk taking. syamlan & azinuddin| why do indonesian islamic banks take the risk?:the case of two major islamic banks ijief:international journal of islamic economics and finance, 1(2), 187-208 |198 6. the partial significance test (t-test) tabel 5. t-test variable coefficient std. error t-statistic prob. bank size 0.343782 0.123767 2.777648 0.0098 lps 0.001878 0.043267 0.043406 0.9657 bank competitor 0.143724 0.033508 4.289294 0.0002 leverage -0.324345 0.125525 -2.583909 0.0155 bankage 0.114503 0.020080 5.702304 0.0000 c 1.852645 0.450087 4.116191 0.0000 partial significance test conducted to determine the effect of independent variables on individual dependent variable. t test can be seen from the level of significance of each variable, if the significance value <0.05 then the independent variables affects the dependent variable. based on table 5 above, it can be seen that all independent variables have a significant effect on risk taking, there is only 1 variable that has no significant effect that is deposit guarantee with the value of 0.9657. the highest value of the significant variable of 0.9657 (deposit guarantee) and the lowest value of 0.0000 (bank age). bank size variable has positive and significant effect to risk taking with a probability value of 0.0098 <0.05. lps variable has no positive effect and is not significant to risk taking with a probability value of 0.9657 <0.05. then, bank competitor variable has positive and significant effect to risk taking with a probability value of 0.0002 <0.05. furthermore, leverage variable have a negative and significant effect on risk taking with a probability value of 0.0155 <0.05. the bank age variable has a probability value of 0.00000 <0.05 indicating that bank age has a positive and significant effect on risk taking. analysis h1: there is a positive influence between bank size on risk taking in table 5 it is known that the probability value of bank size is 0.0098, therefore it can be concluded that bank size has a positive and significant effect on risk taking. this indicates that there is a bank size intervention in risk taking behavior undertaken by the banks. this can be seen from the size of banks that have large assets, tend to give credit in large numbers, and can potentially be a moral hazard. there are studies with similar results among others, explaining that bank size is one of the variables that affect the possibility of moral hazard in the statesyamlan & azinuddin| why do indonesian islamic banks take the risk?:the case of two major islamic banks ijief:international journal of islamic economics and finance, 1(2), 187-208 |199 owned conventional banks in indonesia. banks that have large sizes tend to provide capital easily and if not well controlled, then moral hazard will arise due to the function of banks as business partners, by increasing profits (hamidah, sudarto, & jati, 2015). this research found that bank size has a positive and significant effect on risk taking proxied with loan to asset ratio. h2: there is a positive influence between deposit guarantee on risk taking based on table 5, it can be seen that the effect of the guarantee system using coverage limit is positive and insignificant on risk taking with a probability of 0.9657> 0.05. so it can be concluded that the deposit guarantee system using the coverage limit policy does not affect the risk taking behavior in islamic banking in indonesia. this is not in line with the previous research showing that coverage limit has a positive and significant impact on risk-taking preference in state-owned banks in indonesia (hamidah et al., 2015). they mentioned that the change in policy from blanket guarantee to coverage limit could affect the risk taking preference of state-owned banks in indonesia. thus, the results of this study can not answer the second hypothesis. this is because of the difference in the object and the number of samples. also, the policy of financing in islamic banks does not approach moral hazard due to the different system and financing stages in islamic banks. there is an additional principle that is the halal aspect of the party who applied for financing. which in this case, can reduce the level of possibility of moral hazard in islamic banking industry. h3: there is a positive influence between bank competitive on risk taking based on table 5 it can be seen that the influence of bank competition is positive and significant towards risk taking with a probability of 0.0002 <0.05. so it can be concluded that bank competition in islamic banking have an effect on risk taking preference. this indicates that the more the number of banks, the higher the policy of islamic banks in taking risks, in this case the banks are encouraged to take more risks because there is a level of competition. this is in line with the previous research, that the level of bank competition has a positive effect on risk-taking by the banking industry (boyd & de nicolo, 2005; cubillas & gonzález, 2014; huang & lee, 2013). the study explains the influence of competition on risk-taking from banks. so the hypothesis h3 can be answered. syamlan & azinuddin| why do indonesian islamic banks take the risk?:the case of two major islamic banks ijief:international journal of islamic economics and finance, 1(2), 187-208 |200 tabel 6. growth of total full fledge islamic baks in 2001-2006 source : ojk-statistikperbankansyariah (sps) 2016 in this case, bsm and bmi became the major players in the islamic banking industry from 2001 to 2004. after that in 2005 to 2008 the competition was getting tighter because there were 5 islamic banks in the industry. it became the peak and a beginning of a new era of islamic banks since the presence of law no. 21 of 2008, the business is busy because of the new competitors either it is in the form of islamic commercial bank (bus) or islamic business unit (uus). furthermore, this is in line with research from cubillas& gonzales (2014) which states that many competitors will make the financing market become tighter. a bank that can offer a competitive margin will win the competition. h4: there is a positive influence between leverage on risk taking based on table 5 it can be seen that leverage influence which is the total third party fund is positive and significant towards risk taking with a probability of 0.0155 <0.05. so it can be concluded that leverage in islamic banking has an effect on risk taking preference. this is in line with previous research showing the effect of leverage on risk taking with positive and significant results. the object of research in the previous study calculated the risk preference in state-owned banks (hamidah,et al., 2015). that is when the third party fund (dpk) rose, the provision of financing tend to go down or can be said to falter. this is in contrast with a research that states after the deposit guarantee, total deposits from third party funds increased so that banks are able to distribute more credits. banks with high leverage ratios have a high risk when the bank is fully secured by the deposit insurance agency (celerier, et al., 2016; dell’ariccia, et al., 2014)). the incompatibility of the results of this study is a natural thing considering that syamlan & azinuddin| why do indonesian islamic banks take the risk?:the case of two major islamic banks ijief:international journal of islamic economics and finance, 1(2), 187-208 |201 the previous research took samples from conventional banks while this study took islamic banks as objects. in principle, according to(ahmad, 1993), financing in islamic banks is very different from the character with conventional banks. islamic banks puts the principle of halal and thoyyiban forward, when channeling the financing (ahmad, 1993). the financing selection process should consider the halal aspect of the customer's business. after that, the needs of customers cannot be directly accommodated because islamic banks are obliged to understand the customer's business first and then select the appropriate contract of the business. this is not the case in conventional banks because the used system is not considering the halal aspect of the customer's business because the most important aspect is only the feasibility of repayment. in hamidah's research (2015), leverage has a positive effect which means that when the dpk rises it can be directly channeled into financing. h5: there is a positive influence between leverage on risk taking based on table 5 it can be seen that the influence of bank age which is the islamic bank's age is positive and significant towards risk taking with a probability of 0.0000 <0.05. so it can be concluded that bank age in islamic banking has an effect on risk taking preference. this is in line with the previous research, that the bank's age, or bank history has a positive and significant impact on risk-taking in conventional banking (bouwman & malmendier, 2015). in this case, both in islamic banks and conventional banks, the older age of a bank gives a positive impact because the business experience also increases. in addition, in the case of bmi and bsm who became the object of this study, it also has an effect on the amount of financing. figure 1. the development graph of total assets, financing at bsm bmi source: bmi and bsm financial report syamlan & azinuddin| why do indonesian islamic banks take the risk?:the case of two major islamic banks ijief:international journal of islamic economics and finance, 1(2), 187-208 |202 from the data above, the increasing of the operating age of banks, also affects the increasing amount in dpk or third party fund. the increase in total deposits will ultimately increase the total assets. in addition, the rise in dpk also makes bmi and bsm able to boost their financing, according to the charts through the increasing trend. in the end bank risks will also increase because of the various assets used in the financing are also getting larger from year to year. all in all, based on table 4, the assessment of the whole variables with a probability value of 0.011938 so that the significance value is <0.05 of real level. so the conclusion there is an influence from bank size, deposit guarantee, bank competitors, leverage, bank age toward the simultaneous risk taking. the results of this study cannot prove hypothesis h6. where all the independent variables have a positive effect on the dependent variable. this is because there is one variable that is not significant to the risk taking, which is deposit guarantee. it confirms the difference between islamic banks and conventional banks because only one variable which is leverage (dpk) that has a negative notation due to the reason like the different financing procedures in islamic banks and conventional banks. conclusion and recommendation conclusion the objective of this study to find evidence related to the influence of dependent variable that is risk taking, to independent variable that is bank size, deposit guarantee, bank competitor, leverage and bank age. the object used in this research is islamic banking registered in bank indonesia (bi) with 15 year period from 2001-2016. the results are (1) bank size proved to have a positive effect on risk taking. the size of the banking sector will indirectly increases the risk taking. thus, it can be seen that the size of banking shows how much risk preference is taken by the banking system (2) deposit insurance proved to have positive but not significant impact on risk taking. this shows that if the coverage guarantee system as in coverage limit conducted by deposit guarantee in islamic banking rises, risk-taking preference also increases. however, deposit insurance variable has no significant impact on the risk taking of islamic banking. (3) bank competition proved to have a positive and significant impact on risk taking. this shows that banking competition can increase risk taking preference in islamic banking. (4) leverage has a negative and significant impact on risk taking. that means if the value of leverage increases, then the risk preference made syamlan & azinuddin| why do indonesian islamic banks take the risk?:the case of two major islamic banks ijief:international journal of islamic economics and finance, 1(2), 187-208 |203 by islamic banks is reduced. this is because when it comes to islamic banks, in performing the financing function there are very strict stages from various aspects, especially aspects that pay attention to the halal aspect an effort from the proposed financing, in contrast to the stage of financing in conventional banks. (5) bank age has a positive and significant impact on risk taking. that means if the age of the bank grew, then the islamic bank tends to be more daring in risk taking preference. recommendation based on the above result, there are two recommendations which are: 1. for the future research, this topics can be broaden by omitting the variable of deposit guarantee. it seem logic since only two islamic bank in indonesia, namely bank syariah mandiri (bsm) and bank muamalat indonesia (bmi), who have experience in both limited guarantee as well as blanket guarantee. the omission of that variables may give more findings that will be benefit to the islamic bank industry 2. for the regulator in this case indonesia financial authority (ojk), as per advised by the hamza & saadaoui (2013), the psia can be solved the matter of excessive risk taking by islamic bank since the risk can be shared among investors and islamic banks. moreover, psia will reduce the asymmetric information that is now occurred in islamic bank. to this extent, ojk can implement the work of syamlan (2018) which is the first who write the investment account for indonesian islamic banking. syamlan&azinuddin| why do indonesian islamic banks take the risk? : the case of two major islamic banks ijief:international journal of islamic economics and finance, 1(2), 187-208 |204 references ahmad, a. 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(2013). the relationships between technological investment, firm size, firm age and the growth rate of innovational performance. procedia social and behavioral sciences, 99, 590–599. https://doi.org/10.1016/j.sbspro.2013.10.529 syamlan & azinuddin| why do indonesian islamic banks take the risk? : the case of two major islamic banks ijief: international journal of islamic economics and finance, 1(2), 187-208 |206 appendix appendix 1: chow test syamlan & azinuddin| why do indonesian islamic banks take the risk? : the case of two major islamic banks ijief: international journal of islamic economics and finance, 1(2), 187-208 |207 appendix 2: hausmann test appendix 3: lm test syamlan & azinuddin| why do indonesian islamic banks take the risk? : the case of two major islamic banks ijief: international journal of islamic economics and finance, 1(2), 187-208 |208 appendix 4: multicolleanirity test far banksize lps bankkompeti tor leverage bankage far 1.000000 -0.041972 0.747978 -0.007820 -0.024689 0.342831 banksize -0.041972 1.000000 0.721653 -0.717807 0.798301 0.752543 lps 0.747978 0.721653 1.000000 -0.685277 0.720948 0.662021 bankkompet itor -0.007820 -0.717807 -0.685277 1.000000 -0.697612 -0.727109 leverage -0.024689 0.798301 0.720948 -0.697612 1.000000 0.760032 bankage 0.342831 0.752543 0.662021 -0.727109 0.760032 1.000000 appendix 5: heterodexcity test weighted statistics r-squared 0.414250 mean dependent var 0.749025 adjusted r-squared 0.301605 s.d. dependent var 0.055127 s.e. of regression 0.052573 sum squared resid 0.071861 f-statistic 3.677502 durbin-watson stat 1.806623 prob(f-statistic) 0.011938 unweighted statistics r-squared 0.214153 mean dependent var 0.748805 sum squared resid 0.071899 durbin-watson stat 1.836172 exploring the challenges of conventional banking practices and prospects of introducing an islamic banking in tajikistan: using qualitative aproach ashurov sharofiddin 1 ahmed fauzi bin idris 2 anwar hasan abdullah othman 3 abstract the purpose of this research is to explore the challenges of current banking practices in tajikistan and investigate the prospects of introducing the new islamic banking system. in which the islamic banking may help in bring back the trust to the people for dealing with the banking system that will lead to enhance the economy growth. this study applied the qualitative method by conducting in depth interviews with the experts comprising seven respondents. the result of respondents showed that there is list of challenges that current banking practices facing in tajikistan. this therefore encourage for introducing an islamic banking system in tajikistan. among the challenges in conventional banking system that respondents identified are distrust, an interest-based (ribâ) system, and long processes with complicated systems. this is because the listed challenges by respondents are crippling the entire banking system, if the authority is not concerning for catering the existed challenges. moreover, the findings signify the challenges of conventional banking practice that the authorities of the country and practitioners must avoid when islamic banks are established. in addition, the practitioners need to focus on improving the current banking practice to avoid the challenges identified in the study. keywords : islamic banking, conventional banking, qualitative method, tajikistan 1 post-doctorate researcher, international islamic university malaysia, anwar.hasan@live.iium.edu.my 2 professor, college university insania (kuin), ashurovsharaf@gmail.com 3 professor, college university insania (kuin), pengarahhea@insaniah.edu.my mailto:anwar.hasan@live.iium.edu.my 2 | exploring the challenges of conventional banking practices and prospects of introducing an islamic banking in tajikistan: using qualitative aproach i. introduction by international standards, the most important and most remarkable feature of the tajikistan’s banking system is that it is still today a three-pillar system. there are three parts of the banking systems and correspondingly three important groups – or types – of banks that differ considerably compete severely for market share such as privet owned banks, governmental banks and nonbanking institutions (micro finance) (world bank report bank, 2015). however, there are still many challenges that facing by current banking practices in the country. to the best knowledge of researcher there is no empirical study has been done so far in the context of tajikistan. consequently, the researcher is tried to explore the challenges of conventional banking practices and contribute to the body of knowledge and more specific on tajikistan banking industry to fill the literature gap which is identifying the challenges of conventional banking practices through qualitative approach (coleman et al., 2012). despite the current conventional banking system has been around for more than ten decades in tajikistan, however, the statistical information from the study by falkingham, baschieri, evandrou and grant, (2009), showed that less than 4 % of the population deal with the current conventional banking system (world bank, 2014). the exceptionally low level of the population dealing with the existing banking system slows economic growth and limits productivity. accordingly, the most probably reasons are distrust, the riba-based system, complicated rules and regulations, high interest rate, poverty, and liquidity pressure among others. in addition, some people still do not trust the conventional system due to the lack of knowledge and awareness. therefore, this research attempts to explore the challenges of current banking practices and investigate the prospects of introducing the new banking system which is islamic banking that can bring back the trust of the people to deal with the banking system as a tool to encourage people to deposit their money and invest in the banking sector that will enhance the economy, activate circulation and growth in the country throw qualitative approach. this study therefore conducted to answer the follow research questions. 1. what are the challenges of conventional banking practices in tajikistan? 2. why do the majority of tajiks prefer not to deal with the current banking system in tajikistan? international journal of islamic economics and finance, volume 1, number 1, july 2018| 3 3. do you think the islamic banking system can attract more customers if it is established in tajikistan? 4. what are the challenges of current banking practices that will lead to introducing islamic banking in tajikistan? 5. how will the islamic banking system contribute to society and economic development? ii. literature review 2.1 the concept of challenges in banking and financial industry the concept of challenges has been explained by many different ways according to the different dictionaries being used it. meantime, the challenges of conventional banking system have been explored by many researchers in different ways. for instance according to honohan(1997) that he discussed the challenges is a banking system failures in developing and transition countries’ economy. furthermore, he linked these challenges to macro and microeconomics aspects. unlikely, mrak (2000) has been discussed challenges in broad meaning that a combination of transition and globalization process affects overall development of transition economies by different negative ways that requires changes and improvement. nonetheless, he did not mention specific industry sector and region (qian & allen, 2011,; dellaert, 2012). on the other hand the challenges of banking system in china by luo ping(2003) that the failure to resolve the bank challenges would put china’s financial system at risk and adversely impact on sustainable growth of the economy (peng, 2006; okozaki, 2007; tobergte & curtis, 2013). moreover, banking system as an important financial institution need be straggle for improving and eliminating the challenges in order to fulfill its financial role. hence, according to nyantakyi, sy, and kayizzi-mugerwa(2015), banks play a crucial role in the economy as financial intermediary in the society for accelerating investment cycle and encouraging customers to deposit and contribute in economic growth. thus, a banking system exist in order to screen potential borrowers, monitor customers’ actions and efforts, provide liquidity risk insurance and create safe assets, offer the financial tools for customers for investing and attracting them with high efficiency and flexible rules and regulations (tobergte & curtis, 2013). besides, according to dellaert (2012), banking industry is facing a lacking loyalty and distrust among their customers, providing more advance technology services, ensuring profitability and managing risk through the economic cycle. moreover, there some researcher are explored 4 | exploring the challenges of conventional banking practices and prospects of introducing an islamic banking in tajikistan: using qualitative aproach and specified the banking challenges and focus particularly relevant challenges: the payment challenges, the markets challenges, and the regulatory challenge according to (mersch, 2015,; matsuo, albertazzi, greathouse and while 2016). however there are still many lacking improvement in the banking system that particularly pressured, as regulators continue to lack confidence in the industry (kidder, 2013; mountain 2014). so, the challenges of banking practices from other angle such as information security, launching with an uphill struggle to reestablish economic strength and customer trust, service efficiency and providing free environment that promote competition in the banking sector according to (wehinger, 2009). besides, the european bank has published a study about challenges of banking system on mediterranean partner countries (mpc) and raised discussion challenges in coming years, the sector’s role in promoting inclusive growth via job creation, domestic resource mobilization and financial stability will be ever more pronounced in that region (lima, hecibedel, olejnik, 2011). in this regards, the challenges that lacking the banking practice in tajikistan is a banking failure in creating job by providing financial tools for investing and contributing in economic growth. similarly, moving to central asian region countries’ banking challenges according to pomfret (2009). therefore, the banks’ balance sheets in worldwide and central asia region countries especially are not yet on a sound stability and future bank losses are still expected to be significant with further official support and changes will be needed to develop healthy banking sectors (wehinger, 2009; serrano, 2010). likewise, according to serrano, (2010) besides the financial institutions have become very significant and sophisticated in the way they operate. however, the products and services banking sector offers tend to be more and more problematic. nonetheless, governments, regulators, and other institutions simply cannot manage to provide a solution and remedy for banking industry challenges in a satisfactory manner. as a consequence, many important issues are being overlooked by the banking institutions charged with directing our societies toward the common good(serrano, 2010;dullien, kotte, & priewe, 2010; coleman et al., 2012). consequently, it is very important for baking sector to grab public trust in order to proceeds more convenience in regards of dealing with challenges and satisfying clients. according to devan(2013) the banking system can move more smoothly based on it is built on trust. as such, it is imperative for large financial institutions international journal of islamic economics and finance, volume 1, number 1, july 2018| 5 to protect their reputation in order to ensure the public’s trust in holding and managing their financial activities. in recent years, banks have become more cautious and facing challenges, particularly in the wake of the financial crisis, when a number of large, well-respected financial institutions were the subject of highly publicized investigations of fraud, financial mismanagement, and misleading. subsequently, banks have adopted many measures to protect their reputation and keep themselves away from public clashes (kidder, 2013). furthermore, according to aliqoriev(2013), the challenges of the banking practices in cis countries authorities have addressed some critical banking challenges such as the government’s role in the banking system, transparency and the absence of trust to have potential clients. in particular, uncertainties about policy implementations complicate banks’ operations and liquidity pressure (coleman et al., 2012). nevertheless, the studies mentioned above have not discussed and proposed any solution for those challenges, a gap that this study aims to fill. on the top of that, according to (kidder, 2013) in order to achieve the high level of economic growth and sustainable profitability of banking industry it is urgent to eliminate the main challenges in the banking industry such as high interest rates, rebuilding asset quality and strengthening their capital adequacy by enriching and increasing the business value of customer relationships and restoring public confidence and trust towards the banking industry (mallorca, 2007,; ratings 2014) but did not discuss any potential solution with regard to these banking challenges. in summary, these challenges may be summarized in three parts such as in terms of regulatory and supervisory such as intervention of the government, complicated rules and regulations, operational challenges such as high interest rate, liquidity pleasure, insufficient services and riba based system. 2.2 the challenges of banking practices in tajikistan the concept of challenges was explored that it is a problem and potential failure that facing the banking industry in worldwide. hence this research is adopting the concept which has explained as a threat and problems facing the current banking practices due to avoiding the majority customers to deal with current banking industry in the country and shortcomings of financial role as a financial intermediary institution in tajikistan. in this regard, according to jonson 2000, and nesvetailova, 2014, the main sector that collapsed during collapsing of former soviet union was the economic sector, specifically the banking industry. the banking sector lost the trust of its clients which is deemed as main challenges to the financial institutions that lead to majority of population do not deal with 6 | exploring the challenges of conventional banking practices and prospects of introducing an islamic banking in tajikistan: using qualitative aproach banking industry. beside the economic development and financial enhancement, there is still many other banking challenges in tajikistan that made majority to avoid dealing with banking sector, which is indication of the unsuccessfulness of the banking system to grab during all these time the trust of customers towards banking industries (world bank report bank, 2015). furthermore, this unsuccessfulness of the current banking system leads to lack of economic growth due to involving the minority of population into investment and economic flow with banks. therefore, it is banking sector responsibility to regain the trust of the majority of the population in their activities and in the same time authorities need to give some more flexibility to the banks for acting freely without intervention of the government to the banking industry according to (asia development bank, 2013). in addition there is a need of services development and infrastructure that can contribute in poverty reduction by providing more financial tools for investing and creating more employment rate in the country (world bank report, 2014,; tadjbakhsh 2008,; the world factbook, 2015,; brbone et al., 2010). therefore, another challenge that facing the banking practice in tajikistan is intervention of the authorities into banking activities and limiting banking role in the country (chorshanbiyev, 2013b; shirinov, 2013). furthermore, the ministry of finance of tajikistan stated that the government borrowed over us$2 billion in foreign debt which is equal to approximately 30% of the gdp and it is increasing year after year. although, the borrowing money as a government is almost common among the international community, but if the banking industry shortcoming to provide enough found to big corporation and to relocate these borrowed money wisely, then will be more problematic and challenging to the entire system specifically banking sector. therefore, the current banking system in the country that is facing serious challenges to provide enough financial tools for creating job opportunity and encouraging economic growth, that also lead banking industry not playing its financial intermediary role properly and there will deepen the distrust among customers and banks. in this regard,“asia-plus” bibolov (2013) that the challenges of loan default rate have remained quite high in the central asia region, in particular tajikistan and kazakhstan (asia development bank, 2013). therefore, the banking system in the country is almost losing the control over the financial activities and financial betterment of the country which is really challenging the banking sector in tajikistan. what's more, this loss of control and the ability to play a crucial role as a financial intermediary will lead to more financial instability, insecurity, lacking financial activities and distrust towards their customers in the country. so, the central bank of the country and other authorities need urgently to call for serious international journal of islamic economics and finance, volume 1, number 1, july 2018| 7 solution or restructuring the banking system or introducing a new banking system in the country to reactivate the financial intermediary role in the country, otherwise will be serious financial and economic panic in the country (ahrens & hoen, 2013). likewise, according to akramov and shreedhar (2012), there is lack of financial intermediary, stability, productivity, and the disconnection between investor and savers are major challenges facing the current banking practices in tajikistan. therefore, it is the right time for re-thinking to restructure the banking system and focusing on eliminating these challenges from the banking sectors is an urgent need for keep the financial intermediary active and productive in the country. most important of all, the current banking system, mentioned by ergasheva (2014), is very weak facing a financial crisis and turmoil and needs drastic restructuring and development for the financial betterment of the country. in summary, according to the previous studies mentioned above there are different challenges that beset the current banking practices in tajikistan which has failed to provide enough financial tools for further investment and opportunities. one of the main challenges is the reluctance of the majority of the population to deal with the current banking practices for various reasons such as distrust, poverty, complicated rules and regulations, high interest rate and ribabased system among others that violate the beliefs of the muslim majority in the country. also, although there are many financial supports and help receiving by the financial industry from the international financial institutions such as imf, world bank and others, yet there is a significant lack of financial intermediaries in tajikistan’s banking sector. so, to the best knowledge of the researcher there is no empirical study done so far to identify the challenges of conventional banking practices in tajikistan. therefore, this study as a first empirical study aims to fill this gap by interviewing practitioners and obtaining their points of view. iii. research method the research aimed to explore the challenges of the conventional banking system in tajikistan applying the qualitative method to collect data by conducting in depth interviews with the experts comprising seven respondents and their identities remain confidential in line with the ethical norms and considerations. the respondents of the qualitative method and those who participated in the interview were defined by specific coding such as specialists (s1, s2); two of them are specialists in the field of conventional banking system, who were familiar with 8 | exploring the challenges of conventional banking practices and prospects of introducing an islamic banking in tajikistan: using qualitative aproach islamic banking and finance. practitioners (p1, p2) are in banking in tajikistan. the student (st1) is a postgraduate student at the international islamic university, malaysia, in the area of banking and finance and he is from tajikistan and aware of conventional banking practices there. sharamic scholar (sh1) is a sharlar scholar who is aware of financial banking practices in tajikistan. interview was the instrument utilized to generate information regarding qualitative data from the respondents. the interview covered the above research questions and involved experts in the field of current banking practice in tajikistan and islamic banking system, sharîʿah scholars, and practitioners. the interview was semi-structured and responses were recorded and documented for analysis. in the qualitative interview, seven respondents participated. the selection of respondents for the interview was largely based on expertise. those believed to represents an informed opinion, willingness of the respondents and availability of time, and resources among others were selected to be interviewed. according to schaefer and dervin (2003), expert sampling is a subject of purposive sampling used for two reasons: producing the views of people with specific expertise, and to provide evidence for the validity of research outcomes. on the other hand, according to oliver (2006), expert proposal sampling is a form of non-probability sampling in which decisions concerning the individuals to be included in the sample are taken by the researcher, based upon a variety of criteria which may include specialist knowledge of the research issue, or capacity and willingness to participate in the research. some types of research design necessitate researchers taking a decision about the individual participants who would be most likely to contribute appropriate data, both in terms of relevance and wisdom(richard andrei & julia, 2006). iv. findings and discussion these study findings were derived from the statement made by the experts.the overall respondent and their themes of challenging are reported in table 4.1. international journal of islamic economics and finance, volume 1, number 1, july 2018| 9 table 4.1 summary of qualitative results respondents question 1 question 2 question 3 question 4 question5 what are the challenges of cb? why majority are not dealing with cb? establishment of ib can attract more customers? what are the challenges of cb lead to introduce an ib? how ib can contribute to economic development 1 distrust intervention of the government poverty ribâ system unawareness high interest rate distrust intervention of the government poverty ribâ system unawareness yes because of: majority muslim distrust towards conventional no because of: duplication of conventional unawareness lack of awareness competition distrust toward cb yes because of : historical success of ib create new job capital inflow profit & loss sharing 2 distrust intervention of the government poverty ribâ system unawareness high interest rate distrust intervention of the government poverty ribâ system unawareness yes because of: majority muslim distrust towards conventional no because of: duplication of conventional banking unawareness lack of awareness competition distrust towards cb double taxation yes because of: historical success of ib create new job capital inflow profit & loss sharing 3 distrust intervention of the government poverty ribâ system unawareness high interest rate distrust intervention of the government poverty ribâ system unawareness yes because of: majority muslim distrust towards conventional no because of: duplication of conventional banking unawareness lack of awareness competition distrust towards cb double taxation yes because of: historical success of ib create new job capital inflow profit & loss sharing 4 distrust intervention of the government poverty ribâ system unawareness high interest rate distrust intervention of the government poverty ribâ system unawareness yes because of: majority muslim distrust towards conventional no because of: duplication of conventional banking unawareness lack of awareness competition distrust towards cb double taxation yes because of: historical success of ib create new job capital inflow profit & loss sharing 5 distrust intervention of the government poverty ribâ system unawareness high interest rate distrust intervention of the government poverty ribâ system unawareness yes because of: majority muslim distrust towards conventional no because of: duplication of conventional banking unawareness lack of awareness competition distrust towards cb double taxation yes because of: historical success of ib create new job capital inflow profit & loss sharing 10 | exploring the challenges of conventional banking practices and prospects of introducing an islamic banking in tajikistan: using qualitative aproach 6 distrust intervention of the government poverty ribâ system unawareness high interest rate distrust intervention of the government poverty ribâ system unawareness yes because of: majority muslim distrust towards conventional no because of: duplication of conventional banking unawareness lack of awareness competition distrust towards cb double taxation yes because of: historical success of ib create new job capital inflow profit & loss sharing 7 distrust intervention of the government poverty ribâ system unawareness high interest rate distrust intervention of the government poverty ribâ system unawareness yes because of: majority muslim distrust towards conventional banking no because of: duplication of conventional banking unawareness lack of awareness competition distrust towards cb double taxation yes because of: historical success of ib create new job capital inflow profit & loss sharing what are the main challenges of conventional banking practices in tajikistan? “one of the main challenges of the conventional banking practice in tajikistan is the high interest rate which makes it difficult to attract customers. since the interest rate is very high in the country it has led people in tajikistan to avoid dealing with banks for utilizing services such as borrowing. on the other hand, the people of tajikistan do not trust the current banking practice in tajikistan as it is unpredictable and anything can happen at any time, especially under current international financial instability. therefore, they prefer to save their money at home rather than deposit it in banks. in addition, the complicated rules and regulations, requirements and documentations, the slow and long processing procedure are among challenges of the current banking practice in tajikistan”. (s1) “i prefer to answer this question through the historical perspective, because if you want to know the challenges of the conventional banking system in tajikistan you have to see it from the historical angle. during the early 20 th century, tajikistan was one very poor and economically backward and it remained like that during the latter part of the 20 th century when it was under the communist regime. starting from the early 21 st century and getting independence from the communist regime it experienced a civil war that caused the collapse of the entire system including the financial and banking system. thereafter, tajikistan started to build a new system and adopted the capitalist system that is why tajikistan’s banking system is still not productive. in addition, the tajikistan international journal of islamic economics and finance, volume 1, number 1, july 2018| 11 currency was changed three times until now and that caused people to lose millions in value of their money. as a result, even now tajikistan’s financial system is facing many challenges such as unqualified staff, high poverty rate, little confidence in banks, and little awareness of using banking services, etc. (s1) “although it is common that the government institutions such as education sector, legal sector, economic sector and financial sector are supposed to serve the population’s interest and meet their needs, unfortunately, tajikistan’s legislation is still centralized and the institutions cannot provide services independently and depend on a top down system including the banking sector and central bank. therefore, the central bank is highly dependent on the higher authorities and the government’s permission to provide services, even those that could be beneficial for its customers and society. also, there is another reason for this problem such as distrust among tajikistan’s population of the banking sector as it is based on interest (ribâ). moreover, the population historically prefers to save their money in their homes rather than deposit it in banks. this is because we have experienced many bank bankruptcies which have caused many people to lose their money plus the effects if the currency bring changed three times”. (r1) “as we can see, the banking sector in tajikistan is not developed because there are many challenges facing the banking sector in the country. the main challenge in the country regarding banking is the population’s distrust of the banking practices either in terms of management or processes. moreover, the very high interest rate is deemed another major challenge that has caused people to avoid dealing with the banking sector to borrow money. in addition, there is no creativity in the banking sector like in other countries and this has hampered its development.” (s2) “the main challenges of conventional banking in tajikistan are highly dependent on the individual high authority and political power of the rules and regulations and as a result the central bank and banking sector are not working independently. as a result, the banking services and activities are serving and providing facilities for the high authorities only, but not for ordinary citizens. in addition, the poverty line in the country is very high and people do not have enough money to save in the banks while at the same time the banking sector is not ready to provide facilities and products that can attract the majority of the population. finally, the population in the country does not trust the banking sector”. (p1) 12 | exploring the challenges of conventional banking practices and prospects of introducing an islamic banking in tajikistan: using qualitative aproach “i think the main challenges of conventional banking practice are the reluctance of the majority of the people to deal with banks due to bad past experience with banks which has increased the distrust of the people. the current banking activities are just transferring remittances from overseas to the country while the other banking services and products cannot attract customers”. (st1) “i think the main challenges of conventional banking practice are the majority of the population living under the poverty line and 40% of the population are working overseas and the remittance transfer is consumed. furthermore, there is mistrust/ distrust among the majority of the population in conventional banking practices”. (p2) according to the respondents’ opinions to the first question, all respondents agreed on the challenges of the conventional banking practice in tajikistan such as the distrust of the majority of the population in conventional banking practices. in addition, all respondents agreed that the intervention of the government in the banking practice is another issue and dependence of the banking sector on government decisions in order to provide services and products to customers and clients is a major challenge. the majority of the population are living below the poverty line, which is another issue raised by the respondents. furthermore, the ribâ system is prohibited by islam, which is another challenge of conventional banking since the majority of tajikistan’s population are muslim in the country. another challenge was mentioned by respondent sh1 and that was the low confidence in and little awareness of conventional banking practice due to the historical collapse of the system that triggered the changing if the currency and the loss of huge savings. in addition, this respondent mentioned that the unqualified staffs in the banking sector are another challenge. why do the majority of tajiks prefer not to deal with the current banking system in tajikistan? “as we mentioned earlier, the challenges are the same reasons that made the majority population of tajikistan not to deal with current banking practices. these include distrust in the conventional banking system, dealing with interest (ribâ), long process and complicated rules and regulations, high poverty rates and not linking between bills payment and other obligation payment through the banking system”. (s1) international journal of islamic economics and finance, volume 1, number 1, july 2018| 13 “as i answered in the first question and listed some challenges of the conventional banking system in tajikistan, like the majority of the population is living below the poverty line therefore, they do not have enough money to deposit as savings in banks. in addition, the banking system in tajikistan could not attract the population’s interest to deal with them and there are many reasons behind this distrust in banks such as dealing with interest (ribâ) which violates their islamic beliefs, the awareness of the population is poor toward dealing with banks and how to benefit from the banking system, the interest rate is very high which is more than 25%, etc. these are the main reasons behind the majority of the population not dealing with banks”. (sh1) “this is because the majority of the population are living in poverty and don’t have enough money to deposit in banks. at the same time, tajikistan is a muslim majority country and the current banking sector is violating their beliefs due to its dealing with ribâ-based activities. additionally, there is a distrust of people toward the banking sector due to bad experience during the collapse of the former soviet union and last international financial crisis that in 2008”. (r1) “the same challenges as we discussed earlier is the reason behind the decision of the minority of the population not dealing with current banking in tajikistan”. (s2) “based on the governmental statistics, 98% of the population are muslim and they do not agree to deal with a ribâ-based system. tajikistan’s economic environment is facing more challenges and turmoil and there is no insurance system available to compensate them if they should suffer losses”. (p1) “i think there are many reasons for the majority avoiding dealing with banks in tajikistan such as the high interest rate and intervention of the government in the banking sector and politics influencing banking activities”. (st1) “the same reason we mentioned above is the main factor that causes the majority not to deal with current banking practice. in addition, the other important factor is that the conventional banking is ribâ-based and the majority of the population are muslim and do not accept a ribâ-based system for religious reasons”. (p2) according to the responses to question number two, all the respondents repeated their answers from the first question such as distrust, high interest rate, high level of poverty, dependence of the banking sector on high authority of the 14 | exploring the challenges of conventional banking practices and prospects of introducing an islamic banking in tajikistan: using qualitative aproach government to decide, the ribâ-based system and others. however, the respondent (p1) added another reason for the majority of the population avoiding dealing with the banking sector which is the non-existence of an insurance system to protect the wealth of the population and to encourage them to deal with banks. do you think the islamic banking system can attract more customers if it is established in tajikistan? “i believe yes to some extent only, because the majority of tajikistan’s population is muslim and if the banking system proves that it is working based on the sharîʿah rules; otherwise there will not be much attraction to deal with islamic banks, because there will not be much difference between conventional and new islamic banks. in addition, if the introduced islamic bank could make some sort of products to attract remittance to be used through islamic bank, the public might be interested”. (s1) “i totally agree with you that, if the islamic banking system is established in tajikistan it will attract more customers compared to the conventional system due to many reasons. the reason is very simple in that the challenges which cause the majority of the population to not deal with conventional banking will be eliminated by establishing an islamic bank which will attract more customers and depositors. in the case of dealing with interest (ribâ), it is not allowed in the islamic banking system and this will attract more customers due to tajikistan’s muslim majority. at the same time, the profit and loss sharing system under islamic banking system can attract many customers. in addition, the flowing of capital from the international islamic banking institution will be another reason to attract more customers”. (sh1) “i can say that yes it can attract more customers and cannot as well. yes it can be successful if the islamic bank will be established and can proceed based on the sharîʿah rules and promote the products such as musharalkah and mudarabah and others that will promote and facilitate dealing with islamic bank whether as an investor or just a normal customer. in contrast, there is a possibility that it cannot attract customers because of political issues that may accuse the islamic bank’s customers of being terrorists. people will be scared to deal with islamic banks because any islamic name is very sensitive in tajikistan society”. (r1) international journal of islamic economics and finance, volume 1, number 1, july 2018| 15 “surely, i strongly believe that establishing the islamic banking sector is able to increase its customers and clients for the following reasons: firstly, the majority of tajikistan is muslim and the level of religiosity is increasing as well and as we know that dealing with ribâ is one of the greatest sins in islam. secondly, the product and activities that will be promoted are sharîʿah-based and reasonable for different levels of customers and clients. the important notice i should say here is that it is depending more on whether it will be established as a window or fullfledged”. (s2) “yes, i believe there will be more customers and users for islamic bank if established in the country, because the majority of the population in the country is muslim. on the other hand, if the islamic bank works just to duplicate the conventional banks then people will stay away like they do with the conventional banks. moreover, the government should provide and promote the understanding of islamic banking and increase the awareness of people toward facilities and activities of islamic banks. furthermore, the government and high authorities need to promote the social norm and culture of using islamic banks”. (p1) “since the current conventional banking system in the country cannot satisfy the customers’ interest then there is a need for an alternative banking system which is the islamic bank. therefore, if the islamic banking is introduced in tajikistan, then definitely islamic banks can increase their customers in the country. however, the government should develop the awareness of people and help encourage a culture of using islamic bank in the country. moreover, if the islamic bank covers the challenges of conventional banking, then they can attract more customers”. (st1) “yes, definitely, if the islamic bank is established in the country it will attract more customers because as a muslim majority country and also attract the 14% that dealing so far with conventional banking”.(p2) according to the respondents’ comments for question three, all respondents agreed on some issues such as the establishment of islamic bank will attract more customers in tajikistan because of the muslim majority. moreover, they mentioned that there is one condition to attract more customers, which is, when an islamic bank isestablished, it must be sharîʿah-based rather than duplicate the conventional system. however, some respondents mentioned that there is lack of islamic banking awareness and social norm in the country. therefore, the government should increase awareness of the people about the islamic banking 16 | exploring the challenges of conventional banking practices and prospects of introducing an islamic banking in tajikistan: using qualitative aproach system and social norms toward using and understanding islamic banking in tajikistan, otherwise it will not be successful. what are the challenges of current banking practices that will lead to introducing islamic banking in tajikistan? “the challenge facing the conventional banking system in tajikistan will cause the introduction of an islamic bank and eliminate the distrust toward current banking. therefore, the government should increase the level of banking awareness, understanding, products and activities of islamic banks. on the other hand, i think if conventional banking introduced more simple activities with customers it can compete with islamic banks in the beginning, but later it will not be able to compete”. (s1) “the current banking practice in tajikistan could not get the trust of the population and therefore, there is a need to introduce an islamic bank as new and alternative banking system in tajikistan.the current banking activities in tajikistan are based on debt financing which has caused many investors to lose both money and confiscated property as a result there is a need to introduce an islamic bank in the country. dealing with interest (ribâ) is another reason behind the introducing of an islamic bank in the country in order to attract more deposits to the banking sector. on the other hand if an islamic bank deals in the same way as conventional banking system using an interest-based system then there will be no point in introducing a new system”. (sh1) “i believe the main challenges of introducing an islamic bank in tajikistan is the poor level of awareness of tajik society and population regarding islamic bank. therefore, the government should promote and try to increase the level of awareness of people toward islamic bank. with regard to conventional banking practice i don’t think it will challenge the introduction of islamic bank”. (r1) “i believe if the islamic bank is introduced as a full-fledged system in tajikistan, then there will be challenges for conventional banking to accept another system to compete with it in the country. in addition there is the possibility that current banking practice will be affected by the stiff competition and will challenge the introduction of an islamic bank in the country. on the other hand, the banking legislation and central bank rules and regulation should allow islamic banks to proceed with different laws and regulation matching its objectives international journal of islamic economics and finance, volume 1, number 1, july 2018| 17 otherwise the islamic bank’s contracts and services will be more expensive, and double taxation will appear”. (s2) “the banking acts and legislation are the main challenges of introducing an islamic bank, because the political power is above legislation and rules. so, introducing an islamic bank should work independently and there should be no intervention by political interests “(p1) “the main challenges of introducing an islamic bank in the country are intervention of the government and politics, so the islamic bank is supposed to work independently within special laws and treatment from the central bank”. (st1) “as we discussed earlier, the interest rate is very high in the country and will be the main challenge that will cause the introduction of an islamic bank. at the same time, the tax structure should be changed in order to avoid double taxation to deal with an islamic bank”. (p2) according to the respondents’ comments, all respondents have different views on question four, even though they have similar perceptions on a few issues. the respondents (s1) and (r1) agreed that there is lack of awareness and understanding toward adopting an islamic bank as a new system in the country. therefore, the government should increase the level of awareness. on the other hand, the respondents (s1) and (s2) agreed that if the islamic bank is established in the country there will be stiff competition between the two banking systems. however, respondent sh1 believed that the distrust of the population in conventional banking is an incentive to establish an islamic bank to satisfy all needs of customers and at the same time duplicate conventional banks for debt financing while the ribâ system is another challenge for introducing an islamic bank in the country. moreover, the respondents (p1) and (st1) mentioned that the intervention of the government in the banking sector is another challenge facing the introduction of an islamic bank. lastly, the respondents (s2) and (p2) believed that the tax structure is another challenge for introducing an islamic bank in the country and needs to be amended in order to suit the nature of islamic banking. 18 | exploring the challenges of conventional banking practices and prospects of introducing an islamic banking in tajikistan: using qualitative aproach how will the islamic banking system contribute to society and economic development? “as we know the main aim of islamic bank is providing economic justice in society and distribution of wealth among the population. as it is clearly described by many quranic verses and hadith, there should be islamic economics in promoting the brotherhood principle and not accumulate the wealth among only a few and fulfilling sharî’ah objectives. therefore, if islamic banking is established in tajikistan and operates based on pure sharîʿah’s principles such as profit and loss sharing, then definitely establishing an islamic bank will give the country an economic boost and create a lot of jobs and will enhance the social network and contribute to a decrease in the poverty rate.” “tajikistan should start from the islamic banking windows and develop them such as done in malaysia and other countries, instead of full-fledged islamic bank as is the case in iran and sudan. this will help the country to develop the banking sector faster and to be successful in the country and show to customers that a really successful islamic banking system is possible and need not be just a duplicate of the conventional banking system but a different system in accordance with sharîʿah principles”.(s1) “it is very clear and i strongly believe thatbanks are a financial institution that will channel the money from the savings sector to investor sector therefore establishing of islamic bank will play the same role in tajikistan as a muslim majority country and finally will impact the economic sector positively by creating more jobs and financial activities. at the same time islamic bank will attract depositors and customers because the offered services match their beliefs. at the same time, tajikistan is a rich country with natural resources but needs a lot of capital to invest and develop; therefore, establishing an islamic bank in tajikistan will attract capital flow from the islamic countries which will impact positively on tajikistan’s economy”. (sh1) “definitely,as we see the conventional banking practice in tajikistan is unable to fulfil the needs of its customers and clients, but islamic banking system has been proven all around the world not just in muslim countries but even in nonmuslim countries as well such as uk and others that have contributed and have accelerated the development of economics in society. therefore, if islamic bank is established in tajikistan and introduced properly to the population, i strongly believe that it will contribute in developing tajikistan. at the same time, once the international journal of islamic economics and finance, volume 1, number 1, july 2018| 19 economic is developed in the country it will enhance society as well. the most important thing is the government must increase the level of awareness of the population regarding an islamic bank and promote dealings with the islamic bank in social activities and culture”. (r1) “of course, i believe the islamic bank will contribute to economic development of the country and this is based on the good experience of the countries that have adopted an islamic bank for some time. again, i would repeat that if the islamic bank is introduced as a full-fledged system it can contribute more rather than be established just as a window. moreover, the contribution of introducing an islamic bank in economic development depends mostly on whether it will be introduced as a pure islamic system or just a duplicate of the conventional bank as the former will contribute more and the letter one cannot contribute as it is supposed to. however, establishing any system can only properly fulfil its duties when it proceeds within rules and regulations without the influence of any other external power such as political power, high authority, etc. therefore, introducing an islamic bank will be a success in the country when it proceeds just within laws only”. (s2) “yes, the main objective of the islamic bank is reducing poverty and helping society and contributing to the development of the economy in the country. however, i did not see any islamic bank in the world achieving this objective, unless the introduction of an islamic bank in tajikistan will be done as a purely islamic entity and not just a duplicate of a conventional bank.” (p1) “in my opinion, the islamic banking activities and products can really contribute to economic development and will enhance social progress. for example, if we see in malaysia and other countries which have adopted islamic banking and how it has helped in economic and social development. this is because islamic banks will not focus on accumulating profits only, but will take care to reduce the level of poverty and contribute to social welfare”. (st1) “yes, i do believe that establishing an islamic bank will contribute to developing the economy and enhancing the level of society. for instance, 16-17 october was oic countries economic forum in tajikistan to discuss the investment in different islamic countries. therefore, if an islamic bank were to be established in the country as an oic member, it will definitely attract foreign capital to be invested in the country. ultimately, it will create more jobs and economic progress in the country”. (p2) 20 | exploring the challenges of conventional banking practices and prospects of introducing an islamic banking in tajikistan: using qualitative aproach according to the respondents’ answers to question five, they agreed that the establishment of an islamic bank in tajikistan will contribute to economic development and enhance social welfare. the historical success of islamic banks in other countries is the best example of the contribution of islamic banks to social and economic development. the establishment of an islamic bank will create more jobs due to the nature of its products which is based on profit and loss sharing. therefore, it will create more jobs in the country and will attract more capital from other muslim and non-muslim countries because of opportunities to invest in the country, according to respondents p2 and sh1. according to respondent (s1, r1, p1), the contribution of islamic bank in the country is highly dependent on whether it is sharîʿahbased or simply duplicates the conventional system. it will contribute more once it is established based on sharîʿah objectives. v. conclusion in conclusion, tajikistan is a muslim majority country located in central asia where islamic finance has yet to be established. however, given the challenges of current banking practices in the country and the on-going adverse effects on the banking industry, the authorities are looking to rectify the unproductive banking and financial system in the country. accordingly, the purpose of this research is to explore the challenges of current banking practices and investigate the prospects of introducing the new banking system which is islamic banking that can bring back the trust of the people to deal with the banking system as a tool to encourage people to deposit their money and invest in the banking sector that will enhance the economy, activate circulation and growth in the country. furthermore, to explore the challenges of the conventional banking system in tajikistan the researcher applied the qualitative method to collect data by conducting in depth interviews with the experts comprising seven respondents. however, the result of respondents showed that there is list of challenges that facing current banking practices in tajikistan that lead to the neediness of the introducing an islamic bank there. this is because the listed challenges by respondents are crippling the entire banking system, if the authority is not concerning for catering the existed challenges. among the challenges that respondents identified are distrust in conventional banking, an interest-based (ribâ) system, and long processes and complicated systems, among others. in light of these revelations, the general belief was that the establishment of islamic banks in the country would contribute to economic development and social welfare enhancement. in addition it will fill the financial intermediary gap in the international journal of islamic economics and finance, volume 1, number 1, july 2018| 21 country. moreover, the findings signify the challenges of conventional banking practice that the authorities of the country and practitioners must avoid when islamic banks are established. in addition, the practitioners need to focus on improving the current banking practice to avoid the challenges identified in the study. 22 | exploring the challenges of conventional banking practices and prospects of introducing an islamic banking in tajikistan: using qualitative aproach reference ahrens, j., & hoen, h. w. 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(2015). world bank in central asia. washington dc. retrieved from http://www.worldbank.org/en/region/eca/brief/central-asia world islamic finance marketplace. (2016). cis region: future prospects for islamic finance. malaysia. http://www.reuters.com/article/fitch-kazakh-%20banks-cope-with-new-challen-%20idusfit69655320140409 http://www.reuters.com/article/fitch-kazakh-%20banks-cope-with-new-challen-%20idusfit69655320140409 http://www.reuters.com/article/fitch-kazakh-%20banks-cope-with-new-challen-%20idusfit69655320140409 http://documents.worldbank.org/curated/en/2014/01/20302396/tajikistanhttp://documents.worldbank.org/curated/en/2014/01/20302396/tajikistanhttp://documents.worldbank.org/curated/en/2014/01/20302396/tajikistan-%20%20%20moderated-growth-heightened-risks http://documents.worldbank.org/curated/en/2014/01/20302396/tajikistan-%20%20%20moderated-growth-heightened-risks http://news.tj/en/news http://doi.org/10.1017/cbo9781107415324.004 ijief:international journal of islamic economics and finance vol. 1 (2), pg 209-228, january 2019 awareness and perceptions of muslim society towards islamic banking in the philippines sahraman d. hadji latif mindanao state university-marawi city, philippines, maranaopeace@gmail.com article history received: december 17, 2018 revised: january 4, 2019 accepted: january 5, 2019 abstract the aim of this study was to determine and analyse the level of awareness and perceptions of muslim society towards islamic banking in the philippines.selfstructured questionnaires were administered and distributed to 70 employees of some selected offices of the mindanao state university (msu), marawi city and the data were processed and analyzeddescriptively.the results revealed that most of the respondents are aware of the existence of the al-amanah islamic investment bank of the philippines and that interest and uncertainties are prohibited in all forms of business transactions including in islamic banking. conversely, they are not aware of islamic banking products and services and its modes of financing such as musharakah, mudharabah, murabaha and ijaraah. furthermore, the study found that most of the respondents perceived that al-amanah islamic investment bank of the philippines has not done enough to promote and market its products and service to the public. the problem of peace and order, and the lack of emphasis placed on the importance of islamic banking in the country have affected its development. the study also indicated that majority of respondents believed that islamic banking has a potential positive future in the philippines. hence, promotion through policies and marketing strategies is necessary in strengthening islamic banking in the country. keywords: islamic bank, awareness, perceptions, philippines, muslim society jel classification: g21 @ ijief 2019 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.1211 web: http://journal.umy.ac.id/index.php/ijief/article/view/1211 citation: latif, s. d. h. (2019). awareness and perceptions of muslim society towards islamic banking in the philippines. international journal of islamic economics and finance (ijief), 1(2), 209-228. doi: https://doi.org/10.18196/ijief.1211 mailto:maranaopeace@gmail.com hadji latif|awareness and perceptions of muslim society towards islamic banking in the philippines ijief: international journal of islamic economics and finance, 1(2), 209-228 | 210 introduction the philippines is known as a christian country in asia with minority muslims of around 7-10 percent. islam had been introduced to the philippines for three centuries before the arrival of spaniards in the philippines in the 16th century. the geographical strategic location of mindanao island in the philippines as a trade route catered a huge opportunity for the people of mindanao to have strong collaboration with the muslim world (lingga, 2004). certainly, this was also involved of the interplay of political, economic, psychological and social reasons (gowing, 1979). after the philippines independence, muslim communities in the country have suffered socio-economic predicaments as a result of the government policies which were more favourable to non-muslims. this injustice treatment towards muslim in the philippines known sometimes as bangsamoro people has brought a moro armed resistance in southern mindanao which has adversely affected the socio-economic development of the country particularly the muslim communities. to address the problem, the philippines government established various solutions which primarily aimed in improving the socio-economic conditions of the bangsamoro people. one of the government initiatives was the establishment of al-amanah islamic bank of the philippines in 1973 (lingga, 2004). however, the creation of islamic banking in the country has inappreciably contributed in the enhancement of the socio-economic conditions of the muslim communities in the philippines due to sluggish development and expansion of the said islamic bank. although, it was created to promote the socio-economic growth and development of muslim communities in the country and to serve their banking and financing needs in accordance with islamic principles of banking and finance operations. philippines amanah bank is the only islamic bank in the country recognized and owned by the philippines government applying the principles of islamic banking. it is the only islamic bank in the country allowed to provide islamic banking products and services. its slow-moving expansion and unfavourable performance are mainly associated by absence of concrete regulatory framework and low awareness of the society to its existence, products and principles. the existence of islamic banking in the philippines for more than four decades starting from 1974 has not gained an auspicious market environment. besides of the low public awareness, lack of regulatory infrastructure and environment towards islamic banking has not been developed. the present charter of islamic bank in the country established only the philippine amanah bank but not a regulatory framework for the expansion of islamic banking in the country. besides, the general banking law of the philippines only recognizes al-amanah islamic bank as islamic hadji latif|awareness and perceptions of muslim society towards islamic banking in the philippines ijief: international journal of islamic economics and finance, 1(2), 209-228 | 211 financial intermediary but it does not provide for the creation of other islamic banks (tetangco, 2014). the very low public awareness and dire perceptions towards islamic banking among muslims in the country undoubtedly contributed to its unfavorable performance. according to muhammad ayub (2007), the future of islamic banking and finance and its full recognition depend on the interest of the clients in particular and public in general toward it, and enhancing clients in emerging industry. this can be possible through providing essential education of the people, and creation of awareness about islamic economic system. keeping in view of this situation and the paucity of relevant studies about awareness and perceptions towards islamic banking in the country, there is a need to examine the level of knowledge and perceptions of the muslim society towards islamic banking in the philippines. public knowledge and perceptions play important role for the decision making of the society to adopt islamic bank. certainly, the findings of this study can be considerable factor to strengthen market strategies and innovate islamic financial products and services of present islamic bank in the country. literature review islamic banking in the philippines philippine amanah bank is the only islamic bank in the country that is allowed to provide islamic banking services and products. by virtue of the president decree no. 264 of president ferdinand marcos, philippine amanah bank was established with an initial capital of 50 million pesos. this decree also mandated the bank to invest its 75% total loanable funds for the short and long term credit facilities for some provinces in the philippines with muslim population such as cotabato areas, lanao del sur and lanao del norte, islands of sulu, basilan, palawan and zamboanga areas. philippines amanah bank was mandated to implement the principle of islamic banking and unfortunately, it failed to implement the said principles due to small market demand and public awareness towards it. in 1990, philippine amanah bank was renamed as al-amanah islamic investment bank of the philippines (aaiibp) after the signing of the republic act no. 6848 which also provided the bank the authorized capital of 1 billion pesos for the improvement of socio-economic development of the autonomous region in muslim mindanao through banking and financing based on the concept of islamic bank and finance principles (aaiibp, annual report 2016). after renaming, al-amanah islamic investment bank of the philippines has incurred unfavorable financial losses until to the present. its poor hadji latif|awareness and perceptions of muslim society towards islamic banking in the philippines ijief: international journal of islamic economics and finance, 1(2), 209-228 | 212 performance bore operating losses of php554 millions from 1990 to 2006 with annual average loss of php33 million from its operation ( iqbal &mylenko, 2016).due to incurred losses from its operations, this bank had been bid for private parties but it was not successful. enthusiastically, alamanah islamic investment bank of the philippines envisions to be a leading islamic financial institution in the country providing an alternative banking services in response with global demand for islamic bank and for the development of socio-economic aspects of the muslim minorities in the country. on july 2008, another government bank in the name of development bank of the philippines acquired the said bank , and bank’s rehabilitation plan was implemented in which al-amanah islamic investment bank of the philippines is allowed to operate both islamic and conventional banking. the 5 years rehabilitation plan as approved by monetary board of the country is focused mainly on corporate strategies. these plans are: recapitalization, restoration of financial viability, reorganization, and reform institution. originally, during the conception of al-amanah islamic bank which firstly introduced as philippines amanah bank, the bank was created to provide credit facilities to the people of the muslims in the philippines particularly to the dominated muslim provinces of the country like cotabato, south cotabato, lanao del sur, lanao del norte, sulu, basilan andzamboanga del norte, zamboanga del sur and palawan. the al-amanah islamic bank’s main office is located in makati city, and has 8 (eight) branches in some areas in the country such as in cagayan de oro city, cotabato city, davao city, general santos city, iligan city, jolo city, marawi city and zamboanga city. (aaiibp, annual report 2016).presently, there is a bill submitted before the house of representatives of the philippines for the amendment of the republic act 6848 known as charter of the al-amanah islamic investment bank of the philippines,which aims to strengthen islamic banking in the country and provide the regulatory framework for expansion and promotion of financial inclusion as well as socio-economic development of the muslims in the philippines in particular and the philippines in general. overview of islamic banking and finance principles islamic banking and finance as part of islamic financial system contrasts fundamentally from a conventional banking and finance. islamic finance has unique and distinct basic principles based from islamic law. islamic finance is defined by alamad (2017) as “an approach to finance and undertaking financial activities as founded, governed and illustrated under shariah” (p. 16). the difference between conventional finance and islamic finance is not only confined to its ways of financing and investing but much more on the fundamental principles and ethical values. islamic finance is guided generally by shari’ah principles and ethics. it is not only primarily for profit but rather hadji latif|awareness and perceptions of muslim society towards islamic banking in the philippines ijief: international journal of islamic economics and finance, 1(2), 209-228 | 213 for the achievement of justice and shared development. the prescribed general principle in islamic finance regarding business transaction is that everything is permissible unless there is clear evidence from the primary sources of islamic law that prohibit that transaction. however, there are few constraints of freedom to engage in business transactions that are prescribed by islamic law due to prohibition and unethical considerations. generally, prohibition in islamic law can be divided into unlawful by its own sake or the thing itself is inherently forbidden (haram lidhatihi) such as riba, wine, pork , and unlawful due to external factor (haram ligairihi) such as selling during friday prayer (karim, 2005). in islamic finance, one of the probihitions is interest “ riba”. interest is permanently prohibited in islam and all types of transactions should be free from interest. the word “riba” in arabic language means an “increment” or “addition". technically, it refers to any excess payment or compensation without due consideration (usmani, 2002, p.42).however, application of riba is not only confined to loan but also to selling and exchange. riba in selling or exchange arises when there is an unjustified increment gained by the seller or the buyer if they exchanged goods of the same kind in different quantities (abdelrahman, 2003). furthermore,the wisdom behind the prohibition of riba is for moral and economic reasons. morally, interest is prohibited because it is the way of exploiting the poor and usurping the wealth of others without compensation. economically, it prevents the essence of working to earn profit and does not promote mutual cooperation and brotherhood in the society. moreover, riba will lead to higher income inequality (el-ashker & wilson, 2006). although prohibition of interest is fundamentally aspect of islamic finance, interest free banking and finance is not enough to consider that financial institutions which do not apply interest are fully shari’ah compliant. presence of excessive uncertainty (gharar) and risk in business transaction is also not allowed. muhammad ayub (2008) defines gharar as” the uncertainty or hazard caused by lack of clarity regarding the subject matter or the price in a contract or exchange.”(p.57). however, uncertainty and risk are usually part of business activities and cannot be totally avoided. the prohibition of gharar in islamic finance refers to the excessive uncertainty that entails or causes dispute among the contracting parties (alsaati, 2003). moreover, gambling and any form of games of chance is also not allowed in islamic finance. there are two relevant concepts relating to gambling such as maisir and qimar. maisir is the acquisition of wealth by chance either by deprivation of the rights of others or not. qimar on other hand arises when one gains at the expense of other (ayub, 2008). profit is generally the primary objective of any business venture. however, islamic finance is not primarily guided only by profit maximization, justice and welfares of the society are given priority over individuals, and there are hadji latif|awareness and perceptions of muslim society towards islamic banking in the philippines ijief: international journal of islamic economics and finance, 1(2), 209-228 | 214 limitations that should be observed in earning a profit. for insance, investing in business dealing withunlawful products like gambling or alchohol is prohibited . morever, lending is not for profit activity and any interest attached to lending is not allowed. lending should be done with an intention to help and gain godly rewards. there are products which are prohibited by islam and they cannot be the subject of the transaction. promotion of compassionate finance are encouraged such as zakah, qard hasanah (benevolent loan), waqaf which are not intended to gain profit is quite important for scio-economic improvement of the society. earnings cannot be guaranteed because the nature of business can gain profit or loss, and return cannot be separated from risk. selling of something which is not owned by sellers is also prohibited. promotion of private property and freedom of markets is among also the important basic principles of islamic finance . ownership of an asset or property cannot be separated from its risks and return, and finance cannot be created outside the market for goods and services. market also should be perfectly competitive market. monopoly and all types of market frauds are prohibited. time is valued and adjusted in deferred trading not in money. money is not capital but only potential capital and it becomes capital when it is combined with other resources in productive activity. according to abdelrahman yousri (2013), the madinah market is the model for market structure in islam, which provided rules on market and trading, and this market was described as islamic pure competition. madinah market laid down rules that forbid market irregularities and imperfections such as imposing levy and dues on market entry, ihtejar or using stones to claim permanent private area in market place, monopoly ( ihtekar), monopolistic competition practices , fraud and cheating, discriminative and unfair prices (ghabn), gharar , and price manipulation (najash). justice and mutual consent, transparency, honesty and mutual help also are part of norms and principles prescribed by shari’ah in all business transactions. awareness and perceptions towards islamic banking consumer awareness and perceptions are important in business industry. familiarity of consumers with the distinctive features and usefulness of particular products or services drive their decision to buy or adopt. awareness literally means knowledge and understanding that something is happening or exists. cambridge dictionary defines awareness as” understanding of a situation or subject at the present time based on information or experience”. perception on other hand, is defined by hanna, et al. (2013) as “the process of selecting, organizing and interpreting sensations into meaningful whole “(p.75). moreover, perceptions play vital hadji latif|awareness and perceptions of muslim society towards islamic banking in the philippines ijief: international journal of islamic economics and finance, 1(2), 209-228 | 215 role for in marketing strategy of firm to attract new customers and keep their existing patrons. according to hanna, et al. (2013), there are three important concepts related to perceptions. there are exposure, attention and sensation. exposure occurs when individual comes to contact with environmental stimuli. attention is the allocation of individual’s mental capacity to a stimulus, and sensation refers to the responses of our sensory receptors. in this context of islamic banking, awareness of the islamic banking products and services refers to the understanding and knowledge of the existing islamic bank and its products/services and principles through various ways. awareness of the society towards islamic banking can create favorable or unfavorable decision making. a study conducted by ahmad & bashir ( 2014) asserted that among the masses in pakistan ,there is less awareness among masses about islamic banking terminology, products and services. they also found that customer’s awareness level and customer’s service utilization decision has positive correlation. the study of mahdzan, et al. (2017) in malaysia also inferred that level of understanding of consumers on islamic banking concepts is quite low despite of the fact that malaysia is center of islamic banking and finance. they concluded also that understanding and perceived advantage has a significant influence to the adoption of islamic banking in malaysia. generally, this study used the theory of planned behavior for its theoretical framework. theory of planned behavior is the extension of theory of reasoned action by ajzen & fishbein, 1980; fishbein & ajzen, 1975). the main theme of this theory is the individual intention as precursor of behavior. according to the theory, intentions are the motivational influence of behavior. the performance of individual behavior whether hard or easy is always dictated or driven by the intention. the stronger the intention of individual to take part in a behavior, the more possibly should be its actualization. moreover, intention itself is a function of three considerations. these are attitude toward the behavior, subjective norm and perceived behavioral control. attitude toward the behavior is the degree to which a person has a favorable or negative evaluation or appraisal of the behavior in question. subjective norm refers to the perceived social pressure to do or not to perform the behavior. moreover, perceived behavioral control refers to the perceived ease or difficulty of performing the behavior which includes reflection of past experience as well as anticipated impediments and obstacles (ajzen, 1991). based from the theory of planned behavior (tpb) that proposes three considerations that determines behavioral intention. in this exploratory study, awareness and perceptions of muslim society towards islamic banking are considered salient belief factors that can influence their attitudes towards adoption of islamic bank. hadji latif|awareness and perceptions of muslim society towards islamic banking in the philippines ijief: international journal of islamic economics and finance, 1(2), 209-228 | 216 previous studies studies on awareness and perceptions of people towards islamic bank in the philippines are very limited. however, there are many studies conducted related to awareness, perception, preferences, attitudes and behavior towards islamic banking in the neighboring countries of the philippines and other muslims and non-muslim countries. for instance, in singapore, gerrard & cunningham (1997), inferred in their study that there are two reasons that motivate muslims in singapore to deposit their money in islamic bank, religious and profitability reasons. muslims have low awareness of the culture of islamic banking while non-muslims have an almost complete lack of knowledge about islamic banking in singapore. in new delhi, india, islam & rahman (2017) carried out study regarding the awareness and willingness towards islamic banking among muslims. the study concluded that majority of 290 respondents have lack of understanding on islamic banking operations but they are willing to go for islamic banking if there is proper information and good customer services offered. another findings are found on the study of abduh & idrisov (2014) in dagestan, russia. the study inferred that majority of people of dagestan were not aware of islamic banking products and services. they have low awareness on murabah, mudharabah, murabahah and ijarah contracts in islamic banking and even the principle of profit loss sharing concepts in islamic banking. the authors also found that there is positive relation between awareness and attitude. however, there is no clear influence of attitude to intention of the people to support islamic banking and finance. lujja, et al., (2018) study that aimed to explore the perception of ugandans towards islamic banking concluded that both muslims and non-muslims in ugandans have low awareness towards islamic bank although muslims are more familiar about islamic banks. with 354 sample and the data analyzed through descriptive and factor analysis, the study revealed that muslims attitude towards islamic bank is influenced primarily by religious and profitability, while non-muslims’ attitude is mainly motivated by profitability of islamic banks. for the factors affecting the selection criteria of islamic banks by ugandans, there were 6 determinants such as third party influence, status of the bank, convenience, profitability, hospitality and location. third party influence is homogeny for muslims and non-muslims as selection criteria of islamic banks while the rest vary for muslim and non-muslims. abduh & omarov (2013) conducted a study to examine muslim’s awareness and willingness to patronize islamic banking in kazakhstan and the research showed that majority of the 300 respondents are aware of islamic banking in the country. however, it was observed that they are not aware of the most of the products and services of islamic banking in kazakhstan. in bosnia and herzegovia, a study conducted by ergun and djedovic (2011) revealed that hadji latif|awareness and perceptions of muslim society towards islamic banking in the philippines ijief: international journal of islamic economics and finance, 1(2), 209-228 | 217 the general knowledge about islamic banking is low and the perceptions of islamic banking are not positive. in africa particularly in mauritania, ramdhony (2013) through structured questionnaire for muslim and nonmuslims respondents in mauritania concluded that awareness towards islamic bank irrespective of religion is quite low although muslims have better are of islamic banking terminology than non-muslims. certainly religious belief and return motives are factors that influence them to deal with islamic bank. a study in tunisia by souiden (2013) indicated the vital role of religiosity for favourable attitude towards islamic banks. using convenience sampling with 217 respondents concluded that the more religious the person and fearful to divine punishment, the more he or she will develop favourable attitude towards islamic banks. the study also inferred that the more a muslim believes in islamic laws, the more positive attitude towards islamic banks. moreover, khattak & ur-rahman (2010) analyzed the the customers’ satisfaction and awareness level towards islamic bank institutions in some cities of pakistan. with 156 respondents , the study indicated some of islamic products are known to customers but customers are not aware of murabaha and ijara products in islamic banking . religious reasons also play big factor in bank selection criteria of customers. bank efficient in transaction and confidentiality of islamic banks to their customers have positive significant relation to banking selection criteria of customers. similarly, the study of sohail,i. (2014) in the same country showed that most perceived important factors in selecting banks by the respondents is the consideration of the cost or benefits of the products and services offered by the bank and friendliness behavior of banks and the finding demonstrated that islamic banking system cannot be attractive as compared to conventional bank. furthermore, majority of the respondents also have no enough knowledge about islamic banking system and they cannot easily differentiate between islamic bank and conventional bank because of lack of awareness about islamic bank. a study that used factor and logit regression analysis with 154 respondents was conducted in barcelona, spain by kaakeh, et al. (2018) regarding the attitude of muslim minority towards islamic finance showed that the intentions of muslims to deal with islamic banking is mainly triggered by attitude of muslims in spain. furthermore, religious motivation and awareness play vital role for the selection of islamic banking. conversely, the study also inferred that muslims in spain are not familiar about the modes of operations and contracts used by islamic banking although the respondents are keen to know more about islamic banking. hadji latif|awareness and perceptions of muslim society towards islamic banking in the philippines ijief: international journal of islamic economics and finance, 1(2), 209-228 | 218 in thailand, the study of ismail, et al. (2009),revealed that thai customers muslims and non-muslims were aware of the unique characteristics of islamic banking practice including prohibition of interest but they precieved that there were no differences between islamic bank and conventional bank in thailand. this implies of the very minimal awareness of the thai customers towards islamic banking products and services. generally, based from above mentioned related studies conducted in other countries which indicate of the low awareness and lack of basic knowledge towards islamic banking, further study for the case of the philippines relating to public awareness is vital. there are limited few studies conducted regarding awareness and perceptions towards islamic bank in country particularly in the muslim areas where al-amanah islamic investment bank of the philippines has branches. hence, the main objective of this study is to determine level of awareness, understanding and perceptions of muslim society towards islamic bank in the philippines. methodology data data for this study were collected using a self-administered questionnaire which was developed based on various sources of literature. it consists of three sections. the first section is designed to gather information regarding the demographic profiles of the respondents such as age, gender, educational attainment, monthly salary, work status, length of service and marital status. the second section includes the awareness towards islamic banking and finance. the third section is devised to determine the basic understanding and perceptions of the respondents towards islamic bank. specifically, to determine the awareness of the respondents, the respondents were asked to state their awareness through restricted item or closed ended questions. the respondents also were asked to their level of agreement on the statements regarding understanding and perceptions towards islamic bank basic principles and characteristics using likert-scale ranging from strongly agree (5), to strongly disagree (1). data were analyzed descriptively. method this study was conducted at marawi city, philippines and the data gatheredthrough self administered questionnaire. the employees of some offices of the mindanao state university marawi city were the target hadji latif|awareness and perceptions of muslim society towards islamic banking in the philippines ijief: international journal of islamic economics and finance, 1(2), 209-228 | 219 samples of this research. the respondents are all muslims who are currently working at mindanao state university, marawi city. the selection of sample respondents is based on the fact the university employees are deemed to have relevant knowledge of the islamic banking because they are in academic institution. a total 100 questionnaires were distributed and only 70 questionnaires were deemed valid. responses were screened for errors and misplaced answers. due to large number of muslims in the philippines scattered in various areas, the sampling technique used in this study is nonprobability convenient sampling. this study is exploratory in nature, rigorous statistical analyses were not employed. explorative research design was used in this study and descriptive and frequency analyses were conducted to create and represent the respondents’ demographic profiles, awareness, understanding and perceptions towards islamic bank. furthermore, to measure the internal reliability of questionnaires, cronbach’s alphatest was used. cronbach’s alpha of 1 indicates of perfect reliability and the closer the cronbach’s alpha to 1, the higher the reability. it was suggested that the lowest limit for cronbach’s aplha is 0.70. in this study,0 .97cronbach’s alpha for understandingstatements and 0.98 for perceptions statements. results and analysis results of the study 1. demographic profiles of the respondents table 1. gender, age and educational attainment distribution of the respondents gender group percentage male 27.14 female 72.86 age group percentage 20-23 year 4.29 24-27 17.14 28-31 14.29 32-36 14.29 37-39 5.71 40-43 12.86 44-49 2.86 50-60 27.14 hadji latif|awareness and perceptions of muslim society towards islamic banking in the philippines ijief: international journal of islamic economics and finance, 1(2), 209-228 | 220 table 1. gender, age and educational attainment distribution of the respondents (continue) educational attainment group percentage undergraduate 82.86 master degree 17.14 doctorate degree 0 table 1 above shows that among the 70 respondents, 51 of them are females which constitute 72 percent of the total sample and only 26 percent is males. for the age group, 27.14 percent of the total respondents are in the ages between 50-60 years and followed by the ages between 24-27 years which constitute 17.14 % of the total respondents. furthermore, 2.86 % of the total respondents is in the ages between 44-49 years, and the ages between 37-29 years constitute only 5.71 percent from the total respondents. both the ages between 28-31, and 32-36 years comprise of 14.29 percent respectively. furthermore, almost 83 percent of the respondents acquired their undergraduate degrees and only 12 of them have finished master degrees which constitutes only 17 percent. table 2. length of service, work status and marital status of respondents length of service percentage 1-2 years 27.14 3-7 28.57 8-12 17.14 13-18 2.85 19-25 10.00 26 and above 14.28 total 100 marital status percentage single 61.42 married 37.14 widow 1.42 total 100 work status percentage regular/permanent 42.87 contractual 57.14 total 100 monthly income group percentage 5,000-10,000 pesos 40 10,000-15,000 28.6 15,00020,000 17.1 20,000-25,000 10 25,000-30,000 4.3 total 100 hadji latif|awareness and perceptions of muslim society towards islamic banking in the philippines ijief: international journal of islamic economics and finance, 1(2), 209-228 | 221 the table 2 above shows that majority of the respondents have been in the service at mindanao state university for between 3-7 years, which constitute of almost 29 % of the total respondents. 19 of the respondents or 27 percent have been working in the university between 1-2 years. 2 % of the respondents have been employees of msu between 13-18 years, and 14 percent of them have been worked for more than 26 years in the said university. for marital status, 43 of the respondents or 61 and 37 percent are singles and married respectively and only one is widow. furthermore, 57 percent of the respondents have been working as contractual and the rest are regular employees of msu. for the monthly income or salary of the respondents, out of 70 respondents, 28 of them or 40 % have an average monthly salary between 5,000 10,000 thousand pesos while 28 percent of the respondents have an average monthly income of 10,000-15,000 thousand pesos and only 4 % of them have higher average salary of between 25,000-30,000 thousand pesos followed by 7 respondents with an average salary between 20,000-25,000 pesos as shown in table 2 above. 2. awareness and perceptions towards islamic banking there are 5 questions asked for the respondents to determine their basic understanding of islamic banking existence in the country and its products and services. table 3.awareness responses towards islamic bank questions percentage yes no 1. are you aware of islamic banking? 88.6 11.4 2. are you aware of al-amanah islamic investment bank of the philippines? 87.1 12.9 3. are you aware that the philippines was among the pioneering countries in establishing islamic bank? 48.6 51.4 4. are you aware of islamic products and services and musharakah, mudharabah, murabaha, ijarah islamic banking modes of financing 28.6 71.4 5. have you ever transacted with islamic bank in the country. 32.9 67.1 hadji latif|awareness and perceptions of muslim society towards islamic banking in the philippines ijief: international journal of islamic economics and finance, 1(2), 209-228 | 222 based from table 3 above, 88 percent of the respondents heard and are aware of the islamic banking. specifically, they are aware of existence of alamanah islamic investment bank of the philippines with only 12.9 percent of the respondents who said that they are not aware of al-amanah bank as an islamic bank. conversely, most of the respondents (51 %) are not aware that philippines was among the pioneering countries in establishing islamic bank in the name of philippines amanah bank in 1974. for awareness about islamic banking products and services, most of the respondents (71 %) acknowledged and confirmed that they are not aware of islamic banking products and modes of financing such as musharakah, mudharabah, murabaha, and ijaraah. furthermore, most of them also (67%) had never transacted with islamic bank in the country. the table 4 above shows that for the statement u1, “islamic bank in the country is operated in accordance with shariah law”, majority of respondents agreed to the said statement with a mean of 3.8. for the second statement (u2),” al-amanah islamic investment bank of the philippines is only for muslims”, majority of the respondents are in neutral side. in other hand, islamic bank in the country can be for muslims or nonmuslims. the third statement (u3) is “islamic banks prohibit interest/usury/riba”. most of the respondents agreed that interest is prohibited in islamic banking with 3.5 weighted mean. moreover, majority of the respondents also believed that “islamic banks prohibit uncertainty in all form of business transactions (u4). lastly, they believe that “islamic banks only invest in halal business” (u5) with the mean of 4.0. table 4. understanding statements towards islamic banking principles st sd d n a sa m % % % % % u1 8.6 4.3 21.4 25.8 40 3.8 u2 12.8 31.4 15.8 20 20 3.0 u3 10 15.7 12.8 22.8 38.6 3.5 u4 8.6 8.6 243 31.5 27.1 3.6 u5 5.8 5.8 12.9 32.9 42.9 4.0 note: st-statement; sd-strongly disagree; d-disagree-neutral; a-agree; sa-strongly agree; m-mean ;u-understanding hadji latif|awareness and perceptions of muslim society towards islamic banking in the philippines ijief: international journal of islamic economics and finance, 1(2), 209-228 | 223 3. perceptions towards islamic banking table 5. respondents’ perceptions towards islamic bank st sd d n a sa m % % % % % p1 35.7 25.7 12.8 22.8 2.8 2.3 p2 1.4 11.4 20 48.5 18.5 3.7 p3 8.5 12.8 28.5 41.4 8.5 3.2 p4 14.2 32.8 27.1 18.5 7.14 2.7 p5 2.8 20 21.4 42.8 12.8 3.3 p6 4.28 25.7 20 31.4 18.5 3.3 p7 10 10 21.4 21.4 37.1 3.6 p8 24.2 21.4 25.7 18.5 10 2.6 note: st-statement; sd-strongly disagree; d-disagree-neutral; a-agree; sastrongly agree; m-mean ; p-perception in the table 5 above, most of the respondents disagreed to the statement (p1) that islamic bank in the country deals with interest with weighted mean of 2.3 and only few respondents who disagreed to the said statement. for the statement related to the potential of islamic bank in the country (p2), majority of the respondents have positive perceptions on it with 3.7 weighted mean. the third statement (p3) in which “the presence of al amanah islamic investment bank of the philippines in the country has not done enough to promote its products to the public” has got favourable agreement. furthermore, they perceived that there is no difference between islamic bank and conventional bank in the country (p4). besides, the respondents believed that the problem of peace and order in the country has impacted to the sluggish growth of islamic bank in the country (p5). respondents also agreed that islamic bank has not been expanded due to the less emphasis of the muslim leaders in the country to encourage the philippines government to strengthen and expand islamic bank (p6). certainly, most of the respondents believed that islamic banks are for all, muslims and non-muslims (p7). the development of islamic bank has no relation to its principle of prohibition of interest as perceived by the respondents (p8). analysis the presence of philippines amanah bank which was later renamed as alamanah islamic investment bank of the philippines only enlightened the public of its existence as the sole islamic bank in the country but it has not done enough in enhancing the awareness and understanding of the public particularly the muslim society to islamic banking principles, and products hadji latif|awareness and perceptions of muslim society towards islamic banking in the philippines ijief: international journal of islamic economics and finance, 1(2), 209-228 | 224 and services. this is supported by our hypothesis that employees of mindanao state university, marawi city have very low awareness on the islamic banking products and services as well as its modes of financing. this finding is consistent with the findings of other studies in other countries like of ramdhony (2013) in mauritania; islam & rahman (2017)in india; and lateh, et al. (2009) in thailand. the respondents generally have a basic knowledge of the fundamental principles of islamic banking system which is the prohibition of interest but this knowledge is the result of their general knowledge to the teachings of islam not by because of the establishment of islamic bank in the country. presently, islamic bank in the country is not fully operating in accordance with shariah principles and most of the respondents also had no transaction experience with islamic bank in the country. potentially, majority of respondents have favourable conviction that there will be a huge potential future of islamic banking in the country. this is quite similar to the finding of kaakeh, et al. (2018) in spain where most of the respondents are interested to know more about islamic banking and finance. certainly, the increasing global demand for islamic bank and the integration of asean countries as well as the continuous increase of the muslim population in the country undoubtedly will give conducive environment for islamic banking in the country. majority of the respondents also perceived that the one of the reasons of the low awareness of the public towards islamic bank products and services is the lack of marketing strategies and promotion campaigns of the al-amanah islamic investment bank of the philippines. moreover, the problem of peace and order in the country has impacted to the sluggish growth of islamic banking in the country. armed conflict in the philippines not only brought the death of thousands of people but also disrupted the growth and development of the country. despite of the fact that philippines was one of the pioneering countries in establishing islamic bank in 1973, al-amanah islamic bank as the only one islamic bank in the country has not competitive and financial performed well. muslim leaders have not done enough to push for the development of islamic bank through establishment of regulatory framework for islamic bank and enhancement of public knowledge and human resources for islamic banking in the country. as a result, strengthening of islamic bank has been disregarded and failed to cater the financial inclusion for the society. hadji latif|awareness and perceptions of muslim society towards islamic banking in the philippines ijief: international journal of islamic economics and finance, 1(2), 209-228 | 225 conclusion and recommendation conclusion this paper aimed to explore and examine the level of awareness and perceptions of the islamic banking in the philippines. it concludes that the existence of the sole islamic bank in the philippines for more than four decades has not exhibited auspicious level of awareness of the society towards islamic banking products and services. most of the respondents in general have a basic knowledge of basic principle of prohibition of interest and excessive uncertainty in financial transactions but they are not aware of islamic banking products and services, and the modes of financing such as musharakah, mudharaba, murabah , ijaraah and salam. lack of peace and order in mindanao and lack of emphasis on the importance of islamic banking for muslim communities perceived to contribute in slow development of islamic banking in the country. thus, in line with growing global demand for islamic bank and finance, philippines should initiate its vital step to expand islamic banking in the country to serve the muslims and non-muslims. recommendation based on the findings of the study, the followings are the recommendations for the stakeholders of islamic banking in the country. 1. al-amanah islamic investment bank of the philippines has not done enough to promote the islamic banking and its products and services to society. to strengthen its marketing strategy for the promotion of islamic bank in the country, the bank can initiate various programs such as public seminars, trainings, and collaboration with other educational institutions. 2. mindanao state university as a center of higher academic institution in mindanao has vital role in educating the society about islamic banking and finance through offering new minor or major courses about islamic economics or islamic banking and finance. 3. absence of legal regulatory framework for islamic banking in the country restricts the growth of amanah bank, it is recommended for central bank of the country to work towards in attaining an appropriate legal regulatory framework islamic banking in the country. 4. there is a need of enacting laws pertaining to islamic banking expansion in the country to cater the financial needs of the growing number of muslims in the philippines and for the global demand for islamic banks. hadji latif|awareness and perceptions of muslim society towards islamic banking in the philippines ijief: international journal of islamic economics and finance, 1(2), 209-228 | 226 5. this study confined to muslims with limited samples. future relevant study for both muslims and non-muslims’ awareness and perception is quite important. 6. the present islamic bank in the country should start to work with religious leaders by launching informative campaign about the importance of islamic banking and finance for muslim society. hadji latif|awareness and perceptions of muslim society towards islamic banking in the philippines ijief: international journal of islamic economics and finance, 1(2), 209-228 | 227 references abdelrahman, a.y. 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(2005). an introduction to islamic finance. pakistan: maktaba ma’riful qur’an international journal of islamic economics and finance (ijief) vol. 5(1), january 2022, pages 59-88 the role of institution and macroeconomic policy mix on economic growth in muslim country muhammad ghafur wibowo1*, hadri kusuma2, ibnu qizam3 *) corresponding email: muhammad.wibowo@uin-suka.ac.id article history received: april 28th, 2021 revised: june 30th, 2021 october 10th, 2021 accepted: october 11th, 2021 abstract this study examines the role of the fiscal and monetary policy mix on economic growth with the st. model. louis, which andersen and jordan developed in 1968, included the variable quality of institutions (governance) as a moderator. this research model uses the independent variable in the form of money supply (m) as a proxy for monetary policy and government expenditure (g) and government debt (d) as a proxy for fiscal policy. the governance index variable (ins) consists of 6 indicators, namely 1). voice and accountability; 2). political stability and absence of violence/terrorism; 3). government effectiveness; 4). regulatory quality; 5). rule of law; 6). control of corruption. the objects of this research are all member countries of the organization of the islamic conference (oic), 57 countries. due to the limited data that can be accessed, 46 countries were selected as research samples with a research period of 2005-2018. the analytical tool used in this study is a moderating panel data regression consisting of 28 equations. this study indicates that fiscal policy (government expenditure) and monetary policy (money supply) have a significant effect on economic growth. the government debt has a negative effect on economic growth in oic countries. the quality of governance has a positive effect on economic growth in the oic countries. this shows the important role of the quality of governance in the economy, as in the latest economic growth theory. the quality of governance cannot moderate the effect of the fiscal and monetary policy mix on economic growth in the oic countries. the governance index plays a more direct role in economic growth, not as an effective moderator for government economic policies. the governance index is more effective in moderating various economic variables, which are private economic activities. keywords: governance index; fiscal and monetary policy; economic growth jel classification: e02; e52; h50; 043 type of paper: research paper @ ijief 2022 published by universitas muhammadiyah yogyakarta, indonesia doi: https://doi.org/10.18196/ijief.v5i1.11646 web: https://journal.umy.ac.id/index.php/ijief/article/view/11646 citation: wibowo, m. g., kusuma, h., & qizam, i. (2022). the role of institution and macroeconomic policy mix on economic growth in muslim country. international journal of islamic economics and finance (ijief), 5(1), 59-88, doi: https://doi.org/10.18196/ijief.v5i1.11646 1 uin sunan kalijaga, indonesia 2 universitas islam indonesia, indonesia 3 uin syarif hidayatullah, indonesia mailto:muhammad.wibowo@uin-suka.ac.id https://doi.org/10.18196/ijief.v5i1.11646 https://doi.org/10.18196/ijief.v5i1.11646 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v5i1.11646&domain=pdf wibowo, kusuma, & qizam │ the role of institution and macroeconomic policy mix on economic growth in muslim country international journal of islamic economics and finance (ijief), 5(1), 59-88 │ 60 i. introduction 1.1. background in order to influence the economy and accelerate good economic growth, the country carries out various economic policies; the two main ones are fiscal policy and monetary policy (froyen, 2002; mankiw, 2010). there is a long debate about what policy is more effective in influencing the economy between the two types of policies. the keynesian group has the view that fiscal policy is more effective in influencing the economy, while the monetarist has the opposite view (belliveau, 2011; gray et al., 2013; vanegas, 2018). in order to prove this empirically, andersen and jordan in 1968 tested the effectiveness of the fiscal and monetary policies mix by forming an equation which was later called the st. louis model (andersen & jordan, 1968). this model uses the money supply (m) as a proxy for monetary policy, and government expenditure (g) as a proxy for fiscal policy. economic growth is measured by gross domestic product, gdp or y, so that the equation can be written as y = f (m, g). many studies have applied the st. louis model in various countries. darrat applied it to latin american countries and found that fiscal policy was more effective than monetary policy in promoting economic growth (darrat, 1984). halcon and leon support this finding for cases in the philippines (halcon & leon, 2004). however, it differs from the findings of fatima and iqbal for cases in selected asian countries, which show that monetary policy is more effective in influencing economic growth than fiscal policy (fatima & iqbal, 2003), which was confirmed by ajayi and aluko (2017). in addition, many other studies examine the effectiveness of fiscal and monetary policies on economic performance as measured by economic growth based on the st. louis model (ali et al., 2008; malawi, 2009; jawaid et al., 2011; chowdhury, l. s. & afzal, 2015). most muslim-majority countries are categorized as developing and even underdeveloped countries (kuran, 2018). a study conducted by kuran shows that muslim countries (predominantly muslim) lag behind in terms of their economic performance compared to non-muslim countries. meanwhile, according to kahf, underdevelopment in the economy of muslim countries originates from the budget deficit (government debt) caused by corruption, wasted spending, price subsidies, large inefficiencies in the public sector, and large defence spending (kahf, 1997). muslim countries in the middle east, north africa, south asia and southeast asia are generally weak in education, security stability, and legal certainty. moreover, institutionally, poor public services and high corruption have further aggravated the economic downturn of muslim countries (lackey, 2013). meanwile, chapra (2008) emphasized that development or decline in various muslim countries is caused by many wibowo, kusuma, & qizam │ the role of institution and macroeconomic policy mix on economic growth in muslim country international journal of islamic economics and finance (ijief), 5(1), 59-88 │ 61 factors such as social, political, economic, historical, and moral which have lasted for a very long time. in fact, in the teachings of islam, there is already an islamic worldview of development which, if applied, can bring prosperity to muslims (pramanik, 2002). muslim countries that are members of the organization for islamic cooperation [(oic) have tried to harmonize their activities with various other international organizations, especially the united nations (un). current international issues such as human rights, gender equality, justice, terrorism are explicitly included in the amendments to the charter. this includes the joint efforts of oic countries to create good governance in their respective countries to achieve a better life. issues of democracy, law enforcement, eradicating corruption, and security conflicts are a common concern of all oic countries (organization of islamic cooperation [oic], 2008). muslim-majority countries normatively have religious values that should support good productivity and economic performance. but in fact, in general, muslim countries lag behind in terms of welfare compared to other countries. therefore, there is a big question regarding the effectiveness of fiscal and monetary policies on economic growth (base on the st. louis model) in muslim countries that have similar institutional framework. 1.2. objective this study aims to re-examine the effectiveness of fiscal (government spending) and monetary (money supply) policies from the st. louis model by adding variables of government debt and governance quality in muslim countries (members of oic). this needs to be done considering the oic countries face almost the same economic problems, such as economic backwardness, poverty, unemployment, and so on (kuran, 2018). in addition, the character of formal (organization, constitution, and regulations) and informal (cultural customs, beliefs and religions) institutions also has similarities among oic member countries. this happens because the religious teachings adopted will form beliefs, patterns of thought and actions that should be the same among adherents in various countries (north, 1994). the rest of the paper is organized as follows: section 2 shortly review of the literature related to st. louis model and governance index, while chapter 3 describes the method applied. chapter 4 discusses the findings of this research and finally, with chapter 5 which contains conclusions and suggestions. wibowo, kusuma, & qizam │ the role of institution and macroeconomic policy mix on economic growth in muslim country international journal of islamic economics and finance (ijief), 5(1), 59-88 │ 62 ii. literature review 2.1. background theory fiscal and monetary policy is a combination of the central economic policies of each country to achieve high economic growth (dornbusch et al., 2011; mankiw, 2010). fiscal policy is government policy in managing the budget consisting of government spending and revenue, including the government's decision to get debt if the budget is in deficit (mankiw, 2010; perry, 2014). regarding the impact of government debt (a budget deficit) on the economy, there are three groups with different opinions. neoclassical views that government debt has a negative impact on economic growth, keynesians see the positive impact of debt on the economy, while ricardians see it as something neutral (arjomand et al., 2016). in practice, most countries in the world currently implement budget deficit policies, meaning that government spending is greater than state revenues. this deficit requires financing from various sources in government debt, both domestic and foreign, using various instruments. monetary policy is a state policy (usually by the central bank) to control or regulate the supply of money and interest rates to influence economic activity (froyen, 2002; mankiw, 2010). through the banking system network, the central bank can influence the amount of money supply in society through several monetary policy instruments. the ultimate goal of monetary policy remains to achieve better economic performance, such as price stability (controlled inflation), economic growth, and increased employment opportunities. (simorangkir, 2014). another aspect that has begun to receive considerable attention in the last few decades related to economic growth theory is the institution. according to acemoglu, differences in economic progress between countries are partly due to differences in the choice of institutions in managing these countries. a country with a good institution will be better able to achieve better economic conditions than a country with less good institutions (acemoglu, 2009). in the context of countries with muslim majority populations, this phenomenon has also occurred massively and has been going on for a very long time (kahf, 1997; kuran, 2018). north defines institutions as various rules that can limit humanly devised to build structures for political, economic, and social interactions. institutions have 3 components, namely 1) formal rules (formal institutions), which include the constitution, statutes, law, and all government regulations; 2) informal rules (informal institutions), which include experience, traditional values, religion, and all the factors that influence the form of individual wibowo, kusuma, & qizam │ the role of institution and macroeconomic policy mix on economic growth in muslim country international journal of islamic economics and finance (ijief), 5(1), 59-88 │ 63 subjective perspectives about the world in which they live; 3) the enforcement of various established rules and agreements (north, 1994). the quality of already good institutions will result in lower transaction costs arising from economic activities (transactions). therefore, in order to achieve low transaction costs, two paths can be taken. first, make rules (formal or informal) that guarantee certainty for economic actors to conduct transactions or exchanges. second, strengthen the enforcement system in case of problems in the transaction process (yustika, 2013). the world bank has developed a measure of the quality of institutions at the country level with the concept of governance. through the world governance indicator (wgi) published by the world bank, a governance index is developed. there are 6 dimensions in good governance covering (kaufmann et al., 1999): 1. voice and accountability: the perceptions of citizens of a country regarding their involvement in government elections, freedom of expression, freedom of association and, media freedom. 2. political stability and absence of violence/terrorism: public perceptions regarding the instability of the situation or efforts to overthrow the government through actions that cannot be justified, such as violence or terrorism motivated by political interests. 3. government effectiveness: perceptions of the quality of public services, the quality of civil services, and the level of freedom from political pressure, the quality of policy formulation and implementation, and the credibility of the government's commitment to the various policies it makes. 4. regulatory quality: perceptions on the government's ability to formulate and then implement policies and regulations. 5. rule of law: perceptions of public trust and acceptance of various kinds of regulations, particularly law enforcement, property rights, police and courts. 6. control of corruption: public perceptions regarding the supervision and prosecution of corrupt practices, both small and large, carried out by political elites and the private sector. in islamic economics, good governance is a form of implementation of islamic teachings (hafeez, 2013; hasan, 2009). the concept of governance, both within the company and in the government of a country, must be based on the value of islamic monotheism that comes from the al-qur'an (3: 191). this verse emphasizes the need for muslims always to remember allah wherever and under any circumstances. the value of monotheism underlies all human activities, both individually and communally, both in terms of worship and muamalah (hasan, 2009). the value of tauhid or faith raises the value of ihsan or the value of goodness, as stated in the al-qur'an (29: 69). ihsan or good wibowo, kusuma, & qizam │ the role of institution and macroeconomic policy mix on economic growth in muslim country international journal of islamic economics and finance (ijief), 5(1), 59-88 │ 64 deeds are the implementations of tauhid to allah swt, like the hadith of the prophet saw, which explains the meaning of "ihsan" behaviour (worship) to allah as if seeing god or constantly feeling seen by god (khan, 2019). 2.2. previous studies evaluation of the effectiveness of the fiscal and monetary policies mix on economic growth is a serious concern of researchers. the st. louis model was developed by andersen and jordan (1968) is still being applied by many researchers. darrat (1984) test the st. louis model in latin american countries (brazil, chile, peru, mexico, and venezuela) in 1950-1981 and found that fiscal policy was relatively more effective in promoting economic growth. similar results were obtained by halcon and leon (2004) for cases in the philippines in 1986-2003. fatima and iqbal found different results for cases in several asian countries (pakistan, india, thailand, indonesia, and malaysia) in 1970-2000. in general, monetary policy is more effective in promoting economic growth than fiscal policy in these asian countries (fatima & iqbal, 2003). ajayi and aluko's (2017) research findings also confirmed fatima and iqbal's research results, but for cases in nigeria 1986-2014. according to them, money growth (monetary policy) has a positive and significant effect on economic growth. meanwhile, government spending (fiscal policy) does not have a significant effect on economic growth. various other studies examining the effectiveness of fiscal and monetary policies on economic performance include ali, irum, and ali (2008) researched in 4 south asian countries; malawi (2009) researched in jordan and tunisia; jawaid, arif, and naeemullah (2011) researched in pakistan; chowdhury and afzal (2015) researched in bangladesh. the vital role of institutions to improve people's welfare has started to get the attention of economists for a long time. however, different views on institutions cause the dimensions and sizes of institutions to vary. several studies that generally link the role of institutions and economic growth differ in terminology, indicators and measurements. scully (1988) initiated research linking institutional quality and economic performance (economic growth). scully examined the political freedom index, the property freedom index, the economic freedom index on gdp per capita growth in 115 countries from 1960-1980. the results showed that institutional quality has a significant effect on efficiency and economic growth. politically open societies, respect private property, abide by the rule of law, and have a well-allocated market for resources can grow economies three times and two and a half times more efficiently than countries with restricted freedoms. they were followed in the 1990s by knack and keefer (1995), which relates the law enforcement index from the international country risk guide (icrg) wibowo, kusuma, & qizam │ the role of institution and macroeconomic policy mix on economic growth in muslim country international journal of islamic economics and finance (ijief), 5(1), 59-88 │ 65 with investment and cross-border gdp for 1974-1989. the results showed that a country that can enforce the law in terms of property rights would have a greater investment, which then impacts economic growth. knack and keefer then developed their research with other institutional measures such as law enforcement, contract compliance, and corruption in 102 countries from 1960-1989. the results of this study indicate that the quality of the institution has a positive effect on income. the ability of poor countries to catch up is determined by the quality of the institutions (keefer & knack, 1997). norton found that economic institutions played an essential role in the welfare of the people in 112 countries in 1982-1995. an increase in the institutional quality index (property rights, law enforcement and economic freedom) can reduce human poverty and increase the human development index (norton, 2003). these findings are supported by research conducted by siddiquia and ahmed (2013) for cases in developing countries, also studies from flachaire et al. (2014) for cases in developed countries. another term for institutional quality is governance which was introduced and developed by kaufman, kraay, and lobaton at the world bank in the 1990s (kaufmann et al., 1999). the concept of governance already has its measurement instrument, an extension of the various quality indexes of existing institutions. there are 6 indicators in the governance index, namely: 1). voice and accountability; 2). political stability and absence of violence/terrorism; 3). government effectiveness; 4). regulatory quality; 5). rule of law; 6). control of corruption. empirically, the governance index has been tested by many researchers since the early 2000s. olson, sarna, and swamy examined the effect of governance quality on gdp in 68 developing countries in 1960-1987. this study concludes that countries with good governance have a higher level of productivity to promote economic growth better. (olson et al., 2000). the relationship between governance and economic growth in high and low-income countries is retested by kaufman and kraay (2002) in 120 countries 2000/2001. this study concludes that governance plays an important role in increasing economic growth in the long run. this positive relationship occurs in countries with higher income levels, in contrast to countries with lower income. research findings with similar results were also carried out by aidt et al. (2008), rajkumar and swaroop (2008), also huang and ho (2017). the latest research conducted by vianna and mollick examines the critical role of institutions for economic growth in various countries, especially in latin america, from 1996-2015. the results showed that the institutional index (governance index from the world governance indicator, wgi) had a significant positive effect on economic growth, particularly indicators of the rule of law and political stability. vianna and mollick also emphasized the wibowo, kusuma, & qizam │ the role of institution and macroeconomic policy mix on economic growth in muslim country international journal of islamic economics and finance (ijief), 5(1), 59-88 │ 66 importance of an efficient fiscal and monetary policy mix in promoting economic growth (vianna & mollick, 2018). several studies have interacted the quality of institutions (as a moderator variable) with other independent variables in influencing economic growth. this variable interaction aims to determine the role of institutional in strengthening/weakening the influence of independent variables on the dependent variable. a study conducted by williams in 81 developed and developing countries from 1970 to 2014 found that the quality of institutions can reduce the negative impact of too much credit on economic growth (williams, 2019). a slightly different result was found by rachdi et al. when examining the impact of liberalization on economic growth with institutions (law enforcement) as a moderating variable in 15 mena (the middle east and north africa) countries 2000-2013. rachdi et al. found that financial sector liberalization positively impacted economic growth in mena countries through increased savings and subsequently investment. this study found that good law enforcement will be able to increase economic activity drastically. therefore, to achieve good economic growth and avoid crises, mena countries need to strengthen the quality of institutions by implementing good governance (rachdi et al., 2018). the influence of government debt on economic growth associated with the quality of institutions is also a concern of researchers. sani et al. (2019) analyzing the influence of government debt in sub-saharan african countries in 2000-2014 and linking it with 6 indicators of governance index. the results show that the quality of institutions can reduce the negative impact of government debt on economic growth. the research results support these findings by fraj, hamdaoui, and maktouf, which examined 50 developed and developing countries (hadj fraj et al., 2018). therefore, this study intends to develop various aspects of previous studies. the aspects referred to are 1) broader and comprehensive indicators of governance quality using indexes from the world governance indicator, wgi; 2) interacting the governance index with a fiscal and monetary policies mix (the st. louis model developed by andersen and jordan in 1968); 3) analyzing member countries of the organization for islamic cooperation, oic). wibowo, kusuma, & qizam │ the role of institution and macroeconomic policy mix on economic growth in muslim country international journal of islamic economics and finance (ijief), 5(1), 59-88 │ 67 iii. methodology 3.1. data this research focuses on countries with large muslim populations. therefore, the population in this study is all member countries of the organization of islamic cooperation (oic), which represent the existence of a country with a large muslim population. the data used in this research is quantitative data from various institutions that have credibility in their fields, such as the world bank, the international monetary fund, and the organization of islamic cooperation (oic). all oic members are deemed capable of representing muslim-populated countries in the world. all oic countries (57 countries) were chosen to be research objects, but due to limited data that can be accessed, 46 countries were selected as research samples with the research period 2005-2018. the addition of data outside this observation period will reduce the number of countries studied due to incomplete data in some countries. 3.2. model development this study examines the effectiveness of the fiscal and monetary policy mix in oic countries by referring to the st. louis model developed by andersen and jordan (1968). this model uses the money supply (m) as a proxy for monetary policy and government spending (g) as a proxy for fiscal policy. the dependent variable in this model is economic growth (gross domestic product, gdp or y). this study adds government debt (d) to the st. louis model; therefore, the model in this study becomes y = f (g, d, m). in institutional economics, it is believed that social and economic institutions can influence economic performance. in several empirical models, the quality of institutions plays a direct role in economic performance and moderates the relationship between independent variables and economic performance. in this context, it is understood that the quality of institutions can increase the impact or influence of the various independent variables on economic performance (as a dependent variable). researchers used a governance index published by the world governance indicator (wgi), part of the world bank. the governance index introduced and developed by kaufmann et al. (1999) at the world bank in the 1990s. there are 6 indicators in the governance index, namely 1). voice and accountability (va); 2). political stability and absence of violence/terrorism (ps); 3). government effectiveness (ge); 4). regulatory quality (rq); 5). rule of law (rl); 6). control of corruption (cc). wibowo, kusuma, & qizam │ the role of institution and macroeconomic policy mix on economic growth in muslim country international journal of islamic economics and finance (ijief), 5(1), 59-88 │ 68 in order to obtain a more complete and better empirical model, a control variable will be added to the model. the control variable is not the primary variable that will be researched and tested, but it functions to control the consistency of the estimation results (jogiyanto, 2007; sekaran & bougie, 2016). in this study, the control variables used were population and investment (khalfaoui, 2015; vianna & mollick, 2018). therefore, the final model of this study is as follows: gdp = f (g, d, m, pop, fdi, [ins, va, ps, ge, rq, rl, cc]) where: gdp = real gross domestic product g = government expenditure d = public debt m = money supply pop = population fdi = investment (foreign direct investment) ins = institutional quality (the average value of the 6 governance index) va = voice and accountability ps = political stability and absence of violence/terrorism ge = government effectiveness rq = regulatory quality rl = rule of law cc = control of corruption in this study, economic growth is measured through the logarithmic value of real gdp sourced from the world bank database as in several previous studies (ali et al., 2008; knack & keefer, 1995; olson et al., 2000). refers to the st. louis model, developed by andersen (1998), the independent variables are money supply, government spending, and government debt (m2, g, d in us $). the data for these three variables were obtained from the world bank database. the governance index acts as a moderator variable for the fiscal and monetary policy mix. in this study, the variable ins (institutional quality) is added, which is the composite average value of the six governance indices. the use of the ins variable refers to the latest research conducted by sani et al. (2019).. 3.3. method this study applies a panel data regression model. in general, there are three approaches, namely common effect, fixed effect, and random effect (baltagi, 2005). the chow test, hausman test, and lagrange multiplier (lm) test were performed to determine the best approach model. hypothesis testing is carried out simultaneously and partially as stipulated in the panel data wibowo, kusuma, & qizam │ the role of institution and macroeconomic policy mix on economic growth in muslim country international journal of islamic economics and finance (ijief), 5(1), 59-88 │ 69 regression model with a confidence level α = 1%, 5%, or 10% (gujarati, 2004; sekaran & bougie, 2016). this study developed the moderated regression analysis (mra) method. this regression model contains the interaction between the independent variable (iv) and the moderator variable (mv), which affects the dependent variable (dv). the moderator variable (mv) is a variable that has a contingency effect (possibility) from the relationship of the independent variable (iv) to the dependent variable (dv) (jogiyanto, 2007; sekaran & bougie, 2016). the contingency effect in question can be in the form of direction and or strength of the relationship between the independent and dependent variables (baron & kenny, 1986). 3.4. robustness test in order to produce a valid estimation, it is necessary to carry out a robust test in this study to determine the robustness or constancy of the regression coefficient when the model is modified in such away. if the coefficient results are plausible and robust, it can be concluded that the estimation model is valid (lu & white, 2014). vianna & mollick (2018) and sani et al. (2019) conduct a robust test by calculating the average of the six governance indexes from the world bank and then making it an additional independent variable. this study uses a composite index derived from the six governance indexes of the world bank. in contrast to the two studies, this study combines or reduces the governance index using the factor analysis method. factor analysis is a technique of combining indicators or dimensions that allows capturing as much information as possible so that the reduction results become valid (fernando et al., 2012). this technique is done by determining the structure through data summarization or data reduction (ghozali, 2013). several previous studies used this method to reduce dimensions (revelle, 2017) and compile a composite index (duan, 2007; fernando et al., 2012; nardo et al., 2005). this factor analysis will produce a new variable that is named afgv. a robust test is done by comparing the coefficient of the afgv variable and the interaction of afgv and other variables with the coefficient of the ins variable and the interaction of ins and other variables. if the afgv variable coefficient and the afgv interaction show the same direction and significance (consistent) with the ins variable coefficient and the ins interaction, it can be said that the model built is robust (firm or robust). therefore, the estimation results it produces will also be valid. wibowo, kusuma, & qizam │ the role of institution and macroeconomic policy mix on economic growth in muslim country international journal of islamic economics and finance (ijief), 5(1), 59-88 │ 70 iv. results and analysis 4.1. results table 1 shows that out of a total of 46 oic countries selected as research objects, it turns out that only 6 countries have achieved a positive average governance index (ins). the rest, 40 oic countries, scored negative governance index, with afghanistan scoring the lowest at -1,611. this shows that oic countries have not achieved good governance in general, considering that most countries are still below the median index value (-2.5–2.5). the poor quality of governance in oic countries can also be seen from the low average value of the governance index in all countries, which is only -0.580. table 1. descriptive statistics variable mean median maximum minimum std. dev gdp* 125,276,058 27,212.163 1,240,474.471 720,131 211,590.325 g* 16,313.769 3,801.938 177,002.638 67,965 28835.030 d* 40,675.800 8.728,133 355,421.800 38,017 69,064.469 m* 72,904.401 11,505.521 665,411.012 112,451 120,979.375 ins -0.580 -0.619 0.740 -1.771 0.550 va -0.733 -0.759 0.416 -1.907 0.525 ps -0.680 -0.609 1.388 -2.827 0.918 ge -0.494 -0.585 1.510 -1.776 0.688 rq -0.436 -0.446 1.154 -1.720 0.626 rl -0.551 -0.646 0.959 -1.897 0.635 cc -0.587 -0.699 1.567 -1.638 0.619 pop* 32,626,106 12,726,832 267,663,435 365,114 52,226,484 fdi* 2,982.315 920.222 42,725.211 0.181 5,259.785 *) in a million usd turkey is an oic country with the largest economic variables, among others, such as gdp, government spending, government debt, and the amount of money supply. indonesia is the most populous muslim country, while saudi arabia is the largest investment destination (fdi) country. on the other hand, guinea-bissau is an oic country with the smallest economic sizes, such as gdp, expenditure, and foreign direct investment. however, guinea-bissau is one of the countries with the largest government debt. one that is unique is brunei darussalam (one of the richest countries) which has the least population but also has the smallest government debt. in general, the average of the 6 governance indexes in oic countries is still low (<0). some countries that can achieve the highest governance index, such as saudi arabia, brunei darussalam, and qatar, are muslim countries that are wibowo, kusuma, & qizam │ the role of institution and macroeconomic policy mix on economic growth in muslim country international journal of islamic economics and finance (ijief), 5(1), 59-88 │ 71 relatively safe socially and politically and have a prosperous life (high per capita income). on the other hand, countries with a low governance index (sudan, afghanistan, and iraq) are still ravaged by war conflicts and are poor. this study's panel data regression model consisted of 28 equations divided into 4 (four) analysis groups. gradually, the best model selection test is carried out and then the research hypothesis is tested. table 2, table 3, table 4, and table 5. shows the chow test and hausman test results from the 28 equations, and the selected model is the fixed effect model (fem), because the probability cross-section f value in both tests shows a value less than α = 5% (<0.05). referring to the prob (f-stat.) value in equations (1) to (28) table 2, table 3, table 4, and table 5, the value is 0.0000 <α = 5%. therefore, the entire panel data regression equation model built has passed the significance test of the model and can be used in the analysis of this research (gujarati, 2004). average adj. r2 in equations (1) to (28) table 2, table 3, table 4, and table 5, amounting to 0.859, which means that the variation in the dependent variable can be explained by the variation of the independent variable by 85.9%, while other variables outside the model explain the remaining 14.1%. the results of equation (1) in table 2 show that government spending (g) and the money supply (m) have a significant positive effect on economic growth (gdp) at α = 1% (***). because the three variables (pdb, m and g) are logarithmic, it is often called the log-log model; therefore, the coefficient value shows the elasticity value. the coefficient value of 0.11104 indicates that when government spending increases by 1 %, it will cause economic growth (gdp) to increase by 0.11104 %. the coefficient value of 0.30152 shows that when the money supply increases by 1 %, it will cause economic growth (gdp) to increase by 0.30152 %. the government debt variable (d) does not significantly affect economic growth (gdp). this shows that the government's debt policy cannot increase or decrease economic growth in oic member countries. table 2 equations 1-7 also show that the governance index has a positive effect on economic growth in muslim countries. the governance index consists of 6 indicators: va, ps, ge, rq, rl, and cc. the six indicators are combined into one average value, which forms the ins variable. the average value of governance (ins) is proven to have a positive and significant effect on economic growth (gdp). likewise, the three indicators of governance index, namely regulatory quality (rq), rule of law (rl), and control of corruption (cc), significantly affect economic growth (gdp) at α = 1%. however, there are three indicators of governance index, namely voice and accountability (va), political stability and absence of violence/terrorism (ps) and government effectiveness (ge), which have no significant effect on economic growth. wibowo, kusuma, & qizam │ the role of institution and macroeconomic policy mix on economic growth in muslim country international journal of islamic economics and finance (ijief), 5(1), 59-88 │ 72 table 2. the results of panel data regression, equation 1-7 (without interaction) dependent: lpdb equation (1) (2) (3) (4) (5) (6) (7) lg 0.11104* ** 0.11337* ** 0.11366* ** 0.11412* ** 0.10556* ** 0.11305* ** 0.10978* ** [0.01705] [0.01719] [0.01715] [0.01713] [0.01699] [0.01696] [0.01698] ld -0.00301 -0.00315 -0.00243 -0.00403 -0.00143 -0.00447 -0.00619 [0.00703] [0.00708] [0.00712] [0.00710] [0.00698] [0.00701] [0.00704] lm 0.30152* ** 0.31130* ** 0.31032* ** 0.30832* ** 0.30010* ** 0.30058* ** 0.30396* ** [0.00068] [0.00069] [0.00069] [0.00070] [0.00067] [0.00068] [0.00068] lpop 0.40870* ** 0.37877* ** 0.38260* ** 0.38299* ** 0.41656* ** 0.39443* ** 0.40775* ** [0.04520] [0.04488] [0.04500] [0.04447] [0.04456] [0.04405] [0.04454] lfdi -0.00071 -0.00087 -0.00078 -0.00092 -0.00185 -0.00047 -0.00101 [0.00332] [0.00335] [0.00335] [0.00334] [0.00330] [0.00331] [0.00331] ins 0.07292* ** [0.02348] va 0.00629 [0.01586] ps 0.00749 [0.00897] ge 0.02951 [0.01952] rq 0.08782* ** [0.01985] rl 0.07979* ** [0.02090] cc 0.07545* ** [0.01957] constant 8.18392* ** 8.36112* ** 8.29681* ** 8.37617* ** 8.19297* ** 8.42460* ** 8.25179* ** [0.45587] [0.45666] [0.46465] [0.45448] [0.44990] [0.45004] [0.45088] f-statistics 660.0932 7 648.1244 7 648.8059 3 650.8078 2 672.6033 6 666.3015 9 666.6630 4 prob (f-stat.) 0,00000 0,00000 0,00000 0,00000 0,00000 0,00000 0,00000 adj. r2 0.85876 0.85650 0.85663 0.85701 0.86105 0.85991 0.85997 cem no no no no no no no fem yes yes yes yes yes yes yes rem no no no no no no no (* p<0.1, ** p<0.05, *** p<0.01) wibowo, kusuma, & qizam │ the role of institution and macroeconomic policy mix on economic growth in muslim country international journal of islamic economics and finance (ijief), 5(1), 59-88 │ 73 table 3. the results of panel data moderated regression, equation 8-14 (interaction of government expenditure & governance) dependent: lpdb equation (8) (9) (10) (11) (12) (13) (14) lg 0.09828* ** 0.13157* ** 0.10169* ** 0.09683* ** 0.09186* ** 0.10319* ** 0.09686* ** [0.02112] [0.02094] [0.01855] [0.01947] [0.01939] [0.02034] [0.01963] ld -0.00161 -0.00440 -0.00092 -0.00341 0.00151 -0.00330 -0.00557 [0.00716] [0.00712] [0.00717] [0.00709] [0.00726] [0.00713] [0.00705] lm 0.30051* ** 0.30827* ** 0.30813* ** 0.30839* ** 0.29711* ** 0.29880* ** 0.30173* ** [0.01839] [0.01838] [0.01832] [0.01829] [0.01820] [0.01834] [0.01816] lpop 0.42075* ** 0.38054* ** 0.39438* ** 0.40512* ** 0.43241* ** 0.40700* ** 0.42557* ** [0.04671] [0.04485] [0.04548] [0.04596] [0.04582] [0.04632] [0.04654] lfdi -0.00049 -0.00115 0.00018 -0.00121 -0.00189 -0.00041 -0.00111 [0.00333] [0.00335] [0.00340] [0.00334] [0.00330] [0.00331] [0.00331] ins 0.32516 [0.24765] lg*ins -0.01136 [0.01111] va -0.32214 [0.21676] lg*va 0.01473 [0.00970] ps 0.20298* [0.11674] lg*ps -0.00896* [0.00533] ge 0.38530* * [0.19285] lg*ge -0.01576* [0.00850] rq 0.39499* [0.21122] lg*rq -0.01352 [0.00926] rl 0.27918 [0.22800] lg*rl -0.00895 [0.01019] cc 0.36231* [0.21960] lg*cc -0.01271 [0.00969] constant 8.26023* ** 8.03525* ** 8.36371* ** 8.40213* ** 8.24964* ** 8.45600* ** 8.29581* ** [0.46191] [0.50407] [0.46564] [0.45376] [0.45114] [0.45154] [0.45186] f-statistics 565.9885 2 557.0925 9 558.2327 9 560.6245 4 577.9259 7 571.0051 7 572.3662 4 prob (f-stat.) 0,00000 0,00000 0,00000 0,00000 0,00000 0,00000 0,00000 adj. r2 0.85877 0.85681 0.85707 0.85760 0.86132 0.85985 0.86014 cem no no no no no no no fem yes yes yes yes yes yes yes rem no no no no no no no (* p<0.1, ** p<0.05, *** p<0.01) wibowo, kusuma, & qizam │ the role of institution and macroeconomic policy mix on economic growth in muslim country international journal of islamic economics and finance (ijief), 5(1), 59-88 │ 74 in equation (8) table 3, the results show that the lg*ins variable has no significant effect on economic growth (gdp) at various values of α (no * sign). this means that the ins index cannot moderate the influence of the government expenditure variable (g) on economic growth. the results of the interaction regression between the government expenditure variable (g) and the six indicators of governance index show similar results. the four interaction variables have no significant effect on economic growth. there are only two interaction variables that negatively affect economic growth, namely lg*ps (equation 10) and lg*ge (equation 9). the interpretation of the results of data processing in table 3 shows that the variable quality of governance cannot strengthen the effect of the fiscal policy mix (government spending) on economic growth in muslim countries. in equation (15) table 4, the results show that the ld*ins variable has a significant negative effect on economic growth (gdp) at α = 1% (***sign). this means that the ins index can moderate the influence of the government debt variable (d) on economic growth (gdp) but in a negative (weakening) direction. this is in line with the results of the interaction variables for the other five governance indexes. only the interaction of the ld*va variable showed different results. the interpretation of data processing results in table 4 shows that the quality of governance weakens the effect of fiscal policy (government debt) on economic growth (gdp) in muslim oic member countries. wibowo, kusuma, & qizam │ the role of institution and macroeconomic policy mix on economic growth in muslim country international journal of islamic economics and finance (ijief), 5(1), 59-88 │ 75 table 4. the results of panel data moderated regression, equation 15-21 (interaction of government debt & governance) dependent : lpdb equation (15) (16) (17) (18) (19) (20) (21) lg 0.10814** * 0.11486** * 0.11268** * 0.10909** * 0.10240*** 0.11054** * 0.10824** * [0.01691] [0.01715] [0.01707] [0.01690] [0.01675] [0.01681] [0.01688] ld -0.01892** 0.01304 -0.00760 -0.0210*** -0.01041 -0.01702** -0.01909** [0.00831] [0.01028] [0.00735] [0.00793] [0.00718] [0.00778] [0.00824] lm 0.29719** * 0.30961** * 0.30793** * 0.30745** * 0.29317*** 0.29682** * 0.29793** * [0.01823] [0.01825] [0.01823] [0.01803] [0.01791] [0.01808] [0.01809] lpop 0.44914** * 0.37590** * 0.39980** * 0.43046** * 0.45536*** 0.43434** * 0.44994** * [0.04625] [0.04476] [0.04524] [0.04502] [0.04480] [0.04504] [0.04649] lfdi -0.00092 -0.00096 0.00004 -0.00213 -0.00277 -0.00154 -0.00153 [0.00329] [0.00334] [0.00335] [0.00330] [0.00326] [0.00329] [0.00329] ins 0.73246** * [0.18988] ld*ins -0.0282*** [0.00806] va -0.38166** [0.17965] ld*va 0.01665** [0.00768] ps 0.25630** * [0.09399] ld*ps -0.0108*** [0.00409] ge 0.77416** * [0.16638] ld*ge -0.0314*** [0.00699] rq 0.75775*** [0.15546] ld*rq -0.0283*** rl 0.65761** * [0.16379] ld*rl -0.0250*** [0.00704] cc 0.56175** * [0.16539] ld*cc -0.0208*** [0.00702] constant 8.06751** * 8.04151** * 8.18945** * 8.17094** * 8.03001*** 8.23355** * 8.05379** * [0.45282] [0.47852] [0.46404] [0.44956] [0.44484] [0.44890] [0.45292] f-statistics 578.29537 559.67847 562.83255 578.92412 596.61530 584.15946 580.17407 prob (fstat.) 0,00000 0,00000 0,00000 0,00000 0,00000 0,00000 0,00000 adj. r2 0.86139 0.85739 0.85808 0.86153 0.86512 0.86261 0.86179 cem no no no no no no no fem yes yes yes yes yes yes yes rem no no no no no no no (* p<0.1, ** p<0.05, *** p<0.01) wibowo, kusuma, & qizam │ the role of institution and macroeconomic policy mix on economic growth in muslim country international journal of islamic economics and finance (ijief), 5(1), 59-88 │ 76 table 5. the results of panel data moderated regression, equation 22-28 (interaction of money supply & governance) dependent: lpdb equation (22) (23) (24) (25) (26) (27) (28) lg 0.10916** * 0.11915** * 0.11029** * 0.11151** * 0.10366** * 0.11141** * 0.10929** * [0.01715] [0.01731] [0.01725] [0.01708] [0.01704] [0.01696] [0.01699] ld -0.00127 -0.00455 -0.00083 -0.00161 0.00146 -0.00145 -0.00537 [0.00724] [0.00708] [0.00718] [0.00713] [0.00731] [0.00723] [0.00710] lm 0.29247** * 0.32413** * 0.30264** * 0.29112** * 0.28994** * 0.28486** * 0.29523** * [0.02044] [0.01906] [0.01885] [0.01943] [0.01966] [0.02051] [0.02033] lpop 0.30208** * 0.29509** * 0.30429** * 0.26999** * 0.29783** * 0.24218** * 0.29580** * [0.04142] [0.04269] [0.04309] [0.04159] [0.04104] [0.04068] [0.04153] lfdi 0.00032 -0.00026 0.00072 -0.00022 -0.00063 0.00015 -0.00006 [0.00105] [0.00109] [0.00108] [0.00106] [0.00105] [0.00102] [0.00105] ins 0.29057 [0.21731] lm*ins -0.00938 [0.00931] va 0.42878** [0.18967] lm*va 0.01857** [0.00807] ps 0.17112* [0.09867] lm*ps -0.00720* [0.00433] ge 0.47518** * [0.17492] lm*ge 0.01870** [0.00729] rq 0.32428* [0.18024] lm*rq -0.00990 [0.00750] rl 0.40372** [0.19598] lm*rl -0.01388* [0.00835] cc 0.26121 [0.19815] lm*cc -0.00782 [0.00830] constant 8.23880** * 7.94134** * 8.33535** * 8.40531** * 8.22813** * 8.45508** * 8.26950** * [0.45910] [0.49020] [0.46453] [0.45250] [0.45041] [0.44975] [0.45132] f-statistics 565.95357 560.32564 558.18097 564.02571 577.48904 573.21157 571.44364 prob (f-stat.) 0,00000 0,00000 0,00000 0,00000 0,00000 0,00000 0,00000 adj. r2 0.85876 0.85753 0.85706 0.85834 0.86123 0.86032 0.85995 cem no no no no no no no fem yes yes yes yes yes yes yes rem no no no no no no no (* p<0.1, ** p<0.05, *** p<0.01) wibowo, kusuma, & qizam │ the role of institution and macroeconomic policy mix on economic growth in muslim country international journal of islamic economics and finance (ijief), 5(1), 59-88 │ 77 equation (22) in table 5 shows that the m*ins variable has no significant effect on economic growth (gdp) at various values of α. this means that the ins index cannot moderate the effect of the variable amount of money in circulation (m) on economic growth. the interaction results of the six indexes show mixed results. however, the interpretation of the results of data processing in table 5 shows that, in general, the variable quality of governance cannot strengthen the effect of monetary policy (the amount of money in circulation) on economic growth in muslim countries. based on the interpretation of the results in table 3, table 4, and table 5, it is known that the majority of interactions between the quality of governance and economic policy variables have no significant effect on economic growth. this indicates that the governance index cannot moderate the effect of economic policy (fiscal and monetary) on economic growth. 4.2. robustness test table 6. the results robustness test with the afgv dependent: lpdb equation (29) (30) (31) (32) lg 0.11051*** 0.10169*** 0.10693*** 0.10799*** [0.01699] [0.01799] [0.01677] [0.01704] ld -0.00352 -0.00153 -0.00246 -0.00066 [0.00700] [0.00712] [0.00691] [0.00722] lm 0.29948*** 0.29713*** 0.29284*** 0.29238*** [0.01830] [0.01835] [0.01811] [0.01880] lpop 0.41301*** 0.43356*** 0.46659*** 0.43129*** [0.04493] [0.04698] [0.04608] [0.04627] lfdi -0.00082 -0.00063 -0.00137 -0.00051 [0.00331] [0.00331] [0.00327] [0.00331] afgv 0.05286*** 0.26657* 0.50707*** 0.25668** [0.01422] [0.14495] [0.10841] [0.12714] lg*afgv -0.00954 [0.00644] ld*afgv -0.01928*** [0.00456] lm*afgv -0.00868 [0.00538] constant 8.14463*** 8.01576*** 7.49549*** 8.00319*** [0.45439] [0.46219] [0.47366] [0.46217] f-statistics 665.34266 571.75834 589.07957 572.20912 adjusted r-squared 0.85973 0.86001 0.86361 0.86011 (*p<0.1, **p<0.05, ***p<0.01) wibowo, kusuma, & qizam │ the role of institution and macroeconomic policy mix on economic growth in muslim country international journal of islamic economics and finance (ijief), 5(1), 59-88 │ 78 this study performs a robust test by replacing ins in equations (1), (8), (15), and (22) with afgv (governance factor analysis), which is the result of factor analysis of the six governance indexes. the results of data processing with afgv show in the table 6. the afgv coefficient values and the afgv interaction in equations 29, 30, 31, and 32 in table 6 show the same direction and significance (consistent) with the ins coefficient and ins interactions in equations 1, 8, 15, and 22. therefore, it can be said that the model built is robust. therefore, the estimation results generated in equations 1, 8, 15, and 22 are valid (sani et al., 2019). 4.3. analysis 4.3.1. the impact of the fiscal (g and d) and monetary (m) policies mix on economic growth table 2 equation (1) shows the results that the government expenditure variable (g) has a significant positive effect on economic growth (gdp) in oic member countries. this means that an increase in government spending will increase economic growth, which is proxied by gdp. this finding is in line with the theoretical basis of keynes, which holds that the main key to economic growth is the existence of effective aggregate demand. during times of recession and increasing unemployment, a decrease in income will cause a decrease in consumption, saving and investment. therefore, to boost the economy again, the government must intervene in the economy through fiscal policies to cut taxes or increase government spending (mankiw, 2010). this finding also supports the findings of previous studies in various countries. research conducted by grossman in 48 countries from 1970 to 1983 showed that government spending variables had a significant positive effect on economic growth (grossman, 1990). several other studies with the same findings were conducted by halcon & leon (2004) in filipina (1986-2003); ogar et al. (2014) in nigeria (1986-2010); al mamun et al. (2017) in the 50 oilexporting countries (1980-2012); and hussain & siddiqi (2012) in pakistan (1976-2008). the second fiscal policy in this study is government debt (d). this debt accumulates government debt at a certain time, which comes from various sources (domestic and foreign) and various possible debt instruments. the results of panel data regression in table 2 of equation (1) show that the government debt variable (d) has a negative but insignificant effect on gdp. this means an increase in government debt will not increase or decrease economic growth as proxied by gdp. wibowo, kusuma, & qizam │ the role of institution and macroeconomic policy mix on economic growth in muslim country international journal of islamic economics and finance (ijief), 5(1), 59-88 │ 79 empirically, the impact of government debt on economic performance also shows inconsistent results. several studies have shown the positive effect of debt on economic growth, as has been done by siddiqui & malik in south asian countries (2001) also manzocchi (1997) in central and eastern europe. meanwhile, in several other studies, it was found that government debt had a negative impact on economic performance, such as misztal (2010), woo & kumar (2015), and azzam et al. (2013). the findings of this study indicate conformity to ricardian thinking about the relationship between government debt and economic growth (arjomand et al., 2016). in general, there is no significant (positive or negative) relationship between government debt and economic growth in oic member countries. some of the rich countries in 2018 had fairly high debt to gdp ratios, such as bahrain (94.7%), oman (53.3%), and qatar (48.6%). therefore, if the government cannot stop the withdrawal of new debt, the government in oic countries should use the debt appropriately and efficiently. monetary policy in this study is reflected in the money supply. the results of panel data regression in table 2 of equation (1) show that the money supply (m) has a significant positive effect on economic growth (gdp). an expansionary central bank policy by increasing the money supply will be able to promote economic growth effectively. most of the previous studies showed a positive impact of money supply (m) on economic growth (gdp). application of the st. louis model in latin america (darrat, 1984), 5 selected asian countries (fatima & iqbal, 2003), 4 south asian countries (ali et al., 2008), and also nigeria (ajayi & aluko, 2017) shows a positive and significant effect of the money supply on economic growth. based on the description of the discussion above, it can be concluded that the model st. louis, who analyzed the mix of fiscal policy (g) and monetary policy (m) in oic countries, proved to be effective in influencing economic performance (gdp). the government expenditure (g) and the money supply (m) have a significant positive effect on economic growth. this is in line with the findings of andersen and jordan in 1968 when developing the st. louis model. this means, in general, the direction of fiscal and monetary policy in oic countries is already on the right track; it is just a matter of trying to further increase its effectiveness. unfortunately, the government's debt policy has not had a positive impact on growth in oic countries. 4.3.2. the influence of the governance index on economic growth equations 1-7 in table 2 show the results of panel data regression equation data processing which illustrates the effect of the governance index on economic growth as proxied by real gdp. all six indicators of governance index and average governance value (ins) are proven to affect economic growth positively. however, governance indexes that significantly affect economic wibowo, kusuma, & qizam │ the role of institution and macroeconomic policy mix on economic growth in muslim country international journal of islamic economics and finance (ijief), 5(1), 59-88 │ 80 growth are rq, rl, cc, and ins, while va, ps, and ge have no significant effect. in general, the quality of governance has a significant positive effect on economic growth in oic member countries. the findings of this study are in line with and support the institutional theory on which this research is based. the role of institutions in economic growth can be analyzed using the transaction cost theory resulting from market failures (yustika, 2013). the lower the transaction costs that arise from economic activities (transactions), the institution is already efficient, and vice versa. therefore, the various rules (formal or informal) that ensure economic actors conduct transactions or exchange are very important. the findings of this study are in line with and support some of the results of previous studies, which state that the quality of governance has a positive and significant effect on economic growth. this study is in line with olson et al. (2000), which examines the influence of the quality of governance on gdp in 68 developing countries in 1960-1987. this study concludes that countries with good governance have a higher level of productivity to encourage economic growth better. research findings that are in line with the results of this study include kaufmann & kraay (2002), aidt et al. (2008), asian development bank (2013), and sani et al. (2019). the better a country's governance index, the higher the gdp that the country will achieve. the 2008 amendments to the oic charter were a step forward for this organization. the oic is fully aware that good governance is one of the important factors to encourage the improvement of the welfare of muslims (oic, 2008). in article 2 paragraph 6, it is explicitly stated that all oic members must participate in upholding and advancing the issues of good governance, democracy, human rights, basic freedoms, and law enforcement at various levels of state life. in order to achieve these goals, specifically and in detail, it is revealed in the document the oic-2025: programme of action (oic, 2016b). several work programs and implementation plans are designed closely with the governance index developed by the world bank (oic, 2016a). however, the governance index did not change significantly in the period after the amendment. there is no significant change in the value of the governance index before and after 2008. the number of conflicts within and between oic countries, especially in the middle east and central asia, has seriously disturbed political stability and security. oic member countries are facing an ongoing domestic crisis. various militant movements and acts of terrorism have occurred in oic countries (estes & sirgy, 2014). several organizations labelled as perpetrators of acts of terrorism spread in various muslim countries, such as isis in iraq and syria; wibowo, kusuma, & qizam │ the role of institution and macroeconomic policy mix on economic growth in muslim country international journal of islamic economics and finance (ijief), 5(1), 59-88 │ 81 taliban in afghanistan and pakistan; and boko haram in nigeria (dawoody-al, 2015). when developing the st. louis model, andersen and jordan mentioned that institutions are slowly changing factor for the economy (andersen & jordan, 1968). therefore, improving the quality of institutions is a non-negotiable long-term project for each oic member country. 4.3.3. the role of the governance index in moderating the influence of the fiscal and monetary policy mix on economic growth the results showed that the governance index was not able to moderate the influence of government spending policies (g), government debt (d), and money supply regulation policies (m) on economic growth (gdp) in oic countries. this means that the governance index plays a more role as an independent variable that directly influences, and not as a moderating variable (sekaran & bougie, 2016; sharma et al., 1981; sugiono, 2004). a study conducted by catrinescu shows that the quality of governance can moderate the variable remittances of society towards economic growth (catrinescu et al., 2009). rachdi et al. (2018) also found a similar finding for the case of financial liberalization variables and williams for bank credit (williams, 2019). therefore, it can be understood that the quality of governance will be more able to strengthen the influence of the private sector on economic growth than government economic policies, both fiscal and monetary. this indicates that the role of institutions in economic growth is more dominant through the transaction cost theory in the private sector. muslim countries must continue to improve the quality of institutions that cover various aspects such as political stability (arayssi et al., 2019), democracy and political freedom (sarieddine, 2018), to the eradication of corruption (satar, 2019) to catch up with development. v. conclusion and recommendation 5.1. conclusion the fiscal (government spending) and monetary (money supply) policy mix has a significant positive effect on economic growth in oic member countries. meanwhile, government debt has no significant effect on economic growth. fiscal and monetary policies implemented by oic countries (46 countries) can promote effective economic growth, even though in some countries or regions, there are social, political, and security unrest that disrupts the development process. the quality of governance, in general, has a positive effect on economic growth in oic countries. several governance indexes from the world bank, wibowo, kusuma, & qizam │ the role of institution and macroeconomic policy mix on economic growth in muslim country international journal of islamic economics and finance (ijief), 5(1), 59-88 │ 82 which cover economic, social, political, and bureaucratic aspects, have a strong influence on the economic growth of oic countries. even though the governance index in oic member countries is relatively low compared to other country groups, good governance will encourage even better economic growth. the quality of governance cannot moderate the effect of the fiscal and monetary policy mix on economic growth in oic countries. economic growth institutions indicate that the governance index will be more effective in moderating the private sector than government economic policy. therefore, in this research model, the governance index is more appropriately referred to as an independent variable than a moderator variable. 5.2. recommendation all oic countries must have the awareness and willingness to create good governance in their respective countries to achieve a better life as agreed. however, the agreement in the oic charter must be ensured to be a serious concern by all oic member countries. there needs to be a clear mechanism so that all oic countries do their best to create these conditions. studies on the role of institutions in promoting economic growth and welfare in various countries need to be carried out by interacting with various socioeconomic variables. oic through international institutions islamic fiqh academy (iifa) can cooperate with forum of muslim scholars in each member country to explore and formulate the concept of good islamic governance that can implemented by all oic member countries at once provide advice on its implementation. for further research, the quality of the institution can be represented by various other governance indices in order to obtain more robust results. wibowo, kusuma, & qizam │ the role of institution and macroeconomic policy mix on economic growth in muslim country international journal of islamic economics and finance (ijief), 5(1), 59-88 │ 83 references acemoglu, d. 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(2013). ekonomi kelembagaan: paradigma, teori, dan kebijakan. jakarta: erlangga. international journal of islamic economics and finance (ijief) vol. 4(2), page 177-206, july 2021 towards the implementation of monetary management in islamic economic system based on recent developments mohammad kabir hassan university of new orleans, united states, corresponding email: mhassan@uno.edu muhammad abdul rehman shah university of engineering & technology (uet) taxila, pakistan manzoor ahmad alazhari hitech university taxila, pakistan mohammad selim university of bahrain, bahrain article history received: may 20, 2021 revised: july 27, 2021 accepted: july 28, 2021 abstract monetary management is an essential part of the objectives of shari’ah under the umbrella of the preservation of wealth (ma’al). our primary sources: qur’an and sunn’ah, provide divine legislation on the prohibition of riba to manage bases of monetary transaction. further, the juristic tools facilitate scholars to propose solutions to meet the emerging issues on diversified aspects of society. muslim scholars have always adapted and contributed to the islamic financial system and regulations, theoretically and practically. in recent decades, islamic banking and finance has seen strong momentum with double digit growth, fulfilling the monetary requirement of depositors on the liability side along with industry on the asset side. we seek to review the theoretical and empirical literature on islamic monetary mangement. monetary management in the islamic economic context is still an area that needs more research. this paper examines how literature has been developed over time up until modern islamic economic and banking practices. the findings suggest that islamic monetary management has been gradually developed in recent years and such development is remarkable steps forward in pursuing islamic monetary policy independently. in addition, islamic monetary policy is proved to be relatively more effective compared to interest based conventional monetary policy. the implications of such findings have established new milestones for the central banks of all the countries, including the muslim majority countries for pursuing interest free islamic monetary policy with full confidence. furthermore, there are four major views on islamic monetary policy and the central banks of the world should choose one of the best methods and views for the greater effectiveness of monetary policy because conventional monetary policy has been less effective in bringing full employment and price stability in recent years and financial crisis has crippled the interest based conventional economic systems quite badly. keywords: islamic economic system, islamic monetary instruments, islamic monetary management, riba-free products, effectiveness of islamic monetary policy. jel classifications: g15, e52, e42, g21 type of paper: review paper @ ijief 2021 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.v4i2.11777 web: https://journal.umy.ac.id/index.php/ijief/article/view/11777 citation: hassan, m. k., shah, m. a. r., alazhar, m. a., & selim, m. (2021). towards the implementation of monetary management in islamic economic system based on recent developments. international journal of islamic economics and finance (ijief), 4(2), 177-206. doi: https://doi.org/10.18196/ijief.v4i2.11777 mailto:mhassan@uno.edu https://doi.org/10.18196/ijief.v4i2.11777 https://doi.org/10.18196/ijief.v4i2.11777 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v4i2.11777&domain=pdf i. introduction islam advocates a holistic way of life to provide welfare to mankind by establishing harmony on moral and material requirements of people. interest free islamic monetary management is the core to promote islamic monetary policy for achiving full employment and healthy growth rates of equilibrium real gdp. interest based monetary policy which had been pursued in most of the countries of the world, including in the muslim majority countries had created the problems of under investment spending, unemployment, depressed economic growth rates, perpetual poverty, and periodic financial crisis. in current times, we have plenty of islamic economic theories, and these theories and principles can easily be implemented for pursuing successful islamic monetary policy (selim 2015, 2019, 2020), especially for providing access to the lender of last resort services for the islamic banks (selim & hassan, 2020); for easily financing homes with ijarah based diminishing musharaka (selim 2020a); for eliminating interest in trade or riba al fadl in foreign currency transactions (selim 2021); for pursuing sukuk based open market operation as part of islamic monetary policy (selim 2015) instead of treasury bills and other interest based financial papers and securities; for pursuing interest free financing of infrastructure projects and redesigning it with qard hasan so that it will be acceptable to all islamic schools of fiqh (selim 2020); for providing islamic business based takaful insurance where the policy holders are both owners and risk takers and there are no middlemen who often deprive the share and benefits of the policy holders; here policy holders are active participants and driving forces of such islamic business based takaful insurance and receive hundreds of thousands of dinars (here dinar refers to bahraini dinar where 1 bahraini dinar=us$2.65) during their old age when they need it the most, (selim 2015a); for providing islamic value based islamic cooperative model for poverty elimination (selim & farooq, 2020); for permanently eliminating interest costs in trade deficits financing (selim 2013) but in reality these wonderful islamic economic theories have not been implemented correctly. this paper is a humble effort to urge nations of the world, especially the members of the organization of islamic cooperation (oic) countries to truly implement these theories and thus solving all the above problems of poverty, huge interest payments as part of trade deficit financing, unemployment, low income, widespread interest including riba al fadl or interest originating in trade, ineffectiveness in monetary policy and so on. the motivation of this study is to highlight the importance of all the above theories and many other islamic economic theories and to create an urgency to adopt such islamic economic theories for achieving full employment, potential real gdp, eliminating poverty, riba or interest and many other economic and social problems. despite the development of full fledged and hassan, shah, alazhar, & selim │ towards the implementation of monetary management in islamic economic system based on recent developments international journal of islamic economics and finance (ijief), 4(2), 177-206 │ 178 effective islamic monetary policy as mentioned above (selim 2015, 2019, 2020), the members of the oic countries have so far paid little importance but many members of the organization for economic cooperation and development (oecd) countries are now currently pursuing interest free monetary policy in the form of zero central bank interest rate or even negative central bank interest rate. such interest free monetary policy yields relatively better economic performance (selim & hassan, 2019) and thus more effective in controlling inflation rates and lowering unemployment rates. unfortunately, as mentioned, the members of the oic countries and many other poor nations in asia, africa and latin america are still maintaining high interest based conventional monetary policy and thus complicating the problems of low investment spending, high cost of borrowing, high unemployment rates, widespread poverty, homelessness, severe attacks of covid 19 and many other problems related to chronic low income and vicious cycle of poverty. the objective of this study is to bridge the gap in the literature by portraying to the world central bankers that islamic monetary policy can free all the nations from the curse of interest and can bring back full employment income, output and prosperity and thus can solve the problems of mass unemployment, massive poverty and choronic financial crisis. therefore, the research question of this study can be stated as follows: why the muslim majority countries and poor countries of the world are reluctant or not pursuing interest free monetary policy? why some of the developed capitalist countries are pursuing zero or negative interest based monetary policy while others are not doing so? this study attempts to answer the above issues and to create awareness about the effectiveness of islamic monetary policy which has already been developed in recent years (selim 2015, 2019, 2020). now all the nations should come forward and adopt such interest free monetary policy similar to some of the oecd countries who have been successfully pursuing interest free monetary policy and have had great success in maintaining better economic performance by keeping both unemployment and inflation rates low in recent years. (selim et al., 2019). the paper not only analyses the most basic concept of islamic monetary policy but also emphasizes the implementation plan in real world framework. developing islamic monetary policy and many other related economic theories are important, but the implementations are much more important, and the benefits of islamic monetary policy and islamic economic theories and principles can only be reaped and derived if such theories are fully and correctly implemented. this paper emphasizes how islamic monetary policy in particular can be implemented successfully for the benefits of the muslims and for the rest of the mankind hassan, shah, alazhar, & selim │ towards the implementation of monetary management in islamic economic system based on recent developments international journal of islamic economics and finance (ijief), 4(2), 177-206 │ 179 islamic monetary policy promotes socioeconomic justice and unity among people, nations, and environment. this expands into all aspects of economics such as commerce, banking, trade, etc. in recent times, this has been an area of rising attention. islamic banking and finance (ibf) has drawn the maximum devotion of researchers and practitioners. chapra (1985) has explored that the elimination of riba is an essential characteristic of islamic economic activities; the establishment of an alternative model of riba-free economy, has posed a great test to muslim intellectuals. it should be appreciated that the elimination of riba is not an isolated injunction. rather, it is a social, economic and moral philosophy presented in islamic framework and an integral part of unified and coherent values. so, the ultimate objective is not only to eliminate riba from the prevailing interest-based system, but to rather present an alternative system for establishing moral and material harmony to promote beneficial and optimal resource allocation, capital formation, stability, and growth of economy. therefore, monetary management is kept and pursued as an integral part and interconnected transmission mechanism for providing basis to islamic economic system in modern days. the islamic financial system especially gained attention of scholars, investors, regulators, policymakers, bankers, and practitioners after the 2007-2008 financial crisis – in which it servived on sound basis (shah, rashid & zaman, 2017). we see islamic banking tools expand beyond muslim majority countries as many nations are endorsing running islamic financial institutions (ifis) parallel to their conventional counterparts. in a nutshell, there is potential need to bridge the gap through exploring the monetary perspective of islamic economy for the sake of macroeconomic objectives (chapra, 1985; hardianto, 2004; kaleem & isa, 2006; sukmana & kassim, 2010; farhani & masood, 2013; ibrahim, 2017; rafay & farid, 2019; shah & rashid, 2019). in this paper, we explain how islamic banks play an important role in monetary management through islamic financing channel to achieve the economic growth and stability of markets. the main purpose of this study is to guide policymakers for adopting the islamic monetary policy and banking practices as an alternative to existing interest based conventional system for achieving the objectives of monetary policy of full employment, price stability, high economic growth rates and prosperity. the paper is divided into seven sections. after introduction in section 1, section 2 reviews the literature on monetary management in early islamic history. islamic monetary policy in modern context is explained in section 3. section 4 covers the prominent views of islamic monetary policy. section 5 highlights the increasing share of islamic finance over the globe as a paradigm shift to monetary management. in section 6, we note empirical evidences on hassan, shah, alazhar, & selim │ towards the implementation of monetary management in islamic economic system based on recent developments international journal of islamic economics and finance (ijief), 4(2), 177-206 │ 180 the role of islamic financial institutions (ifis) in monetary policy. we conclude the paper in section 7. ii. monetary management in early islamic history in early time of islamic history, the same money which was prevailing was adopted for all purposes. famous muslim historian al-baladhuri ( البالذري, 1820-1892) had documented in his book “النقود”: ي الجاهل ية، فكانوا ال يتعاملون بها إال كانت دنانير الروم ودراهم الفرس ترد عىل أهل الكعبة ف ٌ وبة – عىل أنها تير من عير المعدن وغير مض ً ي قطعا ول – يعن ً معروفا ً كن المثقال كان وزنا ب عبد الملك بن ي صدر اإلسالم، حنى ض ي العمل عىل ذلك ف ا به. وبقى َ عندهم فكانوا يزنوه مروان الدراهَم والدنانير العربية 1 roman dinar and persian dirham were prevailing before the prophet muhammad (pbuh) and were continued in early islamic period. these were not minted properly, therefore, used to weigh against defined measure of “misqalالمثقال ”. this practice continued till abdul malik bin marwan minted arabic dinar and dirham. further, zaitoon (2001) has documented about shape and gold weight in islamic dinar as follows: ي اإلسالمي الذي سكه عبد الملك عام ـه عىل النحو التالي : نقش 77وجاء شكل الدينار الذهنر الصمد لم يلد ولم يولد( ونقش عىل مدار الوجه نفسه )بسم عىل حد الوجهير )هللا أحد هللا ( أما عىل الوجه اآلخر فقد نقش )ال إله إال هللا ي سنة سبع وسبعير ب هذا الدينار ف هللا ض يك له( ونقش عىل مداره )محمد رسول هللا أرسله بالهدى ونور الحق ليظهره عىل وحده ال شر عي للدينار وكانت نسبة 4.25ان الدين كله( أما وزن هذا الدينار فقد ك غرام وهو الوزن الشر نطة بالغ القسوة؛ حيث فقد جستيان 96الذهب فيه نحو % لقد كان وقع سك الدينار عىل بير القوات بهزيمة انتهت الملك؛ ولكنها الحرب عىل عبد نطي صواَبه وأعلن البير اطور اإلمير ي منطقة }قلقيليه{ يأس ف ً منكرة ً نطية هزيمة 2يا الصغرى البير abdul malik minted gold based islamic dinar in 77 hijrah of islamic calander. there was specific written text on both sides of islamic dinar pertaing qur’anic words and a statement with issuing year of 77 hijrah on one side and the other 1 البالذري النقود دار الكتب المصرية 1939 م ص 5 -3 عندما كان الدينار اإلسالمي -د/ عادل زيتون 2 46ص 2001مارس 508العدد »العربي« عملة عالمية مجلة hassan, shah, alazhar, & selim │ towards the implementation of monetary management in islamic economic system based on recent developments international journal of islamic economics and finance (ijief), 4(2), 177-206 │ 181 one was reflecting oneness of allah almighty and the objective of the prophet muhammd (pbuh). the weight of islamic dinar was 4.25 gm with 96% gold as standard of shari’ah matters. an initiative of islamic dinar appeared to replace byzantium currencies completely and angered justin, the byzantine emperor, who declared war agaist abdul malik. however, it ended in a reprehensible defeat by the byzantine forces in the region of qalqilya. furthermore, kanon (1974) explored how islamic dinar was spread as the primary currency of muslim states. ي العالم اإلسالمي ي وغدا العملة الذهبية الوحيدة ف ثم أخذ الدينار اإلسالمي باالنتشار التدريجر ووضعت الدولة العربية اإلسالمية النظم والقواعد ً إل األندلس غربا ً قا من حدود الصير شر انتشار هذا لم يقتض وإنما لدعمه وحمايته؛ ولكن ، العالم اإلسالمي الدينار داخل حدود اجتازها إل مدن العالم القديم وأسواقه، وتشب إل مناطق لم يصل إليها التجار المسلمون، ا عىل امتداد خمسة قرون من تاري خ العصور الوسطي )من ق ا رئيسيًّ ا دوليًّ ً 8وغدا بالتالي نقد 3م( 13إل ق islamic dinar appeared as a powerful currency from china in the east to andalus in the west. the islamic arab state established rules and regulations to support and protect it, but the spread of islamic dinar was not limited within the borders of the islamic world. rather, it passed it to the cities and markets of the ancient world, and it leaked to areas where muslim merchants did not reach. consequently, it became a major international currency throughout the five centuries of medieval history (from 8th to 13th century). chapra (1996) has reported inadequate amount of notable evidence of monetary policy in the early islamic history during the time of the prophet muhammad (pbuh). during this era, the monetary system consisted of bimetallic standards of gold (dinar) and silver (dirham) coins. these coins were ciculating at a ratio of 1:10, respectively. this ratio remained stable until 661 a.d (40 a.h in islamic calendar). over the passage of time, these two metals had been fluctuating in terms of their relative prices. the exchange rate between dinar and dirham reached 1:12 in the umayyad period (41ah/662ad-132ah/750ad), while the exchange rate reached 1:15 in the abbasid period (132ah/750ad-656ah/1258ad). the ratio eventually fluctuated tremendously over time in various parts of world. this brief evolution of money is reflected in figure 1. عبد هللا كنونالدرهم والدينار عملتان عايشتا العرب بضعة عشر قرناً مجلة »العربي« العدد 187 يونيو1974 م ص 363 hassan, shah, alazhar, & selim │ towards the implementation of monetary management in islamic economic system based on recent developments international journal of islamic economics and finance (ijief), 4(2), 177-206 │ 182 figure 1. historical evolution of currency source: chapra (1996 ) with authors’ modification in the early islamic state of madina, there was no concept of shifting the money supply through discretionary measures due to a lack of a banking system to enforce monetary policy. moreover, there was a working commodity system which has been used widely and extensively. similarly, credit was almost absent as only a few traders used it. in this simple market, riba was nullified from business transactions in five distinct divine revelations from allah, the glory be to him, the exalted. this governed the transaction of commodity money system (barter system) and this regulation, the “ رباالبيوع riba al fadal”, incorporated in six commodities. the prophet muhammad (pbuh) said: ِّ ُ ير ْ ُّ ِبال ُ ير ْ ِة َوال َّ ِفض ْ ِبال ُ ة َّ ِفض ْ ِب َوال َ ه َّ ُب ِبالذ َ ه َّ ِح الذ ْ ِمل ْ ِبال ُ ح ْ ِمل ْ ْمِر َوال َّ ْمُر ِبالت َّ ِ َوالت ِعير َّ ُ ِبالش ِعير َّ َوالش َ ا ِبَيٍد ف ً ٍل َسَواًء ِبَسَواٍء َيد ْ ِبِمث ً ال ْ ا ِبَيد ِمث ً َيد َ ان َ ا ك َ ْم ِإذ ُ ت ْ ْيَف ِشئ َ ِبيُعوا ك َ اُف ف َ ْصن َ ِذِه األ َ ْت ه َ ف َ ل َ ت ْ ا اخ َ ِإذ “(don’t sell) gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates and salt for salt – like for like, equal for equal, and hand to hand; if the commodities differ, then you may sell as you wish, provided that the exchange is hand to hand.” (muslim hadith #1587) time of the prophet muhammad (571-632 a.d) bimetalism currency (roman dinar and persian diram) abdul malik minted islamic dinar in 696 a. d usa in 1792 a. d bimetalism currency gold coins in 1880 gold bullion in 1925 bretton wood system in 1944 fiat money initiated in 1972 electronic currency in modern era hassan, shah, alazhar, & selim │ towards the implementation of monetary management in islamic economic system based on recent developments international journal of islamic economics and finance (ijief), 4(2), 177-206 │ 183 the fist two commodities, gold and silver (dinar and dirham), were the prevailing currencies. the remaining four were the staple consumable commodities of consumer basket during this era. we see evidence about monetary management as prices soared in the markets of madinah. then, people came to the prophet muhammad (pbuh) and requested to fix the price. the prophet rejected this on the notion of not interfering in the normal demand and supply forces of the market. accordingly, the prophet muhammad (pbuh) said: ْ ن َ ْرُجو أ َ َ ي أل ِّ ، َوِإن ُ اق َّ ز َباِسُط الرَّ ْ اِبُض ال َ ق ْ ُر ال ُمَسعِّ ْ َو ال ُ ه َ ه اَّلل َّ ي ِإن ِ ُبن ُ ْم َيْطل ُ ك ْ ِمن ٌ َحد َ ْيَس أ َ ي َول ِّ َرنر قىَ ْ ل َ أ َماٍل َ ٍم َوَل َ ي د ِ ِلَمٍة ف ْ ِبَمظ allah, the glory be to him, the exalted, is the real price maker, controls plenty or shortage of anything and he is the sole provider. i wish to see to him without injustice to any one of you in your blood or in your money" (abu dawud, 3451). as-sadr (1989) noted that products like that of “promissory notes” and “negotiable instruments” were found during this time period as well. these were regulated in the way that their credit was not playing any role in the creation of money. in other words, promissory notes or bills of exchange were used to buy real commodities or to receive the specific quantity of money with zero fee. technically, these documents could never be issued merely for the purposes of credit in the market. a creditor could sell these documents, but a debtor was not allowed to sell them further without taking the possession of underlying assets or commodities to comply with basic requirements of islamic business law. there was no market to sell or buy the negotiable instruments in a speculative way. thus, credit could not create money through debt instruments. this arrangement appeard to affect the equilibrium of the commodity and the money markets based upon transaction where money is achieved only through rendering an economic service in the labour market or through selling a commodity in the goods market. in other words, money was exchanged in business activity that was based on real value-addition and in compliance with shari’ah. as a result, the equilibrium of money and goods markets were determined in the economy in such a way hat the volume of money was always equal to the value of the produced goods. further, islahi (2008) has classified islamic economic thoughts in six phases till the modern inception of islamic banking and finance and explored that modern monetary policy instruments, open market operation, policy rate announcement, forex management, and the trading of the negotiable instruments were not a part of monetary management in the early islamic period. hassan, shah, alazhar, & selim │ towards the implementation of monetary management in islamic economic system based on recent developments international journal of islamic economics and finance (ijief), 4(2), 177-206 │ 184 iii. interpretation of islamic monetary policy in modern era the development of money management has raised concern for important issues about money, banking practices, and monetary policy operations in the 20th century (iqbal, 1997; siddiqui, 2006; abdul-rahman, 2011). an initiative of modern banking practices, globalization of financial intermediation, establishment of financial institutions in muslim states, excessive use of paper currency and then electronic transactions, trade of stocks across the borders, and the increase in public debt have raised questions for jurists, islamic bankers, regulators and islamic economist. to meet these queries, muslim economists and modern jurists tried to revisit western institutions with an objective to make them riba-free with necessary modification or to devise shari’ah-compliant alternatives that may achieve the objectives of public policy as well. these theories are institutionalized due to the rising political independence during this time, that allowed islamic business and monetary practices to be tested. similarly, their desire to spell out the distinctive islamic economic approach, especially separating them from capitalism and socialism, led them to bring several fresh formulations in the domain of monetary policy. ahmad (1984) noted that a significant contribution in the field of monetary policy was made at the 1st international islamic economics conference which was organized at makkah, kingdom of saudi arabia in february 1976 and the new international economic order that was held in london, united kingdom in 1977. in line with same agenda, a seminar on islamic monetary and fiscal economics held at makkah in 1978 and the selected papers were edited by ariff (1978). as an independent book, these policy papers were published by international centre for research in islamic economics (icrie), king abdulaziz university (kau) jeddah. likewise, a seminar was organized on same agenda in 1981 in islamabad, pakistan. another international conference on islamic banking and strategies for economic cooperation was held in baden-baden, germany in 1982. in continuing, the 2nd international conference on islamic economics was held at islamabad, pakistan in 1983. a sizable number of books, monographs, research papers and proposals were produced containing innovative ideas and fruitful discussions as proceedings of these conferences and seminars. it must be noted that the council of islamic ideology of pakistan contributed the most significant intellectual-cumoperational blueprint to eliminate the riba (interest) from a modern interestbased economy through panel of islamic scholars, economists and bankers in 1980. similarly, chapra (1985) has explored that this report of council of islamic ideology, pakistan proved a milestone towards the development of an interest-free model of modern practices of islamic economy. this report was derived from intellectual work of contemporary muslim scholars in the past decade towards an interest-free economy. hassan, shah, alazhar, & selim │ towards the implementation of monetary management in islamic economic system based on recent developments international journal of islamic economics and finance (ijief), 4(2), 177-206 │ 185 furthermore, chapra (1985) has established the three main objectives of islamic monetary policy: i) to achieve the economic well-being of human beings with full employment and optimum rate of economic growth for the economy; ii) to ensure stable value of money and iii) to maintain socioeconomic justice and fair distribution of income and wealth among masses. the former two objectives are considered in conventional monetary theory, and the third one has been added as a new dimension contributed through islamic monetary literature. moreover, ariff (1988) and uzair (1982) have raised some introductory questions on the applicapability of conventional monetary policy in the 1978 seminar in jeddah, saudi arabia. the literature on islamic money has started flourishing after this in line with the objectives of shari’ah. iv. prominent views on islamic monetary policy several islamic economists have presented views, but four views were dominant on this aspect of islamic monetary policy. first, al-jarhi (1983), a pioneer contributer of monetary policy to develop an interest-free financial structure, views primary monetary policy players to be: the central bank, commercial banks, private sector business, and the treasury. it is interesting that he has come with an idea of debt instruments with zero-interest. there will be neither the required reserve ratio nor the discount rate would exist as policy instrument in interest-free monetary policy. in the final verdict, he supports the monetarists rule to manage the money supply in islamic economic framework. second, chapra (1985) and his followers adopted the existing conventional tools of monetary policy with necessary amendments. this strategy would help establish an ideal position of monetary policy step by step. third, some others have proposed to use equity-based profit-loss sharing (pls) securities for monetary management along with other shari’ah compliant instruments in line with second view. although naqvi (1981) has criticized an equity-based economic system because this system makes the return on investment unstable as compared to conventional interest-based system. moreover, investors’ expectations are uncertain in returns on investment. therefore, there is need to hedge the risk of loss through deposit insurance scheme for depositors, otherwise the financial market in particular and the whole economy in general will become highly unstable. likewise, naqvi (1981) and kuran (1986) are convinced that people of this islamic monetary society will not save and invest due to not having interest as a motivating tool. as a result, the state must intervene to compel them to participate in investment activities for expansionary monetary policy. further, kuran (1986) thinks that all the banks will not agree to finance the firms on pls principle of islamic finance. hassan, shah, alazhar, & selim │ towards the implementation of monetary management in islamic economic system based on recent developments international journal of islamic economics and finance (ijief), 4(2), 177-206 │ 186 zarqa (1983) argues that every real business must face uncertainties, and therefore, contrary to what naqvi (1981) states that equity financing increases these uncertainties. rather, it reorganizes the consequences of uncertainty to all business partners promoting stability to a business entity. each head of business partner will bear specific portion of loss without affecting inversely normal business activities to meet commitments. in contrast, the conventional system relieves the financier from bearing any type of risk in terms of uncertainties by transferring the complete risk profile to investor. so, interest-based system leads to instabilities and economic disturbances in market. similarly, khan (1986) argues that islamic financial system adjusts faster to different shocks as compared to the existing traditional system. further, he mentions, with reference to henry simons, that conventional banking system is unstable leading to financial crisis because of interest-based mechanism and proposed an equity-based financial system with 100% reserve banking in line with equity-based islamic economic system. khan (1986) also notes that several islamic economists have developed different frameworks of monetary policy in is-lm framework. in these frameworks, an interaction of monetary policy and the real sector of the economy must go hand in hand and be a top priority. khan and mirakhor (1990) developed a theoretical model through is-lm model of islamic economic system. they have explored how monetary policy actions would affect macroeconomic factors. in this model, a variation in money supply and mudaraba-based financing would affect the macroeconomic variables equally. as a result, an expansionary monetary policy will decrease the rates of return and increase an aggregate output. likewise, khan (1986) favoured to regulate pls ratios to meet the objective of monetary management. he has explained that these monetary actions affect only the new deposits of islamic banks and not existing deposits. he has discussed the two-window banking model. the first window is specific for demand deposit where 100% reserve would be maintained with no return to be given back. the other window would be utilized for pls investment purposes or equity investment where there would not be any guarantee on principal amount and reserve would also not be required. khan (1986) built his modelling framework in line with the model of meltzer (1951). khan (1986, 1992) has presented a macroeconomic model in which monetary policy would work like interest-based economy with the exception that islamic monetary model will have a better speed of adjustment monetary disequilibrium. in contrast, hasan (1991) has criticised some aspects of khan and mirakhor’s model. he has admitted that the rate of return (r) received by the banks on loans (lending rate) must be related to the rate the banks (rb) liable to their liabilities in accordance with khan and mirakhor (1990). in fact, r and rb cannot be zero even if we simplify the analysis by assuming that operational hassan, shah, alazhar, & selim │ towards the implementation of monetary management in islamic economic system based on recent developments international journal of islamic economics and finance (ijief), 4(2), 177-206 │ 187 and other costs of bank are zero. if someone proves that rb is less than r, the results of the models would be challenged as the equality of these two rates is the foundation of all analysis. siddiqui (2006) has also supported hasan (1991) that the equality of the two rates is not possible based on two-tier mudaraba model. once again, khan and mirakhor (1994) have highlighted the role of mudaraba mode for deposit mobilization, and the role of lease financing instruments available in the islamic financial market. they provided a set of information like conventional existing market with necessary modifications. further, they have pointed out that along with the islamic banking system, the primary, secondary and money markets are required to meet the basic requirement of monetary policy actions in islamic economic framework. indeed, mudaraba and musharaka certificates would appear as necessary tools of monetary policy in line with shari’ah legitimacy. they have also framed macroeconomic stability in terms of price stability and efficient balance of payments as the prime objectives of these policy actions. khan (1996) has also contributed theoretically with a model which determines national income, snapshots of economic growth in islamic economic framework. he has emphasized that growth can be manipulated through mobilization of human resources on the supply-side in islamic financial system. the said system produces an implicit islamic macroeconomic system, resulting to full employment, economic growth and further development. similarly, choudhry and mirakhor (1997) have concentrated on the instruments of islamic monetary policy. they have discussed about how to use equity-based securities of government with specific rates of returns based on budgetary surplus for the monetary management in islamic economic framework. there is a tremendous contribution titled “iiie’s blueprint of islamic financial system (1999)” presented by international institute of islamic economics (iiie) from international islamic university (iiu), islamabad, pakistan on the issue of monetary management of an islamic economy. it is, however, not explored largely in the literature of islamic economics and finance. it outlines institutional framework, role of central bank, policy instruments and possible choices for monetary management in an islamic economy. tahir (2013) gave two messages in his theoretical study on institutional framework with specific reference to fiscal and monetary policies in an islamic economy: (1) a fresh thinking is invited for the revival at the systemic level. there are possible changes that would help in achieving the objectives of policy and (2) a place to work out through an active role of government on both economic and distributive aspects of a public policy. in his opinion, the government should confine itself to the governance only. in the light of hassan, shah, alazhar, & selim │ towards the implementation of monetary management in islamic economic system based on recent developments international journal of islamic economics and finance (ijief), 4(2), 177-206 │ 188 shari’ah, the development of monetary aspect would be helpful in achieving the economic goals of a country. even on the monetary side of an economy, the prime role of the central authority may be largely regulatory. the fourth view is proposed by selim (2019) where qard hasan based monetary policy has been designed in the light of the verses of the holy qur’an and and the hadith of prophet muhammad (pbuh) and it has been proved that such monetary policy is most effective in bringing full employment and controlling inflation. in this qard hasan based monetary policy, selim (2019) also proposed the change in the direction of money supply and monetary transmission mechanism from the “central bank to commercial banks” to “central bank to the final users such as the poor and destutes and all those who deserve of additional increase in money supply or for whom money supply will be intended to” in the light of the verse 7 of sura hasr: ٰ ََمٰ َوٱ َ َيت ۡ ٰ َوٱل َ ۡرنر ُ ق ۡ ُسوِل َوِلِذي ٱل ِ َوِللرَّ ه ِ َ َرٰى لِلَف ُ ق ۡ ِل ٱل ۡ ه َ ۦ ِمۡن أ ٰ َرُسوِلِه َ َعىل ُ ه َء ٱَّلل ٓ ا َ ف َ أ ٓ ا ِ َوٱۡبِن مَّ َمَسٰ ِكير ۡ ل ۡ ي َ ِبيِل ك ٱلسَّ َ ۡ ٱأل َ ۡ َبير َۢ َ ة َ ول ُ د َ ون ُ َيك َ َل ْۡۚ ُهوا َ ٱنت َ ف ُ ه ۡ ۡم َعن ُ َهٰىك َ وُه َوَما ن ُ ذ ُ خ َ ُسوُل ف ُم ٱلرَّ ُ ٰىك َ َءات ٓ َوَما ۡۚ ۡم ُ ِء ِمنك ٓ ِنَيا ۡ غ ُ ق َّ اِب َوٱت َ ِعق ۡ ٱل ُ ِديد َ ش َ ه ٱَّلل َّ ِإن ََۖ ه ٱَّلل ْ وا “what allah has bestowed on his messenger from the people of the townships, belongs to allah, to his messenger and kindred and orphans, the needy and the wayfarer; in order that it may not (merely) make a circuit between the wealthy among you. so, take what the messenger assigns to you, and deny yourselves that which he withholds from you. and fear allah; for allah is strict in punishment” (qur’ān, 59:7). allah, the glory be to him, the exalted, enjoins among others, that the wealth will not be a perpetual distribution among the rich from among you. the owners of the commercial banks are the wealthy cohort of population and such wealthy population reap most of the benefits of the expansionary monetary policy while the poor cohort of population may not even qualify for the loans because of the lack of collaterals in the form of assets, jobs, and accumulated wealth. reversing this perpetual flow of wealth from the rich to the poor will permanently create vibrant economic activities in the economy where the poor cohort of population will not be ignored rather will be embedded as actors and key players in new economic activities. such inclusiveness of the poor cohort of population in islamic monetary policy has also great significance during the recession when the central bank increases money supply, but the commercial banks stop lending because of the fear of the loan losses but if the money supply directly flows to “whom it will be intended to” then the ineffectiveness of monetaray policy can easily be avoided, and the economy can be brought to automatic full employment hassan, shah, alazhar, & selim │ towards the implementation of monetary management in islamic economic system based on recent developments international journal of islamic economics and finance (ijief), 4(2), 177-206 │ 189 instanteously. selim (2020) also proposed istisna’a based monetary policy where he showed that if istisna’a is backed by qard hasan for the producers, builders and manufacturers then such monetary policy will not only be most effective, but istisna’a-qard hasan mode of financing will also be accepted by all the schools of fiqh, and production cost will be the lowest while the quality of the product(s) will be the highest. selim (2015) also propounded sukuk based monetary policy as an alternative to fixed interest-based treasury bills (t-bills) and other interest-based securities which are often sold and bought in open market operations as part of the monetary policy. sukuk can be lucrative and may offer relatively higher rates of halal return compared to tbills, and islamic banks can buy and sell sukuk and thus can minimize the requirements of holding huge amounts of idle cash for the fear of default risk. fear of the default risk for the islamic banks place highest possible constraints on the path of growth strategy of islamic banks and both sukuk based monetary policy and qard hasan based monetary policy can eliminate such risks and fear for the islamic banks because in qard hasan based monetary policy, islamic banks can take full advantage of the the service of the lender of last resort (lolr) of the central banks and islamic banks can borrow from the central bank on the basis of qard hasan at zero interest rates. currently, many members of the oecd countries are pursuing interest free or even negative interest based monetary policy which proved to be relatively more effective (selim et al. 2019) and such interest free or negative interest based monetary policy partly resemble qard hasan based monetary policy. however, qard hasan is much more comprehensive, more humane, and full of blessings, bounties, and fosters social harmony, cohesion, and prosperity. v. increasing share of islamic finance around the globe: need to revise monetay management the global islamic banking and financial industry has achieved a rapid growth in different markets, and it expanded into new geographies. therefore, central banks of concerning countries should keep an eye upon responses of islamic banking industry in conducting monetary policy to achieve macroeconomic goals. moreover, as compared to conventional banks, the distinguishing nature of islamic banks affects the composition of assets and liabilities of them. otherwise, it would appear as problematic segment of economy to transmit effective monetary policy for macroeconomic targets. there would appear monetary policy puzzles, making it ineffective. in last quarter of 20th century, theoretical literature of islamic economics and finance moved to establish ifis in islamic countries (islahi, 2008). these institutions became a central hub inviting to meet financial obligations, and to hassan, shah, alazhar, & selim │ towards the implementation of monetary management in islamic economic system based on recent developments international journal of islamic economics and finance (ijief), 4(2), 177-206 │ 190 design structure of products in compliance with islamic law of financial contracts. parallel to these innovative steps, iqbal (1997), naqvi (1981), aljarhi (1983), ahmad (1984), chapra (1985, 1996), kuran (1986), ariff (1988), and selim (2015, 2019, 2020) provided basis to islamic monetary management in modern context. currently, islamic banking industry is an emerging market with a growing share over the globe, especially, with concentration in islamic regions. the global islamic financial industry still managed to contribute with growth in 2018, although it grew slowly as compared to 2017. the industry assets grew with 6.9% across banking, capital markets and takāful with an amount of $2.05 trillion, which was expected to reach $2.19 trillion (for details, see table 1). table 1. global islamic financial industry by sector and region (usd billion) region banking assets sukuk outstanding islamic funds assets takaful contributions total share % asia 266.1 323.2 24.2 4.1 617.6 28.2 gcc 704.8 187.9 22.7 11.7 927.1 42.3 mena (ex-gcc) 540.2 0.3 0.1 10.3 550.9 25.1 africa (exnorth) 13.2 2.5 1.5 0.01 17.2 0.8 others 47.1 16.5 13.1 ---76.7 3.5 total 1531.3 530.4 61.5 27.7 2190 100.00 source: islamic financial services industry stability report, ifsb, 2019. the growth of ifis lies in exploration of islamic monetary theory and practice for deepening its impact in accordance with the objectives of shari’ah. it is the need of the time for other muslim countries, such as sudan and iran that claim to operate fully shari’ah-compliant banking systems, to take accurate steps to develop islamic financial industry. in this regard, malaysia, brunei, indonesia, bahrain, pakistan and uae have worked on the regulations of islamic monetary system and launched some islamic monetary instruments as a first step to direct money and capital market in this direction. indeed, sukuk are the dominant base to these monetary instruments. however, we need to harmonise the differences on structure of sukuk to achieve the global acceptance of these instruments for liquidity management and portfolio diversification of ifis. mansoori (2010) has noted that combined contacts of sukuk instruments are debatable among islamic jurists because such instruments are not devised properly. some grey and black areas of these sukuk are yet to be refined from shari’ah perspective. chaudary and mirakhor (1997) have suggested that most of central banks use moral suasion as a supplement to other instruments. it is difficult to assess its merits and demerits since it may take many forms from persuasion to directives. this hassan, shah, alazhar, & selim │ towards the implementation of monetary management in islamic economic system based on recent developments international journal of islamic economics and finance (ijief), 4(2), 177-206 │ 191 instrument should be used only in rare situations in order to give incentive for other instruments to become effective. in ernst & young’s latest islamic banking competitiveness report (2017), islamic financial market has expanded rapidly over the past decade reflecting the demand for shari’ah-compliant services and products over the globe. over 2000 to 2016, islamic banks’ capital has grown from $200 billion to an incredible $3 trillion and expected to touch $4 trillion by the early 2020s. the annual growth rate of 19.7 % in islamic financial sector is putting pressure on conventional financial institutions to offer shari’ah-compliant services in the market, especifically, the adoption of islamic products by users from nonmuslim majority countries is also showing no signs of slowing down in islamic banking market. it is witnessed that the contribution from the other regions, europe and subsaharan africa especially, has been very low. but the future growth prospects are very brilliant because of current strategies and projects in several new and niche islamic financial markets to move forward in term of infrastructure development. based on historical growth, islamic financial sector is deepening its impact in top markets addressing the requirements of customers on religious basis. we find these islamic financial developments mainly in the gulf cooperation council (gcc), the middle east and north africa (mena) region, and selected countries of asia (ernst & young’s latest islamic banking competitiveness report 2016). in sum, islamic financial industry is growing across banking, capital markets, and takāful with continuous rising trends over the globe. the growth of islamic financial market also attracts researchers and practitioners to explore monetary management in islamic context. vi. empirical evidence on the role of ifis in monetary policy in more recent empirical literature on monetary policy, the instruments and the transmission mechanism in islamic economic framework are parallel to existing conventional interest-based system. monetary policy transmission is the mechanism through which monetary policy transmits the decisions into changes in the real gdp, the rate of inflation, and other macroeconomic indicators (taylor, 1995). similarly, ireland (2005) defined that transmission mechanism of monetary policy explains how changes in the nominal money stock or policy rate affect the macroeconomic variables; aggregate output and level of employment. in economic theory, monetary policy transmission mechanism is commonly termed as “black box” (bernanke & blinder, 1995). these economic objectives can also be achieved through providing accurate shari’ah based channels which will only satisfy muslim community, rather hassan, shah, alazhar, & selim │ towards the implementation of monetary management in islamic economic system based on recent developments international journal of islamic economics and finance (ijief), 4(2), 177-206 │ 192 fulfill the requirement of market. notably, the financial environment, structure of economy, global financial interaction determines the suitability of a transmission channel in any economy (bernanke & blinder, 1995; obstfeld & rogoff, 1996). mishkin and schmidt-hebbel (2007) have explored the importance of an effective transmission channels of monetary policy to lubricate the flow of resources from all segments of the economy to different part of a country for holistic development. furthermore, they have explored that the priority of any monetary policy authority should be price stability and economic growth, while the preferences of any monetary policy depends on political factors, on economic environment and on the quality of economic institutions. for understanding macroeconomic fluctuations, the role of credit has been a source of curiosity among researchers over time. the banks’ credit channel indicates the role of the banking sector in transmission of the effects of monetary policy actions to the real economy. in dual-banking (islamic and conventional banks) economies, policymakers must consider the increasing role of islamic banks parallel to their conventional counterpart in provision of credit to economy. the banks’ credit responds in a specific manner when a monetary policy action is exercised on the economy. banks’ credit is found important in the transmission mechanism of monetary policy in any modernday economy. akteruddin (2016) has noted that islamic finance has developed in the last four decades but a remarkable contribution in domain of islamic monetary management is found in the eighties and nineties of 20th century. kia and darrat (2007) discussed pls banking systems through modelling money demand behaviour in islamic republic of iran for the prtiod of 1966–2001. the demand equation for pls deposits is found to be significant after different policy and non-policy shocks. they have concluded that pls instruments are reliable for monetary management in line with theoretical evidence of chapra (1992, 1996) and khan (1986) who indicated about stable trends through development of pls system in islamic economic system. zulkhibri, m., and sukmana, r. (2017) investigated the responsiveness in the financing rate structures of islamic banks when central bank changes monetary policy for the indonesian economy by using panel data for the periods of 2003 to 2014 and found that ‘the financing rate has a negative impact on financing at islamic banks.’ zulkhibri, m., manap, t. a. a., and muneeza, a. (2019) have clearly differentiated and outlined the functions of conventional monetary policy and islamic monetary policy and emphasized that contemporary islamic monetary hassan, shah, alazhar, & selim │ towards the implementation of monetary management in islamic economic system based on recent developments international journal of islamic economics and finance (ijief), 4(2), 177-206 │ 193 policy tends to be ‘heavily influenced’ by conventional economic thoughts and such trend must be reversed. in addition, zulkhibri, m., ismail, a. g., and hidayat, s. e. eds. (2016) emphasized the interactions and linkages between macroprudential policy and financial stability and urged that central bank must adopt macroprudential policies and approaches for achieving financial stability and averting recurring financial crisis. furthermore. zulkhibri, m. (2018) found no significant difference between financing as well as lending by islamic banks and conventional banks in response to the changes in monetary policy by the central bank. the author also suggests focusing more on profit and loss sharing instruments compared to debt-based financing and lending. alaro and hakeem (2011) explain the basic differences of contractual obligations between islamic versus conventional banks that seem to have differential impacts on credit supply in dual-banking system. they explore that islamic banks do not deal in interest-based loans and participate on a pls basis in industry. moreover, the rate of return on equity shares is not determined through speculation; rather they accept the effects of real economy. sanrego and rusydiana (2013) explain how inflation is controlled in islamic banks through replacing the loan-based credit by pls modes of islamic financial contracts. this market interaction leads to a balance between nominal and real segments of the economy. similarly, majid and hasin (2012) explore the differences on balance sheets of both types (islamic and conventional) banks along with fulfilling the same type of demand of market for consumer and corporate financing. depository accounts are devised on basis of qard and mudarba, whereas the financing is based on murabaha, mudarba, musharakah, diminishing musharka, ijarah, salam and istisnaa contracts. likewise, adebayo and hassan (2013) and mansoori (2010) have added that these shari’ah-compliant contracts incorporate built-in business ethics which can be found in pratices. further, the capital structure is also explored with unique characteristics of islamic banks in case of pakistan (shah, rashid, & zaman, 2017). furthermore, the differences led a policymaker to keep an eye on the distinguishing features of islamic banks in dual banking economies; otherwise, there may appear unwanted results of monetary policy (chapra, 1985; chaudary & mirakhor, 1997; kaleem & isa, 2006; sukmana & kassim, 2010; farhani & masood, 2013; ibrahim, 2017; rafay & farid, 2019; shah & rashid, 2019). charap and cevik (2011) analyse the impact of the interest rate on depository accounts of conventional banks and the impact of the rate of returns on plshassan, shah, alazhar, & selim │ towards the implementation of monetary management in islamic economic system based on recent developments international journal of islamic economics and finance (ijief), 4(2), 177-206 │ 194 based depository accounts of islamic banks in case of malaysia and turkey. they found that there is sound cointegration and correlation and noted that conventional banks’ interest rates granger cause the returns of then islamic banks in depository accounts using the pairwise causality tests and the multivariate causality tests. furthermore, islamic banks fund their operations through participatory pls arrangements at liability side, but they tend to use non-participatory modes of islamic finance in creating their assets. in addition, islamic banks are competitive with conventional counterpart through availing profit equalization reserves (per). they conclude that the instruments of islamic financing require an efficient islamic financial market to run the operation properly. similarly, regulatory and supervisory framework is also necessary to organize a well functioning market. this arrangement is prerequisite to observe an efficient monetary policy through islamic financial market. in recent years, many economists have investigated comparative differences of monetary transmission mechanism between islamic and conventional banks in countries having dual monetary system. sukmana and kassim (2010) have investigated the role of islamic banks in monetary policy for malaysian economy. for empirical evidence, this transmission mechanism of monetary policy is examined through the co-integration test, the impulse response functions, and the variance decomposition analysis. they have found that islamic banks’ financing and deposits are the important determinants to the monetary transmission process in the malaysian economy. islamic deposits and financing are found significant variables in response to monetary policy actions to achieve the real output. they have recommended that monetary authorities should consider the islamic banking industry while designing policy instruments for dual banking economy. they suggest developing the islamic money market to achieve a well-functioning market and to accelerate the transmission mechanism of monetary policy through islamic banks. cevik and teksoz (2012) investigated the monetary policy transmission for gcc and evaluated the effectiveness of monetary policy practices in economy of concerned countries. for empirical investigation, they used svar model with quarterly data over the period of 1990–2010. their results confirmed the significance of the interest rate and banks’ lending channel. because of the pegged exchange rate regimes, the exchange rate channel of monetary policy is found insignificant. it is notable that the important determinants of the interest rate and bank lending channels work through the bank balance sheets in transmission process of monetary policy. they acknowledge the role of shari’ah-compliant securities like sukuk with denomination of domestic currency in recent years in monetary policy transmission. these islamic securities helped park surplus liquidity available in interbank islamic money markets for investment purpose. they recommend that the central bank hassan, shah, alazhar, & selim │ towards the implementation of monetary management in islamic economic system based on recent developments international journal of islamic economics and finance (ijief), 4(2), 177-206 │ 195 authorities should work to strengthen the financial intermediation. it would help to make an efficient monetary policy. similarly, the development of liquid domestic capital markets would also play an important role in transmission mechanism through credit channel of islamic banks in the gcc countries. in case of pakistan, zaheer, ongena and wijnbergen (2013) found that small and less liquid islamic banks or islamic banks similar in size and liquidity of conventional banks, reacted like large conventional banks during tight monetary policy and continued supplying credit to economy irrespective of banks’size and liquidity position of banks. futhermore, they conclude that monetary policy would not be effective in the presence of islamic banks if they continue growing with double digit as in the case of pakistan. in other words, the growth of islamic banking industry would adversely affect the credit view of monetary policy. hence, monetary authorities should consider the growing sector of islamic banking in devising the instruments of monetary policy. azmat et al. (2020) have promoted the use of state contingent banking, particularly islamic banking endorsement of it can help neutralize challenges such as debt overhang and lack of optimal risk takings; these are often associated with conventional banking and can eventually manifest into price bubbles and financial crises. the model holds state contingent contracts on the liability and asset side. holding the contracts as liabilities can reduce liquidity influx from the real economy during heightened macroeconomic risk environments. furthermore, state contingent banks will not need to excessively lend asset, stabilizing rate volatility. with returns linked to the prices of the underlying assets, state contingent contracts may promote optimal risk-taking. selim (2019) shows that if the central bank follows qard hasan based monetary policy and lends at zero interest rate, the investment spending (i) will tend to increase to the maximum possible limit, consumption spending (c) will increase because interest sensitive consumption will expand resulting from the qh based monetary policy, government spending (g) will increase because government will borrow more at zero interest rate, public debt will decrease because of the absence of interest payments, exports (x) will increase because the export industry will reap the benefits of qard hasan based monetary policy, cost of production will decrease and comparative advantage for the export industry will improve, there will be massive import substitution because of the low cost of production resulting from the decline in financing cost, and imports (m) may tend to fall all of which will contribute to the increase in net exports (xn) and trade surplus will increase. therefore, qard hasan based monetary policy will result in simultaneous increase in all the components of aggregate expenditures such as c, i, g, and nx which will cause an upward shift in the aggregate expenditure line and equilibrium real hassan, shah, alazhar, & selim │ towards the implementation of monetary management in islamic economic system based on recent developments international journal of islamic economics and finance (ijief), 4(2), 177-206 │ 196 gdp and employment will increase and unemployment rate will fall. qard hasan based monetary policy will tend to expand the real sector of the economy and as a result, potential real gdp or full employment output will continue to increase and and the long run aggregate supply curve will continue to shift to the right. if real output (y) increases faster or at least equal to the rate of the increase in additional money supply (m) in qard hasan based monetary policy, i.e., if y >m, or, if y=m, then price level will not increase. therefore, qard hasan based monetary policy has the potential to increase equilibrium real income, employment, comparative advantage, trade surplus and can reduce unemployment rate, inflation rate, public debts, and deficits, and as a result, qard hasan based monetary policy will be relatively more effective. selim (2015) argues that central bank can buy and sell sukuk in open market market operations instead of interest-bearing treasury bills and other interest-based securities. such efforts will not only eliminate riba but it will also promote industrialization and productive economic activities which can easily be financed by issuing sukuk. the expansion of sukuk will cause an expansion of the real sector of the economy and potential real gdp will increase, employment will increase, and unemployment rate will fall, and the long run aggregate supply curve will shift to the right, and there will be continuous prosperity in the economy. in addition, islamic banks can easily participate in buying and selling of the sukuk in central bank’s open market operations and can manage their liquidity position efficiently and, therefore, will not need to keep billions of dollars or dinars as idle cash for the fear of default risk and do not need to maintain ‘excess liquidity’ as emphasized by basu et al. (2015). thus, islamic banks can effectively compete the conventional commercial banks and will continue to grow and prosper without limits and constraints. selim (2020) proposed istisna’a-qard hasan based monetary policy because istisna’a or order to manufacture mode of financing is only supported by hanafi school of fiqh. other schools of fiqh do not support it because in istisna’a, both price and product are delayed and delivered later and the builder or manufacturer or the producer must find funds for producing the product(s) and they may need to borrow funds on riba. to eliminate riba, selim (2020) proposed istisna’a based monetary policy with qard hasan where the builders or the producers or the manufacturers will have access to qard hasan funds once the istisna’a contract will be signed. if istisna’a contract is supported by qard hasan, all the schools of fiqh may accept the validity of the istisna’a-qard hasan contract, the cost of istisna’a contract will be lower because more and more builders or manufacturers or producers will be able to participate because of the availability of qard hasan, the bidding process will be more competitive and the quality of the final deliverable hassan, shah, alazhar, & selim │ towards the implementation of monetary management in islamic economic system based on recent developments international journal of islamic economics and finance (ijief), 4(2), 177-206 │ 197 product(s) will be better because the producer will not face shortages of funds and therefore, will be able to afford and use quality inputs and raw materials. therefore, istisna’a-qard hasan based monetary policy will be most effective and the cost of the manufactured products will be lower, and the quality of the products will be better, and more and more producers, manufacturers and builders will be able to participate in the bidding process which may prevent anchoring bias and escalation commitment in decision making to only a few suppliers or builders (selim, 2020b). selim and hassan (2020) have examined how a central bank (cb) can act as lender of last resort (lolr) for both islamic (ib) and conventional interestbased banks by pursuing a qard hasan (qh)-based monetary policy (mp). when the cb acts as lolr by pursuing qh-based mp, it automatically empowers ibs by providing access to borrowing funds from the cb on qh basis. the lending capacity of ibs will increase and deposit expansion, loan creation, and aggregate expenditures in the economy will all expand. this will in turn increase real gdp and there will be increase in employment in the economy. selim, hassan, and rahman (2020) attempt to explore how building a most modern airport can also be financed by pursuing istisnas-sukuk (order to manufacture -sukuk) based expansionary monetary policy (mp). central bank (cb) can buy and sell such sukuk (interest-free financing backed by asset ownership and profit) in open market as tools of monetary policy. in this paper, it has been shown that istisnaa-sukuk financing will have expansionary monetary policy effects and, as such, it will increase output and consequently reduce unemployment rate. in addition, it will also eliminate public debt and interest payments for the government, and the government will have more funds available for public spending. as a result, economic expansion and prosperity will continue unabated. eventually, it will help prevent transfer of domestic resources as interest payments to foreign creditors. shaikh and hassan (2019) finds that countries where the banks have higher capital adequacy ratios usually have lower inequality of income. since remunerative investment accounts in islamic banking are operated through mudarabah, the capital buffer would be greater in islamic banking leading to greater solvency, resilience, and lesser volatility in net banking spreads. financial inclusion in asset side operations through equity financing ensures that people with more human capital but less financial capital also undertake productive investments, which enhances capital formation and employment creation. selim and hassan (2019) have examined the relative economic performance of two groups of countries where in one group, interest free monetary policy (ifmp) was pursued while in the other group, interest based monetary policy hassan, shah, alazhar, & selim │ towards the implementation of monetary management in islamic economic system based on recent developments international journal of islamic economics and finance (ijief), 4(2), 177-206 │ 198 (ibmp) was followed. economic performance is measured by discomfort index (di)/misery index (mi) – calculated as unemployment rate plus inflation rate. the results revealed that in group y nations, where ifmp was adopted, displayed lower mi and better economic performance than group x nations where ibmp was pursued, and the t-test was statistically significant at the 5% level. rashid, hassan, and shah (2019) empirically investigate the impact of monetary policy on the credit supply of islamic versus conventional banks of malaysia using an unbalanced panel data set over the period 2005-2016. evidence shows the existence of the credit channel of monetary policy transmission mechanism, with islamic banks showing more resilience to changes in monetary policy. furthermore, monetary policy measures affect small-sized banks and less-liquid banks more compared to large-sized and more-liquid banks. hassan and al-dayel (1988/1989) examine empirically the stability of the demand for money under two different financial systems. one system pays interest on money deposited at the hank and charges interest on hank loans; the other does not pay interest on money deposited in the bank and enters a profit-sharing contract with the bank borrowers instead of charging interest on hank loans. existing literature backs that interest-free money is more stable than interest-bearing money (darrat, 1988). this study supports previous findings as the velocity of money and variance are lower for interestfree banking system than for interest-bearing banking system. basu, prasad, and rodriguez (2015) note that islamic banks are facing problem of excess liquidity as compared to conventional banking sector in the gcc. this excess liquidity of islamic banks affects the growth of banks adversely. likewise, excess liquidity absorbs tight monetary policy actions against the objectives of monetary policy. to meet the excess liquidity problem, they recommend establishing an islamic money market and modern shari’ahcompliant instruments for monetary management in islamic economic framework. unlike sudan and iran, many islamic countries like malaysia, indonesia, bahrain, bangladesh, pakistan, turkey, and saudi arabia operate a dualbanking system. therefore, the bank credit supply in these countries can be viewed in two perspectives. they are (i) the existing traditional lending channel of monetary policy and (ii) islamc banking credit channel. more recently, zulkhibri and sukmana (2017) in indonesia, shah and rashid (2019), rafay and farid (2019), zaheer, ongena, and wijnbergen (2013) in pakistan, and akhatova, zainal and ibrahim (2016), stepanchuk and tsyrennikov (2015) in malaysia, verified the credit channel through islamic banks in the transmission mechanism of monetary policy. overall, these empirical studies hassan, shah, alazhar, & selim │ towards the implementation of monetary management in islamic economic system based on recent developments international journal of islamic economics and finance (ijief), 4(2), 177-206 │ 199 have found very interesting results about modern practices of monetary management in islamic economic context. aaoifi (2010) and ifsb (2017) are providing standards and regulatory guidelines to bring islamic modes of financing in line with modern contemporary practices. vii. conclusion in islamic economics and finance, monetary management is integral to policymaking. along with the prohibition of riba in the quran, the prophet muhammad (pbuh) closed the backdoor of interest through managing exchange of prevailing roman dinar and persian diram and other six commodities based on same quantity at spot transaction. in the first islamic state, credit was managed through islamic modes of finance: murabaha for traders, musharkah for pooled investment, salam for agricultural sector, istisnaa for manufacturing production units, and ijarah for short-term usufruct of object. all these financing instruments played an important role in monetary management as alternate souces of fund. then, abdul malik introduced 1st islamic dinar in 696 a. d and it became a major international currency throughout the five centuries of medieval history. similarly, we find that several econmists have tried to frame the concept of islamic monetary management in modern framework quite successfully. this study strongly recommends the adoption of interest free islamic monetary policy across the countries. the current study has attempted to create an urge and humble awareness that islamic monetary policy is not only an alternative to conventional interest based monetary policy, but it is superior in many respects and relatively more effective in bringing full employment output, income and prosperity and can minimize or even eliminate the threats of financial crisis. the policy makers, practioners, regulators and central bankers around the globe must come forward and pursue interest free islamic monetary policy and maximize investment spending, minimize the cost of borrowing and thus the economy will be operating at full employment and eventually poverty, hunger, bankruptcy, mass unemployment and financial crisis will be the sad events of the past. in the modern era, islamic banking is an emerging discipline in compliance with islamic law. islamic financial products in islamic economic framework are designed which lead to the development of real economy. indeed, as compared to conventional banks, islamic banks are found with different composition of balance sheet and distinguished contractual obligations. therefore, we have reviewed the theoretical and empirical literature on islamic monetary management to know current position of literature. in more recent studies, we discussed the empirical literature on instruments and hassan, shah, alazhar, & selim │ towards the implementation of monetary management in islamic economic system based on recent developments international journal of islamic economics and finance (ijief), 4(2), 177-206 │ 200 transmission mechanism of monetary policy in dual banking economies. in implementing monetary policy through islamic banks, a central bank can only use instruments in accordance with islamic financial theory. conceptually, islam provides a degree of freedom to scholars to update islamic knowledge stream through ijtehad with necessary conditions. after reviewing the literature, we find that most of the traditional monetary instruments that do not rely on interest are consistent with islamic principles and require only a minor amendment. the islamic banking and financial industry has achieved a rapid growth in different markets, and it has expanded into new geographies. therefore, policymakers of concerning countries should observe the notion of conducting monetary policy by islamic finance ideals to achieve macroeconomic goals. further, we recommend to practitioners to consider all four major views on islamic monetary policy and choose the one which will create maximum possible positive effects in the form of achieving full employment, potential real gdp, low unemployment and low inflation rates, maximum possible economic growth rates, prosperity, and is closer to the principles of qur’an and sunn’ah. for academicians, this paper opens new horizons of research on monetary management in islamic economic framework for making islamic banking industry closer to the objectives of shari’ah. hassan, shah, alazhar, & selim 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(2019). islamic monetary economics and institutions. springer. arabic references 53م ص 1939النقود دار الكتب المضية -البالذري 46ص « العدد عادل زيتون / د ي مارس 508عندما كان الدينار اإلسالمي عملة عالمية مجلة »العرنر 2001 « العدد الدرهم والدينار -عبد هللا كنون ي مجلة »العرنر ً 187عملتان عايشتا العرب بضعة عشر قرنا م 1974يونيو ijief:international journal of islamic economics and finance vol. 1 (2), pg 123-144, january 2019 investigating fairness in economic transactions: evidence in belief systems * hazik mohamed stellar consulting group, singapore, hazik@stellarcg.com article history received: november 22, 2018 revised: december 12, 2018 accepted: december 31, 2018 abstract fairness is one of the central institutional pillars of islamic law, and its inherent legal framework dictates, among other things, clarity and ethical behaviors in all our endeavors. righteous behaviors form the foundation of fairness and justice. this paper attempts to address deep religious understanding in human behavior for fairness and justice so as to use religious values in productive economic behaviors, like the sharing risk and benefits in mutual agreements. the methodology of this study assesses the behavior of the subject pool (players representative of muslims and non-muslims) through the ultimatum game that was designed to test fairness and experiment in decision-making to measure fairness in economic transactions and to observe the level of religious-specific acceptance norms. this paper provides an actual behavioral investigation into how people (muslims and nonmuslims) behave in real life, whether it is in accordance to what their religion prescribes to them or otherwise. in terms of fairness in contracting, non-muslims performed a little bit better than muslims but there were significant differences between the primed and unprimed subjects in the muslim and non-muslim groups where it was positive for the muslim group and negative for the non-muslim group. keywords: behavioral rules, religious framing, cultural heuristic, equality, ultimatum game. jel classification: d30; d90; p47 @ ijief 2019 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.127 web: http://journal.umy.ac.id/index.php/ijief/article/view/127 citation: mohamed, h. (2019) investigating fairness in economic transactions: evidence in belief systems. international journal of islamic economics and finance (ijief), 1(2), 123-144. doi: https://doi.org/10.18196/ijief.127 *this research was made possible through financial support provided by the mohe frgs2015-1 and um-inceif research grant. https://doi.org/10.18196/ijief. https://doi.org/10.18196/ijief. mohamed| investigating fairness in economic transactions: evidence in belief systems ijief: internationaljournal of islamic economics and finance, 1(2), 123-144 |124 introduction if there was one collective criticism of conventional economics, it would be that the study of economics has centered largely on efficiency, and more procedural aspects of transactions and its consequences. increasingly, such critics opined that economics has inadequately focused on substantive areas crucial in maximizing utility in living a good and moral life, which emphasize virtues like trust, equality, fairness, happiness and the well-being of future generations. some extreme critics even go so far to believe that the focus on efficiency and productivity is a well-crafted design for domination to keep resources in the hands of the few who are powerful and wealthy. the italian economist vilfredo pareto defined the modern conventional economic characterization of efficiency (called pareto efficiency)as basically almost the same understanding to that of the gross domestic product. in that view, the more productive a nation is (i.e. the more things they produce like goods and services), the fewer resources they will be wasting by being idle and unproductive. in the utopian world of efficiency, or pareto optimality, there exist a state where the economy is so efficient that one party cannot receive any more without depriving someone else. alternatively, perfect efficiency can be viewed as a state where free-riding is not possible. being able to measure efficiency will enable economists to capture which economic factors (including policies, initiatives and allocations) are not optimal. and as a result, new policies formulated with efficient institutions really can make things better for everybody. the true strength of the efficiency concept is that it emphasizes on small but steady advancement. instead of making huge changes that can disrupt social norms, the efficiency concept focuses on finding policy tweaks that institutions can make everyone a bit better off than before. conversely, the counter argument for the efficiency concept is the provision of available resources at any one time. nations that produce more today will leave fewer resources for the future generation tomorrow —pareto optimality today may be disenfranchising the future generation. as such, economists have to understand the static version of the efficiency concept (efficiency at any one time) versus dynamic efficiency, which is efficiency over time. stakeholders and governments must be able to balance both so that the provision of resources can be made to ensure sustainability of the nation moving forward into the future. furthermore, the consequences of static efficiency such as inequality, has become a looming issue in the advanced economies that such trade-offs between efficiency and equality can no longer be ignored in order to protect the survival of those nations. mohamed| investigating fairness in economic transactions: evidence in belief systems ijief: international journal of islamic economics and finance, 1(2), 122-144|125 in this paper, we wanted to study fairness in transactions using the welldocumented experimental game called the ultimatum game. in our experiment, we will group our sample groups into muslims and non-muslims in order to make distinction in the rootedness of fairness in religious traditions and belief systems. this research will be using a priming instrument to heighten religious saliency in the subjects against control groups which are unprimed. the experiment was carried out in singapore and then repeated in malaysia, with actual cash incentives within the game scenario played out by selected unbiased test subjects. literature review between equality and fairness, what do people want? the philosopher harry frankfurt argues that economic equality has no real value and it is a grouse that people do not realize that they do not have. in his 2015book, on inequality, he contends that it is a moral but a psychological claim, and he gives evidence that if people take the time to reflect, they will realize that inequality is not really what disturbs them. he makes the case that most people are distressed by what they see as unjust causes of economic difference, something that is perfectly understandable. people become more concerned by the potential consequences of economic difference. they imagine it as consequences that will disintegrate democratic societies, or increases crime and result in lawlessness, hence reduces over all happiness and the ability to enjoy a good life. above all, most people are concerned about poverty — not only that the disenfranchised have less, but “that those with less have too little”. instead, frankfurt argues that most people are not really bothered by inequality per se. he makes an important distinction by pointing out that very few people are uncomfortable about the inequalities between the incredibly rich and the well-off, even though their wealth differences might be greater, both absolutely and proportionately, than inequalities between the moderately well-off and those considered poor. by contrast, he described a state where everybody suffered equal poverty but, he says, most people would not prefer that to our current state where we enjoy the world as it is with some inequality. therefore, when we investigate deeper, “equality” cannot be what we really value nor “inequality” is what distresses us. behavioral-based researchers have discovered that if you let kids distribute things to strangers, they have a strong inclination towards equal divisions, even in extremeconditions. research psychologists alex shaw and kristina olson (2012) found that when they told children between the ages of six and mohamed| investigating fairness in economic transactions: evidence in belief systems ijief: internationaljournal of islamic economics and finance, 1(2), 123-144 |126 eight about two boys, dan and mark, who had cleaned up their room and were to be rewarded with erasers. however, there were 5 erasers, so a fair division was impossible due to five erasers for the two boys. children irresistibly reported that the experimenter ought to throw away the extra fifth eraser instead of having to form an inequitable division. they did so even if they could have given the eraser to dan or mark without the other one knowing, so they could avoid eliciting anger, discontentment or jealousy. such responses appear to indicate an inborninstinct for equal distribution and justice ― they can be interpreted as a wish for fairness. additionally, the equal distribution was purely because the children understood that dan and mark did equal work hence they ought to get an identical reward. but once shaw and olson changed the scenario by telling the youngsters “dan did additional work than mark,” they were quite comfortable giving three to dan and two to mark. in simple terms, they were fine with unequal distribution, so long as it was fair and just. our observations from associated studies of children, adults and remote tribes is an instinctive want for fair distribution or just treatment, and a very fervent goal not to get less than others (lose or low in standing). and there is no evidence to say that humans prefer equality for others without any corresponding effort on their part. contractual fairness experimental evidence from previous research appears to point out that in contractual agreements, counterparties have a clear inclination for less complete contracts although the classical self-interest economic axiom forecasts that they would choose the more complete contract (fehr & schmidt, 2000). in their experiments, the explicit contract principals explicitly conditioned a fine on the agent's deviation from a desired effort level. in the implicit contract they promise to pay a bonus after they have observed the agent's effort. the promise was, however, not binding. fehr & schmidt’s theoretical analysis illustrates that fairness concerns can explain this inclination for less completeness. they found that fair counterparties seem to keep their promises which provides strong monetary incentives through an incomplete contract, whereas selfish principals are likely to freeride and exploit the agents. fairness, as they have termed it is the reciprocal response, even in the absence of any material benefits, and not a form of altruism or unconditional kindness. the concept of mutual agreement of traditional contract law focused primarily on "contractual certainty" regarding contract terms. this concept of certainty is reflected in the idea that an offer and acceptance should be a "mirror image" of one another (dimatteo, 1995). thus, if the terms are not mohamed| investigating fairness in economic transactions: evidence in belief systems ijief: international journal of islamic economics and finance, 1(2), 122-144|127 equal, then there could not be evidence of contractual intent. the notion of "fairness of exchange" have provided rationalizations for the relaxing of the stringent application of traditional contract doctrine and for the expansion of its remedial options (atiyah, 1985). as such, dimatteo called for a “new spirit of contract” formulation and where the underlying premise it is supported by the belief that the courts should expand their analyses beyond the words of the instrument. this expanded analysis takes into consideration the "equities" of the overall transaction, including how subsequent events may call for an "equitable reformation" of the contract. for example, all contracts should be equitably reformed to include the obligations of "good faith" and "conscionability." but as much as certainty is assumed, there is significant uncertainty that is possibly not communicated through verbal or written agreements. the certainty and comfort provided by classical contracts quickly dissipates when there is disputes or defaults for various reasons. where there are missing elements within the traditional contract's equation, the courts and judiciary have to depend on the notion of "justifiable reliance" to deal with such disputes or breaches to launch the realm of contract remedies to distributing legal entitlements. and these differ slightly between legal systems: i. civil law describes and limits individual rights with respect to contracts (including business relationships), torts and statutes. civil law nations expect their legislatures to codify laws that anticipate contingencies. ii. common law is a collection of judge-made principles that reflect usages and customs embodied in court decisions handed down from earlier times. common law nations expect their courts to make caseby-case decisions that together comprise the law of contracts and torts, and this is known as the doctrine of stare decisis. its judges were expected to adapt the law to the changing conditions in society, i.e. fill the gap left by statutes, protect individual rights as well as to give meaning to parliamentary intention (respecting the parliamentary opinion). iii. sub-saharan law consists of a long tradition of unwritten customs that focus primarily on resolving disputes among tribal families and individuals. tribal judges often assume the role of arbitrator or mediator. it should be noted that one needs to be mindful of the differences between law as written and law as practiced. iv. east asian law typically covers china, japan, korea and taiwan and it is the confucian ideal of the family. the use of a formal legal system by individuals and businesses is viewed as disruptive to the societal goal of harmony. mohamed| investigating fairness in economic transactions: evidence in belief systems ijief: internationaljournal of islamic economics and finance, 1(2), 123-144 |128 contractual agreements and fairness in islam in comparison, islamic law regulates contractual relationships in a way that is viewed as different from that of common and civil law. the qur’an and sunnah are the sources of the shari’ah that establishes the types of contracts admissible to the faithful, their rights, and obligations. islamic law determines the general theory of contracts comparable to its western counterparts. the shari’ah plays the role of a moral (or ethical) code, in which general principles are included through the jurisprudence of islamic scholars (fiqh). parties to a contract are also free, with some limitations, to place stipulations in a contract. these clauses cannot negate the legal purpose of a contract, or violate specific laws included in the qur’an or the sunnah (arabi, 1998), which are the primary sources for islamic jurisprudence. the model of contracts under islamic law is closely linked to its conduct of the bona fides and pactasuntservanda principles. good faith is very strongly instituted in the islamic legal tradition. the commitment of muslims with respect to their contractual obligations is binding not only in relation to other muslims, but also towards non-believers. a contract in islamic law is often deemed as not just secular law between the parties, but also a law “that is literally a sacred law between the parties” (habachy, 1962: 467). in general, islamic law safeguards all worldly transactions, including economic activities, on written contracts with witnesses. even the primordial covenant between the creator and humans (the mithaq) is essentially a spiritual faith-driven agreement between creation and the one whom they believe as the one and only creator, which imposes the obligation on humans to recognize the creator as the sole provider and sustainer (rabb) of life. from a behavioral perspective, that understanding should translate to a consciousness that their conduct on the earth will conform with the duties imposed by their law-giver. faithfulness to the terms of the primordial covenant (and all subsequent transactional contracts) should encompass establishing all forms of justice (distributive, retributive and restorative), incentives for compliance and retribution for violation. in fact, judgment day holds the ultimate accountability when every human beingis called on their fulfillment of obligations according to the terms and conditions of the primordial covenant. in an explicit and unmistakable verse, the creator commands through his word in the qur’ān: “... fulfill the covenant of allåh,” (qur’ān, 6:152), and then generalizes this obligationto all contracts: “... fulfill all contracts,” (qur’ān, 5:1). thus, the devotion to the terms of every contract, promise, pledge, or oath to carry out obligations that has been designated becomes a duty under the primordial covenant. mohamed| investigating fairness in economic transactions: evidence in belief systems ijief: international journal of islamic economics and finance, 1(2), 122-144|129 islam prescribes writing down contractual agreements as key enablers for fairness in trade and commerce which record mutually-agreed terms for accountability or dispute resolution. the significantly long qur'anic verses of surah al-baqarah in verses 282 and 283, enjoins muslims to put into writing any debt or agreements for accountability in discharging one’s obligations according to that agreement. as such, muslim trade merchants trusted an islamic legal structure for the purposes of accounting and liability, while muslim scholars classified legal standards and acted as arbitrators in trade disputes. dispute can be avoided if parties involved can inculcate the spirit of sincerity in their contracts (danuri,et al., 2015) through good intent, proper disclosure, and effective risk management through risk sharing. previous studies in 1986, kahnemann, et al. (1986) questioned the assumption that fairness is irrelevant to economic analysis. they believed that even profit-driven firms will succumb to individuals who are able to punish unfairness and resist unfair transactions. they conducted three experiments that showed that people are willing to enforce fairness. in other experiments, fehr and schmidt (1999) find that there is strong evidence that people exploit their bargaining power in competitive markets but not in bilateral bargaining situations. their research show that if some people care about equity the enigmasof free-riding on voluntary cooperation and punishment costs can be resolved. it turns out that the economic environment determines whether the fair types or the selfish types dictate behavioral norms. li & jain (2015) found that, contracting parties are expected to be fair, reasonable, and conscionable, and requires parties to conduct themselves in good faith and to co-operate towards achieving the objective of the contract. however, atiyah (1995) finds that there are issues with reconciling ideas of fairness with market flexibility in times of shortage and the difficulties of creating suitable legal remedies to deal with contracts made in imperfect market conditions. she focused on bargaining and its procedures in order to discuss the substantive justice of contractual agreements. in their experiments on social preferences, charness and rabin (2002) found that subjects are more concerned with increasing social welfare— sacrificingto increase the payoffs for all recipients, but they are also motivated by reciprocity: they withdraw willingness to sacrifice to achieve afair outcome when others are themselves unwilling to sacrifice, and sometimes punish unfair behaviors. children respond positively to individuals who favor them and also to individuals who are fair. shaw, et al. (2012) tested to see which preference mohamed| investigating fairness in economic transactions: evidence in belief systems ijief: internationaljournal of islamic economics and finance, 1(2), 123-144 |130 dominates in children and under what circumstances. they found that creating a competitive context increases children's preference for favoritism instead of fairness. they also found that in a third-party context, children value fairness over generosity. for organizations, sedikides, et al. (2008) discussed procedural fairness (whether the organizational decision-making process is perceived as fair) whose complexities have profound psychological effects on organizational members through corporate messaging relevant to the self. specifically, they categorized different types of self (individual, collective, relational) and, more importantly, to different motives within each type of self. as such, procedures satisfy the motives of uncertainty reduction and self-enhancement (individual self), the motives of reputation and status (collective self), and the motives of belongingness and respect (relational self). herbert simon (1976) had initially intelligently distinguished rational behavior as “substantive” and “procedural” as the latter is primarily concerned with process rather than outcome. while economists viewed rationality from a substantive definition, psychologists viewed rationality in procedural terms. on governance, tyler (1994) found that procedural justice judgements influences assessments of the legitimacy of a governing authority. he did not find demographic (age, gender, income, education, ideology, race) differences on such assessments on legitimacy. his findings suggest that procedures give a credible foundation for maintaining public support in the face of differing positions on policies. methodology the methodology is designed to evaluate the behavior of the subject pool (players representative of the muslims and non-muslims) in a given game (ultimatum game) that will test the rules of fairness in transactions. the same ultimatum game will be played by the muslim and non-muslim groups. it is a simple one-off game, in which the players simultaneously and independently choose their actions, and they do so only once. the instructions in a session will be read at the beginning of each game. the game administrators will use neutral terminology to avoid influencing the participants’ decisions and choices. at the end of each session, the data is tabulated for final analysis later once all sessions have been consolidated, to examine the decisions made by the different groups. the test subjects do not know what is being tested for, to obtain neutrality and allows us to extract actual behavioral responses from the scenario outcomes. in addition, we employ a priming instrument created by shariff and norenzyan (2007) to statistically control for religious effects, that is, to segregate the islamicsalient subjects from non-islamic subjects. mohamed| investigating fairness in economic transactions: evidence in belief systems ijief: international journal of islamic economics and finance, 1(2), 122-144|131 priming instrument the consolidated experimental outcomes will be investigated for statistical significance, in particular, for the possible variations between muslim and non-muslim behaviors. as mentioned, we will employ the priming instrument created by shariff and norenzyan (2007) to separate the islamicsalient subjects’ behaviors within the muslim group as well as the religioussalient subjects within the non-muslim group via sentence-unscrambling task. the basic idea is that priming a social category temporarily increases the strength of affiliation with that category. the benefit of this priming instrument is that in the action of unscrambling the sentences, the subjects will be subtly primed to enhance their religious sentiments. this priming instrument is meant to be refined as compared to blatant primes. previous studies have proven that indirect primes are more reliable in influencing behaviors to conform to norms (wheeler and petty, 2001).this helps immensely in inferring the experimental outcomes within our theoretical framework of self-categorization. behaviors that have deeper association with a category causes the subjects to behave towards that category’s norms, so evaluating primed and unprimed behavior allows us to estimate what the norms are and how they are reflected in normal behavior. the ultimatum game (testing for fairness in contracts) the ultimatum game is a popular game in experimental game theory which is played between two subjects where the first player is referred to as the "offerer" and the second player is referred to as the "responder" in our research. the two players will be playing for s$20 in singapore and rm20 in malaysia. player 1makes an offer to player 2 (responder) of s$xx/rmxx from a total of s$20/rm20. if the responder accepts the offer, then the offerer retains s$/rm(20 xx) and responder receives the balance, i.e. what is offered. if the offer is rejected, then both players end up with nothing. under an axiomatic assumption in classical conventional economics, player 1 would give player 2 the lowest possible amount, which in this case could be an offer of a dollar/ringgit. since the offer of a dollar/ringgit has made the player 2 better off, he/she should accept the dollar/ringgit. although it made player 1 seem miserly or cheap, nonetheless player 2 made a dollar out of it. however, this assumed logic is flawed when we observe how people actually behave when faced with this decision in reality. previous experiments using the ultimatum game showed that players consistently reject offers which are too low (offers which are lower than a quarter of the full amount), and players who want their offers accepted must offer more than the lowest amount, which is usually half of the full amount. this unexpected behavior mohamed| investigating fairness in economic transactions: evidence in belief systems ijief: internationaljournal of islamic economics and finance, 1(2), 123-144 |132 provides some real insight into actual human behavior and how the mind perceives distributive and retributive fairness. from a sociological perspective, the ultimatum game illustrates the inborn human unwillingness to accept injustice or unfair outcomes. devotion to the social contracts entered into— spoken or unspoken, are expected and linked to the fulfillment of obligations incurred under the stipulation of terms and conditions of acceptable behaviors which include establishing justice, rewarding fairness and punishing selfishness. the penchant to reject small offers may also be seen as germane to the concept of dignity and honor. details of test subjects for our experimental investigations, we carried out the games in two different cities — singapore and kuala lumpur— and though they had similar demographics, their respective institutions may somewhat vary in terms of performance as well as quality. our sample size was limited by the funding made available to us resulting in sample sizes of 30 in singapore and 40 in malaysia. though modest, our sample still had a good spread of age, education, gender and income instead of limiting to undergraduate or graduate groups, like those studies conducted in the u.s, which then limits the sample in terms of age, education and income levels. also, there is less variation in the muslim community in singapore and kuala lumpur which is predominantly sunni and follow the shafi'e school of thought (mazhab). table 1.decision rules, payoffs and sample size. game decision rules payoffs total size test for contract rule (ultimatum game) player 1 makes and offer which player 2 can decide to accept or reject if player 2 accepts the offer, both players keep the money. if player 2 rejects, then both players lose all their money. 38 non-muslim (22 primed)  19 offerers (11 primed)  19 responders (11 primed) 32 muslim (16 primed)  16 offerers (7 primed)  16 responders (9 primed) mohamed| investigating fairness in economic transactions: evidence in belief systems ijief: international journal of islamic economics and finance, 1(2), 122-144|133 results and analysis results in previous experiments, the average accepted offers were about 50% of the original sumgiven to the second player. it is not surprising that low offers (below 25%) are more likely to be rejected while higher offers were more likely to be accepted (from kahneman,et al., 1986; camerer, 2003; etc). by the axiomatic assumption of classical economics on rationality and selfinterest, the players would be expected to be motivated by some monetary incentive, and hence the subgame-perfect equilibrium prediction would expect player a to offer the smallest monetary unit possible to player b, and player b accepting that offer regardless how small. from that economic perspective, any amount offered no matter how small is better than nothing, so by that rationality player b’s response should be to accept even small offers. however, previous experiments have shown that often times this payoff outcome does not happen, which tend to point to the flaw in economic assumptions of procedural rationality. in its place, actual human behavior is consistent with taking additional, immaterial, non-pecuniary considerationsinto account, such as self-worth, honor, values such as fairness, even when they are no opportunities for bargaining and the game is not repeated between the same players. in our experiment, the players were grouped as offerers and responders. there were: islamicofferers― 7(sg) + 9 (my) = 16 (7 are primed) non-islamicofferers― 8 (sg) + 11(my) = 19 (12 are primed) islamic responders ― 5(sg) + 11 (my) = 16 (9 are primed) non-islamic responders ― 10(sg) + 9(my) = 19 (10 are primed) which makes 35 offerers and 35 responders of 70 in total of which 38 are primed. in both countries where our experiments ran, the results of replicated other documented ultimatum games with more than 50% of the offers gravitating to the 50% value of s$20 at s$10 regardless of priming effects. however, lower offers of s$4 and s$6 were not rejected in our sample as expected (typically offers of < 25% are rejected although our lower offers were between 20-30%). conventional economic theory predicts that any dollar/ringgit amount will make the second player economically better off and so he/she should accept it, and our results of no rejection to lower than 50% offers seem to followthat theory. for our analysis, we focus on the 50% offers (i.e. s$10 and mohamed| investigating fairness in economic transactions: evidence in belief systems ijief: internationaljournal of islamic economics and finance, 1(2), 123-144 |134 rm10) because it is more or less representative of the ultimatum game outcomes (about 50% offers seem to be the norm) and it is considered as the “fair” outcome. when the data of the islamic and non-islamic players were combined, the results seem to suggest that the primed and unprimed segments were almost similarly inclined to make a fair offer (i.e. about 80% of all offerers made the 50% offer). however, the priming effects had a more positive correlation for islamic group (86% primed versus 67% unprimed) compared to non-islamic group who indicated negative priming effects; 75% of the primed subjects made fair offers as compared to 100% of those who were not primed. for the islamic group, the primes did in fact nudged islamic subjects to honor fairness and make more fair offers (86% primed islamic versus 79% of all primed subjects). but the negative results for the nonislamic group seem puzzling; no correlations with the subject profiles nor country characteristics could explain this. it seems to indicate that when religiously primed, non-islamic players seem to act less fairly, but made 100% fair offers when not primed. mohamed| investigating fairness in economic transactions: evidence in belief systems ijief: international journal of islamic economics and finance, 1(2), 122-144|135 table 2: breakdown of offerers and 50% offers by numbers and ratios. interestingly, the one offer that was rejected was a fair one at rm10 but the responder (a primed muslim) rejected it due to personal reasons. when prodded why she rejected it after the session, she said that she will not accept any money without having to work for it― part of her family value system. this rejection clearly signifies that there are other ethical sensitivities involved. this concept of other ethical/moral considerations is also validated by the two maximum offers (s$20 and rm20) and two 75% offers (rm15) by offerers who justified their decisions by "wanting the best for others" and "wanting to be generous" respectively. game 3 total number of offerers singapore malaysia sg & my muslim 7 9 16 primed 3 4 7 unprimed 4 5 9 non-muslim 8 11 19 primed 6 6 12 unprimed 2 5 7 combined (m & nm) 15 20 35 primed 9 10 19 unprimed 6 10 16 subjects who made 50% offers (i.e. s$10 or rm10) muslim 6 6 12 primed 3 3 6 unprimed 3 3 6 non-muslim 6 10 16 primed 4 5 9 unprimed 2 5 7 combined (m & nm) 12 16 28 primed 7 8 15 unprimed 5 8 13 ratio of subjects who made 50% offers (i.e. s$10 or rm10) muslim 86% 67% 75% primed 100% 75% 86% unprimed 75% 60% 67% non-muslim 75% 91% 84% primed 67% 83% 75% unprimed 100% 100% 100% combined (m & nm) 80% 80% 80% primed 78% 80% 79% unprimed 83% 80% 81% mohamed| investigating fairness in economic transactions: evidence in belief systems ijief: internationaljournal of islamic economics and finance, 1(2), 123-144 |136 analysis benevolence in experimental investigations is usually deducedin gametheoretic models as a preference for fairness or equitable outcome. several “inherent social justice” theories try to summarize this observed big heartedness by assuming that it reflects an inclination for equitable outcomes or social wellbeing. for instance, people may distribute portions to others because they achieve satisfaction through others’ payoffs (andreoni and miller, 2000), are opposed to unequal payoff differences (fehr and schmidt, 1999; bolton and ockenfels, 2000), or want to maximize the total social payoffs or enforce the lowest payoff to any one party (charness and rabin, 2002; engelmann and strobel, 2004) as punishment. the shared feature of these analyses or interpretations is that they assume that players’ preferences can be based on the final distributions of wealth. however, there are several reasons as to why people seem to gravitate to fairness and equity. their motives vary from uncertainty reduction and selfenhancement (individual self-image), the motives of reputation and status (collective self-image), and the motives of belongingness and respect (sedikides,et al., 2008). other experiments seem to indicate that one possibility is that people at times feel obliged to give in to situational considerations, without really giving attention toa fair and just outcome. by relaxing transparency in decisions, dana, et al. (2007) found that when given "moral wiggle room" players behaved self-interestedly, and their results showed significantly less fair behaviors. table 3: overall performance for both cities (islamic and priming effects). where p = primed; unp = unprimed subjects and m = muslim and nonm = non-muslim participants and> means performs better and < means conversely according to the primary criteria of the experimental game summary rule of contract muslim priming effects p > unp non-muslim priming effects p < unp combined (m & nm) priming effects p < unp muslim vs non-muslim m < nonm mohamed| investigating fairness in economic transactions: evidence in belief systems ijief: international journal of islamic economics and finance, 1(2), 122-144|137 the outcomes of our experiments seem to suggest that the influence of the islamic identity seem to positively trigger pro-social behaviors resulting in more fairness in the muslim group than when unprimed. the non-muslim players appear to have started with fairness as default (without any religious priming) but became less fair after being primed. one possible explanation could be that the priming resulted in them being driven by selfenhancement regardless of how they were being perceived. this view is substantiated by previous experiments like benabou and tirole (2006) who reformulated weber's findings (1952) of protestant ethics of working hard where religious people derive positive motivation for efforts geared towards the promise of rewards in the afterlife for people who work hard and do good on earth. these people chose higher effort levels and demanded less redistribution in equilibrium. this type of egalitarian justice is different from the distributive justice that philosophers like rawls proposes in his theory of justice. this also seems to support other empirical findings on experiments involving non-muslim societies as in palani (2008) and in rees (2009), where it was establishedthat significant income differences are more apparent in countries with greaterreligiosity. in contrast, steven fish finds that all around the world, “socioeconomic inequality is lower in societies with proportionally larger muslim populations” (2011). this could be attributed to the inherent distributive mechanism of zakat that is mandatory in muslim societies with respect to income and wealth distribution. hence, the expectation of fair outcomes seems to stem from the religious duty of zakat – the fourth pillar of islam – which is confirmed by our results from islamic religious priming. the redistributive power of the zakat system ensures the rights for equality across socio-economic groups, and it appears to be reducing disparity for a more equitable society. in doing so, the islamic concept of fairness may include the desire for others to have a better life. upon closer scrutiny of our results, we observe that players who are older (50s), female (2 out of 7) and the lower-middle income group (2 out of 7) were the ones who gave low offers, where the younger (20s, 30s, 40s) males (8 out of 8) and more affluent gave fair offers (s$10 and above). but this is only apparent in the singapore group. there was no significant difference of such segments, i.e. age, gender and income, for the malaysian group. here, it may appear that in fairness and just distribution, all malaysians take a more pro-social view and singaporeans seem to be more individualistic. as the results suggest, malaysians felt that it is within their own actions to promote fairness and justice, whilst possibly, that some singaporeans view that responsibility does not fall on them (from their individualistic choices), perhaps rather that it belongs to the state to enforce and regulate. mohamed| investigating fairness in economic transactions: evidence in belief systems ijief: internationaljournal of islamic economics and finance, 1(2), 123-144 |138 conclusion and recommendation conclusion various religious traditions advance diverse teachings and apply different frames, and this is indeed true in how they address social and economic norms. investigating how religion influences fairness and just distribution beliefs includes reviewing the basic teachings of the major traditions and how each addresses distribution, equality and fairness. there are many factors and nuances involved and it is naturally more complex than experiment outcomes suggest. in broad terms, religiosity does not oppose the improvement of the living standards of less well-off members of the society. this can be seenfrom the profusion of charitable organizations whose major champions are religious people. as such, it becomes crucial to understand whether this negative correlation in the non-muslim group is due to the differences in normative understanding of their religious beliefs or in their household/social conditioning that influences the expressions of their religion to produce such outcomes. nevertheless, our results uncovered a notable difference in fairness concerns by showing a positive correlation between fairness perceptions of muslims and their religious beliefs. where fairness and just outcomes are needed, muslims should be primed to be more religious. finally, if religious beliefs influence the direction of each group's perceptions and are likely to have opposing views on the issues of fairness and just distribution, then it is imperative that institutions and governments be aware of such disparities for effective policy formulation or any initiatives to be undertaken. it may be useful in determining where subsidies, taxation and welfare-spending can be allocated for which groups, or at least when policies are being formulated, how they would be perceived by certain groups in different jurisdictions. recommendation due to the consequences of a breach of contract, it is advisable then that a section on some important issues when going into an agreement and drafting a contract to ensure fairness and equity. the following are some suggestions and some legal points to note in carrying out business and trade in the present day. i. while drafting a contract or agreement or while vetting a draft, the parties need to go through carefully about various obligations, mohamed| investigating fairness in economic transactions: evidence in belief systems ijief: international journal of islamic economics and finance, 1(2), 122-144|139 rights, consequence of default, remedies available etc. results to be achieved and time limits thereof have to be spelt out with sufficient clarity. where the parties intend to enforce specific performance or to restore status quo ante, it is better to provide a specific clause. sufficient clarity is required to be added as to the mechanism for dispute resolution and jurisdiction of the courts. ii. in contractual fairness, it is the responsibility of contracting parties to mitigate damages. the party who is liable for loss from breach of contract should intuitively take reasonable steps to abate the extent of loss or damage. also, in fairness outcomes, the plaintiff should not act unreasonably and hold defendant liable to loss completely without reasonable opportunities of remedy. iii. extenuation is especially important in sale and purchase contracts. for fair outcomes, the seller should resell the goods at market price and recover the difference (if any), if the buyer refuses to take delivery of the goods. likewise, if seller breaches and cannot complete delivery, the buyer should be compensated with similar goods from any alternative sources, where available. iv. it is desirable in fair dealings that all extensions of time granted to the deliverer should be allowed, in writing, and should be such that it is not partial to the rights of the counterparty to recover liquidated damages for the delay and/or to cancel the contract and make alternate arrangements. such extensions granted should be without any additional financial implications to the other party. further contract variations henceforth should be mutually agreed upon. in addition, the party giving more time for extension has to indicate intention to claim compensation, or it would be deemed to have waived such right. v. in cases of compensation for the aggrieved party for the loss suffered, the aggrieved party has no right to make a profit out of this. hence, despite parties having agreed to a fixed amount payable as damages, the aggrieved party will only get what is due to him/her, nothing exceeding the actual loss suffered. vi. it should be clarified that the objective of having liquidated damages clause in contracts is only to safe guard the diligence and workmanlike execution of the contractual agreement, and endeavor to finish the whole work as given in the contract within the specified time. it must be remembered that the specification with regard to liquidated damages is not designed to provide unjust enrichment to the beneficiary. it should be viewed that recourse to imposition of liquidated damages should be reserved for extreme cases and amiable relationship continues between the parties for future business. unwanted disputes will cause many unnecessary legal and mohamed| investigating fairness in economic transactions: evidence in belief systems ijief: internationaljournal of islamic economics and finance, 1(2), 123-144 |140 financial complications. there may be a legal ruling from the courts restraining the party from continuing the work, pending the court’s decision on the case. vii. complexity and ambiguity of modern transactions in the global market has made the classical legal analysis of rules of contract law increasingly inadequate. contracting parties can no longer optimally bargain future arrangements. contracts built on strong relationships can safeguard complicated arrangements such as agency and employment contracts. there is no contract that is completely contingent on all terms and conditions. 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(2001). the effects of stereotype activation on behavior: a review of possible mechanisms. psychological bulletin 127(6), 797-826. mohamed| investigating fairness in economic transactions: evidence in belief systems ijief: international journal of islamic economics and finance, 1(2), 122-144|143 appendix appendix 1a: sample size and ratios of background spread s amp l e s i ze s i n gap o re m al ay s i a to tal r ati o s amp l e s u b to tal 3 0 4 0 7 0 1 0 0 % m u s l i m 1 2 2 0 3 2 4 6 % no n m u s l i m 1 8 2 0 3 8 5 4 % atheist 1 0 1 buddhist 6 10 16 catholic 3 1 4 christian (non-catholic) 1 3 4 free-thinker 5 3 8 hindu 1 3 4 taoist 1 0 1 age 3 0 4 0 7 0 1 0 0 % 2 0 s 10 18 28 40% 3 0 s 10 16 26 37% 4 0 s 9 6 15 21% 5 0 s 1 0 1 1% gen d er 3 0 4 0 7 0 1 0 0 % m al e 17 20 37 53% f emal e 13 20 33 47% ed u c ati o n 3 0 4 0 7 0 1 0 0 % terti ary 19 38 57 81% no n terti ary 11 2 13 19% in c o me 3 0 4 0 7 0 1 0 0 % < s $ / r m 2 4 k p er an n u m 6 14 20 29% s $ / r m 2 4 k to 3 6 k p er an n u m 14 13 27 39% s $ / r m 3 6 k to 4 8 k p er an n u m 6 10 16 23% > s $ / r m 7 2 k p er an n u m 4 3 7 10% mohamed| investigating fairness in economic transactions: evidence in belief systems ijief: internationaljournal of islamic economics and finance, 1(2), 123-144 |144 appendix 1b: size/ratios of muslim vs non-muslim and primed vs unprimed groupings s a mp l e s i ze s i n g a p o re m a l a y s i a to ta l s a mp l e s u b to ta l 3 0 4 0 7 0 m u s l i m 12 20 3 2 no n m u s l i m 18 20 3 8 p ri med 1 8 2 0 3 8 muslim 7 9 16 non-muslim 11 11 22 un p ri med 1 2 2 0 3 2 muslim 5 11 16 non-muslim 7 9 16 r a ti o s ( %) s i n g a p o re m a l a y s i a to ta l s a mp l e s u b to ta l 1 0 0 % 1 0 0 % 1 0 0 % m u s l i m 40% 50% 46% no n m u s l i m 60% 50% 54% p ri med 6 0 % 5 0 % 5 4 % muslim 23% 23% 23% non-muslim 37% 28% 31% un p ri med 4 0 % 5 0 % 4 6 % muslim 17% 28% 23% non-muslim 23% 23% 23% ijief: international journal of islamic economics and finance vol. 1 (2), pg 145-164, january 2019 analysis of e-banking acceptance in oman: the case of islamic banks’ customers abdelghani echchabi higher colleges of technology, united arab emirates, abdelghani.mo@gmail.com salim al-hajri a’sharqiyah university, oman, drsalim_amor@asu.edu.om islam nazier tanas westcliff university, united states, islamnottingham@gmail.com article history received: november 13, 2018 revised: january 1, 2019 accepted: january 4, 2019 abstract the main objective of this study is to examine the factors that influence the customers’ intention to adopt e-banking services in oman across the islamic banking sector. this research endeavours to assess the willingness of the islamic banks’ customers to adopt these services rather than the traditional banking methods. accordingly, a sample of 300 islamic banks' customers were surveyed in different districts of oman. afterwards, linear regression and one sample t-test were utilized in order to analyse the gathered data. the findings showed that customers have high tendency of embracing and utilizing e-banking services as opposed to the conventional services. additionally, the results revealed that relative advantage, self-efficacy, ease of use, and facilitating conditions are the fundamental factors that impact the selection of e -banking by islamic banks' customers in oman. however, uncertainty had no significant effect on the intention of islamic banks’ customers to use e-banking services. these findings would significantly contribute to the theory, and the way that islamic banking sect or would be practiced and regulated. keywords: technology acceptance, theory of planned behaviour, electronic banking, islamic banking, oman jel classification : d81,g21, o32, o33, o35 @ ijief 2019 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.128 web: http://journal.umy.ac.id/index.php/ijief/article/view/128 citation: echchabi, a., al-hajri, & s., tanas, i. (2019). analysis of e-banking acceptance in oman: the case of islamic banks’ customers. international journal of islamic economics and finance (ijief), 1(2), 145-164. doi: https://doi.org/10.18196/ijief.128. mailto:abdelghani.mo@gmail.com mailto:drsalim_amor@asu.edu.om mailto:islamnottingham@gmail.com echchabi, al-hajri, & tanas | analysis of e-banking acceptance in oman: the case of islamic banks’ customers ijief: international journal of islamic economics and finance, 1(2), 145-164| 146 introduction contemporary islamic finance has emerged in the past few decades not only as a complementary component in dual banking systems, but has also been positioned as a viable alternative to the long existing conventional banking system in many countries. however, the conventional banking system is still relatively dominant in many aspects. one of these aspects is the advanced and improved electronic banking (e-banking) system that was conceived and set up long before the establishment of the modern islamic banking system. it is evident in this regard that having a developed and secure e-banking system contributes in enhancing the performance and efficiency of banks, and attracting and retaining customers as well (chong, ooi, lin and tan, 2010; jalal, marzooq and nabi, 2011; alhinai, et al., 2013; alkailani, 2016). ebanking is also known as internet banking, online banking, web banking, and virtual banking. this form of banking allows the users to manage their bank accounts and perform various banking transactions via the internet and using their smartphones without the need to visit a bank branch. in oman, islamic banking was introduced in 2012 by the establishment of the first islamic bank, namely, bank nizwa after the release of the islamic banking regulatory framework (ibrf) by the central bank of oman, officially allowing the introduction of full-fledged and islamic banking windows in the country. this was subsequently followed by the introduction of other islamic financial institutions including meethaq islamic bank, al-yusr islamic bank, and al-izz islamic bank. since its introduction in oman, the islamic banking industry has registered a robust and steady growth, estimated at an average annual growth of 14 per cent in financing by the end of 2017 1 . however, it still faces high and tremendous competition from the long-established conventional banks in many regards. it is noteworthy that in other settings (e.g. malaysia), it was observed that one of the reasons why some islamic banks were not patronised by customers is their lack of a handy, advanced and effective ebanking system (echchabi and olaniyi, 2012). as such, the purpose of this study is to explore and evaluate the adoption patterns of e-banking services by islamic banks’ customers in oman, and the factors that influence their decisions. this will certainly provide significant insights to the islamic banks’ managers for the improvement of the banking technologies and enhancement of the competitiveness with the conventional banks. 1 https://timesofoman.com/article/122448 accessed on october 14th, 2018 echchabi, al-hajri, & tanas | analysis of e-banking acceptance in oman: the case of islamic banks’ customers ijief: international journal of islamic economics and finance, 1(2), 145-164| 147 the rest of the paper is organised according to the following section: the second section will discuss the major studies in the e-banking acceptance by costumers in addition to the research model. the third section will detail the data which provide about the demographic information about the respondents. the forth section describes the methodology that was implemented in order to analyse the data. the fifth section is concerned about the results of the surveyed customers, while the sixth section is concerned about analysing the data. section seven is going to present the conclusion, and will be followed by the recommendation which is showed in section eight. literature review e-banking acceptance the subject of e-banking and its acceptance among banks’ customers has been heavily discussed in the previous literature both theoretically and empirically. for instance, daneshgadeh and yildirim (2014) investigated the factors impacting internet banking usage by turkish bank customers. the study covered a sample of 500 respondents and used partial least square test for data analysis. the authors found that perceived usefulness, perceived ease of use and personalization have a strong impact on the customers’ acceptance and usage of e-banking services. in another context, mukhtar (2015) attempted to evaluate the perception of e-banking services by the british bank customers. the study randomly selected a sample of 100 respondents. using simple descriptive statistics, the authors found that privacy, security, convenience, and time saving were the main important dimensions to the customers. agha and saeed (2015) examined the factors influencing customers’ acceptance of online banking in pakistan. a total of 200 respondents were randomly selected from rawalpindi and islamabad cities. using regression analysis, the authors found that perceived credibility, perceived usefulness, and social risk have a significant effect on customers’ adoption of online banking services. alkailani (2016) also investigated the perception and adoption of e-banking in jordan. the study covered a sample of 500 respondents, and used exploratory factor analysis and linear regression for data analysis. the findings revealed that perceived ease of use, perceived usefulness, perceived trust, and perceived risk have significant effect on the adoption of e-banking services in jordan. echchabi, al-hajri, & tanas | analysis of e-banking acceptance in oman: the case of islamic banks’ customers ijief: international journal of islamic economics and finance, 1(2), 145-164| 148 khater, et al. (2016) explored the factors influencing customers’ acceptance of internet banking services in sudan. the study covered a sample of 207 respondents and applied sem in the analysis. their findings indicated that internet connection quality is the main factor that has direct effect on the behavioural intention to use internet banking in sudan. in a different context, khan, et al. (2017) studied the factors leading to customers’ intention to use e-banking services in malaysia. the study covered a sample of 200 respondents. the findings showed that convenience, trust, perceived ease of use, and perceived usefulness have a significant positive impact on the customers’ intention to adopt e-banking services in malaysia. in the specific case of islamic banking, feraro-banta (2014) examined the perception of islamic banks’ customers in bahrain about e-banking services. the study covered a sample of 200 bank customers and used mixed methodology approach, triangulating both quantitative and qualitative outputs. the findings showed that islamic banks’ customers in bahrain are actively using e-banking services for their daily banking operations. furthermore, the islamic bank customers have shown high expectations regarding the e-banking services of islamic banks, especially in terms of funds’ transfer. on the other hand, zainuddin (2014) explored the determinants of e-banking adoption by islamic banks’ customers in malaysia. the author found that perceived ease of use, perceived usefulness, security, trust and cost have a significant effect on the customers’ adoption of e-banking services. moreover, perceived usefulness was fund to have the highest influence on islamic banks’ adoption of e-banking services. more recently, echchabi (2018) investigated the level of acceptance of ebanking services among islamic banks’ customers in various regions of thailand, covering a total sample of 500 respondents. the author used descriptive statistics, one sample t-test, and structural equation modelling (sem) for data analysis. the findings revealed that islamic banks' customers in thailand have a high tendency to use e-banking services across different groups. moreover, the results showed that perceived ease of use has a significant positive impact on perceived usefulness. in addition, both perceived ease of use and perceived usefulness were found to have a significant positive impact on customers' adoption of e-banking services. echchabi, al-hajri, & tanas | analysis of e-banking acceptance in oman: the case of islamic banks’ customers ijief: international journal of islamic economics and finance, 1(2), 145-164| 149 theoretical model throughout the past decades, researchers explored some useful models in order to measure the user acceptance behaviour of information technology and information systems. the proposed models are technology acceptance model (tam), theory of reasoned action (tra), theory of planned behaviour (tpb), or the diffusion of innovations theory (dit). tam has been developed by davis (1989) is a standout amongst the most well-known research models to forecast to what extend users can embrace and utilize information systems and technology. tam has been generally considered and confirmed by various researches that assessed the individual technology acceptance behaviour in various information systems concepts. in tam framework, there are two main factors that affect the user’s intention of using innovative technology, perceived usefulness and perceived ease of use. according to davis (1989, p.320), perceived usefulness refers to "the degree to which a person believes that using a particular system would enhance his or her task performance", while perceived ease of use refers to "the degree to which a person believes that using a particular system would be free of effort". these two factors are further affected by external dimensions, namely, social, cultural, and political factors (ziefle and jakobs, 2010). social factors incorporate language, skills and facilitating conditions. the used language in the information systems influences the individual’s attitude towards the developed technology. if the underlying technical language used is easy to understand, then individual is likely to exhibit a positive attitude towards the technology. the opposite is correct when the language used is challenging and complex. in this case, a negative attitude towards using the technology will be observed (ziefle and jakobs, 2010). another crucial factor regarding technology adoption concerns qualifications and skills of the potential users. in this regard, the more skilled and qualified are the users, the higher would be the positive attitude towards the technology, and vice versa. on the other hand, the facilitating conditions reflecting the extent to which the organization can provide technical support to the technology users, prepares a proper setting where the individual will be at ease in using the technology and consequently stimulates a positive attitude to adopt it (ziefle and jakobs, 2010). on the other hand, the cultural factors are mainly obtained from hofstede's cultural dimensions’ theory (hofstede, 1980), which are individualism versus collectivism (idv), uncertainty avoidance index (uai), and power distance index (pdi). the individualism versus collectivism (idv) refers to the degree echchabi, al-hajri, & tanas | analysis of e-banking acceptance in oman: the case of islamic banks’ customers ijief: international journal of islamic economics and finance, 1(2), 145-164| 150 to which one observes the connection between one's self and the group where he or she belongs (hofstede, 1997). in the individualist culture, individuals are expected to stand up for themselves and prioritise their own interests over the group’s. in contract, in the collectivist culture, the individual’s interests and decision making are based on the group which they are loyal to. uncertainty avoidance (uai) is a social dimension which measures to what extent the societies are tolerant of uncertainty. the high uncertainty avoidance societies develop rigid rules and standards which are step-wise strictly followed in order to limit obscure and uncertain conditions. on the other hand, low uncertainty avoidance societies have as few standards as possible, they endure changes and embrace the changing circumstances (hofstede and bond, 1984). power distance index (pdi) reflects to what extent individuals accept and expect equal distribution of power. high power distance societies are characterised by the autocratic relationships and inequalities between their members, while the low power distance societies are characterised by democratic relationships and equality between members (hofstede and bond, 1984). moreover, the political dimensions are mainly the effect of utilizing information systems in the political environment. this can be observed widely in social networks such as, facebook, twitter, and blogs and in social media such as, youtube, e-newspapers, videos and mobiles (teo, lee, and chai, 2008). it is noteworthy that tam was subsequently supported and applied by several empirical studies, and was also adapted by including other dimensions to suit different fields of study, including the e-banking area (echchabi, 2011; siraye, 2014; rahi, et al., 2017; fawzy and esawai, 2017). on the other hand, the tra was first introduced to the social psychology field and has been mostly used to explain the relationship between attitude and behaviour. tra suggests that behaviour is determined by an individual’s intention to be involved in a specific behaviour (ajzen and fishbein, 1980). according to tra, there are two major factors that contribute in predicting behavioural intention, namely, attitude towards the behaviour and subjective norms. the first factor is concerned with the consequences that individual can obtain if he or she performs the behaviour (outcomes). the second factor is concerned with the individual’s perception of what the referent groups would believe about his or her behaviour. echchabi, al-hajri, & tanas | analysis of e-banking acceptance in oman: the case of islamic banks’ customers ijief: international journal of islamic economics and finance, 1(2), 145-164| 151 attitude towards the behaviour mirrors the person’s belief about the desired outcome when the individual performs a specific behaviour and his or her own positive or negative evaluation of these outcomes. the theory proposed that the intention of specific behaviour would increase when the individual has a positive evaluation of the result gained from performing the behaviour (ajzen, 1991). subjective norm alludes to a person's apparent social pressure to perform or not to perform a targeted behaviour. the subjective norm is a composite dimension of regulating convictions about a specific behaviour and the person's motivation to comply with relevant others (fishbein and ajzen, 1980). normative beliefs show one's view of the impact of assessment among reference groups while motivation to comply demonstrates the degree to which the individual needs to follow the desires of the referent other (mathieson, 1991). the hypothesis suggest that individuals frequently act based on their view of what others expect from them. hence, their intention to adopt a behaviour is likely to be impacted by groups who they are belonging to. since its establishment, tra was supported by many empirical studies (e.g. sheppard, et al., 1988). however, subsequent researchers noticed lack of robustness and strength of tra, since its two dimensions were deemed not sufficient to explain human behaviour (warshaw and davis, 1985; davis, bagozzi and warshaw, 1989). hence, an additional improvement of tra was performed by some scholars, and extended later to tpb (ajzen, 1991). tpb is actually an expansion of tra, which includes a construct that incorporates the challenge or easiness of performing a given behaviour, namely, perceived behavioural control. the latter was added as a solid indicator of intention, which is deemed to have a larger effect compared to attitude and subjective norm. ajzen justified this extension of the tra for its weakness in managing behaviour over which individuals have inadequate volitional control (ajzen, 1991). particularly, perceived behavioural control is based on the study of tra and bandura’s concept of “self-efficacy”, which is associated with the idea of “how well one can execute courses of action required to deal with prospective situations” (bandura, 1982, p. 122). he postulates that three variables, namely, attitude, subjective norms and perceived behavioural control can affect behaviour. the perceived behavioural control is reflected in terms of both self-efficacy and facilitating conditions. accordingly, ajzen (1991) recommends that behaviour is significantly affected by people's trust in their own capacity to perform the behaviour. as such, ajzen proposed that on one hand, perceived behavioural control and behavioural intention will impact the actual behaviour, and on the other hand, perceived behavioural control, subjective norms, and echchabi, al-hajri, & tanas | analysis of e-banking acceptance in oman: the case of islamic banks’ customers ijief: international journal of islamic economics and finance, 1(2), 145-164| 152 attitude will influence behavioural intention. in light of the numerous researches related to tpb, ajzen articulated that the new dimension furnished a noteworthy enhancement when contrasted to tra. afterwards, several empirical studies have effectively connected tpb to the internet banking area in forecasting individuals’ intention and behaviour toward internet banking service such as, harrison, et al. (1997), liao, shao, wang and chen (1999), and klobas and clyde (2000), gopi and ramayah (2007), lee (2009), nasri and charfeddine (2012), al-ajman and md nor (2013), as well as al-shbiel and ahmad (2016). dit was introduced by rogers (1983) and could be considered as one of the oldest theories that investigate factors that influence a person’s decision to embrace an innovation or advanced technology (sahin, 2006). in this regard, rogers defines the diffusion of an innovation as “the process by which an innovation is communicated through certain channels over time among the members of social systems”. the main idea of dit is that adopting new innovation is occurs within a set of sequential procedures in order to reduce uncertainty. therefore, people need to put a substantial effort to collect information to form a believe about the new innovative technology. consequently, this belief will play a major role in making decision whether to accept or reject the technology. rogers (1983) identified five major factors of adopting new technology. first is relative advantage, which is "how much the innovation is seen as being better than the idea it overrides" (rogers 1983: 212). this requires the adopter to trade-off between the expected benefits and the cost of embracing the innovation, which can be articulated in economic or social form. the second factor is compatibility, which is defined as “how much the innovation is observed to be consistent with current values, pervious experiences, and the needs of potential adopters”. the computability of innovation is being assessed with respect to the adopter's socio-cultural values and previous innovations, and customer wants for innovative technology. regarding e-banking, innovation is reliable with the users’ present approaches for monetary transactions and the innovation does not conflict with their present values. thus, the innovation has a better opportunity to be adopted. the third factor is complexity, which describes the degree of difficulty of the innovation to be understood or used (rogers, 1983: 242). complexity shows the amount of physical or mental effort that can be exerted by the user to utilize the innovative technology. it is obvious that the idea of complexity is opposed to the ease of use concept that has been claimed by davis (1989) in tam. the forth factor is trialability, which defines the quality or the degree to which the innovation can be tested by the user prior to usage (rogers, 1983: 243). trialability provides the user echchabi, al-hajri, & tanas | analysis of e-banking acceptance in oman: the case of islamic banks’ customers ijief: international journal of islamic economics and finance, 1(2), 145-164| 153 great opportunity to explore the innovation before committing. this can be achieved for instance by releasing a demo or beta version of the digital services. thus, potential adopters can experience the service and its possible effect on their daily activities after using it. the final factor is observability, which refers to the extent to the benefits of utilizing the innovation are visible to the user as well as his social environment. this is possible since the potential users usually observe the existing users of the innovation and clearly see the advantage of adopting and using the innovation (rogers, 1983: 244). dit received wide recognition and was heavily used in behavioural studies in various fields (brown, hope, mugera, newman and stander, 2004; carter and campbell, 2011; sanni, et al., 2013; yuksel, 2015). in light of the analysis of the above empirical studies and models, it was noticed that empirical studies found inconclusive and contradicting results related to different context, and with regards to specific dimensions and factors. in addition, it was noticed that these models were sometimes merged together to reach a better understanding and prediction of behavioural decision. as such, these notes have been considered, and the following model and corresponding hypotheses have been developed: figure 1. research model echchabi, al-hajri, & tanas | analysis of e-banking acceptance in oman: the case of islamic banks’ customers ijief: international journal of islamic economics and finance, 1(2), 145-164| 154 h1: relative advantage has a positive influence on the intention of islamic banks’ customers to use e-banking services in oman h2: uncertainty has a negative influence on the intention of islamic banks’ customers to use e-banking services in oman h3: self-efficacy has a positive influence on the intention of islamic banks’ customers to use e-banking services in oman h4: perceived ease of use has a positive influence on the intention of islamic banks’ customers to use e-banking services in oman h5: facilitating conditions have a positive influence on the intention of islamic banks’ customers to use e-banking services in oman h6: the islamic banks’ customers in oman are willing to use e-banking services methodology data since the current study analyses the acceptance of e-banking services by islamic banks’ customers in oman, the study population is mainly the islamic banks' customers in various regions in oman. specifically, the estimated target sample size was 300 respondents in line with the previous similar studies in the field of innovations and technology adoption (e.g. hill, 1998; bartlett, et al., 2001; nulty, 2008; echchabi and abdul aziz, 2013). out of the distributed questionnaires, only 188 responses were usable. thus, a response rate of nearly 63 per cent was achieved. for data collection purposes, a structured questionnaire was developed to gather perceptions of the islamic banks' customers in oman regarding the ebanking services. specifically, likert type scaling was used to measure this information (where 1 = strongly disagree and 5 = strongly agree). in this regard, 28 items were listed in this section, by adapting them from the existing e-banking literature as well as the general technology adoption models (e.g. rogers, 1983; ajzen, 1991; davis, 1989; echchabi, 2011; echchabi and abdul aziz, 2013), as well as from the current finance and electronic banking literature with the necessary adaptations made for the specific context of the study. the second part of the questionnaire gathered the respondents’ demographic information, i.e. gender, age, and education level. the questionnaire was prepared in english and was translated into arabic and was subsequently distributed in both versions. echchabi, al-hajri, & tanas | analysis of e-banking acceptance in oman: the case of islamic banks’ customers ijief: international journal of islamic economics and finance, 1(2), 145-164| 155 table 1. respondents’ profile demographics categories percentage gender male 40.4 female 59.6 age less than 20 years 7.4 20 to 30 years 38.8 31 to 40 years 32.4 41 to 50 years 17 more than 50 years 4.4 education level high school level 13.3 undergraduate level 65.4 postgraduate level 21.3 the summary of the respondents’ profile in table 1 shows that 59.6 per cent of the respondents are female, while 40.4 per cent are male. regarding the age grouping, 38.8 per cent of the respondents are aged between 20 and 30 years old, 32.4 per cent of the respondents are aged between 31 and 40 years old, and 17 per cent of the respondents are aged between 41 and 50 years old, 7.4 per cent of the respondents are less than 20 years old, and finally 4.4 per cent of the respondents are more than 50 years old. in terms of education level, 65.4 per cent of the respondents are undergraduate degree holders (diploma and bachelor’s degrees), 21.3 per cent are holding a postgraduate degree, and 13.3 per cent of the respondents are high school certificate holders. analysis methods the collected data were analysed afterwards using linear regression analysis and one sample t-test through spss software version 23. it is noteworthy that in the regression model, the dependent variable is the intention to use e-banking in oman in the specific case of islamic banks, while the independent variables are relative advantage, uncertainty, self-efficacy, perceived ease of use, and facilitating conditions. hence, the linear regression equation can be written as follows: i = β0 + β1ra + β2u + β3se + β4peu + β5fc + ε (1) where β0 is a constant term βi are regression coefficients peu refers to perceived ease of use u refers to uncertainty echchabi, al-hajri, & tanas | analysis of e-banking acceptance in oman: the case of islamic banks’ customers ijief: international journal of islamic economics and finance, 1(2), 145-164| 156 ra refers to relative advantage fc refers to facilitating conditions se refers to self-efficacy i refers to the customers’ intention to adopt e-banking services and ε is an error term on the other hand, the one sample t-test is used to compare the mean value of each construct item with the neutral point of the 5-points likert scale i.e. the value of 3. this test is mainly applied to the behavioural intention items to examine the willingness of the islamic banks’ customers to use e-banking services. results and analysis results the factors included in the current model were developed using a wellstructured questionnaire. each factor was measured through at least three items. table 2 presents the reliability of each factor, which is measured through cronbach alpha. in this regard, a cronbach alpha greater or equal to 0.6 is considered to be acceptable (nunnally, 1978). the results indicate the cronbach alpha for the factors is between 0.721 and 0.859. hence, the measurement is reliable and valid. in order to test the hypotheses posited above, linear regression is used for the first five hypotheses, while one sample t-test is used to test the sixth hypothesis. table 3 summarises the linear regression that outlines the factors that influence the customers’ intention to use e-banking services. the findings reveal that relative advantage has a significant positive effect on the intention of islamic banks’ customers to adopt e-banking services. hence, hypothesis 1 is supported. in contrast, the uncertainty associated with the e-banking transactions was found to have no significant effect on their adoption by islamic banks’ customers. thus, hypothesis 2 is rejected. on the other hand, the results indicate that self-efficacy has a significant positive effect on the intention of islamic banks’ customers to use e-banking services. as such, hypothesis 3 is supported. echchabi, al-hajri, & tanas | analysis of e-banking acceptance in oman: the case of islamic banks’ customers ijief: international journal of islamic economics and finance, 1(2), 145-164| 157 table 2. reliability measures table 3. linear regression output model unstandardized coefficients standardized coefficients t sig. b std. error beta (constant) 1.076 .327 3.290 .001 relative advantage .190 .061 .222 3.099 .002 uncertainty -.037 .064 -.039 -.574 .567 self-efficacy .128 .064 .138 2.017 .045 perceived ease of use .211 .070 .215 3.025 .003 facilitating conditions .264 .055 .309 4.770 .000 in addition, the relative ease of use of the e-banking services was found to have a significant positive effect on their adoption by the omani islamic banks’ customers. hence, hypothesis 4 is supported. similarly, the facilitating conditions have a significant positive effect on the adoption of e-banking services by omani islamic banks’ customers. thus, hypothesis 5 is supported. in summary, out of the factors initially included in the model, four were found to have a significant impact on the islamic banks’ customers’ intention to use e-banking services in oman, namely, relative advantage, self-efficacy, perceived ease of use, and facilitating conditions. these factors explain 33.6 per cent of the islamic banks’ customers to use e-banking services. finally, to test the willingness of the islamic banks’ customers to use ebanking services, one sample t-test was applied and its results are summarised in table 4. in this regard, the results show high positive t-values for all the behavioural intention items, with significant probability values. this indicates that the islamic banks’ customers in oman are willing to use ebanking services. thus, hypothesis 6 is supported. constructs cronbach alpha relative advantage 0.787 uncertainty 0.755 self-efficacy 0.859 perceived ease of use 0.721 facilitating conditions 0.799 behavioural intention 0.828 echchabi, al-hajri, & tanas | analysis of e-banking acceptance in oman: the case of islamic banks’ customers ijief: international journal of islamic economics and finance, 1(2), 145-164| 158 table 4. one sample t-test t df sig. (2-tailed) mean difference bi1 11.944 187 .000 .77660 bi2 12.641 187 .000 1.00000 bi3 11.776 187 .000 .82979 bi4 15.209 187 .000 .90426 bi5 12.052 187 .000 .70213 bi6 11.984 187 .000 .74468 analysis the above findings are in line with rogers (1983), agha and saeed (2015), alkailani (2016), zainuddin (2014), and echchabi (2018) with regards to the relative advantage of e-banking services compared to the traditional methods of banking and its significant positive effect on the customers’ intention to use e-banking services. this advantage is primarily valued by customers in terms of the total cost of transactions, and time-saving advantage when using e-banking services, as well as the additional social prestige generally offered by these services. the findings are also in line with ajzen and fishbein (1980) regarding selfefficacy that was found to have a significant positive effect on intention to use e-banking services. this indicates that generally, the omani islamic bank customers perceive themselves to have the required technical skills and knowledge that help them to use e-banking services, as they are currently offered. on the other hand, regarding ease of use, the findings are in line with davis (1989), daneshgadeh and yildirim (2014), alkailani (2016), khan, et al. (2017), zainuddin (2014) and echchabi (2018) who found that ease of use has a significant positive effect on the intention to use e-banking services. particularly, ease of use for the e-banking services is mainly measured according to the extent to which it is easy for the customers to conduct the daily banking operations, the extent to which the banking procedures are easy and clear to be understood, as well as the extent to which e-banking services are easy to use for the continuous management and follow up of bank accounts. hence, these dimensions significant in understanding behaviour towards e-banking and should be stressed by the decision makers and practitioners to further enhance the use of e-banking by islamic banks’ customers in oman. echchabi, al-hajri, & tanas | analysis of e-banking acceptance in oman: the case of islamic banks’ customers ijief: international journal of islamic economics and finance, 1(2), 145-164| 159 the findings are also in line with ajzen (1991) with regards to the facilitating conditions that were found to have a significant positive effect on customers’ intention to use e-banking services. these conditions mainly refer to the government encouragement and support of e-banking services, the social environment support of the implementation of e-banking services, as well as the level of country's safety, political stability and security that indirectly favour the use of e-banking services. as such, the government authorities have a major role to play in order to enhance the islamic banking practice in terms of e-banking services. nevertheless, the findings of the current study contradict with the suggestions by rogers (1983) regarding uncertainty which was found to have no significant effect on the customers’ intention to use e-banking services. this might be explained by the fact that the omani customers perceive the e-banking services offered by islamic banks as relatively trustworthy/not risky, and reliable. as such, it is not considered a significant factor that influence the customers’ decision to use e-banking services or otherwise. however, these findings are in line with the low uncertainty avoidance societies that usually embrace changing circumstances, and have relatively higher tolerance for uncertainty (hofstede and bond, 1984). finally, the findings showed high tendency of islamic banks’ customers in oman to use e-banking services. this indicates that the respondents are satisfied with their e-banking experience and intend to continue using these services and their enhanced versions in the future. this is illustrated by their appreciation of the relative advantage and ease of use of e-banking that are prerequisite for regularly using it in their daily transactions, together with the facilitating conditions that should be consistently preserved and maintained by the government authorities. conclusion and recommendation conclusion in summary, the main purpose of the current study was to analyse the perception of e-banking services among islamic banks’ customers in oman and the factors that might influence their decision. accordingly, linear regression analysis and one sample t-test were used to analyse data obtained from 188 omani islamic banks’ customers. overall, the findings showed high tendency and willingness of islamic banks’ customers in oman to adopt e-banking services. furthermore, the findings revealed that relative advantage, self-efficacy, perceived ease of use and facilitating conditions echchabi, al-hajri, & tanas | analysis of e-banking acceptance in oman: the case of islamic banks’ customers ijief: international journal of islamic economics and finance, 1(2), 145-164| 160 have a significant positive impact on e-banking adoption by islamic banks’ customers, while uncertainty had no significant effect on e-banking usage. it is noteworthy that the model used in this study is a valuable extension of the innovation and technology adoption models. moreover, the above findings provide empirical support to the model, and provide evidence of its applicability and suitability to similar settings. in addition, these findings provide clear guidelines to the practitioners and policymakers on the core dimensions to be stressed in order to promote the effective adoption of ebanking services in oman for islamic banks’ customers, and which is expected to increase the competitiveness of islamic banking in the dual banking sector of oman. particularly, the practitioners should focus on the relative advantage of e-banking services compared to the traditional services, in terms of cost and time saving, efficiency. in addition, the government authorities are required to set up all the required conditions and regulations that contributes to the proper and safe execution and management of the advanced technological banking services. moreover, it is recommended that islamic continuously update the customers on the latest technological applications and services that can enhance the performance of their daily banking transactions. these advances in the banking technology have to be as much as possible made easy and handy to the customers. recommendations finally, the future studies are recommended to extend the current findings to other settings in order to test and validate the model developed in the current study. moreover, they are recommended to cover a larger sample that includes the customers of both islamic and conventional banks and compare between them to identify any differences in adoption patterns. similarly, the future studies are recommended to compare between the customers’ perception and expectations regarding the e-banking services offered by islamic banks. this will help the islamic banks to make the necessary developments to satisfy and retain their customers by providing them better e-banking services. as a result, they would have an opportunity to position themselves in a favourable competitive position with the conventional 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(2010). new challenges in human computer interaction: strategic directions and interdisciplinary trends. presented at the 4th international conference on competitive manufacturing technologies. university of stellenbosch, south africa. international journal of islamic economics and finance (ijief) vol. 4(2), page 233-262, july 2021 integration of knowledge (iok) methodological reasoning of islamic economics (ie) as the wisdom of humanity: a heterodox economic approach jasmin omercic unaffiliated phd graduate in economics (iium), bosnia and herzegovina corresponding email: omercic_jasmin@hotmail.com article history received: april 29th, 2021 revised: july 20th, 2021 accepted: july 22nd, 2021 abstract the world increasingly needs an alternative approach to economic development. this paper endorses the integration of knowledge (iok) approach as the wisdom of humanity through islamic economics (ie). a review of relevant literature through qualitative methodologies of library research, discourse and critical content analysis highlights the civilisational practices of integration, how development of economics diverged from such practices and how heterodox approaches reacted to such divergence. a section on learning the wisdom of humanity from each other emphasizes the inevitable historical civilizational integration (iok) and exchange of knowledge. it follows with a literature review of the development of mainstream economics, how it abandoned such historical civilizational practice and its sound foundations, namely ontology, epistemology, axiology and methodology. a highlight of heterodox economics (he) responses reveals the alternatives to the mainstream-focused positivistic approach to economics. the inadequacy of those alternatives led us to demonstrate muslim responses and the centrality of ie as a comprehensive alternative heterodox economic approach. the analysis shows how ie grew along islamisation of knowledge (iok) as two parallel and major intellectual iṣlaḥ (reform) and tajdīd (renewal) movements. a brief review of the development of each shows the potential of ie’s iok methodological reasoning to revive the iok approach in economics as the wisdom of humanity. the sound ie philosophical foundations, namely ontology, epistemology, axiology and methodology, have a major impact in that process. thus, utilising the core iok objective within iok together with ie contributions shape the process of overcoming problems and issues of mainstream economics. actionable recommendations to practitioners and academics depict how the ie approach to economics could be implemented and sustained along sdgs agenda. keywords: heterodox, islamic economics, integration of knowledge (iok) methodology, wisdom. jel classification: b10, b41, b50, n01. type of paper: systematic review @ ijief 2021 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.v4i2.11658 web: https://journal.umy.ac.id/index.php/ijief/article/view/11658 citation: omercic, j. (2021). integration of knowledge (iok) methodological reasoning of islamic economics (ie) as the wisdom of humanity: a heterodox approach. international journal of islamic economics and finance (ijief), 4(2), 233-262. doi: https://doi.org/10.18196/ijief.v4i2.11658 https://doi.org/10.18196/ijief.v4i2.11658 https://doi.org/10.18196/ijief.v4i2.11658 https://crossmark.crossref.org/dialog/?doi=10.18196/ijief.v4i2.11658&domain=pdf omercic│ integration of knowledge (iok) methodological reasoning of islamic economics (ie) as the wisdom of humanity: a heterodox economic approach international journal of islamic economics and finance (ijief), 4(2), 233-262 │234 i. introduction 1.1. background the disparaging reality of economics with its frequent crises led to diverging perspectives of how the future of economics might look. works like omercic, haneef and mohammed (2020) highlighted the foundational problems of mainstream economics as an ontology limiting the nature of being to physical objects, an epistemology limited to reason and experience as sources/theory of knowledge, futility or marginalisation of axiology (ethics, morality) followed by a deficient methodology. this paper explores and shows in greater detail why the foundational problems of mainstream economics require an alternative. it starts by showing how the abandoned learning and integrating the wisdom of humanity from each other was the practice among civilisations. this is the motivation of our paper in further exploring how that evolved in economics. economic interests were always central in decision making. while later paragraphs elaborate such learning practices from each other more generally and identify the papers’ objectives, a subsequent literature review of the development of mainstream economics reveals how the discipline abandoned its historical foundations and wisdom and pursued a positivistic material approach to economic analysis. then, an insight into heterodox economics (he) responses to the hegemony of mainstream economics highlights commendable alternative approaches to economic analysis but most left problems of foundations unaddressed. these are gaps which promote ie as an alternative heterodox approach, considering muslim responses through iṣlaḥ (reform) and tajdīd (renewal) movements. a thorough analysis of notable intellectual movements of islamisation of knowledge (iok) and islamic economics (ie) as holistic heterodox responses to the materialist western civilisational practice and worldview, and the problems of mainstream economics demonstrates the centrality of integration of knowledge (iok) methodological reasoning of ie based on sound foundations and its potential to overcome problems of mainstream economics. in order to understand the significance of such ie reasoning, we must delve into the greater meaning of learning from each other as the wisdom of humanity and relate it to economics. learning from each other: the wisdom of humanity each civilisation benefitted from the grand achievements of the other, and over years accumulated knowledge that benefits humanity today. each civilisation had particular features and a context that gave it an advantage over the other in some respects, but the exchange of goods and knowledge benefited humanity as a whole (nasr, 1996). despite the existing rivalry omercic│ integration of knowledge (iok) methodological reasoning of islamic economics (ie) as the wisdom of humanity: a heterodox economic approach international journal of islamic economics and finance (ijief), 4(2), 233-262 │235 between civilisations, the greater good and the inevitability of interaction between civilisations and the exchange of knowledge always accumulated new or integrated knowledge to benefit future generations. learning from each other was continuous irrespective of human will (nasr, 2006, 2006a). however, it is also incumbent to critically evaluate each civilisation’s contribution. when the qur`an was revealed, the roman and persian civilisations were rivals, yet each contributed to humanity. the islamic civilisation adopted some contributions after critical analysis and adapted it to its philosophical foundations rooted in the qur`an, sunnah, ijma, qiyas, and others (karčić, 1990; çizakça, 2000). the islamic civilisation enhanced and developed new knowledge (saliba, 2007). such enormous enrichment from the universal wisdom of humanity is necessary today to overcome problems of disciplines like mainstream economics. it justifies and motivates the approach of this paper and revives the iok methodological reasoning approach to civilizational and economic development particularly within ie as the wisdom of humanity. we, however, shall also utilise the excellent practices of mainstream or he to benefit humanity. however, learning and integrating the achievements of civilisations are easier said than done; it takes time, and could lead to conflicts (nasr, 2006, acikgenc, 2014). samuel huntington’s portrayed this interaction and exchange or integration as “clash of civilisations” and mainstream economics emulated it so greatly (said, 1979). but karčić (1990) refuted huntington’s view by pointing out how civilisations learn from each other and cooperate, like during the times of the islamic civilisation that interacted more peacefully than any civilisation with older civilisations. for centuries, it preserved, enhanced, and integrated the knowledge and wisdom of humanity based on sound foundations, namely ontology, epistemology, axiology, and methodology derived from the sources of knowledge in islam (haneef, 1997; furqani, 2012; omercic et al., 2020). we define it in this paper as iok based on iok for ie development. the foundations always involved an interplay of metaphysical and physical realms of which those of the former are central and the source of all knowledge, i.e. qur`an – allah’s swt revelation and sunnah as its prophetic exemplification, peace be upon him (pbuh). such high respect for knowledge was never attained by any other civilisation according to toynbee (1987) and wain and kamali (2018). it was the source of inspiration for the western intellectual revival since medieval times through the enlightenment, reformation, scientific revolution, and others (pribram, 1983). the scientific paradigm is particularly significant and became dominant since the mid-19th century (kuhn, 2012), and since then, has benefitted humanity with its scientific wisdom. integration occurred but took time and had its share of difficulties and tensions. omercic│ integration of knowledge (iok) methodological reasoning of islamic economics (ie) as the wisdom of humanity: a heterodox economic approach international journal of islamic economics and finance (ijief), 4(2), 233-262 │236 however, said’s (1979) ‘orientalism’ pioneered the depiction how the west misused science and moulded its revival through the selective use of the wisdom of the islamic civilisation while discarding its philosophical foundations (acikgenc, 2014; bakar, 2019), ethics, and religious-spiritual teachings (nasr, 2010). those foundations, however, were the sources of divine guidance of all past civilisations. it ensured unity in diversity and vice versa, the multiplicity in diversity and vice versa, and unity leading to unity (nasr, 2006; wain & kamali, 2018). by abandoning such foundations, the western discipline of economics became the leading force of poverty, inequality, and financial crises (mirakhor, 2020). according to sardar and henzell-thomas (2017), and mahomedy (2016, 2017), the western rejection and muslim failure to uphold its foundations besides other internal problems of the islamic civilisation shows that the discourse on learning from each other is necessary to enhance the interaction, exchange, and knowledge integration in contemporary times. it is necessary to revive the iok methodological reasoning and clearly a rationale and motivation of this paper. thus, we clarify the objectives of this paper in next section and continue with a literature review of the development of economics to understand the urgency of such iok as the wisdom of humanity in greater depth while also highlighting the problems of mainstream economics and why ie is a suitable alternative. 1.2. objective the earlier section identified the significance of the rationale and motivation of this paper to revive the practice of learning from each other as the wisdom of humanity generally and in economics particularly. we opt to conceptualise it as the ‘iok methodological reasoning’ in contemporary times. hence, we can openly state that the main objectives of this paper are to review how development of economics abandoned such iok methodological reasoning and how the heterodox alternatives responded to it; and to analyse and demonstrate the potential of ie to revive such reasoning in development of economics. these objectives identify the importance of holistic and multidimensional approaches in addressing problems and issues of economics through iok methodological reasoning of ie. it explains why ie is increasingly appraised in research as the alternative to orthodox economic reasoning. moreover, such an ie offers a sound basis upon which problems of islamic banking and finance can be resolved in light of certain maqaṣid. simultaneously, we can plan concretely towards faster attainment of sdgs. the following literature review addresses how development of economics diverged and ignored iok methodological reasoning as well as how heterodox omercic│ integration of knowledge (iok) methodological reasoning of islamic economics (ie) as the wisdom of humanity: a heterodox economic approach international journal of islamic economics and finance (ijief), 4(2), 233-262 │237 approaches responded to the general course of orthodox economic reasoning. this identifies gaps that the paper aims to fill through an extensive analysis of mutual benefit and potential of iok methodological reasoning within iok and ie responses to orthodox economic reasoning. however, a methodology section of this paper precedes the analysis and results or findings section. lastly, we extrapolate how such an ie development with an iok methodological reasoning boosts development of islamic banking and finance and eases attainment of sdgs. we conclude and provide actionable recommendations for practitioners, academics and further research. ii. literature review the following brief review on the development of economics eases comprehension how economists ignored iok methodological reasoning in problem solving or decision making. such a contrast to the muslim civilisational practice and their own tradition is a gap which popularises alternative (heterodox) economic reasoning. it gained momentum with frequent crises in orthodox economic reasoning, yet inadequacy of western heterodox responses becomes apparent with the iok approach to ie development in this paper based on iok. we then analyse these thoroughly and present results in the final section of this paper. 2.1. development of economics economics was always part of human life and developed as a modern discipline since the 16th century enlightenment in the west according to pribram (1983). for the western civilisation, its roots stem from greek and roman philosophy and ignore the contributions of the islamic civilisation to multidisciplinary development and thought like economics from the 7th century until its gradual weakening during the 17th century in view of malkawi, (2014) and saliba (2007). however, this does not mean that the intellectual activity of the muslims did not continue past the 17th century (nasr, 2006a). economics or iqtisad developed as an integral part of islam, as a way of life, reflective in idarah or administration, waqf or endowment, zakah, or almsgiving, sadaqah or charity and foremost the trading in the market of madinah (chapra, 2001, 2016; çizakça, 1998). interaction, integration and exchange of knowledge and wisdom of humanity with the greek and roman heritage was a common practice of the islamic civilisation as noted by koehler (2014) and saliba (2007). omercic│ integration of knowledge (iok) methodological reasoning of islamic economics (ie) as the wisdom of humanity: a heterodox economic approach international journal of islamic economics and finance (ijief), 4(2), 233-262 │238 in the islamic civilisation, bakar (2019) showed that imam al-ghazali (10581111ac) classified ‘sciences of transactions (mu‘amalat)’, comprising economics, under the sub-category of the sciences of branches (furu‘) or derived principles of the category of religious sciences (u‘lum shar‘iyyah). alghazali perceived economics as a religious obligation under the fard al-kifayah (collective obligations), the category that needs to be studied as a person’s obligation to society. more than a century after al-ghazali, qutb al-din shirazi (1236-1311ac) categorised ‘economics’ under the practical philosophical sciences (u‘lum hikmiyy). all the above implies that economics requires robust philosophical foundations, namely ontology, epistemology, axiology, and methodology, derived from the sources of knowledge in islam as elaborated by haneef (1997) and furqani (2012). thus, an iok methodological reasoning prevailed during those times in practice and theory like islamic law, politics and even economics. however, modern western mainstream economics stopped interaction, integration or iok methodological reasoning, exchange and learning from the wisdom of humanity. the west was convinced it has superior knowledge with the rise of positivism and the scientific revolution that brought about prosperity, but its ineffectiveness and inherent economic instability proved otherwise according to mahomedy (2016), chapra (2016) and omercic et al. (2020). it became obvious to many scholars that mainstream economics suffers from inherent foundational problems that exacerbate its crisis (stiglitz, 2019; mirakhor, 2020). in view of omercic et al. (2020), it suffered due to the missing iok methodological reasoning in economics. the next sections shall depict such a crisis in greater detail. 2.1.1. the multidisciplinary, ethical and moral approach to economics before dichotomisation thoughts and apprehensions about economics were always treated in a cross and interdisciplinary fashion as ibn khaldun (1332-1406) elaborated in his magnum opus ‘muqaddimah (introduction)’ as noted by weiss (1995) and alatas (2014). scholars like ibn khaldun adopted a broad ontology, epistemology, axiology, and methodology that fostered multi-disciplinarity with reference to the physical and metaphysical worlds according to alatas (2014) and acikgenc (2014). this is what we earlier conceptualised the iok methodological reasoning based on iok. ghazanfar (2003) perceived that such was also the reasoning and writings of greek and roman philosophers, later scholastics (13th century) like thomas aquinas (d.1274) and albertus magnus (d.1280), and the early western enlightenment scholars. it is the collective wisdom of humanity. omercic│ integration of knowledge (iok) methodological reasoning of islamic economics (ie) as the wisdom of humanity: a heterodox economic approach international journal of islamic economics and finance (ijief), 4(2), 233-262 │239 to develop economics, the west rejected the islamic philosophical foundations because of the belief in the supremacy of christian teachings of morality and ethics but pribram (1983) and schumpeter (1954) showed that the west failed to uphold even its own teachings. moreover, contemporary research depicted the schumpeterian gap in western economics (samuels, biddle, & davis, j. b, 2008) as the age of intellectual flourishing of the islamic civilisation that inspired western economic and other thought. hence, haneef (2014, 2005) called for a multidisciplinary and pluralistic methodological approach to discipline development as islam promoted which the west abandoned without justification. saliba (2007) showed that marginalisation of morality, ethics or religion is result of secularisation and reflects a paradox and cognitive dissonance of mainstream economic thought and contrasts findings of islahi (2005, 2014), mirakhor (2020), omercic et al. (2020), to name a few. the physicalist ontology, rationalist epistemology, futile axiology, and deficient methodology problems of mainstream economics are results of such neutralisation. thus, this paper depicts ie development through the iok methodological approach (based on iok) as the solution. the 16th century enlightenment, reformation, and renaissance thinkers’ development of a purely secular and rationalist approach to economics, moulding it along the line of physics, mathematics, or newtonian science, according to zaman (2010, 2013), failed to realise that newton was highly religious in view of saliba (2007). even weber’s (2002) claim of the superiority and salvation via the protestant ethic in relation to a purely secular approach to economics led to the evolution of the spirit of capitalism and secularisation in the name of science. this scientific shift intensified in the middle of the 19th century and stripped away normative aspects or theological ratiocination in western economics (kuhn, 2012). the west then nurtured such positivist, mechanistic, material, dry, causality, and greed-based self-centric economic thought according to hunt (2016). thus, the focus on scientific and rejection of metaphysical reasoning in economics is a root cause of mainstream economics’ instability, indebtedness, income inequality, and poverty. scholars like omercic et al. (2020), mahomedy (2016, 2017), and furqani (2012) showed that those issues result from the flawed philosophical foundations of mainstream economics and suggested ie as an alternative that we appraise via iok methodological reasoning in this paper as the revival of the wisdom of humanity. 2.1.2. dichotomisation of economics thus, in the course of the eighteenth century, economics was transformed from a moral discipline into science the propositions of which were derived omercic│ integration of knowledge (iok) methodological reasoning of islamic economics (ie) as the wisdom of humanity: a heterodox economic approach international journal of islamic economics and finance (ijief), 4(2), 233-262 │240 from a few abstract premises and were largely free from normative connotations. (pribram, 1983, p. xlix) the initial dichotomisation of economics into positive and normative during the 18th century led to dominance of positivistic economics from the mid-19th century according to hunt (2016). while some say that positive economics started with the writings of adam smith (heilbroner & milberg, 1995), his thought was infused with morality and ethics yet stratified from his theory of moral sentiments with roots to the 13th century and the islamic influence from the 7th to 13th centuries in view of arif (1985, 1987). thus, normative economics guided and worked together with positive economics within sound philosophical foundations that we need to revive as part of the wisdom of humanity or iok methodological reasoning and integrate beneficial modern economic and other knowledge. however, the west gave positive economics unique precedence. argyrous and stilwell (2011), putnam and walsh (2012) and others tried to reappraise the role of normative economics but the scientific paradigm persevered. according to screpanti and zamagni (2005), most classical economists supported the scientific paradigm in the quest for preciseness in economic like in physics and mathematics. however, putnam and walsh (2012) revealed that it was just scientifically probable and fallible in relation to scientific postulates. thus, it needs a more dynamic approach with sound philosophical foundations as proposed by furqani (2012, 2015, 2017) and omercic et al. (2020). 2.1.3. from classical and keynesian to neoand post-types of economics with the breakthrough of keynesian economic thought during the great depression began the rivalry between multiple streams and schools of economics (froyen, 1996, 2009; lee & lavoie, 2013). constant issues like high us inflation and unemployment contradicted macroeconomic theory defined as the philips curve and led to different schools of economics including heterodoxies (lee & lavoie, 2013). for instance, froyen (2009) claimed that monetarism is supposed to curb inflation with the periodical supply of money to ensure sufficient supply, but prolonged periods of high inflation and rising debt levels led to post-keynesian economic thought (left and right keynesians). post-, neoor other types of economics provided no solution to such issues which increasingly challenged mainstream economics in view of keen (2011). issues of rising income inequalities, uncontrolled inflation, rising debts and mortgages, poverty, unemployment, environmental degradation, climate change, and others inflated the issues and problems with mainstream economics during the 20th and 21st centuries (stiglitz, 2019; mirakhor, 2020). omercic│ integration of knowledge (iok) methodological reasoning of islamic economics (ie) as the wisdom of humanity: a heterodox economic approach international journal of islamic economics and finance (ijief), 4(2), 233-262 │241 the 2008 recession reflected the continuity of the instability and failure of mainstream economics that led piketty (2014) and chapra (2016), to name a few, to express the need to change the approach and explore alternatives like ie to the existing economic narrative, analysis, and development for greater genuine and universal social welfare (omercic et al., 2020). the critique of mainstream economics’ flawed foundations (mahomedy, 2016, 2017), emphasis on its irrational exuberance (shiller, 2015) and indication of its cognitive dissonance (ayub, 2009; irfan, 2015) renders the mainstream economics approach the root cause of many human problems. according to ormerod et al. (1997), keynes’s words ‘no one has the gospel’ and apparent paradoxes show the need for a greater moral and ethical approach to developing economics (putnam & walsh, 2012; furqani, 2012, 2015, 2017). this requires reviving of iok methodological reasoning as the wisdom of humanity to develop ie and resolve issues of mainstream economics. 2.1.4. the need for normative economic alternatives the greater marginalisation of normative economics (norms, ethics, morality, beliefs, religion) since the 20th century proved detrimental within the everincreasing nihilistic economic order in view of boland (2003) and mirakhor (2020). the progressive rise of inequalities and other economic issues led to the demand for more ethical and moral responsibility and this signals the ‘death’ of economics as science according to lee and lavoie (2013), stiglitz (2010) and putnam and walsh (2012), to name a few. according to stiglitz (2019), economics is a progressing science, meaning that pure science-based economic approaches are wrong. this justifies our appraisal and review of ie with its iok methodological reasoning as a distinct heterodox approach to overcome problems of mainstream economics. insight into heterodox economic alternatives to the mainstream clarifies even more why the ie approach is most suitable. 2.1.5. heterodox economics (he) as alternatives to the mainstream 2.1.5.1. heterodox alternatives before the greater ‘he’ block this review of he as alternatives to mainstream orthodox economics highlights the heterodox alternatives as they existed before the formation of a greater block of ‘he’ according to lee and lavoie (2013). several economic ideas other than mainstream economics existed by end of the 19th century and throughout the 20th century. in carson, thomas and hecht (2005) and oatley (2015), we find categories of conservative, liberal, and radical. frieden and lake (2000) explained that the conservative alternative drew ideas from adam smith omercic│ integration of knowledge (iok) methodological reasoning of islamic economics (ie) as the wisdom of humanity: a heterodox economic approach international journal of islamic economics and finance (ijief), 4(2), 233-262 │242 (1732-1790) and preferred a mercantilist style of economics with features of a more closed economic system, monopoly rights, and trade restrictions imposed by governments. the liberal alternative called for economic liberalisation, labour unions, welfare and ‘big government’. to this end, franklin roosevelt envisioned a more balanced political economy (oatley, 2015, carson et al., 2005). liberals mainly referred to the thought of john maynard keynes (1883-1946ac) and their role becomes important in the later development of he with greater emphasis on general social welfare according to hunt (2016) and lee and lavoie (2013). liberals are also institutionalists like john kenneth galbraith and robert heilbroner. lastly, the radical alternative is always associated with karl marx. it is very popular in academia due to a general critique of capitalism, its nature, etc. (heilbroner & milberg, 1995; carson et al., 2005). sadr (1987, 1982 vol.1&2-part1&2, 2016) systematically reviewed marxist economic thought and highlighted its significant critique of mainstream economics’ ontological, epistemological, axiological and methodological foundations. sadr showed how it did not provide a better alternative to such foundations and appraised ie as a solution. 2.1.5.2. he ‘he’ existed as early as the 1870s after the neoclassical revolution along with socialist critique of mainstream capitalism. these included advocates of various economic schools (i.e. historical school, forms of mercantilism) of which some were adherents of conservative, liberal and radical economic thought (i.e. marxists, institutionalists) according to lee (2009, 2011). today, ‘he’ comprises a pool of economic traditions, i.e. austrian, feminist, green, institutionalist, marxian, post-keynesian, radical, sraffian, social and other newer, existing or older traditions of economics (association of heterodox economics, 2020; power, 2012). heterodox economic thought challenges the irrational exuberance of mainstream economics (shiller, 2015), detachment from reality, theoretical and mathematical abstractness, etc. and joined he in view of keen (2011) and is hard to define. nevertheless, the 2003 international confederation of associations for pluralism in economics (icape) defined its mission to promote pluralism in economics. according to davis (2008), icape helped to identify three specific commitments of he, namely (1) rejection of the atomistic individual conception in favour of a socially embedded individual conception; (2) emphasis on time as an irreversible historical process; and (3) reasoning in terms of mutual influences between individuals and social structures. these, however, do not distinguish whether an economic tradition is orthodox or heterodox. thus, davis (2008), lee (2009) and others stated that a tradition is heterodox if it (1) failed to become orthodox following a period of pluralism; (2) lost the status of orthodox when a new orthodoxy emerged; (3) fails to redirect orthodoxy from outside orthodoxy; and (4) fails to redirect omercic│ integration of knowledge (iok) methodological reasoning of islamic economics (ie) as the wisdom of humanity: a heterodox economic approach international journal of islamic economics and finance (ijief), 4(2), 233-262 │243 orthodoxy from inside orthodoxy. for example, post-keynesianism became part of he in 2010 after eminent post-keynesian economist marc lavoie and eminent heterodox economist fred lee realised that their critique of mainstream economics had much in common. similarly, the post-autistic economics network (paecon) that started in 2000 became part of he because of a thorough drive to review the general curriculum of mainstream economics through an international open letter (post-autistic economics network, 2020). paecon focused more on behavioural aspects, cultural and historical heritage and context, including new empirical theories and methods, and a multidisciplinary approach to economics in view of fullbrook (2002). because of the heterogeneity of he, traditions overlapped in the critique of mainstream economics and share an emphasis on issues of justice, social relationships in terms of class, gender, and race, the wealth of nations, full employment, economic and social reproduction and accumulation (power, 2012). lee (2009) summed up these shared concerns through a definition of economics as “the science of the social provisioning process” (p.8) while examining “how capitalism works” (p.9). greater social welfare is a commendable heterodox position while not rejecting the contributions of mainstream economics. however, it is inevitable to notice how most, if not all, he traditions have no clear stance towards the role of religion or metaphysics within historically relevant philosophical foundations (ontology, epistemology, axiology, methodology) of economics as reviewed earlier. nasr (2006) and hunt (2016) claimed that there is a phobia, reluctance, or lack of will to include religion into the discourse of life and economics particularly. thus, he requires sound foundations that cannot be compromised while maintaining a heterogeneous approach to economic analysis. this paper’s ie development via the iok approach based on iok is a more worthwhile and holistic heterodox alternative because it welcomes all good contributions of orthodox and he and is open for common religious perspectives and dialogue that do not contradict foundational islamic teachings. a thorough analysis reveals more after the methodology section. iii. methodology before the results and analysis of the diversified muslim responses to earlier reviewed development of economics, we specify the methods used in this paper’s qualitative methodological approach. ritchie and lewis (2003) perceived the results of such approaches thorough and reliable due to the demonstrative logic. methods like extant literary review, discourse and critical content analysis facilitate such a narrative in this paper. it is understandable to everyone and provides alternative perceptions of phenomena in view of omercic│ integration of knowledge (iok) methodological reasoning of islamic economics (ie) as the wisdom of humanity: a heterodox economic approach international journal of islamic economics and finance (ijief), 4(2), 233-262 │244 denzin and lincoln (2008). moreover, these methods enable the researcher to extract holistic affirmative yet objective arguments which help to answer respective research objectives. moreover, the distinct nature of this paper’s subject matter compelled us to pursue a non-standardised methodology or methodological pluralism. concretisation (from general to particular and vice versa), comparative, and methods of logic (i.e. induction, deduction, synthesis) complement the method of critical content analysis and extant library research in this paper. according to hadzic (2005) and omercic et al. (2020), this is a mandatory approach due to the unique sources of knowledge of ie and iok, i.e qur’an as revelation, sunnah as prophetic pbuh heritage, fiqh and usul al-fiqh. moreover, their inherent iok methodological reasoning approach is another reason why methodological pluralism is mandatory and better. it ensures coherence of the contemporary with the traditional reasoning during the era of islamic civilisation. the objective to revive such traditional reasoning as the learning from each other the wisdom of humanity or iok methodological reasoning renders the methodological approach of this paper credible and reliable. hence, this methodology is becoming the basis upon which future studies can contribute further. iv. results and analysis 4.1. muslim responses: islah and tajdid, the iok movement and islamic economics this section reviews, in brief, some religious, political, and intellectual iṣlaḥ and tajdīd (reform and renewal) movements as responses to western thought and economics particularly that started after the death of the prophet peace be upon him (pbuh) in the 7th century. those seek to reinstate genuine affairs in compliance with islamic teachings integral of universal wisdom of humanity. we identify iok and ie are two particular responses and analyse them in greater detail. this enables us to further link ie with he as a unique approach through iok based on iok. the following discussion is particularly related to muslims yet appeals universally to humanity. 4.1.1. islah and tajdīd: religious, political/economic and intellectual every reformist and renewal movement is by default religious as they aim to revive pristine islamic teachings. kamali (2008, 2013) found that shihab alzuhri (d. 124ah/724ce) recorded tajdīd to mean revival (iḥya’) of dying omercic│ integration of knowledge (iok) methodological reasoning of islamic economics (ie) as the wisdom of humanity: a heterodox economic approach international journal of islamic economics and finance (ijief), 4(2), 233-262 │245 traditions while al-suyuti (d. 911/1505)1 explained it as the reestablishment of truth on earth, in society through the elimination of maleficent innovation (bid‘ah), extremism (ghuluww), and the abhorred considering islamic foundational teachings. this leads to the attainment of the objectives/maqasid of shari‘ah to benefit people, preserve their traditions, and good norms and practices of all civilisations (voll, 1983). hence, the religious nature of the movements is not purely for the revival and reform of ritualistic practices but is integrative and dynamic in reviving and reforming general social affairs and reinstating the wisdom of humanity (al-attas, 2014). enayat (2005) claimed that there are religious movements that focus on preaching islam (da‘wah) yet this also improves the general welfare and peace of society. political/economic reform and renewal movements aimed to revive islamic teachings through political activism that involved economics (enayat, 2005). this, however, did not make them non-religious because islam by definition is a way of life and not pure theology. political/economic movements are best represented by shah wali allah dihlawi (d. 1762), jamal al-din al-afghani (1838-1897), muḥammad ‘abduh (1849-1905), rashid rida (1865-1935), ḥassan al-banna (1906-1949), abul a’la mawdudi (1903-1979) etc. with varying intensity (crone, 2014; kamali, 2008, 2013; shamsul, 1997; karčić, 1990). the dissemination of pamphlets, newspapers, and books made these movements even intellectual-educational. the intellectual movements are most significant to the problems with mainstream economics. intellectual movements are more effective and carry the potential to revive the knowledge tradition of the islamic civilisation in contemporary times (abu sulayman, 2016; nasr, 2006) and so the iok methodological reasoning as the learning from each other the wisdom of humanity approach. the following is a review of some muslim intellectual movements along iok and ie which we characterised as the holistic heterodox economic approach with potential to overcome problems with mainstream economics through reviving the iok methodological reasoning. traditionalism or perennialism is an intellectual movement of a group of intellectuals like rene guenon (abd al-wāḥid yaḥyá), frithjof schuon (īsā nūr al-dīn), martin lings (abū bakr sirāj ad-dīn), syed hossain nasr, houston smith, jean borella, etc. who believe in the transcendent nature of religions, the existence of primordial and universal truths and perennial wisdom or philosophy (borella, 1992; schuon, 2005; nasr, 2010). while the thought of these intellectuals is rich and meaningful, it is very philosophical and complex and relatable to sufism (islamic esotericism) which makes it unidimensional whilst reflecting a higher degree of epistemological nature. it is, however, complementary to the ie development appraisal in this paper. 1 abu al-fadl abdu al-raḥman ibn abi bakr ibn muḥammad jalal al-din al-khudayri al-suyuti. omercic│ integration of knowledge (iok) methodological reasoning of islamic economics (ie) as the wisdom of humanity: a heterodox economic approach international journal of islamic economics and finance (ijief), 4(2), 233-262 │246 the ijmalis or futurists intellectual movement was founded by ziauddin sardar with other proponents like munawar ahmed anees, merryl wyn davies, s. parvez manzoor, etc. this movement addressed the problem of muslim misconceptions and compromising the role and place of science in islamisation writings. thus, we may say that sardar’s (1989) critique of iok resulted in his alternative of ijmalis that linguistically means comprehensive. sardar’s thought as an ijmali aimed to foresee a comprehensive future or plan for the future that considers universal islamic teachings in contrast to the muslim obsession, of which some islamisation proponents are fixated on glorifying the past. however, haneef’s (2014) survey of islamisation showed that the proper understanding of iok clarifies no anti-science attitude but carefully integrates the use of science in the process of islamisation. later sardar’s and henzellthomas’s (2017) emphasis on the shift from islamisation (iok) to integration of knowledge (iok) corroborates that even further. hence, this paper’s focus on reviving iok methodological reasoning as the learning from each other and the wisdom of humanity is timely and facilitates ie development as a holistic heterodox economic approach. islamic science as an intellectual movement developed in response to western scientific development to show the historical existence of an islamic scientific tradition that sparked the western scientific revolution (saliba, 2007; acikgenc, 2014). bakar (1991, 1999) showed a systematic symbiotic account of tawḥid and the philosophy of islamic science. ziauddin sardar and syed hossein nasr are other prominent contributors to the discourse on islamic science. their contributions affirmed the compatibility of islam and science and the potential of scientific development rooted in islamic foundations (sardar, 1989). this reasoning complements our approach in this paper to develop ie. individual iṣlaḥ and tajdīd intellectual movements were more frequent in early centuries of islam and are rarer today. among those who exist today are yusuf qardawi in the muslim world, tariq ramadan and abdul hakim murad (timothy winters) in europe, syed hossein nasr and hamza yusuf hanson in the usa (mohamad, 2016; nasr, 2010). while not being actual movements, the impact is far greater than many movements historically. for instance, more than half a century of intellectual effort of yusuf qardawi revived and reformed many religious, social, political, economic, and other affairs. similarly, the efforts of ramadan, abdul hakim, nasr, and hamza transformed perceptions about islam globally (mohamad, 2016; kamali, 2013; kashani, 2014). collectively, these individual movements fit into the general discourse of iok and this paper’s emphasis on reviving iok methodological reasoning within and through ie. ie, however, shall integrate within its body of knowledge beneficial contributions of mainstream or he. therefore, no absolute rejection of extant bodies of economic knowledge is acceptable and omercic│ integration of knowledge (iok) methodological reasoning of islamic economics (ie) as the wisdom of humanity: a heterodox economic approach international journal of islamic economics and finance (ijief), 4(2), 233-262 │247 possible. following sections shed more detail on the iok and ie and reveal the potential to revive the iok methodological reasoning in contemporary times and show the way towards developing economics on genuine foundations. thus, the reviewed iṣlaḥ and tajdīd intellectual movements complement ie development through iok and iok by facilitating critical analysis of extant bodies of knowledge of conventional or heterodox nature, ie. he. hereby, we relevantise ie development through iok as a holistic he approach based upon iok . it also represents a major contribution as an imaginary framework upon which sound thought can explain the reality of the world and economic phenomena particularly. such explanation, in view of al-attas (2014) would reflect the real and complete ḥaqq (truth) and ḥaqiqah (reality). 4.2. islamisation of knowledge (iok) islamisation of knowledge (iok) is a unique intellectual movement based on sound philosophical foundations derived from sources of knowledge in islam (furqani, 2012; omercic, 2018; omercic et al., 2020). however, it is primarily a methodological movement with sound ontology, epistemology and axiology (haneef, 2014). according to abu sulayman (1989), wan daud (1998, 2010) and many others, iok is traceable to the times of prophet muḥammad pbuh but started in the 20th century with the writings of syed muhammad naquib al-attas and isma’il raji faruqi in the 1970s and 1980s, respectively. interestingly, the writings of syed hossein nasr in the 1960s also talked about the idea of iok (wan daud, 1998). while al-attas presented iok in a holistic (philosophical, rational, practical, sufi etc.) perspective, faruqi had a more rational and practical perspective according to wan daud (1998, 2010). their unique styles of thought on iok led to the establishment of the international institute of islamic thought and civilisation (istac) in malaysia, attached to alattas, and the international institute of islamic thought (iiit) in the usa, attached to faruqi. the former was purely educational while the latter was a non-governmental organisation (ngo), a private, non-profit, academic, cultural, and educational institution (iiit, 2020a; haneef, 2014).2 the iok practice within both institutions was complementary despite unique features and focus of each because of the distinct thinking styles of its founders (hashim & rossidy, 2000). the major objective of iok remained the interaction between the islamic and other legacies (turath) with modern bodies of knowledge (al-attas, 1978, 1980; al-faruqi, 1982). it remained concerned with achieving this aim and few attempted to develop a methodology to attain this objective, what led to 2 iiit advanced the establishment of international islamic university malaysia (iium) of which istac became a branch, international islamic university of islamabad (iiui), and others. omercic│ integration of knowledge (iok) methodological reasoning of islamic economics (ie) as the wisdom of humanity: a heterodox economic approach international journal of islamic economics and finance (ijief), 4(2), 233-262 │248 greater thought on epistemological integration and foundations (furqani, 2012; furqani & haneef, 2012; malkawi, 2014; omercic, 2021). further development of iok or attaining the defined vision failed primarily because of a failure to understand or poor understanding and communication of what iok really entails (omercic, 2021; haneef, 2014; al-attas, 1978). that caused significant critique, most of which were constructive revisions of initial iok frameworks according to abu sulayman (1989) and safi (1993). iok remained deeply concerned with questions of ontology, epistemology, ethics, and morality (axiology) (malkawi, 2014). iok methodology is the least developed of all foundations despite extensive writings on this topic (safi, 1993). however, the sound foundations render iok a genuine and relevant methodological basis to develop disciplines like ie, a holistic he approach, to address problems with mainstream economics. this gap is overcome with adoption of the contemporary methodological shift within iok to iok that malkawi’s (2014) ‘epistemological integration’ made obvious. aggregatively, it revives the iok methodological reasoning as wisdom of humanity for ie development as an alternative and holistic he. even crow (2018) and sardar and henzell-thomas (2017) emphasised the need for more integration instead of islamisation while malkawi (2014) and haneef (2014) explicitly expressed still the need for both with, however, a greater focus on integration efforts to develop contemporary bodies of knowledge. a methodological focus in the past iok contributions and the shift to iok methodological reasoning today just reflects its real foundational teachings in practice which this paper depicts as the solution to problems of mainstream economics. its ontology and epistemology that recognizes metaphysical besides physical phenomena and sources of knowledge, and axiology derived from akhlaq/ethics of the sources of knowledge in islam (haneef, 1997) are facts indicating greater contextual adaptability, understanding and explanation of reality (ḥaqiqah). the outcome of such reasoning is truth (ḥaqq) or real economics. thus, iok is an advanced intellectual movement among alternative muslim responses to western general and economic reasoning because none had as much impact and received as much attention and thought. an additional indicator of iok as a significant intellectual alternative to problems with mainstream economics in contrast to other muslim and western responses is many books and journal3 publications and translations at the headquarter and regional offices of iiit (iiit, 2020; haneef, 2014). therefore, iok is the basis of the iok methodological reasoning to learn from each other the wisdom of humanity. iiit adopted this approach in the 21st century more ardently. this corroborates our appraisal of 3 such as ‘intellectual discourse’ journal of international islamic university malaysia (iium), ‘al-shajarah’ journal of istac-iium, ‘muslim education quarterly’ of cambridge university, ‘american journal of islamic social science (ajiss)’ of iiit, ‘journal of islamic science’ of association of muslim social scientists (amss), etc.. omercic│ integration of knowledge (iok) methodological reasoning of islamic economics (ie) as the wisdom of humanity: a heterodox economic approach international journal of islamic economics and finance (ijief), 4(2), 233-262 │249 ie development through iok as a holistic he approach in this paper to overcome problems of mainstream economics. it is a universal approach of interaction between legacy/classical and modern knowledge as a human accumulated legacy knowledge until today. the greater analysis of the application of such an approach to ie in the following section makes it obvious. 4.3. islamic economics (ie) the intellectual movement of islamic economics (ie) in the form of discourse and writings predates that of iok from the late 19th and early 20th centuries (islahi, 2010). according to chapra (2016), ie development led to greater muslim discourse on economics from an islamic standpoint in a contemporary context as was the case throughout the islamic civilisation whereby economics was an integral part of the religious science (ulum al-shari’iyyah) discourse and integrated within the idarah (general administrative management) of daily affairs (bakar, 2019). the literature review of this paper showed in detail how muslim polymaths like imam al-ghazali classified economics as a religious obligation to some people (fard al-kifayah). thus, economics was a daily occupation of muslims’ living of islam as a way of life and not purely ritualistic experience. likewise, economics occupied a central role within the western civilisation as clear in colonial and imperial times (hunt, 2016). because of the centrality of interest or riba in western economic reasoning, it became a major concern of the ie discourse (siddiqi, 1983, 2004, 2004a). hence, the idea was to develop an interest-free economic system. this characterised the preparatory period of ie from the middle of the 19th to early 20th century when much of western economic thought was translated into the different languages of muslim communities (islahi, 2010).4 we mentioned earlier that the reviewed intellectual movements complement the development of ie (enayat, 2005). an important feature of the scholars of this period was their multidisciplinary approach that characterises the nature of ie or its basis on iok and current appraisal via iok methodological reasoning. in view of islahi (2010), the first-generation of 1926-1950 were the real founders of ie5 and defined it with an emphasis on the distinction from mainstream economics that underwent major clashes between classical, keynesian, and other streams of thought. apparent is how ie with its iok 4 more prominent scholars of this period were: a‘bd al-qadir al-mijawi and u‘mar burayhimat from algeria; muḥammad a‘bduh and rashid riḍa from egypt; and shibli nu‘mani, muḥammad iqbal, sayyid sulaiman nadwi and abus-salam nadwi from the indian sub-continent. 5 ie scholars of this period were: ḥifzur raḥman sewharawi, manazir aḥsan guilani, abul a‘la mawdudi, muḥammad hamidullah, anwar iqbal quraishi, shaikh maḥmud aḥmad, yusufuddin, zaki ṣaliḥ, muḥammad a‘li nasha`t, aḥmad muḥammad riḍwan, abu zaharah. a‘li fahmi taman, muḥammad a‘bdullah al-a‘rabi, etc.. omercic│ integration of knowledge (iok) methodological reasoning of islamic economics (ie) as the wisdom of humanity: a heterodox economic approach international journal of islamic economics and finance (ijief), 4(2), 233-262 │250 methodological reasoning represents a serious intellectual alternative to mainstream economics mainly because of inherent inconsistency and flawed foundations (siddiqi, 1981, 1983). the ‘big push’ of ie distinguishes the second-generation from 1951-1975, known as the pioneers of ie6, who according to islahi (2010) and siddiqi (1981) gave impetus to the development of islamic banking and finance (ibf). according to kahf (1989, 1998), the international conferences on islamic economics in 1976 and later events played a major role in that. scholars of this period had traditional and modern education in economics (haneef, 1995, 2014). their efforts reflect the inevitability of integration between the two and corroborate this paper’s rationale for iok based ie development through the iok methodological reasoning as the revived learning from each other and wisdom of humanity approach. ibf, like mainstream economics, diverged from such iok methodological reasoning and fell prey to replicating mainstream banking and finance practice (omercic, 2018, 2021). thus, some guidance and convergence through the iok methodological reasoning is necessary and possible. the ie generation7 of 1976-2000 fostered development via more conferences and the rise of journals in ie that makes this intellectual movement a very distinct one compared to earlier muslim responses to the west and economics (islahi, 2010; chapra, 1996, 2001). greater non-muslim interest during this period was apparent according to el-ashker and wilson (2006). however, later generations of ie from the 2000s until today witnessed a stagnation and abstractness of thought in ie while ibf characteristically continued to track the development of mainstream economics via replication and attempts of product differentiation (khan, 2013, 2013a). irfan (2015) showed that ibf, like mainstream economics, suffers from foundational problems that also represent a gap to overcome with this paper’s appraised ie development as a holistic he approach through iok methodological reasoning based on iok. hence, this is a major contribution to what the contemporary ie generation could pay further attention. this approach establishes the relevance of iok for ie development, revives interest in them and demonstrates the potential of ie to not only overcome problems of mainstream economics and link ibf to its initially defined philosophical foundations, but also to expedite attainment of sdgs through a focus on maqaṣid. the maqaṣid theory is also central to ie and its methodology. 6ie scholars of this period were: muḥammad uzair, baqir al-sadr, i‘sa a‘bduh, abdul hamid abu sulaiman, ḥasanuzzaman, muḥammad nejatullah siddīqī, khurshid aḥmad, f.r. faridi, m.a.mannan, aḥmad al-shirbasi, muḥammad al-mubarak, muḥammad aldusuqi, yusuf al-qaradawi, gharib al-jammal, shawqi al-fanjari, m.u.chapra, akram khan, m. anas zarqa, sami ḥasan ḥamud, sabhuddin zaim, saliḥ tug, monzer kahf, muḥammad aḥmad saqr, rifat al-a‘wdī, a‘bd al-salam al-misrī, a‘bd al-salam ala‘bbadī, a‘bd al-samī al-miṣrī, a‘bd a-raḥman yousrī, masudul alam choudhury, etc.. 7 prominent second-generation pioneers are zubair ḥasan, salamah a‘bidīn, ausaf ahmad, tag el-dīn seif el-dīn, ḥasan a‘bd-allah al-amīn, shawqī dunya, m. fahim khan, munawar iqbal, muḥammad a‘bdul ḥalīm u‘mar, mohamed aslam haneef, etc.. omercic│ integration of knowledge (iok) methodological reasoning of islamic economics (ie) as the wisdom of humanity: a heterodox economic approach international journal of islamic economics and finance (ijief), 4(2), 233-262 │251 apparently, ie is of a dynamic and multidisciplinary character and so relates to socio-political and governance affairs (asutay, 2007, 2012). its link with religious affairs is most reflective in the requirement of shari’ah compliance within the ibf industry as corroborated by findings of ie being rooted in islamic jurisprudence (fiqh) and principles of islamic jurisprudence (usul al-fiqh) (furqani, 2015, 2017). to our knowledge based on research so far, no earlier study attempted directly and systematically to overcome problems of mainstream economics through use of iok and ie contributions accumulatively and particularly via the recent emphasis and this paper’s revived iok methodological reasoning approach. however, extant he development can be integrated and used within ie as our appraised holistic he approach. thus, (1) the general stagnation of ie development because of weaker methodological foundations or an inadequate systematic understanding can be complemented through extant he attempts in relation to economic orthodoxy, and (2) application of extant methodological contributions in relation to ontological, epistemological, and axiological foundations, makes this paper’s preliminary systematic linking and appraisal of (1) iok and (2) the new shift to iok methodological reasoning as the learning from each other the wisdom of humanity with ie development extensively commendable. this represents it as a holistic he approach. it is also, after all, an accumulation of muslim responses to incursion of western thought and that of economics particularly. contributions of he as well as conventional economics help us to seriously address many issues within ie like the methodology and develop a genuine iok methodological reasoning within ie based on sound foundations that is practical and can be validated in terms of its theoretical objectives. this will enable us to pursue a more extensive development of ie. hereby, we can bypass the current frontiers in ie development and overcome issues and foundational problems of mainstream economics along with those of other (heterodox) alternatives, ibf and easily draft plans to attain sdgs. such issues and foundational problems were clearly our motivation and rationale in this paper and as such we showed how it can be overcome through further studies. hence, the need to systematically review the trend of ie development in relation to the somehow newly revived iok methodological reasoning upon legacy/classical and modern bodies of knowledge. thus, it is only after an ie firmly consolidates through such reasoning that it can overcome any problem and face any challenge. greater emphasis on applied methodological procedures, their validation criteria and theory appraisal should be the focus in future research if willing to develop a genuine ie that in light of its multidisciplinary nature facilitates development of even other disciplines and overcoming of its challenges, issues. it is these envisioned outcomes that would reflect the real spirit of iok methodological reasoning within ie as the learning from each other and the wisdom of humanity. omercic│ integration of knowledge (iok) methodological reasoning of islamic economics (ie) as the wisdom of humanity: a heterodox economic approach international journal of islamic economics and finance (ijief), 4(2), 233-262 │252 v. conclusion and recommendation 5.1. conclusion the need to learn from each other and integrate knowledge revealed the historical significance of exchanging the wisdom of humanity attained through accumulating knowledge of other civilisations. it promises a sustainable and harmonious life. for the islamic civilisation, the ontological, epistemological, axiological, and methodological foundations always guided such learning from the wisdom of humanity. such practice ended with the revival of the west and the development of mainstream economics in particular. it neutralised the morality and ethics of the islamic civilisation in pursuit of secularisation and scientific paradigm. the dichotomisation of economics rendered axiological questions futile while ontology and epistemology gained a purely material and rational character. the rise of the protestant ethic shed hope for some link of economic capitalist development embedded with christian ethical teachings while the later success of capitalism set a final blow to ethics in the name of science and its replication in mainstream economics. heterodox economic alternatives countered the hegemonic mainstream economics because of apparent issues in theory and practice yet never addressed its foundational problems. those revealed gaps could be addressed through the muslim responses in the form of iṣlaḥ and tajdīd movements and alternatives to mainstream economics. we identified outstanding intellectual movements and responses of iok and ie as a holistic he approach with genuine foundations and potential to overcome problems of mainstream economics. thus, future studies may further systematic reviews of iok development and ie with focus on the iok methodological reasoning in the 21st century which utilises extant contributions of conventional economics, he or those of other disciplines. this is the future trajectory of ie development and genuine solution to problems and issues caused by mainstream economics, but even ibf. moreover, attainment of sdgs could be planned and executed more efficiently and the theory of maqaṣid would greatly facilitate it. therefore, the potential welfare impact of the development of ie via iok methodological reasoning based on iok will attempt to show how a proposed alternative integrative methodology with common ontological, epistemological and axiological foundations can then produce a holistic he which utilises extant beneficial economic and other bodies of knowledge and become mainstream. it is best to perceive our appraised ie as a holistic he approach to be a blueprint subject to improvement in future research. likewise, it can be indirectly viewed as an imaginary framework of reviving iok methodological reasoning as the learning from each other the wisdom of omercic│ integration of knowledge (iok) methodological reasoning of islamic economics (ie) as the wisdom of humanity: a heterodox economic approach international journal of islamic economics and finance (ijief), 4(2), 233-262 │253 humanity through and for ie development. it is solid ground for much actionable thought to come. 5.2. recommendations contemporary times reveal ever greater disruptive, innovative and creative yet sound and genuine ideas, products and practice. it became harder than ever to lightly discard or ignore anything without critical insight into the potential, scalability and impact it may have. all of it has extensive economic implications. however, we witness that humanity increasingly cares about psychological, social, political, religious environmental and other implications in the 21st century as well. thus, a potentially disruptive, sound and genuine alternative to mainstream economics like ie with its iok methodological reasoning becomes irresistible and greatly appeals to almost 2 billion muslims globally. the number becomes larger if including the rising non-muslim conversion to islam. it has extensive implications on aspects of human life. hence, the ie alternative and the iok methodological reasoning appraised in this paper imply certain recommendations that we consider crucial for practitioners and academics. we recommend academics to improve the mutual communication and sharing of ideas on ie like the ones presented in this paper. much of the research among academics remains uncommunicated and infrequently read. increased communication of ideas to the public, practitioners and academic colleagues would raise awareness about the alternative ie to extant economic thought, services and practice. moreover, academics should focus to elaborate how an ie approach has wide implications on general welfare. academics could challenge the findings of papers like this and test the viability and impact of an iok methodological reasoning framework of ie on the ibf industry and attainment of sdgs. this brings us to recommendations for practitioners. since practitioners identified the sdgs based on exacerbated human and planetary circumstances, we recommend a shift in mainstream economic reasoning that led to such circumstances towards alternatives like ie’s iok methodological reasoning. involving and integrating the efforts of academics based on earlier recommendations with practitioners’ sdgs plans could demonstrate how ie based solutions in more stable muslim majority nations like malaysia, turkey, indonesia can impact socio-economic-political and environmental welfare. we recommend practitioners to adopt greater theoretical ‘what should’ solutions rather than ‘what is’ solutions because the later may be incongruent with the human aspirations for greater welfare and sustainability. thus, it is not enough to comply with ‘what is’ even if it is omercic│ integration of knowledge (iok) methodological reasoning of islamic economics (ie) as the wisdom of humanity: a heterodox economic approach international journal of islamic economics and finance (ijief), 4(2), 233-262 │254 welfare-enriching because the ‘what should’ promises greater welfare. nonetheless, one should not be totally diverted into ‘what should’ without recourse to ‘what is’. the two have certainly complementary implications. therefore, we can say that ie development through iok methodological reasoning as the learning from each other the wisdom of humanity becomes increasingly the new ‘what is’ while simultaneously demonstrating the ‘what should’. this paper showed how it can be done and advises future researchers to pursue greater applied and testable iok methodological reasoning-based challenges in ibf or sdgs and contribute to ie development. omercic│ integration of knowledge (iok) methodological reasoning of islamic economics (ie) as the wisdom of 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(2013). logical positivism and islamic economics. international journal of economics, management and accounting, 21(2). ijief: international journal of islamic economics and finance vol. 2(1), pg 1-20, july 2019 islamic bank’s performance in the light of competition and csr yunice karina tumewang universitas islam indonesia, indonesia, yunice.karina@uii.ac.id novita kusuma maharani universitas muhammadiyah prof. dr. hamka, vhyta.maharani@gmail.com article history received: february 28, 2019 revised: june 17, 2019 accepted: july 8, 2018 abstract this study aims to examine the effect of competition and corporate social responsibility (csr) disclosure toward islamic banks’ financial performance. it used generalized least square with panel data of islamic banks in asean and gcc from 2012-2016 obtained from orbis bank focus. h-statistic (panzar-rosse) test was employed to measure the degree of competition and the relationship between variables. this study found that competition contributes a negative effect toward performance of islamic banks, while csr contributes a positive effect toward performance of islamic banks. the result of this study suggests the management of islamic banks to be more aware of the importance of management of csr programs for the acceleration of sdgs set by un as well as survival of companies in the future. additionally, this study would like to support to push ahead government plan to strengthen domestic islamic bank through consolidation or a merger of state-owned islamic banks in order to lower the degree of competition which ultimately leads to a better performance of islamic banks as well as an enhanced financial deepening in indonesia. keywords: competition, islamic banks’ performance, csr disclosure jel classification: g20, g21, g28 @ ijief 2019 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.2113 web: http://journal.umy.ac.id/index.php/ijief/article/view/5925 citation: tumewang, y. k., & maharani, m. k. (2019). islamic bank’s performance in the light of competition and csr. international journal of islamic economics and finance (ijief), 2(1), 1-20. doi: https://doi.org/ 10.18196/ijief.2113. mailto:yunice.karina@uii.ac.id mailto:vhyta.maharani@gmail.com http://journal.umy.ac.id/index.php/ijief/article/view/5925 tumewang & maharani | islamic bank’s performance in the light of competition and csr ijief: international journal of islamic economics and finance, 2(1), 1-20 |2 introduction islamic banks which account for the largest chunk of islamic finance industry is expected to contribute significantly to play a role as an alternative of financial system based on sharing-economy principle which could boost economic growth. hence it becomes an important institution in world-wide financial sector. average growth of islamic banking increased by 15-30% each year (antonio et al. 2012). in this growth phase, performance measurement on islamic banking is necessary to be able to detect problems and settle concerns about the safety and soundness of investments for any stakeholders. moreover, it can help the determination of banking prospect in the future to become better and sustainable islamic banking (kuppusamy et al. 2010). the climate changes of the banking sector in many countries has an impact on the level of competition and concentration of banks. there are two tendencies between competition and concentration which related inversely. these proportions reveal that the more concentrated market implicated the lower degree of competition due to unwillingness of the banks to have market power (maharani & setiyono, 2018).the soundness and stability of the financial sector may in various ways be influenced by the degree of competition and concentration. competition can have a negative impact on stability because it can reduce bank charter value, so that can reduce the incentives for prudent risk-taking behavior. in previous literature, measuring the level of competition can examine using non-structural approach based on new empirical industrial organization (neio). this approach is based on premise that the company in a competitive and imperfect markets will have different reactions to the changes in demand and supply (lubis, 2012). thus, measuring competition is focused on price behavior and market power (world bank report, 2015) which are proxied by several methods such as h-statistic, lerner index, and boone indicator. h-statistics by panzar-rosse is a measurement to see the direct effect of bank competition based on market forces. h-statistics is based on a market model that determines the balance of output by maximizing company-level profit and industry (schaeck et. al, 2012). market powetshows the performance of how much a company can raise prices above marginal costs. companies that have high market power are considered as monopoly companies which are very affected by price changes.meanwhile, companies that have low market power and are not affected by price changes (lubis, 2012). tumewang & maharani | islamic bank’s performance in the light of competition and csr ijief: international journal of islamic economics and finance, 2(1), 1-20 |3 on the other side, islam respect on the good ethics and behavior which have brought into social justice, wealth, and maslahah as a way of life. so as in term of ethical individual and organizational in islamic banks environment that concern on “social good” and “good governance”. as the form to create the ethical responsibilities in the islamic banks, bank driven by public demand to increase transparency and accountability with regard social responsibility as a result of changes in community norms and expectations. csr is a concession to islam are meant for islam as a religion show a proactive stakeholder paradigm and developing the company applying moral obligation to the community through substantive morality (platonova et al. 2016). additionally, with regard to the stability of financial systems, poor corporate governance is considered to have negative affect and also have tangible, serious social and environmental consequences, the focus has shifted from the conventional ‘shareholders only’ approach to corporate governance to a broader corporate governance model that identifies the issues and priorities of stakeholders (dusuki 2011). it means that company should take care of stakeholders’ demands although they believe that csr could connect to governance at the values level, determining the boundaries and accountabilities of the company in relation to a broad universe of stakeholders and its social and environmental responsibilities (strandberg 2005). there are many factors could be considered as the affecting variable on islamic bank’s performance supported by a number of prominent literatures. this paper adds to the empirical literature of islamic bank’s performance which relates to its competition in several ways.as far as we are concerned, there is only small number of researches on analyzing the competition of islamic banking such as sghaier et al. (2015) and mokhtar et al. (2008), although this kind of analysis is vital to improve the stability and development of this sector. this work is an attempt to fill in this gap. this study examines whether islamic banks tend to be concentrated or even have a high level of competition. besides, there is still several research that analyzes the impact of good corporate governance (gcg) policies. by applying csr it is possible to increase the value of islamic banks so that it affects the level of competition between banks. this study helps to raise the awareness of society to see islamic banking and its csr’s program as a mutually beneficial sector in the foreseeable future. tumewang & maharani | islamic bank’s performance in the light of competition and csr ijief: international journal of islamic economics and finance, 2(1), 1-20 |4 literature review islamic bank’s performance for many decades since its first footstep into the mainstream industry, islamic finance has shown a slow progress despite its exponential growth in the first couple years. it has been widely criticized for just focusing on islamic banking sector which are largely mimicking its counterpart with few ‘controversial’ distinctive values but undoubtedly higher cost. though we have to be fair to say that many initiatives have been made by islamic banks to upgrade its sharia-compliance, but it still remains controversial in society. most studies in banking literature focused on profitability which affect on bank performances with generally used the financial ratio. measuring the bank performance can be measured by internal and external factors. ben and omran (2011) analyzed the impact of bank regulation, concentration and institutional and financial development on the profitability of 173 banks in the mena during the period 1988-2005. the empirical results suggest that the specific characteristics of banks, the capitalization of banks and especially credit risk, have a significant and positive impact on profitability, while indicators of macroeconomic and financial development have no significant impact on performance, with the exception of inflation. ben and rachdi (2014) assessing bank profitability in mena region with the sample of 15 conventional and 15 islamic banks. the result shows that the bank profitability in mena region are slightly persistent due to the intervention of government that become barriers for banks to be more competitive. previous studies there are two tendencies between competition and concentration which related inversely. these proportions reveal that the more concentrated market implicated the lower degree of competition due to unwillingness of the banks to have market power. other studies found that both competition and concentration can coexist. this term, refers to contestability theory assuming the company can enter or leave rapidly in the market without losing their capital and competitors have the same cost function as the companies that have been existing at these market (mamatzakis et al. 2005). efficiency is an important aspect to ascertain when evaluating the competition. commonly, the more competitive market means the higher efficiency (allen and engert 2007). another argument reveals that the greater competition among banks heading to more fragility (beck et al. 2013). most studies in banking literature focused on profitability which affects tumewang & maharani | islamic bank’s performance in the light of competition and csr ijief: international journal of islamic economics and finance, 2(1), 1-20 |5 banks’ performance with generally used the financial ratio. measuring the bank performance can be measured by internal and external factors. ben naceur and omran (2011) analyzed the effect of bank regulation, concentration and institutional and financial development on the profitability of 173 banks in the mena during the period 1988-2005. the result indicates that the specific characteristics of banks, the capitalization of banks and especially credit risk, have a significant and positive impact on profitability, whereas macroeconomic indicators and financial development have no significant impact on performance, with the exception of inflation. mokni and rachdi (2014) assessing bank profitability in mena region with the sample of 15 conventional and 15 islamic banks. the result show that the bank profitability in mena region are slightly persistent due to the intervention of government that become barriers for banks to more competitive. islam respect on the good ethics and behavior which have brought into social justice, wealth, and maslahah as a way of life. so as in term of ethical individual and organizational in islamic banks environment that concern on “social good” and “good governance”. as the form to create the ethical responsibilities in the islamic banks, bank driven by public demand to increase transparency and accountability with regard social responsibility as a result of changes in community norms and expectations. csr is a concession to islam are meant for islam as a religion show a proactive stakeholder paradigm and developing the company applying moral obligation to the community through substantive morality (platonova et al. 2016). based on the above-mentioned literature review, the hypotheses developed in this study are as follow: h1: competition are negatively related to islamic banks’ performance h2: csr weakening the negative relationship between competition and islamic banks’ performance. research method this study used yearly unbalanced panel method to identify the characteristic of each sample. generalized least square (gls) method was employed as a statistical technique to eliminate the problem of heteroscedasticity and autocorrelation, namely by weighting the value of its observations. focusing on islamic and conventional commercial banks in 8 countries (indonesia, malaysia, bahrain, kuwait, oman, qatar, saudi arabia, and united emirates arab) were both bank types coexist, and the initial panel data set comprises a total of 314 banks (217 islamic banks and 97 conventional banks) with the period 2012-2016. the reason conventional tumewang & maharani | islamic bank’s performance in the light of competition and csr ijief: international journal of islamic economics and finance, 2(1), 1-20 |6 banks to enter into the sample is to test directly the characteristics of islamic banks in each country that views of the whole banks. this paper takes bank specific information from orbis bank focus database for banks variable and thomson reuters datastream for csr disclosure index. this paper used h-statistic adopting panzar and rosse test to examine directly the effect of bank competition based on market power, which is the sum of elasticities of the reduced-form revenue function with respect to factor prices (unit of capital, funds, and labor) (schaeck et al, 2012). the result of h-statistic (schaeck et. al, 2012; bikker et. al, 2010; mamatzakis et. al , 2005) can be interpreted as the characteristic of monopoly market colluding oligopoly perfectly when h is equal to 0. conversely if h is equal to 0, it indicates a perfect competition market. meanwhile, monopolistic competition condition can be indicated by the result of h between 0 and 1. csr as a moderating variable is proxied by csr disclosure index which is calculated as the ratio of points awarded over the total number of selected dimensions.the index is based on csr categorization defined by 2010 aaoifi standards and items that are required and recommended by the standards to disclose in annual reports of islamic financial institutions, and also based on other established literatures. some modifications were made to this checklist in order to adapt it to the conditions and characteristics of islamic banks in the selected counties. to calculate h-statistic, this paper use the specification of the reduced-form revenue equation (mamatzakis et al, 2005; schaeck et al, 2012) : ln(r) = α + β1 ln(w1) + β2 ln(w2) + β3 ln(w3) + δ1 ln(y1) + δ2 ln(y2) + ε where r is proxied interest income to total asset (output price), w1 represents price of fixed asset (other operating expenses to fixed assets), w2 captures price of labour (staff expenses to total assets), and w3 captures price of funds (interest expenses to total liabilities). respecting for risk and size, y1 denotes credit risk (impaired to npl) and y2 is the proxy of total asset. therefore, h is calculated as the sum of coefficient of β1 + β2 + β3. tumewang & maharani | islamic bank’s performance in the light of competition and csr ijief: international journal of islamic economics and finance, 2(1), 1-20 |7 csr (moderating variable) is proxied by csr disclosure index which is calculated as the ratio of points awarded over the total number of selected dimensions following haniffa and hudaib (2007): csr disclosure index = where csr disclosure index jt denotes the csr disclosure index for dimension j and period t; xijt is variable x (1, …, n) for dimension j and time t; n is the number of variables/statements. the previous study expected that increased competition in the financial sector leads to boost efficiency and decreased the costs, but, in fact that financial product are quite heterogenous (claessens and laeven 2004). thus, the empirical model of this study based on relevant literature: roaait = α + β1comptit + β2csrit +σβ3 bank controlit + β4gdpt + d1ibdum + d2region +eit roaait = α + β4comptit*β5csrit + β6csrit + σβ7bank controlit + β8gdpt + d3ibdum + d4region +eit where roaarepresent return on average asset ratio is calculated by earning after tax (eat) to total asset as a proxy of islamic bank profitability, compt denotes a competition of islamic banks which is measured by h-statistic , csr as a proxy of csr disclosure index, 𝛴bank control includes a set of bank specific characteristics which is represented by size (natural logarithm total asset), npl (ratio of non-performing loan to total asset), and gdp is proxy for macroeconomic indicators which calculated by gross domestic product (gdp) growth. in addition, this paper includes a islamic banks dummy variable (d1ibdum) to differ from conventional banks and regional dummy variable (d2region) to control for other region specific characteristics. subscripts i and t refer correspondingly to islamic banks i at time t, and e is a zero-mean disturbance term. result and analysis the paper first present the result of h-statistic based on panzar and rosse test. in table 1 are the results of the calculation of the h-statistic for each country the period of 2012 to 2016. these results cover the entire sample of islamic banks and conventional banks. the calculated of h-statistics are in line with those reported by previous literatures and suggest that there is a monopolistic competition condition in both islamic and conventional banks for each countries. furthermore, in table 2 are presented descriptive tumewang & maharani | islamic bank’s performance in the light of competition and csr ijief: international journal of islamic economics and finance, 2(1), 1-20 |8 statistics of each variable. table 3 shows correlation among variables which are in pairs. the test used to identify the correlation among the variables as indication of multicolinearity in independent variables. table 1. summary statistics of h-statistic for each countries this table report summary statistics of h-statistic for each countries. this shows h-statistic for the full sample of islamic banks and conventional banks. country year bahrain indonesia kuwait malaysia oman qatar saudi arabia uae 2012 n/a 0.75 0.58 -0.23 n/a n/a 0.47 0.71 2013 n/a 0.47 0.77 0.71 0.66 -0.42 0.56 0.62 2014 -0.26 0.62 0.45 0.49 0.65 0.22 0.62 n/a 2015 0.13 0.66 0.3 -0.76 0.6 -0.64 0.59 0.11 2016 0.89 n/a n/a n/a n/a -0.1 n/a 0.89 average 0.15 0.50 0.42 0.04 0.38 -0.19 0.45 0.47 in table 4 (model 1, 2, 5, 7), h-statistic as a proxied of competition have negatively affected on average return on asset (roaa), indicating that the higher degree of competition will decrease banks’ performance. this result suggest that the greater banks’ performance have less competition. the result in line with competition and banks’ profitability hypothesis, and banks with lower level of competition lead to higher concentration. according to the competition-fragility paradigm, banks which have the higher degree of competition tend to reduce market power and decreased the profit margin. this result can also be concluded that most commercial banks in indonesia have behavior that tends to be concentrated, even though the concentration level is still relatively low. this result can also be attributed to the large number of foreign banks entering a country and the low restrictions on bank activities can encourage the level of competition in the banking system. thus, concentrated banking is negatively related to competitiveness. the need for regulations regarding restrictions on the entry and exit of foreign banks into indonesia can help guide the climate of effective competition and can also reduce gaps or imbalances that can affect the stability of the banking sector. under these circumstances, it is vital for the regulatory authorities to revisit the structuralchanges in order to avoid the occurrence of banking sector instability argued by theexisting literature. this research would like to push ahead the government plan to strengthen domestic islamic bank through consolidation or a merger of state-owned islamic banks in order to lower the degree of competition which ultimately leads to a better performance of islamic banks in indonesia. tumewang & maharani | islamic bank’s performance in the light of competition and csr ijief: international journal of islamic economics and finance, 2(1), 1-20 |9 indonesia’s islamic banking industry currently is highly fragmented, with 12 shariah-compliant commercial banks, 163 islamic rural banks and 22 islamic windows, and so, consolidation would likely bring significant economies of scale, therefore making the industry more competitive. all the usual arguments for bigger business and economies of scale appear on the surface to be relevant here, without the failings that might otherwise be relevant if we were truly looking at the creation of a megabank. the merger of five state-owned islamic banks which will include bni syariah, bri syariah, bank syariah mandiri and the shariah unit of btn is expected to enhance financial inclusion as they will have more capital, more resources, and more offices across the country to offer more creative products and services to the customer. together, these banks reportedly account for up to 40% of the indonesian islamic banking industry, and would create an entity with assets of us$ 8 billion. a mega islamic bank will enable the islamic banking industry to compete with larger conventional banks and to extend their financing to both smes and big corporate segment. further, by having the big scale, mega islamic bank could reduce operating costs and provide services at more competitive rates. it is also expected to help improving public awareness of shariah compliant finance as well as having access and ability to raise further funding for large projects by issuing a series of sukuk (islamic bonds) with a variety of maturities in diversified sectors and regions. for having a smooth progress of islamic banks’ consolidation, sustained regulatory support and marketing of shariah-compliant financing, together with increased training and development of experts in the field will also be necessary for islamic banks to achieve the ojk’s desired aim of islamic finance holding at least 15% of the indonesian finance market by 2023. the indonesian authorities have made a promising start and shown a clear intention over the past 12 months to assist in shaping the way forward for the country’s islamic finance industry and in encouraging consolidation and proposals for building a new regulatory system. this table shows descriptive statistics for dependent variable, banks’ performance is proxied with the average of return on asset (roaa), and independent variables this paper use in the regression that model roaa as a function of competition, csr, and a set of control variables. h-statistic is the measure of competition, csr as a moderating variable that is proxied with csr disclosure index, the bank control variables are size (ln asset) impaired to non performing loans, and gdp as a macroeconomic control variable. this paper report the number of observation, the mean, standard deviation, minimum and maximum. tumewang & maharani | islamic bank’s performance in the light of competition and csr ijief: international journal of islamic economics and finance, 2(1), 1-20 |10 table 2. summary of descriptive statistic obs mean st.dev min max roaa 800 0.0125964 0.08786 -0.02243 0.0366 h-statistic 852 0.4052113 0.3942919 -0.76 0.89 csr 1171 62.44812 16.93912 23 96 size 890 7.737923 0.8167508 5.245477 9.424317 npl 815 13.79412 2.277882 6.116313 18.66686 gdp 956 0.0476198 0.0159576 -0.01622 0.099589 the result between h-statistic interaction and islamic bank (h-statistic * d_ibdum) is negative and not significant (model 2 and 7). based on these results, it can be concluded that islamic banks cannot moderate competition relations and banks' performance.this shows that there is no difference in the effect of competition level on islamic bank and conventional banks on the performance of banks that correlate negatively. this finding implicates that the condition of firms at islamic bank is still low and does not reflect the performance of the islamic bank. these results are supported also by previous literature which found that islamic banks have lower comparative rates compared to conventional banks (ariss 2010). the estimation result between roaa and csr is positive (model 3, 4, 5, 6) indicates the existence of csr is proven to improve bank performance. these results support previous literature where csr implementation can have a positive impact on bank performance (maqbool and zameer, 2018; odetayo et al. 2014). however, when csr variables are witnessed with islamic bank dummy (csr * d_ibdum) negative result is significant where the existence of csr turns down the performance of sharia banks. this result is not in accordance with research found by platonova et al (2016) in which csr has a positive effect on bank financial performance. table 3. pairwise correlations matrix roaa h-statistic csr size npl gdp roaa 1.00000 h-statstic -0.0646 1.00000 csr -0.0612 -0.0874 1.00000 size 0.3831 -0.0092 -0.3481 1.00000 npl 0.2996 -0.1541 -0.3559 0.7562 1.00000 gdp 0.0308 0.0843 0.2738 -0.0423 -0.0722 1.00000 tumewang & maharani | islamic bank’s performance in the light of competition and csr ijief: international journal of islamic economics and finance, 2(1), 1-20 |11 further, this study attempted to interact with h-statistic and csr (model 6 and 7). the results show the value of negative and significant coefficients (model 6) stating that csr moderates the relationship of roaa and h statistic. there is a difference of influence between roaa and h-statistic moderated by csr where csr weakens the negative relationship between bank performance and competition. the presence of csr can weaken the negative relationship between competition and bank performance. these results indicate that on the whole sample of competition level at banks implementing csr will be higher. this result is also supported by a research by quairel-lanoizele'e (2011) who concluded that the higher level of csr, the competition negatively affects the banks' performance in the future because the csr program is used by management as a form of entrepreneurs strategy to deal with stakeholders. this is due to management's expectations that competitiveness is not aligned with other stakeholders by implementing csr programs. then this research tried to interact with islamic bank dummy (h-statistic * csr * d_ibdum), but the result is not significant. so there is no difference in the effect of csr moderation in islamic banks and conventional banks. banks that are concerned about encouraging csr programs have a good image in the public. banks that focus on supporting the development of csr programs will attract customer interest and increase bank performance. if there are banks that have implemented csr programs, they will directly make other banks participate in developing csr so as to increase the degree of bank competition. thus, the competition climate will be created with the many banks that make up csr programs. finally, the bank's performance seen from its level of profitability will further increase bank profits. even though many banks operate and go in and out in indonesia which reflected high competition, it will not disturb its banks' performance. the effect of size on banks' performance is positive and statistically significant at the 1 percent level on the overall model. structured conducted-performance (scp) hypothesis in which states that the larger banks in a more concentrated market will increase the banks' -charter values due to more profitable and high market power and would have more capital buffers (chan et al. 2015). the influence of npl is negative in value, indicating that banks with lower npls demonstrate better banks' performance that has lower loans and default risk. while management cannot avoid opportunities for high-risk taking practices in boosting the financial performance, but the expected high-risk actions are not detrimental to the interests of other stakeholders in the long run so the banks can enjoy the benefits of csr programs on the financial performance and in turn will be enjoyed by the public in general. moreover, it will also link tumewang & maharani | islamic bank’s performance in the light of competition and csr ijief: international journal of islamic economics and finance, 2(1), 1-20 |12 to the acceleration of united nation’s program stated in sustainable development goals (sdgs) as they share equally a deep concern on environmental and social objectives among the society. table 4. regression result (1) (2) (3) (4) (5) (6) (7) roaa roaa roaa roaa roaa roaa roaa h-statistic -0.0017* -0.001 -0.001 0.009 -0.000 (0.001) (0.001) (0.001) (0.005) (0.01) h-statstic*d_ibdum -0.002 -0.000 (0.002) (0.000) h-statistic*csr -0.000* -0.000 (0.000) (0.0002) h statistic*csr*d_ibdu m 0.0001 (0.000) csr 0.000** * 0.000** * 0.000** * 0.000*** 0.0001 (0.000) (0.000) (0.000) (0.000) (0.000) csr*d_ibdum -0.000 -0.0002* (0.000) (0.0001) size 0.0051** * 0.005** * 0.005** * 0.005** * 0.006** * 0.0052** * 0.004** * (0.001) (0.001) (0.000) (0.001) (0.001) (0.001) (0.000) npl -0.0001 -0.000 -0.000 -0.000 -0.000 -0.000 (0.000) (0.000) (0.000) (0.000) (0.002) (0.000) gdp 0.0731** * 0.070** * 0.040* 0.042** 0.051** 0.061** (0.024) (0.024) (0.021) (0.021) (0.025) (0.026) d_ibdum 0.0024** * -0.001 0.002** * 0.001 -0.001** -0.002** 0.008 (0.001) (0.001) (0.001) (0.002) (0.001) (0.001) (0.007) d_region -0.0011 -0.001 0.003** * 0.003** * 0.002** * -0.002** 0.002** * (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.0001) c 0.0265** * 0.027** * 0.033** * 0.034** * 0.035** * 0.037*** 0.032** * (0.004) (0.004) (0.004) (0.004) (0.004) (0.005) (0.006) obs 560 560 641 641 560 579 598 no banks 196 196 196 196 196 197 212 tumewang & maharani | islamic bank’s performance in the light of competition and csr ijief: international journal of islamic economics and finance, 2(1), 1-20 |13 full sample test of competition and banks’ performance. the dependent variable is roaa, which represents banks’ performance. h-statistic represents the competition among the banks. csr as a moderating variable between competition and banks’ performance. size represents the natural logarithm of total bank assets. npl is the proxy for bank risk. gdp is the annual growth of real gross domestic product. d_ibdum is an islamic bank dummy, and d_region as a dummy of banks’ region. gdp variables that represent macroeconomic conditions show positive and significant results in all models. increased performance in banks was also an impact on improving a country's macroeconomic condition. according to the existing literatures, there is a huge gap found in the relationship between csr disclosure, competition, and the macroeconomic view. this paper examined the relationship between competition and performance of the bank, and then encounters competition with csr and its effects on the performance of the bank. from the findings it can be concluded that based on previous literature, banks with high performance reflects the market power held by the bank. the amount of market power held by banks showed a dominant position in the market which leads to a high concentration. thus, banks with high concentrations have low competition in the market. this study is also in line with concentration stability theory in which a concentrated banking system more stable due to more profitable, better diversified, easier to monitor, and more resilient to shocks (berger et al. 2003). this can trigger higher growth and greater access to the bank in carrying out its activities. the result show that the behavior of islamic banks are concentrated, due to the negative relationship between competition and performance of the bank which is interpreted by the high concentration for each countries. however, this study proves that spending on csr-related activities could weaken the negative correlation between competition and performance of islamic banks. for csr approaches that adopt a new institutional grid of interpretation, corporate economic decisions should be embedded within a social network. agreements among competitors in the same sector and also with other actors contribute to the institutionalisation of the values of sustainable development and to the definition of new market conditions according to generally accepted principles of international law or agreements which promote a broad vision of csr. overall, such agreements prefer cooperation to competition. it is in line with islamic worldview which encourages cooperation and social action. islam emphasizes on the good ethics and behavior which have brought into social justice, wealth, and maslahah as a way of life. therefore, tumewang & maharani | islamic bank’s performance in the light of competition and csr ijief: international journal of islamic economics and finance, 2(1), 1-20 |14 islamic banks environment should put more concern on “social good” and “good governance”. as the form to create the ethical responsibilities in the islamic banks, banks are driven by public demand to increase their transparency and accountability with the respect to social responsibility as a result of changing norms and expectations in society. “csr is an intended consequence of islamic ethics because islam as a religion suggests a proactive and expanded stakeholders’ paradigm through enforcing a moral obligation of corporations towards society by substantive morality” (platonova et al. 2016). the concern over csr is also signi cant to islamic banks. as a business entity established within the scope of islamic law (shari’ah), islamic banks are expected to be guided by an islamic worldview, which is based on principle of social justice and wellbeing (dusuki, 2006). this is particularly true since those involved in islamic banking and nance normally regard their ethics and social responsibility commitment as being more enduring since they are ultimately based on divine revelation, whereas ethics and social responsibility derived from secularist morality are unavoidably temporary (wilson, 2001)the concern over csr is also significant to islamic banks. as a business entity established within the scope of islamic law (shari’ah), islamic banks are expected to be guided by an islamic worldview, which is based on principle of social justice and wellbeing (dusuki, 2006). this is particularly true since those involved in islamic banking and nance normally regard their ethics and social responsibility commitment as being more enduring since they are ultimately based on divine revelation, whereas ethics and social responsibility derived from secularist morality are unavoidably temporary (wilson, 2001) the concern over csr is also significant to islamic banks. as a business entity established within the scope of islamic law (shari’ah), islamic banks are expected to be guided by an islamic worldview, which is based on principle of social justice and wellbeing (dusuki, 2006). this is particularly true since those involved in islamic banking and nance normally regard their ethics and social responsibility commitment as being more enduring since they are ultimately based on divine revelation, whereas ethics and social responsibility derived from secularist morality are unavoidably temporary (wilson, 2001) the concern over csr is also significant to islamic banks. as a business entity established within the scope of islamic law (shari’ah), islamic banks are expected to be guided by an islamic worldview, which is based on principle of social justice and wellbeing (dusuki, 2006). this is particularly true since those involved in islamic banking and finance normally regard their ethics and social responsibility commitment as being more enduring since they are tumewang & maharani | islamic bank’s performance in the light of competition and csr ijief: international journal of islamic economics and finance, 2(1), 1-20 |15 ultimately based on divine revelation, whereas ethics and social responsibility derived from secularist morality are unavoidably temporary. the limits of the csr concept within the liberal paradigm, arguing that the mainstream theoretical csr framework based on the hypothesis of the convergence between firms' objectives and the common interest is not relevant. it can be explained by the paradox motivation of corporate conducting csr merely torespond the increasing pressure from new social movements that denounce the irresponsible actions of large multinationals in the international context of deregulation, while the actual demand for csr is low and the impact of this loss of legitimacy does not offset the pressures arising from strong global competition. this paper highlights that the framework of islamic worldview is more appropriate to analyze the identical link between csr and competition in islamic banks due to the presence of concept of mashlahah (benefit of the society) and maqashid sharia (purpose of islamic rules). in the point of view of islamic financial institutions, islamic banks act not merely as an ordinary intermediary body, but also as a social agent which should manage the social funds for investment on real-sector activities which is highly sharia compliant and socially-impactful. conclusion & recomendation conclusion based on hypothesis testing, this study could conclude that the competition has negative influence on the islamic bank’s financial performance as the first hypothesis is accepted. in addition to that, as the second hypothesis is also accepted, it means that the activities of corporate social responsibility (csr) associated with the degree of competition affect the company’s financial performance in the future.having said that, investors and creditors are expected to exercise careful consideration to the investment decision (the decision to provide loans), especially in manufacturing companies implementing csr programs. input for the management is expected to be more aware of the importance of management of csr programs for the survival of companies in the future. to that end, management is expected to harmonize the various interests of stakeholders through csr programs by maximizing the positive impacts and minimizing negative impacts of a particular business activity. tumewang & maharani | islamic bank’s performance in the light of competition and csr ijief: international journal of islamic economics and finance, 2(1), 1-20 |16 recommendation based on this empirical evidence, we would like to recommend regulatoryauthority to ensure a structure for the banking sector with necessary incentive forbanks, particularly for islamic banks, to improve their profitability and efficiency. nodoubt, a number of conversions to islamic banking and various changes under financial deregulation have been successful in acceleratingthe level of competition. the issue is whether this changing level of competition canenhance the banking sector performance in a developing country like indonesia. suchdecision accelerates the competition level in the future, which may result in a decreasedperformance. under these circumstances, it is vital for the regulatory authorities to revisit the structural changes in order to avoid the occurrence of banking sector instability argued by the existing literature. this research would like to push ahead the government plan to strengthen domestic islamic bank through consolidation or a merger of state-owned islamic banks in order to lower the degree of competition which ultimately leads to a better performance of islamic banks in indonesia. the merger of five state-owned islamic banks which will include bni syariah, bri syariah, bank syariah mandiri and the shariah unit of btn is expected to enhance financial inclusion as they will have more capital, more resources, and more offices across the country to offer more creative products and services to the customer. a mega islamic bank will enable the islamic banking industry to compete with larger conventional banks and to extend their financing to both smes and big corporate segment. for future research, we recommend to extend the period of observation as well as to have a broader coverage (include more islamic banks in more selected 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(2007). concentration and foreign penetration in latin american banking sectors: impact on competition and risk. journal of banking and finance. https://doi.org/10.1016/j.jbankfin.2006.11.003 tumewang & maharani | islamic bank’s performance in the light of competition and csr ijief: international journal of islamic economics and finance, 2(1), 1-20 |20 this page is intentionally left blank building the index of resilience for islamic banking in indonesia: a preliminary research fanny arumsari 1 dimas bagus wiranatakusuma 2 abu umar faruq ahmad 3 abstract the 2007-2008 global financial crises had brought severe financial instability in financial institutions, and since then it became more complex and irreparable. therefore, it has become inevitable to examine various tools that can monitor resilience of these financial institutions, especially the banking system that plays significant role in economic development of a country. although islamic banking operates in the same financial environment, its distinguishing features and fundamental differences demand different treatment in building resilience. the scope of existing literature of banking surveillance tools is either to some extent, mostly limited to banking sector in general, or it is dominated by partial developments. hence, there is a significant gap that lies in the literature to address the specificity of islamic and conventional banking surveillance tools analysis to build resilience that can contribute to reduce the span of financial instability in a country. this study seeks to explore to fill in this gap in indonesian jurisdiction. the study finds that optimum resilience level of shari`ah banking in indonesia exists in specific range as a result of the contribution that is made by each and every indicator. the study also attempts to find a way to trace some indicators that could effectively contribute to prevent the instability of shari`ah compliant banking system in indonesia. keywords: shari`ah banking, resilience, index, islamic banking, indonesia 1 researher at international program for islamic economics and finance, department of economics, faculty of economic and business, universitas muhammadiyah yogyakarta. corresponding author: fannyarumsari@gmail.com 2 lecturer at international program for islamic economics and finance, department of economics, faculty of economic and business, universitas muhammadiyah yogyakarta. corresponding co-author: dimas_kusuma@umy.ac.id 3 associate professor at institute of policy studies, universiti brunei darrussalam, email: umar.ahmad@ubd.edu.bn or aufahmad@gmail.com mailto:dimas_kusuma@umy.ac.id mailto:umar.ahmad@ubd.edu.bn%20or%20aufahmad@gmail.com 78 | building the index of resilience for islamic banking in indonesia: a preliminary research i. introduction as a divine religion and being a complete code of life, islam has special and unique characteristics while it is not only all-inclusive but also universal. allinclusive means the islamic shari`ah combines all aspects of human life, and as such it discusses all matters pertaining to both rituals (`ibadat) and social behaviors or civil transactions (mu`amalat). the tenets of universal islamic shari`ah can be applied in any time and and place until the day of judgment. this universality is similarly applicable in the fields of mu`amalat. besides, being broad and flexible, the principles and practices of mu`amalat do not discriminate between muslims and non-muslims, and as such in terms of mu`amalat, nonmuslims obligations are considered muslims’ obligation and vice versa. islamic economic system is a part of muslims’ life in an effort to implement the teachings of islam in economic activities. according to yuliadi (2007), this system is an important aspect of an integral and comprehensive islamic system to create a better human life. alignment and balance between the horizontal and vertical aspects can guarantee the human’s lives and the universe to walk in harmony and continuous prosperity in this world and the hereafter. by applying the system one may automatically fit unanswerable questions in economy as well as in human life. the absence of shari`ah managemnet and its application in economic system might have indirect links with the financial crisis in the asian financial crisis of 1997-1998. perhaps, it is because the riba or interest based commercial dealings caused money creation, while, gharar or uncertainty and excessive risks, or maysir or gambling and games of chance in secondary were inevitable, which resulted in bringing the financial crisis. it happened as asian financial crisis of 1997-1998 spent extraordinary cost to countries for bailing out banks as much as 55% of gross domestic products (gdp). 4 albeit, this does not include the cost to depositors and borrowers of wider interest rate spreads from bad loan of balance sheets that can push down economic growth of countries involved. given that, the demand for financial stability and a sound and resilient economic environment have been increased, , and are becoming an interesting phenomena in both developing as well as developed countries. the only alternative solution remains is to test the robustness of islamic economics and finance that are based on the rules and tenets of shari`ah. 4 caprio and klingebiel 2003 in world development indicator, 2009. international journal of islamic economics and finance, volume 1, number 1, july 2018| 79 in order for finding solutions to these issues, several international forums that have been devoted to provide crisis prevention namely, the world bank, and international monetary fund (imf) came forward by introducing the financial sector assessment program (fsap) in 1999 in the wake of the asian financial crisis. the program brings together bank and fund expertise to help countries reduce the likelihood and severity of financial sector crises.t other international forums that have been instrumental to solve the crisis were the basel committee on banking and supervision (bcbs), islamic financial services board (ifsb), financial stability board (fsb), the international association of insurance supervisors (iais), and international accounting standard board. generally, the aim of these forums is to assess regularly the strength and weaknesses of financial systems to enhance financial stability. the study undertaken by the authors from indonesian jurisdiction on the relevant area shows that this country is classified as bank backed asset where more than 70% of the assets in financial institutions dominated by banking. (figure 1.2) according to basurto & padilla (2006), a robust and good financial system is a key for macroeconomic stability in terms of supporting, savings and efficiency in allocating resources and investment opportunities. hence, it is important to conduct surveilance as a prior step to catch up financial system stability. according to bank indonesia, the resilience of financial system can be defined through several conditions, as described as follows: (i) when financial system is able to allocate resources and to absorb shock occurs, which can prevent surprises in the real sector, (ii) when financial system is still capable of running intermediation function, execute payments and redistribute risk properly if there is an interference with the economy, and (iii) when price decision, allocation of funds and the risk management in financial system are running well and supporting economic growth. the stability of the financial system itself cannot be achieved without the in-depth understanding of any components inside the system. the financial system consists of a number of financial institutions, a set of financial markets, the financial system infrastructure, and a number of rules and procedures that guarantee the savings and transactions of loans are running well. here financial system stability cannot be separated from financial institutions, soundness and financial market stability. banking is one important part that supports financial system stability. a strong banking system and resilience of banking system are the foundation for sustainable economic growth, as banks are at the center of the credit intermediation process between the savers and investors (bis, 2009). the 80 | building the index of resilience for islamic banking in indonesia: a preliminary research existence of both banks individually and the entire system is a requirement for sustainable economic growth. islamic finance, with the banking system part and parcel of it, is one of the fastest growing segments of the global financial industry. in some countries, it has become systematically important, while in many others, it is hard to be ignored. though, islamic finance encompasses banking, insurance, leasing, investment funds, micro finance, sukuk (islamic securities) and equity and so on their assets mainly generate from banking and sukuk sectors. these two sectors of islamic finance represent about 95% of the total global islamic finance assets. it is estimated that the size of islamic banking industry at global level was nearly $882 billion as at the end of 2014 with average growth rate of 14% per year during 2010-2014. 5 this is about two to three times faster than the rate at which conventional bank grew over the same period, due in part to the global financial crisis. despite these developments of islamic banking industry, it is worthy of note that although the structured literature that mainly focused on micro prudential surveillance there is a dire need of comprehensive discussion on resilience-based supervision. generally, surveillance authorities apply either macro prudential or generic surveillance framework procedure for both institutions offering islamic financial services (iifs) and conventional banks. one of well-known tools in this regard is capital, asset quality, management, earnings, liquidity and. capitalmanagement-earnings-liquidity-sensitivity (camels) rating system, which is generally appropriate, but still less adapted to the specific risks by islamic banks (ibs) and iifs, particularly regarding shari`ah compliance, capital adequacy, asset quality, and liquidity. moreover, the present literature covers partial islamic banking (ib) soundness variables, by using non performing financing (npf), capital adequacy r atio (car), return on asset (roa) to gain understanding about ib resilience. gunadi (2013) provided comprehensive understanding about banking resilience even financial system stability by using financial system stability index (fssi). however, the discussion has been centered toward assessing the banking resilience and stability rather than specific for iifs and micro prudential perspectives. islamic banking has some distinguishing features that made it unique and different from its conventional counterparts in several ways. conventional banks’ (cbs) intermediation is largely debt-based with pre-specified interest rate and 5 world islamic competitiveness report, ey, 2016 international journal of islamic economics and finance, volume 1, number 1, july 2018| 81 allows for risk transfer, while iifs and ib’s intermediation is asset-based and centers on risk sharing (mejía, 2014). in running sale and lease contracts, iifs must have underlying assets. it makes iifs more resilient during the global financial crisis compare to its conventional counterparts. a recent theoretical study carried out by farahani, guzardi et al., 2012) found positive and significant relationship between islamic banking development and economic growth. while the expansion of ibs is expected to support growth, it still stances challenges in terms of competition, size, standardisation, regulation, and cost structure. standardisation and regulation of ibs is one of potential challenges to be explored, as it can make effective surveillance and give directions for authorities as well as institutions themselves to promote stability and resilience that can contribute to economic growth. moreover, the urge for tools for ibs to do supervision and surveillance is categorised as strategic issue in the developments of ibs and iifs in indonesia. 6 in recent developments, composite indicators (cis) that compare country performance are increasingly recognised as a useful tool in policy analysis and public communications. according to bandura, (2006) the number of cis in existence around the world is growing year after year in academic circles, the media and among policymakers. he cites more than 160 composite indicators that provide simple illustration of complex and sometimes elusive issues in wideranging fields, e.g., environment, economy, society or technological development. this can be used not only in macro level, but also in micro level, such as bank. it is quite rare for ib having tool such as internal composite index compare to cb. according to the description above, this study attempts to fill the gap in term of the lack of comprehensive tools for ib to enhance resilience. analyzing islamic banking resilience supervision in indonesia is interesting effort, as this country is the biggest muslim population in the world and has complete periodical economic situation. this economic situation refers to normal, recession, and crisis in the last two decades. hence, this studyis going to provide tools as a surveillance the resilience of ib in indonesia. the study uses a constructed index to supervise resilience of islamic banking in indonesia. the data used are high-frequency data (monthly data) that reflect the behaviour of the financial institutions, particularly ib. this study has adapted the specific characteristics of shari`ah banking intermediation, which is 6 roadmap perbankan syariah indonesia, 2015-2019 82 | building the index of resilience for islamic banking in indonesia: a preliminary research asset based and centers on risk sharing. methodology used is normalisation of indices pre-and post-year by comparing current related variables of idyosyncratic risk in banking with pre-and post-year. the proportion of every index forming financial institutions assumed to be equal. the study contains several sections, which are as follows: section 1 provides the background and introduction to the study. section 2 covers literature review of composite indicators (ci) formation any indicator related to stability of financial institutions. section 3 explains the data selected, steps for constructing shabar index, as well as construction model of shabar company index. while section 4 analyses the results of shabar index formation. it also discusses the implications and key issues in building ib’ resilience sensitivity analysis of each indicator on the index, as well as future index projection. section 5 concludes and offers a way forward for shabar index studies followed by appendices. the scope of the study has some limitations to the extent that it analyses the problems that focused on (i) all ibs 7 listed in website of bank indonesia after the enactment of islamic banking act no. 21 of 2008 (hereiafter ‘the act’, (ii) the data spans from january 2010 to december 2016, monthly time series data, (iii) indicators used to build shari`ah banking resilience (shabar) index based on trinity of financial system stability from bank indonesia, (iv) indices constructing resilience are related to idiosyncratic risk of shari`ah banking (micro level) 1. to reflect to research problems to be solved in this study, the overall quest of the research questions can be formulated as follows: how to construct an index for monitoring the resilience of islamic banking in indonesia? 2. to what extent was the resilience of islamic banking in indonesia? 3. how does each indicator of the index contribute to the resilience of islamic banking in indonesia? ii. methodology 2.1 research variable and data type shari`ah banking resilience (shabar) index is arranged based on the trinity of financial system stability by using 11 indicators classified into 3 major categories, namely islamic banking institution pressure index, islamic banking institution intermediary index, and islamic banking institutions; efficiency index. 7 institutions offering islamic fiinancial services, analog with islamic banking international journal of islamic economics and finance, volume 1, number 1, july 2018| 83 variables reflecting degree of pressure from ibs and iifs are npf, car, roa, and delta liquidity (∆l). variables reflecting islamic banking intermediation are the spread financing margin to dpk margin (sftd), gap financing to deposi ratio (gap fdr), financing to gdp ratio (f/gdp), and gap gross domestic product (gap gdp). variables reflecting islamic banking efficiency are net operating margin (nom), operational efficiency ratio (oer) or bopo ratios, cost to income ratio (cir), and overhead cost (ohc to total operating revenue. data used in this study are secondary monthly time series data, starting from january 2010 until december 2016. the usage of monthly data based on technical statistics consideration is related to degree of freedom problem and limitation of publication, while the selection time period from 2010 until 2016 is based on the period after being issued the act. this regulation practice has certainly undergone evolutionary episodes of juridical legal base not only for the growth and development of shari`ah banking, but also for possibile developments of introducing islamic windows or subsidiaries by conventional interest-based banks in indonesia. it was assumed that 1 year is effective period of socialisation of regulation, where another 1 year is to build up complete economic situation in indonesia (normal-recession-crisis) which is expected to make this study applicable for such future situation. 2.2 data collecting method and sources a documentary review (documentary research method) was used in collecting relevant information in this study on the subject . payne and payne (2004) describe the documentary method as the techniques used to categorise, investigate, interpret and identify the limitations. according to bailey (1994), documentary research method refers to the analysis of documents that contain information about the phenomenon the researchers wish to study. data were obtained from various sources published periodically by (i) bank indonesia (bi), (ii) financial services authority (ojk) and (ii) central bureau of statistics (bps), such as indonesia islamic banking statistics (spsi) and indonesia financial economic statistics (seki) reports. this study also obtained relevant information from official websites, magazines, journals and articles regarding the relevant study. 84 | building the index of resilience for islamic banking in indonesia: a preliminary research 2.3 data analysis model and hypothesis testing the study used indexing method with standardisation normalisation basic year approach to analyse shabar index. the purpose of using this method is to achieve the key research objectives and find possible answers to the existing problem formulation. also, because this method normalises the outliers in data series, paves the way for making adjustments in scale, facilitates the transformation and aggregation of abnormal data. another key reason for using this method is that it enables to illustrate complex and sometimes elusive issues in wide range of fields, especially in banking system. step 1: developing a theoretical framework 1) complex adaptive system theory complexity results from the inter-relationship, inter-action and inter-connectivity of indicators within and between a system as well as its environment. many natural systems (e.g., brains, immune systems, ecologies, societies included politic and economic) and increasingly, many artificial systems (such as parallel and distributed computing systems, artificial intelligence systems, artificial neural networks, evolutionary programs) are characterised by apparently complex behaviours that emerge as a result of often nonlinear spatio-temporal interactions among a large number of component systems at different levels of organisation. these systems have recently become known as complex adaptive systems (cas). 8 banking system as part of economy face same characteristics of complex behawviour from nonlinear interactions among a large number of indicators at different levels that emerge from the whole system of even economy and a country. constructing the resilience of shari`ah banking can be done by feasible monitoring process of every indicator in the banking system itself, so that every movement can be measured and advanced with a quick and precise decision. 8 ibid international journal of islamic economics and finance, volume 1, number 1, july 2018| 85 indicators/ element dimension s system/composite source: authors’ own, 2014 figure 2.1 2) financial cycle phase theory in the financial cycle, the build up phase is the stage of source formation interference. in this phase, market participants tend to take advantage of conditions in order to achieve the greatest profits even though the stringent prudential rules may apply. this phase has been illustrated in the upward or upswing cycle segment (figure 3.1). under these conditions, systemic risk measurement needs to be focused on measurements of financial system imbalance, and measurements against stress indicators that show signs of the fact that the financial cycle are approaching to its peak, which is interpreted as already excessive risk-taking behaviour. imbalances were detected here are related with to the behaviour of bank's’ procyclicality in lending. establishment of financial cycle indicators, as was described previously is also considered also as one of the efforts to detect imbalances in the financial system because ofowing to the perception of market participants against economic conditions, as far as the risk-taking behavior is concerned and behavior take its risks. furthermore, the source of the materialized materialised disturbance becomes a risk that will spread in the propagation phase or propagation mechanism. that phase happens after and between the peak of the financial cycle until the cycle reaches basically or trough (figure 3.1). in this phase, the problem occurs in one elements of the banking system tend to be transmitted to or propagated on sectors or other elements of the banking system. therefore, the measurement of risk systemic in this phase generally use cross sectional indicators. indicators the most needed in this case are indicators that indicate the relationship between physical exposures among financial system elements, including for every individual element of the financial system which is primarily a financial institution and corporation. 86 | building the index of resilience for islamic banking in indonesia: a preliminary research the last phase is the systemic event phase or also called ss materialized shock. thise phase is related to the financial crisis. the results of the data were collected in the past showed that the crisis generally occurs around 2 years after the peak of the financial cycle. thus, systemic event is a very short period in the propagation phase due to the fact that shock and vulnerability occur and resulted in establishing systemic risk. after the systemic event occurs, the downswing segment formed can be u-shaped or v-shaped. if it is u-shaped, downswing will last deeper and longer in the cycle finance, and will be accompanied by a long recovery period. this condition has the potential to have structural impacts on downswing. if it is v-shaped, downswing will take place in a shorter period and the recovery will also take place faster. in the financial cycle, systemic events just cannot happen because in the downswing segment market participants are in a position to automatically adjust its portfolio to reduce potential losses. it depends on the resilience of the elements of the financial system. 3) defining resilience and signal crisis to determine the level of resilience of shari`ah banking in indonesia, the first step is to understand the flows of macroprudential framework in indonesia in order to identify the risk embodied in the financial system, which potentially leads to create systemic system, realising how to deal with risksspread, through which channels the risks are spread out, and the precise momentum to release the particular instrument of macroprudential policy so the potential risks can be prevented and spread accross financial system, macroeconomic, and real sector (ascarya et al., 2016). figure 2.2 conventional macroprudential framework in bank indonesia international journal of islamic economics and finance, volume 1, number 1, july 2018| 87 the study specifies to construct such index to monitor the financial system until risk signaling, which are the first four steps in conducting macroprudential surveillance process. macroprudential policy appears in the critical points when crossing below or above the tolerated thresholds. based on figure 3.3 it happens in fist step of financial system surveillance. after determining the area of banking resilience, the next step is to determine the definition of resilience itself. this definition is made to focus the study’s initial objectives and facilitate the identification as to whether the value of the index shabar exceeds its threshold or not. if the variable crosses the threshold, a signal is emitted, and as such it will determine whether the composite of shari`ah banking is in a position of resilience or not. the definition of resilience is as follows: the signal is constructed to be a binary variable where . if the variable crosses the threshold, a signal is emitted . mathematically, it can be described, { } {| | | |} (4) meanwhile, if the indicator remains within its threshold boundary, it behaves normally and does not issue a signal, so . { } {| | | |} (5) in terms of defining crisis, the research borrows the shabar is as follows: { } { } (6) { } { } (7) where: : signal variable relating indicator xt in t-period : value of indicator xt in t-period : threshold of the indicator ̅ : standard deviation of of xt in 2011 in addition, in taking a conclusive remark, it is important to notice the directional sign 9 may vary depending on whether the indicators (leading indicators) at resilience level questions above are expressed in absolute terms. after that, it needs to obtain a binary time series of signal or no-signal observations. interpreting crisis and signal framework once the crisis and signal are defined, the evaluation criteria can be conducted by using matrix framework. kaminsky, et al. 9 loc.cit 88 | building the index of resilience for islamic banking in indonesia: a preliminary research (1998) developed matrix crisis-signal framework by using 12 months as signal window horizon, which is as follows: table 2.1 the performance of individual indicator by matrix crisis-signal framework table of statistical error actual crisis (c=1) no crisis (c=0) signal issued (s=1) correct signal (a) no stress event (b) no signal issued (s=0) type i error (c) correct signal (d) source: ito, et al., 2014 in wp/7/2015 bi in this matrix, a is the number of months in which the indicator issued a good signal, b is the number of months in which the indicator issued a bad signal or “noise”, c is the number of months in which the indicator failed to issue a signal (which would have been a good signal), and d is the number of months in which the indicator has refrained from issuing a signal (which would have been a bad signal). it would issue a signal in every month that is to be followed by a crisis (within the next n months, example 12 months), so that a > 0 and c = 0, and it would refrain from issuing a signal in every month that is not to be followed by a crisis (within the next n months, example 12 months), so that b = 0 and d > 0. for sure, none of the indicators fit the profile of a perfect indicator, but the matrix will be a useful reference to assess how close or how far is each indicator from that profile. 4) determining evaluation criteria this study employs six evaluation criteria in order to assess the performance of indicators which was identified through crisis-signal framework, as follows: (1) the proportion of observations correctly called , defined as the proportion that all observations correctly bring information about crisis and not crisis. this implies that the higher proportion occurred will lead to best evaluation criteria. (2) the noise-to-signal-ratio , it measures the false signals as a ratio of the good signals issued. the selection rule is to pick the variable or model that minimises the noise to signal ratio (nts). (3) the proportion of crises correctly called , is defined as the proportion of crisis happened once the signal was issued. thus, the higher of its proportion would be fitting of a perfect indicator in signaling the crisis. international journal of islamic economics and finance, volume 1, number 1, july 2018| 89 (4) the proportion of false alarm of total alarms issued , given that, an individual indicator exposes a frequent false signal. thus, the lower of its proportion would be good to minimise the panic behavior in the markets. (5) the proportion of crisis given an alarm issued , given that, an individual indicator generates different signals. this criterion is to select indicators that can maximise the probability of a crisis, given a signal was issued as alarm. (6) the proportion of probability of crisis given no alarm issued , given the signal is important, an occurence of crisis without signals was extremely reduced or minimised. 5) determining signalling horizon the study involves various signaling horizons to be chosen as the fit horizon that can predic the crisis. this signaling horizons are range of period that has ability for anticipating a crisis. kaminsky (1997) used 24 month signaling horizon. he argued that the longer signaling horizon would enable policy makers to anticipate a crisis. meanwhile, bussiere and fratzscher (2002) set 12 and 18 months as signal horizon. they argued that various time horizons would provide the best achievable trade-off between missing crises and wrong signal. in addition, this paper adds another 3 and 6 months as signaling horizons considering that a crisis is difficult to be predicted. providing short horizon enables policy makers to react immediately as crisis starts to build up. 6) determining thresholds describing conditions on the indices that have been established thresholds required one (thresold) making it easier to determine the conditions and steps to be taken. beginning the formulation by the reference of bank indonesia threshold, namely 2 standard deviations (sd), 1,7 sd, and 1,3 sd to construct shabar index threshold. later, the all mentioned thresholds are used to determine the level of resilience in islamic banking. threshold is then translated into 4 conditions: the resilience condition, alert condition out of resilience, warning condition out of resilience, and crisis conditions. 90 | building the index of resilience for islamic banking in indonesia: a preliminary research figure 2.3 shabar index’s threshold step 2: selecting varibles (research variable and operational definition) this study uses variables derived from all data of iifs listed in bank indonesia. operational definitions of each variable used in this study are as follows: statistical normalisation approach shari`ah banking resilience (shabar) index base year 2011 is used as forming the single index, dimension index, and the main index (shabar index) sequentially. methodology of calculation using the statistical approach normalisation base year 2011, was formed through the following calculation: ∑ ̅ ̅ (8) where: qt : composite index (single, dimension, main) : weight value of each variable : value of variable xt in t-period ̅ : average variables of xt in 2011 ̅ : standard deviation of of xt in 2011 the period of 2011 base year as a benchmark for shari`ha banking and financial system of indonesia on the period experienced a complete regulation after enactment of the act , which brought adequate regulation for expansion and operation of islamic banks in a proper way. step 3: imputation of missing data the data used in this research are secondary data from bank indonesia which are categorised as monthly time series data from january 2010 to december 2016. the study period is chosen as a benchmark for shari`ah banking and financial international journal of islamic economics and finance, volume 1, number 1, july 2018| 91 system of indonesia on the period experienced a complete regulation after the enactment of the act which brought adequate regulation for expansion and operation of ibs in a proper way. this step can be skipped by the availability of adequate data. step 4: normalisation of data shari`ah banking resilience (shabar) index formed using the statistical normalisation approach base year 2011, when banking performance is in the most stable level compare to the other years. 10 step 5: weighting and aggregation for every indicators the result of normalisation of each indicator (single index) of islamic banks will be merged into an index with a certain weight (dimension index). weighting will be determined through variance of the standard deviation of the sample mean to put into strengths in the interpretation of shabar index. the approach is expected to perform the synchronisation between the perceptions of security conditions for ibs and ifis with the movement of the index. the calculation of the weighting method by using variance of the standard deviation can be described in the following formula: √ (9) where: : mean of the variance (weight index) : number of observations in the sample used : annually standard deviation of the mean of xt : standard deviation of xt the use of positive and negative sign indicates the direction vector of each indicator against which shabar index was formed, the positive influence showed that the higher the pressure on the index and vice versa. especially, for the index banking intermediation, a positive sign indicates an increase in intermediation and the negative sign indicates a decrease in intermediation. step 6: accuracy test to measure the accuracy of forecasting calibration the probability of resilient uses quadratic probability score (qps). qps has a range from 0 to 2, when score = 0 reflects very accurately with the following formula: ∑ (10) where: 10 ibid 92 | building the index of resilience for islamic banking in indonesia: a preliminary research p = forecasting r = realisation t = period meanwhile, the calibration of probability forecasting relates to the accuracy of probability forecasting and the observed relative frequency. calibration compares the average probability forecast to the average of its realisation. global square bias (gsb) values have ranges from 0 to 2 with score value = 0 reflecting perfect calibration. the formula is as follows: ̅ ̅ , (11) where ̅ ∑ and ̅ ∑ (12) step 7: back to the details heat map is one of the best visualisation tools for dense point data. they are also useful for doing cluster analysis or hotspot analysis. in this study, heat map or chart indicators with color indication are used as manual to measure vulnerability level of the indicator. heat map of shabar index show the entire index results in terms of pressure, intermediation and banking efficiency. for each composite index will be composed of the composite index constituent presence. the use of heat maps is commonplace in all types of risk analysis since they make it easy to see the source of vulnerability. the use of variation colour in heat maps refers to the threshold (treshold). overall, there are three colors on the heat map shabar index, green depicts resilience condition, with colour indicator stands at a better value than the first treshold. yellow colour (two degradations depict below and upper threshold) depicts alert condition out of resilience threshold. the indicator value in these conditions is between treshold first and treshold second. the orange colour indicates the area of early warning system of crisis before crisis in resiliency of islamic banks. if it is more than upper threshold or below the lower threshold then it depicts crisis in banking. international journal of islamic economics and finance, volume 1, number 1, july 2018| 93 iii. result and discussion 3.1 results shabar index with standardised normalisation approach (17) (18) (19) (20) shabar index formation, with a based year approach to statistical normalisation of monthly time series data from january 2010 to december 2016. this is modified by the availability of existing data. after determining the index normalisation method followed by the selection of indicators finally specific weight for each dimension forming shabar index is obtained. it is shown in formula (17) to (20) above. based on formula (17), pressure index contributes positively 7% to shabar index, while intermediary index contributes negetively 75% and efficiency index contributes positively 19%. in the formula (18), npf contributes positively 18% to the pressure index, while car contributes negetively 59%, roa contributes negatively 7%, and liquidity contribute positively 16%. in the formula (19), sftd contributes negatively 23% to the intermediary index, while gapfdr contributes positively 4%, f/gdp contributes positively 2%, and liquidity contributes positively 71%. formula (20) shows negative contribution of nom in the level of 7% to the efficiency index, bopo contributes negatively 49%, cir contributes negatively 35%, and contributes negatively 9%. 94 | building the index of resilience for islamic banking in indonesia: a preliminary research 3.2 result of accuration test of shabar index composite index table 3.1 test accuration of shabar index with upper treshold items threshold 1,3 1,7 2 upper threshold loss 24 month 0,169109 0,086907 0,09198 12 month 0,005556 0,033437 0,048758 6 month 0,046784 0,057019 0,070779 3 month 0,08538 0,080128 0,092788 current year 0,106322 0,103241 0,109259 qps 73,80952 73,80952 70,2381 gsb 94,33107 92,50283 91,14229 dimension index table 3.2 test accuration of shabar index with lower treshold items threshold 1,3 1,7 2 lower threshold loss 24 month 0,077193 0,016667 0,016667 12 month 0,021131 0,019591 0,019591 6 month 0,02284 0,022121 0,022121 3 month 0,02284 0,022121 0,022121 current year 0,02284 0,022121 0,022121 qps 88,09524 94,04762 94,04762 gsb 99,94331 99,64569 99,64569 international journal of islamic economics and finance, volume 1, number 1, july 2018| 95 table 3.3 qps and gsb of dimention index table 4.1 and 4.2 explain the result of accuration test for shabar index with upper and lower threshold, the resuts are as follows: a. the smallest loss value for upper threshold is 0,005556 which occurs at 12 months’ prediction months with threshold 1.3. b. the smallest lloss value for the lower threshold is 0.016667 which occurs on the 24 months’ prediction month with the threshold of 1.7 and 2 c. the smallest loss value for the threshold is 0,005556 which occurs at prediction month 12 months with threshold 1.3 d. the largest percentage of qps for upper threshold is 73,80952 which occurs at threshold 1.3 and 1.7 e. the largest percentage of qps for the lower threshold of 94.04762 occurs at the threshold of 1.7 and 2 f. the largest percentage of gsb for upper threshold is 94.33107 occurs at threshold 1.3 g. the percentage of gsb is the same for each level (1.3, 1.7 and 2) in the lower threshold table 4.3 shows the results of accuration test of every dimension index constructing shabar index. the red colour shows the accuracy below the standard, while the others are in it track. generally, all constucted dimentions’ index shows good accuracy performance of more than 66,67%. the dimension index that shows less accuracy performance is intermediary index which has qps level only 65,48%. category no indicator trend loss (1,3) threshold 1,3 lamdha=1600 (bank indonesia) accuracy and calibration dimension index (µ = 0,5) 2.1 pressure index one side hpf 0,021 upper threshold qps 82,14 gsb 99,65 one side hpf 0,08 lower threshold qps 69,05 gsb 91,84 2.2 intermdiary index one side hpf 0,073 upper threshold qps 65,48 gsb 95,90 one side hpf 0,017 lower threshold qps 85,71 gsb 97,96 2.3 efficiency index one side hpf 0,06 upper threshold qps 82,14 gsb 99,31 one side hpf 0,117 lower threshold qps 80,95 96 | building the index of resilience for islamic banking in indonesia: a preliminary research single index table 3.4 qps and gsb of dimention index category no indicator trend loss threshold 1,3 lamdha=1600 (bank indonesia) accuracy and calibration single index (µ = 0,5) 3.1 npf one side hpf 0,048 upper threshold qps 91,66667 gsb 99,30556 npf one side hpf 0,074 lower threshold qps 89,28571 gsb 99,98583 3.2 roa one side hpf 0,061 upper threshold qps 78,57143 gsb 97,95918 roa one side hpf 0,09 lower threshold qps 72,61905 gsb 93,75 3.3 car one side hpf 0,022 upper threshold qps 95,2381 gsb 99,94331 car one side hpf 0,25 lower threshold qps 46,42857 gsb 84,56633 3.4 ∆l one side hpf 0,036 upper threshold qps 80,95238 gsb 98,58277 ∆l one side hpf 0,098 lower threshold qps 75 gsb 94,88379 3.5 sftd one side hpf 0,094 upper threshold qps 66,66667 gsb 90,4195 sftd one side hpf 0,025 lower threshold qps 84,52381 gsb 97,60488 3.6 gapfdr one side hpf 0,095 upper threshold qps 83,33333 gsb 98,58277 gapfdr one side hpf 0,122 lower threshold qps 63,09524 gsb 94,88379 3.7 gdp one side hpf 0,025 upper threshold qps 98,80952 gsb 99,98583 gapgdp one side hpf 0,017 lower threshold qps 100 gsb 100 3.8 gdp one side hpf 0,081 upper threshold qps 63,09524 gsb 88,08107 gapgdp one side hpf 0,021 lower threshold qps 82,14286 gsb 99,30556 3.9 nom one side hpf 0,058 upper threshold qps 76,19048 gsb 99,94331 nom one side hpf 0,108 lower threshold qps 66,66667 gsb 90,4195 3.10 bopo one side hpf 0,088 upper threshold qps 80,95238 gsb 97,22222 bopo one side hpf 0,027 lower threshold qps 77,38095 international journal of islamic economics and finance, volume 1, number 1, july 2018| 97 gsb 95,9042 3.11 cir one side hpf 0,033 upper threshold qps 73,80952 gsb 99,4898 cir one side hpf 0,033 lower threshold qps 77,38095 gsb 97,60488 3.12 ohc/po one side hpf 0,021 upper threshold qps 90,47619 gsb 99,09297 ohc/po one side hpf 0,08 lower threshold qps 65,47619 gsb 88,08107 table 3.4 shows the results of accuration test of every single index constructing shabar index. the red colour shows the accuracy below the standard, while the others are in it track. generally, all indicators show good accuracy performance more than 66,67%. the single indices that show less accuracy performance are lower threshold of car, gapfdr, nom, and ohc/po, while the upper one is sftd. car has qps level only 46,43%, gapfdr has 63%, nom has 66,67%, and ohc/po has 65,48%. sftd has only qps level of 66,67%. 3.3 resilience level of shabar index composite index table 3.5 resilience level of composite index(ci) no indicator probability of systemic risk (c & b) threshold (index) resilience level 1.1 shabar index/ci 0,03 upper 4,4 0,994 1.2 shabar index/ci 0,07 lower 3,2 0,979 table 4.5 shows the resilience level of shabar index. for shabar index itself, resilience level of composite index (ci) exists in the range level of 0,979 to 0,994 with upper threshold 4,4 and lower threshold 3,2. probability level of systemic risk occurred 3% only for upper threshold, while it is 7% for lower threshold of all crisis possibilities based on sample. 98 | building the index of resilience for islamic banking in indonesia: a preliminary research dimention index table 3.6 resilience level of dimension index no indicator probability of systemic risk (c & b) threshold (index) resilience level 2.1 pressure index 0,07 upper 0,1 0,979 pressure index 0,42 lower 0,0 0,920 2.2 intermdiary index 0,33 upper 6,3 0,927 intermdiary index 0,03 lower 4,4 0,983 2.3 efficiency index 0,20 upper -0,3 0,945 efficiency index 0,23 lower -1,7 0,974 table 4.6 shows the resilience level of dimension index constructing ci. resilience level of pressure index exists in the range level of 0,920 to 0,979 with upper threshold 0,0 and lower threshold 0,1. probability level of systemic risk occured 7% for upper threshold, while it is 43% for lower threshold of all crisis possibilities based on sample. while resilience level of intermediary index exists in the range level of 0,927 to 0,983 with upper threshold 4,4 and lower threshold 6,3. probability level of systemic risk occurred 33% for upper threshold and 3% for lower threshold of all crisis possibilities based on sample. last but not the least, resilience level of efficiency index exists in the range level of 0,945 to 0,974 with upper threshold -1,7 and lower threshold -0,3. probability level of systemic risk occurred 20% for upper threshold and 23% for lower threshold of all crisis possibilities based on sample. international journal of islamic economics and finance, volume 1, number 1, july 2018| 99 single index table 3.7 resilience level of single index components of pressure index no indicator probability of systemic risk (c & b) threshold (index) resilience level 3a npf 0,10 0,4 0,953 3a npf 0,15 -0,7 0,926 4a roa 0,25 0,4 0,939 4a roa 0,28 0,0 0,910 5a car 0,08 -0,7 0,978 5a car 0,50 -0,9 0,750 6a ∆l 0,08 0,5 0,964 6a ∆l 0,35 -0,4 0,902 components of intermediary index sftd 0,33 -0,3 0,906 sftd 0,17 -0,6 0,975 gapfdr 0,22 0,4 0,905 gapfdr 0,23 0,1 0,878 f/gdp 0,05 1,8 0,975 f/gdp 0,03 -0,8 0,983 gapgdp 0,18 8,9 0,919 gapgdp 0,07 6,3 0,979 components of efficiency index nom 0,20 0,7 0,942 nom 0,45 0,6 0,892 bopo 0,30 0,2 0,912 bopo 0,27 -0,4 0,973 cir 0,07 -1,1 0,967 cir 0,07 -4,3 0,967 ohc.po 0,07 -0,3 0,979 ohc.po 0,23 -0,6 0,920 table 4.7 shows the resilience level of single index constructing ci. from pressure’s side, resilience level of npf exists in the range level of 0,926 to 0,953 with upper threshold 0,4 and lower threshold -0,7. probability level of systemic risk occurred 10% -15% of all crisis possibilities based on sample. 100 | building the index of resilience for islamic banking in indonesia: a preliminary research resilience level of roa exists in the range level of 0,910 to 0,939 with upper threshold 4,4 and lower threshold 6,3. probability level of systemic risk occurred 25%-28% of all crisis possibilities based on sample. resilience level of car exists in the range level of 0,950 to 0,978 with upper threshold 0 and lower threshold -0,7. probability level of systemic risk occurred 8% -50% of all crisis possibilities based on sample. resilience level of ∆l exist in the range level of 0,902 to 0,964 with upper threshold 0,5 and lower threshold -0,4. probability level of systemic risk occurred 8-35%% of all crisis possibilities based on sample. from intermediary side, resilience level of sftd exists in the range level of 0,906 to 0,975 with upper threshold -0,6 and lower threshold -0,3. probability level of systemic risk occurred 17-33%% of all crisis possibilities based on sample. resilience level of gapfdr exists in the range level of 0,878 to 0,905 with upper threshold 0,4 and lower threshold 0,1. probability level of systemic risk occurred 22% -23% of all crisis possibilities based on sample. resilience level of f/gdp exists in the range level of 0,975 to 0,983 with upper threshold 1,8 and lower threshold 0,8. probability level of systemic risk occurred 3% -5% of all crisis possibilities based on sample.resilience level of gapgdp exists in the range level of 0,919 to 0,979 with upper threshold 8.9 and lower threshold 6,3. probability level of systemic risk occurred 7-18%% of all crisis possibilities based on sample. from efficiency side, resilience level of nom exists in the range level of 0,892 to 0,942 with upper threshold 0,7 and lower threshold 0,6. probability level of systemic risk occurred 20-45%% of all crisis possibilities based on sample. resilience level of bopo exists in the range level of 0,912 to 0,973 with upper threshold 0,2 and lower threshold -0,4. probability level of systemic risk occurred reach 27% -30% of all crisis possibilities based on sample. resilience level of cir exist in the level of 0, with upper threshold -1,1 and lower threshold -4,3. probability level of systemic risk happen reach 7% of all crisis possibilities based on sample.resilience level of ohc/po exist in the range level of 0,920 to 0,979 with upper threshold -0,3 and lower threshold -0,6. probability level of systemic risk happen reach 7%-23% of all crisis possibilities based on sample. international journal of islamic economics and finance, volume 1, number 1, july 2018| 101 1. threshold single index table 3.8 upper and lower treshold of indicators indicator upper threshold lower threshold th 1,3 th 1,7 th 3 th 1,3 th 1,7 th 3 npf 0,38 0,55 0,68 -0,71 -0,88 -1,00 roa 0,38 0,44 0,48 0,04 -0,02 -0,06 car -0,67 -0,63 -0,61 -0,88 -0,92 -0,94 ∆l 0,46 0,59 0,69 -0,41 -0,54 -0,64 sftd -0,29 -0,24 -0,20 -0,62 -0,67 -0,71 gap fdr 0,44 0,49 0,52 0,14 0,09 0,06 f/gdp 1,83 2,24 2,54 -0,81 -1,21 -1,52 gap fdr 8,95 9,36 9,66 6,28 5,88 5,57 nom 0,69 0,70 0,70 0,63 0,62 0,61 bopo 0,19 0,28 0,35 -0,40 -0,49 -0,56 cir -1,14 -0,66 -0,30 -4,25 -4,73 -5,09 ohc/po -0,32 -0,27 -0,23 -0,65 -0,70 -0,74 from the above, we can see the results of upper and lower threshold of every single indicator constructing shabar index. threshold 1,3 used as a basis to determined resilience level because it is the most low threshold which contributed to the loss level in shari`ah banking. 3.4 trace back by using heat map one of the weaknesses in the indexation of the indicators is difficulty of tracing back to see the source of the pressure on the index. heat maps are one of the best visualisation tools for dense point data. they are also useful for conducting cluster analysis or hotspot analysis. in this study, heat maps or chart indicators with colour indication serve as manual vulnerability level of the indicator. heat maps of shabar index show the entire index results in terms of pressure, intermediation and banking efficiency. each composite index will be composed of the composite index constituent, presence heat map make easy see the source of vulnerability. the use of variation colour in the heat maps refers to the threshold (treshold). overall, there are three colours on the heat map shabar index. green colour depicts normal conditions, with colour indicator stands at a better value than the first treshold. yellow colour depicts the standby state: the indicator value in these conditions is between 102 | building the index of resilience for islamic banking in indonesia: a preliminary research treshold first and second treshold. the orange colour, the standby state, the indicator on this colour is at a value between. table 3.9 heat map shabar index (january 2010-december 2016) the above heat maps are presented based on the single, dimension, and composite index data that have been formulated in the previous section. these heat maps describe the condition of banking in indonesia in 2010 after the enactment of the act. based on the above mentioned heat maps it appears that the trend of banking conditions in indonesia is beyond the threshold limit of its ideal level of resilience. based on business cycle theory, it happen if in the business implementation of shari`ah banking is too excessive (above upper threshold) or too defensive whereas looking for a safe level (below ideal resistance level). the average indicator shows its resilience level near the end of 2010. car and bopo are at their ideal resilience levels in november, while gap fdr and ohc/po is in october (?). npf and f/gdp are at warning level in december (?). while δliquidity successively is within its ideal resilience level in may and august (?), nom indicator is in the most frequently alert horizon in 2010 compared to the other variables in may, june, and october. other yellow horizon indicators occurred in cir and ohc/po respectively in march and november. pressure on banks was at its ideal level of resilience in october. indicator such as gap gdp, sftd, and roa was out of its ideal level of resilience based on threshold 1,3. when it comes to lower economic growth compare to its trend, it could impact to the banking system. moreover, shari`ah banking performance seems play in save area looking at lack contributions of roa to the shabar index. international journal of islamic economics and finance, volume 1, number 1, july 2018| 103 2011 heat maps explain it appears that the trend of banking conditions in indonesia has increased its resilience compared to previous year. shari`ah banking stack in the ideal level of its resilience means it is not too excessive (above upper threshold) or too defensive (below ideal resistance level). moreover. it is entering 3 years after enactment of the the act. the socialisation and implementation of regulation seem to be showing positive results. the average indicators show its resilience level near the end of 2011. car and bopo were at their ideal resilience levels in november in the same year, while gap fdr and ohc / po was in october. npf and f / gdp were at warning level in december. while δliquidity was successively within its ideal resilience level in may and august. on the other hand, the nom indicator was in the most frequently alert horizon in 2010 compared to the other variables in may, june, and october in the same year. other yellow horizon indicators occurred in cir and ohc / po respectively in march and november. pressure on bank was at its ideal level of resilience in october. the contribution of each indicator to the resilience of shari`ah banking in indonesia appeared to spread evenly throughout 2011. the most isgnificant was the f/gdp indicator. which was almost at its ideal resilience level from april to december, 2011. followed by npf and bopo indicator that experienced 5 periods of resilience. the most minimal indicators contributing to banking resilience were car, roa, and cir. even the gdp gdp did not show the resiliencenya level at all. the 2012 heat maps explain the single, dimension, and composite index data that have been formulated in the previous section. based on the above heat maps it appears that the trend of banking conditions in indonesia was beyond the threshold limit of its ideal level of resilience. based on business cycle theory it possible happen if in the business implementation of shari`ah banking is too excessive (above upper threshold) or too defensive whereas looking for a safe level (below ideal resistance level). the average indicators shows its resilience level near the beginning of 2012. it shows that in february, shari`ah banking was able to reach its resilience level. main contribution emerged from intermediary dimension by its f/gdp indicator showed alert horizon and same with ohc/po. while intermediary contributes to resilience of shari`ah banks significantly, pressure dimension shows constant and the most frequently reach resilience level. in this year, there is quite significant decrease in npf role toward the contribution to shabar index. it is also happened to roa and gap fdr which did not 104 | building the index of resilience for islamic banking in indonesia: a preliminary research significantly contribute to shabar index throughout the year 2012. generally, indicators contribute to shabar index existed in the beginning of 2012 from january to may. based on the above heat maps, it appears that the trend of banking conditions in indonesia was beyond the threshold limit of its ideal level of resilience even it has been categorised as red zone compared to the other years. based on business cycle theory, it possible happen if in the business implementation of sharia banking is too excessive (above upper threshold) or too defensive whereas looking for a safe level (below ideal resistance level). international journal of islamic economics and finance, volume 1, number 1, july 2018| 105 the average indicators showed its resilience level near the end of 2013. intermediary dimension showed its lack contribution throughout 2013.contributions made by npf, car, sftd, nom, bopo mainly in the end of the year. while rest of the indicators that did not not have any green or even yellow area at all, that means those lack the conribution. when it comes to lower economic growth compared to its trend, it could impact to the banking system. moreover, sharia banking performance seems play in save area looking at lack contribution of roa to the shabar index. the above heat maps are presented based on the single, dimension, and composite index data that have been formulated in the previous section. based on the above heat map it appears that shari`ah banking which had 2 times experiences of conditions in indonesia was beyond the threshold limit of its ideal level of resilience. based on business cycle theory it possible happen if in the business implementation of sharia banking is too excessive (above upper threshold) or too defensive whereas looking for a safe level (below ideal resistance level). for the following year, resilience level mostly existed in 2015 iv. conclusion islamic banking operates within the similar financial environment which has been created and facilitated for conventional banking sector. the fundamental differences between the two counterparts call for different treatments in building resilience. the existing literature on banking surveillance tools is either mostly for conventional banking in general, or it is dominated by partial developments. 106 | building the index of resilience for islamic banking in indonesia: a preliminary research hence, there is a significant gap lies in the literature to address the specificities of islamic and conventional banking surveillance tools analysis to build resilience that can contribute to financial stability in indonesia. this study explores to fill in this gap in indonesian jurisdiction. the study finds that there are 8 steps to be taken in order for constructing shari`ah banking resilience (shabar) index, namely, (1) theoretical framework, (2) data selection, (3) imputation of missing data, (4) normalisation, (5) weighing and aggregation, (6) robustness and sensitivity test, (7) back to the real data, (8) presentation and visualisation. to conclude, resilience level of shari`ah banking in indonesia exists in spesific ranges as a result of the contributions every single indicator has made towards building required resilience. the future studies may be carried out to run tracking of which indicator enables to contribute to reduce and remove the instability of shari`ah banking system in indonesia. international journal of islamic economics and finance, volume 1, number 1, july 2018| 107 reference abubakar a., et al., 2015 “kerangka dan analisis indikator ketidakseimbangan keuangan dalam nasional and regional balance sheet (version 1), bank indonesia abubakar a., rieska i. a., rini oktaviani, 2016, “pemilihan early warning indicator untuk mengidentifikasi distress sektor korporasi: upaya penguatan crisis prevention, bank indonesia alawode, a. a., 2008, "what is financial stability", financial stability paper 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(2019). perception of stakeholders on abandoned housing projects in malaysia. international journal of islamic economics and finance (ijief), 2(1), 131-148. doi: https://doi.org/10.18196/ijief.2118. mailto:norainima@iium.edu.my ariffin, razak, & imtiyaz | perception of stakeholders on abandoned housing projects in malaysia ijief: international journal of islamic economics and finance, 2(1), 133-148 | 132 introduction though the malaysia housing sector has achieved tremendous strides over the years by making housing affordable to large part of the population, the issues of abandoned housing projects (ahps) still exist. as a result, many buyers have become victims of ahps. there is no generally agreed definition of abandoned housing in the literature (morckel, 2014). this is the reason why various researchers came up with uncountable operational definition to represent or serve as proxy for abandoned housing. mallach (2006) for instance defined abandoned projects as those property whose owner has stopped carrying out at least one of the significant responsibilities of property ownership, as a result of which the property is vacant or likely to become vacant in another study, marcuse (1985) defined abandoned projects as property where the owner is willing to surrender title to it without compensation because of the absence of effective demand for its continued use or reuse. hence, researchers have used various operational definitions to represent the same construct. based on the definition of ministry of housing and local government (mhlg), abandoned housing has been defined as any housing projects that have the following features: (i) construction activities on site of the housing construction project have stopped for 6 (six) months or more consecutively, after the expiry of the sale and purchase agreement (s & p) executed by the developer and the purchaser or; (ii) the developer has been put under the control of the official receiver and the housing controller is of the opinion that such developer cannot duly proceed with the execution of its obligations as a developer. therefore, by referring to mhlg, an abandoned project is defined as an uncompleted project or a project that under delaying. basically, it classified into three categories by the mhlg where “delay project”, “ailing project” and “abandoned project”. for the “delay project”, it is defined as project under 10% until 30% delaying compare to the actual date that targeted mean that the project is still under progress in the catch up the delay. however, for “ailing project” is project which is under more than 30% delaying compare to the actual date that targeted or date of completion that stated in the sales and purchase (s & p) agreement but it's still under progress diligent in completed the entire project. however, for “abandoned project”, it is a project that fully stopped where no more work is carrying on the entire project anymore. ariffin, razak, & imtiyaz | perception of stakeholders on abandoned housing projects in malaysia ijief: international journal of islamic economics and finance, 2(1), 133-148 | 133 as at mid of 2014, a total number of 211 sick housing projects, 33,647 houses and 22,135 house buyers in malaysia had been abandoned by the private developers for various reasons (mhlg, 2014). the issue of abandoned housing is burdensome not only to the homebuyers but also to the government and the society. for instance, home owners are required to pay back the loans despite the fact that, there is no guarantee of completion and handing over of the house. in addition, the problem of abandoned housing can jeopardize government efforts of developing the housing sector. it is no doubt that increasing rate of abandoned housing project has posed serious headache to the government. there are various reasons causing ahps and the consequential problems they have caused are grave. one of the reasons is that there are insufficient legal provisions and protection to avoid and prevent abandonment and to protect the interests of the buyers. in the case of malaysia, there are already few studies discussing the causes and issues on ahps in the past. however, this study would like to examine whether the causes and issues are linked with the shariah contract for home financing offered by islamic banks to house buyers. therefore, this study willexamine the perceptions of stakeholders on the causes and issues on ahps, including the shariah contract used for home financing in islamic banks. literature review debt based financing ali et al. (2004) studied on contractor’s perception of contributing factors to delayed projects. according to their findings, slow collection, low profit margins and insufficient capital or excessive debt are the three major causes of financial difficulties among contractors. some of the contractors are overburden with debt due to excessive interest rate and other loans condition. in addition, it is equally stated that poor site management significantly contribute to the problem of abandoned housing project. this might be due to the possibility of transferring the bulk of the problems to the home buyers. as such, the contractors care less about effective site management since they are going to be less affected if the project is abandoned. if the contract is structured based on profit –loss sharing basis, all parties might take site management serious in order to protect their respective investment. ariffin, razak, & imtiyaz | perception of stakeholders on abandoned housing projects in malaysia ijief: international journal of islamic economics and finance, 2(1), 133-148 | 134 in addition, several studies pointed that abandoned housing problems are mainly due to the nature of the contract i.e. sell then buy (stb) system) (sufian and sapian, 2009). according to several commentators, the stb system has caused unbearable damages to households (sufian and sapian, 2009). example of the problem witnessing is the situation where developers collect deposit from purchasers and then disappears. as such some developers collect booking fees and deposit with completing delivering the projects. based on the review, abandoned project is due to interplay of various factors that mainly comprises of injustice in contract which transfer most of the risk to the house purchaser, ineffective regulatory system and the nature of the contract. justice and fairness justice and fairness constitute an important element towards successful implementation of transactions or contract. the absent of fairness in any business dealing or contract may result to less commitment and subsequent failure of the project. in relation to ahps, various studies have attributed justice as one of the main problems. according to dahlan and aljunid (2010) who assessed shariah and legal issues in the bai bithamanajil (bba), bba is marred with injustice and unjust to the customers. in the case of default for instance, the borrower has to repay the banks the whole amount of sale price which is usually higher than the purchase price in the sales and purchase agreement entered between the buyer and developer. the whole amount of the debt together with the margin portion should be limited to the repayment period which the house buyers has utilized, occupied and enjoyed rather than the blanket amount of the whole repayment period as contained in the sales and purchase agreement. based on their findings, bba is embedded with high level of uncertainty which constitutes to be one of the major grievances of the purchaser in ahps. according to them, the position regarding the status of the house, the charge, the ownership, the purchaser, the bank and the developer in the bba transaction are ambiguous. bba contract is equally considered as unfair to the general public because the profit margin is higher than the debt owed. in addition, the purchasers are still required to pay monthly installment to the banks even if the housing project is subsequently abandoned. this thus makes the banks to worry less about the issue of abandoned housing since their monthly installment is guaranteed. the purchasers are therefore the victims in abandoned houses issues because they must continue paying the monthly installments but yet they cannot ariffin, razak, & imtiyaz | perception of stakeholders on abandoned housing projects in malaysia ijief: international journal of islamic economics and finance, 2(1), 133-148 | 135 occupy the purported houses. in a situation where the return of the banks is tied to the performance of the contract, the banks will take appropriate measure before realizing money to the developers with more commitment to regularly evaluate the progress of the contract. in support of the above argument, razali (2011) indicated that the current system of house delivery (i.e. stb) has been acknowledged to have helped in making many people a house owner, but it has however shown to be unsustainable due to the high occurrence of delay and ahps. according to the razali (2011), stb system has been blamed for the rising cases of abandoned housing because it put the house buyers at the mercy of the developers. the system therefore makes it possible for the house buyers to bear the business risk of the developers through the progressive payment. this thus purely reflects injustice on the part of the house buyers. the issue of injustice faced by the house buyers has been further expound by (yap et al., 2010) that house buyers are the immediate victims in the event of abandoned projects. this is because the house buyers bear the business risk that is supposed to be borne by the developers, they (i.e. developers) take less measure to prevent the project from abandonment. this has resulted to lack of feasibility studies and mismanagement of financial resources. despite the fact that the project is abandoned, the house buyers are mandated to service the bank loans. in addition, the house buyers are denied the benefits of potential property value appreciation and rental collection. other aspect of injustice that contributes to abandoned project is high interest rate which affects the sales and cash flow of the project (yap et al., 2010). similar view has been expressed by tan (2011) who indicated that the main victims of abandoned are mainly of low and middle-income groups which bear large portion of the risk involved when buying a house. as further stated by tan (2011), there are cases where developers employed substandard materials such as leaking roof and uneven flooring. this has been made possible due to the delivery system whereby developers receive money before completion of the project and lack of law that protect the house buyers for such breach of contract. as argued by the association of abandoned building owners (aabo) in malaysia, banks rather than buyers should bear the risk of ahps. the banks care less about the ahps since the bulk of the burden is born by the home buyers rather than the banks and the developers who have real direct control. the banks in most cases do not care about the viability of the housing projects since their regular payment by the home owners is ariffin, razak, & imtiyaz | perception of stakeholders on abandoned housing projects in malaysia ijief: international journal of islamic economics and finance, 2(1), 133-148 | 136 guaranteed irrespective of the completion of the projects. according to the report, most victims of abandoned housing project recommended the build then sell (bts) model. meanwhile, the president of the aabo argued that such a model would be too riskier for big project rather the solution on the risk sharing between the developers and the banks. this thus indicate that the prevalent injustice in term of transferring the bulk of the risk to the house buyers is a significant contributing factor to the problems of ahps. regulatory system of housing projects in malaysia another main cause of ahps is lack of effective regulatory system. as indicated by hoe (2013), lack of home indemnity insurance, no special tribunal for home buyers claims and lack of effective planning and land policy significantly contribute to ahps. the existence of an effective special tribunal whereby errant developers will be penalized could serve as a deterrent to others. this may thus make the developers to take proper measure that could lead to the abandonment of the project. in addition, tan (2011) identified some nature of the regulatory system such as ambiguous relationship between federal, state and local level, delay in the process and approval of application for land development, conversion, subdivision and issuance of titles that contribute to abandoned projects. the same view as been expressed by khalid (2010) who relates weak institutional factors as one of the main causes of abandoned houses. according to abdul hadi et al. (n.d), the causes of abandoned construction projects can be broadly grouped into five categories, which are mismanagement, unfavourable government policies, inefficient public delivery system, unfavourable economic conditions and financial problems. dahlan (2011) discovered that abandoned housing problems occur due to the housing provision system and legislations which are complex and problematic. the findings by dahlan (2011) agreed with loi (2000), khalid (2010) and tan (2011). loi (2000) and khalid (2010) had discovered that housing provision in malaysia is highly regulated and it is governed by so many legislations. loi (2000) described that the malaysian housing industry is govern by more than 50-60 piece of legislation ranging from development license issuance to private developers, law of building and land to the environment and workers safety. moreover, loi (2000) stated that it is compounded by the fact that separate laws, policies, and controlled by federal, state and local government separately. ariffin, razak, & imtiyaz | perception of stakeholders on abandoned housing projects in malaysia ijief: international journal of islamic economics and finance, 2(1), 133-148 | 137 from the previous studies, it can be concluded that the main factors contribute to ahps are due to the nature of the contracts, financing from the banks, absence of fairness in any business dealing or contract may result to less commitment and subsequent failure of the project and finally, lack of effective regulatory system. therefore, this study aims to confirm whether these issues have been resolved after few years. methodology data this study utilized a self-structured questionnaire based on a 5 likert scale. the questionnaires were distributed to a sample of 500 respondents that are selected based on stratified sampling methods. random sampling is chosen in order to ensure that all parts of the population are represented which can help to enhance the efficiency. five-point likert scale was employed in the analysis of the questionnaires. in addition, several interviews were conducted with relevant stakeholders (solicitor, banker, developer and ministry official) to complement the findings from the questionnaire. method based on a 5 likert scale in the questionnaire, percentage of disagree includes ‘strongly agree’ and agree includes ‘strongly agree’ and ‘agree’ are obtained from the respondents’ answers in addition, the current research adopted the fundamental approaches in analysing the output from the interviewees. the analysis includes data reduction, transcription of interviews, data display and conclusion drawing. the data gathered from interview will be arranged and summarised according to categories as mentioned earlier: debt financing,justice and equity and regulatory system of housing projects in malaysia. the researcher then analysed and interpreted the information provided by the respondents in accordance with the objectives of the study. ariffin, razak, & imtiyaz | perception of stakeholders on abandoned housing projects in malaysia ijief: international journal of islamic economics and finance, 2(1), 133-148 | 138 results and analysis debt based financing table 1. debt financing’ issues on ahps concepts used disagree (%) neutral (%) agree (%) by choosing an islamic home financing it will mitigate abandoned housing projects. 8.8 23.2 68 home financing based on profit-loss sharing between the customers and bank can avoid cases of abandoned housing projects. 9.8 21.3 69 i prefer financing that is based on profit and losssharing when purchasing a house. 4.3 19.2 75.6 table 1 above showed that majority of the home buyers (68%) share the opinion that by choosing islamic home financing it will mitigate ahps. this is however not precise as to which specific islamic home financing concept they think will help mitigate ahps. thus, the second question gives a specific islamic home financing concept to get the views of the respondents. as shown in table 1, majority of the respondents (69%) believe that home financing based on profit-loss sharing between the customers and bank can avoid cases of ahps. conversely, only 9.8% of the respondents disagree and 21.3% remained neutral about that statement. finally, 75.6% respondents prefer financing that is based on profit and loss-sharing when purchasing a house as compared to only 4.3% who do not prefer. about 19.2% respondents remained neutral. the above findings therefore mean that, while majority of the home buyers believe that choosing an islamic home financing will help mitigate ahps, they specifically prefer profit and loss-sharing concept. this is consistent with the findings of ahmad and hassan (2009). according to ahmad and hassan (2009) equity home financing such as musharakah mutanaqisah financing is a better alternative compared to debt-based home financing because in musharakah mutanaqisah financing, bank is a partner in owning the house with the customer. hence by taking joint ownership, the issue of bai al-inah or legal trick that exist in bai bithaman ajil can be avoid the problem of ahps. therefore, the use of musharakah mutanaqisah financing rather than bai bithaman ajil concepts in islamic home financing can help reduce the problem of ahps. the interview with the solicitor, banker, developer and ministry official onthe main factors that cause ahps in malaysia is undertaken. for the ariffin, razak, & imtiyaz | perception of stakeholders on abandoned housing projects in malaysia ijief: international journal of islamic economics and finance, 2(1), 133-148 | 139 solicitor, the main factor is the weak process of giving the license to the developers, even though they are not qualified to get the licence. this can lead to the ahps. this is consistent with the response from the banker, which is in the opinion that the main factor is due to the capability or credibility of housing developers, and this can be related to easy licensing to them. the developer and the ministry official perceived that the factor is related to the funds for the project. solicitor “answer is the cheap and easy process of licensing of developer from the government. compared to other countries, it is very easy in malaysia to get developer’s license. so, there are a lot of unqualified developers who got the license. selling the houses while they are in reality not qualified financially and capability wise. so basically, they are small companies with a very small fund but what they do is to collect 10 percent from each house purchaser and invest in other projects.” banker “factors contributing to ahp is mainly related to capability or credibility of housing developers experience, finance and management, economy and geographical factors. i believe there is a need to enhance or review of existing government policies and guidelines, for more structured guidelines and controls in managing ahps.” developer “in my opinion, abandoned house has been reduced and will happen mostly during financial crisis. in my opinion the main cause of abandoned house is due mismanagement of funds where the funds are disbursed to the contractors rather than developers. these funds are then used for other purpose and not for the construction of the project.” ministry official “the main reason for abandoned project is because of cash flow of housing developer as it is not well managed. there are also other issues, sometimes the issues about technical, there are house already 90 percent completed but still abandoned. we even do not know, we have sometimes problem with agencies such as drainage unit, firefighter unit, tnb, etc. they are sometimes may be the cause.” however, from the interview findings, it can be concluded that the main factor is related to house developers and not much on the shariah contract used by islamic banks, whether the islamic bank should use musharakah mutanaqisah financing rather than bai bithaman ajil. ariffin, razak, & imtiyaz | perception of stakeholders on abandoned housing projects in malaysia ijief: international journal of islamic economics and finance, 2(1), 133-148 | 140 justice and equity table 2. justice and equity’s issues on ahps justice and equity disagree (%) neutral (%) agree (%) customers should be fully burdened for houses that are abandoned 89 9.5 1.2 islamic home financing using bba uphold justice when the house is abandoned 59.8 29.6 5.5 islamic home financing based on profit and losssharing contributes positively to the equitable distribution of wealth and income 1.8 14 83.8 referring to table 2 above, 89% of the respondents disagree that customers should be fully burdened for houses that are abandoned. on the other hand, only 1.2% respondents agree to the statement and the rest of the 9.5% were neutral. similarly, majority (59.8%) of the respondents disagree that islamic home financing using bba uphold justice when the house is abandoned. however, only 5.5% agree that it upholds justice while 29.6% stayed neutral. considering the contribution of islamic home financing based on profit and loss-sharing, 83.8% of the respondents agree to the statement that islamic home financing based on profit and loss-sharing contributes positively to the equitable distribution of wealth and income. as argued by aaobo report above, most victims of abandoned housing project recommended the build then sell (bts) model which can provide justice and equity. therefore, the interview questions were asked to the relevant stakeholders on the issue whether ‘build then sell (bts)’ or ‘sell then build (stb)’and their responses are as follows: solicitor “the former is always the best option. in the case of singapore where they are financially capable, they don’t have to go through all the process of guarantee. after completing about 90% to 95% of the project, only then they will sell it. this concept too has issues, first, it is the political reason. second, it is due to the financial incapability or sustainability. in malaysia this is difficult especially when it is involved small developers with limited budget relying on the payment progress and in addition, it is hard to commence it due to political reasons. malaysian government once announced about the “build and sell” concept during the time of tun abdullah ahmad badawi but later it becomes unperceivable. third reason is the property speculation or the property flipping where some people are buying the property with the intention to sell it back with higher prices gaining lot of margins. (property flipping becomes illegal and a fraud for profit scheme when a home is purchased and resold within a short time frame at an artificially inflated value).” ariffin, razak, & imtiyaz | perception of stakeholders on abandoned housing projects in malaysia ijief: international journal of islamic economics and finance, 2(1), 133-148 | 141 banker “i would definitely agree to the said concept as a risk mitigation tool for ahp. this concept would be not an issue for tier a or may be tier b housing developers, as they could proceed with completion of their project due to their financial strength. it is greatly good for bank and also the house buyers, but in an effort to support the growth of potential developers, bank would still need to support in spreading wealth creation with proper credit rating. hence “build then sell” concept is still greatly relevant to support new and potential developers.” developer “yes, ‘build then sell’ concept will be able to solve the problem of abandoned house compared to the prevailing ‘sell then build’ concept as the consumer can guarantee the project will be completed soon. however, under the bts concept, the small developers will not be able to survive because they require a lot of fund to finance the house development which is currently based on stb. if developer were to use the bts, the price for house could also be higher as the developer will have to seek its own external financing. the developer will have to seek its own financing and will incur higher interest cost.” ministry official “this concept of build and sell from my viewpoint will help the sellers who already have completed houses to sell their houses to the buyers. hence, they no longer think of the issue of abandoned housing. however, this concept requires large funds for developer. even though they can get a loan from bank to finance the project, they cannot roll the money to pay every month because they cannot claim from the buyer as provided now. moreover, if the cash flow is stop accordingly, the project will be abandoned. for an example, for low or medium cost housing might can be overcome but for high cost housing cannot be overcome because they needed much funds or are expensive. furthermore, the cash flow plays an important role. developer must provide strong cash flow before applying the scheme. let say if it can be implemented, i think it is no problem because this something can be guaranteed, giving security for the buyers as compared current practice which is leads to abandoned project and illegal house built.” based on the above interview findings, the concept of bts will prevent ahps and can promote justice and equity. however, this bts requires a lot of funding to the developer to complete the housing projects before selling the houses. this will require the support from the financial institutions. ariffin, razak, & imtiyaz | perception of stakeholders on abandoned housing projects in malaysia ijief: international journal of islamic economics and finance, 2(1), 133-148 | 142 regulatory system of housing projects in malaysia table 3. legal and governance’s issues on ahps legal and governance disagree (%) neutral (%) agree (%) the track record and the legality of the developer is important to avoid the case of abandoned house 0.3 5.8 93.9 the bank must take legal action on the developer if it fails to deliver the house on time 1.2 8.8 89.9 the existing laws and regulations are insufficient to ensure justice (adl) to islamic home financing customers in cases of abandoned house 1.8 18 80.2 with reference to table 3, whereas 5.8% of the respondents remained neutral with regard to the first statement in the table, 93.9% of the respondents agree that the track record and the legality of the developer is important to avoid the case of ahps. however, 0.3% of the respondents disagree with this assertion. secondly, while 1.2% respondents disagree with the second statement, 89.9% of the respondents agree that the bank must take legal action on the developer if the developer fails to deliver the house on time. nevertheless, 8.8% respondents neither agree nor disagree with the statement. with regard to the third statement, 1.8% respondents disagree while 80.2% respondents agree that the existing laws and regulations are insufficient to ensure justice (adl) to islamic home financing customers in cases of abandoned house. considering the above results, the responses to all the three statements points out to the fact that it is important to have proper laws and regulations in order to avoid the cases of ahps. however, the present laws and regulations are insufficient. this situation therefore contributes to the rampant cases of ahps. these findings are consistent with some of the previous studies such as khalid (2010), tan (2011) and hoe (2003) who have documented that lack of legal and governance for housing projects is among the reasons for the cases of ahps in malaysia. . this is supported by chen (2007), who claimed that the tribunal for homebuyer claims has proven to be very effective. it is however believed that the developers being sued are often insolvent and getting compensation is highly unlikely. however, the solicitor was in the view that there is lack of legal and regulatory provisions to reduce ahps. ariffin, razak, & imtiyaz | perception of stakeholders on abandoned housing projects in malaysia ijief: international journal of islamic economics and finance, 2(1), 133-148 | 143 above findings are further supported by following summaries of interviews had with industry stakeholders on the sufficiency of the regulatory protection for customers for housing development projects. ministry official “we indeed have an act 118 about housing development. i think already enshrined in to the act which is covering housing development projects. my own view for these victimized buyers, for example in my division, we pay more attention to buyers that buy low cost home. we are more concern to them because they come from low income group which sometimes need a house and are involved with abandoned house, they get problem. therefore, if there are low cost abandoned house and still have no funds to be spent, the government will channel the funds to set the project up ready. in my own opinion, the government must be more aggressive going to the ground to inspect every project that is growing in the new region i.e. the growing area. that’s why in some areas seem as goldmine. the buyer must actually be aware before buying, make sure to check and refer to national housing officer whether there is any realization of the project or not and do not just simply buy.” banker “yes. there are certain measures. first, we have an account we call it house development account (hda). this is one of the agreements of home financing. the payment from the customer will go to this account first and the developer doesn’t have direct access to this account they only get the amount when the bank sees the progress. this is one of the basic government initiatives to manage the risk of home financing. and i think this is one of the reasons why the cases of abundant houses are decreasing.” developer “yes, even currently the developer is already certified and licensed by the ministry before they can undertake housing projects. however, there could be other issues that need to be looked it the housing development act (hda) does not allow the bank to go against the developers. hence, i agree that we should look at the hda to find out why this so.” solicitor “to be frank there is not such a thing in law. there are two scenarios. one is abandoned forever, which is the worst case the other one is the delay in completion. in case of forever the customer will sue the developer and he may get a good judgment from the court but by then, the developing company may be worth of nothing. i have seen one abandon project it was delay for 10 years. the customer was supposed to get 10 % every year. so, at ariffin, razak, & imtiyaz | perception of stakeholders on abandoned housing projects in malaysia ijief: international journal of islamic economics and finance, 2(1), 133-148 | 144 the end of 10 years by law the customer could claim 100 % as late delivery charges. but the project was completed finally at that time and the developer didn’t have the money to pay the customer. it is very tricky issue at the end they will negotiate. so, it is better for the customer to get 50 % or 60% or otherwise they will lose the title.” with regard to the sufficiency of the regulatory protection for customers for housing development projects, it can be shown from the above interview findings that it is still not sufficient. customers are not really protected based on the current regulation. in addition, the interview question on the need of an independently rating scheme for developer based on performance can prevent ahps is asked to the relevant stakeholders. the findings are as follows: solicitor it is good in a way of convincing people that the rating is fair and clean to everybody. the rating system is based on the feedback of previous purchaser. for new developers with no record, the rating should be an indicative on how trustworthy they are. hence, it is important that the rating is done by independent body or third party like ministry, or by the reliable consumer group, or third-party trustee. it cannot be done by the association as they might be bias in the rating. banker as a banker’s point of view in supporting housing developers’ financial needs, we categorized them into tiered categorization of tiers a, b, c & d with the application of difference credit rating in determining the amount/limit of financing to be granted. developer yes, an independently rating scheme for developer based on performance would help prevent abandoned house to safeguard the reputation of the developer. however, this also mean that we are grading our developer into various grades. ministry official yes, perhaps it may help because we can see from history of successful in a project whether developer has a good track record. however, from my own observation, mostly developer has been successful in the first project to the third or the fourth project but to the fifth or sixth project may arise cash flow problem. it shows that authority of the first project and third project make ariffin, razak, & imtiyaz | perception of stakeholders on abandoned housing projects in malaysia ijief: international journal of islamic economics and finance, 2(1), 133-148 | 145 they feel confidence about the project but in the fourth and fifth project they announce that it will arise some issues. from the interview, it can be concluded that independent rating scheme for developer can overcome the problem of ahps. this is because if the ratings are not good, then this developer will expose to reputational risk. therefore, the developers will perform the best to complete the housing projects. conclusion and recommendation conclusion the focal issue of this study is on abandoned housing project (ahps). the sufferings of the victims of ahps who bought houses through bank financing are two folds. first, the house is abandoned and secondly, they have to carry the burden of huge debt. even though the financing was availed from an islamic bank but due to the debt-based nature of the contract, the victims have to pay all liabilities in full in the event the house is not completed. for example, in the popular home financing product like bba, the bank does not share risk with customers... the islamic banks in this case take no responsibility which goes against the core objectives in the fulfillment of maqasid al shariah. on the other hand, it was found that musaharakah mutanaqisah concept which is based on profit sharing isable to mitigate abandoned houses because the bank shares risk and responsibilities with customers. hence, the bank will be responsible in cases for such occurrences. hence, there is more justice and fairness in using the equity concept compared to debt financing which is also in line with maqasid al shariah another important finding from this study is the need to improve the regulatory aspects to mitigate abandoned houses from incurring. statutory provision provided by mhlg, local authority, planning authority and technical agencies had failed to strictly monitor the term in legal provision and requirements in the housing projects that can lead to ahps. however, based on the interview findings, it can be concluded that financial institutions are not the absolute players of the abandonment, but the use of the right shariah contract, for example musharakah mutanaqisah can promote justice and fairness in the transactions. therefore, weakness in the law remains the prime contributors to the problem of ahps in malaysia. ariffin, razak, & imtiyaz | perception of stakeholders on abandoned housing projects in malaysia ijief: international journal of islamic economics and finance, 2(1), 133-148 | 146 recommendations it is suggested that the regulatory authorities should strengthen the law in order to protect the right of the home buyers to ensure justice and fairness. this can reduce the case of ahps. in addition, the implementation of insurance and takaful cover to be undertaken by developers can prevent such occurrences. it also feasible to introduce ratings in order to screen developers based on their capabilities and track records in completing housing project. therefore, it will be a great advance for the society, industry and country, if efforts are made jointly by the civil and private sectors to end this problem of ahps. ariffin, razak, & imtiyaz | perception of stakeholders on abandoned housing projects in malaysia ijief: international journal of islamic economics and finance, 2(1), 133-148 | 147 references abdul hadi, a., mohd salleh, n. & mei, t. (n.d.). abandoned housing project: issues and challenges. school of housing, building & planning university science malaysia. ali, a.s., smith, a. & pitt, m. (2004.) contractors’ perception of factors contributing to project delay: case studies of commercial projects in klang valley, malaysia: university of malaya. dahlan, n. h. m. (2011). legal issues in the rehabilitation of abandoned housing projects of the liquidated housing-developer-companies in peninsular malaysia. european journal of social sciences,23(3), 392409. dahlan, n.h.m. & aljunid , s.z.s.a.k (2010). shariah and legal issues in bay’ bithaman al-ajil (bba): a viewpoint. shariah law journal, 90-123. hoe, y. e. (2013). causes of abandoned construction projects in malaysia (doctoral dissertation, department of surveying, faculty of engineering and science, universiti tunku abdul rahman. khalid, m. s. (2010). abandoned housing development: the malaysian experience submitted in fulfilment of the requirements for the degree of doctor of philosophy, heriot-watt university. loi, e. c. k. (2000). the state housing and property industry presented in the national conference on housing and urban governance, selangor, malaysia. mallach, a., & brachman, l. (2010). ohio’s cities at a turning point: finding the way forward. brookings: metropolitan policy program. marcuse, p. (1985). gentrification, abandonment and displacement: connections, causes, and policy responses in new york city. washington university journal of urban and contemporary law, 28, 195–240. ministry of urban wellbeing, housing and local government (mhlg) http://ehome.kpkt.gov.my/bi/main.php?content=vertsections&subve rtsectionid=103&vertsectionid=17&curlocation=91&iid=&page=1 (access on 08/05/2015). morckel, v. (2014). predicting abandoned housing: does the operational definition of abandonment matter? community development, http://dx.doi.org/10.1080/15575330.2014.892019. razali, m.f.m. (2011). build then sell (bts): delivering dream homes with more protection to house buyers. housing news, 11. sufian, a., & sapian, a. r. (2009). an invention of “build-then-sell” in malaysia via the housing law, in proceeding of international symposium in developing economies: commonalities among diversities, 103-108. tan, t. (2011). sustainability and housing provision in malaysia. journal of strategic innovation and sustainability, 7(1). yap, e.h., tan h. c. & chia f.c.(2010). causes of abandoned construction projects. file:///c:/users/norai/downloads/ministry%20of%20urban%20wellbeing,%20housing%20and%20local%20government%20(mhlg)%20http:/ehome.kpkt.gov.my/bi/main.php%3fcontent=vertsections&subvertsectionid=103&vertsectionid=17&curlocation=91&iid=&page=1%20(access file:///c:/users/norai/downloads/ministry%20of%20urban%20wellbeing,%20housing%20and%20local%20government%20(mhlg)%20http:/ehome.kpkt.gov.my/bi/main.php%3fcontent=vertsections&subvertsectionid=103&vertsectionid=17&curlocation=91&iid=&page=1%20(access file:///c:/users/norai/downloads/ministry%20of%20urban%20wellbeing,%20housing%20and%20local%20government%20(mhlg)%20http:/ehome.kpkt.gov.my/bi/main.php%3fcontent=vertsections&subvertsectionid=103&vertsectionid=17&curlocation=91&iid=&page=1%20(access file:///c:/users/norai/downloads/ministry%20of%20urban%20wellbeing,%20housing%20and%20local%20government%20(mhlg)%20http:/ehome.kpkt.gov.my/bi/main.php%3fcontent=vertsections&subvertsectionid=103&vertsectionid=17&curlocation=91&iid=&page=1%20(access http://dx.doi.org/10.1080/15575330.2014.892019 ariffin, razak, & imtiyaz | perception of stakeholders on abandoned housing projects in malaysia ijief: international journal of islamic economics and finance, 2(1), 133-148 | 148 this page is intentionally left blank perception of stakeholders on abandoned housing projects in malaysia noraini mohd ariffin international islamic university malaysia, malaysia, norainima@iium.edu.my dzuljastri abdul razak, mohamed noorden mohamed imtiyaz article history ariffin, n. m., razak, d. a., & imtiyaz, m. n. m. (2019). perception of stakeholders on abandoned housing projects in malaysia. international journal of islamic economics and finance (ijief), 2(1), 131-148. doi: https://doi.org/10.18196/ijief.2118. ijief: international journal of islamic economics and finance vol. 2(1), pg 21-46, july 2019 literature review on reits and islamic reits and lessons learned for islamic reits in indonesia imam wahyudi indrawan international islamic university malaysia, malaysia, indrawan.imam@live.iium.edu.my wahyuningsih universitas indonesia, indonesia, wahyuningsihayu75@gmail.com article history received: april 11, 2019 revised: june 18, 2019 accepted: july 8, 2019 abstract real estate investment trusts (reits) as a new instrument in many capital markets is an interesting topic. although not yet to be popular globally, reits has gained popularity as flexible, cost efficient and profitable real estate investment vehicle for investors as well as provide liquidity for real estate sector, especially in advanced markets like in us, japan and singapore. the emergence of islamic financial institutions (ifis) coincided with increasing popularity of reits open opportunity for development of islamic reits (i-reits) as competitive but sharia compliant reits compared to the conventional one. the dominance of malaysia as market player of i-reits as well as many underresearched areas open opportunity for betterment of the current i-reits markets. this paper is a literature review with two objectives. first, to compile and review existing articles on reits, both conventional and islamic, and second, to gain lesson learned as material for development of i-reits in indonesia as ultimate goal. it is expected that this literature review will generate ideas for future development proposals on i-reits, particularly in indonesia. this study found that literature on i-reits is relatively thin compared to its conventional counterparts, and indonesia is still left behind in i-reits development despite regulatory framework is already in force. therefore, further effort to promote supply and demand of i-reits in indonesia should be taken as a way to diversify islamic investment avenues for sharia oriented investors. keywords: indonesia, islamic reits, literature review, real estate investment trusts (reits). jel classification: g23, n20 @ ijief 2019 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.2114 web: http://journal.umy.ac.id/index.php/ijief/article/view/6132 citation: indrawan, i. w., & wahyuningsih. (2019) literature review on reits and islamic reits and lessons learned for islamic reits in indonesia. international journal of islamic economics and finance (ijief), 2(1), 21-46. doi: https://doi.org/10.18196/ijief.2114. mailto:indrawan.imam@live.iium.edu.my mailto:wahyuningsihayu75@gmail.com indrawan & wahyuningsih | literature review on reits and islamic reits and lessons learned for islamic reits in indonesia ijief: international journal of islamic economics and finance, 2(1), 21-46 | 22 introduction real estate investment trusts (reits) is a relatively new topics in many capital markets. although it has been introduced in 1960 in the united states (us), there are some markets especially in emerging economies that do not have any company listed as reits, such as china and even most european countries (campbell & sirmans, 2002; quek & ong, 2008). despite that, reits is perceived to be a good vehicle to invest in real estate sector with advantage but flexibility as unit trusts, as well as providing liquidity to support the developer of real estates. thus, reits is attractive for many investors. currently, the global reits market capitalization has reached us$ 1.7 trillion with 7% growth in 2018, with us as the main driver of growth with 10% growth in its reits market that already reched us$ 1.15 trillion market capitalization (ey, 2018). the emergence of islamic financial institutions (ifis), such as islamic banks and islamic capital markets also influenced market players to also have the so called islamic reits (i-reits), reits with consideration on the sharia compliant issue of the business as alternative for its conventional counterpart. since its emergence of al-‘aqar kpj reits, the first i-reits in the world that based in malaysia in 2006, there are some i-reits emerged and try to catch up the performance of the conventional reits (osmadi and razali, 2014; hussin, husaini, muhammad, razak, and hadi, 2016).the biggest i-reits today is emirates reits with market capitalization of us$ 333 million, although malaysia is still the dominant i-reits market in the world with market capitalization around rm 2.6 billion (us$ 637.44 million) (mohamad & saad, 2012; zainuddin & nordin, 2016). although there are many studies that try to analyzed conventional reits and some studies on i-reits, such as chuweni and ahmad (2014); nadiah, ali, halim, and noor (2016); rozman, azmi, ali, and razali (2015); and osmadi and razali, 2014; hussin, husaini, muhammad, razak, and hadi(2016), but literature review that on this issue is still lacking. there are some literature review on conventional reits, such as corgel, mcintosh, & ott (1995), but in author’s best knowledge, literature review on both reits (conventional and islamic) is none. this paper is a literature review on both conventional and islamic reits with objective to provide reader the latest development on studies on both reits in general, with ultimate goal to find state of art on the studies and to gain lesson learned for i-reits from its conventional counterpart in order to enhance listing of new i-reits and improve the performance of existing i-reits. more specifically, this kind of study is important since i-reits is non-exist yet in indonesia, although the regulatory framework for i-reits is already in force and even practically, malaysia based al-‘aqar kpj reits has investment in indonesian hospital (najeeb & vejzagic, indrawan & wahyuningsih | literature review on reits and islamic reits and lessons learned for islamic reits in indonesia ijief: international journal of islamic economics and finance, 2(1), 21-46 | 23 2013). in other words, there is a potential for development of i-reits in indonesia that can be realized. thus, this kind of study is expected to provide insights that may lead to enhancement of i-reits in indonesia. this paper is dividied into four sections. first section is the introduction which describe the background and objective of the study. second section focus on the methodology of the literature survey and review. third section is the literature review based on categorization of literatures. fourth section is the concluding remarks with some lessons learned for potential future studies on i-reits from literatures reviewed. literature review theory 1. conventional reits reits can be defined as companies that buy, develop, manage, and sell real estate properties with the revenue from real estate related business will be distributed nearly all to the the company’s shareholders or unit holders (chiang & joinkey, 2006). reits can be seen as companies that provide hybrid investment vehicle that combine (unsecuritized) real estate and common stocks characteristics but with lower volatility (alias & y, 2011; j. kim & jang, 2012). reits originally created in 1960 by approval from us congress as an instrument to enhance liquidity and improve efficiency as well as performance on the real-estate sector (campbell & sirmans, 2002). one reason behind reit existence is to provide a tax-efficient vehicle for commercial real estate ownership, because high tax will decrase reit market competitiveness compared to other countries, and existence or reit market will bring expertise that will attract many investors, which in turn will enhance marketability of nation’s real estate (quek & ong, 2008). reits is also able make individual investors to have real estate indirectly by purchasing reits’ shares that mostly traded in the exchanges (alias & y, 2011). 2. islamic reits islamic reits (i-reits) is a recent financial vehicle in the islamic finance universe. securities comission (sc)of malaysia defined i-reits as “a collective investment scheme in real estate, in which the tenants operate permissible activities according to the sharia”. from this definition, it can be concluded that the main feature that differentiate i-reits from its conventional counterpart is the obligation to follow the sharia or islamic law, particularly on the operation of the tenants. malaysia in 2005 issued guidelines on ireits and the first i-reits listed on kuala lumpur stock exchange (klse) in indrawan & wahyuningsih | literature review on reits and islamic reits and lessons learned for islamic reits in indonesia ijief: international journal of islamic economics and finance, 2(1), 21-46 | 24 2006, making malaysia as the first jurisdiction to issue guidelines and establish i-reits as well as the largest i-reits market by far, with market capitalization around rm 2.6 billion (usd 637.44 million), representing around 14.2% share of malaysia’s domestic reits market (mohamad & saad, 2012; zainuddin & nordin, 2016). 3. comparison between conventional reit and islamic reit in its operation, i-reits does not differ from the conventional reits. both types of reits will gain two sources of income stream from the properties, i.e. rental income and capital appreciation. both reits also give potential return for the investors in form of dividend and capital gain, that distributed from realized gains or income from the properties. however, i-reits will only allow the tenants of the properties to conduct sharia compliant activities, or the jurisdiction may put certain benchmark as upper limit for non-sharia compliant activities and income for i-reits, let say 20% of the total income as for the case of malaysia (mohamad & saad, 2012). previous studies scholars have conducted several studies to survey the literature on islamic finance, either as a whole or partially. a study by hassan and aliyu (2018) focuses on islamic bank sustainability, while another study by zulkhibri (2015) discussed the nature and operational aspect of sukukand its impact towards economic growth. a more comprehensive study conducted by mukhlisin and komalasari (2018) covering 330 literatures on the universe of islamic finance, including islamic banking, takaful, islamic capital market, unit trust fund and islamic endowment (waqf) from 1983 to 2017 with more emphasis on how those literatures capture the effect of financial crises on islamic finance. however, none of the aforementioned studies put i-reits as their focus of the study as well as its comparison with the conventional counterpart. therefore, this study would focus on reits and i-reits with emphasis to provide insights for development of i-reits in indonesia. indrawan & wahyuningsih | literature review on reits and islamic reits and lessons learned for islamic reits in indonesia ijief: international journal of islamic economics and finance, 2(1), 21-46 | 25 methodology in order to conduct this literature survey, some websites of scientific works database are accessed to find relevant articles on reit. the websites browsed with the keywords are shown on the following table: table 1. websites and keywords for literature survey websites 1) emerald insight (www.emeraldinsight.com) 2) science direct (www.sciencedirect.com) 3) ebscohost (https://search.ebscohost.com) 4) google scholar(https://scholar.google.com) keywords 1) real estate investment trust 2) reit 3) islamic real estate investment trust 4) islamic reit 5) reit indonesia some criteria are set in order to give limitation on this literature survey. first, an article must be found and accessible on above websites.second, an article must be published at year 2000 or afterwards. an article that published prior to year 2000 (1999 or before) will not be part of the literature survey.after filtering the articles with above criteria, there are 75articles that proceed for literature survey process. the articles are grouped into following categories: table 2. classification of the literature on reits and i-reits no. category description 1 understanding reits (structure and characteristics) any article falls within this category must contains description of any (conventional) reits structures and characteristics. some articles with quantitative method but does not discuss on performance, such as comparing cost structures of some reits also included within this category. 2 regulatory framework of reits articles within this category must explain some aspects of regulatory framework for (conventional) reits from any jurisdictions. 3 reits performance articles that examine performance, including returns and volatility of (conventional) reits fall within this catogory. most quantitative works are categorized here. 4 islamic reits any articles that discuss any aspects of islamic reits are included within this category. http://www.emeraldinsight.com/ http://www.sciencedirect.com/ https://search.ebscohost.com/ https://scholar.google.com/ indrawan & wahyuningsih | literature review on reits and islamic reits and lessons learned for islamic reits in indonesia ijief: international journal of islamic economics and finance, 2(1), 21-46 | 26 table above shows that studies on conventional reits are classified into three groups. however, some of the papers may have more than one focus, hence they can be classified into more than one groups. meanwhile, studies islamic reits are included into one group only regardless of their focus. in addition to the literature review, this paper also addresses critical evaluation on reits’ regulatory framework and development in indonesia as well as taking lesson learned for development of islamic reits (i-reits) in indonesia, which is still non-exist yet. results and analysis results 1. mapping the literature on reits out of 75 papers found related on reits and islamic reits, there are only nine of them discussed islamic reits. most studies of islamic reits focus on the case of malaysia. meanwhile, majority of papers on conventional reits try to focus on the reits performance, although there are some papers that have more than one focus. the mapping of the literature is shown on the following table: table 3. mapping of the literature on reits and i-reits no. category number of literature 1 understanding reits (structure and characteristics) 14 2 regulatory framework of reits 6 3 reits performance 53 4 islamic reits 9 2. understanding reits (structure and characteristics) there are three key elements of reits, particularly the us reits: i) reits’ assets and revenues should be dominantly in form of real-estate, with little proportion of securities; ii) reits are usually non-corporate taxable although most of the are public companies. this is important as key point to avoid double taxation; iii) all accounting earnings must be distributed to the shareholders, making it taxable at investor level. in other words, reits will give the shareholders similar features like unit trust but with smaller tax, without double taxation, and lower transaction cost compared to direct investment on real estate. reits in us can be divided into two categories. first, mortgages reits that focus on originating and/or acquiring mortgages. second, equity reits that focus on real-estate direct investment (campbell & sirmans, 2002). there are some obstacles that still inhibit the growth of reits especially in indrawan & wahyuningsih | literature review on reits and islamic reits and lessons learned for islamic reits in indonesia ijief: international journal of islamic economics and finance, 2(1), 21-46 | 27 emerging markets. study by (quek & ong, 2008) found six reit development obstacles in china: 1) security of property legal title because vendor may disappear or use the money from investor for other purposes instead of real estate investment; 2) china is still lacking professional and asset management experts; 3) different property valuation method between chinese vendors (market comparable approach) with international practices (discounted cash flow approach); 4) china is still lacking market transparency; 5) no regulatory framework for reit in china; 6) high tax imposition by chinese government to foreign investors, such as value-added tax, enterprise income tax, and land appreciation tax. the chinese case is very different from its special administrative region (sar), hong kong that has a notable reits market. one notable reit in hong kong is called “link”, the first and dominant reit in hong kong, established in 2005 and currently has various real estate portfolios such as retail facilities and car parks (chiang & joinkey, 2006; hui, yiu, & yau, 2007). another important consideration to be taken in introducing reits instruments into the market is the cost of reits unit issuance, particularly the underwriting discount cost. a study by (bairagi & dimovski, 2012b) on us seasoned equity offerings (seos) reits that there are some significant determinants of underwriting discount cost, such as dollar offer price per share, gross proceeds, interest rate on us 10 year-treasury bill, and number of total underwriters and number of representative underwriters. authors suggestion to enhance efficiency of seos reits issuance is by stating that issuers can allocate underwriting process among some underwriters. meanwhile, study by (bairagi & dimovski, 2012a) that focus reits ipo direct cost echoed similar statement, that distributing underwriting business to several underwriters will reduce direct cost of reits ipo. with regard to capital structure, reits as public should also raise capital to finance its operation. study from (dong, 2012) found that listed property trusts (lpts), name for reits in new zealand, tend to reduce long-term debt in its capital structure when there is appreciation on new zealand dollar one-year forwards rate because it will favour lpts to get short-term debt overseas with foreign currency, thus shrinking long-term debt leverage. however, reits with high market valuation tend to have persistent and high leverage (feng, ghosh, & sirmans, 2007). meanwhile, for the ownership structure, many reits can be categorized as umbrella partnership reits (upreits). upreits is a form of reits that have dual ownership structure, comprising common shares and operating partnership units (op units). op units is a vehicle that enable upreits to defer unit holders’ capital gain tax because as long as op units are hold as well as the real estate contributed, the unit holders’ will get deferment capital gain tax, and make op unit holders has tax advantage over common indrawan & wahyuningsih | literature review on reits and islamic reits and lessons learned for islamic reits in indonesia ijief: international journal of islamic economics and finance, 2(1), 21-46 | 28 shareholders. however, upreits dual ownership may raise conflict of interest between shareholders and unit holders as well as agency problem(han, 2006). in general, we can conclude that reits is an attractive and flexible vehicle for real estate investment, given the market infrastructures are provided. cost efficiency and tax advantage are two main issues that must be solved prior to emergence of well-performed and liquid reits market. 3. regulatory framework of reits regulatory framework is important part on developing reit market, that even to some extent regulation aspect is the most distinct feature of reits market in each jurisdictions (alias & y, 2011). there are some studies that have tried to look at the regulatory framework of reits in various jurisdictions(alias & y, 2011; campbell & sirmans, 2002; chiang & joinkey, 2006; pellerin, sabol, & walter, 2013; quek & ong, 2008). currently, there are some jurisdictions with strong reits market presence. they are us, australia, japan, south korea, singapore and taiwan. with regard to the regulatory framework, all these countries have some common reits regulatory features. first, reits companies are required to have dominant portion of their portfolio in real estate related assets. in south korea and singapore, real estate must be at least 70% of reits’ assets, 75% in us and japan and 100% in australia. second, requirement to distribute almost all of reits’ revenues to shareholders or unit holders. it is 100% in australia and singapore, 90% in japan as well as south korea with korean reits will gain tax exemption if the requirement fulfilled. third, tax advantage of reits from zero corporate tax if most revenues are distributed (us), tax redemption for real estate acquistions and registrations (japan), tax deferment for investors (australia), and zero income tax for investors (taiwan). fourth, geogrpahical location of real estate assets with most jurisdictions do not have restrictions for geographical location of reits’ properties to enhance flexibility of their investment. fifth, leverage cap with some imposed certain cap such as 45% in hong kong, but some (us, australia, south korea and japan) do not have any leverage restrictions(chiang & joinkey, 2006). while reits is a popular instrument in us and has been contributed to us real market liquidity and efficiency, europe, on the other hand is still left behind in developing reits market. with only the netherlands, united kingdom, and belgium as european countries with reits-like company up to 2007, there are some issues related to european regulatory framework of reits such as restrictions on reits ownership concentration, size of indrawan & wahyuningsih | literature review on reits and islamic reits and lessons learned for islamic reits in indonesia ijief: international journal of islamic economics and finance, 2(1), 21-46 | 29 permitted ownership for institutional investors, portion of accounting earnings to be paid as dividends, and ease of de-reit (close the reits) and re-reit (open reits again), and the scope of reits operation in cross-border europe (alias & y, 2011; campbell & sirmans, 2002). at the same time, china as the new giant of world economy does not have regulatory framework to regulate it, thus making reit market still does not exist in china(quek & ong, 2008). meanwhile, malaysia with smaller economic size compared to china has rapid development of reits market that also complemented with product variant, particularly islamic reits (hamzah, rozali, & tahir, 2010). in general, regulatory framework that must be developed for a reits market must solve some issues, such as tax transparency which if possible having tax advantage to enhance reits market competitiveness, legal titles, market transparency, property valuation method and expertise. 4. reits performance, risk and volatility basically, reits performance is relied on tax advantage and fair value accounting (fva) practices (haslam, tsitsianis, andersson, & gleadle, 2015). tax advantage is the most attractive feature of reits since this feature give reits higher benefits for investors compared to direct real-estate investment. in return, reits will generate higher liquidity into real-estate market. less tax advantage will reduce reits competitiveness, especially in a globalized market. fva practices is also an important role in reits performance because it gives transparent image on the value of real-estate portfolio and enable reits managers to observe the portfolio value directly from real estate value. however, fva practices also cause reits will exposed to real estate sector volatility, which is reasonable because real estate assets are reits’ main underlying assets. one of the effects of reits performance is the institutional investors intention to invest through reits, especially reits with high volume of transaction (al-haj & hashim, 2009). many studies have tried to investigate the behavior of reit performance. one of the most common scope ofstudies in reits performance is comparing performance of one or some reits companies within one jurisdiction (akinsomi, ong, ibrahim, & newell, 2016; aro-gordon, 2015; asteriou & beigazi, 2013; bene, anderson, & zumpano, 2009; brown, 2000; compton, johnson, kunkel, & compton, 2006; escobari & jafarinejad, 2016; hartzell, kallberg, & liu, 2008; hartzell, sun, & titman, 2014; ho & tay, 2016; huerta, jackson, & ngo, 2015; larson, 2005; c. lee, chien, & lin, 2012; liow & addae-dapaah, 2010; lu, chen, & liao, 2014; olanrele, said, & daud, 2014; pellerin et al., 2013; quek & ong, 2008; san, heng, & pong, 2011; yung, li, & jian, 2017), with usa market is the most studied so far, which is not indrawan & wahyuningsih | literature review on reits and islamic reits and lessons learned for islamic reits in indonesia ijief: international journal of islamic economics and finance, 2(1), 21-46 | 30 surprising because usa reits market is the mature one in the world. one example is a study by (brown, 2000) found that mortgage reits that financed real estate investment using financial leverage had deeper negative returns compared to equity reits that financed the investment directly. meanwhile, study (quek & ong, 2008) that based in china, which does not have regulatory framework. therefore, reits that operated with chinese property as underlying asset are hong kong based gzi reit and singapore based capita return china trust (crct). this study found that both reits were performed well during their respective ipo, but crct can outperformed gzi and some other singaporean reits after ipo, while gzi still left behind even in hong kong reit market. despite their different performance, performance of these two reits indicates strong demand for reits in china. some of studies are also comparing reits in different jurisdictions (alexander, cheng, rutherford, springer, & alexander, 2013; alias & y, 2011; brobert, 2016; ho, addae-dapaah, & peck, 2017; c. l. lee & lee, 2012; loo, anuar, & ramakrishnan, 2016; mi, benson, & faff, 2016; olanrele, said, & daud, 2015; seiler, lee, & seiler, 2003; i.-c. tsai & lee, 2012; i. tsai, 2013; yeboah, ling, & naranjo, 2012). one example is a study by (alias & y, 2011) that compared performance of malaysian reits and uk reits found several factors that affect reits performance in these two markets. first, the rental revenue from the real estate tenants, which in turn becomes the dividends for reits’unit holders. second, type of real estate property will determine the revenue generated with following order from the highest to the lowest: i) retail commercial properties; ii) office properties; iii) residential properties; iv) industrial properties. meanwhile, another study by (i.-c. tsai & lee, 2012) found an interesting finding. by cips or pesaran test method, this study found that the returns of asian reits markets (singapore, hong kong, malaysia, thailand, taiwan, and korea) are more converged to the performance of us reits market compared to japan’s market returns. this finding indicates that the behavior or reits investors are tend to be irrational and influenced by nonfundamental issues. to comprehend our view, a study from (sah & seagraves, 2012) found that in us reits market, there is no significant evidence that clustering reits ipo time in will give different performance in terms of operating measures (operating return on total assets (oroa), net return on total assets (nrta) and total assets turnover ratio (tatrs)). this is due to us market’s transparency which means very little assymetric information between managers and investors. by comparing between these two studies, reits investors in emerging markets like in asia is still irrational compared to their counterparts in mature market like usa, and difference between the two is due to differences in market transparency which is indrawan & wahyuningsih | literature review on reits and islamic reits and lessons learned for islamic reits in indonesia ijief: international journal of islamic economics and finance, 2(1), 21-46 | 31 related to the regulatory framework. other studies focus on comparison of reits performance between before and after certain events, such as real estate downturn and global financial crisis (gfc) (brown, 2000; campbell & sirmans, 2002; dimovski, ratcliffe, & keneley, 2017; m. lee & lee, 2003). in post global financial crisis (gfc) 2008, real estate sector suffered from huge impact of the crisis, including the reits. thus, there are many cases where post-gfc reits were looking to merger or acquire other reits. study from (ratcliffe & dimovski, 2012) on several bidders (acquirers) and targets (acquirees) found that targets gained higher wealth after the merger or acquisition, while for bidders, they will gain higher if the targets are private companies and tend to suffer loss of wealth when acquiring targets that listed as public companies. gfc also gave impact to reits ipo, that most reits ipo in post-gfc period tend to be underpriced (dimovski et al., 2017). another study by (campbell & sirmans, 2002) found that reits companies in us market gained momentum after 1986 tax reforms that removed tax advantage of real estate limited partnerships (relps), a real estate investment vehicle other than reits, making reits as vehicle that had the most advantage for real estate investment. there are also some studies that tried to compare the performance of reits with other instruments, (ivanov, 2016; h. kim, gu, & mattila, 2002; c. l. lee & ting, 2009; m. l. lee & chiang, 2010; olaleye & ekemode, 2014; piao, mei, & zhang, 2017; waggle & moon, 2006), with most of them compared reits performance with common stocks and exchange traded funds (etf). study by (m. l. lee & chiang, 2010) found that between 1978 to 2008, reits performance has two distinct phase. prior to early 1990s structural break, reits performance in the long run behaved like common stocks. meanwhile, after the structural break, reits performance behaved in opposite direction with common stocks and parallel with real estate performance, in the long run. meanwhile, in case of malaysia, reits has been found to bring more diversification benefits with returns improvement and/or risk reduction for mixed-portfolio investors compared to listed property company’s shares, which means reits can be a good vehicle for real estate investors(c. l. lee & ting, 2009). there is also a unique study by (ho, rengarajan, & lum, 2013) on the effect of green building into reits performance in singapore. this study found that if reits has higher greenness, that measured by the percentage of square feet of certified properties and the average “greenness” score, will yield better operational and financial performance. this is an important finding which indicates that reits can play its role together with socially responsible investment (sri). indrawan & wahyuningsih | literature review on reits and islamic reits and lessons learned for islamic reits in indonesia ijief: international journal of islamic economics and finance, 2(1), 21-46 | 32 another sub-category is studies that looking for the impact of macroeconomic variables to reits performance or macroeconomic policy such as the fed’s taper tantrum to reits market (ewing & payne, 2005; s. lee, 2016; loo et al., 2016). studies found that macroeconomic policy and variables have fundamental and long-run relationship with performance of reits markets, with usually any shocks will tend to lower the reits returns compared to investors’ expectation. there is also a study by (nazlioglu, gormus, & soytaş, 2016) that found oil price shocks will generate volatility in various reits sectors (residential, hotel, healthcare, retail, and warehouse/industrial reits). 5. islamic reits number of literatures on islamic reits (i-reits) is not quite much. within author’s database, there are only 14 literatures on i-reits, compared to 61literatures on conventional reits.all of literatures in i-reits are published in 2010 or after. most of the literatures are focusing on malaysian i-reits (chuweni & ahmad, 2014; chuweni & eves, 2017; mohamad & saad, 2012; a. osmadi & razali, 2014; rozman, azmi, ali, et al., 2015; rozman, azmi, razali, & ali, 2015; teh, soh, & yan, 2012; yahya et al., 2016; zainuddin & nordin, 2016), which is not surprising since the first i-reits in the world, the al ‘aqar kpj reit is based in malaysia(najeeb & vejzagic, 2013). other papers are studied the case of gcc (gulf cooperation council) reits (akinsomi et al., 2016; ibrahim, ong, & akinsomi, 2012) with one study on cross-jurisdictions reits comparison between malaysia and gcc (ma’in et al., 2016) above i-reits related papers can be further categorized into some subcategories. first, policy and conceptual paper which tried to explain the nature of i-reits (lewis, 2010), which basically explained i-reits together with other islamic funds. also falls within this sub-category is a study by(ibrahim et al., 2012) that underlined some sharia guidelines on i-reits, particularly requirement of sharia assessment, limitation of revenues from non-permissible activities by tenants at maximum 20% of total rental revenues of i-reits and all financial operations (deposit, investment and financing) must be sharia compliant. next category is studies that focus on governance of i-reits. there are two studies which focusing on malaysian i-reits governance and they conclude that current malaysian i-reits’ governance is in good position because no disputed area between sharia scholars on existing i-reits as required by the regulatory framework, which means sharia compliant is not a problematic issue (chuweni & ahmad, 2014). this condition is also supported by large shareholding which enable good control of management from shareholders indrawan & wahyuningsih | literature review on reits and islamic reits and lessons learned for islamic reits in indonesia ijief: international journal of islamic economics and finance, 2(1), 21-46 | 33 and liquid capital market that enhance management’s transparency and reduce agency cost (zainuddin & nordin, 2016). other studies have tried to find empirical evidence of i-reits performance, most of them are cases of malaysia(akinsomi et al., 2016; chuweni & eves, 2017; ma’in et al., 2016; mohamad & saad, 2012; a. osmadi & razali, 2014; rozman, azmi, ali, et al., 2015; teh et al., 2012; yahya et al., 2016). one example is a study by (rozman, azmi, ali, et al., 2015) that found some benefits of holding i-reits instead of other asset classes such as shares and bonds. i-reits in malaysia during 2008-2014 period provided higher average annual returns compared to shares and bonds, but with lower risk-to-returns ratio. another benefit is i-reits is found to have little correlation with bonds and shares, which make it suitable for portfolio diversification. in other words, i-reits is a profitable, safe and independent vehicle of investment. typical study by (rozman, azmi, razali, et al., 2015) echoed above result by stating that, in post-gfc event, i-reits performed better compared to the conventional counterpart by also providing a higher degree of diversification for investors.in terms of performance determinants, a study by (ma’in et al., 2016) found that macroeconomic variables (inflation and interest rate) are insignificant factors, and only firm size that significantly determine i-reits performance in malaysia, singapore and kuwait. in general, some notable findings on i-reits performance and risks are as following. first, the emergence of i-reits is still a new phenomenon in islamic financial industry since the first world i-reits was established in malaysia, in 2006. second, malaysia is still the dominant market of i-reits with some other new i-reits also emerged from gcc, notably bahrain, kuwait as well as singapore (ma’in et al., 2016).third, sharia issues within application of i-reits have been solved by regulatory framework and sharia scholars so far.fourth, i-reits has well-performed by far compared to other asset classes and conventional reits with performance is positively and significantly determined by i-reits’ firm size. analysis 1. regulatory framework of reits in indonesia reits (dire/dana investasi real estat in bahasa indonesia) have been regulated in indonesia since 2007. at the time, the government of indonesia recognises the need to enable reits establishment to boost investment, particularly in real estate sector and in turn to help boost economic growth(molina & nugraha, 2016). during joko widodo’s term as indonesia’ president in 2014, some new regulations, either by government or otoritas jasa keuangan/ojk (financial services authory/fsa) were enacted to indrawan & wahyuningsih | literature review on reits and islamic reits and lessons learned for islamic reits in indonesia ijief: international journal of islamic economics and finance, 2(1), 21-46 | 34 support reits development in indonesia. they are: 1. peraturan pemerintah (government regulation) no. 40 year 2016 which regulates that capital gain tax on reits is only at 0.5% (republik indonesia, 2016). 2. peraturan ojk (fsa regulation) no. 64/pojk.04/2017 on reits which regulates important aspects of reits, such as(otoritas jasa keuangan, 2017): a) a reit should invest at least 80% of its portfolio to real estate properties, and the rest 20% can be in form of real estate related assets, money market instruments, other securities, or cash. b) direct investment by reit on real estate property can be either in a finished property or under-construction property. but the fund manager should make sure that after sixth month, the latter type of property should have generated income and at most 10% of reit’s nav. c) direct investment by reit on real estate property is only permissible for property in indonesian territory. d) a reit should distribute at least 90% of its annual return to the unit holders. e) a reit in its prospectus should disclose all information regarding its investment, including risk, appraisal method, taxation, etc. 3. peraturan ojk no. 30/pojk.04/2016 on islamic reits which regulates important aspects of i-reits in indonesia as following(otoritas jasa keuangan, 2016a): a) an i-reit should follow regulations on reits like the conventional ones. b) an i-reit is only permitted to invest on real estate properties which already generating income. it is different from conventional reits that permitted to invest in underconstruction real estate properties but they must generate income at six months after the reits’ investment. c) an i-reit should have sharia supervisory board like in other islamic financial institutions. d) an i-reit cannot invest in a real estate property which more than 10% of its area is used for non-halal activities and generate more than 10% non-halal income e) non-halal income of an i-reit should not be included as net asset value (nav) of the i-reit by the investment manager. indrawan & wahyuningsih | literature review on reits and islamic reits and lessons learned for islamic reits in indonesia ijief: international journal of islamic economics and finance, 2(1), 21-46 | 35 on the ground of fatwa or sharia opinions, although no specific fatwa on reits or i-reits in indonesia, since i-reits is part of trust fund, it is subject to the fatwa dewan syariah nasional (national sharia council fatwa) no. 20/dsn-mui/iv/2001 on trust fund (dewan syariah nasional majelis ulama indonesia, 2001). 2. critical evaluation above explanation shows that reits market in indonesia has been regulated well, even for i-reits despite its current non-existence. the regulations have adressed central issues on reits such as tax incentive, transparency, and minimum investment on real estate properties as in more advanced reits markets. however, up to now, only two reits companies listed in indonesia stock exchange. they are dire ciptadana properti ritel indonesia and dire bowsprit commercial and infrastructure, which the latter’s status is inactive according to indonesia central securities depository and none of them are i-reits (kustodian sentral efek indonesia, 2018). it is unparallel with indonesia’s huge potential on real estate market, due to high economic growth especially bussinesses in the capital city area of jakarta and tourism activities in regions such as bali (hotradero, 2014). in the context of i-reits, the first i-reits operated in indonesia is not indonesian based but malaysian instead. in 2012, al-aqar group, a i-reits company from malaysia owned two hospitals in indonesia (najeeb & vejzagic, 2013). in other words, indonesia is still left behind in developing islamic capital market, particularly i-reits. one possible reason behind this phenomena is low concern among indonesian practitioners to develop i-reits. this is due to little appetite among investors for this kind of investment(najeeb & vejzagic, 2013). this condition can be explained by relate it with low literacy rate of indonesian citizens to the capital market. according to national survey on financial literacy and inclusion 2016, conducted by ojk, the financial literacy rate of indonesians on capital market is just 4.4%, while the inclusion rate is even lower at 1.25%. islamic capital market is suffering much lower rate, with literacy rate and inclusion rate are 0.02% and 0.01% respectively. same survey concluded thatfinancial understanding and involvement of most indonesians dominated by the banking system with capital market, including islamic capital market is still at little rate of literacy and inclusion (otoritas jasa keuangan, 2016b). apart from low appetite from demand side, there is also one possible reason from supply side. it is because reits in indonesia is only possible to be established as collective investment contract. this regulation is imposed on all regulatory of reits (and i-reits) in indonesia (otoritas jasa keuangan, indrawan & wahyuningsih | literature review on reits and islamic reits and lessons learned for islamic reits in indonesia ijief: international journal of islamic economics and finance, 2(1), 21-46 | 36 2016a, 2017). this regulation implies that only fund manager can establish reits and i-reits. meanwhile, other jurisdictions like japan, korea and us, reits can be established by non-fund manager, especially developers who seek non-bank financing to fund their construction projects (chiang & joinkey, 2006). restrictive requirement on reits and i-reits should be reconsidered in order to enhance the supply of reits in indonesian market. conclusion and recommendation conclusion reits as investment instrument has been widely regarded as a good vehicle of real estate investment due to cost efficiency, tax advantage, market transparency and liquidity capacity for real estate sector since it can provide alternative financing, especially when credit rationing is imposed by government. also, reits provide the unit or shareholders flexible investment instrument that consists of two components, features like stock (dividend and capital gain) with some exposure to real estate sector. us reits market is by far the most developed reits market, followed by south korea, taiwan, japan, australia, and singapore. within the studied period, the most researched topic on reits is reits performance, with usa market is the most studied so far as it the most mature reits market in the world. reits performance behavior is found to be a hybrid of common stock and real estate. reits performance is found to be irrational in nature since geographical proximity does not show significant impact on reits performance. also, reits market is heavily affected by the 2008 financial crisis since real estate sector as the provider of underlying assets of reits damaged from huge losses during the crisis. other than the performance, literatures on conventional reits focus on understanding on reits, especially on its structure as well as investigation on the regulatory framework on reits, including comparison among jurisdictions. the existence of islamic financial institutions (ifis) such as islamic banks has triggered demand for sharia-compliant reits (i-reits) in order to provide islamic-preferred investor with such flexible and attractive investment instrument but in accordance with sharia rulings. malaysia by far is the dominant player in global i-reits markets since the establishment of al ‘aqar kpj reits as first i-reits in the world, based in malaysia. most studies on ireits are dominated by malaysian cases, with scope ranging from regulatory framework to performance. in general, i-reits has no sharia compliant issue by far and found to outperformed other asset classes (bonds, shares, and conventional reits) with high diversification benefit. indrawan & wahyuningsih | literature review on reits and islamic reits and lessons learned for islamic reits in indonesia ijief: international journal of islamic economics and finance, 2(1), 21-46 | 37 there are some lessons learned from this literature review for development and study of i-reits in the future. first, study on muslim countries with proper capital markets such as indonesia, saudi arabia and pakistan but lack of progress on i-reits is a potential research field. by looking at regulatory framework requirements mentioned by (alias & y, 2011; quek & ong, 2008) then make comparison with those jurisdictions, we can come up with proposed solutions for existence of reits markets in these jurisdictions. this is an important issue since these countries need alternative financing for infrastructure, including that related to real estate sectors. second, with regard to sharia compliant issues, the current settled condition of i-reits sharia compliance aspect is a good avenue for innovation of ireits, such as i-reits as financing to develop waqf properties or to support “green” buildings like the case of singapore. this concern will make i-reits become a “beyond sharia compliant” investment due to its applicability to support sustainable development. third, empirical analysis on i-reits focus on its performance, risk and its relation with macroeconomic shocks, particularly inflation and interest rate. there are two possible areas to be studied here. first, the relationship between i-reits and economic growth in aggregate or in particular, real estate sector. this area is important since islamic finance is declared inseparable with real economic sectors. second, future studies on i-reits should look at more micro aspect of i-reits management such as capital structure, ownership structure and cost structure in order to evaluate i-reits operation and open paveway for its improvement. also, studies on marketing aspect, especially i-reits investors behavior and its determinants are important to open opportunity new i-reits markets. recommendation in the context of indonesian i-reits, it is an instrument in islamic capital market that still left behind islamic equities and sukuk. despite strong institutional supports in form of regulations as well as potential real estate development in indonesia, local practitioners still disregard i-reits since little appetite among investors. however, since malaysian based i-reits (alaqar) has been operated in indonesia, it means there is potential market for i-reits development, but huge efforts should be taken by stakeholders to enhance financial literacy and inclusion on capital market, including islamic capital market, which in turn will trigger development of i-reits. in this regard, the financial services authority (otoritas jasa keuangan/ojk) as the regulator of indonesia’s stock market may consider to opening opportunities for non-fund manager establishments to set up reits and iindrawan & wahyuningsih | literature review on reits and islamic reits and lessons learned for islamic reits in indonesia ijief: international journal of islamic economics and finance, 2(1), 21-46 | 38 reits. inability for non-fund managers, particularly the real estate developers to issue i-reits according to the current regulatory framework hinders possibility for more supply of i-reits product. also, incentive for ireits issuer may become a trigger to start this new islamic capital market product. meanwhile, on the demand side, the islamic finance practitioner must enhance the awareness, literacy and inclusion of the populace regarding ireits market. one possible way to enhance awareness, literacy and inclusion is optimizing the role of information and communication technology (ict) such as internet and social media as well as integrating i-reits products with other islamic financial institutions’ products, either from islamic banks, takaful (islamic insurance), etc to trigger the demand for the product. lastly, from above discussion, future research may analyze the factors related to the reluctance of practitioners to issue i-reits in indonesia that lead to its non-existence as well as the level of community understanding on i-reits and their possible willingness on that product if realized. this issue is important to be considered since development of i-reits will attract potential investors will appetite to invest in real estate market, provide financing for real estate sectors, which in turn will boost the economy as well as deepening the islamic capital market in indonesia. 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(2015). a synthesis of theoretical and empirical research on sukuk. borsa istanbul review, 15(4), 237–248. https://doi.org/10.1016/j.bir.2015.10.001 indrawan & wahyuningsih | literature review on reits and islamic reits and lessons learned for islamic reits in indonesia ijief: international journal of islamic economics and finance, 2(1), 21-46 | 46 this page is intentionally left blank article history ijief: international journal of islamic economics and finance vol. 1 (2), pg 47-72, july 2019 understanding consumer receptiveness of mortgage-based islamic social finance using a maqasid framework: a preliminary study hanudin amin♣ universiti malaysia sabah, malaysia, hanudin@ums.edu.my article history received: may 29, 2019 revised: june 18, 2019 accepted: july 8, 2019 abstract this study proposes a workable model of the mortgage-based islamic social finance (mbisf) and to test the model acceptance using a maqasid framework empirically. three battery items are intended to measure each latent variable. as for independent variables, the latent variables are an educational programme, mortgage welfare, consumer justice and islamic debt policy, whilst as for a dependent variable, the latent variable is consumer receptiveness. using structural equation modelling (sem) – partial least squares or sem-pls, this study finds out that educational programme, mortgage welfare, consumer justice and islamic debt policy are instrumental to lead the consumer receptiveness of mbisf. these results suggest that the elements of maqasid al-shariah (education, welfare, justice and debt policy) are significant to consumer receptiveness of mbisf. the relationships established are then called as the maqasid theory of consumer behaviour (mtcb).though the present work produced a fruitful outcome, yet the generalisation of the findings is somewhat limited and the application of the theory used in consumer behaviour is relatively fallen short or even unpopular in the conventional thinking. the results obtained provide better planning for islamic banks to market their mortgages effectively. keywords: mortgage-based islamic social finance, islamic social bank, maqasid, affordable financing. jel classification: g21; d11; d12 @ ijief 2019 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.2115 web: http://journal.umy.ac.id/index.php/ijief/article/view/6337 citation: amin, h. (2019). understanding consumer receptiveness of mortgage-based islamic social finance using a maqasid framework: a preliminary study. international journal of islamic economics and finance (ijief), 2(1),47-72. doi: https://doi.org/10.18196/ijief.2115. ♣ corresponding author: labuan faculty of international finance, associate professor dr., universiti malaysia sabah, labuan int ernational campus, malaysia, e-mail: hanudin@ums.edu.my mailto:hanudin@ums.edu.my mailto:hanudin@ums.edu.my amin | understanding consumer receptiveness of mortgage-based islamic social finance using a maqasid framework: a preliminary study ijief: international journal of islamic economics and finance, 2(1), 47-72 | 48 introduction by definition, a mortgage is a legal agreement in which a consumer house purchase is typically financed by an islamic bank while the former repays the latter that includes (principal + profit) as written in the mortgage agreement. in a mortgage transaction, the bought house is collateral to secure the financing obtained (abdul-razak & abduh, 2012). as for islamic banks, mortgage financing is a secured and stable portfolio due to constant monthly repayment by homebuyers (i.e. debtors). as for homebuyers, the financing facility provides a financial resource to improve their homeownership but also requires a long term financial commitment and for that their well-being of family members is, somehow, affected. indeed, payment for home mortgage normally takes a good chunk of one’s monthly income (mydin-meera & abdul-razak, 2005; hasan, 2011). islamic home financing products are an important segment of islamic banking products, contributing to the market share of 36.6 per cent for islamic total financing in malaysia whilst the rest is controlled by conventional loans, amounting 63.4 per cent of the total financing exist in the banking industry in malaysia (bank negara malaysia, 2018). although imperative, the growth of islamic home financing is somehow unpredictable due to inconsistency in consumer receptiveness that is driven by many factors. one of the possible reasons is the imitation of islamic home financing products in which the features are analogous to their conventional peers out of lending and borrowing principle and public misconception (abdul-razak & abduh, 2012). as a preliminary idea, the present work intends to suggest a new form of mortgage to be called as mortgage-based islamic social finance (mbisf), that can be offered by islamic banks but the emphasis is on the social benefits, exceeding the profit generation of the banks since the funding is generated from non-liability sources like zakat and awqaf. besides, there is a growing interest by scholars in islamic home financing to promote a more socialoriented islamic home financing. for instance, two works by zabriet al. (2015) and zabri and mohammed (2018) examine the offering of shariahcompliant mortgage financing by financial cooperatives and a cash waqffinancial cooperative-musharakah mutanaqisah home financing model, respectively. the message of these works is to convey an important idea pertinent to improved homeownership among needy and poor using innovative islamic home financing facilities without compromising the financial returns of islamic banks. this article, however, considers the need for mbisf in the context of malaysia to support by zakat, awqaf and sadaqah for existence and sustainability. as such, the term mortgage-based islamic social finance is defined as the mortgage facility offered to low and moderate-income amin | understanding consumer receptiveness of mortgage-based islamic social finance using a maqasid framework: a preliminary study ijief: international journal of islamic economics and finance, 2(1), 47-72 | 49 families who are in need of homeownership for improved well-being. this idea, however, is mixed blessings. there are three (3) reasons why this mortgage is vital for households:  firstly, inequality of wealth distributions. the gini index can be employed to explain the social gap in which the score of 0 representing 100 per cent perfect equality while the score of 1 demonstrating 100 per cent inequality. department of statistics malaysia (2016) reports that the gini index for urban and rural areas was 0.391 and 0.355, respectively. in labuan and sabah, the reported index was 0.390, implying there exists income disparity between households;  secondly, the house and land prices. owing to the income disparity as mentioned, the ability of an individual to purchase a complete house or land for a house is difficult. in the past, an intermediate terrace house cost rm200,000-rm300,000 which was affordable to the medium-income groups. today, however, the price of the house can reach up to rm1 million. this trend, however, is quite alarming. in labuan, malaysia alone, the price of a single storey terrace house is estimated around rm350,000-rm500,000, implying a level that is difficult to fulfil by the low-income group to make a house purchase. in fact, the prediction of the increased price of houses among local folks has also contributed to the increased price for the house. for instance, some parents buy houses today for their children to improve their children homeownership in the future. in turn, the house prices are affected out of contemporary demand by parents; and  thirdly, a bank's aptitude in approving the mortgage’s applications. there was evidence saying that some people blame a bank for declining their financing applications. in real practice, however, the bank has put its best effort to approve the customer application for maslahah to avoid the latter to get trapped into an acute indebtedness. those earning rm3,000 – rm5,000 have a greater risk if they think for a better home that costs them a price of rm500,000. consumers existing financial obligations such as car and personal financing are some reasons why their applications are rejected to avoid themselves trapped in bad debts. this study expounds at least four (4) features of mbisf as follows:  firstly, absolute ownership. the ownership of the mortgage and the house are surely owned by allah (swt). hence, the transacting parties should promote integrity, fairness, honesty and faith in god. consequently, the element of piety in the mortgage is of importance amin | understanding consumer receptiveness of mortgage-based islamic social finance using a maqasid framework: a preliminary study ijief: international journal of islamic economics and finance, 2(1), 47-72 | 50 to secure its purpose in providing financial assistance to needy for home ownership instead of profit maximisation. the mortgage proposed is aimed at maximising pahala of all parties involved, at least;  secondly, relationships of the transacting parties. the relationships that generate are significantly in extending financial resources to enable the poor and needy to get their first homeownership. the concept of brotherhood and ihsan are extended;  thirdly, the exclusion of all forms of interest in financial transactions. the element of interest charges is excluded including its “implication”; and  fourthly, the sources of knowledge. the mortgage-based islamic social finance is prescribed in the quran in the support of wellbeing and inner peace. in the quran (al-maidah: 5:2), allah (azza wajalla) said “…help ye one another in righteousness and piety, but help ye not one another in sin and rancour…” implying mortgage-based islamic social finance is about to help needy and poor along with an effort to generate sufficient profit for continuity. in all, this paper aims to examine factors determining receptiveness of consumer of mbisf. for this purpose, the theory of maqasid consumer behaviour (tmcb) is developed to capture the distinctiveness of mortgagebased islamic social finance. literature review and maqasid theory of consumer behaviour theory maqasid theory tells us about the inter-relationship from one occurrence to another. in my opinion, the theory provides answers to queries of how and why. it explains about the event about why behaviour takes place and how it happens. typically, theory in islamic banking literature is stemmed from the primary sources of islam, which are of interest to protect one's tawheed, akhlaq and fiqh for the benefit of all parties involved. it is of an assertion that a maqasid theory is a good theory that can provide a better explanation, prediction and measurement of consumer receptiveness of islamic banking products like in the case of a tawarruq-based mortgage. the term maqasid al-shariah refers to an objective of shariah that gives a balanced deliberation on one’s life, religion, intellect, property and lineage. choudhury (1986) offers an insightful concept of maqasid al-shariah through the confirmation about a universal goal and specific applications that can be amin | understanding consumer receptiveness of mortgage-based islamic social finance using a maqasid framework: a preliminary study ijief: international journal of islamic economics and finance, 2(1), 47-72 | 51 built on this goal to attain the hierarchy of values in islamic law. for instance, homeownership is categorised under property in the maqasid. auda (2010) refers maqasid to a purpose, objective, principle, intent and goal, among others. in this regard, the objectives of shariah are of three. the first is to educate individual, the second is to establish justice and the third is to realize public interest covering all individuals to serve ummah better. after all, the quran and the hadith are the sources that explain why maqasid alshariahis needed in our society. maqasid al-shariah plays a vital rule to offer a shariahparameter in upholding fair financial transactions involving banks and customers. dusuki (2008) supports an assertion that maqasid can jack up the quality of justice in social financial transactions. a well-known scholar, chapra (2000) asserts the significance of balancing the measures between individuals’ interest and ummah’s interest to meet the maqasid and for that, the vision of the religion can be attained. the two visions are the promotion of socio-economic justice and well-being of individuals. chapra (2000) suggest that the islamic banking objectives should be at firstly (1) promoting social welfare or obligation of individuals or consumers, and secondly (2) to optimise the earning that can be drawn from their interaction with consumers at large in order to actualise the maqasid alshariah in islamic banking. chapra (2000) has influenced dusuki (2008) in the proposal of what are objectives of islamic banks. dusuki (2008) provides empirical support which of these objectives is essential, firstly, profit obligation, and, secondly social obligation. he discovers that the latter plays as a primary objective of islamic banks. these include the responsibilities to take up the welfares of their staff, customers and the general public. this also means that profit should come after social obligation takes place to promote the maqasid and for that it becomes a competitive banking weapon for islamic social banks.this is also in light with kamali’s (2008) viewpoint who stresses the importance of fairness in terms of justice, removal of prejudice and assuaging hardship in one’s action. chapra (1992) asserts that maqasid al-shariah is related to islamic business activity to fulfil falah and well-being of individuals. it is also needed to promote ethical practices among individual in society. a work by richardson (2011) provides support to chapra’s (1992) theory. the author confirms the significance of equity promotion, justice, no exploitation and protection of individual wealth and also the promotion of clean and ethical standards of doing social interactions. the inability of islamic banks to apply these measures can be of a reason why their performance is still lagged behind compared with their conventional peers. amin | understanding consumer receptiveness of mortgage-based islamic social finance using a maqasid framework: a preliminary study ijief: international journal of islamic economics and finance, 2(1), 47-72 | 52 importantly, maqasid al-shariah is able to minimize any diversity in society by providing a means to promote integration and interaction. chapra (2000) believe that islamic and conventional economies are of two different things with different societies and visions are brought into play. accordingly, the term well-being is sourced from material and hedonism in the western world and because of that enhancement of individuals' self-interest is important including the optimising of their wealth and sensual satisfaction. unlike this concept, the religion of islam gives an emphasis on iqtisad or moderation, where the interest of ummah and individuals are balanced to avoid malaise and upholding social justice. essentially, this article intends to propose a theory that can represent a maqasid theory. it is proposed as a “maqasid theory of consumer behaviour” – mtcb. two reasons why it is proposed. firstly, it is a pioneering effort to promote new research to extend the theory for comparison and evaluation. secondly, it is a pioneering effort to suggest variables capturing the theory for new debate and contribution. furthermore, given the extant works of literature, a framework that represents the theory should capture four variables but are not confined to:  variable #1:educational programme – islam gives a key priority to disclose any information that can help consumers make a sound decision pertinent to spending, savings and consumption. the dimensions like clear advertisement and full disclosure are of importance to deliberate;  variable #2: consumer justice – it deals with fairness, equity and impartiality as prescribed in the primary sources;  variable #3:mortgage welfare – like in the case of a mortgage, for instance, helping bank customers in hardship and protecting their confidentiality and interest are upheld in the islamic business philosophy, so do islamic banks. it addresses both financial and nonfinancial supports given to customers in need; and  variable #4 – islamicity of debt policy – it defines generally as the shariah agreement of debt policy by the banks. shariah is the core reason of why islamic banks do exist. the higher the extent of islamicity of debt policy, the better is consumer acceptance of islamic financing products. all in, the tmcb is a theory that is modified from maqasid al-shariah that offers numerous benefits to banks and customers at large. from the banks’ side, maqasid al-shariah needs to represent in the structure, process and culture of the bank. the bank is expected to promote the welfare of the customer in a just and equitable manner for enhanced islamic banking operations. in short, maqasid al-shariah moderates the need for profit and amin | understanding consumer receptiveness of mortgage-based islamic social finance using a maqasid framework: a preliminary study ijief: international journal of islamic economics and finance, 2(1), 47-72 | 53 social factor for islamic banking, in turn, promoting true islamic banking operations. from the customers’ side, the tmcb proposed provides a better prediction for the relationship between consumer behaviour and maqasid al-shariah. the tmcb can establish new relationships that build new debates and proposing a new idea for better empirical support. the tmcb is expected to open a new spectrum of conducting research in the area of islamic banking and finance, where the benefit it offered is greater than other theories introduced in the west, at least. previous studies though available, studies related to four factors under contemplation are relatively fallen short. four works, firstly by mohammed et al. (2008), abdulrazak and abduh (2012), amin et al. (2014) and amin (2017) provide a departure. concerned with the educational programme for islamic banks, mohammed et al. (2008) have projected three items in measuring the performance of the banks. these include advancement of knowledge, instilling new skills and improvement and creating awareness of islamic banking. the annual report is the sample used. this work discovers the sudanese islamic bank (sib) has relatively better than others in terms of the allocation of education grants. the significance of education is somehow limited when it comes to consumer perspective. the one addressed by mohammed et al. (2008) is confined to education grants and scholarships. due to this flaw, a work by amin et al. (2014) extends mohammed et al. (2008) to include consumer behaviour or consumer receptiveness. amin et al. (2008) try to explicate it using a questionnaire survey, not intended to become as a surveyor but for the development of theory where behavioural finance comes into play. drawing upon the maqasid al-shariah index, this work managed to discover the significant connexion between education and consumer preference. the result obtained is fruitful that suggests education creates awareness, and awareness creates adoption. relating to consumer justice, these two works also outline the role that can be played by consumer justice in creating demand from mortgage products, mainly by amin et al. (2014). this study, discovers, otherwise in which consumer justice is not related to consumer receptiveness, perhaps out of poor development of battery items used and the inability of respondents to understand the motive behind the development of the items. earlier, mohammed et al. (2008) used to measure justice based on fair dealings, affordable products and elimination of injustices, but their objective is not meet out of scarcity of data pertinent to justice in the operations of islamic banks. amin et al. (2014) though used the same approach as mohammed et amin | understanding consumer receptiveness of mortgage-based islamic social finance using a maqasid framework: a preliminary study ijief: international journal of islamic economics and finance, 2(1), 47-72 | 54 al. (2008), but the battery items used are unclear, having issues on reliability and validity. despite its flaw, the work is an eye-opener about the importance of having our own theory in consumer research. the welfare programme in islamic banking is also prioritised in mohammed et al. (2008) study, proposing three items capturing welfare, namely, profitability, redistribution of income and wealth and investment in the vital real sector. of these, mohammed et al. (2008) find a significant effect of zakat payment by sudanese islamic bank and bank muamalat malaysia berhad also play an important role in terms of zakat payment. these items somehow are mixed and no focus is directed to understand mortgage welfare rather generic capturing the general idea of islamic banking. due to this limitation, a work by amin et al. (2014) takes a brave step by examining the role of welfare for islamic home financing products although their efforts are yet proven. evidently, however, they discover there is no significant effect that mortgage welfare can bring when a consumer intends to take up a mortgage. one of the reasons is that perhaps islamic banks have not made mortgage welfare as an integral part of their mortgages, implying their customers clueless about it, which, in turn, can bring insignificant outcome. not because it is not important but because it is not practised by islamic banks seriously. besides these three factors, islamic debt policy is also found important when offering the mortgage facilities. amin (2017) discovers a significant relationship between islamic debt policy and consumer behaviour. the reason of this outcome is based on the fact that many have been exposed about the horror stories about islamic home financing court cases, and at the same, it is significantly contributed to the well-being of individuals since it has a long term repercussion (abdul-razak and abduh, 2012). furthermore, a work by amin et al. (2017) examines consumer attitude and preference in the islamic mortgage sector in malaysia. unlike abdul-razak and abduh (2012), this study provides new thinking about examining consumer receptiveness of islamic mortgage by considering ‘our’ own paradigm to understand the behaviour without being capturing by western theories. besides the significant roles brought by service quality and product choice, this study managed to discover the significant effect of debt policy on attitude, which in turn, affecting consumer preference. such a significant role occurs out of the fact that the respondents involved are knowledgeable since they are university staff in which the information pertinent to islamic mortgage is widely available and shared from one to another. amin | understanding consumer receptiveness of mortgage-based islamic social finance using a maqasid framework: a preliminary study ijief: international journal of islamic economics and finance, 2(1), 47-72 | 55 the proposed model of mortgage-based islamic social finance (mbisf) as noted earlier, the model of this mortgage is based on the "intermediary" concept in which normal banking transactions are taken place. in the banking sector, sources of fund are emanated from depositors and shareholders while uses of the fund are for various types of financing products. as for the mortgage model, the sources of fund are not considered as liabilities but instead of trust from muslimfor the blessings of the almighty. the uses of the fund are for the benefit of the mortgage in which a small monthly repayment is considered for the benefits of poor and needy. figure 1 shows the model. furthermore, to make one mortgage considers as the mortgage-based islamic social finance, some particular assumptions are needed as follows:  sources of funds – according to obidullah and shirazi (2015),based on their work on islamic social finance report (2015), islamic social finance comprising institutions rooted in islamic philanthropy such as zakat, awqaf and sadaqah, among others. this suggests that the proper sources of funds from the mortgage are derived mainly from zakat and awqaf. no liabilities are directly incurred. these measures indeed are growing in malaysia; sources of fund uses of fund falah blessing report r repay collect distribute figure 1. a proposal of mbisf joint management zakat awqaf sadaqah mortgage for poor mortgage for needy others islamic social bank state islamic religious council allah (swt) islamic worldview amin | understanding consumer receptiveness of mortgage-based islamic social finance using a maqasid framework: a preliminary study ijief: international journal of islamic economics and finance, 2(1), 47-72 | 56  facility providers – this mortgage should be provided by faith-based organisations, which will be mandated by the state government to work for it or federal government in matter considers its applicability. in our case, we propose “islamic social bank” which has two expertise, the bank’s expertise and the social’s expertise (managing the needs of needy);  mortgage objective – the facility provided should reflect five elements of maqasidal-shariah, viz., life, faith, mind, belongings and descendants. the mortgage offered should protect these elements otherwise it is unqualified. explicitly, it consists of two objectives namely #1financial assistance to the poor and needy for owning a better affordable house #2 promoting ummah’s well-being through subsidised homeownership; and  shariah contract used – the mortgage should apply shariah contracts to reduce the implications of debts and the ribatoo. needless to say, bay bithamanajil (bba), tawarruq and murabahah are islamic financing products that encourage debt taking at losing one’s debt freedom. this article, however, suggests the musharakah mutanaqisah principle in governing the operation of the mortgage promoting debt equity between the transacting parties for mardhatillah. even better “qardhul hassan mortgage financing” but it is, however, subject to profound research and development (r&d) before it can depart. this proposed mortgage model helps to stimulate homeownership among poor and needy to protect their privacy and family development. it also helps to transform home-industry where the emphasis is given on a true and real mortgage as needed by society at large that brings ummatic transformation to those in need. the mortgage, however, is a mixed blessing in that it captures a specific need of those needy and poor people at the expense of other societies. defining needy and poor people for the mortgage also requires further research for objectivity. despite this issue, however, the current study considers as an eye-opener to improve homeownership where islamic social finance comes into play. our proposed workable model here is in its infancy stage and we only aim to expose the explicit form of the model for greater work in future studies. thus, the success of this model is relied on the smart partnership between the transacting parties (i.e. the government, society and faith-based organisation) to implement the model, where the benefits of it will be greater for greater benefits to ummah in the nation, at least. amin | understanding consumer receptiveness of mortgage-based islamic social finance using a maqasid framework: a preliminary study ijief: international journal of islamic economics and finance, 2(1), 47-72 | 57 methodology data the subject of this study is young millennials who intend to buy affordable houses using islamic home financing products. they shape the potential customer base for the mortgage and explicitly significant to generate a new customer segment that helps to create improved profitability to islamic banks. in our context, however, affordable houses are houses that are adequate in quality, and importantly they have a reasonable price that leads to a fulfilment of homebuyers of their mortgage needs and other basic living needs. at a young age, homeownership is almost unbearable due to poor cash inflow of savings and the issue of pricing that contributes to an inability among prospective homebuyers to obtain cash financing from a bank out of a low monthly salary and skyrocketed price of the house bought. this study was conducted in labuan, east malaysia in january 2019. judgmental sampling was chosen. we select a respondent once he/she meets these criteria:  respondents plan to buy a property using islamic home financing facilities;  respondents are millennials who are the existing customers of islamic banks; and  respondents are those who support the importance of islamic social finance including mortgage-based islamic social finance. we provide 300 questionnaires for data collection. though 300 questionnaires were successfully distributed, however, only 268 questionnaires were usable for further analysis of the data. insincere responses of 32 questionnaires were discarded. our sample size is based on 268. the profiles of our respondents are presented in table 1. table 1. respondents’ profile demographic detail n % gender male 126 47.0 female 142 53.0 education obtained diploma/stpm 3 1.1 degree 165 61.6 master 72 26.9 phd 28 10.4 marital status single 69 25.7 married 199 74.3 amin | understanding consumer receptiveness of mortgage-based islamic social finance using a maqasid framework: a preliminary study ijief: international journal of islamic economics and finance, 2(1), 47-72 | 58 method we keyed in all responses using spss by assigning a specific code from one respondent to another. in more detail, the respondents’ demographic data are analysed using descriptive statistics to elicit results of respondents’ characteristic. the data keyed in using spss is then saved as csv to allow pls analyses to meet the objective of this study. each latent variable has three (3) battery items equally to allow a better comparison between factors analysed by understanding their significance level to the model of this work. at least two reasons why pls are selected. firstly, pls allows a theory development when a new factor in added to the formation of a research model like occurs in this present study (amin, 2017). secondly, pls demands minimally on scales used, sample size and residual distributions (chin et al., 2003). the present work suggests new battery items representing a framework, allowing their compatibility with the research hypotheses. following churchill jr. (1979), we develop the research items using two approaches, firstly literature analyses, and, secondly expert feedback. as for the former, all battery items developed are adapted from previous studies related. the detail descriptions are provided as follows: educational programme – three items of this variable are modified from mohammed et al. (2008) and billah (2006). these studies have defined “education” differently. mohammed et al. (2008) decompose it to include education grants/donation, research, training and publicity whilst billah (2006) refers it as knowledgeable persons. we modify these items to generate these battery items:  i consider a bank that provides mortgage's educational programme;  i consider a bank that provides publicity on islamic home financing; and  i consider a bank that provides adequate adverts. mortgage welfare three items of this variable are modified from haniffa and hudaib (2007) and jabatansyariah bmmb (2012) and amin (2015). emanating from these works, we create these items:  i consider a bank that protects customers' interest;  i consider a bank that provides a mortgage to needy and poor people; and  i consider a bank that extends its value-based intermediation to existing and new customers. consumer justice three items of this variable are adapted from amin (2015). deriving from this work, these three items are developed:  i consider a bank that avoids disputes;  i consider a bank that acts justly to customers; and  i consider a bank that avoids a dubious financial contract. amin | understanding consumer receptiveness of mortgage-based islamic social finance using a maqasid framework: a preliminary study ijief: international journal of islamic economics and finance, 2(1), 47-72 | 59 islamic debt policy – three items of this variable are adapted from amin (2017) and haniffa and hudaib (2007). the details are as follows  i consider a bank with an islamic debt policy;  i consider a bank that offers me an islamic debt restructuring; and  i consider a bank that offers me an islamic rescheduling. all items are adapted out of the fact that earlier studies have developed their battery items to capture a context of islamic home financing in malaysia. after the generation of items, we invite 5 shariah scholars to review and to comment on the research items. with all considerations, only a small revision is conducted. the items are measured using a 5-likert scale ranging from a low response of strongly disagree [1] to a high response of strongly agree [5]. as for face validity, a pilot test was conducted among 30 respondents in which the battery items were corrected and improved accordingly. the finalised questionnaire was sent for an actual survey to elicit responses and feedback. model development our mtcb is based on four latent variables namely educational programme, mortgage welfare, consumer justice and islamic debt policy. each of these variables generates three battery items for better operationalisations (churchill jr., 1979). we build up a relationship between educational programme and receptiveness based on mohammed et al. (2008) and billah (2006). the educational programme is important as it creates consciousness and public confidence for the formation of patronage. hence, the higher the extent of the educational programme, the better is the consumer receptiveness. likewise, the relationship we establish between mortgage welfare and consumer receptiveness is based on haniffa and hudaib (2007) and jabatan syariah bmmb (2012) and amin (2015). mortgage welfare is important owing to these reasons. firstly, mortgage welfare is important to protect the interest of customers via financial counselling and secondly the bank is offering continuous support (e.g. payment holiday) after the patronage mainly when the customers are encountered with financial hardship. consequently, the higher the extent of mortgage welfare, the better is the consumer receptiveness. amin | understanding consumer receptiveness of mortgage-based islamic social finance using a maqasid framework: a preliminary study ijief: international journal of islamic economics and finance, 2(1), 47-72 | 60 figure 2. the research model likewise, we propose a relationship between consumer justice and consumer receptiveness by extending a work by amin (2015) meticulously. this work expounds five battery items to capture consumer justice but in this current work, we examine three only for relevancy. these constitute the act of avoiding disputes, the act of fairness and the act of preventing dubious financial contracts. this variable is essential because it creates a value-added facility that protects the interest of customers when they patronising the facility. thus, the higher the extent of consumer justice, the better is the consumer receptiveness. furthermore, a relationship between islamic debt policy and consumer receptiveness is also proposed. debt policy should be 'islamic' to allow better patronage of customers with their financial capacity at the expense of self-interest and no performing financing. this variable is significant owing to the fact that islamic debt policy allows a debt treatment islamically to debtors who are facing financial hardships at the expense of acute indebtedness. amin (2017) and haniffa and hudaib (2007) assert the significance of having an islamic way of treating debtors to improve public perception, allowing a new formation of consumer receptiveness mainly by millennials. accordingly, the higher the extent of consumer justice, the better is the consumer receptiveness. on the basis of these avowals, i propose four alternative hypotheses to validate the relationships exist between four independent variables and a dependent variable. the details are provided.  h1: there is a significant relationship between the educational programme and consumer receptiveness (mohammed et al., 2008 & billah, 2006);  h2: there is a significant relationship between mortgage welfare and consumer receptiveness (haniffa & hudaib, 2007; jabatan syariah bmmb, 2012); educational programme consumer justice mortgage welfare islamic debt policy consumer receptiveness amin | understanding consumer receptiveness of mortgage-based islamic social finance using a maqasid framework: a preliminary study ijief: international journal of islamic economics and finance, 2(1), 47-72 | 61  h3: there is a significant relationship between consumer justice and consumer receptiveness (amin, 2015); and  h4: there is a significant relationship between islamic debt policy and consumer receptiveness (amin, 2017; haniffa & hudaib, 2007). results and analysis in analysing the data, two stages of the data analysis are conducted, namely, measurement model that describes factor loadings, reliability and discriminant validity and structural analysis that describes the effects of the variables tested on the receptiveness. the details are provided as follows: results 1. measurement model in this work, our analysis is conducted using a two-stage approach (chin, 2010). the approach includes measurement model and structural analysis, in which the former is conducted to examine the validity and reliability of the model developed whilst the latter is conducted to evaluate the pattern and significance of the relationship between one variable to another. likewise, table 2 presents the factor loadings for all battery items under contemplation. it is found out that all items that hypothesised to represent their own particular factor/variable are statistically significant and loaded highly in the factor that they supposed to measure. besides, no battery items loaded higher on the factor that they are not hypothesised to gauge. following churchill jr (1979), factor loadings are important in discriminating valid items from non-valid items for a specific factor that they measure. given our results, we conclude that all battery items analysed are valid and taken up for further analysis of the data. amin | understanding consumer receptiveness of mortgage-based islamic social finance using a maqasid framework: a preliminary study ijief: international journal of islamic economics and finance, 2(1), 47-72 | 62 table 2. factor loadings item idp cr ep cj mw idp1 0.883 0.413 0.139 0.400 0.494 idp2 0.919 0.424 0.203 0.549 0.446 idp3 0.893 0.432 0.149 0.499 0.339 cr1 0.485 0.953 0.380 0.333 0.544 cr2 0.425 0.935 0.335 0.445 0.434 cr3 0.411 0.884 0.206 0.434 0.484 ep1 0.221 0.331 0.944 0.294 0.139 ep2 0.184 0.301 0.938 0.205 0.144 ep3 0.133 0.243 0.892 0.253 0.194 cj1 0.433 0.492 0.240 0.934 0.446 cj2 0.531 0.301 0.223 0.935 0.519 cj3 0.523 0.305 0.248 0.890 0.493 mw1 0.424 0.433 0.205 0.491 0.915 mw2 0.382 0.484 0.131 0.384 0.922 mw3 0.235 0.484 0.131 0.433 0.832 note: idp=islamic debt policy, cr=consumer receptiveness, ep=educational programme, cj=consumer justice, mw=mortgage welfare. we also run several tests covering ave, composite reliability (cr) and cronbach’s alpha for reliability. our ave values are also greater than the recommended value of 0.5. these results are in tandem with fornell and larcker (1981) proposal in which ave values that greater than 0.5 are meeting the convergent validity. all factors tested have produced acceptable values for cr, exceeding the threshold value of 0.7 and for that all items capturing the factors are reliable. furthermore, our cronbach's alpha test also reveals favourable outcomes in which all constructs' items have produced the intended value of greater than the threshold of 0.6. this concludes the battery items representing the constructs are having adequate internal consistency. table 3. reliability factor ave composite reliability r square cronbach's alpha idp 0.807 0.926 0.881 ep 0.869 0.952 0.925 cj 0.848 0.944 0.910 mw 0.817 0.930 0.889 cr 0.855 0.946 0.687 0.915 note: idp=islamic debt policy, cr=consumer receptiveness, ep=educational programme, cj=consumer justice, mw=mortgage welfare. amin | understanding consumer receptiveness of mortgage-based islamic social finance using a maqasid framework: a preliminary study ijief: international journal of islamic economics and finance, 2(1), 47-72 | 63 furthermore, table 4 presents the results pertaining to the discriminant validity. all values examined for the respective factors are greater than the threshold value of 0.7, implying there exists the discriminant validity for the factors under contemplation. our results are in line with fornell and larcker’s (1981) proposal, in which they assert that the discriminant validity established when the square root of the ave for the given factor is greater than the correlation shared with other factors under consideration. the details of this assertion are given in table 4. table 4. discriminant validity factor idp ep ch mw cr idp 0.899 ep 0.199 0.932 cj 0.311 0.273 0.921 mw 0.497 0.192 0.380 0.904 cr 0.395 0.335 0.360 0.421 0.925 note: idp=islamic debt policy, cr=consumer receptiveness, ep=educational programme, cj=consumer justice, mw=mortgage welfare. 2. structural analysis figure 3. the analysed research model amin | understanding consumer receptiveness of mortgage-based islamic social finance using a maqasid framework: a preliminary study ijief: international journal of islamic economics and finance, 2(1), 47-72 | 64 table 5. structural analysis pathway beta sd t-value supported cj  cr 0.420 0.063 6.555 yes ep  cr 0.125 0.038 3.189 yes idp  cr 0.343 0.050 6.973 yes mw  cr 0.141 0.061 2.309 yes note: idp=islamic debt policy, cr=consumer receptiveness, ep=educational programme, cj=consumer justice, mw=mortgage welfare. the results obtained as reported in table 5 suggest that consumer justice has the highest influence on consumer acceptance (β =0.420& t=6.555) followed by islamic debt policy (β =0.343 & t=6.973). this finding indicates that bank customers intend to take up the mortgage when the treatment emanated from the mortgage is fair and it is accessible to all layers of individuals in our society. this element needs to be included in the mortgage model. this finding also indicates that bank customers will consider islamic debt policy when they are satisfying the fair treatment that comes without discrimination to prospective customers. the respondents are also believing that consumer justice and islamic debt policy is somehow related in which the latter is part of the former. regardless of these, banks that offer actual islamic debt treatments can be potential to be patronised by bank customers. likewise, the results also suggest that mortgage welfare has a higher influence on consumer receptiveness(β =0.141 & t=2.309) than educational programme (β =0.125 & t=3.189). the reasons are two-fold. the results reveal that mortgage welfare is greater than an educational programme since the former has a direct influence when one decides to take up the mortgage than that of the latter. individuals could have been expected to react mostly because of the packages of welfare provided by service providers. if the welfare programme is accessible and available, one tends to opt it first before the educational programme comes into play. the educational programme is only considered when it is relevant and has a direct input to make a decision to take up the mortgage facility. to sum up, all proposed hypotheses are validated empirically and found to be statistically significant and related, implying the present research framework is acceptable. amin | understanding consumer receptiveness of mortgage-based islamic social finance using a maqasid framework: a preliminary study ijief: international journal of islamic economics and finance, 2(1), 47-72 | 65 analysis as for the first hypothesis, we managed to discover that there is a significant relationship between the educational programme and consumer receptiveness, in which the relationship is of positive, implying the higher the extent of the educational programme, the better is the receptiveness. this result is tandem with mohammed et al. (2008) and billah (2006), extending their findings on the significance of education to the current research. why it is significant? with an improved educational programme, one’s confidence is improved for better acceptance of the mortgage facility. with knowledge, consumer confidence is improved. in terms of the second hypothesis, mortgage welfare is also demonstrated to be statistically related to consumer receptiveness and the relationship found is positive. this means, the higher the extent of mortgage welfare, the better is the acceptance. this finding is in light with assertions by hanifa and hudaib (2007) and jabatan syariah bmmb (2012), denoting mortgage welfare and the mortgage facility are related. perhaps, it is explicitly argued that mortgage welfare is an essential component in the maqasid, and also an objective of the mortgage facility to jack up the preservation of interest of homebuyers mainly those who are millennials (needy and poor people). the relationship between consumer justice and consumer receptiveness is also fruitful and has a greater impact compared with other variables. this work confirms an earlier finding by amin (2015) who claims the formation of patronage is due to consumer justice. consumer justice enables the promotion of shariah compliance to the transacting parties, where maslahah to bankers and customers are upheld accordingly. it can become like a competitive advantage to improve its discrepancy compared with existing islamic home financing products. we find a positive relationship between consumer justice and consumer receptiveness, suggesting when consumer justice is upheld by the bank, consumer willingness to take up the facility is improved accordingly. on the same note, the same trend of finding is also found to a relationship between islamic debt policy and consumer receptiveness. this finding is supported by amin (2017) and haniffa and hudaib (2007) and one of the possible reasons is that debt policy is an important element in the financial transaction between a debtor and a creditor as promoted in the primary sources (i.e. the quran and the hadith). amin (2017) examines the possible influence of islamic debt policy on existing islamic home financing products and its outcome is of significance. our finding is in tandem with this work since our battery items are taken from amin (2017), indicating that there exists an element of compatibility between the present work and amin (2017). we also find that the present finding is in consonance with haniffa amin | understanding consumer receptiveness of mortgage-based islamic social finance using a maqasid framework: a preliminary study ijief: international journal of islamic economics and finance, 2(1), 47-72 | 66 and hudaib (2007) due to a proper conceptualisation, which is done on the basis of cognitive. more importantly, our finding is significant and it's in light with amin (2017) and haniffa and hudaib (2007) because of our study finding support on debt cancellation, debt forgiveness and islamic debtors' treatment as operationalised accordingly in the present work. conclusion and recommendation conclusion the results obtained suggest that consumer justice, islamic debt policy, mortgage welfare and educational programme determine consumer receptiveness. in other words, consumers show positive perceptions regarding the ability of justice, islamic debt policy, mortgage welfare and educational programme to meet their financial mortgage needs. as a result, banks can provide sufficient information about these factors to potential consumers, which may function as a reliable source of information and can help them to make a sound decision. though websites of islamic banks are essential, somehow, the reliability of the websites is dependent on how often the banks update the information available on websites. as such, a constant update at least for every 5 minutes can be of help to improve the relevance and usefulness of mortgage facilities offered. in more detail, we provide the following contributions: theoretical contributions this work introduces a new framework that captures the effects of consumer justice, islamic debt policy, mortgage welfare and educational programme on consumer receptiveness. our empirical findings indicate that these factors are statistically significant and for that, the hypothesised hypotheses are found valid. on the same note, the maqasid framework is also found relevant and for that, it is a new measure that can be employed for future studies, where islamic banking products and services are brought into play. another theoretical contribution of the current study is the inclusion of customer perceptions of the factors involved based on the cognitive belief evaluations, which in turn, can deliver valuable insights into potential home buyers' cognitive processes. on the same note, this study also makes a substantial contribution to the body of knowledge by reducing the gaps in consumer mortgage behaviour/receptiveness. more importantly, this work provides empirical support for the factors under contemplation to explicate consumer receptiveness in the context of mbisf. amin | understanding consumer receptiveness of mortgage-based islamic social finance using a maqasid framework: a preliminary study ijief: international journal of islamic economics and finance, 2(1), 47-72 | 67 methodological contributions our study here provides also a methodological contribution pertinent to the development of constructs’ items related to consumer justice, islamic debt policy, mortgage welfare and educational programme on consumer receptiveness. we find no specific battery items that represent these factors. we build up the items by examining some ideas expressed by earlier works (e.g. billah, 2006; haniffa and hudaib, 2007; mohammed et al., 2008; jabatansyariah bmmb, 2012).the measurement scales are developed specifically by eliciting responses by five shariah scholars, who are pious and knowledgeable on mortgage facilities. in this study, each factor proposed has three battery items and consistently applied to other factors and further, they are enhanced through interviews with shariah scholars as well as a pilot test involving 30 respondents (not reported in this study). yet, the battery items develop can also be employed and to be generalised into other islamic banking products without confining themselves to islamic home financing products, alone. practical contributions this study generally provides a general guideline on how to improve consumer receptiveness using so-called islamic yardsticks. in their marketing, managers of the mortgage in should pay attention to the fairness of the financial treatments, related to consumer justice and islamic debt policy. the factors recognised in this study can determine consumer receptiveness and allow managers of islamic social bank to focus on developing better plans to improve visibility and thus demand. this indicates that our findings are not only served as a source of reference but also can act as a directive that can be fully optimised to strengthen the marketing strategies should islamic social bank introduce. all taken, our findings are able to educate mortgage managers even to existing islamic bank about how to maintain the competitive advantage of islamic home financing products through the inclusion of zakat, waqf and sadaqah. likewise, no studies can immune from any limitations and the same goes to the present study. we outline two main limitations to drive future works in this area:  firstly, this work is confined to labuan, a specific city presently accessible in malaysia that can explicate its limitations and so do its contribution to the body of knowledge. results obtained may not be fully generalisable to include other bank customers from untested market segments. future works may learn on how to cover the amin | understanding consumer receptiveness of mortgage-based islamic social finance using a maqasid framework: a preliminary study ijief: international journal of islamic economics and finance, 2(1), 47-72 | 68 geographies to include indonesia, brunei and philippines to extend the research findings; and  secondly, our contributions are confined to the variables under contemplations, in which only four factors are proven to be essential to predict consumer receptiveness of mortgage. our pls model presents 68.7 per cent of the variances explained in the consumer receptiveness, implying about 31.3 per cent of its variances are drawn from other factors, not tested in the present model. despite these flaws, the present study provides us with an improved understanding about a framework that explicates consumer receptiveness of mortgage-based islamic social science and perhaps this work can become as a source of reference to guide more academic research by academicians and action research by practitioners pertinent to the feasibility of the mortgage implementation. recommendations this work provides direction on how to promote mbisf in the islamic banking industry, mainly in malaysia. as such, we offer some recommendations to the practitioner (islamic bank), regulator, and academician.  islamic banks that intend to offer this mortgage facility needs to set up a special workforce to carry out research before departing for the offer of the facility. objectives, shariah contracts and targeted customers should be understood before others can take place. importantly, islamic banks should ensure that the starting point and direction are defined correctly. it would be difficult to change once it offers to the public at large. for that, educational programme, consumer justice, mortgage welfare and islamic debt policy need to be included;  regulators mainly bank negara malaysia can develop a smart collaboration with state governments and islamic banks by firstly developing a directive, a guideline and a product disclosure of the mortgage facility to guide state government and islamic banks in implementing the facility gradually; and  academicians may change their direction of research by developing their own islamic theories to study consumer behaviours where maqasid al-shariah is brought into play. yet, academicians from other geographies can think of expanding the horizon of this work to other countries to extend the findings. it might be worthy to consider indonesia, brunei, thailand and the philippines and even amin | understanding consumer receptiveness of mortgage-based islamic social finance using a maqasid framework: a preliminary study ijief: international journal of islamic economics and finance, 2(1), 47-72 | 69 better to perform a comparative study of consumer behaviour of mbisf. indeed, this study provides a new perceptive to researchers to guide their consumer behaviour studies related to islamic banking products. it is intended to reduce their reliance on conventional consumer theories to avoid further extension of westernisation of knowledge of islamic banking products. yet, if daruriyyat established, some exceptions can be considered. allah (swt) knows best. acknowledgement this study is funded by the fundamental research grant scheme (frgs): frg0438-ss-1/2016, ministry of higher education (mohe), malaysia. amin | understanding consumer receptiveness of mortgage-based islamic social finance using a maqasid framework: a preliminary study ijief: international journal of islamic economics and finance, 2(1), 47-72 | 70 references al-quran, (1997). english translation of the meaning of al-quran, translated from arabic by muhammad farooq-i-azam malik houston, texas, u.s.a: the institute of islamic knowledge. abdul-razak, d., & abduh, m. 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(2015). jeddah: islamic research and training institute (irti). richardson, e. (2011). islamic finance for consumers in ireland: a comparative study of the position of retail-level islamic finance in ireland. journal of muslim minority affairs, 31(4), 534-553. rosly, s. a. (2010). shariahparameters reconsidered. international journal of islamic and middle eastern finance and management, 3(2), 132-146. zabri, m., md, z., abdul razak, d., & mohammed, m. o. (2015). an analytical framework to examine shari'ah-compliant mortgage financing by financial cooperatives in malaysia. journal of islamic finance, 176(3132), 1-13. zabri, m. z. m., & mohammed, m. o. (2018). examining the behavioural intention to participate in a cash waqf-financial cooperativemusharakah mutanaqisah home financing model. managerial finance, 44(6), 809-829. amin | understanding consumer receptiveness of mortgage-based islamic social finance using a maqasid framework: a preliminary study ijief: international journal of islamic economics and finance, 2(1), 47-72 | 72 this page is intentionally left blank article history ijief: international journal of islamic economics and finance vol. 3(1), pg 1-20, january 2020 exploring the knowledge of islamic banking among libyan bankers mohamed a. m. abdelrahim el-brassi international islamic university malaysia, malaysia, mohamedelbrassily@gmail.com syed musa alhabshi international islamic university malaysia, malaysia, syedmusa@iium.edu.my anwar hasan abdullah othman international islamic university malaysia, malaysia, anwarhasan@iium.edu.my article history received: december 14, 2019 revised: january 3, 2020 accepted: january 7, 2020 abstract although it has been five years since the beginning of the conversion to the islamic banking system (ibs) in libya., the level of knowledge of islamic banking (ib) products and services among bankers is yet to be investigated. the study uses a quantitative research design to address the issue. a total of 207 complete and valid questionnaires were collected from bankers in several libyan commercial banks. statistical package for social sciences spss version 23.0 was employed to analyze the data. findings showed that bankers have a basic to moderate level of knowledge of ib services and products. they were unaware of some important islamic services and products such as musharakah, murabahah to the purchase ordered (mpo), current islamic account and investment banking account. the findings also concluded that the bankers were only knowledgeable about concepts of islamic principles such as the permissibility of selling and prohibition of riba. however, they were unaware of how riba is applied in the banking system. this study urges relevant libyan stakeholders such as government and top bank management to develop intensive islamic banking training programs. in order to increase the level of knowledge and awareness of bankers towards ib. this would help to facilitate the conversion to (ibs) in the country. keywords: knowledge, islamic banking products, employees, libya. jel classification: m10 @ ijief 2020 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.2119 web: http://journal.umy.ac.id/index.php/ijief/article/view/7220 citation: el-brassi, m. a. m. a., alhabshi, s. m., & othman, a. h. a. (2020). exploring the knowledge of islamic banking among libyan bankers. international journal of islamic economics and finance (ijief), 1(2), 1-20. doi: https://doi.org/10.18196/ijief.2119 mailto:syedmusa@iium.edu.my mailto:anwarhasan@iium.edu.my el-brassi, alhabshi, & othman|exploring the knowledge of islamic banking among libyan bankers ijief: international journal of islamic economics and finance, 3(1), 1-20|2 i. introduction the ib industry was practically unknown in the 1970s, however, since then, it has grown at a rapid pace across the world due to several reasons such as the increase of awareness among muslims as well as non-muslims. knowledge of islamic banking services and products has increased due to increased interest in ib. this interest increased particularly after the 2008 financial crisis which illustrated the strength of the islamic banking system in comparison with the conventional banking system (cb) (harun, 2015). in this regard, understanding ib principles, as well as knowledge of ib among bankers, is key to the future success of islamic banks (wahid, 2013; abdullah & rahman, 2007; arshad, aslam, razi, & syed, 2011). several studies have focused on this issue. according to harun, rashid, and hamed (2015), there are always concerns regarding whether banking employees have adequate training and knowledge of islamic banking. abdullah and rahman (2007) stated that the majority of islamic bankers have an inadequate understanding of the differences between islamic and conventional banking mainly because they lack knowledge and training. as such, knowledge of ib is a critical element in ib. libya, as a muslim majority country, attempted to introduce ib to replace the existing conventional banking system with the enacting of act no. 1 in 2013, which requires all financial transactions to be shariah-compliant. various studies have concluded that there is a potential of high demand among libyans for ib services and products due to the fact that muslims are a majority in the country. according to omar (2015), libyan customers are ready and demand islamic banking products, however, there is the question of the readiness of conventional banks and their employees to apply the new system of ib, especially in terms of their knowledge about the shari'a-compliant financial system. on the matter of knowledge of islamic banking among current bankers, the evidence in the literature is inconsistent. according to (gait, 2009) and abdulaziz (2016), libyan banking staff have basic knowledge of ib and are aware of its products like musharakah and murabahah. however, according to sabri elkrghli and abtesam yahya (2017) and saaid (2016), libyan banking staff do not fully understand islamic banking services and products. furthermore, el-brassi, bello, and alhabshi (2017) and saaid and shafii (2013) concluded that the lack of knowledge ib and the inadequacy of intensive training, are among the crucial issues facing the transformation process to islamic banking in libya. in light of this, the current study attempts to address the issue of the level of knowledge of islamic banking among libyan bankers. el-brassi, alhabshi, & othman|exploring the knowledge of islamic banking among libyan bankers ijief: international journal of islamic economics and finance, 3(1), 1-20|3 ii. literature review 2.1. knowledge of islamic banking there are several definitions of “knowledge,” most of which are broad, with many differences based on varying operational contexts. knowledge has been defined as “a type of instruction or recipe that sets out how an item of goods or service can be produced” (blakeley, lewis, & mills, 2005), 2005, p. 2). according to hunt (2003, p. 100) knowledge is “beliefs that are true and are justified”. jaffar and musa (2014, p. 140) defined it as “the fact or condition of knowing something with familiarity gained through experience or education,”. on the other hand, awareness is defined as “having or showing realization, perception or knowledge of a situation or fact.” the last definition refers to knowledge and awareness as relating to each other and is considered an essential factor in understanding behavioral intention (omar, 2015; jaffar & musa, 2014). regarding the ibs, knowledge, and awareness have been used to assess consumers' and bankers' understanding of ibs and related services and products. mehtab, zaheer, & ali, (2015) examined the knowledge of and the attitude toward ib among the account holders in conventional and ib and found that knowledge and practice of ib are positively related. moreover, harun (2015) tested the level of knowledge among bankers of ib products and reported a need to improve their level of knowledge. the study recommended that the government and stakeholders should focus on developing well-trained and skilled employees to improve the ib industry. tara, irshad, khan, and rizwan (2014) studied the factors that influence the adoption of ib in pakistan and concluded that awareness of islamic finance principles is the most critical factor in the case of ib in pakistan. furthermore, the same study tested the role of knowledge in the intention to embrace and implement ib products and reported that the knowledge of ib was positively related to attitude and inclination to use ib products. in malaysia, several studies have addressed the role of knowledge in ib. abdullah and anderson (2015) investigated the factors affecting islamic financial literacy among bankers in the city of kuala lumpur and their knowledge of ib products. they concluded that views and knowledge of ib and its products are the factors that identify the financial literacy of bank employees in kuala lumpur. in other words, wilmot (2017) revealed that ghanaians are unwilling to adopt ib because they lack awareness and knowledge of ib and its products. in nigeria, kewuyemi (2015) examined customers’ awareness of and attitude toward islamic patronage banking. he reported that nigerian muslims and el-brassi, alhabshi, & othman|exploring the knowledge of islamic banking among libyan bankers ijief: international journal of islamic economics and finance, 3(1), 1-20|4 some non-muslims are willing to deal with ib products and services because they are aware of such services. furthermore, abdullahi and shaharuddin (2016) studied the potential of ib in macedonia and found that banking stakeholders are very knowledgeable and aware of ib products, which explains the high demand for ib products and services in the country. in the case of tunisia, aida and imen (2014) explored the knowledge of ib products among tunisian business students. they concluded that knowledge of ib was the most significant factor in determining the use of ib products. also, the students expressed a desire to work in financial institutions offering ib products. in the context of libya, omar (2015) examined knowledge and awareness as factors influencing the intention of customers to subscribe to the ibs. he found that knowledge and awareness of ib have a significant impact on the desire of libyan customers to accept ib, regarding bankers, many studies have discussed the influence of knowledge on banking employees' behavior and practice of ibs. in malaysia, zainol, shaari, and ali (2008) stated that the majority of bankers had insufficient knowledge about ib products. in pakistan, arshad et al. (2011) confirmed that most islamic banking employees have limited knowledge of ib products. moreover, baba and amin (2009) mentioned that banking employees in offshore islamic banking in labuan, malaysia, are confused regarding ib services and products because they have insufficient knowledge of these products and services. in contrast, zainol et al. (2008) maintained that ib bankers are more knowledgeable than their counterparts in conventional banks that offer ib products and services through their branches and windows system. ahmad, palil, abu bakar, and dolah (2015) concluded that the most significant factor that influences the knowledge of ib among bankers is the underlying principle that prohibits riba, gharar, and maysir. thus, stakeholders and industry players should support training programs to increase the level of knowledge to achieve sustainable growth of ib and this is true across jurisdictions and more so in countries undergoing a transformation. in 2013, libya has, by virtue of law, prohibited riba and started the conversion to an islamic banking system. studies have mentioned the role of knowledge of islamic banking as one of the key factors that will facilitate the transformation process to the islamic banking system. several studies in libya have been done regarding the transformation to ib. gait (2009) investigated the attitude of libyan consumers toward the protentional use of ib. in contrast to the findings of some other studies, he found that the majority of bank managers had a high awareness of islamic el-brassi, alhabshi, & othman|exploring the knowledge of islamic banking among libyan bankers ijief: international journal of islamic economics and finance, 3(1), 1-20|5 finance and its products such as musharakah, bai muajjall, and quard al hassan, although they were unaware of some islamic products like mudarabah and murabahah. sabri elkrghli and abtesam yahya (2017) studied the viewpoint of libyan bankers working in wahda bank in the city of benghazi regarding ib and finance and found that one of the major obstacles to the conversion process was the lack of knowledge among customers and bankers regarding ib products. there were also misunderstandings among top management about islamic banking operations. abdulaziz (2016) studied the opportunity of applying islamic banking products to finance the small and medium-sized enterprises (smes) in libya using bank al tanmyia as a case study. he concluded that bankers had a basic knowledge of ib concepts but had insufficient knowledge of ib products. however, this result cannot be generalized due to the study’s small sample. with regard to the conversion process to the islamic finance system in libya, saaid (2016) tested the factors influencing the successful conversion to islamic banking among bankers and concluded that ib products do exist but there is a significant lack of transformation mechanism which includes training programs. knowledge of bankers regarding ib products is vital in the transformation process and practice of islamic banking. this was among the leading reasons for postponing the transformation process to islamic banking until 2020. moreover, most studies on the issue of knowledge of islamic banking in libya focused on a single bank as a case study meaning that the results cannot be generalized to the entire banking sector. therefore, and with reference to the majority of the literature, we can confidently say that there is a need for a certain level of knowledge to smooth the transition from conventional banking to ib in libya especially after law 1 2013 was enacted. thus, further investigation is needed to understand and verify the actual level of knowledge of libyan bankers concerning ib. based on that, this study hypothesizes that: h1 libyan bankers have good knowledge of islamic banking products and services. el-brassi, alhabshi, & othman|exploring the knowledge of islamic banking among libyan bankers ijief: international journal of islamic economics and finance, 3(1), 1-20|6 iii. methodology 3.1. sample and procedure the population of this study comprises of employees working at different levels of management in libyan commercial banks in the city of benghazi. the sampled banks include four state-owned banks which are, goumhoria bank, sahari bank, national commercial bank, al whada bank, these banks account for almost 90% of libya’s banking sector assets. also, they employ the majority of bankers (cbl, 2014). the sample also included two private banks, which are ijma al arabi bank, and trade and commerce bank. both accounting for around 7% of libyan banking sector assets, and they are considered among the most important private banks in libya (saaid, 2016). the sample includes a combination of different areas of specialization and scientific qualifications. most of the targeted banks offer islamic banking services and products through branches and islamic windows system. the sample has been chosen of the aforementioned characteristics to increase the dependability of the results of this study. it is a non-probability sampling by selecting a judgemental sampling method. a total of 300 questionnaires was distributed, and 221 were returned. ultimately, 207 eventually were accepted as complete and usable for analysis. according to, shukla (2008) 200 is a threshold for an adequate sample size. 3.2. measurement items this study adopted the quantitative method using a self-administered questionnaire for the collection of primary data. the measurement items were adapted from the literature. section a of the questionnaire concerns the demographic background of the respondents, while section b was adapted from wahid (2013) who surveyed the knowledge of ib among muslim and non-muslim consumers in singapore and abdullah and rahman (2007) who surveyed the knowledge of bank managers about islamic banking in malaysia. these studies developed special techniques to measure a person’s level of knowledge of ib products. the questionnaire is divided into three categories to assess the level of knowledge as basic, intermediate, and advanced. out of the 13 questions, five were classified as basic, four as intermediate, and four as advanced. the basic questions test the fundamental underpinning shari’ah or fiqh muamalat concepts. these include the prohibition of riba, the concept of a loan with interest, basic differences between conventional and ib, and the respondents' awareness of ib philosophy as muslims. el-brassi, alhabshi, & othman|exploring the knowledge of islamic banking among libyan bankers ijief: international journal of islamic economics and finance, 3(1), 1-20|7 table 1. section of categories of islamic banking concepts the intermediate questions test the concept of riba and gharar, as well as the participants’ extent of knowledge of ib and products. the advanced questions were developed to reflect whether the participant has an in-depth understanding of the islamic banking system and its products. 3.3. data analysis to analyze the data, the study used a quantitative approach by adopting spss and microsoft excel, a descriptive statistical method, and frequency distribution to describe the demographic profile of the respondents such as age, gender, level of education, as well as to test and identify the extent of knowledge among libyan banking employees toward ib products. questions difficulty answer 1 islam prohibits earning interest from loans. basic true 2 shari’ah allows trading and sale. basic true 3 ib products and services are similar to those of conventional banks. basic false 4 islamic banks can receive interest when they give loans. basic false 5 we need islamic banking because we are muslims. basic true 6 the islamic banking system is aimed at maximizing profit only. intermediate false 7 investment in islamic banking is based on products and services that do not involve prohibited elements such as gambling and alcohol. intermediate true 8 riba can be accommodated in islamic banking if it is not excessive. intermediate false 9 islamic banks can charge their customers the expenses of issuing debit or credit cards. intermediate true 10 current accounts in islamic banking are considered as a liability to the banks and hence should not be treated as qard. advanced false 11 murabaha is the sale of goods at an agreed cost-plus mark-up, to be paid on spot only. advanced false 12 islam prohibits fixed or lump sum returns on mudharabah and musharakah contracts. advanced true 13 in a general mudharabah account, the mudharib may invest the money in any shari’ah-acceptable investment. advanced true el-brassi, alhabshi, & othman|exploring the knowledge of islamic banking among libyan bankers ijief: international journal of islamic economics and finance, 3(1), 1-20|8 iv. results 4.1. demographic profiles table 2. questionnaire response rate questionnaires distributed questionnaires return and complete questionnaires failed to return 300 numbers percentage numbers percentage 207 69% 93 31% this section discusses the results related to the demographic background and includes the response rate, age, job, gender, religion, and level of education. demographic information is essential when analyzing the determinants of the level of knowledge of the respondents. table 2 shows that 300 questionnaires were distributed to employees of six libyan commercial banks in benghazi city. out of the 300 questionnaires, 207 were returned complete (69% of total questionnaires) while 93 (31%) questionnaires were not returned. the table indicates that the response rate was almost 70% of the total number of distributed questionnaires, which is considered a high response rate. according to babbie, (1995), a response rate between 50% and 60% is considered a good response rate, while 70% is an excellent response rate. as such, the number of completed questionnaires was satisfactory and appropriate to proceed to the analysis. table 3. age group of respondents age frequency percentage less than 26 9 4.3 26-35 95 45.9 36-45 32 15.5 46-55 60 29.0 more than 55 11 5.3 total 207 100.0 el-brassi, alhabshi, & othman|exploring the knowledge of islamic banking among libyan bankers ijief: international journal of islamic economics and finance, 3(1), 1-20|9 table 4. gender response several indicators are observable in table 3. the participants aged 26-35 years represent the biggest group, with 45.9%. this is followed by those aged between 46 and 55 years (29%), 36-45 years (15.5%), 55 years and above (5.3%) and less than 25 years (4.3%). furthermore, the table indicates that 94.7% of the participants are still actively working, while 5.3% have reached pensionable age or will do so soon. regarding gender, the table indicates that males outnumber female respondents by 40% which means males dominate the workforce in commercial banks in libya. table 5 indicates that employees represent the largest group, with more than 50% of the sample. this is followed by the heads of departments with 37.25%, then by managers with 6.3%. on the other hand, management personnel, shariah committee members and executive managers make up only 1.9%. table 5. respondents’ work designations designation frequency percentage management personnel 4 1.9 executive manager 4 1.9 manager 13 6.3 head of dept. 77 37.2 shari’ah committee member 4 1.9 employee 105 50.7 total 207 100.0 frequency percent gender male 145 70.0 female 62 30.0 total 207 100.0 el-brassi, alhabshi, & othman|exploring the knowledge of islamic banking among libyan bankers ijief: international journal of islamic economics and finance, 3(1), 1-20|10 table 6. level of education level of education frequency percentage no qualification 10 4.8 diploma 50 24.2 bachelors 130 62.8 masters 16 7.7 phd 1 0.5 total 207 100.0 table 7. years of working experience experience frequency percentage less than 5 32 15.5 5-10 55 26.6 11-15 43 20.8 16-20 33 15.9 more than 20 44 21.3 total 207 100.0 the table indicates that the majority of respondents are educated and only 4.8% are without any educational qualification. the majority have a bachelor’s degree with 62.8%, followed by a diploma (24.2%), master’s degree (7.7%) and only one respondent with a phd. regarding working experience, the table shows that employees who have experienced between 5and 10 years make up 26.6%, followed by those with more than 20 years’ experience (21.3%), and those with 11 to 15 years of experience make up 20%, and 16 to 20 years’ experience (15.8%), while employees with less than 5 years’ experience were the smallest group in the sample with 15%. it means that banking staff has sufficient experience in banking services. el-brassi, alhabshi, & othman|exploring the knowledge of islamic banking among libyan bankers ijief: international journal of islamic economics and finance, 3(1), 1-20|11 4.2. testing the level of knowledge the primary purpose of this study is to establish the level of knowledge of libyan banking employees in ib services and products after five years since the issue of act no. 1 2013, which strictly prohibits dealing with riba (interest) in the financial system and require a transition to full-fledged islamic finance. to achieve this target, the questions in section b are designed as true or false answers to determine the understanding of the participants of the concept of ib services and products. the 13 questions are divided into basic, intermediate and advanced levels. these questions seek to assess the level of knowledge about ib based on the percentage of participants who answered the questions as true or false. this study adopted five classifications for assessing the level of knowledge of the participants measured by very good, good, moderate, poor and very poor. this classification was adopted by abdullah and rahman (2007). this study seeks to establish the level of knowledge by gathering the scores of participants' answers. for assessment, very good was scored between 90 and 100, followed by good between 80 and 89 and moderate from 70 to 79. scores from 60 to 69 are considered poor, and 59 and below as very poor. this study is the first attempt to understand the level of knowledge of libyan banking employees regarding ib. the next table presents the finding among the participants concerning their knowledge of ib and its services and products. table 8. knowledge level classification percentage score classification 90-100 very good 80-89 good 70-79 moderate 60-69 poor >59 very poor el-brassi, alhabshi, & othman|exploring the knowledge of islamic banking among libyan bankers ijief: international journal of islamic economics and finance, 3(1), 1-20|12 table 9. general findings on knowledge of islamic banking no statement level of difficulty score level of knowledge 1 islam prohibits earning interest from loans. basic 97.10% very good 2 shariah allows trading and sale. basic 97.58% very good 3 murabaha is the sale of goods at an agreed cost-plus mark-up, to be paid on the spot only. advanced 48.78% very poor 4 investment in islamic banking should only be in products and services that do not involve prohibited elements such as gambling and alcohol. intermediate 88.11% good 5 islamic banks can charge their customers the expenses for issuing debit or credit card. intermediate 69.1% poor 6 islam prohibits fixed, or lump sum returns on mudharabah and musharakah contracts. advanced 68.6% poor 7 islamic banks can receive interest when they give loans. basic 70% moderate 8 we need islamic banking because we are muslims. basic 89.4% good 9 the islamic banking system is aimed at maximizing profit only. intermediate 69.1 poor 10 riba can be accommodated in islamic banking if it is not excessive. intermediate 78.3% moderate 11 current accounts in islamic banking are considered as a liability to the banks and hence should not be treated as qard. advanced 27.5% very poor 12 the products and services of islamic banks and conventional banks are similar. basic 72.9% moderate 13 in a general mudharabah account, the mudharib may invest the money in any shari’ah-compliant investment. advanced 16.4 very poor mean 70.73 moderate table 9 shows the results and the percentages of the correct answers. in this regard, s1 and s2 score the highest at 97.10% and 97.58% respectively. s8 scores 89.4%, indicating that the participants realize the importance of the islamic banking system as part of compliance with the shari’ah and obedience to allah. on the other hand, s7 and s9 are confused about the concept of riba and they score moderately 70% and 78% respectively. el-brassi, alhabshi, & othman|exploring the knowledge of islamic banking among libyan bankers ijief: international journal of islamic economics and finance, 3(1), 1-20|13 the intermediate level questions indicate high scores of correct answers especially in s8 with more than 88%, which is “investment in islamic banking is based on products and services that do not involve prohibited elements such as gambling and alcohol.” it reflects the strong understanding of respondents about other prohibited elements from the view of the shari’ah such as alcohol and gambling. in contrast, the result in s5, which is about charging fees for a credit card is poor with 69%. the respondents show a poor understanding in s9 with 69%, which is about the principles of ib, which seeks not only to maximize the profits but also to achieve maqasid shari’ah such as the preservation of properties (hifth al mal). the most difficult questions the advanced questions address the concepts of musharakah, mudarabah, murabaha and current account practice. in this regard, the respondents showed very poor scores in all questions. for instance, s13 concerning mudarabh score very poorly as only 16.4% seem to understand the concept of mudrabah and how it is practiced in islamic banking. the majority of respondents are ignorant about the characteristics of the current account in islamic banking, and only 27% seem to understand how the current account is used in islamic banking. despite practicing the murabaha in most libyan commercial banks since 2010, s3 shows that only 48% of the respondents understand the concept of murabaha, which is considered a surprising result in the case of libya. table 10: sample’s knowledge level classification of knowledge mean scores categories basic 85.41 good intermediate 75.96 moderate advanced 40.33 very poor total mean 70.73 moderate table 10 summarizes the outcomes of this study. the outcomes indicate that the respondents have good basic knowledge about the concept of ib while they have moderate knowledge about the intermediate terms of ib and a very poor understanding of advanced terms in ib and islamic banking products such as murabaha and mudarabah. in conclusion, libyan banking employees have a barely moderate level of knowledge about ib, with only a 70.73% score. el-brassi, alhabshi, & othman|exploring the knowledge of islamic banking among libyan bankers ijief: international journal of islamic economics and finance, 3(1), 1-20|14 v. discussion and implications this study seeks to investigate and establish the level of knowledge of libyan banking employees about ib services and products. it is a pioneering study that tests the level of knowledge of banking staff regarding ib concepts in libya. the outcomes suggest that banking employees have a good level of knowledge about the basic principles of the shari’ah, such as the permissibility of selling and prohibition of riba. this result is expected as islam is the sole religion in libya, and the majority of libyans are knowledgeable about the basic principles of islamic law. however, the staff is very confused about how riba is applied in the banking system. libyan banking employees have a low level of knowledge and awareness regarding the variances between the ibs and the conventional system. the findings also indicate that banking employees in libya have very poor knowledge about pls products, which are musharakh and mudarabah. this might be because these products are seldom used in libyan financial markets. according to el-brassi et al. (2017), more than 90% of islamic banking services offered by libyan commercial banks are based on murabaha while less than 10% of islamic banking products are based on musharakah offered exclusively by algamhouria bank. despite offering and practicing the murabaha products in most libyan commercial banks, the findings show that most libyan banking employees still lack knowledge about the murabaha to the purchase order (mpo). this could be due to the absence of practical training programs about islamic banking products. furthermore, the results observed suggest that the banking employees are unaware of the concept of the current account in islamic banking and how it is treated from the shari’ah perspective. in the same way, the banking staff is unaware of islamic investment banking account, as its functions as such islamic investment tools like islamic portfolios and investment accounts and sukuk are not yet available in libya. the outcomes of this study concluded that libyan banking staff lacks knowledge and awareness about the theory and practice of ib, especially about different products offered in this banking system. they are unaware of the variances between the ibs and conventional banking systems. there are primary factors that created this situation in the libyan context. managers of libyan commercial banks have shown no interest in applying islamic banking as they are accustomed to conventional banking. this resistance leads to the axing of the training programs on islamic banking in most libyan commercial banks. the majority of libyan banking employees are unprepared to understand and deal with islamic banking services and products (saaid, el-brassi, alhabshi, & othman|exploring the knowledge of islamic banking among libyan bankers ijief: international journal of islamic economics and finance, 3(1), 1-20|15 2016; el-brassi et al., 2017; shafii, shahimi, & saaid, 2016a; shafii, shahimi, & saaid, 2016b; sabri elkrghli & abtesam yahya, 2017). these studies concluded that the most prominent issues in applying the ibs in libya are the lack of training programs, the absence of education institutions specialized in islamic banking knowledge, and the influence of conventional banking culture which creates resistance towards adopting islamic banking among the leaders of the libyan banking sector. these factors prevent the libyan banking system from transforming into full-fledged islamic banking to adhere to the law no. 1 of 2013. this position indicates that libyan commercial banks are in a dilemma about how to adopt and practice islamic banking services and products in such circumstances. regarding implications, the current study addressed in detail the influence of knowledge of ib on the perception of the banking staff in the context of libya. it proved that one of the most serious problems which prevent the transformation process in libya is the absence of banking staff who are qualified to offer and deal with ib services and products to meet the demand from libyan consumers for islamic banking. libyan banking managers need to pay more attention to increasing the level of knowledge of their subordinates regarding ib, so as to benefit from the potential market opportunities which will emerge as a result of high demand for banking services that comply with islamic law. the managers also need to introduce and improve the intensive training programs in islamic banking in their respective institutions. they should support awareness campaigns about the importance of islamic banking to increase the awareness of their staff about the ibs, which is considered a promising sector in libya. the study will benefit the libyan government by highlighting the role of knowledge about islamic banking in the conversion of the financial system to a full-fledged islamic financial system. the government should also encourage libyan education institutions to adopt and offer islamic finance programs. it will contribute to creating an appropriate environment for the growth and sustainable development of the islamic finance industry in libya. 5.1. limitations of the study and future researches the current study had several limitations which should be noted. firstly, the size of the study sample may be inadequate to generalize the findings to the entire financial sector in libya. besides the relatively small sample size, there were some difficulties during the collection of data such as unwillingness of some employees to complete the questionnaire, and some banks refusing to el-brassi, alhabshi, & othman|exploring the knowledge of islamic banking among libyan bankers ijief: international journal of islamic economics and finance, 3(1), 1-20|16 distribute the questionnaires in their branches (ejma al-alrabi bank and trade and commerce bank), there were also security concerns which prevented accessibility to a wider survey area. in light of these limitations faced by the current study, it is recommended that future research avoid these obstacles and ensure the data collected are adequate to be able to generalize the findings. furthermore, due to limitations of time, the current study addressed the level of knowledge regarding islamic banking among banking staff in the city of benghazi only. future researches should include other areas in libya such as tripoli and al bida for a comprehensive evaluation of the level of knowledge regarding ib services and products among libyan banking employees. future studies should also make comparisons between the different public commercial banks and private commercial banks regarding the level of knowledge of their staff of ib and its products and services. lastly, future study should also investigate the influence of act no. 1 2013 on the perceptions of libyan banking stakeholders towards the transformation process to full-fledged islamic banking in libya. vi. conclusion and recommendations the current study explored the knowledge level among libyan banking employees regarding ib products and services by collecting data from more than 200 respondents. the descriptive analysis was utilized to identify the outcomes which showed that libyan banking employees have just moderate knowledge of ib products and services. furthermore, the banking staff demonstrated very poor knowledge and awareness of most ib products currently being offered such as murabahah, musharakah, and mudarabah. the current study concludes that the majority of banking staff in libyan commercial banks are not well informed and also lack training in islamic banking. therefore, libyan commercial banks may not be able to meet the requirements of act no. 1 of 2013, which is to transform the libyan financial system to full-fledged islamic finance by 2020. thus, the current study recommends that the libyan authorities should encourage and support educational institutions like universities to offer courses on ib and finance. however, managers of libyan commercial banks are encouraged to help create greater awareness among their subordinates on islamic products and services and point to the importance of successfully transforming to ib in libya. lastly, libyan banking and finance institutions should seek help from international experts who are qualified in ib to increase the level of knowledge of ib among bank employees. el-brassi, alhabshi, & othman|exploring the knowledge of islamic banking among libyan bankers ijief: international journal of islamic economics and finance, 3(1), 1-20|17 references abdulaziz, m. a. 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(2017). patronage prospects of islamic banking and finance in ghana. ashesi university college. zainol, z., shaari, r., & ali, h. m. (2008). a comparative analysis of bankers’ perceptions on islamic banking. international journal of business and management, 3(4), 157–168. el-brassi, alhabshi, & othman|exploring the knowledge of islamic banking among libyan bankers ijief: international journal of islamic economics and finance, 3(1), 1-20|20 this page is intentionally left blank ijief: international journal of islamic economics and finance vol. 3(1), pg 121-142, january 2020 islamic banks and monetary policy: the case of indonesia regi muzio ponziani stie trisakti, indonesia, regi@stietrisakti.ac.id tatik mariyanti universitas trisakti, indonesia, tatik_m2002@yahoo,com article history received: september 17, 2019 revised: january 26, 2020 accepted: january 28, 2020 abstract islamic banks in indonesia exist side by side with their conventional counterparts within a dual banking system. the central bank aims to achieve price stability in the economy using both conventional and islamic monetary instruments within this dual monetary system. this creates a unique environment for islamic banks. this research aims to examine the role of islamic banks in the monetary policy transmission mechanism using granger causality and autoregressive distributed lag (ardl). the balance sheet components of deposit and financing are hypothesized to function in the monetary transmission process within the bank financing channel. granger causality reveals that the islamic interbank overnight rate granger causes islamic deposits and financing, and that these in turn granger cause the industrial production index. this index granger causes inflation, islamic deposits, and the islamic interbank overnight rate. islamic deposits and inflation then granger cause the islamic interbank overnight rate. the ardl results show cointegrating relationships in the output and inflation model. long-term convergence could be achieved to correct deviations in output and inflation by way of islamic banks’ deposits and financing. however, there is only a short-term influence of islamic bank deposits on output. in the short-run, these deposits do not contribute to inflation. islamic bank financing does not have a short-term relationship with output and inflation; therefore, there is declining effectiveness of islamic banks’ financing contribution to the economy. keywords: monetary policy transmission mechanism, ardl, granger causality jel classification: c540; e52; e58; g20 @ ijief 2020 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.2124 web: http://journal.umy.ac.id/index.php/ijief/article/view/7094 citation: ponziani, r. m., & mariyanti, t. (2020). islamic banks and monetary policy: the case of indonesia. ijief: international journal of islamic economics and finance, 3(1). 121-142. doi: https://doi.org/10.18196/ijief.2124 http://journal.umy.ac.id/index.php/ijief/article/view/7094 ponziani & mariyanti │ islamic banks and monetary policy: the case of indonesia ijief: international journal of islamic economics and finance, 3(1), 121-142 | 122 i. introduction 1.1. background islamic economics promotes the concepts of trade and profit-and-loss sharing, or pls (including risk sharing), as the main instruments that drive the economy. based on these concepts, a certain level of risk has to be borne before assuming the right to returns. as opposed to the conventional framework, which is based mainly and solely on the concept of interest, justice and fairness are highly considered in economic activities in the islamic system. with pls and trading concepts, no oppression can be imposed on one side of the transaction. in the conventional purview, it is reasonable to expect a fixed return on capital loaned. this is because loans are considered equal to the rent of money. one has foregone his right to use the capital at the moment, so they need to be compensated in the form of a required fixed return. however, islamic banking operates on the basis of islamic values; transactions should be just and fair and in accordance with islamic law. supervisory boards oversee and monitor the transactions made by islamic banks. risk and return sharing products are among the main offers of such bank, together with trade products. what makes islamic banks special is that financial stability is enhanced by the existence of risk sharing activities (alaro & hakeem, 2011; yungucu & saiti, 2016; miah & uddin, 2017). whenever there are shocks to the financial system, islamic banks can absorb these and transmit them. shocks will mostly affect the assets side of a bank’s balance sheet. however, due to the risk sharing nature of islamic banking, these shocks will be transmitted to the liabilities side. this capability will render islamic banks capable of withstanding uncertainty in the economy (rashid, yousaf, & khaleequzzaman, 2017). this is opposed to the conventional system, in which banks will fully absorb shocks and see their assets and equity impacted. this will render the economy more vulnerable to crisis and can lead to systemic risk taking place in it. however, islamic banks are also expected to perform certain functions undertaken by conventional banks; for example, they should facilitate payments and use the scale advantage to exploit opportunities in order to minimize market imperfection. for instance, islamic banks, just like conventional ones, can ease the burden of information costs when they are about to grant financing to the public. regulations imposed by central banks also apply to islamic banks. therefore, required capital and reserve requirements should be observed carefully. in addition, bank indonesia, as the central bank, has two monetary instruments at its disposal. it can employ both conventional and islamic monetary instruments to transmit its monetary policy. conventional monetary instruments make use of interest rates to influence the money supply in the financial system. on the other hand, with regard to islamic monetary instruments, the profit sharing ratio could be used. islamic banks will buy and sell islamic securities through ponziani & mariyanti │ islamic banks and monetary policy: the case of indonesia ijief: international journal of islamic economics and finance, 3(1), 121-142 | 123 the auction system. in this way, bank indonesia can calibrate the money circulating in the banking system before it affects the real economy. in the field of monetary policy, research has been conducted using indonesian samples. sukmana and ascarya (2010) examined the role of islamic stock markets in transmitting monetary policy. ascarya (2012, 2014), herianingrum and syapriatama (2016), setiawan and karsinah (2016), widodo (2017) and fikri (2018) investigated the transmission process through both conventional and islamic banking, while zulkhibri and sukmana (2017) and octaviani and arif (2018) examined the transmission process through islamic banks, specifically passing through their financing. this paper aims to fill the gap by focusing solely on the role of islamic banks in indonesia in the monetary transmission process. it therefore differs from the studies of ascarya (2012, 2014), herianingrum and syapriatama (2016), setiawan and karsinah (2016), widodo (2017) and fikri (2018), which analyzed both conventional and islamic bank samples. zulkhibri and sukmana (2017) employed panel regression analysis, while this paper uses time-series econometrics, i.e autoregressive distributed lag (ardl), with additional analysis using granger causality. octaviani and arif (2018) also employed time-series econometrics on indonesian islamic bank samples. however, islamic bank financing is the only balance sheet item analyzed by them this paper will analyze the role of islamic bank deposits and financing in the monetary transmission process of the bank lending (financing) channel. 1.2. objective this research uses islamic banks as the main sample to investigate the bank financing channel in the monetary policy transmission mechanism. both the financing and deposits of islamic banks will be further analyzed for their role in monetary transmission as indonesia operates a dual banking system, with both conventional and islamic banking comprising its financial system. the central bank focuses its attention on how these two systems react when it applies a new policy. the primary objective of the indonesian central bank is price stability. various other objectives are considered paramount to achieving this, i.e. the employment rate, exchange rate stability, and sustainable economic growth. to achieve price stability, the central bank needs to observe the economic situation. in times of a booming economy, it will try to control the money supply so that economy does not overheat, which is known as tight money policy. through open market operations, the central bank will issue banknotes to reduce money supply in the economy. it can also increase the required reserve requirement so that banks have to maintain increased amounts of reserves within the central bank. these actions will increase the cost of funds available to debtors. as a result, ponziani & mariyanti │ islamic banks and monetary policy: the case of indonesia ijief: international journal of islamic economics and finance, 3(1), 121-142 | 124 aggregate spending will decrease and acceleration of economic growth will be slowed. on the other hand, in times of economic slowdown, the central bank will make money supply available in the economy through generous purchase of notes or lower reserve requirements. an increase in money supply will energize the economy. in conducting its monetary policy, the central bank needs to put banks into account. its policies will affect banks’ balance sheets through their deposits and loans. in turn, these deposits and loans will affect the economy. it is therefore interesting to consider how islamic bank financing and deposits will react to monetary policy. this paper further investigates how islamic banks function in transmitting monetary policy to the economy. the paper comprises five sections. the first is the introduction, followed by the literature review. the methodology is discussed in the third section; the results and analysis in section four; and the final section presents the conclusion and recommendations. ii. literature review 2.1. background theory the importance of monetary policy cannot be overstated. economic output in terms of goods and services can be influenced by the availability of money supply in the short-run (akinsola & odhiambo, 2017). increasing money supply will enable real sectors to obtain the financing needed to acquire production factors, which in turn enables them to produce goods and services. monetary policy is therefore designed to achieve certain inflation targets by paying close attention to economic growth (dimitrijevic & lovre, 2013; walsh, 2017). akalpler and duhok (2017) consider monetary policy to be the most prominent influential factor, having a significant impact on economic growth. one desired characteristic of monetary policy is its countercyclical nature (twinoburyo & odhiambo, 2017). in times of recession, aggregate demands will fall because of the lack of spending by customers, the decrease in investment by firms, or a halt to foreign direct investment inflows. monetary policy can lessen the consequences of recession by increasing money supply and subsequently triggering growth. however, imprudent monetary policy can also cause a worrying rise in the price of goods and services (taylor, 2018). as monetary policy increases the supply of money, input prices will rise as the economy approaches full capacity. therefore, expansion of the money supply should be followed by tight monetary policy to curb price increases. consequently, the stability target of the price of goods and services is usually accompanied by a focus on macroeconomic indicators, such as output and employment. however, to overcome crisis and spur growth, monetary policy is not the only option. fiscal policy can also be used ponziani & mariyanti │ islamic banks and monetary policy: the case of indonesia ijief: international journal of islamic economics and finance, 3(1), 121-142 | 125 for such objectives. this comes in the form of tax management and government spending. unfortunately, the implementation of fiscal policy requires more time, since approval is required from legislative and executive bodies. therefore, the formulation and implementation of fiscal policy will have to go through administrative and political processes. based on this, monetary policy is considered to be of paramount importance to weather difficult economic times and downturns (kallianiotis, 2015). it is implemented by using financial instruments, which comprise marketable securities issued by the central bank or by market players, including the government. these bear interest or margin/profit and can be used to inject liquidity into or absorb liquidity from the banking system. besides financial instruments, the central bank also offers a standing facility in the form of deposits and financing. this can also be used to inject liquidity or absorb it from the banking system. monetary policy through financial instruments or the standing facility will affect the supply of money in the economy. financing and deposits will be affected by the monetary policy taken by the central bank. in turn, they will influence economic productivity and ultimately have an effect on the level of inflation. the financial instruments and standing facility can be of two types: conventional or islamic. the conventional bear and earn interest, while the islamic offer profit-sharing schemes. monetary policy through islamic instruments and facilities is expected to be more stable, as it is more closely tied to the real sector through profit-sharing agreements than to the financial sector. as a consequence, financial and economic stability can be created from islamic instruments and facilities (wisandani, iswati, & ismal, 2017). 2.2. previous studies many empirical studies have investigated how islamic banks can act as a transmission channel of central bank monetary policy. whenever the central bank exercises such policy through islamic monetary instruments, islamic bank balance sheets will be affected, with deposits and financing reacting in line with this. hence, the effect of monetary policy is transmitted to the economy. discount rates are the variable that represents central bank monetary policy and the impact of monetary policy will be shown in the manufacturing index. the preferred methodologies to capture the act of transmission by islamic banks are auto-regressive distributed lag (ardl), vector autoregression (var), the vector error correction model (vecm), and the error correction model (ecm). whenever there is a long-term association, ardl, ecm and vecm are frequently used to capture the association; i.e., the cointegrating relationship. var is used when a cointegrating relationship is not present. ponziani & mariyanti │ islamic banks and monetary policy: the case of indonesia ijief: international journal of islamic economics and finance, 3(1), 121-142 | 126 said and ismail (2007) investigated how monetary policy has an impact on islamic bank lending in malaysia. their samples consisted of full-flag islamic bank and islamic windows. employing the m3 money supply measure, threemonth islamic interbank bank rate, and unemployment as the monetary policy indicators, they found that m3 money supply and unemployment affected bank lending. they used the generalized least squares (gls) method to investigate the relationship. also using a malaysian bank sample, kassim and majid (2008) examined how islamic bank loans and deposits reacted to monetary policy changes. interestingly, they used two approaches in their methodology. ardl was employed to specially investigate the short-run relationship, while vecm was used to examine the dynamics of both short and long-run relationships. they found that in the short run, both loans and deposits were affected by monetary policy, while in the long-run, only deposits were affected. the cumulative sum of squares of recursive residuals (cusum) test employed proved that there was no structural break in their models. kassim, majid, and yusof (2009) took the investigation further by including conventional banks as the counterpart of islamic ones. they were interested in comparing how islamic and conventional banks reacted to monetary policy and found that islamic banks were more vulnerable to monetary policy changes, specifically interest rate changes, compared to conventional banks. they attributed the results to the long existence of conventional banks, which has allowed them to anticipate liquidity volatility by using the global linkages they possess. islamic banks still have underdeveloped links with the market, which leaves them vulnerable to monetary policy changes. an international comparison was made by yusof, wosabi, and majid (2009). taking samples from malaysian and bahraini islamic banks, they found that bahraini islamic bank deposits were more sensitive to monetary policy in the long run, while malaysian islamic bank deposits were able to weather the destabilizing effect of monetary policy and hence were more policy invariant. a cointegrating relationship among islamic bank deposits and monetary policy variables was also found by sukmana and kassim (2010). this finding showed the long-run relationship between the discount rate, as a representation of monetary policy, and islamic bank deposits. sukmana and ascarya (2010) investigated monetary transmission through the equity market. they found that the islamic equity market did not transmit central bank monetary policy. hence, the equity market could not yet support the real economy. ascarya (2012) used an indonesian sample to examine the role of islamic banks in monetary policy transmission. using conventional and islamic bank data, he found that conventional banks did indeed have an important transmission function, but islamic banks did not. however, islamic instruments that adopted profit-loss sharing (pls) positively influenced the aggregate output of the real sector and did not affect inflation. there was also a sign of speculative behavior from the conventional bank data, something ponziani & mariyanti │ islamic banks and monetary policy: the case of indonesia ijief: international journal of islamic economics and finance, 3(1), 121-142 | 127 that islamic banks did not seem to show. zaheer et al. (2013) found that small banks in pakistan experienced sharp drops in lending following a monetary policy shock. however, large banks managed to maintain a stable lending position which was indifferent to such shocks. this provides evidence of how islamic banks are unable to function effectively as instruments for transmitting monetary policy. therefore, as islamic banks grow in importance, it is expected that they will be relatively unable to transmit policy from the central bank. ascarya (2014) found evidence of decoupling between the real sector and financial market and that a financial system based on interest has the inclination to trigger inflation and stifle growth. a financial system based on islamic precepts only makes a minor contribution to inflation and has no impact on economic growth. the research findings of ascarya (2014) are shared by setiawan and karsinah (2016) and widodo (2017). the only difference is that setiawan and karsinah (2016) argue that islamic banks do contribute to economic growth. consistent with ascarya (2012), herianingrum and syapriatama (2016) found that islamic instruments show potential growth and are able to contain inflation. however, they differ in terms of the influence islamic banks have on the real sector. herianingrum and syapriatama (2016), using irf and vda, proved that islamic banks play a role in transmitting monetary policy and positively influence economic growth. this was corroborated by octaviani and arif (2018), who found a positive impact of islamic bank financing on economic growth. zulkhibri and sukmana (2017) employed the panel multiple regression technique to investigate whether macroeconomic monetary policy factors and financing rates influence islamic banks. they found that financing rates negatively influence islamic banks, while bank-specific properties have a positive influence. nevertheless, bank financing was not significantly influenced by monetary policy. this suggests that islamic banks have not been proven to function as transmitters of monetary policy. this is in line with with fikri (2018), who demonstrated that islamic banks are not efficient transmitters, unlike their conventional counterparts. rafay and farid (2019) investigated the role of islamic banks in monetary transmission in pakistan. they found that islamic banks play an active role in transmitting monetary policy from the central bank, especially through the lending channel. in addition, besides the shariah motive, profit maximization is an underpinning factor for bank customers. in this case, there is no significant difference between conventional bank customers than those of islamic banks. in addition, the research showed further evidence of commercial risk. this strengthened previous research that found a pronounced existence of commercial risk in the dual banking system. ponziani & mariyanti │ islamic banks and monetary policy: the case of indonesia ijief: international journal of islamic economics and finance, 3(1), 121-142 | 128 iii. methodology 3.1. data table 1. research variables variable description abbreviation source monetary policy islamic interbank overnight rate iior bank indonesia financing islamic bank financing ifin financial services authority (ojk) deposits islamic bank deposits idep financial services authority (ojk) macroeconomy industrial production index ipi biro pusat statistik macroeconomy inflation inf bank indonesia this study uses the islamic overnight rate to represent the monetary policy of the central bank of indonesia. the ultimate objective of bank indonesia is to ensure price stability in the economy. to achieve this, interest rate control is the standard parameter. therefore, the islamic overnight interest rate is suitable for depicting the monetary policy of bank indonesia. the other variables used are islamic bank deposits, islamic bank financing, the industrial production index, and inflation. deposits and financing will capture the response of islamic banks to monetary policy, while the industrial production index will measure aggregate productivity and economic growth. islamic bank deposits and financing will be in natural logarithmic terms. the sample uses monthly data from january 2010 to september 2019. a summary of the variables is given below. 3.2. model development mishkin (1996) first proposed monetary policy transmission through the bank lending channel. interest rates are the main instrument for central banks to achieve their main objective, price stability. ascarya (2014) and fikri (2018) investigated monetary policy transmission in a dual banking system. their samples included both conventional and islamic banking systems. this research will modify the research model of ascarya (2014) and fikri (2018) to include only islamic banks in indonesia. the central bank of indonesia, bank indonesia, will target the islamic interbank overnight rate (iior) as the instrument to transmit monetary policy. variance in this rate will influence islamic bank deposits; as deposits mean the availability of funds for financing, this will later affect financing, which can have an effect on aggregate productivity in the economy. the level of productivity will ultimately determine the aggregate level of prices. for instance, when the central bank ponziani & mariyanti │ islamic banks and monetary policy: the case of indonesia ijief: international journal of islamic economics and finance, 3(1), 121-142 | 129 targets an increase in the rate, the flow when the policy rate increases becomes: policy rate↑ → iior↑ → idep↓ → ifin↓ → output↓ →prices↓ therefore, the research model is: figure 1. research model 3.3. method 3.3.1. granger causality granger causality was first employed to obtain preliminary evidence of the cause and effect relationship between two existing variables. granger causality can also help define the direction of a relationship or causality when a certain causal relationship is indeterminately known. a time series variable that consistently predicts changes in another variable is the focus of granger causality (studenmund, 2017). technically, a variable is said to granger cause another variable if its past lagged values or current value influence the other variable (asutay & ergec, 2013). using this method, researchers can establish whether there exists unidirectional causality, bilateral causality, or independence (gujarati, 2016). the granger causality models are: 𝑨𝒕= 𝜆1+ ∑ 𝜶𝒊 𝒔 𝒊=𝟏 𝑨𝒕−𝒊 + ∑ 𝜷𝒊 𝒔 i=𝟏 𝑫𝒕−𝒊 𝑫𝒕= 𝜆2 + ∑ 𝜹𝒊 𝒔 𝒊=𝟏 𝑫𝒕−𝒊 + ∑ 𝜱𝒊 𝒔 𝒋=𝟏 𝑨𝒕−𝒊 the granger causality test will always involve two equations, one for each variable. if both equations have a significant f value, then bilateral causality exists. one significant f value indicates unidirectional causality. iior islamic deposits islamic financing output inflation ponziani & mariyanti │ islamic banks and monetary policy: the case of indonesia ijief: international journal of islamic economics and finance, 3(1), 121-142 | 130 3.3.2. autoregressive distributed lag model (ardl) ardl was employed to examine monetary transmission by islamic banks. this can model shortand long-term relationships between variables by including a cointegrating relationship (brooks, 2014). to test for such a relationship, an ardl-bound test was conducted (pesaran & shin, 1997). the model to test for cointegration is: output: ∆𝐼𝑃𝐼= α1 + β1 ipit-1 + β2 iiort-1 + β3 idept-1 + β4 ifint-1 +∑ 𝜃1𝑖 𝑝 𝑖=1 ∆𝐼𝑃𝐼𝑡−𝑖 + ∑ 𝜃2𝑖 𝑞 𝑖=1 ∆𝐼𝐼𝑂𝑅𝑡−𝑖 + ∑ 𝜃3𝑖 𝑟 𝑖=1 ∆𝐼𝐷𝑒𝑝𝑡−𝑖+ ∑ 𝜃4𝑖 𝑠 𝑖=1 ∆𝐼𝐹𝑖𝑛𝑡−𝑖 + e1 inflation: ∆𝐼𝑁𝐹= α1 + β1 inft-1 + β2 iiort-1 + β3 idept-1 + β4 ifint-1 +∑ 𝜃1𝑖 𝑝 𝑖=1 ∆𝐼𝑁𝐹𝑡−𝑖+ ∑ 𝜃2𝑖 𝑞 𝑖=1 ∆𝐼𝐼𝑂𝑅𝑡−𝑖 + ∑ 𝜃3𝑖 𝑟 𝑖=1 ∆𝐼𝐷𝑒𝑝𝑡−𝑖+ ∑ 𝜃4𝑖 𝑠 𝑖=1 ∆𝐼𝐹𝑖𝑛𝑡−𝑖 + e2 ho: β1= β2= β3=0 h1: β1≠ β2≠ β3≠0 a cointegrating relationship exists whenever β1≠ β2≠ β3≠0. after performing the bound test, we proceeded by estimating the shortand long-run relationships. the ardl model for estimating short-run and long-run relationship (pesaran and shin, 1997) is: output: ∆𝐼𝑃𝐼= α1+∑ 𝛽1𝑖 𝑝 𝑖=1 ∆𝐼𝑃𝐼𝑡−𝑖 + ∑ 𝛽2𝑖 𝑞 𝑖=1 ∆𝐼𝐼𝑂𝑅𝑡−𝑖+ ∑ 𝛽3𝑖 𝑟 𝑖=1 ∆𝐼𝐷𝑒𝑝𝑡−𝑖 + ∑ 𝛽4𝑖 𝑠 𝑖=1 𝐼𝐹𝑖𝑛𝑡−𝑖 + λ1 ect1 + e1 inflation: ∆𝐼𝑁𝐹= α1+∑ 𝛽1𝑖 𝑝 𝑖=1 ∆𝐼𝑁𝐹𝑡−𝑖 + ∑ 𝛽2𝑖 𝑞 𝑖=1 ∆𝐼𝐼𝑂𝑅𝑡−𝑖 + ∑ 𝛽3𝑖 𝑟 𝑖=1 ∆𝐼𝐷𝑒𝑝𝑡−𝑖 + ∑ 𝛽4𝑖 𝑠 𝑖=1 𝐼𝐹𝑖𝑛𝑡−𝑖 + λ2 ect2 + e2 where: .ect1 = ipit-1 θxt-1 ect2 = inft-1 θxt-1 the variable xt-1 will consist of iiort-1, idept-1, and ifint-1. λ1 and λ2 denote speed adjustment parameter with a negative sign, while ect1 and ect2 are error correction terms. the terms 𝛽1𝑖 , 𝛽2𝑖 , 𝛽3𝑖 are the short-run dynamics of the model, while λ1 and λ2 signify the long-run equilibrium adjustment in the form of an error-correction term. ponziani & mariyanti │ islamic banks and monetary policy: the case of indonesia ijief: international journal of islamic economics and finance, 3(1), 121-142 | 131 iv. results and analysis 4.1. results 4.1.1. volatility figure 2 shows the movement of each variable during the research period. graphing their volatility will give an impression of their movement and stationarity. .0 .1 .2 .3 .4 .5 .6 .7 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 iior 31.2 31.6 32.0 32.4 32.8 33.2 33.6 34.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 idep 31.2 31.6 32.0 32.4 32.8 33.2 33.6 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 ifin 90 100 110 120 130 140 150 160 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 ipi .02 .03 .04 .05 .06 .07 .08 .09 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 inf figure 2. fluctuations of the variables iior shows stable movement. in the mid-2010, there was a sharp spike, which indicates tight monetary policy. this sudden increase means a greater return on islamic interbank money market, which can drain liquidity from the economy. however, during the rest of the period, no sharp increases or decreases occur in the iior movement, only ones of insignificant magnitude. idep increases steadily over time, with no sudden spike in its movement. ifin ponziani & mariyanti │ islamic banks and monetary policy: the case of indonesia ijief: international journal of islamic economics and finance, 3(1), 121-142 | 132 also shows a steady increase during the research period. in the early months of 2014 and in late 2017, ifin experienced falls, but recovered quickly afterwards. ipi is very volatile, although it displays an increasing trend. ups will almost certainly be followed by downs. in late 2017 and at the beginning of 2019, it experienced somewhat larger falls and almost every year it has some sudden increases, although the magnitude if these is relatively small. it is clear that ipi is not stationary due to its volatility. inf exhibits erratic volatility, with no certain trends. during 2010 and 2011, 2013 and 2014, and 2014 to mid-2015, there were huge swings in inflation; sharp increases were accompanied by sharp decreases. post 2015, the volatility decreased, and was less severe than before. it is also clear that there is no stationarity in inf. 4.1.2. descriptive statistics iior has a maximum value of 0.0609. during the research period, the profit sharing ratio offerred by the islamic interbank market reached a maximum ratio of 7.30% and a minimum of 1.08%. the mean of iior is less than the median, and the iior data is skewed to the left. idep has a maximum value of 32.82918. since this is a log natural value, we have to apply an antilog exponential, which translates the value to around rp389 trillion. the minimum value is 31.48414, which is around rp47 trillion. this was the value of idep in the early period when islamic banking was still in its infancy. ifin has maximum and minimum translated values of rp.471 trillion and rp343 trillion respectively. the mean is less than the median, which means that the data are skewed to the left. ipi is skewed to the right, as indicated by a higher mean than median, while inf is skewed to the right. the highest rate of inflation during research period was 8.79% and the lowest 2.48%; the mean of inflation was 4.8595%. table 2 shows the descriptive statistics of the data: table 2. descriptive statistics variable observations mean median maximum minimum std. dev. iior 117 0.052268 0.054 0.073 0.0108 0.011263 idep 117 32.82918 32.97643 33.59666 31.59774 0.571698 ifin 117 32.73246 32.88454 33.47127 31.48414 0.525711 ipi 117 122.5921 122.2119 154.02 92.55 15.93944 inf 117 0.048595 0.0442 0.0879 0.0248 0.016725 ponziani & mariyanti │ islamic banks and monetary policy: the case of indonesia ijief: international journal of islamic economics and finance, 3(1), 121-142 | 133 4.1.3. unit root test table 3 shows the stationarity check for the variables: table 3. unit root test level 1 st difference adf pp adf pp iior 0.0000 0.0000 0.0000 0.0001 inf 0.1135 0.2392 0.0000 0.0000 ipi 0.9854 0.6287 0.0000 0.0001 idep 0.2353 0.0024 0.568 0.0000 ifin 0.0002 0.0006 0.0000 0.0000 the first procedure was the stationarity test. this was of paramount importance because we wanted to avoid spurious regression. the methods chosen were the augmented dickey-fuller (adf) and phillips-perron (pp) tests. iior and ifin are stationary at level, while inf and ipi are not, although they are stationary at first difference. an interesting case occurs with idep. at level, adf rejects its stationarity, while pp supports it. when first-differenced, adf still rejects the stationarity, while pp continues to support it. hence, we cannot employ the vector autoregressive (var), vector-error correction (vecm) or error-correction(ecm) models. therefore, these different types of stationarity do not allow for the inclusion of a long-term relationship. however, the contrasting stationarity conditions of the research variable support the use of the ardl model. 4.1.4. results of granger causality the results of the granger causality test are shown in table 4. table 4. granger causality results dependent variables iior idep ifin ipi inf independent variables iior 7.65* 2.42*** 0.04 0.29 idep 4.097** 0.15 5.98* 0.28 ifin 1.379 15.23 3.32** 0.26 ipi 2.65*** 1.91** 0.02 3.18*** inf 4.99* 0.13 4.00** 0.12 *significant at 1% level. **significant at 5% level. ***significant at 10% level. ponziani & mariyanti │ islamic banks and monetary policy: the case of indonesia ijief: international journal of islamic economics and finance, 3(1), 121-142 | 134 figure 3. granger causality relationships according to figure 3, bivariate causality exists between idep and iior and between idep and ipi. univariate causality exists between iior and ifin, ifi and ipi, ipi and iior, ipi and inf, inf and iior, and inf and ifin. all other connections besides those mentioned previously are independent. independence indicates two possibilities, that there is either no causality relationship or no long-term cointegrating relationship. the figure maps the causality relationships revealed by granger causality. 4.1.5. results of ardl table 5 shows the results of the bound test for cointegration for the dependent variable ipi. the table shows that there is cointegrating relationship when ipi is the dependent variable. the p-value for the cointegrating variable is below 0.1, which indicates that h1: β1≠ β2≠ β3≠0, in pesaran and shin (1997). hence, this proves that there is a long-term relationship in the ardl model for ipi. table 5. bound test for cointegration for ipi variable coefficient std. error t-statistic prob. d(ipi(-1)) -0.6231 0.133531 -4.66634 0.0000 d(ipi(-2)) -0.44134 0.12689 -3.47815 0.0007 d(ipi(-3)) -0.27325 0.105347 -2.59382 0.0108 d(idep) 6.293451 9.131073 0.689235 0.4922 d(ifin) -0.08514 7.590498 -0.01122 0.9911 d(iior) -8.13247 39.762 -0.20453 0.8383 cointeq(-1) -0.21915 0.121371 -1.8056 0.0738 the results of the bound test for cointegration for the dependent variable inf are shown in table 6. iior idep ifin ipi inf ponziani & mariyanti │ islamic banks and monetary policy: the case of indonesia ijief: international journal of islamic economics and finance, 3(1), 121-142 | 135 table 6. bound test for cointegration for ipi variable coefficient std. error t-statistic prob. d(inf) -0.18172 0.093415 -1.94529 0.0544 d(idep) -0.01754 0.007985 -2.19656 0.0302 d(ifin) 0.016858 0.008556 1.970375 0.0514 d(iior) -0.0509 0.053037 -0.95975 0.3393 cointeq(-1) -0.10788 0.043315 -2.49046 0.0143 in table 6, cointegration has a p-value of 0.0143, well below 0.05. a long-term relationship therefore exists in the ardl model for inf. table 7 shows the ardl estimation for ipi and includes the error correction term. the lag length for the regressors is 4; the criterion for choosing this length is based on the schwartz information criterion. as suggested by table 7, the short-term variables that influence ipi are idep lag 2 and 3, ipi lag 2 and 3, and the error-correction term. there exist long and short-term dynamics in the model. the error-correction term is of the correct sign (minus), with a coefficient of -0.697343. this means 0.697343% of the deviation in ipi will be corrected each month, which is a very slow adjustment process. however, this should not be surprising given the small proportion of islamic banks in indonesia. table 7. ardl estimation for ipi variable coefficient std. error t-statistic prob. c 1.496169 0.772004 1.938031 0.0556 d(ipi(-1)) -0.271652 0.219546 -1.237338 0.2190 d(idep(-1)) 27.82633 22.04652 1.262164 0.2100 d(ifin(-1)) 10.59097 20.77490 0.509796 0.6114 d(iior(-1)) -17.26175 53.64329 -0.321788 0.7483 d(ipi(-2)) -0.440725 0.143386 -3.073693 0.0028 d(idep(-2)) -48.60618 20.23226 -2.402410 0.0183 d(ifin(-2)) 25.77296 20.82855 1.237386 0.2190 d(iior(-2)) 38.86692 62.72640 0.619626 0.5370 d(ipi(-3)) -0.337965 0.134541 -2.511978 0.0137 d(idep(-3)) -67.60912 20.60492 -3.281212 0.0015 d(ifin(-3)) 19.08086 21.32566 0.894737 0.3732 d(iior(-3)) 6.961210 63.05235 0.110404 0.9123 d(ipi(-4)) -0.077556 0.110429 -0.702314 0.4842 d(idep(-4)) -35.05207 22.09070 -1.586734 0.1159 d(ifin(-4)) 30.22429 21.13519 1.430046 0.1560 d(iior(-4)) -34.21411 59.87245 -0.571450 0.5691 errorcorrect(-1) -0.697343 0.228566 -3.050953 0.0030 ponziani & mariyanti │ islamic banks and monetary policy: the case of indonesia ijief: international journal of islamic economics and finance, 3(1), 121-142 | 136 table 8. ardl estimation for inf variable coefficient std. error t-statistic prob. c 0.001303 0.000962 1.355396 0.1784 d(inf(-1)) 1.753335 0.388886 4.508614 0.0000 d(idep(-1)) -0.00679 0.025519 -0.26598 0.7908 d(ifin(-1)) -0.00966 0.026013 -0.37145 0.7111 d(iior(-1)) 0.04423 0.068693 0.643872 0.5211 d(inf(-2)) -0.17327 0.10212 -1.69667 0.0929 d(idep(-2)) 0.025474 0.025243 1.009143 0.3154 d(ifin(-2)) -0.03523 0.027916 -1.26208 0.2099 d(iior(-2)) 0.046821 0.078974 0.592864 0.5546 d(inf(-3)) 0.058163 0.097639 0.595695 0.5527 d(idep(-3)) -0.02504 0.024963 -1.00323 0.3182 d(ifin(-3)) -0.02074 0.028111 -0.73783 0.4624 d(iior(-3)) 0.007771 0.074142 0.104816 0.9167 errorcorrect(-1) -1.52014 0.409503 -3.71216 0.0003 table 8 shows the ardl estimation for inf. as for ipi, the estimation includes the error correction term. the lag length for the regressors is 3, based on the schwartz information criterion. in table 8, it can be seen that the autoregressive components of inf influence inf. hence, inf lag 1 and 2 have a significant influence on inf. the last row contains the test results for the error-correction term, which are significant with a coefficient of 1.52014. the sign is correct (minus), meaning that any deviation in inf will be corrected at an adjustment speed of 1.52014% per month. this indicates that it would take roughly 16 months to fully correct the deviation. 4.2. analysis granger causality indicates that there exists bivariate causality between iior and idep; any movement in iior will induce volatility in idep. the reverse also applies any change in idep will trigger movement in iior. ascarya (2014) and fikri (2018) revealed the univariate causality from idep to iior, which is an indication of how iior takes into account deposits in islamic banks. the higher the idep, the lower the level of liquidity in the economy, because money supply decreases. this will lead to economic stagnation. iior will deflate to supply the economy, with more liquidity taken from the islamic banking system. furthermore, any increase in iior will positively affect idep. iior represents the rate of return. any increase in this will attract depositors to save their money for greater returns, so deposits in islamic banks will increase. iior has univariate causality with ifin; any movement in iior will be followed ponziani & mariyanti │ islamic banks and monetary policy: the case of indonesia ijief: international journal of islamic economics and finance, 3(1), 121-142 | 137 by movement in ifin. as a parameter for return, ifin will adjust to the change in iior. the adjustment in ifin will first occur in the form of adjusting the profit sharing ratio. this adjustment will lead to a change in the magnitude of total islamic financing. this contradicts octaviani and arief (2018), who found no causality relationship between iior and financing. ifin also imposes univariate causality on ipi; any movement in ipi will be preceded by movement in ifin. an increase in ifin means economic parties have more liquidity and access to production factors. they will have more infrastructure at their disposal to increase production. a decrease in ifin will reduce the availability of liquidity to obtain more production factors, resulting in a decrease in production. this result is consistent with those of herianingrum and syapriatama (2016) and fikri (2018). furthermore, ipi produces movement in inf. an increase in ipi signifies an increase in economic activity; in times when the economy is booming, inflation ensues. when ipi deflates, there is a slowdown in the general increase of the price of goods and services. this result is contrary to ascarya (2014), who proved otherwise. movement in inf will trigger movement in ipi. a general rise in the price of goods and services will entice producers to increase production to benefit from the price increases. ipi also has bivariate causality with idep. an increase in ipi will precede an increase in idep. when productivity in the economy increases, economic parties, such as the private sector, can gain more from the sale of produced goods and services. later, liquidity in the banking sector will increase due to the increase in deposits. due to bivariate causality, movement in idep will trigger movement in ipi. the ardl test corroborated this finding and even revealed the negative influence of idep on ipi for lags 2 and 3. an increase in idep will lower ipi. idep represents the availability of liquidity in the economy; when idep increases, liquidity in the economy will decrease because money supply has been attracted inside the banking system. lower money supply acts as a disincentive, as producers lack liquidity to obtain production factors. lower productivity ensues. these results agree with those of sukmana and kassim (2010) but not with those of herianingrum and syapriatama (2016) or fikri (2018), who found no short-term relationship causality between idep and ipi. ipi also has univariate causality with iior. this is indicative of how monetary policy also considers the movement of ipi. a sharp increase in ipi can encourage inflation. consequently, iior will be increased to curb the inclination of prices to rise. conversely, a decrease in ipi results in low productivity, so iior will be reduced to stimulate the economy. movement in inf will be followed by movement in ifin. in times of increasing prices, injection of liquidity is needed to match demand with increased prices. ifin will be volatile to meet the requirement of liquidity. monetary policy can also stimulate an increase in ifin when there is a slowdown in price increases. this increase in ifin will help the lethargic economy recover. according to setiawan and karsinah (2016), ifin and inf have bivariate causality. ifin can also trigger ponziani & mariyanti │ islamic banks and monetary policy: the case of indonesia ijief: international journal of islamic economics and finance, 3(1), 121-142 | 138 inf when liquidity injection stimulates an increase in the price of goods and services. finally, consistent with ascarya (2014) and setiawan and karsinah (2016), fluctuation in inf precedes movement in iior. this shows how the level of prices becomes the feedback for iior assignment. the ardl test results shows significant error-correction terms for both ipi and inf. the coefficient for ipi is 0.697343, while that for inf is 1.52014. convergence in ipi will be stable in about two months, while it takes 16 months to correct inf. cointegration in ipi is a new finding. fikri (2018) found no cointegrating relationship for ipi. however, fikri (2018) obtained a cointegrating coefficient of 3.2782, comparable to that of this research of 1.52014. however, it is still a low number for the correction of inf by t islamic banks’ deposits and financing. v. conclusion and recommendations 5.1. conclusion this paper aimed to examine the role of islamic banks in transmitting monetary policy. the stationarity test showed that the data were of mixed stationarity. hence, granger causality and ardl were considered suitable methods to analyze the data. granger causality revealed various causality relationships. the islamic interbank overnight rate has bivariate causality with islamic deposits, while islamic deposits and financing have a univariate relationship with the industrial production index. this index has univariate relationships with inflation, islamic deposits and the islamic interbank overnight rate. finally, inflation has a univariate relationship with the islamic interbank overnight rate. this shows that the islamic interbank overnight rate made its way through the industrial production index and inflation through the elements of islamic deposits and financing. as for the ardl testing results, islamic deposits have a significant negative influence on ipi for lags 2 and 3. cointegration exists for both ipi and inflation. this confirms that islamic banks contribute in the long-term to the correction of ipi and inflation. 5.2. recommendations the recommendations based on the results of the study can be summarized as follows. granger causality shows that any movement in the islamic interbank overnight rate is expected to trigger fluctuations in islamic deposits and financing. hence islamic deposits and financing are subject to changes in the islamic interbank overnight rate. bank indonesia could modify and alter this rate to determine the amount of liquidity injected into or absorbed by the economy. second, islamic bank deposits can contribute to output and growth in the short run. encouraging greater output or curbing output in fear of ponziani & mariyanti │ islamic banks and monetary policy: the case of indonesia ijief: international journal of islamic economics and finance, 3(1), 121-142 | 139 economic overheating could be conducted by using the element of islamic bank deposits. ardl shows that within 2 or 3 months the influence of islamic bank deposits will begin to take effect. third, islamic bank financing has begun to lose its effectiveness in contributing to output and inflation. the ardl test only showed a long-term relationship, with no significant short-tem influence of islamic bank financing on output and inflation. the channel for financing has grown tremendously recently. creative chanelling through mobile devices by way of applications has eroded bank dominance in financing. central banks will need to consider how financial technology companies contribute to the economy, in terms of output and inflation. products that utilize profit-sharing schemes should also be encouraged. this will further the contribution of islamic bank financing to the economy. the study has certain limitations. the mixed stationarity of the data prevents the analysis from employing impulse response function (irf) and forecast error variance decomposition (fevd). these two methods can trace the magnitude of variance induced by shocks occuring to the system over time. further research could use the same type of data stationarity. further research could also investigate how the monetary policy transmission mechanism operates through rural islamic banks (bprs) and the small and medium enterprise index. since most research on monetary transmission still focuses on large manufacturing indexes and only takes samples of islamic commercial banks, the role of fintech companies in monetary transmission could also be examined, since they have become a popular form of financing and can reach out to the unbanked population. ponziani & mariyanti │ islamic banks and monetary policy: the case of indonesia ijief: international journal of islamic economics and finance, 3(1), 121-142 | 140 references akalpler, e., & duhok, d. 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(2017). the financing channel and monetary policy in a dual banking system: evidence from islamic banks in indonesia. economic notes, 46(1), 117-143. ijief:international journal of islamic economics and finance vol. 3 (1), pg 51-74, january 2020 implementing a central bank issued digital currency with economic implications considerations hazik mohamed stellar consulting group, singapore, hazik@stellarcg.com article history received: november 27, 2019 revised: december 20, 2019 accepted: january 7, 2020 abstract a central bank-issued digital currency (cbdc) could solve the volatility of a privatelyissued cryptocurrency as well as keep intact its potential benefits. this research intended to analyze the possibilities for implementing a cbdc in a viable format that is also shariah-compliant which may have the capacity to tackle issues plaguing the current financial system. we discuss possible scenarios and the resulting impact and consequences of cbdc implementation, through a deep examination of the benefits, opportunities, costs and issues of several conceptual formats. methodologically, we used qualitative, comparative and analytical assessments on the critical impact on crucial levers like dilution to monetary policy, and the stability of the financial system. finally, we found that the best format was a non-interest bearing cbdc for the interbank settlement and wholesale payment systems which would have the least disruption to the economy but strongest monetary policy transmission. keywords: currency, public deposit, policy tool, interbank settlement. jel classification: e58, e61, g20, o33 @ ijief 2020 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.2121 web: http://journal.umy.ac.id/index.php/ijief/article/view/7582 citation: mohamed, h. (2020) implementing a central bank issued digital currency: assessing the shariahcompliant format. ijief: international journal of islamic economics and finance, 3(1), 51-74. doi: https://doi.org/10.18196/ijief.2121 http://journal.umy.ac.id/index.php/ijief/article/view/7582 mohamed | implementing a central bank issued digital currency: assessing the shariah-compliant format ijief: international journal of islamic economics and finance, 3(1), 51-74 | 52 i. introduction customarily, the central authority that provides banks and other monetary organizations with electronic accounts for its functionality in the financial system is the central bank (cb). the public does not have such access and is only permitted to keep cb money in physical forms (i.e. coins and/or notes). if a cb would issue a universal cbdc, all stakeholders (regardless if they are individuals, firms, institutions, governments and central banks) “could store assets and make payments using the central bank-issued digital currency” (cerqueira et al., 2017). in consequence, this could have important shifts and repercussions for financial stability, monetary policy and the relation of economic actors to the financial system. there are not many papers in the literature (although there are some cbs already conducting research and pilot projects) that “address questions on the feasibility of a cbdc implementation, its impact on monetary policy, the financial sector and the economy” (danezis and meiklejohn, 2015; rogoff, 2016; barrdear and kumhof, 2016). however, these research are descriptive or focused on regulatory frameworks and legal implications, while others are unable to define clear use cases and as a result confuse the implications of a possible cbdc deployment. the possible lack of actual implementation is due to the significant disruption caused to the existing monetary system without a clear understanding of its consequences and subsequent impacts. 1.1. objective the objective of this paper is to analyze the possibilities for implementing a cbdc in a viable format which is also shariah-compliant that may have the capacity to tackle issues plaguing the current financial system. we discuss the possible scenarios and the resulting impact of cbdc on financial markets, monetary policy, on consumers, smes, banks and even central bank independence. in each format discussed, we describe the benefits, costs and incentives faced by stakeholders and end each format section with our assessment on the probability of adoption. based on the four scenarios described in cerqueira et al. (2017), we study the implications of each cbdc format. these formats are assessed separately in sections 1, 2, 3 and 4 broken down by their nature and projected impact, consequences and possible adoption assessment in terms of cost-benefit, feasibility and their overall effect on financial stability. mohamed | implementing a central bank issued digital currency: assessing the shariah-compliant format ijief: international journal of islamic economics and finance, 3(1), 51-74 | 53 ii. literature review 2.1. background theory cash is a financial instrument and tangible asset that exhibits four attributes: (i) it is anonymous (ii) it is universal (anyone can take possession); (iii) it is exchanged between individuals (or “peer-to-peer”, without involvement of a central authority or the issuer) and (iv) it does not produce any interest by itself. cbdc is a digital alternative to cash that is also decentralized, but it gives more flexibility in the treatment of the other three features: • they can be anonymous (like cash) i.e. the idea of token–based cbdcs, or identifiable (non-anonymous like current accounts) like account–based cbdcs. • they can be unrestricted (universal) or restricted to a particular set of users. likewise, distributed ledger (dl)-based tokens can be public (open) or private (closed), for instance, limited to banks or financial institutions. • they can be designed to pay or not give returns (in absence of interest). these options can be melded in different ways to generate useful formats of cbdcs for practical applications. such amalgamation for purposeful solutions may involve these objectives: (i) to enhance the operations of wholesale payment systems; (ii) to replace or support cash with a more proficient substitute; (iii) to broaden and enrich tools for monetary policy transmission, particularly in overcoming the zero lower bound and (iv) to strengthen overall financial stability by decreasing the occurrences of banking and financial crises. 2.2. previous studies some earlier investigations found during the literature review attempted to understand the viability of a centrally-issued cryptocurrency and its possible implementation, its impact on monetary policy, and the subsequent effects on financial stability and the economy. danezis and meiklejohn (2015) noted that decentralization through a cryptocurrency has its benefits, such as independence from political control, but they also realized considerable constraints in terms of computational costs and scalability. rogoff (2016) in his curse of cash suggested to reduce the circulation of cash which, according to his findings, is “feeding tax evasion, corruption, terrorism, the drug trade, human trafficking, and the rest of a massive global mohamed | implementing a central bank issued digital currency: assessing the shariah-compliant format ijief: international journal of islamic economics and finance, 3(1), 51-74 | 54 underground economy”. he also showed that “paper money can also cripple monetary policy” due to falling interest rates (below zero) and still unable to stimulate the economy. in another study, dyson and hodgson (2016) recommend “an indirect access approach, in which a central bank (specifically the bank of england) would still create and hold the digital cash, but all payment and customer services would operate through ‘digital cash accounts’ (dcas) provided by (or ‘administered’ by) private sector firms”. fung and halaburda (2016) proposed a “framework for assessing why a central bank should consider issuing a digital currency and how to implement it to improve the efficiency of the retail payment system”. however, these research are descriptive or focused on regulatory frameworks and legal implications, while others are unable to define clear use cases and as a result confuse the implications of a possible cbdc deployment. we have also focused our research on central bank-issued digital currencies because non-central bank-issued currencies have been volatile and do not make a good medium of exchange (unit of account and store of value too) when the value fluctuates quite drastically. furthermore, cryptocurrencies are not legal tender if not issued by the central bank. 2.3. conceptual framework for the purposes of discussion, the assumption is that the possible cbdc formats are maintained at a 1:1 parity with cash already in the economy. this assumption is held for all formats under discussion as uneven parity would create a series of aggravations and too many probabilities to ascertain any practical assessment. table 1. the four formats that are discussed in this research. format use case characteristics 1 cbdc as a sovereign currency (similar to cash/fiat) anonymous, universally-accepted and non-interest bearing 2 cbdc as public deposit in central bank identified (non-anonymous), universally-accepted and noninterest bearing 3 cbdc as a monetary policy instrument anonymous, universally-accepted and interest bearing 4 cbdc for interbank settlement identified, restricted use and noninterest bearing mohamed | implementing a central bank issued digital currency: assessing the shariah-compliant format ijief: international journal of islamic economics and finance, 3(1), 51-74 | 55 iii. methodology the methodology employed for this investigation into the four different use cases for the cbdc is a qualitative one, where we seek to determine its variation in application impact and to understand the relationships of each of the four formats with respect to being a cash substitute, their impact on monetary policy, on operations of wholesale payment systems and on the overall stability of the economic system. 3.1. model development as we are still in early stages of consideration for a cbdc issuance and possible implementation, this research has adopted an overview approach to first qualitatively assess the critical impact on crucial levers like monetary policy, and the stability of the financial system as a result of the shifts from digital transformation. although in section 5, we discussed barrdear and kumhof’s (2016) investigations on the properties of a specific format of cbdc (format 3 as described in section 4.3) using the dsge model on the countercyclical monetary policy measures and interactions with fiscal policy, we felt that our approach provides a foundational understanding for the reader to grasp the different aspects of how the digital currency can be utilized to solve certain limitations to traditional policy instruments, and how introducing something new may impact the economy and in what way. this is particularly useful for policy-makers and central bankers who are unfamiliar with blockchain technology. 3.2. method of assessment in order to assess cbdcs as cash substitute, their impact on monetary policy, on operations of wholesale payment systems and on the overall stability of the banking and financial systems, we had to qualitatively trace the repercussions that would result from such changes, with considerations to the current interactions with the existing cash, bank deposits and electronic money environment. as such each of the four formats will be assessed in three ways: by its expected impact, consequences, and adoption assessment. mohamed | implementing a central bank issued digital currency: assessing the shariah-compliant format ijief: international journal of islamic economics and finance, 3(1), 51-74 | 56 iv. results and analysis 4.1. the cbdc as a sovereign currency (like cash/fiat currency) this cbdc format retains all four features of cash: anonymity, peer to peer (p2p), universality, and non-yield bearing. banks would remain as its creators and maintain their inimitability at keeping reserves at the cb. yves mersch (2017) of the ecb, defined this cbdc format as “value-based” in collocation to an “account based” cbdc (analyzed later in format 2 in section 4.4.2). anonymity in cbdcs would have the same issues with security and safety as cash. like cash, stolen cbdcs would be hard to recover once stolen or lost, although cbdcs would be less likely to be stolen or lost than cash. p2p exchangeability allows its exchange between counterparties without intermediaries. universality means that anybody can take possession of it, use and store it. finally, this cbdc would not bear any yield just like cash. 4.1.1. impact and consequences by virtue of the essential functions of money ― ”unit of account, medium of exchange and store of value”―the performance of the cbdc is assessed in the following paragraphs in relation to the most pertinent kinds of money: “bank deposits, cash and other private/foreign currencies”. as a “unit of account”, the cbdc would be comparable to that of physical cash, as long as they remained pegged to each other1. this format is superior to private and foreign currencies because this cbdc currency would be digital hence effortlessly traded online. while current fiat currencies would remain vulnerable to exchange rate fluctuations on top of the risk of capital controls, the cbdc would not. as a “medium of exchange”, this cbdc format would both compete and complement both cash and bank deposits. however, it would remain an imperfect and also uncertain substitute for both because of required access and internet connection. undoubtedly, its usage would increase as people become more familiar with online transactions and are more technologically savvy. also, because it would retain anonymity2, this format would not curb illicit transactions. “compared to bank deposits, this format would facilitate 1 the implementation of this cbdc format would be like issuing a new “coin” or “note”, although this note would be digital hence effortlessly traded online and infinitely divisible. 2 this format could even enable unlawful activities, as moving money becomes cheaper and easier than cash, although this may be unlikely considering that it is cb-issued, and there is a possibility of overturning anonymity in exceptional cases. mohamed | implementing a central bank issued digital currency: assessing the shariah-compliant format ijief: international journal of islamic economics and finance, 3(1), 51-74 | 57 long-distance and/or large-quantity payments, but it would not necessarily offer additional services3”. furthermore, “it would facilitate the offering of such services by firms other than banks―fintech companies and small players―thus further commoditizing the payment infrastructure and reducing the comparative advantage of deposits” (bis, 2015). in its function as a “store of value”, cbdc persist to be riskier than bank deposits (in this format), at least up to the amount guaranteed by authorities. with no traceability, anonymity becomes a liability if it were stolen, lost or the password (to the wallet) forgotten. according to broadbent (2016), “if all cbdc did was to substitute for cash .... people would probably still want to keep most of their money in commercial banks” simply because it is familiar and there is a custodian for safe-keeping. the introduction of this format would impede cash usage and potentially diminish (but not severely) bank deposits. physical cash would still dominate in economies where transactions are cash-driven but in increasingly cashless societies where cash transactions are dwindling, cbdcs would swiftly replace cash. as a means of exchange, the total advantages of this format would compensate for its costs. cbdc in this format is digital cash without the volatility and price instability of current non-government crypto-currencies, such as bitcoin (btc), ethereum (ether), ripple (xrp). the advantages of currencies like bitcoin, ethereum, ripple is in the faster money transfers (and cheaper too) that would also benefit cbdc holders by turning these advantages to productive gains (barrdear and kumhof, 2016). financial inclusion can be advanced, especially where it is difficult for banks to establish branches due to geographical remoteness or where physical cash are ineffective compared to digital versions (imf, 2019). in asean, the asean financial innovation network (afin) “aims to facilitate broader adoption of fintech innovation and development in the region”. according to a january 2019 from the bank of international settlements (bis, 2019), 70% of central banks (based on 63 central banks that participated in the survey) are currently researching the issuance of a cbdc. the majority of the countries currently investigating to launch of a digital currency, cited ‘financial inclusion’ as the main reason for exploring cbdcs. for consumers and businesses, transactional settlements and fund transfers become faster and cheaper since accessibility becomes easy to perform these transactions (cerqueira et al., 2017). this feature is particularly useful for developing countries, as remote and rural areas have accessibility 3 it is highly unlikely that cbs would provide fi-type financial services, despite certain types of services can be inherent to a cbdc through a tech-centric platform as opposed to a bank-centric one. mohamed | implementing a central bank issued digital currency: assessing the shariah-compliant format ijief: international journal of islamic economics and finance, 3(1), 51-74 | 58 challenges. savings would also be improved since the cbdc as an instrument would allow money to be stored effortlessly. also, the gains would likely outweigh the outlays for central banks and monetary authorities. higher efficiency gains would be obtained from emerging markets with high inflation, where maintenance and issuance of physical cash have become costly. furthermore, this format will aid monetary authorities to become competitive and limit the use of private or foreign digital currencies which they do not control. importantly, cbdc strengthens monetary policy transmission mechanism in that it brings the latter closer in line with the objectives of monetary policy. however, the authorities will have to bear all the costs required to implement and maintain the new infrastructure along with first hand equipment and the hiring and training of new skills. unfortunately for the banking industry, the expense will exceed the gains. the cbdc would make intermediaries (like banks) for payment transactions unnecessary, ending the payment business4 for banks. the payment services would then be just an auxiliary part of an encompassing service of financial management. due to the partial substitution of cbdc for deposits, banks´ credit business would deteriorate too. as the volume of deposits drops, so does the money multiplier. also, as the deposits in the banking system fall, their volatility increases due to wealth reallocation from deposits into a broader range of riskier alternatives. with increased volatility, asset and liability management by banks would become more intricate. in addition, the banks would lose critical data that they use to draw up credit scores based on consumer wealth and repayment behaviors. the potential benefits for banks would likely arise from the easing of banking regulations as the sector become less strenuous and their activities become less disruptive to the financial system. potential benefits might ensue from new business opportunities facilitated by cbdc, such as the management and protection of the keys for cbdc wallets, although it is more likely that this will be adopted by banks themselves. 4 faced with bank fees (no matter how minimal), even people who prefer traditional accounts would consider converting their deposits to frictionless cbdc for more efficient payments. international transfers are already affected. mohamed | implementing a central bank issued digital currency: assessing the shariah-compliant format ijief: international journal of islamic economics and finance, 3(1), 51-74 | 59 4.1.2. adoption assessment the elimination of cash, or at least a partial elimination as suggested by rogoff (2016) is always an option, and only low-denomination bills and coins are preserved. such possibility is particularly significant under this format, as the cbdc replaces physical cash, although in high amounts only. it would be easier to eradicate cash in developed economies where most transactions are already digitalized, but in cash-dependent economies, it is more challenging. eliminating cash could save bank fees but create other costs for end users, although they would enjoy social benefits from the reduction in unlawful transactions. although the cbdc remains anonymous, there is a possibility that obscurity can be reversed at any point for aml/ctf investigation purposes. such possibility makes this cbdc format unappealing for illicit activities, like tax evasion, etc. using cbdc in this format equates to enhanced efficiency in payments and money transfers, reducing transactional costs. for the finance industry, as security measures to safeguard e-wallets (on top of safeguarding passwords), new businesses could emerge based on this type of service. the reduction in deposits will cause an immediate drop in the amount of credit granted or an increase in the cost of credit, if there are no cb compensatory measures or stabilization policy. in such a scenario, financial stability and the credit markets may be negatively affected. 4.2. the cbdc as public deposit in central bank this format generates a very disruptive configuration of cbdc because it proposes an identifiable money which is non-anonymous. practically, “having a cbdc held by the general public is the equivalent of keeping a deposit in the central bank, so that the authority’s power to supervise and monitor it would be substantially greater than it is today” (cerqueira et al., 2017). being identifiable and non-anonymous, non-compliant activities can be detected. as a deterrent and a regulatory tool in combating illegal activities, it would require the eventual elimination cash and limit the use of alternative assets for this cbdc format to be absolutely effective, which is not easy to do. two possible scenarios for the adoption of a cbdc with these characteristics have two main differentiating and important elements. in the first scenario, particularly in countries where there is a high volume of illegal activities―such as attempts to launder money and evade taxes―makes the adoption of this cbdc format useful for the government. in the second scenario, cbdc as a recognized conversion of deposits in the mohamed | implementing a central bank issued digital currency: assessing the shariah-compliant format ijief: international journal of islamic economics and finance, 3(1), 51-74 | 60 banking system into deposits in the central bank, can offer greater financial stability to the country. however, the consequent reduction in bank deposits would shrink credit markets significantly, as falling bank deposits would mean that credit creation becomes severely limited. since every deposit would be accounted against sovereign wealth (i.e. cash, central bank reserves and government securities), this format facilitates a full-reserve banking (frb) system. frb endeavors to “separate the payments system from the financing system as well as monetary policy from credit policy” (laina, 2015). preventing private money creation would ensure financial stability as initially proposed in the uk bank charter act of 1844, the us acts of 1863 and 1864, the chicago plan of 1930s forbade “private money creation through fractional-reserve banking by requiring that bank notes (which were the prevailing means of payment) should be fully-backed by government money”. this format opens a discussion on allocating government-backed liquidity and the conditions that the cb could benchmark to build up liquidity in the banking system with framework adjustments for reserves and/or open market transactions. 4.2.1. impact and consequences a non-anonymous cbdc format would make it less appealing than cash as a medium of exchange, at least for some. but the demand will rise for such cbdcs as it is a more efficient means of exchange. in comparison with other cbdc formats namely as a sovereign currency (format 1 discussed in section 1.0) and as a monetary policy tool (format 3 discussed in section 4.3.), this format would be less desirable as an exchange medium. however, as a store of value, this cbdc format would be highly desirable because it is a safer form of money as compared to other formats. it will be a safer from technological issues and because it is identifiable (nonanonymous), it will be easier to recover in cases of loss, theft, etc. moreover, it will be a safer than bank deposits, as the maintenance risks at the cb are clearly lower than as deposits in a bank. some would still demand bank deposits due to higher remuneration and services, but banks would prefer higher credit levels in a fractional reserve system for higher profitability. deposits at the cb are much safer than bank deposits, among other things, because they do not bear any credit risk. due to that feature of cbdc deposits, this is comparable to keeping deposits in a purported “narrowbank” model, i.e. in a “financial institution that is compelled by authorities to maintain the public’s resources under custody in a liquid and safe form, such as in government bonds, rather than leveraging on them in order to create mohamed | implementing a central bank issued digital currency: assessing the shariah-compliant format ijief: international journal of islamic economics and finance, 3(1), 51-74 | 61 credit” (kotlikoff, 2010). this would likely lead to a narrow-banking system due to cb accepting cbdc deposits and making cbdc non-anonymous. despite having this format and the cb functioning broadly as a narrow-bank, existing banks will continue to function as “fractional-reserve banking” models, i.e. “transforming part of the public’s deposits into credit and keeping only a fraction of them as reserves”. in this way, we can refer to this format as a partial limited-purpose banking system, as opposed to a full narrow-banking system where financial institutions are also required to operate as stable narrow-banks rather than as fractional-reserve banks that is less stable systemically. from the monetary authority perspective, the demand increase for cbdc equates to the increase in the size of the cb’s liabilities, hence increasing the size of its balance sheet. the cb will then increase its assets through purchase of predominantly safe and liquid assets, such as gdp-linked bonds, treasury bills and public securities, to counterbalance cbdc deposits, in order to match the increase in its liabilities. 4.2.2. adoption assessment cbdc in this format will “work as a proper unit of account, like cash and bank deposits, and in contrast with private and foreign currencies” (cerqueira et al., 2017). in this particular format, “the cbdc will be in general a better store of value and a worse medium of exchange” than in other formats, its adoption will very much depend on how the government and its people value financial stability, safety and anonymity. on a cautionary note, the deposits that the cb obtains with a recognized cbdc should not be used to either grant loans to the non-financial private sector or finance governments. first off, it would be problematic as cb is not meant to do so and a non-independent cb could, for example, compete with banks for more deposits, and lose its focus on its original objectives as a market supervisor and regulator. although this format may reverberate changes to a more financially-sound and stable system, like all systems, its moral risks remains. in the guise of improving financial stability, moral hazards include unscrupulously generating unreasonable incentives for the government, increasing the risks of fiscal slippage, and creating problems for the cb with regards to its independence. mohamed | implementing a central bank issued digital currency: assessing the shariah-compliant format ijief: international journal of islamic economics and finance, 3(1), 51-74 | 62 4.3. the cbdc as a monetary policy tool in this format, the proposed digital currency bears semblance to cash (being universal and anonymous) in some ways “but with the special feature of possibly being interest-bearing” (cerqueira et al., 2017). “an interest-bearing currency as a monetary policy instrument gives the central banks autonomy to meet their inflation targets, by dropping the nominal value of the digital currency”, similar to reducing the interest rates without any lower bound (refer to barrdear and kumhof (2016) or the following section 5.0). analogously, the nominal value of the cbdc would rise if there is a rise in interest rates, causing an increase in the monetary base. in such a format, monetary policy would be transmitted directly, thus accelerating the transmission of this policy whilst creating unlimited room for action to meet inflation targets without having to depend on the banking system as a proxy transmission channel to the economy. as a consequence, the effectiveness of monetary policy is enhanced considerably. under the present configuration of monetary policy transmission mechanism, the banks have a crucial role in the effectiveness of this mechanism. it should be noted that the aim of monetary policy is to prompt adjustments in the private sector’s portfolio (investment and consumption) in order to achieve stability. however, the banking system and monetary policy have two different objective functions. the former maximizes profits while the latter’s objective is to achieve financial stability to help growth. more often than not, the two are in conflict. current monetary policy relies on the banking system to transmit its actions to the private sector to induce it to adjust its portfolio to achieve monetary policy objective(s). as the objective of monetary policy comes into conflict with that of the banking system, more than likely that the banking system will serve its own objectives, thus, reducing the strength of monetary policy transmission and thus rendering monetary policy actions impotent. as mentioned, cbdc in this format has the capacity to reduce the dissonance from the banking system while, concurrently, enhancing the power of monetary policy transmission mechanism by directly inducing private sector portfolio adjustments. 4.3.1. impact and consequences it is possible to create cbdc with smart contracts that can change the face value of the whole stock of cbdc, effectively transforming the cbdc into an interest-bearing currency. an interest-bearing currency would be a radical shift that could create possibilities for monetary policy that are currently unavailable, and difficult or costly to implement. mohamed | implementing a central bank issued digital currency: assessing the shariah-compliant format ijief: international journal of islamic economics and finance, 3(1), 51-74 | 63 being able to change (particularly to decrease) the face value of a national digital currency is equivalent to being able to set interest rates as low as is required (even as negative as necessary) without being constrained by any “zero lower bound”. this would allow cbs to respond assertively against recessionary economic pressures. inversely, increasing the face value of the currency will positively cause an expansion in the monetary base. however, being able to do it technically does not equate to wanting to do it politically or strategically. empowering cbs to decrease the face value of circulating currency can be wickedly construed as expropriation. although expropriation in real terms happens via economic inflation and quite regularly too, it is not clear how society would react to a minimal sequestration of wealth via monetary policy. in terms of legitimacy, when cbs are empowered to vary the face value of circulating currency, it effectively tantamount to adjusting the wealth of those holding the currency. in the existing economic system, this is traditionally the sanction of the fiscal authority, not the monetary authority. by varying interest rates, it raises legitimacy issues for cbs to transmit fiscal policies, or at least a new discussion on a modified or merged function. moreover, the currency becomes a questionable numeraire5 as a unit of account in the market when cbs have control over its face value. this cbdc format retains anonymity, p2p and universality. but unlike cash, this cbdc format can bear interest. an important point to note is that the interest rate of the cbdc can be different from the monetary policy interest rate. the different yields could weaken the efficiency of monetary policy transmission but, a lower interest rate would afford more flexibility for banks to incentivize deposits above the cbdc rate than the official interest rate, which could protect both financial stability and credit markets. the coexistence of cash and cbdc under this format would be complicated and somewhat thorny. if interest rates were negative, people would convert their cbdcs to zero-yield physical cash to safeguard its value, and cbdcs would logically only sustain significantly negative rates only if all physical cash were abolished. if the cbdc bore positive rates instead, then people would change their cash into cbdcs, and in doing so, transforming itself to a cashless society. as in the first format (cbdc as a sovereign currency), this “cbdc would exhibit advantages in comparison to bank deposits, especially when viewed as a medium of exchange without intermediaries” (cerqueira et al., 2017). however, “bank deposits would likely keep their advantage as a store of value (better safeguards) and continue attracting those looking for specific 5 an item or commodity acting as a measure of value or as a standard for currency exchange. mohamed | implementing a central bank issued digital currency: assessing the shariah-compliant format ijief: international journal of islamic economics and finance, 3(1), 51-74 | 64 banking services. as a result, the demand for bank deposits relative to that for cbdc would depend on the yield spread between them” that gives better value. but intuitively, any volatility would be higher as the spread between cbdc and deposits would be fluctuating at both of its margins6. in this form, cbdc still competes with other currencies and assets. in deciding which form of currency to hold, the value and the perceived stability of cbdcs versus other currencies/assets would be crucial in the demand for cbdc. viewed from exchange rates between currencies, it is no different to what we have today, where floating rates of currencies coexist while preserving their own domestic interest rates. yet uncertaintyinstability might intensify with negative rates, making cbs forced to impose capital controls as a last resort7. according to the bis (2018), “cbdcs are considered an autonomous factor for monetary policy implementation for two reasons. first, from the viewpoint of the day-to-day steering of the central bank’s balance sheet to control short-term interest rates, daily fluctuations in the demand for cbdc are an exogenous factor, even though cbdc would be an endogenous factor within the broader monetary policy framework. second, even if cbdc was introduced, the amount of digital central bank money held by monetary counterparties (reserves) would still be crucial for control over short-term interest rates”. 4.3.2. adoption assessment in principle, this format would allow the cb to implement negative interest rates, which would incur losses in value for these cbdc holders, equivalent to sequestration. in addition, users can possibly be identified due to technological breach or legal requirement, at the costs of still not having cash in hand. in addition, any internet disruption or power shortage would also magnify the costs of the abolition of cash. conversely, positive rates would be a welcomed option as it would improve cbdc value for the holders. if cash (sovereign fiats) were to be replaced, authorities would bear the high cost of accessibility to this new cbdc, both in educating the global public as well as reducing technology barriers concerning its use. further, it is intuitive 6 as suggested before, cbdc interest rates could be set at a sufficiently low level such as to guarantee that demand for bank deposits does not fall significantly, driving credit levels down. 7 uncertainty might rise because cbs are only held accountable for keeping inflation under control (and their credibility on that front has led to stability in international exchange markets). however, central banks are not held accountable for sustaining rates above any level. mohamed | implementing a central bank issued digital currency: assessing the shariah-compliant format ijief: international journal of islamic economics and finance, 3(1), 51-74 | 65 and important to discuss what the cb’s roles8 and mandates are before allowing cbdcs to yield interests, and then to establish a framework to correctly incentivize major stakeholders. further considerations will be made to comply to shariah which forbids interest in islamic nations. finally, the cross-border payments transactions could be considerably diminished by any possible adoption of capital controls. domestically, payment services would practically come to an end with the elimination of cash, as in format 1 (section 4. 1.) which replaces cash. 4.4. the cbdc as interbank settlement the ”current settlement of payments is costly because it needs strict monitoring to avoid any double spending or sudden default. as a result, payment systems currently used by cbs are tiered: only tier1 banks can open a settlement account in the cb (which needs to remain continuously funded) for immediate settlement purposes. banks in other tiers have to open accounts in tier1 banks and go through them to settle their transfers in the cb. thus, top-tier banks intermediate other banks’ transfers while also managing their own customers’ accounts” (cerqueira et al., 2017). figure 1. tiered payment model versus distributed payment model 8 although changing the face value of a currency seem similar to changing its yield, there is an important dissimilarity when effecting such a change as a policy lever. in normal cb operations, interest rates are typically adjusted in open market operations by changing their total balance. in this format, reducing the face value of cbdc implies the reduction of the cb´s liabilities without a corresponding fall in its assets and conversely, increasing the surplus (or reducing the deficit) of the consolidated fiscal account. mohamed | implementing a central bank issued digital currency: assessing the shariah-compliant format ijief: international journal of islamic economics and finance, 3(1), 51-74 | 66 for this format, the current interbank payment system is replaced with a dlt-based infrastructure, so that the participants’ accounts in the central bank are replaced by cbdc wallets and the cb becomes merely another node in the network (see figure 1), albeit with regulatory concessions― retrieve information on all the transactions as a market supervisor. cb can decide who participates in the system and is the sole cryptocurrency issuer. the “main advantages of this scenario lie, on the one hand, in the increased efficiency of the interbank payment system (i.e. cost reduction and speed increase)” (bis, 2018). on the other hand, “in the greater resilience of a system of this type to cyberattacks since there is no vulnerable central point. the less efficient and insecure the system is, the greater the net benefits of adopting a cbdc” (bis, 2019), making up for the implementation costs of new substructure, and adoption more likely. 4.4.1. impact and consequences this format achieves what modern payments systems set out to do―p2p and more rapid payments, and involving fintech companies (or other nbfis) which have the expertise but not necessarily focused in banking services. this would separate the financial business of credit and payments, where payments now can become commoditized through innovation for better services and use. overall, all parties, including consumers, will benefit from faster, better and cheaper services from the efficiencies gained. the creation of a shared payments ledger system would allow for real-time and traceable transactional information about capital flows, which is progressing towards dynamic scrutinizing and better handling of systemic risk. furthermore, the cb will have to compete with other digital currencies/ledgers9 in order to keep full-control (supervision) of the settlement system. in fostering competition, it will expand accessibility without incurring traditional payment infrastructure costs. the marginal cost of adding a new participant would be considerably lower which is done by simply adding a new node to the network. allowing more players to have direct entry to the wholesale payments business would increase competition, but these benefits can only be realized at a high initial cost of application10 and subsequent maintenance costs after implementation (although these are lower than present systems). 9 in this research, other digital currencies are defined as those not issued by the cb, like libra, bitcoin, etc. 10 implementation costs include the development of new skills needed in cbs in order to be able to make full use of data stored in the ledger. mohamed | implementing a central bank issued digital currency: assessing the shariah-compliant format ijief: international journal of islamic economics and finance, 3(1), 51-74 | 67 however, “tier1 banks would lose their privileged role as ultimate settlers in cb accounts, and would lose part of the payment business in favor of tier2 banks, and all of them in favor of non-banks. additionally, direct access to the wholesale payments settlement system would allow non-banks to provide end-to-end payment services and, as a consequence, increase their market share. such new entrants might negatively impact the revenues of banks. however, the benefits in terms of efficiency, infrastructure costs savings, resilience, transparency and innovation could well outweigh such loss of revenue” (cerqueira et al., 2017). with new competition, this format would drive “banks to focus on the credit business, where their expertise in risk management and the resources needed to enter into the business” are their competitive advantages. but looking at how banks have adopted fintechs to protect their market share, cooperative partnerships and collaborations between banks and the new techfin11 entrants or other fintech companies will naturally develop, to complement knowledge, processes and skills in payments and credit services. operationally, the management of consumer liquidity via their cbdc wallets is a departure from the traditional overdraft sequence to topping up of wallets in a dl-based system. cb settlement accounts in rtgs today are quite similar, as they are “periodically pre-funded with accurate calculated funds enough to cover the payment needs”. however, in this situation, banks need to balance the amount of cb money both in its traditional form and in cbdc at all times. for central banks, the “utilization of a dl-based infrastructure allows for the full availability (365 days a year, 24 hours a day, 7 days a week) of the system, which can operate without interruption, unlike current rtgs systems, such as target2 in europe, which have predetermined operating schedules”. in addition, a decentralized system is much more robust to hacks and cyber-attacks than the current online systems because there is more than a single point of attack in order for it to fail. for banks, the main benefits would be similar to those of the cb: 24-7 accessibility and security against threats and attacks, besides being faster and cheaper in the whole settlement process, and that includes its new infrastructure costs. due to tougher competition, transaction fees will drop to more precisely indicate the marginal cost of verification related to payments. 11 fintech is a financial technology company whereas techfin is a primarily technology company that is venturing into financial services. mohamed | implementing a central bank issued digital currency: assessing the shariah-compliant format ijief: international journal of islamic economics and finance, 3(1), 51-74 | 68 from the payment aspect, business competitiveness would shift from merely payments itself to the evolution of additional consumer services. the transactional part of payments can be afforded by any financial service provider since they now have direct access to the decentralized settlement system. as such, the successful provider of the payment business would then seamlessly and intuitive create a strong user experience through wideranging value-added services, primarily built upon the payment insights retrieved from transactional data. despite not being able to access cbdcs directly in this scenario, end-users (i.e. the customers) would benefit from cheaper, safer and faster money transfers. a report from the imf notes that “one area where there is a huge potential for efficiency gains is in cross–border payment systems” (imf, 2017). they believe that “cryptocurrencies offer an opportunity for dramatic cost reductions, which may translate into faster and less expensive transactions, for instance in remittances”. being national payment systems, cbdcs may compete with cryptocurrencies in remittance transactions, or develop interconnected payments systems between nations for cross–border transactions to vie for preference over privately-issued cryptocurrencies. 4.4.2. adoption assessment this cbdc format is amply favorable because of its benefits and could serve as an intermediate step to start testing the more disruptive scenarios of formats 1, 2 and 3. cbs such as “the bank of england are currently working on modernizing their rtgs systems, and a dl-based infrastructure is being seriously considered”, as reported by bbva research (cerqueira et al., 2017). mohamed | implementing a central bank issued digital currency: assessing the shariah-compliant format ijief: international journal of islamic economics and finance, 3(1), 51-74 | 69 further analysis 4.5. countercyclical measures and fiscal policy interactions with cbdc in another study, barrdear and kumhof (2016) of the bank of england investigated the properties of a specific format of cbdc (format 3 discussed in section 4.3) which “can be held by the non-bank private sector“ (unlike reserves), that it is bears yield (unlike cash), and that it rivals the “internally created private bank-issued money”. their quantity or price rules react to inflation, in the same way it responds to the policy rate12. hence, the quantity and price rules for cbdcs have a “very similar potential for countercyclical policy responses to standard shocks” (discretionary monetary stimulus or money supply shock). the “choice between quantity and price rules must therefore mostly be based on the fact that price rules, as mentioned above, perform better under money demand shocks”. barrdear and kumhof (2016) also found that “the relative performance of countercyclical quantity and price rules depends critically on the elasticity of substitution between cbdc and bank deposits, with a lower elasticity implying that smaller quantity responses and larger interest rate responses to inflation are required to achieve the same degree of countercyclicality”. in order for the “cbdc price rule and countercyclical quantity rule” to be sufficiently effective, barrdear and kumhof held the assumptions that the steady state quantity of cbdc amounts to 30% of gdp (sufficient to render substantial withdrawals of cbdc possible “without hitting a ‘quantity zero lower bound’”), that the cbdc is used frequently enough by its prospective users, and that the “steady state efficiency gains of cbdc issuance” are sizeable over the expected scale measured. within this model, barrdear and kumhof found that a “system of cbdc offers a number of clear macroeconomic advantages, including large steady state output gains of almost 3% for an injection of cbdc equal to 30% of gdp”, and considerable “gains in the efficacy of systematic or discretionary countercyclical monetary policy”. their analysis suggests that the only restrictions required to obtain these gains are that an adequately large supply of cbdc is circulated in steady state, and that the central bank only utilizes the cbdc when it trades against government debt instruments. 12 they visualized that the “cbdc would be an economically relevant monetary aggregate as long as the quantity outstanding is sufficiently large and its substitutability with other monetary transactions media is sufficiently low”. mohamed | implementing a central bank issued digital currency: assessing the shariah-compliant format ijief: international journal of islamic economics and finance, 3(1), 51-74 | 70 4.6. further economic implication analysis and recommendations from the formats that have been ruminated, format 4 (described in section 4.4.) appears to be the least disruptive to the existing system. the benefits are extensive in terms of operations from the banking, payments and “huge potential for efficiency gains is in cross–border payment systems”. and rightly so, many central banks are at present looking into this particular format to venture and experiment with. in terms of ranking, format 3 (described in section 4.3.) would be recommended next, as it has the potential to generate steady state output and efficiency gains unique to the cbdc as a monetary policy tool albeit with certain essential conditions. among the attractive advantages is its ability to overcome the ‘quantity zero lower bound’ issue. formats 1 and 2 could be implemented at later stages after formats 4 and 3. however, the interest rate as the pricing mechanism and policy lever here then requires a little more in-depth discussion, considering the shariah perspective. it is intended to explain the islamic financial perspective which effects a ban on interest, including interest rate as a pricing mechanism. the concern for justice and equity involves nondiscriminatory exchange and fairness in financial transactions, including getting the market prices right through proper pricing mechanisms so as to not suffer the consequences of mispricing. ‘getting the prices right’ means letting market forces function naturally to produce market prices that reflect all opportunity costs that correspond to them. john maynard keynes (1932) had already indicated that “the interest rate policy had deviated the true opportunity cost of financial resources”, and james tobin (1969) pointed out that “there was no such thing as a ‘market rate of interest’ in an environment in which policy drove the ‘market rate of interest’”. “monetary policy had the ability”, tobin argued, “to force a deviation between market valuation of capital and its replacement cost”. his “fundamental-valuation efficiency” concept, interpreted as “allocative efficiency”, would ascertain the opportunity cost of financial resources that guides and necessitates their worthiest uses. in ‘getting the prices right’ dogma, a market where prices were not allowed to reflect their opportunity cost, becomes repressive to market players―which “was the mckinnon-shaw argument for liberalization of the financial sector of developing countries” (mirakhor, 2017). financial repression, the deviation of “administered interest rate” from the “market interest rate”, led to market distortions, which has resulted in poor savings, inadequate investments and stunted economic growth. in the subsequent decades of financial liberalization to chase economic prosperity, mirakhor laments that “a basic question never asked was how and in what sense did mohamed | implementing a central bank issued digital currency: assessing the shariah-compliant format ijief: international journal of islamic economics and finance, 3(1), 51-74 | 71 the ‘market rate of interest’ reflect the true opportunity cost of financial resources”. one of the central problems of major economies, according to mirakhor, “is the uncoordinated and mismatched balance sheets of the real, financial, household and government sectors”. ideally, the assumption is that the market would work freely to coordinate the balance sheets and allow for equilibrium to surface. unfortunately, the current state of economics suffers from a runaway financial sector, which is decoupled from the real sector. in its current state, the economy only apportions a miniscule amount of market trades to capital formation in the real sector resulting in a real sector with corporations overflowing with cash, but not investing. with reduced investments, msmes become starved for financial resources, and unable to grow and survive, while government sectors amass huge debts to fund their programs, unable to coordinate its balance sheets. the market’s inability has spawned a “paper economy” without much connection to the real sector, when in fact, the economy needs a real sector rate of return to replace the mis-pricings of opportunity cost of financial resources in order to productively allow capital to circulate. mohamed | implementing a central bank issued digital currency: assessing the shariah-compliant format ijief: international journal of islamic economics and finance, 3(1), 51-74 | 72 v. conclusion and recommendation 5.1. conclusion for cbdcs to be practical, it has to provide pragmatic implementable solutions that will solve existing problems that cannot be solved by current tools or instruments. current policies and frameworks will remain ineffective to existing problems so long as fundamental flaws which are systemic are not rectified. they cannot be resolved by “patch” solutions which only treat symptoms (not the root) where increasingly outdated and flawed mechanisms have masked their compounding detrimental effects. dl-based solutions like the cbdc in its various formats offer alternatives in tackling some of these important issues as we work towards a freer marketplace, a more stable financial and considerably more prosperous economic system. 5.2. recommendations to possibly rectify and rise from a “paper economy” without much connection to the real sector, a properly-researched cbdc can at least enhance the effectiveness of the tools of monetary policy. where the interest rate mechanism is no longer available to allocate (better said, misallocate) financial resources, as would be the case in islamic finance, monetary policy becomes even more effective in inducing private sector portfolio adjustment as it relies on the rate of return to investment in the real sector of the economy (as the true opportunity cost of financial resources) to guide its policy actions. such systemic change is required for a systemic problem that has gone on for far too long. for further research, central bank researchers and policy-makers can test these scenarios (cbdc formats) using the dsge model since monetary dsge models are widely used because they fit well with the such data well and they can be used to address important monetary policy questions (christiano et al, 2010). policy analyses with dsge models requires data being assigned numerical values to model parameters. vi. acknowledgement the author would like to thank professor abbas mirakhor for his invaluable inputs and suggestions. mohamed | implementing a central bank issued digital currency: assessing the shariah-compliant format ijief: international journal of islamic economics and finance, 3(1), 51-74 | 73 references agarwal, r., & kimball, m. 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(2015). proposals for full-reserve banking: a historical survey from david ricardo to martin wolf. university of helsinki. mohamed | implementing a central bank issued digital currency: assessing the shariah-compliant format ijief: international journal of islamic economics and finance, 3(1), 51-74 | 74 mersch, y. (2017). digital base money: an assessment from the ecb’s perspective. speech at the farewell ceremony for pentti hakkarainen, deputy governor of suomen pankki – finlands bank. helsinki, 16 january 2017. mirakhor, a. (2017). islamic finance and financial repression. https://journal.wahedinvest.com/islamic-finance-and-financialrepression/ accessed 5th july 2019. pfister, c. (2017). monetary policy and digital currencies: much ado about nothing? bank of france, working papers, no 642. raskin, m., & yermack, d. (2016). digital currencies, decentralized ledgers, and the future of central banking, nber working paper no 22238, may 2016. rogoff, k. (2016). the curse of cash, princeton university press. stevens, a. (2017). digital currencies: threats and opportunities for monetary policy, national bank of belgium, economic review, june. sveriges riksbank (2017). the riksbank’s e-krona project – report 1, september. ijief: international journal of islamic economics and finance vol. 1 (2), pg 75-94, january 2020 fintech and islamic finance: literature review and research agenda rashedul hasan inti international university, malaysia, hasanaiub05@gmail.com m. kabir hassan university of new orleans, united states, mhassan@uno.edu sirajo aliyu federal polytechnic bauchi, nigeria, sirajoaliyu@yahoo.com article history received: december 23, 2019 revised: january 7, 2020 accepted: january 11, 2020 abstract fintech revolution started with the introduction of credit cards in 1960 and have been revolutionized with blockchain technologies. integration of fintech based solution with islamic finance has gained interest among academics. however, the lack of literature evidence on this issue has motivated us to conduct a systematic literature review on islamic fintech. we have identified fourteen documents relevant to the context of the study and conducted the content and thematic analysis. an extensive review of past literature allows us to identify shari’ah compliance as one of the major challenges for the growth of islamic fintech. in addition, we conclude that islamic fintech might pose challenges for islamic financial institutions (ifis) in terms of operational efficiency, customer retention, transparency and accountability. we contribute by providing insights on the challenges faced by the islamic finance industry toward integrating fintech based solutions with reference to past studies and indicate areas for future studies that could reduce the gaps in islamic fintech literature. keywords: islamic fintech, blockchain. bitcoin, cryptocurrency, shari’ah. jel classification: o30, o33 @ ijief 2020 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.2122 web: http://journal.umy.ac.id/index.php/ijief/article/view/7823 citation: hasan, r., hassan, m. k. and aliyu, s. (2020). fintech, blockchain and islamic finance: literature review and research agenda. ijief: international journal of islamic economics and finance, 3(1), 75-94. doi: https://doi.org/10.18196/ijief.2122 mailto:sirajoaliyu@yahoo.com http://journal.umy.ac.id/index.php/ijief/article/view/7823 hasan, hassan, & aliyu | fintech, blockchain and islamic finance: literature review and research agenda ijief: international journal of islamic economics and finance, 3(1), 75-94 | 76 i. introduction fintech is characterized as the financial services of the twenty-first century (todorof, 2018). recent growth in the mobile applications and usage of website among users have hinted the inclusion of fintech revelation among the global financial sector. fintech development has revolutionized the financial service industry with the use of computer-based technologies. hence, fintech is often referred to as the blend of digital innovation and financial services with an aim to improve the efficiency of the financial service industry. zavolokina, dolata and schwabe (2017), therefore, regarded fintech as the marriage of technological innovation and finance which has the ability to elevate the financial service industry to a new height. recent studies have indicated several advantages of the fintech revolution in the financial service industry. in addition to the disruption of traditional financial markets (lee & shin, 2018), fintech can ensure operating efficiency, improve (gomber, kauffman, parker, & weber, 2018) customer-centric services and lead to better transparency in the financial service sector. loo (2018) is more optimistic about the role of fintech in the financial service industry and believe that this revolution can positively improve the growth of the financial service industry by reducing the probability of a financial crisis. such results can be achieved if financial service providers are allowed to compete freely. islamic finance, developed on shari’ah principles, can be benefitted from the application of fintech technologies. however, recent studies (abu-bakar, 2018; abubakar, ogunbado, & saidi, 2018; biancone, secinaro, & kamal, 2019; todorof, 2018) have explored on the computability issues of fintech based solutions for islamic finance industry. while there are views both for and against shari’ah compliance nature of fintech products, various applications of fintech for the islamic finance industry cannot be denied. elasrag (2019) has highlighted the use of smart contracts to ensure products or services of the islamic financial industry as shari’ah complaint. the use of blockchain-based solutions can allow islamic banks to control the increasing cost of transactions and can help to manage profit-sharing agreements. benefits of blockchain in creating smart contracts have already attracted many financial enterprises. abojeib and habib (2019) highlighted the possible use of blockchain for a charitable purpose, especially in the collection of zakat. a similar application of fintech can also improve the utility of waqf. tieman and darun (2017) reflected on the importance of blockchain as a solution for the halal industry problem. hasan, hassan, & aliyu | fintech, blockchain and islamic finance: literature review and research agenda ijief: international journal of islamic economics and finance, 3(1), 75-94 | 77 as a result, islamic fintech industry has emerged robustly since 2010. the industry has been estimated at usd 2.4 trillion in 2017 and is projected to grow at 7.7 per cent cagr to reach usd 3.8 trillion in 2023 (dubai islamic economy development centre, 2018). in general, the core impact of fintech technology for islamic fiancé industry is divided into three categories. first, technologies such as artificial intelligence (ai) and big data that aims at greater automation from insights of activity. the second group of technologies are focusing on disintermediation leading to open access to services and include p2p finance and mobile banking. the final group consist of greater decentralization and security and include blockchain and cloud-based technologies. however, we have witnessed a lower level of adoption of big data and ai-based solutions for wealth management. fintech has yet to mark its presence in the takaful industry as compared to the high degree adoption in the islamic banking industry. therefore, we have conducted this study to explore the possible application of fintech in islamic finance. we provide a systematic review of related literature to explore challenges faced by islamic fintech and contribute by highlighting research agenda that could improve the integration of fintech and islamic finance. ii. literature review fintech has proven to be a beneficial innovation for the financial service industry and has improved the level of financial inclusion by reaching to a diverse group of customers. while the concept of fintech is new, it has already made its mark in the islamic finance industry. the development of islamic fintech has paved the way for developing innovative shari’ah compliant products for the islamic consumers which could pave the way for a greater competitive edge for the islamic finance sector. it is important to highlight that islamic fintech is different than the conventional fintech due to the requirements of shari’ah compliance. however, the emergence of fintech solution has provided islamic financial institutions (ifis) with greater opportunities to improve their infrastructure and product offering (jamil & seman, 2019). as such, research on the application of fintech in the islamic finance sector has increased in recent years (abojeib & habib, 2019; biancone et al., 2019; jamil & seman, 2019). baber (2019) has made a significant contribution by studying the contribution of fintech and crowdfunding on customer retention among islamic banks in malaysia and the united arab emirates. malaysia was selected for such analysis due to malaysia receiving the highest score in the islamic finance country index. the united arab emirates was chosen for the hasan, hassan, & aliyu | fintech, blockchain and islamic finance: literature review and research agenda ijief: international journal of islamic economics and finance, 3(1), 75-94 | 78 comparative analysis as the country has the largest market share in islamic finance. results provided though the survey of 535 customers of selected islamic banks indicate that fintech based services do not contribute toward improving customer retention among islamic banks. however, crowdfunding based services have a positive impact on customer retention for islamic banks operating in malaysia and the uae. these findings contradict with the findings of aisyah (2018) who report that islamic fintech can improve financial dealings, service offerings and convenience leading to higher customer loyalty for indonesian banks. as mentioned earlier. shari’ah compliance takes a center stage in the possible integration of fintech with islamic finance. islamic fintech firms have made a good attempt to ensure that their business models are compliant with shari’ah requirements by adhering to universally applicable shari’ah standards and going through a regulatory audit. however, shari’ah compliance has remained a wide research area for islamic fintech. biancone et al. (2019), for example, explored the shari’ah compliant business models of crowdfunding and fintech firms and conclude that shari’ah compliant crowdfunding invests in halal products, shares the risk of investment and does to charge interest. biancone & radwan (2019) further emphasized the importance of the prohibition of interest for the acceptance of fintech based business models as shari’ah compliant. fintech also allows ifis to become more transparent by creating a direct link between the customer and the investors from the very beginning of the project. past literature has focused primarily on the shari’ah aspect of bitcoin, a popular cryptocurrency. the first view toward cryptocurrency is that it is not permissible in islam. according to the grand mufti of egypt, shaykh shawki allam, bitcoin has been linked to illegal activities and have been used to invest in non-shari’ah compliant purposes (abu-bakar, 2018). the fatwa provided by the turkish government states that the buy and sell of virtual currencies are not complying the requirements of shari’ah as it is affected by the elements of speculation (excessive gaharar). the fatwa centre of palestine is in line with the views of the turkish government and have declared bitcoin and cryptocurrencies as haram (nonpermissible). the primary reason behind such a view can be attributed to the lack of monitoring and ability to trace the issuer of bitcoin which makes it untrustworthy and unreliable. sheikh imran (2017) views that intrinsic value should be considered while evaluating money and bitcoin does not pass the test of intrinsic value. shaykh haitam also commented that bitcoin and any other forms of cryptocurrencies should be prohibited as they are not backed by anything and also created out of nothing. (abubakar et al., 2018). hasan, hassan, & aliyu | fintech, blockchain and islamic finance: literature review and research agenda ijief: international journal of islamic economics and finance, 3(1), 75-94 | 79 however, some scholars have an opposite view toward cryptocurrencies and rule bitcoin as a complaint to shari’ah. oziev and yandiev (2018), for example, do not find any evidence that makes bitcoin contradict to shari’ah and indicate that high instability attached to the exchange rate of bitcoin acquired for saving purpose may have excessive risk (gharar) and speculation (maysir). therefore, elimination of the volatility of bitcoin exchange rate can improve its shari’ah compliance feature and it can be done by adjusting it with major currencies of the world. bakar (2018) also believes that bitcoin complies with shari’ah and recommends the application of blockchain-based solutions to reduce the allegation that bitcoins are being used for money-laundering and other forms of illegal activities. kahf (2015) concludes bitcoin like any other currency within its community and thus the exchange of bitcoin with their currencies should be subject to similar conditions of currency exchange. such condition can include but are not limited to the location of exchange and prohibition of speculation related to such exchange. iii. methodology fintech is a recent innovation and limited literary evidence exist on its integration in the islamic finance industry. therefore, we have made an attempt to conduct a systematic review of the possible application of fintech solution toward improving the attractiveness and shari’ah compliance of products offered by the islamic finance industry. we have used the literature review process proposed by stechemesser and guenther (2012). there are three stages in the literature review process applied by stechemesser and guenther (2012). the first stage includes establishing the research objective and collection of papers from databases. this stage allows us to identify relevant literature focusing on islamic fintech. we have included both theoretical and conceptual papers in our literature review process. the primary objective of this research is the identification of a research agenda to explore possible ways of integration of fintech based solution in the islamic finance industry. therefore, we have used several keywords in our database which include “fintech”, “bitcoin”, “blockchain”, “islamic finance”, “shari’ah”. we have used elsevier, emerald, scopus, springer and google scholar databases for the literature search process. the initial search resulted in the collection of 58 paper. in the second stage, we have established screening criteria to identify relevant papers for the content analysis process. we have considered the hasan, hassan, & aliyu | fintech, blockchain and islamic finance: literature review and research agenda ijief: international journal of islamic economics and finance, 3(1), 75-94 | 80 limited supply to the relevant publication of journal articles on fintech and islamic finance, and thus, included journal articles, books, reports published by governmental and professional bodies, books, book chapters and conference proceedings. following the findings of morrison et al. (2012), we have restricted our study to papers published in english. both empirical and conceptual articles are included in the review process. finally, 20 documents were found relevant and are used in the literature review process. in the final stage, we have applied a review protocol proposed by krippendorff (2013) to analyze the suitability of the selected documents for the content analysis. documents published before 2013 are not selected for the content analysis process. we have also reviewed the citation score of all documents to improve the reliability of findings presented through the literature review process. application of these inclusion and exclusion criteria have resulted in the selection of 16 documents that meet all requirements established by the review protocol. brief description of the documents is provided in table 1. hasan, hassan, & aliyu | fintech, blockchain and islamic finance: literature review and research agenda ijief: international journal of islamic economics and finance, 3(1), 75-94 | 81 table 1. key findings on islamic fintech no author and date document type findings 1 khan (2017) article cryptocurrency, one of the latest creations of blockchain technology, has not been designed with islamic markets in mind. 2 todorof (2018) article introduction of fintech in islamic banking has the potential to improve competitiveness and inclusiveness. however, it would require an increasing number of products and services that are offered at lower prices which can reduce the credit gap existing among various muslim countries. 3 abu-bakar (2018) working paper bitcoin is permissible in principle as it is traded on global exchanges and accepted worldwide. 4 lacasse et al. (2017) article this paper made a qualitative enquiry about the ability of bitcoin technology and smart contracts to support and enhance the transparency of the islamic finance industry. 5 elasrag (2019) article this paper provides various applications of blockchain in the islamic finance industry. 6 dubai islamic economy development centre (2018) report this report provides valuable insights on the global fintech ecosystem and islamic fintech ecosystem. 7 abojeib and habib (2019) book chapter blockchain and smart contract technologies can help waqf institutions to improve their governance structure and ensure shari’ah compliance. 8 lacasse et al. (2018) article a qualitative research framework is adopted to explore the compatibility of the blockchain monitoring process for the islamic banking industry. 9 muedini (2018) article bitcoin and other cryptocurrencies are providing better solutions to ensure shari’ah compliance of products offered by islamic financial industry. 10 meera (2018) article gold-backed cryptocurrencies are compliant with shari’ah and are becoming more desirable among islamic investor. 11 abubakar et al. (2018) article muslim scholars believe that bitcoin is shari’ah compliant and therefore may be used under certain conditions. 12 muneeza et al. (2018) article bitcoin technology can help mitigate current challenges faced by crowdfunding platforms to promote financial inclusion. 13 irwin and milad (2016) article presence of bitcoin atms and exchanges at countries with a significant number of foreign fighters join isis in the middle east can present a significant risk for the platform. 14 evans (2015) article bitcoin system is more appropriate for islamic banking industry than interest-backed central bank fiat currency. 15 abybakar, hassan and haruna article crypto currencies provide benefits over gold and can make significant impact in mitigating inflation. 16 haruna, abubakar and hassan conference paper crypto currencies can provide an efficient medium of exchange if backed by precious metal such as gold and silver. source: author’s own hasan, hassan, & aliyu | fintech, blockchain and islamic finance: literature review and research agenda ijief: international journal of islamic economics and finance, 3(1), 75-94 | 82 iv. results 4.1. islamic fintech landscape and ecosystem figure 1. number of islamic fintech startups by country source: dubai islamic economy development centre (2018) according to the dubai islamic economy development centre (2018), a total number of islamic fintech startups delivering customer-facing financing solutions globally are 93 as of 2018. figure 1 provides the geographic distribution of islamic fintech startups and indonesia secure the top spot with 33 per cent of the islamic fintech startups. however, the number of global fintech firms has increased to 7,500 with a value of usd 58 billion in 2018. islamic fintech has substantial room for growth and concentrated efforts are required from government entities and financial investors toward reducing the gaps in islamic fintech ecosystem. we provide the list of popular islamic fintech startups in table 2. it is evident that islamic fintech firms have evolved and has been providing services in a wide variety of areas. indonesia based invesporperti and singapore based ethics has become popular by providing shari’ah compliant crowdfunding platform for property investment. kaptal bost, on the other hand, focuses on financial inclusion of smes and provide a crowdfunding platform that follows shari’ah standards. malaysia has become a leader in islamic fintech development and we provide more detail in the later segment of the paper. in table 2, we highlight two islamic fintech firm providing a wide variety of fintech services for a wide group of stakeholders. 33% 13% 12% 11% 7% 24% indonesia us uae uk malaysia others hasan, hassan, & aliyu | fintech, blockchain and islamic finance: literature review and research agenda ijief: international journal of islamic economics and finance, 3(1), 75-94 | 83 table 2. islamic fintech startups in selected countries no name of the islamic fintech firm country major activity 1 invesproperti.id indonesia property investment using shari’ah compliant crowdfunding platform. 2 ethis singapore the first islamic crowdfunding platform for property investment. 3 kapital boost singapore islamic crowdfunding platform focusing on smes. 4 ata plus malaysia the first equity crowdfunding platform in malaysia. 5 myfinb malaysia big data & analytics using ai for islamic banks. 6 invoice wakalah pakistan shari’ah compliant peer-to-peer online lending platform. 4.2. islamic fintech in the banking industry islamic banking products suffer from high prices as compared to their conventional counterparts (todorof, 2018) which are attributed to their inability to reduce the rate of non-performing loan (beik & arsyianti, 2008) and tendency to maintain a higher portion of the equity in the debt-equity ratio (iqbal, 2012). in such a situation, islamic banks can improve their product offerings by incorporating fintech-based solutions. it is expected that the integration of fintech-based solutions could enhance the shari’ah compliant feature of islamic banking products and make it cheaper. as such, islamic banking products will receive much-required attention from the western fintech industry. recent fintech platforms using blockchain technology and backed by gold are found to be shari’ah-compliant according to the accounting and auditing organization for islamic financial institutions (aaoifi). therefore, one of the agenda for future research could focus on the identification of various instruments that could be applied to the islamic finance industry. there has been a growing consensus among researchers that consumer awareness regarding various types of fintech based services offered by ifis has increased in recent years. saad and fisol (2019) explore the willingness of potential customers to use fintech services offered by ifis using a qualitative research design and conclude that awareness theory is suitable to explain the behaviour toward fintech based services offered by ifis. the theory of reasoned action (ibrahim, fisol, & haji-othman, 2017) and the theory of planned behaviour (khan & ismail, 2011) has also been adopted to explain the attitude toward fintech based services among various stakeholder groups. hasan, hassan, & aliyu | fintech, blockchain and islamic finance: literature review and research agenda ijief: international journal of islamic economics and finance, 3(1), 75-94 | 84 the emergence of fintech and increase of customer awareness toward fintech based services could create new challenges for ifis. irfan and ahmed (2019) indicate that fintech can become an alternative of ifis by creating a non-bank intermediary platform. currently, crowdfunding based platforms are working on such principled by collaborating with ifis. however, the growth of crowdfunding platform in providing financial access to various groups of consumers regarded as risky by traditional banking channel might create more opportunities for these platforms to serve as an alternative to the banking channel. we should remember that structural constraints and high-margin investment banking services have paved the way for the development of fintech industry. fintech platform operating within the boundaries of shari’ah does not come with the shareholder and regulatory constraints associated with a traditional bank, conventional or islamic, and thus can be more niche in their offering. 4.3. islamic fintech development in malaysia malaysia has made significant development in the fintech sector. as of 2019, the country has witnessed the development of 198 fintech firms, providing services in a wide variety of sectors including electronic payment gateways, blockchain and cryptocurrencies, crowdfunding, online peer-to-peer lending platforms and artificial intelligence. there have been significant improvements in the islamic fintech largely contributed by the growth of the islamic finance sector. we introduce six islamic fintech firms operating in malaysia in table 3. ethics kapital is one of the earlier crowdfunding platforms that comply with shari’ah standards. the crowdfunding platform has an operation in fifty-nine countries and focuses primarily on financing housing projects as a means to combat poverty-stricken demographics in indonesia and malaysia. the management team of ethis is divided into founders, advisors, global partners and team. the business model, structure, process and documentation have been reviewed by scholars of fsac shari’ah committee and the panel find their structure and mechanism follows the requirements of mudarabah structure. the undergoing projects are also found to be shari’ah compliant. ethis has made a significant contribution to sustainable development as a participant of the united national global compact (ethicscrowd, 2019). as-sidq serves as an online financing platform. products offered by as-sidq include personal financing and credit cards which are free from elements prohibited in shari’ah, i.e. interest (riba), uncertainty (gharar), gambling (gharar) or immoral practices (zulm). the platform has disbursed over 37 billion ringgit worth of shari’ah compliant financing among 400,000 hasan, hassan, & aliyu | fintech, blockchain and islamic finance: literature review and research agenda ijief: international journal of islamic economics and finance, 3(1), 75-94 | 85 table 3. islamic fintech firms in malaysia no name of islamic fintech major activities 1 ethis kapital peer-to-peer lending platform. 2 as-sidq as-sidq provides a fundraising platform which is approved by twenty financial institutions in malaysia. 3 finterra finterra provides cloud-based financial services. 4 global sadaqah donation-based crowdfunding platform. 5 payhalal payment gateway which follows shari’ah standards. 6 wakaful digital financial services following waqf principles. source: fintech malaysia applicants through the participation of more than fifty islamic financial institutions (as-sidq, 2020). unlike as-sidq, finterra operates using blockchain technology to provide cloud-based financial services and has operations in india, hong kong, malaysia, singapore and the united arab emirates. services offered by finterra include blockchain consulting, token development, software and blockchain development. finterra has grown rapidly since its establishment in 2017, the platform has over 700,000 members to their digital wallet and made 1 billion tokens available which can be traded by the public. global sadaqah provides a donation-based crowdfunding platform which allows members to conduct charitable deeds and provide sadaqah, zakat and waqf to credible partners. the crowdfunding platform complies with islamic digital economy (ide) standards which ensure shari’ah compliance of their business operations. payhalal, a platform under souqa fintech sdn bhd, also provides similar services. finally, waqaful operated on the basis on waqf principles and provides a one-stop digital solution which can be used by individuals, businesses and specific communities. the platform is contributing to sustainable development by ensuring well-being among community members and is working toward reducing inequalities by utilizing blockchain technologies. 4.4. islamic fintech case studies case 1: ethical and shari’ah compliant investing wahed invest is a digital platform that provides ethical investment opportunities to investors. the platform requires investors to open an account before making an investment decision. a minimum deposit of usd 100 is required while opening the account. investors of wahed invest can invest in a diversified portfolio that includes global stock, emerging marker hasan, hassan, & aliyu | fintech, blockchain and islamic finance: literature review and research agenda ijief: international journal of islamic economics and finance, 3(1), 75-94 | 86 table 4: portfolio of wahed invest no portfolio description past performance 1 global stocks these stocks consist of stock from developed markets. it follows a large-cap value and is diversified across industries and geography. 162 per cent increase in 2019 compared to 2010. 2 emerging market stocks investors requiring geographic diversification and growth can select this portfolio. however, this portfolio consists of a riskier asset class as compared to global stocks. emerging market stocks include companies operating in emerging markets and following islamic investment principles. 102 per cent increase in 2019 compared to 2010. 3 sukuk or islamic bond sukuk provides ownership of the underlying asset and free of interest. both asset-based and asset-backed sukuk are included in the portfolio. 51 per cent increase in 2019 compared to 2010. 4 gold gold historically has a low correlation with stocks and bonds and has the potential for long-term capital appreciation. it can also act as an inflation hedge. 34 per cent increase in 2019 compared to 2010. source: wahed invest (2019) stock, sukuk and gold. brief description of each portfolio is provided in table 4. the portfolios are further divided into six categories including very conservative moderate, moderately aggressive, aggressive and very aggressive. wahedinvest has allocated 97.50 per cent of its very conservative investment in sukuk (wahed invest, 2019). the preferred securities selected for investment is the franklin global sukuk fund. the franklin global sukuk fund has an aim to maximize investment return by investing in either fixed or floating securities that are compliant with shari’ah requirements (franklin templeton, 2019). however, 87.50 per cent of the very aggressive investment is allocated to global stocks, considering their growth potential as presented in table 4. the preferred securities for global stocks are ishares msci world islamic ucits etf. case 2: real estate islamic crowdfunding ethicscrowd, an indonesia based crowdfunding platform, offers propertybased islamic crowdfunding. the fsa shari’ah committee has pronounced that the structure and mechanisms adopted by ethicscrowd comply with shari’ah requirements. however, the use of properties to invest crowdfund is identified as a factual matter and the shari’ah committee advice to determine the shari’ah compliance status on a case by case basis. the mudharabah funding arrangement adopted by ethicscrowd is also found to be shari’ah compliant. as of 2019, the islamic crowdfunding platform has involved 27,092 investors to transform the community by building affordable houses and allowing a poor segment of the community to fight against hasan, hassan, & aliyu | fintech, blockchain and islamic finance: literature review and research agenda ijief: international journal of islamic economics and finance, 3(1), 75-94 | 87 poverty. the value of islamic crowdfunding investment has grown to usd 7,200,696 which covers 65 countries around the world. this crowdfunding platform also utilizes istisna and murabahah structure for crowdfunding investment. the istisna structure begins with the appointment of the crowdfunding agent by the project developer. in the second step, the investor appoints an agent to exercise an istisna contract with developed undertaking a housing project. after securing necessary legal permission to continue with the project, the investor transfers the investment t the agent. the agent, after receiving the fund from the investor, is responsible to make payment to the project developer according to the attunements specified in the contract. the istisna contract is concluded upon completion of the completion of construction and disbursement of remaining sales price to the developer by the agent. in the case of the murabahah contract, the agent is responsible to appoint the developer of the housing project. the developer is responsible identify potential buyers to sell housing units upon completion. bank indonesia and bank btn syariah play a major role as the developer is required to follow their requirement while completing the sale of the units. proceed from the sale are shared between the agent and the developer. upon receipt of the sales proceeds, the agent transfers to the investor according to the agreed profit sharing ratio. v. islamic fintech – challenges and research agenda the financial sector has received the necessary boost with the introduction of fintech, which is a combination of financial technology and services offered by financial institutions. fintech firm, in general, is posing challenges to the conventional financial institutions by offering innovative services to a wide variety of consumers. recent fintech innovations have disrupted ordinary ways of banking and finance. islamic financial institutions (ifis) are also facing challenges from fintech start-ups. blockchain technology has introduced alternative currencies which are complicating the operations of traditional financial institutions. the islamic finance industry can benefit significantly by incorporating blockchain and other fintech based technologies with their product offering. however, such integration of fintech with islamic finance industry would require improved monitoring to maintain the complex relationship between agents and key stakeholders. absence of such monitoring would give rise to trust issues which is evident with all new technologies. fintech based hasan, hassan, & aliyu | fintech, blockchain and islamic finance: literature review and research agenda ijief: international journal of islamic economics and finance, 3(1), 75-94 | 88 solution providers are faced with the challenge of increased scrutiny from various governmental bodies. this is one of the major challenges and both fintech solution providers and regulator have to work on a common solution to allow the efficient application of such innovation in the islamic finance industry. another challenge affecting the integration of fintech with islamic finance is the lack of understanding among stakeholders which can be attributed to the abstract nature of fintech based technologies. underdevelopment of the ecosystem of several fintech infrastructures is limiting a comprehensive understanding of its capabilities and also affecting its market progression. in addition, fintech based solutions are affected by security and privacy issues. finally, the major challenge toward successful integration of fintech in islamic finance is the view of several shari’ah scholars that fintech innovation such as bitcoin and other cryptocurrencies are non-complying with shari’ah. therefore, the successful integration of fintech technologies in the islamic finance industry would require developing a set of standards that can ensure shari’ah compliance nature of the products offered. future research can focus on developing the areas to be covered while setting those standards and unveiling effective ways to monitor fintech transactions to enhance stakeholder trust. in addition, it is important to explore the possible application of fintech in islamic finance that can improve the competitiveness of islamic finance products as compared to products offered by the conventional financial industry. we should also acknowledge that the growth of islamic fintech based startups creates pressure on the market share in the global islamic economic industry. islamic fintech firms, with their niche offerings, are able to provide services which are appealing to untapped segments of muslim societies where ifis have yet to reach due to their operational and regulatory restrictions. islamic fintech firms have allowed access with a click of the button and islamic crowdfunding platforms are serving as a meeting place where investors can directly contact their debtors and monitor the progress of the project from the beginning. thus, islamic fintech firms have increased the need for transparency and accountability among ifis. however, islamic fintech firms are facing challenges with regards to reporting and shari’ah compliance. while several islamic fintech firms have managed to ensure satisfactory level of shari’ah compliance by adhering to globally accepted shari’ah standards prescribed by regulatory bodies such as accounting and auditing organization for islamic financial institutions (aaoifi) and islamic financial services board (ifsb), majority of the islamic fintech firms have yet to meet such standards. in addition, islamic fintech firms are not following any uniform reporting standards which often hasan, hassan, & aliyu | fintech, blockchain and islamic finance: literature review and research agenda ijief: international journal of islamic economics and finance, 3(1), 75-94 | 89 evaluation of their performance and efficiency difficult for shareholders. in addition, islamic fintech start-up firms might need to review their internal and external governance mechanisms to ensure the long-term sustainability of their operations. vi. conclusion islamic fintech has the potential to disrupt all aspects of the industry. it has the potential to mirror the growth of the global fintech ecosystem and improve the shari’ah compliant nature of business and consumer financing. the growth of islamic fintech is driven by government initiatives, startups and customers, creating an efficient value chain. government efforts can play a vital role in the development of islamic fintech ecosystem and recent initiative by organizations such as dubai international finance center (uae), malaysia digital economy cooperation (malaysia), bahrain fintech bay (bahrain) and financial services authority (indonesia) is ensuring a promising future for the industry. moreover, there is a demand for digital technologybased product offering among muslim consumers which is expected to rise in the coming future. in such a situation, islamic fintech has a lot of potentials to ensure shari’ah compliant products are available for the global market which can improve the competitiveness of the industry and its product offerings. growth of the islamic fintech, however, will require the development of appropriate shari’ah standards by relevant regulatory bodies. in addition, reporting and governance standards applicable to islamic fintech can improve the operational efficiency and transparency of islamic fintech firms. central banks of several jurisdictions, for example, the central bank of bahrain, bank indonesia and bank negara malaysia have taken steps to develop necessary standards to ensure effective monitoring of islamic fintech firms. we have made an attempt to provide necessary direction to the regulators and academicians by addressing major challenges in the development of islamic fintech from a global perspective. findings provided by this study is expected to shed new light in this relatively new field of research. hasan, hassan, & aliyu | fintech, blockchain and islamic finance: literature review and research agenda ijief: international journal of islamic economics and finance, 3(1), 75-94 | 90 references abojeib, m., & habib, f. 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(2017). fintech transformation: how it-enabled innovations shape the financial sector. in financecom hasan, hassan, & aliyu | fintech, blockchain and islamic finance: literature review and research agenda ijief: international journal of islamic economics and finance, 3(1), 75-94 | 93 2016 (pp. 75–88). springer, cham. hasan, hassan, & aliyu | fintech, blockchain and islamic finance: literature review and research agenda ijief: international journal of islamic economics and finance, 3(1), 75-94 | 94 this page is intentionally left blank ijief: international journal of islamic economics and finance vol. 2(1), pg 73-108, july 2019 fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia hassnian ali international center for research in islamic economics, icrie, pakistan, hassnian.icrie@mul.edu.pk rose abdullah, muhd zaki zaini universiti islam sultan sharif ali, brunei darussalam article history received: may 31, 2019 revised: june 20, 2019 accepted: july 8, 2019 abstract fintech is growing at an exponential rate which leads to the emergence of innovative business models. advanced technologies like blockchain, internet of things (iot’s), artificial intelligence (ai), and robotics have become mature enough to create disruption in banking and finance industry both conventional and islamic finance industry. brunei darussalam and malaysia, both, offer wide range of shari'a compliant services. the main purpose of this study is to investigate the potential impact of fintech on the islamic banking and finance industry in brunei and malaysia. accordingly, this research deals with the qualitative method to accomplish and fulfill the research objectives. content analysis and semi-structured interview approach were employed throughout the research. the results clearly show that fintech has great potential impact on both conventional and islamic finance industry. this potential impact is in both ways i.e. positive and negative. and, the response and reaction of islamic finance industry towards the emergence of fintech and its potential impact seems very slow as compared to their conventional counterparts. this study has indicated important points which include the necessity for the islamic financial institution to cope with the growth of fintech. keywords: fintech, potential impact, islamic banking and finance, brunei darussalam, malaysia jel classification: o14, o32, o33, o57, y10 @ ijief 2019 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.2116 web: http://journal.umy.ac.id/index.php/ijief/article/view/6364 citation: ali, h. abdullah, r. & zaini, m. z. (2019). fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia. international journal of islamic economics and finance (ijief), 1(2),73-108. doi: https://doi.org/10.18196/ijief.2116. mailto:hassnian.icrie@mul.edu.pk ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 74 introduction the world faces original problems and challenges. it is the first time; the whole society is on the verge or exceeding critical globally ecological limits. this situation leads to the frustration for researchers, economists, and technologist because it must create some 1.5 billion new livelihoods by 2050 against a backdrop of population growth and increasingly speedy technological changes. the history has witnessed three stages of the industrial revolution; the first industrial revolution used steam power and water to mechanize and increase production. the second revolution used electric power to create a bulk production. the third used advanced electronics and information technology to make the production automate. now, we are in fourth industrial revolution which is based on the third, the digital revolution that has been started and occurring since the middle of the last century. it is typified by a fusion of technologies that is blurring the lines between the economical, physical, biological, and digital spheres (world economic forum, 2016). in this present era, it is not easy to imagine a world without the internet or mobile devices. they have become core elements of our lifestyle and have brought a high degree of disruption to virtually every area of business. the financial services (fs) industry is no exception; the digital revolution is transforming the way customers access financial products and services. although the sector has experienced a degree of change in past years, but the constant penetration of technology-driven applications in nearly each and every segment of fs is something new. amidst of the digital revolution 4.0, a new industry called “fintech industry” emerged and exploded around the globe. fintech is becoming a big disruptor of existing banking and finance industry due to the provision of same but more innovative financial services as those provided in traditional banking and finance industry except with lower fee costs and with high margins. islamic banking and finance industry also subject to immense pressure especially due to the fee costs in the islamic banks is higher than conventional banks. fintech has circled the whole finance space. fintech is growing at an exponential rate which leads to the emergence of innovative business models. in 2017, global fintech financing hit a new record of $16.6 billion as compare to 2016 (it was $13.3 billion) (cb insights, 2018).during 2018, fintech venture capital backed fundingwas dominated by asia with $22.65 billion across 563 deals. us followed by asia hit $11.89 billion across659 deals. europe hit $3.53 billion across 363 deals (cb insights, 2019). ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 75 adoption of digitalization is on the high in islamic finance industry, with conspicuously gcc countries in which bahrain is trying to become a leader through a partnership of bahrain islamic bank with bahrain fintech bay, and the establishment of the first shariah-compliant digital bank. investment platforms for potential investors are also proportionally developed mostly by using blockchain, while venture capital and crowdfunding are put into place to gain the necessary funds. the islamic finance industry was estimated to be worth us$2.4 trillion in 2017 and forecast to grow by 7.7 percent cagr to reach us$3.8 trillion by 2023. fintech is very new industry and it becomes more nascent when it combines with islamic finance industry. the recent studies conducted on fintech (biancone, secinaro, & kamal, 2019; lacasse, lambert, & khan, 2017; laldin&furqani, 2019; todorof, 2018)with the combination of islamic finance do not cover the topic holistically and there is no study available especially based on primary data. these studies specifically elucidate one of segments of fintech such as crowdfunding, use of blockchain etc. this is justified due to newness of the fintech and its adoption in islamic finance industry is also at very initial stage. thus, there is enormous research gap existed in this field. researchers tried to explore the potential impact of this emerging industry on islamic finance industry in two countries i.e. brunei darussalam and malaysia. as, it is no doubt that brunei darussalam and malaysia have well organized and established islamic financial services industry. but the emergence and growth of the fintech and its potential impact on islamic financial industry cannot be overlooked and neglected. so, this study examines the different aspects of fintech and its potential impact on islamic banking and finance sector in brunei darussalam and malaysia. everyone is now expecting different results and has different assumptions about the impact of fintech on islamic banking and finance. a review of the present literature does not provide a clear-cut answer to this question. the work, thus, attempts to fill this gap in the literature on the potential impact of fintech on islamic banking and finance in brunei darussalam and malaysia by using scientific research methodology and investigation tools. literature review on fintech in islamic finance industry theory the interconnection between finance and technology has a long history. it is necessary to distinguish three major eras of fintech evolution. from around 1866 to 1987, a period which is named as fintech 1.0 during this period the financial services industry was interlinked with technology, but as an analog industry and use of telegraphy. by 1987 the financial services industry and ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 76 technology connection changed from analogy to digitalization. this period, which is characterized as fintech 2.0, continued until 2008. during fintech 2.0, fintech was dominated primarily by the regulated traditional financial services industry that used technology to provide financial products and services. however, since 2008 which has witnessed a big financial crisis leads to a new paradigm shift for a new fintech period which is called as fintech 3.0. during this era of post-crisis technology industry has also become advanced and new digital devices including smartphones, smart wearables, heath tech instruments, 3d printers, smart homes have been introduced. new start-ups and established technology companies have begun to deliver financial products and services directly to businesses and the general public. fintech 3.0 emerged as a reaction to the financial crisis in the west, but in asia and africa recent fintech advancements have been primarily prompted by the pursuit of economic development. this era in these two regions is named as fintech 3.5. thought the fintech is not a new concept; however, it is only since 2014 that the sector has attracted the great attention of regulators, industry participants and consumers alike. islamic finance industry with no more exception also tapped into fintech industry. with the combination of islamic finance and fintech, islamic fintech has emerged as islamic version of fintech. there are ninety-three islamic fintech companies in different jurisdictions predominantly leveraging peer-to-peer technology to disrupt personal and business finance and eliminate subsidiary service providers.the sixty-six islamic fintech companies are concerned and focusing on making business and consumer finance more easy, cheap and accessible. there are fourteen islamic fintech companies deploying blockchain technology in their solutions (dinarstandards, 2018). on the basis of this evolutionary analysis, it is possible to develop a comprehensive typology for the fintech industry. fintech today comprises five major areas: (1) finance and investment, (2) financial operations and risk management, (3) payments and infrastructure, (4) data security and monetization, and (5) customer interface. the payments industry today is in a state of constant change, with several economic, technological, and demographic factors at cutting edge across the length and breadth of the value chain. the industry is observing rapid development in innovations across the value chain, thus making it more splintered (capgemini, 2016). p2p lending is considered an alternative to banking lending through an online platform that facilitates the lending of funds from one peer to other peer or peers. the p2p business model is different from that of traditional banks. according to morgan stanley, it is expected that marketplace lending will attain $290 billion by 2020, averaging 51% growth per year. but in the more optimistic scenario, this sector is seen exceeding $490 billion by 2020 (coraggio, 2017).meanwhile, the crowdfunding industry is doubling or more, ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 77 every year, and is spread across several types of funding models including rewards, donation, equity, and debt/lending. the analysts forecast the global crowdfunding market to grow at a cagr of 26.87% during the period 20162020 (research and markets, 2016). insurtech is also one of the segments of fintech addressing existing insurance opportunities, potential and challenges. insurers are introducing lifestyle apps that give additional consumer value on a continuing and constant basis. the supporting technologies which are the core of fintech industry include blockchain, big data, robo advisory and artificial intelligence. the world economic forum (wef) has given the six important findings related to the implications of blockchain on the future financial services industry. this forum suggested that this technology has great potential to drive efficiency and simplicity by reshaping the infrastructure and process within financial industry. wef concluded that blockchain technology is not a panacea, but it is one of the new emerging technologies that will establish the financial infrastructure for a new generation (world economic forum, 2016). a research firm international data corp (idc) defines big data as “the intelligent economy produces a constant stream of data that is being monitored and analyzed. social interactions, mobile devices, facilities, equipment, r&d, simulations, and physical infrastructure all contribute to the flow. in aggregate, this is what is called big data”(international data corp. (idc), 2012). the volume of data is growing exponentially, and it is expected that by 2020 there will be more than 16 zettabytes (16 trillion gb) of useful data (turner, gantz, reinsel & minton, 2014). there are several ways for financial services industry to achieve business advantages by mining and analyzing data. these include enhanced detection of fraud, retail customer service, and improvement of operational efficiencies. big data also can be used to identify exposure in real time across a range of sophisticated financial instruments like derivatives. predictive analysis of both internal and external data results in good, proactive management of a wide range of problems from credit and operational risk (e.g. fraud and reputational risk) to customer loyalty and profitability. robo-advisors also quickly attained market traction, overseeing $19 billion by the end of 2014. according to two research firms, kpmg and cgi forecast the number will hitting to $2 trillion in assets by 2020 (patpatia& association and cgi, 2016).kpmg’s survey forecasts that 75% of survey’s respondents are interested in robo-advisor services (kpmg, 2016). artificial intelligence (ai) in this digital era has become a hot topic with regards to the advantages that it can bring to the financial services industry. ai can help banks in their anti-money laundering or employee misconduct detection efforts by replacing costly functions that are currently done manually by humans (arslanian, 2016). ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 78 previous studies researchers in the field of islamic finance have just started paying attention to the area of fintech. it is important and noteworthy to highlight and admit that an attempt to collect a body of literature on fintech related to islamic finance, will unable to get a single scholarly writing. there were plenty of studies available on islamic crowdfunding but those studies also missing the other segments, which are numerous, of this broad industry of fintech. see alonso (2015); khan (2015); lutfi & ismail (2016); marzban, asutay & boseli (2014); ng, mirakhor & ibrahim (2015); taha & macias (2014); torabi (2017); and wahjono & marina (2017). with the acceptance of that islamic finance researchers are at infancy stage regarding research on this particular area of fintech with the link of islamic banking and finance. there are some scholarly studies with regards to the practice of fintech within islamic financial institutions have started being published in second half of 2017. finocracy & mirakhor (2017)provide a view on how fintech can accelerate the adoption of risk sharing islamic finance and focused on blockchain technology and its potential in the enhancement of adoption of risk sharing finance. another study done by lacasse, lambert, & khan (2017)focused on blockchain technology and they provide the view on the possibility of using blockchain technology for the assurance of shariah compliance in islamic finance industry. these both studies give a general overview of fintech and then concentrate on blockchain technology and its potential in islamic finance industry. malaysian international islamic financial center (2016) published a report on financial technology in islamic finance and explored that with the progress of islamic banking and finance, technology has become a key enabler for future financial services and business. mifc report also highlighted one of the innovative products of islamic finance which is currently launched in malaysia i.e. an investment account platform (iap). this platform was developed by the owned unit of raeed, iap integrated sdn. bhd. which comprised a consortium of various islamic financial institutions. through this platform will provide the investors with direct access to the new investment opportunities and businesses as well as islamic banks with many innovative sources of funding. two piece of studies written by lajis (2017), she opined in her studies that fintech can be proved as a game changer for islamic finance industry especially in the promotion of risk sharing islamic finance. because of big hype of bitcoin and cryptocurrencies in 2017 we have found some studies on cryptocurrencies especially bitcoin and their shariah appraisal (adam, n.d.; bergstra, 2015; evans, 2015; lim & masih, 2017; nordin, hassan, & nor, 2017; nurhisam, 2017; tayel & sganga, 2015; zubaidi ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 79 & abdullah, 2017). these studies discuss the topic with the lens of shariah legitimacy of bitcoin and cryptocurrencies. and still there is great confliction have been found among scholars regarding this issue. apart from these scholarly research writing related to different segments (crowdfunding, blockchain and bitcoin) of fintech with the combination of islamic commercial law and islamic finance, we have seen some general articles on different blog sites, social sites (linkedin), magazines and newspapers from different authors like (abdullah, 2017; hasan, 2017; mohamed, 2017; munshi, 2017). these writers discuss different topics, like smart contracts in islamic finance, fintech opportunity or threat for islamic finance, fintech for islamic finance, fintech is a game changer for islamic finance etc. research methodology data the primary data collection perpetrated deploying interviews. the interviews of incumbents of islamic banks and takāful companies are conducted for this purpose. then the collected data is summarized and analyzed through various stages including the organization of data, familiarization, coding, and developing themes, etc. the majority of the selected persons from both countries are of manager rank in their organizations. they are linked with innovation, technology, research and development departments in their respective organizations. this lead to the validity and reliability of their opinions on any topic or issue. by doing interviews, it is possible to get extensive information and to deepen the understanding of the subject of the study. the interview questions in this research consist of semi-structured questions. the questionnaire for interview is divided into three parts. first part covers nine questions which are constructed to accomplish the second research objective and to answer the second research question. the second part of the questionnaire for interview encompasses three questions which are constructed to fulfil the third research objective and to answer the third research objective. the third part is about the demographic details of the respondents. there were total nine interviews conducted in both countries, four from brunei and five from malaysia. to cope with the criteria of research sample and to attain the targeted number of malaysian islamic banks, researcher selected annual reports of four malaysian islamic banks. so, in this research study researcher took six malaysian islamic banks and three takaful companies as a sample. these reports are used as content analysis. the annual reports of selected islamic ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 80 banks of malaysia were downloaded from their organizations’ sites. these reports are used for the purpose of content analysis through nvivo 11. after making analysis, findings are explored to show what has been observed and concluded through the whole process of investigation and finally, recommendations are provided. method and model this study is based on the qualitative research method viz a viz exploratory research design. the qualitative research method also involves interviews and texture or content analysis that permits the researcher to use these tools in accomplishing the research objectives. researcher applied this method and used these tools to explore the potential impact of fintech development on islamic banking in brunei darussalam and malaysia and secondly to sort out the strategies for islamic banking industry regarding fintech in brunei darussalam and malaysia.this exploratory research design with the interviews is used to identify and to know the opinion and perception of experts and personnel of the industry on a current issue. in this research study the researcher conducted interviews and ask the industry people about the potential impact of fintech on islamic banking in brunei darussalam and malaysia and also about the strategy that should be adopted by islamic banking regarding fintech in both countries. the nvivo 11, computer-assisted qualitative data analysis software (caqdas) is used in this research to analyze and interpret the data. to make comprehensive analysis of the data, the interviews are coded by nvivo. content analysis is used with both qualitative and quantitative data in an inductive and deductive ways. but, the common use of content analysis is with qualitative data (elo & kyngäs, 2008).there are three approaches in content analysis used to explain the meaning from the selected text data. these three are conventional, directed and summative approaches.researcher adopted summative approach in this research. as this approach involves counting of key term or words from the selected documents followed by the explanation. researcher applied this approach to count the word fintech in the selected documents and then compare the coverage of that term among selected reports. for explanation of the content related to fintech in the selected reports, researcher also extracted all the content related to term fintech from the reports, nvivo 11 is used to do summative content analysis. firstly, researcher edited the content of the interviews conducted from the targeted interviewees. the editing of the interviews in a special format is essential before starting to analyze them in nvivo. after editing the ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 81 interviews, the researcher uploaded microsoft office word files of interviews into the nvivo 11 software. these files considered as sources in nvivo 11. into the nvivo software, researcher form the main nodes and then child nodes of each question. this provides the most relevant statements of interviewees regarding questions. researcher also used the suggestions of (maxwell, 2012)in constructing main and child nodes and in doing coding. the main node shows the theme of the question and child nodes show the responses of the interviewees regarding the question. then, finally, a project map for each question is drawn to show the responses of all the interviewees regarding each question. the project summary report that covers the name of nodes and child nodes with the number of sources and also the references related to the nodes, time of creation and name of the creator. a sources summary report also produced by the researcher through nvivo 11 which shows the total number of nodes including the main nodes also called anchor nodes and child nodes, and the number of project maps which are created by the researcher (see appendix a & b). in doing content analysis of the selected reports, nvivo 11 is also used. the reports in pdf form were uploaded into the software and the search query of the word fintech was processed. the table of coverage of the word fintech is also constructed. then, the most relevant paragraphs which discuss and cover the term fintech were separated and extracted from all the reports and a figure was exported as an evidence. the model which is developed as given in the following figure is authors’ own designed model as this model is generally used in qualitative studies. it provides flexibility to the research while exploring a new and emerging phenomenon or industry. ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 82 figure 1. research methodology results and discussions results 1. demographic details of interviewees following table 1.0 shows the detail of demographics of all the interviewees from both countries brunei darussalam and malaysia. b1, b2, b3 and b4 represent interviewees from brunei darussalam (see appendix a for results). m1, m2, m3, m4, and m5 represent interviewees from malaysia (see appendix b for results). research methodology project maps type: qualitative research content analysis interviews 4 bruneian respondents semi structured interviews exporting of word files design: exploratory 5 malaysian respondents summative type of content analysis nvivo 11 4 banks’ annual reports nvivo 1111 interview questions interviews editing of interviews coding main nodes child nodes interview questions interviewees’ responses output: research output: results frequency of words/coverage percentage text preview for fintech processing word query for fintech exporting of pdf files content analysis ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 83 table 1. demographic details of interviewees no. gender age nationality education post industry b1 male 36 bruneian bachelor manager banking b2 male 47 bruneian mba manager banking b3 male 45 bruneian higher national diploma manager takaful b4 male 38 bruneian bachelor degree deputy general manager takaful/ insurance m1 female 33 malaysian master manager banking m2 male 45 malaysian master hod innovation banking m3 male 34 malaysian master manager takaful m4 male 35 malaysian master manager takaful m5 male 37 malaysian bachelor manager insurance/takaful the above table 1 shows the demographic details of all the interviewees of both countries. all of the bruneian and malaysian respondents were male except one malaysian female respondent. this table also highlights that the respondents are having good experience in financial industries because most of the respondents having age between 35 to 45years. this also shows that all of the respondents are well educated as majority has master level of education. one of important things is that majority of the respondents are of manager rank in their corresponding organizations. this means their opinion on an issue has great value in making some conclusion about an issue. this set of respondents is very fit for qualitative research within the exploratory research design. the opinion and perception of the experts helps the research to get the answer of the research questions and also to attain research objectives. 2. nvivo 11 results on interviews’ data and its analysis potential impact of fintech on islamic banking in brunei darussalam and malaysia. this section encompasses eight interview questions which deal and answer the first research question. a. definition of fintech here is the attempt to investigate the definitions and understanding of all the interviewees through the lens of available definitions of fintech present in the literature. the results show that the responses of 4 respondents from brunei darussalam with regards to the definition of fintech. according to one respondent b1 and the two respondents b3 and b4 explained that fintech is ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 84 the combination of finance and technology and b1 also added that fintech is just a tool not any product or a model. and the fourth respondent b2 said fintech is all about automation and it can be defined as “automated interactions with customers”. the findings indicate that the responses of 5 respondents from malaysia regarding definition of fintech. two respondents m1 and m2 mentioned that fintech is the emerging financial services sector that deploys the technology. on the other side the two respondents m3 and m4 thought that fintech is the redefining of banking and takaful industry. they also added that fintech is the use of technology that gives customers access to banking. and the fifth respondent m5 was unable to explain this term. the definitions of fintech provided by the respondents from brunei do not cover the holistic or whole concept of fintech. they just define the epistemological meaning like fintech is the combination of finance and technology and it is merely a tool. on the other hand, definitions provided by the malaysian respondents do cover the main concept of fintech like as two respondents from malaysia m1 and m2 mentioned that fintech is the emerging financial services sector that deploys the technology. this definition said fintech is an emerging financial sector, this point is mentioned in the definition of fintech provided by (schueffel, 2016).one of the malaysian respondent said fintech is the redefining of banking takaful industry. this main point is also highlighted in a number of studies (dhar & stein, 2017;broby & karkkainen, 2016). fintech refers to “innovative financial services or products delivered via technology and with advancements in technology (such as mobile and internet) coupled with their global widespread adoption, consumers expectations are changing”(kuo chuen, teo, & others, 2015).one of the common point mentioned in the definitions of both countries is that fintech provides access of banking to the customer through automated channels. finally, all the points can be summarized in one definition that “fintech is a new and emerging financial services industry which is harnessing advanced technology to provide innovative and traditional financial services and products to the customers through multi and automated channels”. b. potential disruption areas of islamic banking and finance industry the results exhibitthat the responses of respondents regarding the disruption areas of islamic finance industry which have been precipitated by the development of fintech. all four respondents answered very short as two respondents b2 and b3 gave similar answer. they said all segments of islamic finance industry may be disrupted. but another respondent b1 claimed that there is not any disruption due to fintech for any segment of ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 85 islamic finance industry in brunei darussalam. and the fourth respondent b4 opined that islamic finance industry is very slow to respond fintech. the results show that two respondents, m4 and m5 opined that all of the islamic banks and takaful companies still exploring and observing the emergence fintech. remaining three respondents, m1, m2 and m3 think that due to emergence of fintech there is the need to re-assess traditional way of conducting businesses and re-engineering and provision of innovative offerings to the customers. it is cleared from these answers that all the interviewees are unable to give the name of areas of islamic finance industry, like payments, takaful, consumer banking etc. which have potential impact by the fintech. on the other hand, these results show that some of the respondents think that the whole islamic finance industry may disrupt due to fintech. the same question with different words is also covered in different surveys conducted and published by numerous forums and research firms including pwc, capgemini, mckinsey & co. and cfa institute etc. in a survey conducted by (pwc, 2016b)from only malaysian financial institutions and fintech companies, it has been shown that both malaysian traditional financial institutions and fintech companies thought alike when they were asked about three top areas of financial services that are prime for disruption. in a survey conducted and published by (cfa institute, 2016), the question was asked that what are the top areas of financial services can be disrupted due to automated financial advice tools (robo advisors). 54% of the survey’s respondents opined asset management followed by banking (16%), securities (12%), insurance (8%), financial advisors and wealth management (7%) and 3% chosen none of the above option. c. fintechs will take customers from islamic financial institution the results highlight that the opinions of respondents about a statement that fintech will take customers from islamic financial institutions due to providing better customers’ experience. three respondents, b2, b3 and b4 opined that fintech will take customers from ifi’s and b2 and b4 also said that this will happen if ifi’s keep away from embracing fintech or innovative models and technological adaptation. but, b1 said there is no chance for fintech to take customers from ifi’s. the findings show that 4 out of 5 respondents are agreed with the statement that fintech will take customers from islamic financial institutions. m4 also mentioned that this can be happened if the ifi’s will not fulfil the needs of the millennial generation. m3 also added that fintech is in ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 86 line with the digital shift. only one respondent m1 disagreed with the statement but she also clearly opined that ifi’s should embrace technological transformation on leveraging. from these results it is clear that majority of the respondents are agreed on the statement that “fintech innovations offer end customers a noticeably better value proposition, in terms of ease of use, cost, the speed of service and integration with social media” which lead to their agreement with a hypothetical view that fintech will take customers from the ifi’s. respondents also explain and give the reason of this agreement that fintech is in line with the digital shift. and they further added that ifis will lose the customers if they will not fulfil the needs and will not embrace the fintech. these results are strong supported by large number of studies and survey reports. d. potential of blockchain and smart contracts in islamic finance industry the findingsexhibit that the opinions about deploying technologies like blockchain, smart contracts and their potential in islamic finance industry. 3 out of 4 respondents from brunei darussalam opined that these technologies have potential mean these can be used in islamic finance industry to bring efficiency in operations and products as well. only one respondent which is b1, he said “i don’t believe on any kind of blockchain”. majority of respondents highlighted that there is the challenge of shariah compliance that should be tackled when deploying these technologies. the results exhibit that m4 and m5 elucidated that in malaysia they have not seen any development or adoption of blockchain. m4 also added that smart contracts have big potential in islamic banking and finance. the respondents from m1, m2 and m3 opined that there is more control (law and preventive solutions) and in-depth studies needed to be conducted to understand the potential opportunities that offer blockchain. m3 also added that blockchain is good in recording transactions hence facilitating more secure online transactions. these results show that majority of the respondents opined that the blockchain and smart contracts have potential in islamic finance industry. but the respondents also mention that there is still need for understanding of this technology and the challenge of shariah compliance must be addressed. these results are also supported and similar to different reports and studies (veronika, 2016)mohamed, 2016).according to accenture report, blockchain is one of the most talked about topic in the present financial services industry. 90% banks’ executives are interested in blockchain and currently their banks are exploring the use of blockchain in the payments’ industry. moreover, ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 87 this report also highlights the benefits of using this technology in payment industry these are lower frictionless cost, shorter settlement time, reduce errors, new revenue opportunity, and lower administrative cost(accenture, 2016a).in another report published by (pwc, 2016a) explains that a majority of respondents (56%) recognize the importance of blockchain and smart contracts, 57% say they are not sure or unlikely to respond to this trend. as the one respondent b1 from brunei said he does not believe on any kind of blockchain. this may be explained by the very low level of familiarity with this innovative technology as 83% of respondents are at best “moderately” familiar with it and only very few consider themselves to be experts (pwc, 2016a).the point about legal and compliance is also discussed in numerous studies. (pwc, 2017,iosco, 2017) elucidate that for smart contracts to take root, legal finality must be clear and the smart contract must be enforceable in law. e. potential of artificial intelligence, big data, iot and robo advisors in islamic finance industry the findingsshow that all the respondents think that the technologies, like artificial intelligence (ai), big data, iot, and robo advisors have big potential in islamic finance industry. b3 and b4 also added that there are some challenges and issues as well as risk of data sharing and privacy in usage of big data. the results reveal that m2, m3 and m4 clearly opined that ‘yes’ the adoption of cloud computing islamic finance industry can reduce their it cost. m1 and m5 neither said ‘yes’ nor ‘no’. and m1, m4 and m5 also added that data security, cyber-attacks and legal risks are also involved. these results clarify that majority of the respondents from both countries especially, all the respondents from brunei opined that they are all think that the technologies, like artificial intelligence ai, big data, iot, and robo advisors have big potential in islamic finance industry. and some of the respondents also highlight that before adoption of these technologies in the industry data security, cyber-attacks and legal risk must be discussed. the same results have been found when asked and discussed this point by conventional counterparts in different reports and studies. white house’ report shows that by using big data educational opportunities can be increased. data and algorithms can potentially help law enforcement become more effective, transparent, and efficient(the white house, 2016).grouping ai, machine learning, big data and blockchain together as a “cognitive business and technology model”, rometty said “there is a moment of opportunity if you want to catch it”, with these technologies offering and providing the potential to reduce costs and improve opportunity spotting and compliance. the winners, according to her, will be ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 88 those businesses that are able to deploy these technologies effectively. “you will need some new technology to deal with all of the data that is out there in order to gain insights, comply and operate efficiently” (accenture, 2016c). f. cloud computing adoption the results show that all the respondents unanimously opined that cloud computing has potential and its adoption is a good option for ifi’s. b1 and b4 also added that the decision of this adoption depends upon the institution’s policy and resources as well. three respondents except b4, highlighted that there are some risks and challenges involve in the adoption of cloud computing for ifi’s. like b1 said that legacy system of banks also acts as a problem and challenge as there are multi tiering legacy systems functioned in banks. so, it is not easy to embrace innovation and especially technological innovation like cloud computing. according to b3 there is the scalability. it means there is the limit of data which we can control and store in the form of clouds and also with the time limit. so, what will happen if the company finished the agreement with the bank. finally, b2 opined that there is the risk of cyber security which should be managed before adoption. the findingsshow that m2, m3 and m4 clearly opined that yes, the adoption of cloud computing islamic finance industry can reduce their it cost. m4 and m5 neither said yes nor no. and m1, m4 and m5 also added that data security, cyber-attacks and legal risks are also involved. according to a report provided by a research firm “peak 10” the financial sector does show greater hesitation to using the cloud than other industries, but some specific aspects of financial it environments have already been migrated, while others are in the works. for example, software as a service (saas) usage is on the rise, showing that the level of comfort and frequency of cloud adoption are increasing in the financial sector for both insurance companies and banks. 48% of banks are using saas for administrative functions, 24% of banks are using saas for mobility, and while 15% of insurance companies are using in different operations. this report also highlighted some risks in the adoption of cloud computing as 58% of respondents reported loss of control over data as the top cloud risk and fear (financial services cloud adoption, 2017). g. promotion of financial inclusion through fintech the results enumerate the opinions of respondents about the promotion of financial inclusion by using fintech through ifi’s. all the respondents agreed with the statement that ifi's can promote financial inclusion by providing financial services to underbanked or unbanked people via fintech. moreover, b2 and b4 also added that mobile technology can help a lot for financial inclusion. ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 89 the results depict that all the malaysian respondents agreed with the statement that islamic financial institutions (ifi's) can promote financial inclusion by providing financial services to underbanked or unbanked people via fintech. m3 added that fintech has allowed this by providing innovative solutions as a new touchpoint for customers. m2 thinks that fintech provide solutions but it would not solve underlying cause of this problem. moreover, the respondents focused on mobile technology which they opined that it can help a lot to promote financial inclusion. according to mobile payments and fraud survey, 60% of respondents from all types of organizations as well as merchants considered a mobile strategy to be “very important” to promote financial inclusion (kount, 2016).there are numerous studies which support these results. islamic financial services board, ifsb, (2017)in his latest report on islamic finance industry make a valuable addition and discussed fintech and shariah compatibility and application to islamic finance industry, regulatory issues and financial inclusion. report also claims that islamic fintech can grow and develop rapidly in the jurisdictions where islamic banking has attained systematic and reasonable importance. h. fintech segments which can grow in brunei darussalam and malaysia the results show that three respondents b2, b3 and b4 opined that the fintechs that will provide banking services can grow in brunei. b2 add payment sector as well. but, b1 didn’t give any clear answer of this question. b1 just mentioned that his organization is providing all the banking services to their customers and working very well. the findings show that m1, m2 and m4 opined that payments is the sector in which fintech can grow repidly in malaysia. crowdfunding is also highlighted by m1 and m4. m3 and m5 claim that all segments have potential and can grow in malaysia. the results show that the respondents mentioned the banking sector, payment sector and crowdfunding which can grow in both countries. moreover, some respondents think that in all segments fintech has potential to grow in malaysia. the research firm finextra with collaboration of dovetail completed a survey by more than 100 senior payments practitioners in 2017. the respondents’ organisations included payment processors, banks, corporate treasuries, merchant services, and industry associations.one of the conclusions of this survey is “banks are convinced that payments will be fundamental to their future businesses, and confirm that payments transformation is critical to their digital programmes, but they are less confident in the clarity of their digital and payments transformation strategies” (finextra & dovetail, 2017).it is also witnessed that global non-cash transaction volumes grew ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 90 11.2% during 2014–2015 to reach 433.1 billion (capgemini worldwide & bnp paribas, 2017). i. fintech for islamic finance industry an opportunity, and threat or disruptor the resultsreveal that all the respondents from both brunei darussalam and malaysia unanimously think that fintech is an opportunity for ifi’s. and b4 also opined that fintech is also threat and disruptor for ifi’s. m1 also added that awareness about fintech is needed to get benefit from this opportunity. m3, m4, and m5 also mentioned that fintech opens up many possibilities and reaches out to more consumers and cross border market. these results clarify that all the respondents from brunei and malaysia are unanimously agreed on the point that fintech is an opportunity for islamic finance industry. these results are also in line with the results of previous surveys and studies. the report provided by (accenture, 2016c)shows that banks are now recognizing that fintech companies typically pose more of an opportunity than a threat. the same results are also found in a survey conducted by (finextra & dovetail, 2017). j. fintech collaboration or competition with islamic finance industry the resultsshow that three respondents from brunei b1, b2 and b4 opined that collaboration between fintech and ifi’s is the right option as compare to the competition. b3 said it depends upon the situation means what the fintech has new thing mean any innovative business model etc. then we will decide for competition or collaboration. the findings unveil that majority of the respondents from malaysia m1, m4 and m5 opined that ifi’s should collaborate with fintech. m2 claims that banks are the biggest fintechs (it means banks spend high percentage of revenue on it), and fintech does not create disruption it is only on-going evolution of financial services. m3 thinks that fintech will definitely complement the islamic financial services in malaysia. from these results it is clear that majority of the respondents opined that collaboration with fintech is preferable and suitable option for ifi’s. according to a report provided by capgemini worldwide, a research and consultancy firm, as fintechs are showing progress, traditional financial institutions have become more open to regard fintechs as partners, rather than competitors. more than three-fourths (76.7%) of executives agree fintechs provide partnership opportunities. this partnership is good for both. because traditional institutions pose advantages over non-traditional firms and customers favor and choose traditional firms due to trust, quality of service, security, and ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 91 transparency, and they favor non-traditional firms in the areas of timely efficient service and better value for money (capgemini worldwide, 2017). according to another report provided by pwc (2016c), 42% of banks are already engaging in joint partnerships with fintech companies, this is more than any other financial sector. the report also claims that banks are also the most active of all sectors in holding venture funds to finance fintech companies (19%).some of the respondents mentioned that the decision of collaboration and competition is depends upon the organization and what fintech offers in that region. this trend of interoperability, coordination and collaboration is prevailing in the world (duflos, 2015).p2p lenders jimubox, renrendai and minshengyidai and china minsheng bank are helping each other to manage and safeguard funds of investors (ernst & young ey, 2016).the dianrong.com and the regional bank of suzhou set up collaboration agreement in 2014 in targeting small enterprises (finextra, 2014).there are numerous examples of this type can be found around the globe. k. strategy of islamic finance industry regarding fintech fintech having aim to attract customers with services and products that are easy to use normally named as user friendly, speedy, efficient, automated and transparent(mackenzie, 2015). the results show that according to b2 and b4, ifis should embrace fintech and this is the right time for the adoption of fintech as it is era of digitalization. but, b3 and b1 have different opinion that they are still at observing the situation and it’s highly depends upon the organisation which strategy is good for them. among malaysian respondents, m1 thinks that ifi’s should redefine the future in terms of rethinking, redesigning the products and services to meet the needs of millennial generation. m2 opined that ifi’s should find solutions through fintech. m3 claims that ifi’s can get benefit of fintech but they have to follow the shariah principles. m4 and m5 mentioned that ifi’s have to follow regulations of bank negara malaysia if they want to embrace fintech. the results show the majority of the respondents opined that ifi’s should embrace fintech and find new solutions through fintech. some of the respondents explained ifi’s should embrace fintech, but they have to follow the shariah principles, and malaysian respondents added that they have to also follow the regulations of bank negara malaysia. in a survey conducted by (capgemini worldwide, 2017)it is highlighted that traditional firms are having and implementing a wide range of strategies in response to fintech. survey results shows that almost as many are developing their own in-house capabilities (59.2%) as are seeking partnerships with fintech (60.0%). ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 92 secondly, investment in a fintech is the next-most popular activity (38.0%), though most institutions are stopping short of actually acquiring firms. 3. results of content analysis of annual reports of malaysian islamic banks and its analysis to cope with the criteria of research sample and to compensate this research weakness, summative type of content analysis was adopted. for this, annual reports of 4 islamic banks were selected among these 2 are fullfledged islamic banks (m7, m8), and other 2 are islamic subsidiaries of commercial banks (m6, m9). annual reports of other commercial banks which have islamic subsidiary but did not publish separate annual reports of their islamic subsidiaries were excluded. the results show that the coverage about fintech in these reports is very low it’s about 0.01%. only in one report which is of m7, the word fintech is mentioned thirteen times but in remaining three reports it is only mentioned two times. this shows that m7 is more active in response to fintech as compared to other islamic banks. this is relevant and there are some evidences also support these results. recently, m7 signed an agreement with a consulting firm “cognizant” to make the foundation for its digital banking platform roll-out across its whole network (peyton, 2017). table 2. frequency and coverage of word fintech name references/ frequency coverage m6 2 0.01% m7 13 0.01% m8 2 0.01% m9 2 0.01% ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 93 figure 4. text search query for word fintech this text research query figure of these four reports shows that three out of these four banks (m9 is excluded) are the part of a platform which is investment account platform. this is totally a digital platform which was established to expedite channeling of funds from investors to finance viable ventures. this is the first islamic banks intermediated financial technology (“fintech”) platform was launched on 16 february 2016 (mifc, 2016). the nvivo output of this content analysis also clears that one common thing is mentioned in all these four reports that the representatives of these four islamic banks attended a fintech dialogue organized by bank negara malaysia on 29 august 2016. the topic of that dialogue was: fintech’s impact on financial institutions. only m7’ annual report also shed light about different aspects of fintech and it also highlights the views and strategy of this organization towards fintech. the report shows that the authorities of this organization consider the fintech an opportunity for islamic finance industry and moreover, they also explained that “fintechs that can help us improve our customer experience by being more efficient and differentiating ourselves from our competitors”. they also prefer the option of partnership and collaboration with fintech to keep the organization competitive in the market. the report also claims that by harnessing fintech, organization have made a lot of saving. they used ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 94 digital channels and mobile technology to offer services to millennials. due to this they opened only one digital only banking branch instead of six branches as it was targeted earlier. conclusion and recommendations conclusions clearly, fintech has taken its prominent role in the finance sector, as fintech has grown to be an important player in the sector and the added-value it provides cannot be denied hence islamic financial institution in particular must response to this accordingly. the aim of this study is to explore the potential impact of fintech on islamic finance industry in brunei darussalam and malaysia. the results clearly show that fintech have great potential impact on both conventional and islamic finance industry. this potential impact is in both ways i.e. positive and negative. positive in the way that ifis can harness and utilize the opportunities offers by digital shift and fintech. ifis can introduce new business models, can bring more transparency and efficiency in the products and can become able to provide the more customer friendly islamic financial products and services. on the flip side, negative in a sense that if ifis keep avoiding from embracing this phenomenon and completely neglecting this without adopting any appropriate strategy. in result, ifis can lose their customers, and market share as well. and, the response and reaction of islamic finance industry towards the emergence of fintech and its potential impact seems very slow as compared to their conventional counterparts. this study has indicated important points which include the necessity for the islamic financial institution to cope with the growth of fintech. fintech has become so dynamic yet prominent but yet islamic financial institution still shows some passivity in responding to the growth of fintech despite realizing the potential impact fintech may have upon the islamic financial industry.in order to properly reap the benefits of fintech, synergy between islamic financial institutions and fintech companies must be realized, both have its strength and weakness but through its collaboration, the weakness of each institution can be filled by the strength of others. it is timely for islamic financial institutions to be very proactive with the development of fintech, the potential impact and disruption cannot be ignored. recommendations there are following some recommendations for islamic financial institutionsifi’s, regulators and also for academia especially for researcher in the area of islamic finance. ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 95 islamic finance industry in brunei and malaysia have to focus on the customer centricity and have to understand the behavior and needs of millennial generation of this digital era. they have to admit that the approach in which they are dealing the customers from last thirty to forty years, now, it has to be changed. this is also applicable in general islamic finance industry as well. ifis should start simplifying islamic financial products and services to facilitate and assist comparisons between the market players and decrease client confusion. in the same time, it is important and crucial that ifis have to design products with the user experience in mind instead of the normal “processes as design guidelines” approach. ifis should start some test use cases of adopting technologies like blockchain, big data, artificial intelligence and robo advisors etc. globally traditional financial firms are moving towards the adoption of these technologies with each passing year. so, this is indispensable for ifi’s globally to show agility in this changing environment. keep in mind the risks and challenges which are the part of this digital era, like cyber security, data sharing, and scalability etc. ifis should think holistically and have to tackle these challenges and manage these risks wisely and efficiently. ifis need the right people in place to drive digital transformation. the people who are able to bring the it and business functions together will be helpful for ifis to keep them competitive in the presence of fintech. regtech has also become the part and parcel of fintech. regulators have to issue separate guidelines for islamic finance industry and islamic fintech sector. because normally they issued general guidelines for whole financial industry. this will remove the confusions and conflicts among scholars especially islamic commercial law experts and islamic finance industry as well. there should be joint sitting and discussion of regulators, academia, islamic finance industry and fintech. so, they can make better and join plan to provide better, affordable islamic financial products and services to the customers. and, this is necessary to solve the problems and cater the needs of customers. ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 96 references abdullah, o. 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(2017). developing a digital currency from an islamic perspective: case of blockchain technology. international business research, 10(11), 79. http://weforum.org/reports/the-future-of-financial-infrastructure-an-ambitious-look-at-how-blockchain-can-reshape-financial-services http://weforum.org/reports/the-future-of-financial-infrastructure-an-ambitious-look-at-how-blockchain-can-reshape-financial-services http://weforum.org/reports/the-future-of-financial-infrastructure-an-ambitious-look-at-how-blockchain-can-reshape-financial-services ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 101 appendix a nvivo 11 project summary report bruneian respondents created on: 13-july-2018 4:45 pm created by: ali nodes sources references created on created by q1 definition of fintech 4 5 30-jan-18 4:30 pm ali automated interactions with customers 1 1 30-jan-18 4:28 pm ali combination of finance and technology 2 2 30-jan-18 4:29 pm ali fintech is a tool 1 1 30-jan-18 4:26 pm ali q2 potential disruption areas of islamic banking and finance industry due to fintech 4 4 30-jan-18 9:41 pm ali all segments may disrupt 2 2 30-jan-18 8:22 pm ali islamic finance industry is very slow to respond fintech 1 1 30-jan-18 8:44 pm ali not disruption for any segment 1 1 30-jan-18 8:06 pm ali q3 fintech will take customers from islamic ifi's 4 5 30-jan-18 9:42 pm ali fintech will take customers from ifi's 3 4 30-jan-18 8:27 pm ali if ifi's keep away from embracing fintech or innovative business models and technological adaptation 2 2 30-jan-18 8:45 pm ali no, fintech will not take customers from ifi's 1 1 30-jan-18 8:04 pm ali q4 potential of blockchain and smart contracts in islamic finance industry 4 5 30-jan-18 4:37 pm ali no, i don't believe 1 1 30-jan-18 8:03 pm ali yes, these technologies have big potential 3 4 30-jan-18 8:45 pm ali challenge of shariah compliance 1 1 30-jan-18 8:35 pm ali q5 potential of artificial intelligence, big data, iot and robo advisors in islamic finance industry 4 6 30-jan-18 4:41 pm ali no, i don't believe 2 2 30-jan-18 4:43 pm ali yes, these technologies have big potential 2 2 30-jan-18 8:48 pm ali challenge of shariah compliance 4 4 30-jan-18 8:47 pm ali ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 102 risk of data sharing and privacy theft in the usage of big data 3 3 30-jan-18 4:51 pm ali q6 cloud computing adoption 4 8 30-jan-18 5:18 pm ali depends upon the organization’s policy and resources 2 2 30-jan-18 8:38 pm ali risk and challenges 3 3 30-jan-18 8:48 pm ali cyber security 1 1 30-jan-18 4:54 pm ali legacy system of banks 1 1 30-jan-18 8:15 pm ali scalability 1 1 30-jan-18 9:27 pm ali yes, cloud computing adoption is good option 3 3 30-jan-18 4:57 pm ali q7 financial inclusion through fintech 4 5 30-jan-18 9:28 pm ali mobile technology can help a lot for financial inclusion 1 1 30-jan-18 5:10 pm ali yes, ifi's can promote financial inclusion through fintech 4 4 30-jan-18 8:40 pm ali q8 fintech segments which can grow in brunei 4 5 30-jan-18 5:00 pm ali banking services providers 2 2 30-jan-18 8:50 pm ali not clear 1 1 30-jan-18 8:13 pm ali payments 2 2 30-jan-18 8:39 pm ali q9 fintech for islamic finance industry is opportunity, threat or disruptor 4 6 30-jan-18 8:48 pm ali all three 2 2 30-jan-18 8:47 pm ali opportunity 3 4 30-jan-18 4:45 pm ali we can bring speed and efficiency in our operations through fintech 2 2 30-jan-18 8:49 pm ali q 10 ifi's should collaborate or compete with fintech 4 4 30-jan-18 5:01 pm ali collaboration is the right option 3 3 30-jan-18 9:30 pm ali it depends upon the situation 1 1 30-jan-18 8:41 pm ali q11 strategy should be adopted by ifi's for fintech 4 5 30-jan-18 10:28 pm ali ifi's should embrace fintech 2 2 30-jan-18 9:30 pm ali we are still working on it and it depends upon the organization 3 3 30-jan-18 8:43 pm ali ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 103 nvivo 11 source summary report (bruneian respondents) created on: 14july2018 12:20 pm created by: ali items numbers created by no of source 5 ali no of total nodes 45 ali no of anchor nodes 11 ali no of child nodes 34 ali no of memos 0 ali no of cases 0 ali no of project maps 11 ali ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 104 appendix b nvivo 11 project summary report malaysian respondents created on: 1-july-18 4:03 am created by: ali node item sources references created on created by q1 definition of fintech 5 4 01-feb-18 7:30 pm ali emerging financial services sector with the deployment of technology 2 2 01-jan-18 7:31 pm ali usage of technology that gives customers access to banking 1 1 01-feb-18 7:29 pm ali redefining of banking and takaful 1 1 01-feb-18 7:27 pm ali q2 potential disruption areas of islamic banking and finance industry due to fintech 5 5 01-feb-18 8:29 pm ali islamic banks and takaful companies are still exploring fintech 2 2 01-feb-18 8:31 pm ali due to fintech there is need to re-assess traditional way of conducting business and re-engineering of innovative offers for customers 3 3 01-feb-18 8:35 pm ali q3 fintech will take customers from islamic ifi's 5 9 01-feb-18 8:26 pm ali yes, fintech will take customers from ifi’s 4 7 01-feb-18 8:40 pm ali fintech organizations have yet to fully appreciate the impact of risk (leading to losses). security (cyberattacks and fraudulent attacks) and regulatory costs (aml, kyc, reporting etc.) 1 1 01-feb-18 8:43 pm ali fintech innovations are in line with the digital shift 1 1 01-feb-18 8:44 pm ali if ifi’s will not fulfil the needs of millennial generation 1 1 ali no, i don’t agree on taking customers from ifi’s but do agree on fintech innovations 1 2 01-feb-18 8:48 pm ali ifi’s should embrace 1 1 01-feb-18 8:49 pm ali ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 105 technological transformation on leveraging side q4 potential of blockchain and smart contracts in islamic finance industry 5 7 01-feb-18 8:30 pm ali smart contracts have big potential in islamic finance 1 1 01-feb-18 8:52 pm ali in, malaysia we have not seen any adoption of blockchain from ifi’s 2 2 01-feb-18 8:55 pm ali blockchain is good in recording transactions hence facilitating more secure online transactions 1 1 01-feb-18 8:57 pm ali further control (laws and regulations) and in-depth studies needed to be conducted to understand potential opportunities 1 3 01-feb-18 9:00 pm ali q5 potential of artificial intelligence, big data, iot and robo advisors in islamic finance industry 5 8 01-feb-18 :35 pm ali yes, these technologies have potential in islamic finance 4 7 01-feb-18 9:05 pm ali ai and robo advisors for instance have room in islamic finance industry 1 1 01-feb-18 9:08 pm ali chat bots can improve customers’ experience 1 1 01-feb-18 9:13 pm ali at the end we will use these technologies 1 1 01-feb-18 9:20 pm ali we are thinking about these technologies 1 1 01-feb-18 9:25 pm ali q6 cloud computing adoption 5 6 02-feb-18 4:27 pm ali yes, by adopting cloud computing ifi’s can reduce their it costs 3 3 02-feb-18 4:30 pm ali data security, cyberattacks and risks also involved 3 3 02-feb-18 4:38 pm ali q7 financial inclusion through fintech 5 7 02-feb-18 4:47 pm ali yes, ifi’s can promote financial inclusion through fintech 5 7 02-feb-18 5:10 pm ali fintech provide solutions but it would not solve the underlying cause of the problem 1 1 02-feb-18 5:17 pm ali fintech has allowed this by providing innovative 2 2 02-feb-18 5:23 pm ali ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 106 solutions as a new touch point for customers q8 fintech segments which can grow in brunei 5 8 02-feb-18 9:40 pm ali insuretech 1 1 02-feb-18 9:50 pm ali crowdfunding 2 2 02-feb-18 9:53 pm ali payments 3 3 02-feb-18 9:59 pm ali all segments have potential and can grow in malaysia 2 2 02-feb-18 10:04 pm ali q9 fintech for islamic finance industry is opportunity, threat or disruptor 5 8 02-feb-18 10:09 pm ali it’s all three 1 1 02-feb-18 10:17 pm ali opportunity 4 7 02-feb-18 10:23 pm ali to avail the opportunity awareness is needed 1 1 02-feb-18 10:31 pm ali fintech open up many possibilities and reach out many consumers across markets and cross borders 2 2 02-feb-18 10:37 pm ali q 10 ifi's should collaborate or compete with fintech 5 5 02-feb-18 10:42 pm ali ifi’s should collaborate 3 3 01-feb-18 10:48 pm ali no disruption, banks are itself biggest fintechs. this is only an ongoing evolution of financial services 1 1 01-feb-18 10:52 pm ali fintech will definitely complement islamic finance industry in malaysia 1 1 02-feb-18 10:54 pm ali q11 strategy should be adopted by ifi's for fintech 5 5 02-feb-18 11:00pm ali redefining the future 1 1 02-feb-18 11:07 pm ali find solutions through fintech 1 1 02-feb-18 11:11 pm ali ifi’s can take benefit of fintech but they should follow the shariah principles 1 1 02-feb-18 11:18 pm ali ifi’s in malaysia have to follow regulations of bnm while embracing fintech 2 2 02-feb-18 11:25 pm ali ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 107 nvivo 11 source summary report (malaysian respondents) created on: 14-july-2018 11:15 am created by: ali items numbers created by no of total nodes 51 ali no of anchor nodes 11 ali no of child nodes 40 ali no of memos 0 ali no of cases 0 ali no of project maps 11 ali ali, abdullah, & zaini | fintech and its potential impact on islamic banking and finance industry: a case study of brunei darussalam and malaysia ijief: international journal of islamic economics and finance, 2(1), 73-108 | 108 this page is intentionally left blank article history ijief: international journal of islamic economics and finance, 3(1), 95-120 | 95 ijief: international journal of islamic economics and finance vol. 3(1), pg 95-120, january 2020 muzakki potentials’ role in alleviating poverty (case study of aceh) siectio dicko pratama bps-statistics of lampung utara regency, indonesia, siectio@hotmail.com rizal rahadiana bps-statistics of aceh tenggara regency, indonesia article history received: december 2, 2019 revised: january 15, 2020 accepted: january 16, 2020 abstract zakat is an obligation in islam which commands followers to donate a small amount of money to the poor, the needy and other particular recipients determined by the qur’an. since zakat is obligatory only for the rich, the system should be able to reduce inequality and poverty. aceh has implemented a zakat management program since 2006; however, its impact has not been evident. this study aims to analyze the impact of potential muzakki on poverty reduction in aceh and to identify the main factors contributing to its rise. by using socio-economic survey data from the bps-statistics of aceh province, the potential of muzakki numbers can be estimated. consequently, its impact on poverty will be analyzed. the method used to identify the variables affecting the muzakki numbers is multiple linear regression with the stepwise selection method. the results show that potential muzakki in aceh have reached 3 million people and is able to reduce the poverty rate by approximately 3.25 percent. subsequently, the economic size and the average number of dependents are the significant variables whose impact increase the number of muzakki. to maximize these opportunities, data and program synchronization between the government and zakat institutions is suggested. keywords: zakat distribution, muzakki, poverty reduction, gross domestic regional product, number of dependents. jel classification: p36, d63, d31 @ ijief 2020 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.2123 web: http://journal.umy.ac.id/index.php/ijief/article/view/7637 citation: pratama, s. d., & rahadiana, r. (2020). muzakki potentials’ role in alleviating poverty (study case in aceh). ijief: international journal of islamic economics and finance, 1(2), 95-120. doi: https://doi.org/10.18196/ijief.2123 http://journal.umy.ac.id/index.php/ijief/article/view/7637 pratama & rahadiana | muzakki potentials’ role in alleviating poverty (study case in aceh). ijief: international journal of islamic economics and finance, 3(1), 95-120 | 96 i. introduction 1.1. background islam is a religion whose blessings to the universe. therefore, people who lack welfare and also live in difficulty must be considered by the religion. in islam, there are a mechanism and a concept to achieve equity in life which consider both the rich and the poor. those who have more assets are required to reserve a small proportion of their money to donate to certain people, which is known as zakat. as stated in qur'an surah at-taubah verse 60, "zakah expenditures are only for the poor and for the needy and for those employed to collect (zakat) and for bringing hearts together (for islam) and for freeing captives (or slaves) and for those in debt and for the cause of allah and for the (stranded) traveler an obligation (imposed) by allah. and allah is knowing and wise." this surah determines the eight kinds of people who should receive zakat, giving first priority to the poor. theoretically, if zakat can be implemented in regency to all people, equity in life will be able to be achieved. aceh is the only province in indonesia that has implemented islamic rule since it was given special autonomy in 2006. since then, zakat and alms have been required to be paid by at least government officials, as listed in qanun aceh number 10 of 2007 (qanun, 2007). baitul mal was created to manage all funding related to zakat and alms; nevertheless, poverty in aceh remains the worst on sumatra island. figure 1. the development of zakat revenue and poverty in aceh, 2008-2018 source: bps-statistics of aceh province and baitul mal of aceh 23,53 21,8 20,98 19,57 19,46 17,6 18,05 17,08 16,73 16,89 15,97 39,8 54,2 65 71,5 85,6 93,2 130,8 157,7 175 190,1 212,7 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 poverty rate (%) zakat revenue (billion) pratama & rahadiana | muzakki potentials’ role in alleviating poverty (study case in aceh). ijief: international journal of islamic economics and finance, 3(1), 95-120 | 97 figure 1 clearly shows that the revenue from zakat has increased five-fold since 2008, from 39.8 billion dollars to 212.7 billion dollars. meanwhile, the poverty level has only fallen by 7.56 percent. moreover, since 2017 aceh has been the poorest province in sumatra, according to the data provided by statistics indonesia. in other words, it can be concluded that there has been no significant improvement in the implementation of zakat in aceh. 1.2. objective based on the discussion above, this research will study the potential for muzakki in aceh and analyze the performance of baitul mal in managing zakat. furthermore, the factors contributing to the rise of muzakki in aceh will also be identified. subsequently, it will be possible to ascertain the causes of the present situation, as well as solutions to them. however, because of the limitations of the data, the scope and simulation of zakat will be limited to professional zakat only. it is hoped that the study will have a significant effect on the sustainability of zakat management in aceh and make the province a role model for the implementation of effective zakat management in indonesia. ii. literature review 2.1. poverty and the zakat nexus the world bank (2009) defines poverty as the deprivation of welfare, meaning that the poor are people who lack well-being. in addition, the government planning and development agency (2004) states that the poor, both men and women, individuals or groups of people, are those not capable of fulfilling their basic needs in order to maintain and develop dignified lives. these definitions point to people who face difficulties in life and have low incomes. the cut-off point for poverty is called the poverty line, which is a sum of money that determines whether people are poor or not. if their incomes are below the line, they are poor. this line allows analysis of the gap between the poor and the line, known as the poverty gap index. as recommended by the united nations, the poverty gap index can be analyzed to establish the distance between the average income of the poor and the poverty line. furthermore, the amount of money needed to lift the revenue of the poor to the line can also be identified. zakat literally means to grow, develop, fertilize and increase (hr. tirmidzi). it can also be defined as cleaning and purifying according to qur'an surah taubah verse 10. in relation to such terms, zakat is the amount of money pratama & rahadiana | muzakki potentials’ role in alleviating poverty (study case in aceh). ijief: international journal of islamic economics and finance, 3(1), 95-120 | 98 which must be delivered to certain people when it has fulfilled all the requirements specified by islamic rules. there are eight kinds of people who must receive it, including the poor. in summary, zakat has the capability to help the poor out of poverty because of the obligation to deliver it. professional zakat is one of the zakat mal, which has become a popular topic of discussion. this kind of zakat can be implemented to all people who work, and the required amount which must be possessed in order to become muzakki (zakat payers) is not high compared to other kinds of zakat. professional zakat is analogized to agricultural zakat, so payment is made when revenue has been received. however, nisab (the limit of money possessed for zakat payment to be required) follows the rule of zakat mal, which is 7.84 grams of gold, as stated in qanun aceh number 10 of 2007. the proportion of money that must be paid is only 2.5 percent of total income. 2.2. factors affecting the number of muzakki a study of the factors contributing to the welfare of muzakki and zakat spending found that marital status, education, income, and religious values were the main factors affecting zakat spending. on the other hand, the welfare of muzakki was affected by age, education, the number of dependents, income and religious values (asdiansyuri, 2016). one of the indicators which can describe education level and income at the same time is the human development index (hdi). this also indicates the quality of a human being. the good quality of individuals will ensure that they have a good understanding of knowledge. as the understanding of religion is one of the significant factors affecting the amount of muzakki (majid, 2017), hdi is a perfect indicator for further analysis. based on this, the proposed hypothesis of this study is that the higher hdi, the higher the potential of individuals to be eligible as muzakki. another variable which describes income and education is the education level of workers. to be eligible to become muzakki, people must work, because if they do not, they will not have an income. highly educated people tend to secure jobs with high salaries. data from the bps-statistics of indonesia (2019) show that average net income tends to rise in line with the level of education in employment status. therefore, the number of workers with a high level of education will definitely affect the total number of muzakki in a positive direction. high education level in this study refers to the last education obtained by people above senior high school, such as diploma, bachelor, master or doctor. the average number of dependents is defined as total household members, and is a component which has an impact on the rise in muzakki numbers. the pratama & rahadiana | muzakki potentials’ role in alleviating poverty (study case in aceh). ijief: international journal of islamic economics and finance, 3(1), 95-120 | 99 higher the number of dependents in a household, the higher its needs. this will affect the welfare of the households, as more income will be used to cover expenditure. ultimately, the number of muzakki could be reduced (asdiansyuri, 2016). the economic climate of a county will affect society, including income. in line with this, the influence of macroeconomic variables such as the inflation rate will affect the quality of life. moreover, instability in macroeconomic performance will influence people’s allocation of funds, including payment of zakat or alms, or other social funds (saadillah et al., 2019). therefore, the stability of the economy must be maintained or even improved to attract a rise in muzakki. the main indicator to describe the economic situation is gross domestic regional product (grdp). hence, a rise in grdp will improve the number of muzakki. to summarize, there are at least four variables that affect the number of muzakki: the human development index (hdi); the total number of dependents; workers with a high level of education; and grdp. all these have a positive impact on the number of muzakki, apart from the number of dependents, which has a negative effect. 2.3. previous studies research on zakat and poverty has been conducted by many practitioners, academicians, and even the government, with many variations in their findings. some studies have found a significant effect of zakat on poverty, while others have found the opposite. this section will summarize these works by underlining the three main studies related to this research. the research conducted by beik (2009) studied the impact of zakat distribution on poverty. he used the study case approach to examine the effectiveness of zakat distribution at the dompet dhuafa institution, specifically in a program called “layanan kesehatan cuma-cuma”. to analyze the effect, various supporting indexes were employed, namely the headcount ratio, poverty gap index, income gap index, sen index and foster, greer and thorbecke index (fgt index). the results showed that zakat was able to reduce poverty because all the indicators used were reduced. the headcount ratio fell by 10 percent, as did the poverty gap and poverty severity. this finding undeniably proved that zakat was a potential instrument to reduce poverty at the micro level. another study by musrizal (2017) was conducted in aceh utara from 2011 to 2017 and concluded that zakat revenue had a positive impact on poverty. by using data from bps-statistics, the researcher regressed zakat revenue with pratama & rahadiana | muzakki potentials’ role in alleviating poverty (study case in aceh). ijief: international journal of islamic economics and finance, 3(1), 95-120 | 100 the poverty rate and found that zakat did have an effect on poverty. the poverty rate, which can be explained by the zakat revenue variable, reached 52.2 percent, which means that the effect of zakat was significant at the regency level. on the contrary, mubarokah, beik, and irawan (2018) studied the impact of zakat on the poverty and welfare of zakat recipients by using the islamic poverty index. the findings of the research show that zakat was able to improve the welfare of people who were poor materially, but not of those in absolute poverty. similarly, khasandy and badrudin (2019) built a model to describe the influence of zakat on economic growth and society welfare using the partial least squares method with the human development index, percentage of poor people and the gini index as variables. the research indicated that zakat did not have a positive impact on economic growth and welfare because of the small amount of zakat collected by baznas. the findings tend to prove that at the national level zakat is not sufficiently effective to have a positive impact. in summary, zakat has the potential effect to improve the welfare of people at the micro level. this notion is strengthened by the positive results of the ability of zakat to eliminate poverty displayed by the research in the form of case studies and also at the regency level. nevertheless, zakat is still not able to have a significant impact at the national level. iii. methodology this research uses two approaches: descriptive statistical analysis and inference statistical analysis. the first approach describes the performance of baitul mal as well as the role of muzakki. data from a socio-economic survey conducted by bps-statistics of aceh province in 2018 and those from the finance report of baitul mal will be utilized. the second approach identifies the factors contributing to the rise of muzakki in aceh. a linear regression model will be utilized to identify the most significant variables. all the data is from bps-statistics of aceh province, which comprises the socio-economic data, and the publication entitled, “aceh in figure 2019" (bps-statistics of aceh province, 2019). the first analysis involved various steps. in order to analyze the relationship between muzakki and the poor, the first of these was to estimate the number of muzakki. to do this, the income prediction was measured by the expenditure approach because of the limitation of the income data. because zakat payers are the ones whose income, the expenditure of households was divided into the number of working people in them. by assuming the price of pratama & rahadiana | muzakki potentials’ role in alleviating poverty (study case in aceh). ijief: international journal of islamic economics and finance, 3(1), 95-120 | 101 gold is stable at 640,000 rupiahs (as of 1 march 2018), the nisab will be 5,017,600 rupiahs. therefore, muzakki have an estimated income above this level. after getting the sum of muzakki, the potential funding was calculated. consequently, its connection with the poverty gap index was analyzed descriptively. the proposed model in this study has four variables: the human development index, gross domestic regional product (in natural logarithm format), the average number of dependents, and workers educated above high school level. this is a linear log model; all of the chosen variables have an effect on the number of muzakki. the human development index (hdi) and gross domestic regional product (grdp) have a positive impact on the collection of zakat (afifah, 2017). a higher level of grdp means that economy activities produce more income, so when people’s income reaches nisab, they will become muzakki. in addition, hdi describes the quality of people from three aspects, namely education, health and income per capita. huda et al. (2013) found that age, education and job affected the understanding of muzakki in paying zakat. therefore, an increase in these three aspects is bound to raise the capacity of individuals, so they will have a greater tendency to become muzakki when the hdi is high. other studies show that education and income are factors which affect people’s propensity to pay zakat and become muzakki. nasution (2017) concluded that income is the main factor affecting zakat payment, together with education and awareness factors. consequently, highly educated workers can describe the income and education factors, so this variable was chosen. the last variable, number of dependents, also affects the number of muzakki, as more dependents will lead to greater expenditure in the family, meaning people will no longer become muzakki (asdiansyuri, 2016). all of these are reasons why the four variables were chosen. as the goal of the study is to identify the most significant variables, all of them were selected by using the stepwise selection method. this method helped to develop the best model by combining the forward elimination method (entering variables one by one then choosing the best) and the backward elimination method (entering all the variables, then excluding them one by one until finding the best) (draper & smith, 1998). eventually, only significant variables will remain. by referring to it, the proposed model is as follows: pratama & rahadiana | muzakki potentials’ role in alleviating poverty (study case in aceh). ijief: international journal of islamic economics and finance, 3(1), 95-120 | 102 𝑌 = 𝑎 + 𝑏1𝑋1 + ln 𝑏2 𝑋2 + 𝑏3𝑋3 + 𝑏4𝑋4+∈ notes: y = number of muzakki x3 = average number of dependents x1 = human development index x4 = workers with high level of education x2 = gross domestic regional product € = error term to establish the unbiased estimators of the proposed model, the model must fulfil all the multiple linear regression assumptions: the error term must have a normal distribution and constant variance (homoscedasticity); there should be no autocorrelation in the error of independent variables; and there should be no multicollinearity between the independent variables. to ascertain whether these assumptions are fulfilled, different approaches are used. a histogram can be used to identify the normality of the data by studying the chart. another way is by conducting the kolmogorov smirnov test, which is used to determine whether a series of data follows a particular distribution; in this case, normal distribution. the white test can also be conducted by regressing the quadratic error with the independent variables, quadratic being utilized to detect heteroscedasticity problems. autocorrelation can be detected by counting the durbin watson values (d values). if the result is du < d < 4 – du, then autocorrelation does not occur. finally, multicollinearity is detected by observing the value of the variance inflation factor (vif). multicollinearity will not take place if the value is below 5 (pratama, 2013). iv. results and analysis 4.1. zakat and the poverty reduction nexus the identification of households which became the sample in the socio-economic survey conducted by bps-statistics of aceh province in march 2018 shows that there were 3,191,972 individuals whose estimated incomes were above the nisab level. in other words, the number of potential zakat payers in aceh is high, because this figure represents more than half of the population, 60.72 percent. the detailed muzakki numbers for each regency and municipality, together with the potential zakat revenue in aceh, are shown in table 1. pratama & rahadiana | muzakki potentials’ role in alleviating poverty (study case in aceh). ijief: international journal of islamic economics and finance, 3(1), 95-120 | 103 table 1. estimation of number of muzakki and potential zakat revenue in aceh province, 2018 regency/municipality number of muzakki potential zakat revenue (rupiahs) simeulue 40,921 2,176,957,364 aceh singkil 72,023 5,775,947,096 aceh selatan 109,180 6,704,544,041 aceh tenggara 128,773 8,093,121,378 aceh timur 264,093 14,759,893,084 aceh tengah 145,620 9,444,749,647 aceh barat 139,985 9,470,345,211 aceh besar 295,234 23,769,918,145 pidie 265,593 14,659,565,432 bireuen 300,080 17,309,303,264 aceh utara 277,151 16,266,535,196 aceh barat daya 78,897 4,082,888,180 gayo lues 64,103 4,051,777,443 aceh tamiang 141,409 8,530,043,791 nagan raya 78,136 4,809,537,942 aceh jaya 54,335 3,186,767,992 bener meriah 100,026 5,647,101,757 pidie jaya 105,990 7,041,378,883 banda aceh 203,608 28,605,165,673 sabang 25,270 1,836,147,280 langsa 123,074 11,735,631,323 lhokseumawe 140,278 11,492,237,902 subulussalam 38,193 2,282,033,532 aceh 3,191,972 221,731,591,556 source: processed data the amount of money earned by the muzakki which makes them liable to pay professional zakat is 221 billion rupiahs. this funding is twice as high as the total zakat revenue collected by baitul mal in 2018, even though the zakat collected in baitul mal was of various types. therefore, potential zakat, especially the professional form, is still high, so the government must continue to work hard to achieve its maximum potential in aceh. turning to the poverty situation in aceh, the data from bps-statistics of aceh province show that 15.97 percent of people in the region are poor. this means that approximately 839.49 thousand people lack welfare. the gap between the average income of the poor and the poverty line, as shown by the poverty gap index, is 2.85. by using a poverty line set at 454,740 rupiahs, around 1.087 trillion rupiahs would be needed to lift all the poor above the line, or pratama & rahadiana | muzakki potentials’ role in alleviating poverty (study case in aceh). ijief: international journal of islamic economics and finance, 3(1), 95-120 | 104 1,296,009 rupiahs per person. this could be achieved if the assumption of perfect distribution is fulfilled. as zakat must be delivered to the poor, the flow of money from it is more near to this assumption, so the level of success of lifting the poor out of poverty is extremely high. to calculate the number of people who would be able to rise above the poverty line because of zakat revenue, a simulation must be run. if all the zakat professional revenue earned from the potential muzakki in aceh were dedicated to the poor, it would cover approximately 171,000 people. so the poor people will be 668.4 people, or 12.72 percent. therefore, the poverty rate would be reduced by 3.25 percent. if this could be implemented, aceh’s poverty rate ranking on sumatra island would be improved to two levels higher than bengkulu and lampung. these figures only refer to professional zakat, so other sources of zakat could be distributed to other categories. to put this into practice, the cooperation between baitul mal and the government planning and development agency and also other related institutions must be braided well. according to figure 2, the main recipients of zakat in 2017 were stranded travelers, who received around 31.52 percent of the total amount, followed by the poor and the needy, at 31.28 and 26.84 respectively. however, the total zakat received by the poor and the needy was 58.12 percent, or more than half. the meaning of the needy itself when it is separated from the poor has included the meaning of the poor (chaniago, 2015). in relation to this, it is relevant to focus on the distribution of professional zakat only for the poor. the characteristic of this zakat is that it must be paid when income is received to ensure the sustainability of the revenue given to the figure 2. percentage of zakat revenue by recipients in 2017 source: yearly report of baitul mal aceh 2017 (aceh, 2018) 26,84 31,28 3 5,8 1,09 31,52 0,47 0 the needy (faqir) the poor amil muallaf people in debt stranded traveler fiisabilillah riqab pratama & rahadiana | muzakki potentials’ role in alleviating poverty (study case in aceh). ijief: international journal of islamic economics and finance, 3(1), 95-120 | 105 poor. as the poor usually have a low income, this sustainability will greatly help them rise above the poverty line and reach stability in their expenditure. the fact that the largest percentage of zakat recipients are the poor is proof that the zakat management in aceh baitul mall is supporting the government in eliminating poverty. however, the insignificance of the poverty reduction may be caused by the weakness of the data, so distribution of funding is worse. hence, cooperation between the government agencies in strengthening the data, especially on those who have the right to receive funds, must be improved. moreover, the synergy of all the poverty alleviation programs run by agencies with baitul mal must also be ensured to avoid overlapping. these approaches should improve the significance of zakat in poverty alleviation. 4.2. analysis of number of muzakki, zakat revenue and poor people creating scatter diagrams of the number of muzakki (vertical axis) and poor people (horizontal axis) results in four quadrants. the first of these is regencies or municipalities with a high number of muzakki and low level poverty. second, there are regions with many muzakki but also many poor people. the third quadrant represents regions with a low number of muzakki and a high poverty rate, while the fourth comprises regions with a low poverty level but just a few muzakki. they also will be available if we change the number of muzakki with the potential zakat revenue. this section will discuss the results of the scatter diagrams, which are represented in maps. figure 3. results of the quadrant analysis comparing number of muzakki and poverty level source: processed data pratama & rahadiana | muzakki potentials’ role in alleviating poverty (study case in aceh). ijief: international journal of islamic economics and finance, 3(1), 95-120 | 106 from figure 3, it can be noted that almost all regencies and municipalities in aceh have a small number of muzakki, but also a low level of poverty. the regions in this group may not have too many concerns as poverty is at a low level. on the contrary, high levels of poverty together with large numbers of muzakki mean improvements need to be made, specifically in the way the government manages zakat. the regions in this group are aceh timur, aceh besar, and pidie. the zakat management in these regencies needs to be examined and evaluated. the government also must utilize the potential of muzakki as well as persuading people to pay zakat so that the mechanism of zakat in solving poverty can be implemented. to clarify, these three regencies have all they need to have a significant impact on reducing poverty. in the other two quadrants, there are two quadrants more, one is a group which has the possibility of sharing their zakat funding with other regencies, while the other is a group of regencies which are needed to help in eliminating poverty. subulussalam, as the poorest region in aceh, has a low number of muzakki. in other words, if this city struggles to maximize its zakat potential, it will remain very hard to significantly alleviate poverty. that is why this regency needs more aid and transfer to eliminate poverty. on the other hand, aceh tengah, lhoksemauwe, aceh tamiang, aceh barat and banda aceh have many muzakki but only a few poor people. this situation means all these regions have great figure 4. results of the quadrant analysis of potential zakat revenue and poverty level source: processed data pratama & rahadiana | muzakki potentials’ role in alleviating poverty (study case in aceh). ijief: international journal of islamic economics and finance, 3(1), 95-120 | 107 potential to deliver their zakat funding to other regencies, specifically to help subulussalam. in other words, these five regions have been ready to improve other things, not only poverty reduction. a high number of muzakki does not always produce a large amount of zakat collected. certain factors, such as purchase power, also affect the collection of zakat revenue. figure 4 shows the regencies with potential zakat revenue and their poverty level. from this, it can be seen that there are only six regencies and municipalities in aceh which are not included in the group with little potential zakat revenue and poor people. these conditions are very different to the previous map, which uses the variable of number of muzakki. this demonstrates that even if the number of muzakki in a region is high, the potential zakat which can be collected is not also necessarily high. besides purchasing power, the economic level, income per capita and inflation are also variables which can affect this situation. subulussalam city, according to figure 4, remains in the group with high poverty and little potential zakat revenue, which is is similar to the situation in figure 3, so are banda aceh and aceh utara. banda aceh is also in the group with low poverty and high potential zakat revenue, while aceh utara is in the group with high poverty and high potential zakat revenue. on the contrary, aceh besar, bireuen and pidie have turned group when it comes to the potential zakat revenue which can be collected. aceh besar and bireuen turn to the group which has the potential to share and help other regencies, such as banda aceh. this means that from the funding perspective, the amount of zakat which can be collected is high enough for both of the regencies to be able to have a significant impact on eliminating poverty in other regencies. at the same time, pidie, which has many muzakki, as seen in figure 3, tends to have low potential zakat revenue. this means that expenditure per capita there tends to be smooth and up to the nisab level of zakat, so muzakki numbers are high, but the potential zakat revenue is not high enough. according to the discussion of all the variables, it can be concluded that not all regions with high numbers of muzakki provide bog amount of potential zakat revenue, because this is also determined by equality, economic size and income per capita. nevertheless, regions with a high number of muzakki and a large amount of potential zakat revenue, such as aceh tengah, lhoksemauwe, aceh tamiang, aceh barat, aceh besar, bireuen and banda aceh, have great potential to improve the amount of zakat collected in order to alleviate poverty. on the contrary, subulussalam and pidie are regions face great difficulties in using the zakat instrument to eliminate poverty because of their low muzakki numbers and low potential zakat revenue. pratama & rahadiana | muzakki potentials’ role in alleviating poverty (study case in aceh). ijief: international journal of islamic economics and finance, 3(1), 95-120 | 108 4.3. effect of grdp and average number of dependents on the number of muzakki �̌� = −1,695.13 + 101.56 ln 𝑋2 ∗ + 63.62𝑋4 ∗ 𝑅2𝑎𝑑𝑗 = 0.802 𝐷𝑢𝑟𝑏𝑖𝑛 𝑊𝑎𝑡𝑠𝑜𝑛 = 1.696 𝐹ℎ𝑖𝑡 = 45.630 the equation which resulted from the regression analysis indicates that only two variables remained: grdp and average number of dependents. this is the best equation because it has fulfilled all the regression assumptions. normality is shown by the histogram and strengthened by the kolmogorov smirnov test, which produced results to accept the null hypothesis, meaning that data distribution was normal. multicollinearity and autocorrelation also did not occur because the vip value is lower than 5. in addition, the result of the durbin watson test is 1.696, a value which shows that at the 0.1 percent significance level there is neither positive nor negative autocorrelation. since the value of the dw table is 1.535, the result of the counting durbin watson formula shows that the value is above the figure. therefore, autocorrelation did not take place. finally, homoscedasticity matter is seen by the graph consists of the predictor and the residual value, which did not show a particular pattern. moreover, the result of the white test shows that the null hypothesis is accepted both in the overall and partial test, which demonstrates that that there is no heteroscedasticity. the overall test of the equation shows that the null hypothesis is rejected. therefore, all the independent variables affect the dependent variables simultaneously at the 5 percent significant level. partially, each variable also affects the number of muzakki at the 5 percent significance level. moreover, grdp is significant at the 1 percent significance level, and the value of the adjusted r2, which displays the proportion which can be explained by the variables, is very high, at 80.2 percent. this means that grdp and the average number of dependents are capable of explaining the variance of the dependent variable at the level of approximately 80.2 percent. all these conditions show that this is the best equation to describe the effect of economic conditions and the number of household members on the number of muzakki. gross domestic regional product, which describes the economic size in regency, had a significant impact on the number of muzakki. the economic situation will probably affect the capability of people to become muzakki and thus have the obligation to pay zakat. fundamentally, grdp is used to indicate the standard of living in a society. by dividing total grdp by the total number of people in the regency, grdp per capita will be able to estimate, which is an indicator of the standard of living. therefore, if grdp falls, the standard of pratama & rahadiana | muzakki potentials’ role in alleviating poverty (study case in aceh). ijief: international journal of islamic economics and finance, 3(1), 95-120 | 109 living will also fall, and the number of muzakki will be lower. based on the equation, an increase of one million rupiahs in grdp will raise the number of muzakki by 101 thousand. this high number suggests that the policy to protect and increase the economy in aceh will help to increase the number of muzakki. turning to another significant variable, the number of dependents, this will affect the motivation of people to pay zakat, as found by asdiansyuri (2016). however, the number of muzakki will increase if the number of household dependents also increases. this is because when a household adds members, its expenditure will also rise. hence, those in work will need to improve their income to fulfil the need of all the household members. as professional zakat only considers the capability of people from the view of total income, this will undoubtedly make them eligible to become muzakki. referring to the results of the regression, an increase in household members of 64 in a regency/municipality will increase the number of muzakki by 1,000. 4.4. social economic policy integration the significance of the number of household members with regard to the number of muzakki benefits indonesia in general, and aceh specifically. this is because aceh will have the demographic dividend, as shown by the dependency ratio of below 50, in 2020 (bps-statistics of indonesia, 2018). the rise in the number of youths caused by this phenomenon will improve the quality of household members, so the potential to improve muzakki is high. despite this fact, young people must work and not become unemployed so the potency can be empowered. furthermore, grdp also has a significant impact on the number of muzakki. hence, the integration of social and economy policy must be put in place, not only to raise the number of muzakki, but also to bring indonesia to gold indonesia in 2045. an example of a social-economic policy is suggested by pratama and rahadiana (2019) in their study on optimizing the demographic dividend. they evaluate the performance of the labor force and suggest the creation of the chance to develop micro and small enterprises to support the economy. this concept could be well implemented by the collaboration of the regional government and baitul mal. by implementing zakat productively, targeting the poor and the youth, poverty could vanish. the utilization of zakat productive for entrepreneurship has been proven to have a real impact, even if the funds used are low (pratama, 2015). moreover, the entrepreneurs who result from such programs may become muzakki. therefore, developing micro pratama & rahadiana | muzakki potentials’ role in alleviating poverty (study case in aceh). ijief: international journal of islamic economics and finance, 3(1), 95-120 | 110 and small enterprises for the poor is a possible solution to raising the number of muzakki, eliminating poverty and improving economic growth. v. conclusion and recommendations 5.1. conclusion the potential number of muzakki in aceh is 3 million people, with potential funding as high as 221 million rupiahs. this amount of money is only from professional zakat and been twice times higher zakat collected by baitul mal aceh. if these funds are delivered to the poor in a perfect way, they will be able to lower the poverty rate in the region by approximately 3.25 percent. with a percentage of around 12.72 percent, aceh will be placed as the third poorest province on sumatra island, two places higher than before. aceh tengah, lhoksemauwe, aceh tamiang, aceh barat, aceh besar, bireuen and banda aceh are regions which have a high number of muzzaki and a large amount of potential zakat revenue, as well as a low poverty level. the government must focus on improving zakat management in these regions so that they can be a prototype for reducing the number of poor people using the zakat instrument. subsequently, the regions with a high poverty level and a low number of muzakki, or little potential zakat revenue, that is subulussalam and pidie, can count on zakat to alleviate their poverty with the support from other regencies or municipalities. the variables which are significant in affecting the number of muzakki are grdp and the average number of dependents. grdp, which illustrates the economic situation, has a positive impact on the rise in the number of muzakki. 101 thousand people will become muzakki if grdp increases by one million rupiahs. similarly, the average number of dependents also has a positive direction, which is contrary to the proposed hypothesis. the reason for this is that the addition of household members will increase household expenditure, so the exisiting members must try to cover this extra spending. because income is estimated from expenditure, this will influence the household members who work becoming muzakki. around one thousand new muzakki will be created if the number of household members increases by around 64. pratama & rahadiana | muzakki potentials’ role in alleviating poverty (study case in aceh). ijief: international journal of islamic economics and finance, 3(1), 95-120 | 111 5.2. recommendations to maximize the utilization of zakat in alleviating poverty, the government must cooperate with zakat institutions, specifically on programs and data. the poverty reduction-related programs, whether run by zakat institutions or the government, must not overlap. they should complement each other so that they run effectively. this can start with the use of databases of poor people. if a household has been aided by the government, it should not also receive aid from zakat institutions. these institutions should cover the households which have not been included by the government. such cooperation is bound to have a significant effect on poverty reduction. creating more chances for developing micro and small enterprises for the poor and young people is one solution for supporting the income of the poor sustainably. it will not only help the poor in the short term, but also mean they do not solely depend on aid. these are generally called productive zakat programs. if the data used is well targetted, it will significantly improve people’s welfare and also economic growth. further studies which could be made relating to this research could focus on the national level, or more specifically on the regency level. it would be extremely beneficial if we could examine and assess zakat management in the regions with high muzakki numbers or high potential zakat revenue. by identifying regions with good zakat management, the prototype of a region which could be emulated in terms of of the utilization of zakat to eliminate poverty could actually be put into practice. in addition, at the national level, study could be made of whether the planning family policy interferes with zakat management, and whether gdp affects the collection of zakat revenue. the results of such studies would be very helpful in formulating zakat policies in indonesia. pratama & rahadiana | muzakki potentials’ role in alleviating poverty (study case in aceh). ijief: international journal of islamic economics and finance, 3(1), 95-120 | 112 references aceh, b. m. 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(2009). handbook on poverty and inequality. world bank. ijief: international journal of islamic economics and finance, 3(1), 95-120 | 114 appendix descriptive statistics mean std. deviation n muzakki 138.7814 86.99355 23 hdi 70.2830 4.69919 23 ln_grdp 15.4801 .74454 23 workers above high school level 6.4424 2.43769 23 average number of dependents 4.1135 .29421 23 correlations muzakki hdi ln_grdp workers above high school average of dependents pearson correlation muzakki 1.000 .265 .880 -.058 .258 hdi .265 1.000 .408 .772 -.359 ln_grdp .880 .408 1.000 -.035 .049 workers above high school level -.058 .772 -.035 1.000 -.309 average number of dependents .258 -.359 .049 -.309 1.000 sig. (1-tailed) muzakki . .111 .000 .397 .117 hdi .111 . .027 .000 .046 ln_grdp .000 .027 . .436 .412 workers above high school level .397 .000 .436 . .076 average number of of dependents .117 .046 .412 .076 . n muzakki 23 23 23 23 23 hdi 23 23 23 23 23 ln_grdp 23 23 23 23 23 workers above high school level 23 23 23 23 23 average number of dependents 23 23 23 23 23 pratama & rahadiana | muzakki potentials’ role in alleviating poverty (study case in aceh). ijief: international journal of islamic economics and finance, 3(1), 95-120 | 115 variables entered/removeda model variables entered variables removed method 1 ln_grdp . stepwise (criteria: probability-of-fto-enter <= .050, probability-of-fto-remove >= .100). 2 average number of dependents . stepwise (criteria: probability-of-fto-enter <= .050, probability-of-fto-remove >= .100). a. dependent variable: muzakki model summaryc model r r square adjusted r square std. error of the estimate durbin-watson 1 .880a .774 .763 42.32469 2 .906b .820 .802 38.68387 1.696 a. predictors: (constant), ln_grdp b. predictors: (constant), ln_grdp, average number of dependents c. dependent variable: muzakki anovaa model sum of squares df mean square f sig. 1 regression 128874.345 1 128874.345 71.941 .000b residual 37618.970 21 1791.380 total 166493.316 22 2 regression 136564.477 2 68282.238 45.630 .000c residual 29928.839 20 1496.442 total 166493.316 22 a. dependent variable: muzakki b. predictors: (constant), ln_grdp c. predictors: (constant), ln_grdp, average number of dependents pratama & rahadiana | muzakki potentials’ role in alleviating poverty (study case in aceh). ijief: international journal of islamic economics and finance, 3(1), 95-120 | 116 coefficientsa model unstandardized coefficients standardized coefficients t sig. collinearity statistics b std. error beta tolerance vif 1 (constant) -1452.534 187.822 -7.734 .000 ln_grdp 102.798 12.120 .880 8.482 .000 1.000 1.000 2 (constant) -1695.130 202.290 -8.380 .000 ln_grdp 101.563 11.091 .869 9.158 .000 .998 1.002 average of dependents 63.624 28.066 .215 2.267 .035 .998 1.002 a. dependent variable: muzakki excluded variablesa model beta in t sig. partial correlation collinearity statistics tolerance vif minimum tolerance 1 hdi -.113b -.992 .333 -.217 .833 1.200 .833 workers above high school level -.027b -.252 .804 -.056 .999 1.001 .999 average of number of dependents .215b 2.267 .035 .452 .998 1.002 .998 2 hdi -.018c -.155 .879 -.035 .689 1.450 .689 workers above high school level .044c .429 .673 .098 .904 1.106 .903 a. dependent variable: muzakki b. predictors in the model: (constant), ln_grdp c. predictors in the model: (constant), ln_grdp, average of dependents pratama & rahadiana | muzakki potentials’ role in alleviating poverty (study case in aceh). ijief: international journal of islamic economics and finance, 3(1), 95-120 | 117 collinearity diagnosticsa model dimension eigenvalue condition index variance proportions (constant) ln_grdp average number of dependents 1 1 1.999 1.000 .00 .00 2 .001 42.541 1.00 1.00 2 1 2.995 1.000 .00 .00 .00 2 .004 28.742 .03 .18 .85 3 .001 55.077 .97 .82 .15 a. dependent variable: muzakki residuals statisticsa minimum maximum mean std. deviation n predicted value -11.0530 284.2044 138.7814 78.78754 23 std. predicted value -1.902 1.846 .000 1.000 23 standard error of predicted value 8.112 22.661 13.476 3.770 23 adjusted predicted value -20.7677 286.0028 138.6823 79.96140 23 residual -74.66259 66.38995 .00000 36.88362 23 std. residual -1.930 1.716 .000 .953 23 stud. residual -2.109 1.787 .002 1.019 23 deleted residual -89.12903 72.01669 .09911 42.17825 23 stud. deleted residual -2.331 1.901 -.003 1.071 23 mahal. distance .011 6.593 1.913 1.608 23 cook's distance .000 .287 .048 .070 23 centered leverage value .000 .300 .087 .073 23 a. dependent variable: muzakki pratama & rahadiana | muzakki potentials’ role in alleviating poverty (study case in aceh). ijief: international journal of islamic economics and finance, 3(1), 95-120 | 118 one-sample kolmogorov-smirnov test unstandardized residual n 23 normal parametersa,b mean .0000000 std. deviation 36.88362475 most extreme differences absolute .114 positive .083 negative -.114 test statistic .114 asymp. sig. (2-tailed) .200c,d a. test distribution is normal. b. calculated from data. c. lilliefors significance correction. d. this is a lower bound of the true significance. pratama & rahadiana | muzakki potentials’ role in alleviating poverty (study case in aceh). ijief: international journal of islamic economics and finance, 3(1), 95-120 | 119 white test variables entered/removeda model variables entered variables removed method 1 x2, x4, x4^2, v2^2, x2*x4b . enter a. dependent variable: res_kuadrat b. all requested variables entered. anovaa model sum of squares df mean square f sig. 1 regression 19237756.994 5 3847551.399 1.345 .293b residual 48614484.481 17 2859675.558 total 67852241.475 22 a. dependent variable: res_kuadrat b. predictors: (constant), x2, x4, x4^2, v2^2, x2*x4 coefficientsa model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 17124.025 201463.263 .085 .933 x2 11401.524 22498.740 4.834 .507 .619 x4 -54989.704 56570.255 -9.212 -.972 .345 x2^2 -573.305 706.005 -7.514 -.812 .428 x4^2 3589.068 5330.267 4.908 .673 .510 x2*x4 1735.665 1579.679 5.586 1.099 .287 a. dependent variable: res_kuadrat ijief: international journal of islamic economics and finance, 3(1), 95-120 | 120 this page is intentionally left blank international journal of islamic economics and finance (ijief) vol. 3(2), page 283-304, july 2020 switching intentions among millennial banking customers to fintech lending muhammad anif afandi universitas muhammadiyah metro, indonesia corresponding email: afandianif@gmail.com article history received: june 4 th , 2020 revised: july 25 th , 2020 accepted: july 27 th , 2020 abstract the purpose of this study is to analyze of switching intentions among millennial banking customers to the financing services of fintech lending in indonesia using the ppm framework. 245 primary data were collected by likert 5 scale category which was subsequently conducted data analysis using the ols method. the results showed that in the perspective of push effects, all factors have no significant effect on switching intentions or in other words the millennial banking customers have considered that credit/financing services in banking is quite good that it does not encourage them to switch. in the perspective of pull effects, ease of use and pricing benefit factors of fintech lending have significant effect on switching intentions so that it attracts them to switch. meanwhile, in the perspective of mooring effects, the factors of service products and reputation significantly affect switching intentions so as to impede them to switch. in addition, islamic banking customers are known to have higher potential to switch to the financing services of fintech lending. the results of this study provide useful information for the banking industry, fintech lending and regulators to be able to develop strategies and effective policies amid the potential of customer switching. keywords: switching intentions, banking, fintech lending, millennial, ppm. jel classification: g4; m3. @ ijief 2020 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.3230 web: https://journal.umy.ac.id/index.php/ijief/article/view/8955 citation: afandi, m. a. (2020). switching intentions among millennial banking customers to fintech lending. ijief: international journal of islamic economics and finance, 3(2),283-304. doi: https://doi.org/10.18196/ijief.3230 https://doi.org/10.18196/ijief.3225 https://doi.org/10.18196/ijief.3225 afandi│ switching intentions among millennial banking customers to fintech lending international journal of islamic economics and finance (ijief), 3(2), 283-304 │284 i. introduction 1.1. background the 4.0 industrial revolution is the integrated physical, digital and biological world that spawned artificial intelligence, internet of things (iot), autonomous vehicles, 3d printing, nanotechnology, biotechnology, quantum computing and others (schwab, 2016). one of the biggest achievements of the 4.0 industrial revolution is the development of technology. the rapid development of technology resulted in many activities of human life experiencing changes such as browsing, connectivity, shopping and even ordering taxis can now be done using only devices such as smartphones or websites run through the internet network. the ease and speed offered by the technology leads to a phenomenon called disruption. according to kasali (2018), disruption interpreted as a change that occurred as a result of future presence to the present through the presence of something new and changed something that has been running normally. one of the novelties of disruption phenomenon is the emergence of new business model company called new-entrants which are disrupted their business model of incumbent companies from all aspects of the business process include production, consumption, transportation and distribution (schwab, 2016). one industry that is predicted to be disrupted with the presence of new business model of new-entrant companies is the banking industry with the presence of similar industries that utilize technology as its competitive advantage called financial technology (fintech). according to pricewaterhousecoopers (2016), the banking industry is predicted to be disrupted by fintech in four categories namely market share, margin, information system security and customer switching. in addition, due to the ability of fintech to reach micro clients more broadly, predicted to reduce the banking revenue by 10 – 40 percent in 2025 (dietz et al., 2016). the switching of banking customers as in the explanation of price waterhouse coopers (2016) is needed scientifically proven through study to be able to know the factors that affect it. however, study on the factors affecting of switching intentions among banking clients to the financing services of fintech lending tends to be limited as done by maier (2016). however, maier (2016) examined about the phenomenon of customer switching in banking to crowdlending financing services using the research object of msmes and analysts using four dimensions namely technical dimension, functional dimension, image and innovativeness. other studies that discuss the phenomenon of banking customers to the financing services of fintech lending tend to still be segmented in each sector, such as the customer switching from bank one to another bank or from one type of fintech to other types of fintech such as the studies conducted by al-hawari (2014), vyas and raitani (2014), piha and avlonitis afandi│ switching intentions among millennial banking customers to fintech lending international journal of islamic economics and finance (ijief), 3(2), 283-304 │285 (2015), bakar et al. (2016), farah (2017a), farah (2017b), koutsothanassi et al. (2017), lee et al. (2019) and le wang et al. (2019). in addition, in earlier studies, it is still very rare that the literature focuses on the phenomenon of customer switching on banking to the fintech lending services by using the category of millennial clients. in fact, based on the report of transferwise (2016), the increasing in the number of millennials is one of the causes of receiving fintech industry as a new player in financial industry market beside other factors such as the declining in banking customer trust due to the global financial crisis of 2008, better expectations of fintech industry, the increasing in the use of mobile internet and the regulation that support fintech existence. in addition, millennials are the largest proportion of indonesians to reach 33.75 percent or amounting to 88 million people that should be the largest consumer target of the financial industry (kpppa and bps, 2018). 1.2. objectives of the research based on the discussion above, because of the gap that the previous studies discussing the customer switching in banking to the financing services of fintech lending is still very limited and segmented in each sector as well as the lack of studies that focuses on the millennial generation, then this study is conducted to examine and analyze comprehensively regarding the phenomenon of customer switching in banking to the financing services of fintech lending with customer object of millennial category. the results of this study are beneficial to the management of the banking industry, fintech lending and regulators in order to determine the best strategies or policies in the midst of the potential of customer switching. this study proceeds several discussions as follows. section ii discusses regarding literature review including the theory used, previous studies, hypothesis development dan conceptual framework. section iii discusses the methodology used. in the section iv, we discuss the results and analysis and then finally in the section v, we formulate our conclusion and recommendation. ii. literature review 2.1. customer switching in the context of push-pullmooring (ppm) framework one theory that discusses the phenomenon of customer switching is the push-push-mooring (ppm) theory. the ppm theory was developed by bansal et al. (2005), which adopted the theory of human migration in geography. if in the concept of human migration, someone moved from one place to another, then in the context of customer switching then a customer moved from one service provider to another service provider (bansal et al., 2005). afandi│ switching intentions among millennial banking customers to fintech lending international journal of islamic economics and finance (ijief), 3(2), 283-304 │286 the ppm theory consists of three effects namely push effect, pull effect and mooring effect. the push effect is a negative factor of the services used today that encourage customers to switch to other services that are considered better. the pull effect is a positive factor of the intended service that attracts customers to switch to the previously used services. meanwhile, the mooring effect is a factor that inhibits the movement of customers (bansal et al., 2005). in this study, modifications were made to each factor in ppm theory based on previous studies to adapt to the context of the research. the push effect in this study consists of the pricing problem factor (vyas and aratani, 2014), processing problem (maier, 2016) and service quality (vyas and aratani, 2014). the pull effect consists of the easy process factor (maier, 2016), ease of use (ye and potter, 2011) and pricing benefit (vyas and aratani, 2014). meanwhile, the mooring effect consists of the factors of inertia (li, 2018), security (ye and potter, 2011), service products (vyas and aratani, 2014) and reputation (vyas and aratani, 2014). the ppm theory is a very dominant theory used to analyze the phenomenon of customer switching that has been used in a variety of research contexts such as the customer switching in the aviation industry by jung et al. (2017), the customer switching in the hospitality industry by yan et al. (2019), the customer switching in the manufacturing industry by suh and kim (2018), the switching of social media users by hwang et al. (2018), the switching of cloud storage users by cheng (2019) and others. 2.2. previous studies as explained in the introduction that the study on switching intentions among banking customers to the financing services of fintech lending is limited which requires further study to examine and analyze the phenomenon of the potential of customer switching among banking customers to the fintech lending financing services. in this section is explained regarding the two previous study results in accordance with the context of this study so that it can formulate research gaps and novelties. maier (2016) conducted study on the phenomenon of customer switching among banking customers on crowdlending services using four dimensions namely technical dimension, functional dimension, image and innovativeness and concluded that the convenience and transparency factors which are the factor of the functional dimension has significant effect on switching intentions. innovativeness dimension is also known to have significant effect on switching intentions. meanwhile, the technical and image dimension are known to have no significant effect on switching intentions. lindner (2018) also conducted research on the phenomenon of customer switching among banking customers on fintech lending financing services using qualitative research approach with grounded theory method based on ppm theory and concluded that in the perspective of push effects, the afandi│ switching intentions among millennial banking customers to fintech lending international journal of islamic economics and finance (ijief), 3(2), 283-304 │287 factors affecting of customer switching include such as bad reputation, high price and inefficiency. in the perspective of pull effects, the factors affecting of customer switching include such as the regulation/portfolio sales, visibility and digitization. meanwhile, in the perspective of mooring effects, the factors that affecting of customer switching include such as launching pad, access and cheaper. both studies, using the research object in the form of msmes yet to other types of customers such as individual customers. therefore, to fill the research gap and create novelty, this study used is an individual customer with a category of millennials which became the highest proportion of indonesian population age today. in addition, this study used a quantitative approach by adopting ppm theory since it is the dominant paradigm in migration literature to answer the phenomenon of customer switching (jung et al., 2017). 2.3 hypothesis development the association between pricing problem and switching intentions the pricing problem relates to the customer’s perception of the pricing policy imposed by the bank (vyas and raitani, 2014). the more negative the perception of a banking customer towards the pricing factor, there will be an increasing in the potential of customer switching to the financing services of fintech lending. therefore, the hypotheses proposed in this study is: h1: pricing problem factor has positive and significant effect on millennial banking customer switching intentions to switch to the financing services of fintech lending in indonesia the association between processing problem and switching intentions the processing problem factor relates to the inherent perception in a service user to the procedures or terms of service she/he uses (maier, 2016). increasingly negative perceptions of banking customers to the procedure or requirement of bank’s financing will increase the potential of customer switching to the financing service of fintech lending. therefore, the hypotheses proposed in this study is: h2: processing problem factor has positive and significant effect on millennial banking customer switching intentions to switch to the financing services of fintech lending in indonesia the association between service quality and switching intentions the service quality factor relates to the perception of the banking customers to the services who she/he enjoys (vyas and raitani, 2014). service quality in a banking highly determines the loyalty of its customers (vyas and raitani, afandi│ switching intentions among millennial banking customers to fintech lending international journal of islamic economics and finance (ijief), 3(2), 283-304 │288 2014). increasingly negative perceptions of banking customers towards banking services, then the potential of customer switching will be greater. therefore, the hypotheses proposed in this study is: h3: service quality factor has positive and significant effect on millennial banking customer switching intentions to switch to the financing services of fintech lending in indonesia the association between easy process and switching intentions according to maier (2016), the easy process factor is one of the hallmarks of fintech lending that triggers banking customers to switch to the use of fintech lending services. all of the procedures in financing services of fintech lending use internet-based technology media by utilizing a website or application platform to facilitate the borrowing process and the process is more transparent (maier, 2016). therefore, the hypotheses proposed in this study is: h4: easy process factor has positive and significant effect on millennial banking customer switching intentions to switch to the financing services of fintech lending in indonesia. the association between ease of use and switching intentions the ease of use factor is a perception of prospective service users to the ease received from the use of a service. according to ye and potter (2011), the more prospective users of the service have an easy perception of a service as compared to the alternative services used today it will magnify the chances of switching to a service that is considered easier to use. therefore, the hypotheses proposed in this study is: h5: ease of use factor has positive and significant effect on millennial banking customer switching intentions to switch to the financing services of fintech lending in indonesia. the association between pricing benefit and switching intentions the pricing benefit factor is the inverse of the pricing problem factor where the perception of a prospective user towards the intended service is positive because the pricing policy set by the service provider is cheaper so it attracts prospective users of services to switch from the currently used services to other services (vyas and raitani, 2014). therefore, the hypotheses proposed in this study is: h6: pricing benefit factor has positive and significant effect on millennial banking customer switching intentions to switch to the financing services of fintech lending in indonesia. afandi│ switching intentions among millennial banking customers to fintech lending international journal of islamic economics and finance (ijief), 3(2), 283-304 │289 the association between inertia and switching intentions the factor of inertia is an intentional and conscious process that is done by the user to use the product or service offered by the service provider (li, 2018). someone with a high level of inertia will generally still use the current product or service even if there are products or services offered by a better service provider. therefore, the hypotheses proposed in this study is: h7: inertia factor has negative and significant effect on millennial banking customer switching intentions to switch to the financing services of fintech lending in indonesia. the association between security and switching intentions the factor of security is a perception of prospective users’ service to the security of transactions and the risks offered by service providers. according to ye and potter (2011), security factors are very important aspect that must be secured by the service provider regarding transaction security, user data and risk aspects. therefore, the hypotheses proposed in this study is: h8: security factor has positive and significant effect on millennial banking customer switching intentions to switch to the financing services of fintech lending in indonesia. the association between service products and switching intentions the service products factor is related to the innovation of products or services offered by service providers that affect a person to purchase or use a product or service. according to vyas and raitani (2014), the service products factor is very crucial in a business that can determine the sustainability of the business. therefore, the hypotheses proposed in this study is: h9: service products factor has positive and significant effect on millennial banking customer switching intentions to switch to the financing services of fintech lending in indonesia. the association between reputation and switching intentions reputation factor is the perception or image of a prospective user of service to a service provider. reputation factor will generally impact the service user’s trust in service providers (vyas and raitani, 2014). the reputation factor is indispensable to the service provider as an asset to compete in a competitive marketplace. therefore, the hypotheses proposed in this study is: afandi│ switching intentions among millennial banking customers to fintech lending international journal of islamic economics and finance (ijief), 3(2), 283-304 │290 h10: reputation factor has positive and significant effect on millennial banking customer switching intentions to switch to the financing services of fintech lending in indonesia 2.4. conceptual framework based on the hypotheses proposed above, the research framework used in this study demonstrated in figure 1. this framework is modified from ppm theory which was developed by bansal et al. (2005) to examine regarding switching intentions among millennial banking customers to the financing services of fintech lending in indonesia which was caused by three effects of ppm namely push, pull and mooring effects. push effects are consisted by the negative factors of banking services namely pricing problem, processing problem and service quality which encourage millennial banking customers to switch. pull effects are consisted by the positive factors of fintech lending services namely easy process, ease of use and pricing benefit which encourage them to switch. while, mooring effects are factors that can inhibit millennial banking customers to switch because of the negative factors of fintech lending services consisted by inertia, security, service products and reputation. source: modified from bansal et al. (2005) figure 1. research framework iii. methodology 3.1. data this study uses research design using a quantitative approach aimed at examining and analyzing the factors affecting of switching intentions among millennial banking customers to the financing services of fintech lending. this study is conducted using the sample criteria namely banking customers who have made credit/financing at conventional commercial banks or islamic commercial banks within the last 5 years, aged 18 to 39 years old as a push effects switching intention pricing problem processing problem service quality ….. easy process ease of use pricing benefit ….. pull effects inertia security service products reputation mooring effects millennial banking customers toward fintech lending afandi│ switching intentions among millennial banking customers to fintech lending international journal of islamic economics and finance (ijief), 3(2), 283-304 │291 representation of the millennial age and know but have not used the financing services of fintech lending. the data collection techniques used in this study were surveying techniques using the likert 5 scale category (1 = “strongly disagree” to 5 = “strongly agree”) which were collected online during the period of october 17th – november 22nd, 2019. all research questions used adopted the ppm framework developed by bansal et al. (2005). a total of 245 primary data was successfully gathered from respondents who had answered all research questions based on their experience. 3.2. model development once the data has been collected, the test factor is carried out from the kaiser-meyer-olkin (kmo) test, anti-image matrices, communalities and component matrix as the validity test. as for the reliability test using cronbach’s alpha test (malhotra, 2019). after testing the factor analysis, then conducted testing of ordinary least square (ols) using the software of spss 16.0. according to bansal et al. (2005), ppm framework has three effects namely push, pull and mooring effects reflecting independent variables which trigger switching intentions reflecting dependent variable. the ols model used is written in the following regression models: (1) where: yi = switching intentions i = number of observations (245 samples) b0 = constant x1i = dummy bank used (0 = conventional bank, 1 = islamic bank) x2i = pricing problem x3i = processing problem x4i = service quality x5i = easy process x6i = ease of use x7i = pricing benefit x8i = inertia x9i = security x10i = service products x11i = reputation ei = error term 3.3. method this study is used the ordinary least square (ols) as a method. ols is a regression model by using independent variables of more than one variable. this method is commonly used to determine the relationship afandi│ switching intentions among millennial banking customers to fintech lending international journal of islamic economics and finance (ijief), 3(2), 283-304 │292 between independent variables and dependent variable and also used as preliminary research to determine the new advanced model (abduh et al. 2013). in the ols model have some problems which can interfere with the accuracy of the model made. the problems in the ols model are the multicollinearity, heteroskedasticity, autocorrelation and normality. to ensure that no problems in the ols model can be detected through the value of variance inflation factor (vif) and tolerance approaching 1 to be free from multicollinearity, the plot on the resulting chart does not form a specific pattern (random) for homoscedasticity, the value of durbinwatson (dw) approaches 2 to be free from the autocorrelation and residual forming a normal distribution bell pattern as well as the plot are along the lines for normality (calen et al. 2018). iv. results and analysis 4.1. result 4.1.1. profile of respondents prior to process and to analyze data using ols model, it is necessary to conduct the description of the respondent’s profile used in accordance with table 1. table 1 informs that the majority of respondents are male genders with a total of 149 people. the age of majority of respondents is at a range of 30 to 39 years old, which is 136 people. the domicile of the respondent was scattered in 22 regions in indonesia but most are domiciled in dki jakarta (65 people), yogyakarta (38 people), bekasi (31), tangerang (26 people), lampung (14 people), malang (13 people), bandung (11 people) and bogor (11 people). in addition, the majority of respondents ended his education at bachelor degree and worked as an employee on the public or private sectors with a monthly income of idr 1.6 – idr 4.5 million. 172 respondents admitted as muslim and 150 people claimed to have been credit at the conventional banks and 95 people claimed to have been financing at the islamic banks within the last 5 years. afandi│ switching intentions among millennial banking customers to fintech lending international journal of islamic economics and finance (ijief), 3(2), 283-304 │293 table 1. profile of respondents (n = 245) variable category frequency percentage gender male 149 60.8 female 96 39.2 age 20 – 29 109 44.5 30 – 39 136 55.5 domicile aceh 2 0.8 bandung 11 4.5 banjarmasin 1 0.4 banten 1 0.4 bekasi 31 12.7 bogor 11 4.5 cirebon 1 0.4 dki jakarta 65 26.5 jambi 2 0.8 kebumen 1 0.4 lampung 14 5.7 lombok 2 0.8 madiun 1 0.4 malang 13 5.3 medan 4 1.6 ntt 2 0.8 padang 3 1.2 palembang 2 0.8 sumedang 8 3.3 surabaya 6 2.4 tangerang 26 10.6 yogyakarta 38 15.5 education level high school or below 38 15.5 diploma 47 19.2 bachelor degree 141 57.6 master of doctoral degree 19 7.8 profession entrepreneur 26 10.6 staff on private or public sectors 163 66.5 housewife 30 12.2 income per month  idr 1.5 million 13 5.3 idr 1.6 – idr 4.5 million 112 45.7 idr 4.6 – idr 10 million 98 40 > idr 10 million 22 9 religion islam 172 70.2 catholic 30 12.2 protestant 43 17.6 bank used conventional bank 150 61.2 islamic bank 95 38.8 source: computed by author (2019) afandi│ switching intentions among millennial banking customers to fintech lending international journal of islamic economics and finance (ijief), 3(2), 283-304 │294 4.1.2. factor analysis tests the factor analysis test serves to test the validity and reliability of any research question in the proposed questionnaire. the validity and reliability test outputs are shown in table 2 and table 3. table 2. output of validity tests variable indicators kmo anti-image matrices communalities component matrix pricing problem item1 0.802 0.833 0.720 0.849 item2 0.843 0.750 0.866 item3 0.777 0.830 0.911 item4 0.772 0.848 0.921 processing problem item5 0.871 0.819 0.959 0.979 item6 0.890 0.933 0.966 item7 0.945 0.842 0.917 item8 0.844 0.946 0.973 item9 0.879 0.794 0.891 service quality item10 0.685 0.617 0.903 0.818 item11 0.616 0.947 0.814 item12 0.866 0.686 0.828 item13 0.724 0.531 0.728 item14 0.659 0.889 0.766 item15 0.698 0.930 0.835 easy process item16 0.754 0.823 0.693 0.832 item17 0.764 0.597 0.630 item18 0.748 0.502 0.709 item19 0.926 0.765 0.875 item20 0.648 0.727 0.853 item21 0.690 0.802 0.895 ease of use item22 0.730 0.666 0.955 0.977 item23 0.660 0.958 0.979 item24 0.950 0.870 0.933 pricing benefit item25 0.714 0.805 0.761 0.872 item26 0.712 0.823 0.907 item27 0.655 0.880 0.938 inertia item28 0.746 0.816 0.566 0.605 item29 0.693 0.859 0.927 item30 0.699 0.837 0.915 item31 0.852 0.802 0.896 security item32 0.634 0.746 0.627 0.792 item33 0.586 0.872 0.934 item34 0.627 0.769 0.877 service products item35 0.702 0.792 0.695 0.834 item36 0.653 0.829 0.911 item37 0.693 0.777 0.881 reputation item38 0.669 0.843 0.731 0.855 item39 0.606 0.926 0.962 item40 0.640 0.878 0.937 source: computed by author (2019) afandi│ switching intentions among millennial banking customers to fintech lending international journal of islamic economics and finance (ijief), 3(2), 283-304 │295 table 2 explains that based on the validity test, all research questions have a value of kmo > 0.5, anti-image matrices > 0.5, communalities > 0.5 and component matrix > 0.5 which means that all research questions have fulfilled the validity test or the entire list of research questions can be said to have been appropriately used as measuring of research variable and can be continued to the next test namely reliability test. table 3. output of reliability test cronbach’s alpha cronbach’s alpha based on standardized items n of items 0.862 0.856 40 source: computed by author (2019) table 3 shows the reliability test output using the value of cronbach’s alpha. based on cronbach’s alpha value, the whole research question has fulfilled the assumption of the reliability test due to the value of cronbach’s alpha > 0.6 or in other words the respondents have answered the research questions consistently. 4.1.3. ordinary least square (ols) after all research questions meet the assumption of the validity and reliability test or it is said to be valid and reliable, then the data processing can be conducted using the ols model as shown in table 4. table 4. output of ordinary least square (ols) model unstandardized coefficients standardized coefficients t sig. b std. error beta (constant) -0.091 1.476 -0.061 0.951 dummy bank used 0.729 0.256 0.151 2.852 0.005 pricing problem 0.068 0.040 0.088 1.709 0.089 processing problem 0.036 0.029 0.073 1.246 0.214 service quality -0.029 0.028 -0.049 -1.002 0.317 easy process 0.078 0.048 0.095 1.621 0.106 ease of use 0.420 0.071 0.352 5.950 0.000 pricing benefit 0.352 0.068 0.292 5.143 0.000 inertia -0.054 0.040 -0.067 -1.361 0.175 security 0.105 0.068 0.114 1.537 0.126 service products -0.164 0.057 -0.152 -2.878 0.004 reputation -0.162 0.056 -0.199 -2.886 0.004 r square 0.565 source: computed by author (2019) from table 4 above can be written the ols model in this study: switching intentions = -0.091 + 0.0729 bank used + 0.068 pricing problem + 0.036 processing problem – 0.029 service quality + 0.078 easy process + 0.420 ease of use + 0.352 pricing benefit – 0.054 inertia + 0.105security– 0.164 service products – 0.162 reputation + e afandi│ switching intentions among millennial banking customers to fintech lending international journal of islamic economics and finance (ijief), 3(2), 283-304 │296 the resulting of ols model can be done of model interpretations: a. the value of constant of -0.091 means that the average of switching intentions of millennial conventional banking customers to switch to the financing services of fintech lending. b. value b1 variable of dummy bank used of 0.729 means that the average of switching intentions of millennial islamic banking customers higher than the average of switching intentions of millennial conventional banking customers as big as 0.729 times to switch to the financing services of fintech lending. with p-value of 0.005 means h0 is rejected or in other words there is a significant difference between millennial islamic banking customers and millennial conventional banking customers to switch to the financing services of fintech lending. c. value b2 variable of pricing problem of 0.068 means that every increasing in the negative perception of pricing problem in credit/financing services of banking will increase the switching intentions of millennial banking customers to the financing services of fintech lending by 0.068 percent. with p-value of 0.089 means that h0 is received or in other words the pricing problem has positive but not significant effect on switching intentions. d. value b3 variable of processing problem of 0.036 means that every increasing in the negative perception of processing problem in credit/financing services of banking will increase the switching intentions of millennial banking customers to the financing services of fintech lending by 0.036 percent. with p-value of 0.214 means that h0 is received or in other words the processing problem has positive but not significant effect on switching intentions. e. value b4 variable of service quality of -0.029 means that the service quality in credit/financing services in banking services is considered to be good enough so as to reduce the switching intentions of millennial banking customers to the financing services of fintech lending by -0.029 percent. with p-value of 0.317 means that h0 is received or in other words the service quality has negative and not significant effect on switching intentions. f. value b5 variable of easy process of 0.078 means that every increasing in the positive perception of easy process in credit/financing services of fintech lending will increase the switching intentions of millennial banking customers to the financing services of fintech lending by 0.078 percent. with p-value of 0.106 means that h0 is received or in other words the easy process has positive but not significant effect on switching intentions. g. value b6 variable of ease of use of 0.420 means that every increasing in the positive perception of ease of use in credit/financing services of fintech lending will increase the switching intentions of millennial banking customers to the financing services of fintech lending by 0.420 percent. with p-value of 0.000 means that h0 is rejected or in other words the ease of use has positive and significant effect on switching intentions. afandi│ switching intentions among millennial banking customers to fintech lending international journal of islamic economics and finance (ijief), 3(2), 283-304 │297 h. value b7 variable of pricing benefit of 0.352 means that every increasing in the positive perception of pricing benefit in credit/financing services of fintech lending will increase the switching intentions of millennial banking customers to the financing services of fintech lending by 0.352 percent. with p-value of 0.000 means that h0 is rejected or in other words the pricing benefit has positive and significant effect on switching intentions. i. value b8 variable of inertia of -0.054 means that every increasing of inertia towards credit/financing services of banking will decrease the switching intentions of millennial banking customers to the financing services of fintech lending by -0.054 percent. with p-value of 0.175 means that h0 is received or in other words the inertia has negative and not significant effect on switching intentions. j. value b9 variable of security of 0.105 means that the security factor in the financing services of fintech lending is deemed to have been good enough so as not to degrade and precisely increase the switching intentions of millennial banking customers to the financing services of fintech lending by 0.105 percent. with p-value of 0.126 means that h0 is received or in other words the security has positive but not significant effect on switching intentions. k. value b10 variable of service products of -0.164 means that every increasing in the negative perception of service products in credit/financing services of fintech lending will decrease the switching intentions of millennial banking customers to the financing services of fintech lending by -0.164 percent. with p-value of 0.004 means that h0 is rejected or in other words the service products have negative and significant effect on switching intentions. l. value b11 variable of reputation of -0.162 means that every increasing in the negative perception of reputation in credit/financing services of fintech lending will decrease the switching intentions of millennial banking customers to the financing services of fintech lending by 0.162 percent. with p-value of 0.004 means that h0 is rejected or in other words the reputation has negative and significant effect on switching intentions. m. the r square value of 0.565 means that all independent variables are able to explain the variation of the dependent variable which is switching intentions as big as 56.5 percent, while the remainder of 43.5 percent is explained by other variables that are not calculated in the model. afandi│ switching intentions among millennial banking customers to fintech lending international journal of islamic economics and finance (ijief), 3(2), 283-304 │298 table 5. output of multicollinearity and autocorrelation tests collinearity statistics durbin-watson tolerance vif 0.669 1.494 1.628 0.703 1.423 0.550 1.819 0.774 1.292 0.546 1.832 0.532 1.878 0.579 1.727 0.761 1.314 0.341 2.936 0.672 1.487 0.394 2.538 source: computed by author (2019) the resulting ols model has been freed from the problem of multicollinearity and autocorrelation that can be known from the value of vif and tolerance which are close to 1 and the dw value approaching 2. whereas, normality and heteroscedasticity are shown in figure 2. (a) (b) (c) figure 2. output of normality and heteroscedasticity tests source: computed by author (2019) figure 2 explains that the resulting ols model has fulfilled the assumption of normality which can be known from figure 2(a) which is the residual forming normal distribution pattern of bell-shaped and figure 2(b) which the plot in the image is not far from the line (nachrowi and usman, 2018). in addition, the resulting ols model has fulfilled the assumption of homoscedasticity which can be known from figure 2(c) which the plot in the image is not form a particular pattern or in other words the residual is not heteroscedasticity. 4.2. analysis based on the results of the study above, it can be done analysis of the following study results: millennial islamic banking customers are known to have higher the average of switching intentions than the millennial conventional banking customers to switch to the financing services of fintech lending. the afandi│ switching intentions among millennial banking customers to fintech lending international journal of islamic economics and finance (ijief), 3(2), 283-304 │299 results of this study confirm the study conducted by afandi and muta’ali (2019) explained that millennial islamic banking have the opportunity to switch to the financing services of fintech lending higher than the millennial conventional banking customers due to the lower level of inertia of millennial islamic banking customers than the millennial conventional banking customers. in the perspective of push effects that consists of the pricing problem, processing problem and service quality factors can be noted that each factor does not have a significant effect on switching intentions. the results were not in accordance with the results of the study conducted by jung et al. (2017); li (2018); li and ku (2018) explained that the push factor has significant effect on switching intentions. in other words, the result of this study provides evidence that the millennial banking customers tend to have a positive perception of credit/financing services in banking in the aspect of pricing, processing and service quality so as not to encourage them to switch to the financing services of fintech lending. in the perspective of pull effects, only the ease of use and pricing benefit factors are significant impact on switching intentions so that it attracts the millennial banking customers to switch to the financing services of fintech lending. the results of this study correspond to the results of study conducted by jung et al. (2017); li (2018); li and ku (2018) explained that the pull factor has significant effect on switching intentions. the use of technology is an advantage of fintech lending which causes its services to have characteristics such as ease, speed, flexibility and sufficient information so as to influence the person’s perception to switch using fintech lending services (maier, 2016). in addition, the use of technology also leads to more efficient of fintech lending services so as to reduce of operational costs impacting the price of products that are cheaper than credit/financing services in banking (lindner, 2018). meanwhile, in the perspective of mooring effects is only factor of service products and reputation which are known to have significant effect on switching intentions that could impede millennial banking customers to switch to the financing services of fintech lending. the results of this study confirm the results of study conducted by jung et al. (2017); sun et al. (2017); li (2018) explained that the mooring factor has significant effect on switching intentions. the result of this study also proves that the level of inertia of millennial banking customers are high enough that can be known from the negative axis of inertia towards switching intentions that it can reduce their motivation to find information about other products or services so as to inhibit them to switch (li, 2018). in addition, the service products and reputation factors are also the factor which can inhibit the switching intentions among millennial banking customers to the financing services of fintech lending which means they have the perception that fintech lending products or services have yet afandi│ switching intentions among millennial banking customers to fintech lending international journal of islamic economics and finance (ijief), 3(2), 283-304 │300 to fit their needs and the reputation of fintech lending in the eyes of prospective users has not been so good. v. conclusions and recommendations 5.1. conclusions based on the results and discussions that has been done can be concluded that in the perspective of push effects, each of push factor consisting of pricing problem, processing problem and service quality has no significant effect on switching intentions of millennial banking customers to the financing services of fintech lending or in other words credit/financing services in banking is taken into account quite good so that it does not encourage them to switch to the financing services of fintech lending. in the perspective of pull effects is known only the ease of use and pricing benefit factors that have significant effect on switching intentions of millennial banking customers to switch to the financing services of fintech lending. this result proves that the use of technology in the operations of fintech lending provides more benefits and gave positive response by prospective users so as to attract them to use fintech lending services. in the perspective of mooring effects is only factor of service products and reputation that have significant effect on switching intentions of millennial banking customers to switch to the financing services of fintech lending. this result also proves that the level of inertia of millennial banking customers is quite high coupled with a perception that has not been so good against the factors of service products and reputation on the financing services of fintech lending so as to impede the millennial banking customers to switch to the financing services of fintech lending. in addition, one of the results of this study can be known that the average of switching intentions among millennial islamic banking customer are higher than the average of switching intentions among millennial conventional banking customers which can be an important information for the managerial parties of islamic banking. 5.2. recommendations the results of this study are expected to provide useful information for the managerial banks, fintech lending, regulators and other researchers to be able to determine effective strategies and policies as well as research development amid the occurrence of disruption in banking services due to the presence of fintech lending especially in the aspect of customer switching. therefore, the banking industry and fintech lending is recommended to conduct a partnership model amid the competitive advantages that each has so that it can receive benefits and minimizing of losses due to customer switching and tougher business competition. that afandi│ switching intentions among millennial banking customers to fintech lending international journal of islamic economics and finance (ijief), 3(2), 283-304 │301 partnership model needs to be governed by the regulator in this case is the financial services authority. in addition, for further research development, researchers are expected to add a sample of research used with a more equitable distribution of samples in each province in indonesia to provide more representative research results. research development can also be done by adding other factors to each ppm effects. references abduh, m., kassim, s. h., & dahari, z. 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(2011). the role of habit in post-adoption switching of personal information technologies: an empirical investigation. communications of the association for information systems, 28(35), 585 – 610. afandi│ switching intentions among millennial banking customers to fintech lending international journal of islamic economics and finance (ijief), 3(2), 283-304 │304 this page is intentionally left blank international journal of islamic economics and finance (ijief) vol. 3(2), page 119-144, special issue: islamic social finance and ethics contemporary issues on cash waqf: a review of the literature khaled nour aldeen airlangga university, indonesia, damascus university, syria corresponding email: khaled.knd@hotmail.com inayah swasti ratih airlangga university, indonesia, inayah.swasti.ratih-2018@pasca.unair.ac.id sri herianingrum airlangga university, indonesia, sri.herianingrum@feb.unair.ac.id article history received: may 30 th , 2020 revised: july 17 th , 2020 accepted: august 28 th , 2020 abstract this paper presents the most recent works on cash waqf, focusing on identifying contemporary scholars' work in this area, providing a novel framework to indicate the existing gap, subsequently, it opens the door wider for new research commitment. this research adopts the paradigm of qualitative approach research, based on disk-based research. google scholar was employed, searching through the passage. only contemporary english documents within the period of 2002-2019 were the subject of this study. lately, cash waqf has been proven as a proper method for poverty alleviation. previous studies attempted to address several models in order to enhance socio-economics issues. this research is a distinct attempt, as to the best of our knowledge, there is no previous research addressed the subject matter. moreover, this study is expected to assist the interested scholars by offering comprehensive conclusion about have been done in the field. hence, opens new doors for scholars to develop new innovative cash waqf models to bridge the socio-economic issues. our findings depict that malaysian and indonesian scholars show a robust research commitment on cash waqf during 2002-2019. furthermore, this study highlights the existing gap that must be researched to enrich the potentials of cash waqf, future research should address other countries practices in term of cash waqf, moreover, validating a proposed model through interviews to ensure that a proposed model is applicable. in terms of cash waqf awareness, research might consider peer influence”, “self-efficacy in contributing to cash waqf. keywords: waqf, cash waqf, socio-economic, social welfare, sustainable philanthropy. jel classification : i31, i30, p36 @ ijief 2020 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.3236 web: https://journal.umy.ac.id/index.php/ijief/article/view/8923 citation: aldeen, k. n., ratih, i. s., & . herianingrum, s. (2020). contemporary issues on cash waqf: a review of the literature. international journal of islamic economics and finance (ijief), 3(2), 119-144. doi: https://doi.org/10.18196/ijief.3236 https://doi.org/10.18196/ijief.3227 https://doi.org/10.18196/ijief.3227 aldeen, ratih & herianingrum│ contemporary issues on cash waqf: a review of the literature international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │120 i. introduction 1.1. background islamic finance is growing rapidly in the contemporary world particularly during the last few decades. many countries are contesting in socioeconomics sector to enhance society’s well-being. for instance, indonesia, malaysia, and saudi arabia as muslim majority countries. in addition to singapore and nigeria as muslim minority. principally, islamic economy not limited to the material profit could be attained from the current life rather than considering both the current world “dunia” plus the hereafter “akhira” which is considered muslims’ ultimate goal (kahf, 1999). whereas, conventional economy is materialistic and profit-oriented in its nature. this the core difference between islamic banking and economy compared to its counterparts. the conventional economy is man-made, it’s also the subject of being used against him or rather being expired for a certain time. the main reason that the islamic economy and finance have received this high consideration during the last few decades is attributed to their, potential, certainty and quality in uplifting economic development and growth of the human being, aptitude in terms of poverty reduction and socioeconomics welfare. moreover, promoting livelihood standards through special instruments so-called waqf, zatakat, sadaqah, and infaq among of society members. mubyarto (1988) stated that welfare indicators are as follows, clothing, sufficient food, health maintenance, shelter, feeling of being treated fairly in life, and educational achievement of children all effectively addressed by waqf institutions. furthermore, waqf has performed well in the field of the assurance of the five essentials (al-daruriyaat al-khams): protection of life on the essentials; protection of the religion and religious activities; protection of the body; human intellect with sound and harmonious mind’s development, and soul through educational services; protection of widows and orphans; and protection of income; wealth and reallocation of wealth through economic activities (alam et al., 2018; kahf, 1999; abdullah, 2018). the most common and discussed aspect of the islamic economy and banking is the prohibition of usury (riba). the islamic scripture (qur’an) stresses on the prohibition of usury in several verses (qur’an, 3:130-131). islamic economics work differently from the traditional framework. the islamic one, however, refers to a system that operates according to islamic law (shariah), which predominantly prevents charging extra money for the borrowed money, it is based on (pls) profit-loss sharing where all the financial transactions are assets-backed. furthermore, it does not permit aldeen, ratih & herianingrum│ contemporary issues on cash waqf: a review of the literature international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │121 investments in any prohibited products, for example, pork (qur’an, 1:173) and alcohol as the in (qur’an, 1:219). the main dimensions of islamic economics are to enhance the social welfare, social security, debt, management and distribution of wealth, consumption, taxation, debts, monetary policies, market exchange and investment (shinkafi and ali, 2017). the subject matter has received and contemporary researches’ attention worldwide. especially in the last decades. waqf is considered as an effective socio-economic tool represent part of islamic ethical values of islam and counted among financing vehicle that serves islam and society. the implementation of cash waqf has attracted many researchers' attention to consider the potential and influences of this method of finance. however, to the best of authors’ knowledge there is no previous study addressed thoroughly what have been done in this area. among the reason of the recent comeback of cash waqf in the temporary context is due to its flexibility, it allows all muslims segments to participate in waqf activity regardless to the amount of money. moreover, more practical to distribute its benefits among the wider segments of receivers, uncomplicated to manage and easy to utilize for the beneficiary’s daily necessities. waqf issues have taken this significant place due to the efforts have been done by contemporary scholars, revealing the benefits associated with waqf practices including its applications in contemporary society plus addressing associated challenges. most of the reviewed research stressed that cash waqf is an efficient instrument can be an alternative for poverty alleviation, since such an initiative require a tremendous amount of money that could not be attained totally by the government. hence, seeking for a sustainable source if fund is inevitable. an indispensable part of islamic socioeconomics, cash waqf is a social fund politically and economically free of charge. moreover, it more powerful, permanent and pervasive since it is cardinally voluntary activity characterized by perpetuity. upon to the aforesaid, this research is an attempt to address what has been done in this area, subsequently will open new doors for scholar to address the potentials and challenges related to the field. for instance, find innovative ways to manage cash waqf systems and create a hybrid-sustainable cash waqf model to generate more benefits for all involving parties. therefore, it is crucial to seek for the enhancement of waqf institutions role in the current socioeconomic conditions. aldeen, ratih & herianingrum│ contemporary issues on cash waqf: a review of the literature international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │122 1.2. objectives mainly, our literature review aims to address three main areas. first, presenting what has been done by scholars in the field. secondly, highlighting the main topics that attracted the contemporary scholars’ attention. and lastly, identifying the existing gap for future research. the reminder of the paper is arranged in following chronological order: first start with waqf definition and its legitimacy, followed by research methodology, next discussion and ending up with the conclusion. ii. literature review 2.1 background and theory 2.1.1 the term waqf before discussing the main research question, let us tackle what is the essential characteristic of waqf, and its permissibility from islamic perspective. in the arabic language, singular waqf and the plural awakaf means to stop, preserve, or contain (shukor, anwar, aziz, & sabri, 2017a). in the islamic context, waqf simply interpreted as holding an asset (maal) and limiting its consumption to frequently extract its usufruct for the benefit of an objective representing philanthropy/righteousness (qudamah 1998; kahf, 1999; mahamood, 2006). waqf is endowing a property for philanthropic goals seeking reward from allah (swt) (kahf, 2003). hence, the control of waqf property lies outside the individual who endowed the waqf property. waqf is permanent, neither refundable nor returnable, and disposition of it outside the particular objective is prohibited (yusof, hasarudin, & romli, 2014). in other words, waqf is a gift that will keep giving until the day of judgment. two models of prominent waqf are the immovable property (`aqar) and movable (manqul) property (mahamood, 2006). waqf is an endowment made by the wealthy to serve the needy. basically, four parties contribute with waqf property as follows (khademolhoseini, 2008):  waqif (endower);  nadzir (waqf manager); (in the case of cash waqf, nadzir he is obliged to maintain the fund in a way that keep the original amount)  mawquf ‘alaih (beneficiaries); and  mawquf (property or cash as property). aldeen, ratih & herianingrum│ contemporary issues on cash waqf: a review of the literature international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │123 it is one of the essential components in islam in mitigating poverty through granting primary needs to improve the universal welfare of people and or has the strong economic dynamism to pave the path of growth to facilitate the society's growth (aliyu, 2019; kahf, 1999). apart from the relationship between mankind and allah (swt), waqf also relates to people’s affairs among each other’s (aliyu, 2019). according to nadwi, (2015) waqf institution serves two purposes. on the one hand, provide a perpetual reward for the donor. on the other, it is in the interest of the whole community in general. alam, shahriar, said & monzur-e-elahi (2018) stressed that through waqf institutions the living standards of ummah can be uplifted. moreover, reduce the poverty and difficulties among the needy and poor. through islamic history, waqf has witnessed tremendous development, since its early stages in the prophet muhammed era until the present moment. to be mentioned, the very first waqf in islam was quba mosque in al madinah, it was established upon the profit muhammed (saw) arrival in 622 a.d (laldin, 2005). throughout the reign of the khulafa’ al-rashidin and the subsequent period of islamic ruling waqf activities were further extended. this kind of waqf referred to a type of waqf, which essentially concern the religious, philanthropic, posterity of family and educational purposes. since the very beginning, numerous educational institutions have been financed employing waqf funds, for instance, there were 60 awqaf schools established by awqaf properties in palestine. moreover, syria and turkiye (of which 40 had been established by ayubite governors (kahf, 2003). the university of al-azhar in cairo alone is financed by numbers of awqaf (established in october 975 ad) (aliyu, 2019). 2.1.2 the term of cash waqf typically, waqf practices ordinarily centered on the building or land. however, many donors cannot afford an asset to participate in waqf. hence, cash waqf has come as a good option for donors who do not have a fixed asset but rather have movable assets i.e. cash for donating. thus, all the strata of the society are able to perform sustainable charity activities through cash waqf as long as they keen on doing it voluntarily only for the sake of allah swt blessing (mohsin, 2008). cash waqf practices could be categorized into two ones, the first so-called is the direct one, for instance, channel waqf money to redevelop an old waqf property. the indirect form of cash waqf where the fund invested in a particular permissible project and distributing its profit (mohsin, 2013). aldeen, ratih & herianingrum│ contemporary issues on cash waqf: a review of the literature international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │124 a sizable number of present scholars accept that participation in waqf in the form of cash becomes crucial (mohsin, 2008). however, over the years, the role of waqf in the socio-economic area has decreased significantly (saifuddin, kadibi, polat, fidan, & kayadibi 2014). the practice of cash waqf is not a new phenomenon. the first cash waqf in islam has been approved by imam zufar in the eighth century (sanusi and shafiai, 2015). it was effectively employed during the ottoman era. pitchay, meera, & saleem (2015) showed that by the end of the 16th century, the term of cash waqf was fully accepted by the whole antonia and the european territories of the ottoman empire which correspondingly managed some parts of the middle east, south-eastern europe and north africa. during that time, the collections in the cash waqf were used to acquire and improve several models of fixed assets. saifuddin et al. (2014) highlighted four notable implementations of cash waqf: i) it is accessible since it only requires a small amount of cash, which enables those who cannot afford to endow an asset; ii) creating a backup fund for educational institutions that face a cash flow problem; iii) generate funds for the improvement of waqf assets (waqf lands); and iv) boosting islamic institutions to be more independent, and release the pressure from the government back. furthermore, cash waqf can be employed for financing purposes, such as the development of waqf properties through acting as medium such as musharkah and mudarabah contracts. 2.1.3 legitimacy of waqf flashback to the legitimate (waqf), we find that the scholars have been rooted waqf with many evidences of the qur’an and the sunnah (the teachings and practices of muhammad) and the consensus. although they do not indicate the subject of the endowment directly, it urges the acts of righteousness and goodness. there is no single verse in qur’an refer to endowment (waqf) in a strict way, but waqf activities can be associated to many verses indicate the philanthropy and charity (qur’an,1:280; qur’an, 3:116; qur’an, 5:35 qur’an; 2:276; qur’an 2:261 qur’an, 2:110 qur’an, 73 :20 qur’an, 2:43 qur’an, 3:92 qur’an, 2:273). what is more, islam has several (ahadeeth) narrated from prophet muhammad (saws) indicates the importance of waqf, and his waqf contribution for instance: “a single sadaqa closes seventy gates of evil (al-ghazali, n-d). aldeen, ratih & herianingrum│ contemporary issues on cash waqf: a review of the literature international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │125 additional to (sunnah), prophet muhammed companions have recorded a notable waqf contribution. for instance, uthman bin affan r.a. it was narrated that the prophet (saw) called upon muslims to buy the well and provide the water free for the public upon realizing that water was traded at a high price. uthman bin affan r.a responded to the prophet muhammed (saw) call by acquiring the well and rendering the water for the public free (saifuddin et al., 2014). the granting of benefit to the detainees is based on its contribution to preserving the donator dignity to draw closer to god almighty. this giving is expressed by the charity that the prophet (saws) has urged. the charity based on endowment waqf is sustainable, on the other hand, the charity, which intended to expire, its works as paracetamol. same as all islamic activities, waqf activities must not contravene the roles of almighty allah. the shari’ah scholars: imam hanafi, imam hanbali, imam maliki’s and imam shafi’i and concur on perpetual waqf. however, from imam maliki’s point of view, it is permissible to be temporary (aliyu, 2019). the malikis, for instance, establishes that the waqif has the right to determine a particular period for the contract, which by its end, the property returns to him after a defined period of time. to be mentioned, waqf practices is only deemed to be only for muslims, while it could be donated by non-muslins as well (puad, rafdi, & shahar 2014). 2.1.4 legitimacy of cash waqf hanafi, maliki, shafi'i, hanbali schools have confirmed the legitimacy of moveable waqf (mohsin, 2013). however, jurists differ on the permissibility of cash waqf even though it is counted under moveable waqf. the hanafis and shafi’is fix that cash waqf is impermissible, the hanbalis and malikis say it is permissible (aliyu, 2019). al-mujamma’ al-fiqhi (islamic fiqh academy) in its fifteenth meeting, issued a statement no. 140 that countersigns that cash waqf is permissible. likewise, on may 11 2002, “ulama council” in indonesia issued a fatwa declaring that cash waqf is allowed (endowment cash/waqf al-nuqud) on condition that the principal value of endowments must be guaranteed sustainability (aliyu, 2019). they attributed their fatwa to general dalil in the qur’an which related to the managing cash waqf in indirect way, surah al-baqarah 215, 254 and 267, surah al-imran 92, in addition to hadith narrated by ibn umar (muslim, hadith no. 1632), as well as to the ijtihad (independent reasoning). in 2007, the malaysian national fatwa council concluded that cash waqf is permitted in islam (rahman, 2009). all muslims jurists fix that once a property is confirmed as waqf, it will be under three restrictions (al-zuhaili, 2004). the same should be implemented in the case of cash waqf (mohsin, 2013), namely: i) irrevocability: when a https://en.wikipedia.org/wiki/hanafi https://en.wikipedia.org/wiki/maliki https://en.wikipedia.org/wiki/shafi%27i https://en.wikipedia.org/wiki/hanbali aldeen, ratih & herianingrum│ contemporary issues on cash waqf: a review of the literature international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │126 founder endows a cash waqf, he cannot revoke it, in some special cases ca take enjoy part of the profit; ii) perpetuity; and iii) inalienability: it cannot be the subject to any, inheritance, gift, or any alienation whatsoever. figure.1 the categories of waqf according to (hanfi, maliki, shaf’i, hanbali) 2.2 previous studies in this section we attempt to present the outlines of the studied literature plus related reviews has been done in this area. a detailed explanation will be presented in the next section since this article is a literature review one. the early presence of cash waqf studies mainly addressed the poverty eradication through this sustainable instrument. masyita, tasrif, & telaga (2005) study was among the early studies that suggested cash waqf tool to eradicate poverty. however, there are a wide range of research addressing cash waqf. previous studies mainly attempted to associate cash waqf with microfinance (zabri and mohammed, 2018), smalland medium-sized enterprises (amuda, embi, & babatunde 2014), education (aziz, johari, & yusof, 2013), factors influence the contributors (witjaksono, 2018) , management (siswantoro, rosdiana, and fathurahman, 2018), e-cash waqf (yusof et al., 2014), and socio-economics development (sanusi and shafiai, 2015). atan and johari (2017) aim to examine the 2006-2016 literature of waqf dealing with the topic poverty alleviation; the writers concentrate on the publications’ years, the number of the contributors, and the country of a study. they use the open access mendeley database to retrieve relevant information. as hundreds of studies they confirmed that waqf is an efficient method to alleviate poverty. on the other hand, the contemporary scholars are focusing on maximizing the benefits of cash waqf, for example nadya, alwyni, hadiyati, & iqbal (2019); while others concentrate on the waqf manager accountability (siswantoro et al., 2018). aldeen, ratih & herianingrum│ contemporary issues on cash waqf: a review of the literature international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │127 our study differs in many aspects; the firs, is the in-hand study concentrate on the cash waqf; we attempt to narrow the research topic to end up with reliable conclusion. secondly, this study not only counting the article rather than it summarizes the conclusion of the research counted in the results. this research is a distinct attempt in nature since there is no previous study presented what has been done in this area. this research will highlight the main areas has been associated to cash waqf practices and highlighting what has been missed in the literature. iii. methodology 3.1. data this study relied on the finding based on the selected keywords mainly “cash waqf” and “waqf” “islamic socio-economics” “zakat, infaq, sadaqah”. prior to the review phase all the recovered documents relevancy was evaluated based on the title, abstract, conclusion, and addition to bibliography. some papers seem not relevant to the main topic “cash waqf” but these papers were used in the next phase, which is reviewing the reference list thoroughly seeking for further articles related to the subject of “cash waqf”. all the selected article has to include information suggests its relevance to the topic of “cash waqf”. to be mentioned, documents that do not indicate the subject of “cash waqf” has been excluded. the main purpose beyond narrowing the research question to cash waqf, is to end up with, exhaustive summary of current evidence relevant to “cash waqf”. generally, all article dose not research cash waqf in direct or indirect way plus article are not written in english were excluded from the in-hand study. wholly, published studies were downloaded employing google scholar. however, only articles were considered relevance significantly to be scored as part of this result. the idea of cash waqf is thus relatively brand-new as compared to its common applications (siswantoro and dewi, 2007). research that shed lights on cash waqf implementation and opportunities has been commenced in the last decade, resulted from newly allowing cash waqf practices in countries, for instance, indonesia “ulama council” in 2002 (aliyu, 2019). followed by another fatwa from the “malaysian national fatwa council” in 2007 (rahman, 2009). therefore, the span of this study was (2002-2019). in all, 74 references were used in this research, while only 57 references were found significantly related to the subject of cash waqf to be scored the part of the result. aldeen, ratih & herianingrum│ contemporary issues on cash waqf: a review of the literature international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │128 3.2. method the literature review is used in this study, collecting secondary data, this is followed by synthesizing the data qualitatively and quantitively. hence, provide a comprehensive summary of current literature related to the “cash waqf”. the exploration processes started in october and ended in november 2019. the research phases employed in this study were used by shinkafi and ali, (2017) as follows:  documents that match with the search keywords;  seeking for more relevant references in the bibliography of the downloaded articles to expand the retrieved data. rstudio software were employed to analyze the data and extract the visuals. this software commonly used for visual programming particularly in the case of literature review studies (aria, and cuccurullo, 2017). iv. results and analysis 4.1. results to present the result of this study, the full title of the 57 scored paper presented in figure.4 to identify its relevance to the subject matter. to ease the analyses, eight themes connected to cash waqf were identified. to be said, some papers correlated to more than one them, but to avoid duplication the dominant content of the paper was mainly considered to categories each article. after deciding these eight themes, a second searching round employing google scholar to ensure that no related articles are lifted behind. figure 2 shows the number of the accessed documents each year spanning 2002-2019, the result during the stated period present a significant advancement after the declaring the permissibility of cash waqf in indonesia and malaysia, and started increase significantly starting from 2006, that could be attributed those two announcements have spotted the light of the cash waqf. the period 2012-2018 witnessed extraordinary growth, most of the contemporary scholars moved to the socio-finance due to its positive consequences. however, in 2019 the number slightly declined, probably many related articles have been accepted and not published yet. figure 3 illustrates the contribution of each theme during the study period. title 5 and 7 have the highest percentage of 23% and 21% respectively, revealing that the contemporary scholars concerning the management of cash waqf and the factor influence cash waqf contributions rather than aldeen, ratih & herianingrum│ contemporary issues on cash waqf: a review of the literature international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │129 other aspects. title 1 and 8 recorded a significant result compared with titles 3, 4 and 6. whereas, title 2 recorded the least effect with 3%. figure 2. number of the articles per year. figure 3. documents’ analysis per title. the consequence of systematic literature review could be categorized into several themes as follows:  cash waqf for microfinance (4 articles)  cash waqf for smalland medium-sized enterprises (8 articles)  cash waqf for education (2 articles)  cash waqf for poverty alleviation (4 articles)  factors influence the contributors of cash waqf (13 articles)  management of the cash waqf (12 articles)  e-cash waqf (5 articles)  cash waqf for socio-economics development (9articles) 0 1 2 3 4 5 6 7 8 9 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 title 1 14% title 2 3% title 3 7% title 4 7% title 5 23% title 6 9% title 7 21% title 8 16% aldeen, ratih & herianingrum│ contemporary issues on cash waqf: a review of the literature international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │130 figure 4. structuring exogenous research topics cash waqf for microfinance islamic microfinance institutions lacking the economic and financial sustainability of the financing modalities employed. hence, produce often very little social impact (nadwi and kroessin, 2013). cash waqf can enhance the accessibility of microfinance institutions to access financial markets. zarka (2007) stresses that cash waqf is an efficient method to alleviate poverty through bridging cash waqf donations to relieve the poverty of those who cannot fully support themselves. furthermore, he confirmed that cash waqf is a proper way to combat poverty fulfills a major economic goal in islam. kachkar (2017) introduced cash waqf microfinance fund (cwrmf) in order to bridge microfinance facilities to refugee entrepreneurs who are capable to run their businesses. this model employed cash waqf donations to serve microfinance facilities. zabri and mohammed, (2018) examined the behavior intention to participate in {cash waqf-financial cooperative-musharakah mutanaqisah (cwfcmm)} home financing model with four different form of normative influence namely; subjective norm, attitude, perceived cost benefits, perceived behavioral control of the proposed model, their results showed that subjective norm was determined to be as a significant factor in measuring the intention of the homeowners in malaysia to participate in the model. nadwi and kroessin (2013) reviewed the socio-economic cash waqf for microfinance for smalland medium-sized enterprises education for poverty alleviation factors influence the contributers management e-cash waqf for socioeconomics development cash waqf aldeen, ratih & herianingrum│ contemporary issues on cash waqf: a review of the literature international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │131 and fiqh (islamic jurisprudence) issues about cash waqf permissibility. moreover, he stresses that hybridization of cash waqf and microfinance can offer an innovative way to enhance access to development finance. cash waqf for smalland medium-sized enterprises mohsin (2013) addresses a new model that cwfi cash waqf financial institution can be employed by any muslim societies to fulfill a social need and uplift their living standards, without depending on the governments. cwfi can assess entrepreneurs with qard hassan loan/free-interest loans in order to commence their businesses. duasa and thaker (2016) stressed that through cash waqf a country’s gdp can be accelerated by bridging the donations of cash waqf to microenterprise financing. furthermore, it has been found a high level of readiness of the micro-enterprises in accepting the model as a source of financial and human capital development. another model as source for small enterprises has been approached by duasa and thaker (2015 & 2016) and thaker et al. (2016) the proposed a new financing model {cash waqf micro-enterprises investment (icwme-i)} for microenterprise through an agreement between cash waqf institutions and micro enterprises through musharaka mutinaqisa to finance projects and businesses. nevertheless, thaker et al. (2016) confirm the feasibility of this model by interviewing experts from different backgrounds. another study addressing this model by thaker et al. (2016) to examines the intention of micro-enterprise to adopt such a model icwme-i the findings indicate that both the subjective norms and attitude are seen to have a positive significant impact on the intention of micro-entrepreneurs to use the icwme-i model in malaysian context. another study by lahsasna, (2010) addressed the role of cash waqf to enhance and develop the financial services for micro and medium-sized enterprises (mmes). an interesting study by amuda et al. (2014) discussed the possibility of using cash waqf funds between nations (malaysia-nigeria) relaying on the excelled nigerian agriculture sector. aldeen, ratih & herianingrum│ contemporary issues on cash waqf: a review of the literature international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │132 cash waqf for education as a result of the importance of education for the development of human capital and its impact on the economic growth (wafa, 2010). wafa (2010) promotes the third sector of islamic economics through benevolent and educational programs. aziz et al. (2013) design a new cash waqf model for education financing through waqf bank, waqf bank can be entrusted to with cash waqf and collecting it from public and cannel it for education purposes. to ensure the perpetuity of the fund, a reserve account can be established to cover any default since the given loans are interest-free with minimum service charge. cash waqf for poverty alleviation most of the reviewed studies indicated directly or indirectly that waqf could be considered among the effective method to alleviate poverty, due to its sustainability. saifuddin et al. (2014) attempted to examine the potential of cash waqf to alleviate poverty in malaysia due to the malaysian government policies to alleviate poverty, their findings show that cash waqf can be used as an effective tool to eradicate poverty because cash waqf reached great lengths in these recent years. in the case of oic countries amuda and embi (2013) analyze the forms and extent of funding that may be spent in established voluntary organizations such as waqf properties, public funding, and sadaqah to create employment to decrease the poverty rate in oic countries. masyita et al. (2005) developed a cash waqf model in order to assess sme’s as an alternative to alleviate poverty in indonesia. factors influence the contributors of cash waqf witjaksono (2018) attempted to examine the customers’ intention to donate cash waqf through islamic banks in indonesia, the author stressed that behavior, religious commitment, subjective, attitudes, influence cash waqf donation through islamic banks. affandi and nufus (2010) find that cash waqf contributions still far from its expectations. rizal and amin (2017) investigated the role of islamic religiosity, islamic egalitarian and perceived ihsan on cash waqf contribution in aldeen, ratih & herianingrum│ contemporary issues on cash waqf: a review of the literature international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │133 malaysia, their findings indicate a significant relationship between the studied factors and cash waqf contribution. shukor et al. (2017a) in the case of malaysia find that demographic can predict the donor/nondonor. furthermore, they extended their study to confirm that trust and religiosity in awqaf institution are predictors of muslims’ participation in cash waqf (shukor et al., 2017b). osman, mohammed, & amin (2012) tried to explain the role of demographic factor, religious satisfaction, trustworthiness, tax incentive, and efficient management to increase cash waqf contributions. another study that addresses the malaysian context is done by pitchay et al. (2015) who tried to explain the factors influents the employee to contribute in waqf through salary deduction, verified the structural relationship between subjective norms, attitude and behavioral intentions of muslim workers. in addition, the individuals’ mindset will inspire waqf endowers. it has been stated that the effect of attitude on behavioral intent is instrumental in understanding acceptance of cash waqf (shukor et al., 2015). haron, kamarudin, fauzi, ariff, & zainuddin (2016) recommended the increase of cash waqf promotion in order to gain more collections since his findings illustrate the factors to influence this collection authority, promotion, method, place, and stuff. concerning the theory of planned behavior, osman et al. (2016); ratnasari and arifin (2017); osman et al. (2014) confirm the validation of the theory to explain cash waqf giving behavior. adeyemi, ismail, & hassan (2016) indicate that the level of awareness in malaysia is in its low levels, awareness level was explained by the lack of promotion and lack of understanding. johari, alias, aziz, ridhwan, kefeli, ahmad, & ibrahim (2015) attempted to give insight about continuous cash waqf contribution, they suggest that the popularity of contributing to cash waqf continuity is more prevalent among married males of 36 to 40 years old and reside in the rural area. management of the cash waqf after the announcement of both malaysian and indonesian government, many waqf institutions have been established (nahar and yaacob, 2011). nadya et al. (2019) indicated that cash waqf in indonesia facing three main difficulties to reach its optimal level, regulations, nazhir, and socialization. another study addressed the indonesian context by nahar and yaacob (2011) established that the aldeen, ratih & herianingrum│ contemporary issues on cash waqf: a review of the literature international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │134 indonesian awqaf institutions have a unique characteristic. hence, they attempted to reconstruct the accountability of waqf institutions in indonesia. on the other hand, chowdhury, et al., (2011); nahar and yaacob, (2011). in the case of malaysia, attempted to examine the accountability, they stress that the accountability system in the country needs to be enhanced and uplifted. further study in malaysia examining the operation of cash waqf and its limitations, mokhtar, sidin, & abd razak (2015) concluded that the lack of qualified nadzir plus the multi decision-making process should be addressed to maximize the performance of a cash waqf institution. in the same context yaacob (2013) investigates some cash waqf cases when civil law violates the shariah law. khademolhoseini, (2008) attempted to approach new models (mutual fund and cooperative) to maximize cash waqf management. since cash, waqf practices were significant in the ottoman empire (ibrahim, amir, & masron, 2013; toraman et al., 2007). toraman et al. (2007) attempted to present cash waqf accounting practices in the ottman empire era. a sole study concerned the case of singapore by karim (2007) discussing the administration and the management in the country, indicating that the country lacks expertise in the waqf. it seems the same in the indonesian context when rusydiana and devi (2018) state that indonesian cash waqf institutions lack qualified human resources, efficient system, trust and fulfilled waqf covenants. mauluddin and rahman (2018) discuss the permissibility of cash waqf in aceh (wellknown as islamic district in indonesia), they noted that the aceh’s scholars do not declare the permissibility of cash waqf if it is not going to be linked with a fixed asset. sulaiman et al. (2019) proposed unit trust model to enhance the performance of cash waqf plus enlarge the base of cash waqf collection. e-cash waqf lately, e-waqf increases the collection of waqf electronically; motivate existing internet banking users to contribute to waqf activities. moreover, enabling the collectors to make more funds to be invested to serve the development of the ummah (yusof et al., 2014). amin et al. (2014) attempted to investigate the factors influence the contribution of cash waqf, perceived ease of use, religiosity, and usefulness plus the amount of information play a vital role in the aldeen, ratih & herianingrum│ contemporary issues on cash waqf: a review of the literature international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │135 contribution of cash waqf. (yusof et al., 2014) attempted to identify the challenges and the limitation of the conventional way of cash waqf collection, he proposed that e-cash waqf in malaysia has great potential since the country enjoys advanced information technology. only age among the demographic factors influence e-cash waqf contribution in malaysia (perlis et al., 2014). a sole study in the indonesian context by victoria and ong, (2019) stressing on the potential of the e-waqf in indonesia if and only if managed properly. cash waqf for socio-economics development several studies pointed the potential of cash waqf for socio-economic development, but in this section, we will discuss only articles which discussed thoroughly cash waqf potentials for socio-economics development. nurrachmi, (2012) and suhaimi et al. (2014) discuss that through cash attained by committees of a mosque can be bridged to provide financing facilities. alam et al. (2018) based on literature review, indicated that all types of waqf including cash waqf can be an effective tool for social welfare if utilized properly through synthesizing models to address current contexts. while nurrachmi (2012) stresses the importance of availability of qualified nadzir to meet cash waqf objectives. ibrahim et al. (2013) indicate the potentials of cash waqf to uplift ummah living standards using evidence from ottoman empire cash waqf implications. sanusi and shafiai (2015) provide an evidence in malaysia based on literature and interviews that cash waqf is the alternative method toward societal development. che hassan and rahman (2018) confirms that through cash waqf can improve the development factors of malaysian economy such as well-being, education, health, agriculture and religious affairs. mohammad (2011) discussed the permissibility of establishment of waqf bank based on cash endowments to serve the ummah national and internationally. aliyu (2019) and mohammad (2009) discussed all types of waqf and its potentials enhance socioeconomics, but he insisted that cash waqf should be priorities due to its flexibility and ease of collection. aldeen, ratih & herianingrum│ contemporary issues on cash waqf: a review of the literature international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │136 4.2. analysis this is unfortunate that most of the published papers address the indonesian and malaysia context. however, that cash waqf had played a notable role in the development of socio-economic of muslims in history (aliyu, 2019). the principle of waqf is to serve the well-being of society to the large extent (alam et al., 2018). furthermore, provide needs in a sustainable way to serve a community. it attends by covering the social work, health, education and economic activities such as business expansion, and other areas of societal work without depending on the government’s budget (mohsin, 2013). hence, it goes beyond the religious activities. at the present time, issues have urged contemporary scholars to employ cash waqf in such a way that can serve society’s needs by highlighting the significance of cash waqf as a fundraising scheme. moreover, shed some light on the modus operandi of investment for cash waqf while guaranteeing its perpetuity. since management systems are facing number of challenges to make it productive, transparent, dynamic and innovative in the utilization of the waqf properties recommended solution for these problems are good governance, creating secondary projects to generate a regular flow of incomes for insufficient project (mokhtar et al., 2015). to be said, accounting and reporting practices seem to exist in the awqaf entity, notable changes remain essential to guarantee accountability that could be continuously enhanced and uphold. sharing the reports with the contributors, this might prompt them to increase their contribution. furthermore, they will be an indispensable part of the advertisement campaign when mutawallis address the purpose of waqf properly (shukor et al., 2015). aside from perceived behavioral control and religiosity other factors should be addressed which for example cash waqf awareness and cash waqf (dakwa) “peer influence”, “self-efficacy”, impact, this will open new broaden insight how waqif performs. moreover, factors that influence individuals to donate continually should be examined, because the information will enable the nadzir (waqf manger) to set future plans based on reliable forecast (taking into consideration muslims occasions such as (ramadan, iduladha, idulfitri, and milad). awareness and willingness towards technological waqf in the 4.0 era, in addition to contemporary issues related to encrypted cash waqf aldeen, ratih & herianingrum│ contemporary issues on cash waqf: a review of the literature international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │137 must be enhanced (amin et al., 2014). studies on transferring cash waqf from country to another is highly encouraged, since muslim and non-muslim endowment for conflicted countries could be managed in sustainable way. since cash been started in those countries at present, countries that accept and practice cash waqf are pakistan, iraq, turkey, iran, syria, india, egypt, and burma (rashid, 2003). however, we have found no previous study addressed the context of the above-mentioned countries. it is crucial to learn from their experience since the cash waqf initiative has been highlighted in these counties. it has been discussed thoroughly that public literacy about cash waqf is on its low level, which is vital to be enhanced since they are the main contributors. convincing and enhancing public awareness is crucial to uplift cash waqf potential to a higher level. some potential factors such as waqf awareness and cash waqkf dakwa impact could provide new insights on how waqif perform such divine giving in order to address the aforesaid limitation. moreover, an intensive advertisement campaign is highly recommended and this could be started from friday prayer minbar (pulpit). v. conclusion and recommendation 5.1. conclusion this research presents the most current literature on the avenue addressed the cash waqf for socio-economic advancement; this it is also could be considered as an eye-opener to encourage other researchers to work on cash waqf broadly in a developing nation not only in malaysia and indonesia but extending it to rest of the world. hence, exchanging its positive vibes. however, most of the studies addressed the malaysian and indonesian context, duplicate the previous research ideas with expanding the geographical limits of the previous research will be recommended, subsequently, attaining more reliable generalizable results. same with any study, our study has several limitations which is focusing on and addressing the literature related to cash waqf, disregarding other waqf practices such as waqf istibdal, sukuk waqf, and waqf assets. in addition, reviewing only articles published aldeen, ratih & herianingrum│ contemporary issues on cash waqf: a review of the literature international journal of islamic economics and finance (ijief), 3(2), si, 95-118 │138 in english. in adherence to our systematic review features, the in-hand research handles all related studies to cash waqf irrespective of their type and status. to ensure the so-called “publication equality”. all the unpublished attempts have been excluded from this study, as it is difficult to be accessed. this study accepted all the published articles irrespective to the location and landmass as long the article presented in english, and during the study period spanning 2002-2019. this study dose not only identify the gaps for the contemporary scholars but provide a venue to establish more comprehensive work based on the presented information. 5.2. recommendations waqf activities should be given a wider attention. for instance, extending the proposed models to cover a wider range of sdgs. waqf manager should always stress on the transparency in all the transitions, hence, enhancing its credibility. an established/professional entity should be considered to supervise and manage the cash funds. hence, avoiding any potentially fraudulent activity among the mutawallis as well as to perform evaluations on the nadzir’s performance. moreover, the availability of such an entity will ensure the proper allocation of cash waqf returns. for academia and theoretical, more proposed models addressing he sustainable development goal (sdgs) should be taken into consideration, since cash waqf enjoy high flexibility and could be directed to the desired way. waqf in muslim minority countries, usually studies focus to measure the impact of religiosity and other factor but they do not consider how to increase and propose a new hybrid cash waqf model to enhance the participation in such an activity. moreover, proposed model or the ones will be proposed in the future should be validated through interviews and surveys to assess the stakeholders’ intentions to apply such a model. seeking for people’s preferred types of waqf is crucial; 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(2007, april 14). leveraging philanthropy: monetary waqf for micro finance. paper presented at the symposium towards an islamic micro-finance, harvard law school, massachusetts. international journal of islamic economics and finance (ijief) vol. 3(2), page 251-282 july 2020 impact of liquidity shortage risk on financial performance of sudanese islamic banks omer allagabo omer mustafa sudan academy for banking & financial sciences (sabfs-sudan), sudan corresponding email: omergabo78@sabfs.edu.sd, article history received: may 3 rd , 2020 revised: july 15 th , 2020 accepted: july 20 th , 2020 abstract the paper aims to examine the impact of liquidity shortage risk (lsr) on the financial performance of islamic commercial banks (icbs) in sudan (1992-2018). the following explanatory powers were used to indicate lsr; which include: liquid assets to total assets, total finance to total deposits, current deposits to total deposits and inflation as a control factor. the financial performance of icbs (the dependent variable) was measured by the return on assets. to concludes the relation between the variables, data were analyzed thought used ordinary least squares technique. the main findings revealed that current deposits to total deposits, total finance to total deposits and inflation negatively affected the financial performance. while liquid assets to total assets have positive influence to the performance of icbs. monetary policy indirectly contributed to the exposure of icbs to lsr through money supply increase. moreover, high inflation motivated depositors to high cash withdrawal from their deposits; and, consequently exposed icbs to lsr. the study recommends that icbs should not wholly depend on current deposits as a source of finance, because customersʹ default might lead to lsr resulting in deteriorating profitability. moreover, diversification of financial assets (with high liquidity) protects them from lsr. as for the central bank, the contractionary monetary policy is a crucial to control inflation in order to improve the financial performance of icbs. keywords: liquidity, risk, banks, sudan jel classification: e52; g21; g32; n27 @ ijief 2020 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.3229 web: https://journal.umy.ac.id/index.php/ijief/article/view/8744 citation: mustafa, o. a. o. (2020). impact of liquidity shortage risk on financial performance of sudanese islamic banks. international journal of islamic economics and finance (ijief), 3(2), 251-282. doi: https://doi.org/10.18196/ijief.3229 mailto:omergabo78@sabfs.edu.sd https://doi.org/10.18196/ijief.3225 https://doi.org/10.18196/ijief.3225 mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │252 i. introduction 1.1. background islamic commercial banks (icbs) are financial institutions with main objective is to satisfy the instructions of the holy quran in all their financial transactions with totally avoiding interest rate (mustafa,2019a, p.14). liquidity is the ability of banks to cover/meet their financial obligations in its time. the liquidity is important to sustainability of any financial institution specially banks. thus, liquidity management is the one of the most important actions conducted by banks. good liquidity management will lead to reduce the possibility of banks to face some problems (bankruptcies). basel committee on banking supervision (bcbs) 1 has mentioned that, current technological and financial modernisations have provided banks with new methods to financing their operations and supervising their liquidity position. (bis,2000, p.1). meanwhile there is a correlation between banksʹ liquidity and their financial soundness, therefore, a careful management of liquidity ensures the stability of the banking system. liquidity management for icbs compared to the conventional banks is differed because of the most existing instruments used for managing liquidity in conventional are interestbased, for that reason, managing liquidity in icbs should complies with shari’ah rule (ariffin, 2012, p.77). if a bank become unable to meet cash withdrawal of customers from their accounts this means that it has a problem in managing its liquidity (liquidity shortage), liquid assets to total assets ratio is use to measures the shortage of liquidity. but if a set of banks faced shortage of liquidity as happened in sudan in 2018 this position influences their financial performance and might have linked to macro-policy (monetary policy, money supply, inflation, size of production and people behavior in the community). the problem of the research is derived form the question: if all icbs in sudan are exposed to liquidity shortage risk (lsr), what will be happen to their financial performance? previously, significant studies have been runes regarding the proficiency of islamic banking in general, but quantitative research is still needed to runes on the area of effect of lsr on the financial performance of islamic banks locally and regionally. 1 the bcbs is a supervisory body which was founded in switzerland in the year 1975 by the governors of the central banks of the g10 countries. it is involving experts’ representatives of banking supervisory authorities and central banks from all over the g10 countries. mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │253 this paper seeks to contribute to highlighting this issue through analysing and assessing the impact of lsr on the financial performance of islamic banks in sudan in (1992-2018) period. 1.2. objectives of the research the study attempts to achieve the following objectives: 1) to examine the relationship between lsr and the financial performance of icbs in sudan (1992-2018); 2) to assess the efficiency of monetary policy in mitigating the icbs exposure to lsr; and 3) to discuss the reasons which led to lsr that icbs faced in sudan in 2018. moreover, the study aims to examine the following hypotheses: 1) there is a significant relationship between lsr and the financial performance of icbs; and 2) monetary policy is effective in mitigating icb’s exposure to lsr. the paper organized to contains an introduction includes background of the study and the objectives of the research, followed by review the literature related to theories, methodologies and previous studies on liquidity shortage risk. after that the study shifted to describes the methodology of the research which contain the data employed, model description and the method used to estimate the model. subsequently, the study analysed the results obtained from; data on islamic banking in sudan and output of the estimated model. finally, the paper discussed the conclusions and mentioned the recommendations. ii. literature review 2.1. theoretical basis for measuring lsr conventionally, banks use quantitative approaches based on controlling instruments to analyse their liquidity position. moreover, the bank’s position associated with liquidity risk is newly evaluated through quantitative methods based on financial ratios. measuring liquidity risk shortage(lsr) is challenging for islamic banks for the difficulties of keeping, collecting, sorting, classifying and analysing of the financial data. theoretically, the liquidity position of the bank is judged by computing some financial ratios, such as a dividing current assets (ca) by current liability (cl), ca by total assets(ta), liquid assets (la) by total assets(ta), current deposits(cd) by total deposits(td) and total finance (tf) by (td). generally, higher ratios indicating that, bank in its better position regarding to liquidity. but if a bank keeping higher liquidity ratios such procedure has a negative effect on a bank’s profitability (liquidity and profitability trade-off). another mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │254 methodology to measure liquidity risk is to compute the maturity gaps. it gives the bank an indication for lsr (rania,2013, pp.19241934). recently, some scholars such (resti and sironi, 2007), (anolli and resti, 2008), (bessis, 2009), (hull, 2012), and (tutino, 2012) has developed three dissimilar methodologies for measuring lsr namely: stock-based approach(sa), cash flow -based approach(cfa) and hybrid approach(ha). the three approaches (sa, cfa and ha) were based on that banks are exposure to funding liquidity risk. the funding liquidity risk clarifies the fact that a bank incapable to well cope with unanticipated cash leakages. it is the incapability of a bank to fulfil its own obligations on time. according to scannella (2016, p.5), the funding liquidity risk includes; 1). liquidity mismatching risk: the mismatch between amount and maturity of cash inflows and cash outflows. moreover, gap between liquid asset and liability of bank causes liquidity shortage risk; 2.) liquidity contingency risk: future actions may make the bank forced to search for extra liquid assets; 3). margin call liquidity risk: greater margin calls on the derivatives rise the liquidity risk as cash outflows increase and; 4). failure to meet daily payments and requirements of the collateral. the liquidity risk types are interrelated, leading banks to look for more funds to cover unexpected cash outflows or to liquidate some assets. with (sa) approach, it is not difficult to calculate and monitor the liquidity risk. through dividing assets and liabilities into cashable assets2 (marketable), instable liabilities3 and off-balance sheet obligations to finance, it is possible to evaluation the bank’s ability to bear up liquidity shortages. equation (1) shows that, if the cash position of bank is greater than 0 indicates that, it has a positive margin of funds to cover changes in liabilities and commitments regards to finance. moreover, it measures the stock of assets that can be liquidated on time to cope with banksʹ liquidity shocks. on the other hand, the cfa implies two types of liquidity gaps: marginal liquidity gap and cumulative liquidity gap. the first gap measures the net unequilibria between cash inflows and cash outflows related to bank’s operations while the second gap measures the cumulative liquidity gap as the sum of marginal liquidity gaps (ibid, p.8). additionally, the cfa is able to estimate the influence of liquidity variations using periodic gaps that are in 2 includes all assets in the balance sheet of bank that can rapidly transformed to cash. 3 includes wholesale financing and unpredictable changes of customer deposits. mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │255 line with the nature of bank’s assets and liabilities. the estimation of the different gaps of liquidity for different times improves ability of banks to tackle lsr. the two dissimilar approaches (sa and cfa) are complementary methods quantifying lsr in banking. the sa measures the exposure to liquidity risk in terms of cash shortages and long-term finance ratios. the cfa measures the exposure to liquidity risk in terms of liquidity gaps or lsr and expected cash flows, rise and fall of assets, liabilities and situations of offbalance sheet. the adjusted cfa is known as ‘hybrid approach’ (ha) adjusts the cfa taking into consideration the unrestricted assets that can be sold or guaranteed to get cash funds by collateralised loans or repurchase operations. but the problem with ha is that in islamic banks it is not allowed to get cash with guaranteed loans, however, when the problem is solved the ha can be applied. the development of models (sa, cfa and ha) makes it possible to attain greater truth in estimating the measures of liquidity shortage risk. furthermore, cfa and ha are affected by some restrictions regarding the calculation of cash flows, division and sorting it into different scheduled time. the assumptions on allocation and estimation of cash required and cash outflows will affect liquidity gaps. the key simplifying assumptions required for any approach or methodologies are used to measures lsr should be includes at least one of: expected maturity between assets and liabilities; clients’ behaviour and their response to changes in economic volatility; expected fluctuations regards sight deposits and demand accounts and options about assets and liabilities. 2.2. previous studies in islamic banking the risk of withdrawal cash increases as they pay savers, investors, shareholders and depositors a share of the profit that is not prefixed. the rate of return on assets/equity and the implementation of profit and loss sharing (pls) rule contributes uncertainty or unsure concerning to the actual value of the funds deposited. the icbs may exposing to pressure of pay of returns like any other institutions (locally or regionally), as they sure that the depositors will make the bank bear the responsibility of the lower return which causing withdrawal of funds by the holders of deposit consequently lsr arises. most of past studies focused on the definition of the liquidity shortage risk (lsr) from the banks’ aspect that the inconsistency in the ability of the lending system of banks to fund rises in assets and cover obligations in its relevant time when the payment become due (bcbs, 2008). this aspect is supported by the study of greuning and iqbal (2008). in addition to mounira (2008) that lsr refers to failure of banks to meet their expected and mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │256 unpredicted present and future cash flow needs and guarantee wants. this situation rises question of how islamic banks behave when they are exposes to lsr? according to diamond (2005), some financial crises happen at the time of banks fail to fulfil the demand for money (lsr) and the difficult arises when liquid assets totally fade within a short time as a result of increased deposit withdrawals. subsequently, banks are involuntary sell specific assets in order to protection their obligations and avoid insolvency but if assets liquidated were inadequate, lsr will rises. for the important of lsr in practice, many researches and formal regulatory bodies has stressed lsr management that, icbs should take in their account, lsr management policy that covers a wide process for defining, determining, measuring and monitoring lsr (ifsb,2012). while almani and oehler (2012) disputed that islamic banks faces constraints in re-granting the finance because of the prohibition of interest. islamic banks normally keep a lesser levels of liquidity compared to conventional for the reasons include: a) absence or inactive of interbank money market; b) lack of a lender of last resort; and c) the focus on short term investments in their investment portfolios. moreover, the application of (pls) rule between the provider of finance (the bank) and the debtor client is matter to sharia; so keeping adequate assets with high-quality to insurance liquidity needs is inappropriate in the system of islamic finance because the mechanism of (pls) contribute to the mitigate of the effect of general risks faced by islamic banks (jaara, jaara, shamieh and fendi, 2017). the theoretical and monitoring framework for systemic liquidity risk as stated by european central bank (2018), stressed on the legal foundation for macro-prudential liquidity instruments under (article 458 of the capital requirements regulation, articles 105 and 103 of the capital requirements directive and national law), which is important condition for the application of macroprudential liquidity instruments in the european union. empirical evidences on lsr management from the past studies like hidayat (2012) shows that respondents such bahraini islamic banks are unsurely about of the efficiency of lsr management. as for the relationship between bank’s financial performance and lsr there is only statistical significance when the normality assumption was relaxed through the appropriate technique as examined by berrios (2013). the results of almumani (2013) presented that bad debt to equity, capital adequacy and return on assets had positive relations with lsr, while size of bank, total finance to total asset ratio, total finance to total deposit ratio and return on equity have inverse relationships with lsr whatever kind of bank (islamic or conventional) but cucinelli (2013) sheds light on size of bank, capitalization, assets quality and specialization may can have effect on lrs management. this partially agreed mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │257 with the results of mustafa (2019a) that the risk indicators and inflation have a negative relationship with the financial performance (in terms of roa) of sudan’s islamic banks in (1995-2017) period. but it is different with the results of mustafa (2019b), where it showed that liquid assets to total assets ratio have a positive relation with the provision of banking finance whereas return on assets is linked negatively with the finance. on the other hand, some researches are tried to update the determinants of lsr by introduces macroeconomic variables to the analysis. according to shen, chen and kao (2009) some economic factors affect lsr management in both islamic banking and conventional where the system converts liabilities (deposits) into liquid rights or dues (granting finance, credit facilities or loans), this basic operation and through “money multiplier” make banks exposed to lsr risk. in the same direction, moussa (2015) found that gdp growth, inflation rate, capital, loans to total assets and operating costs to total assets have a significant influence on bank’s liquidity in tunisia. while the study of mazur and szajt (2015) concentrated partially on microeconomic factors such credit risk, effectiveness level, size of the bank, financial leverage level and engagement in the interbank market as internal factors of lsr. furthermore, yaacob (2016) introduced two new factors as suggested by bcbs includes liquidity coverage ratio and net stable funding ratio. the results shown that capital adequacy and financing are probable have influence on lsr management in the short term. moreover, macroeconomic indicators (gdp and inflation) displayed a significant relationship with lsr on the long term. mustafa (2020) used economic and financial data to test why islamic banks focused on murabaha mode and its effect on banking risk and performance. the basic result that banks with used the murabaha succeed to increased their profit but exposed to more risk. the discussion of the previous studies pointed out that, there is a variation in the results and effects related to liquidity shortage risk because of banks are differ in applied of some criteria including; the methodology used to define the liquidity risks, how to measure them, banking environment and philosophy (whether islamic or conventional), difference in economic variables which used to measure the impact on the banks’ performance. however, islamic banking is still need to studying the issue of lsr in order to build adequate and strong literature help islamic banks practically in managing lsr compared to the literature of conventional banking. this study basically wishes to inspect the lsrʹ impact on the banksʹ performance in sudan. mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │258 iii. methodology 3.1. data the study uses annually secondary data (1992-2018). data were obtained from the published reports of the sudan’s monetary authority. in addition to the previous studies in relation to lsr. the selected period includes important economic actions; in 1992 some icbs in sudan were merged in accordance with the economic liberalization policies to meet international solvency standards. moreover, south sudan seceded in the year 2011 and is considered the one the reasons behind exposure icbs to lsr specially in 2018. the study applied the ordinary least squares process to concludes how the lsr influence the financial performance of icbs in sudan. 3.2. model development the following model is designed to answer the question of how liquidity shortage risk (lsr) will be affect the financial performance (fp) of islamic commercial banks (icbs). (2) “eq. (2)” implies that the financial performance of banks (the dependent variable) is a function in the indicators of liquidity shortage risk and inflation (the independents variables). rewritten “eq. (2)” we have: (3) “eq. (3)” indicates that when lsr take place may lead to inadequacy funds because the bank will look for other sources of finance to cover up the loss. it will also lead to reduce liquidity required to meet up with other customer’s demand and thus less profitability or even bankruptcy. this shows that lsr and returns are interrelated that, higher liquidity shortage lead to fewer returns (sinkey, 1992, p.47). banks act as a link between all economic sectors through providing needed funds for these sectors. the inflation variable was introduced to the model as a control factor reflecting the efficiency of the monetary policy in maintaining economic stability. high inflation causes mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │259 deterioration value of money thereby reduces the real profitability4 of the banks (marianne, 2001,28). “eq. (3)” can be rewritten as follows: (( ) ( ) ( ) ) (4) where: roa is return on assets. it is commonly defined as net income earned (or pre-tax profit)/total assets. it provides information about management's performance in using the assets of the business to generate income (adam,2014, p165). (la/ta, cd/td, tf/td, inf) are indicators of lsr. (la/ta) is the ratio of liquid assets to total assets. this ratio indicates lsr; the decrease of liquid assets to total assets ratio may expose the icbs to lsr because in case of the decrease of liquid assets makes icbs unable to fulfil withdrawal from banks’ accounts. hence, it is negatively related to the performance of icbs. (cd/td) is the ratio of current deposits to total deposits. an increase in the current deposits will improve the liquidity of icbs, consequently the financial performance. (tf/td) is the ratio of total finance to total deposits. it indicates to both lsr and credit risks, an increase in provision of finance to total deposit may expose the icbs to credit risk because in cases inability of customer to pay back. hence, it is negatively related to the profitability of the bank (ifsb, 2031). there another interpretation will be; the provision of finance is one of the main sources of bank profitability. therefore, if a bank relies on granting finance on current deposits, it increases its profitability and thus improves performance, but may lead to the possibility of exposure to lsr, therefore, the relationship between the granting of finance and profitability is positive (mekasha, 2011, p.73). inf is the inflation rate; inflation indicate an external environment that might influences the bank’s performance. it is directed icbs to choice of granting or not granting the financing. the sign for the relationship between inflation 4 in banking industry, the term profitability measures the capability of banks to create the profits. mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │260 and the performance is expected to be a negative due to the deteriorated value of money (mustafa,2019a, p23). “eq. (4)” is specified in symbols as follows: ( ) ( ) ( ) (5) where: β 0 = the intercept. β 1, β 2 ,…,β 4 = the betas (βs) are the parameters that ols estimates. μi = error term. 3.3. method there are a various types of regression methodologies can be used in scientific research. one of the most important estimation methods, namely, the method of ordinary least squares(ols). ols is a statistical technique that is capable of determining the line of best fit of a model and seeks to find the minimum sum of the squares of residuals. this method is extensively used in regression analysis and estimation (peprah and mensah, 2017, p. 78). furthermore, it enables researchers to examine relationships between variables in the linear regression model (lrm). lrm is a modeling technique where a dependent variable is predicted based on one or more independent variables. moreover, it is allowing to investigate the specific effects variables have on one another. (kumari and yadav, 2018). fox (2016) described that, ols regression method is assumed to have a linear trend during estimating the unknown parameters of lrm, so, the ols estimates are determined as the regression coefficients that minimize the sum of squared differences between the outcome variable and the linear combination of explanatory variables. according to mahaboob, venkateswarlu, narayana, ravi and balasiddamuni (2018, p.518) if the regression model involves more than two regressor variables, it is called a “multiple linear regression model (mlrm)” specified as follows: (6) where is the intercept and the parameters are known as regression coefficients. usually is called the dependent variable and are called the independent variables or the explanatory variables . if the mlrm fulfill the linearity assumption, ols is the best method to estimate of relationship between and because it minimizes the sum of squared vertical distances between the observed dataset and the responses forecasted by the linear approximation. mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │261 economists such (mosteller, frederick and tukey,1977, p.48) have traditionally referred to equation (6) as ordinary least squares or (ols), putting this equation in matrix terms, we have: [ ] [ ] [ ] [ ] (7) output of “eq. (7)” is (8) the number of columns of the x matrix is k = k* + 1. x containing k* “real” independent variables, plus there is one additional independent variable that is nothing more than a series of 1’s. the tool of prediction is a linear combination of independent variable values, with coefficients known as β’s. the prediction for , in other words e( ), is traditionally notated with a hat as below: ̂ (9) the difference between ̂ and is the error, that is ̂ as ̂ the error vector is a key input in ordinary least squares. assumptions about the nature of the error are largely responsible for our ability to make inferences from and about the model that e(e) = 0 where both e and 0 are n by 1 column. note that this is an assumption that does not restrict us in any way. if e(e) ≠ 0, the difference would simply be absorbed in the -intercept, . in this study, the ols technique was used to estimate the model which described in equation (5). the reason behind choosing ols, that the model is based on assumptions that there is a linearity relationship between a response variable (roa or the bank’s performance) and predictor variables (lsr and inflation), moreover, there is no autocorrelation among a set of variables. the durbin-watson (dw) statistic is a good test for this assumption. therefore, ols enables to determine the variablesʹ trend (positive or negative) and measure the power of the relationship between roa and set of independent variables. moreover, the analysis of the financial indicators of icbs in sudan and model output (adjusted r-squared, f-statistic, probability of (f-statistic), dw statistic, coefficient value and variables probability) help us to understand how (roa) is response to changes in the values of (lsr and inflation). mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │262 iv. results and analysis 4.1. islamic banking in sudan bank’s performance involves two aspects of solvency and sustainable profitability. as (solvency-improving) measures primarily affect bank's balance sheets while (profitability-improving) measures affect bank's income. financial performance is the monetary term for measuring firmʹs operations, policies, assess financial conditions, income statements and the balance sheets of companies (adam, 2014, p.164). since 1992, cbos adopted a number of regulative measures to comply with bcbs accords which emphasized on lsr, exchange rate fluctuations and inflation. moreover, implementation of supervisory policies aimed at achieving the financial stability of icbs that ensures the efficiency of the banking system. table 1. financial indicators of sudan’s icbs (1992-2018) percentage% year capital adequacy ratio (car) non-performing loans to total funding (npl/tf) financing provision to non-performing loans (fp/npl) return on assets (roa) liquid assets to total assets (la/ta) 1992 3.4 6.1 9.4 1.3 17 1993 3.7 7.5 10.1 1.1 19.5 1994 3.9 9.0 8.9 1.4 22.6 1995 0.4 11 7.4 0.9 19 1996 5.6 13 10 0.6 21 1997 7.2 15.1 8.1 3.3 29 1998 0.4 15.6 9.0 3.4 26 1999 0.4 23 8.9 1.2 10 2000 0.4 16 28.4 1.4 7.0 2001 11 17 23.2 0.9 20.9 2002 0.4 13 37.5 0.4 18.6 2003 10 11 44.2 0.4 19.2 2004 12 0.4 33.7 5.3 18.3 2005 19 0.4 19 0.4 17.4 2006 27 19 3.2 2.1 17.0 2007 25 17 24 2.5 21.0 2008 12 15 27 1.4 20.9 2009 11 15.1 29 3.4 27.6 2010 10 14.1 31.1 3.9 22.5 2011 13 12.6 39.7 4.20 32.0 2012 12 11.9 36.4 4.40 41.5 2013 16.6 8.40 37.0 3.70 39.0 2014 18.0 7.10 61.7 4.00 39.1 2015 20.2 5.10 90.7 4.00 37.4 2016 18.7 5.20 60.0 4.70 35.1 2017 16.2 3.30 81.3 3.80 37.3 2018 9.9 3.20 72.0 4.70 52.0 mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │263 source: cbos, annual reports, (1992-2018) figure 1. trend of financial indicators of icbs in sudan 1992-2018 sources: cbos, annual reports (1992-2018) in light of table1 and figure1, since 1992 up to 2003, capital adequacy ratio 5 ranged between (3%-10%) remained below its standard level. but during (2004-2017) except (2009-2010), it was fluctuating within its standardized ratio (12%-20%).moreover, it sharply declined to 9.9% in 2018 for a growing of risky assets because of sudan’s local currency devaluated indicating inefficiency of banks’s regulatory capital to deal with banking risk. during 1992-2014, non-performing loans to total financing ratio 6 (npl/tf) ranged between (6%-19%) representing inefficient utilization of fund. but it decreased notably from 5.1% in 2015 to 3.2% 2018 reflecting the supervisory efforts of the cbos to reach zero percentage. for the duration of 1992-2018, the financing provisions to non-performing loans ratio (fp/npl) ranged between (3%-81%) indicating the reduction in the adequacy of provisions or in other word, ability of icbs to deal with the credit risk declined. for the period 1992-2018, the return on assets (roa) ranged between (0.6%5.3%) indicating a weak financial performance and icbs have no ability to invest their capital efficiently. 5standardized ratio and minimum required of car is 12%. 6 this ratio used to measure the quality of utilization of assets and the standardized ratio should not be more than 6%. 0 20 40 60 80 100 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 capital adequacy ratio (car) non-performing loans to total funding (npl/tf) financing provision to non-performing loans (fp/npl) return on assets (roa) liquid assets to total assets(la/ta) mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │264 from the time when 1992 to 2010, liquid assets to total assets ratio7(la/ta) ranged between (7%-26%) indicating that it was out of its standard ratio (30%-40%). but it approximately reached its standardized level (32%-41%) all through (2011-2017). although (la/ta) reached 52% in 2018, icbs in sudan faced severe shortage of liquidity and they were unable to meet customers ’cash withdrawal from their accounts. this means that if banks owned highly liquid assets but they fail to liquidate them (the difficulty of converting to cash) they may also be exposure to lsr, which might negatively affect their financial performance. 4.1.1. balance sheet indicators of islamic commercial banks in sudan (1992-2018) the benefit of analyzing of balance sheet indicators of banks is that such liquidity shortage risk results from the gap between the two sides of the balance sheet (assets and liabilities) in terms of maturities, generating either excess of cash that needs to be invested or a shortage of cash that needs to be funded (mounira,2008, p.86). the best indicators used to assess the performance of the bank’s consolidated balance sheet include: ratio of capital and reserves to total liabilities and the ratio of total finance to total deposits. moreover, the comparison between the two ratios (total finance to total assets) and (total deposits to total liabilities) gives an indication of liquidity shortage risk (mustafa, 2019a, p.28). duties. 7 standardized ratio between (30%-40%) and it used to measure ability of banks to meet their cash duties in light of availability of liquid assets. mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │265 table 2. banks’s balance sheet indicators sources: cbos, annual reports, (1992-2018). figure 2. trend of balance sheet indicators of icbs 1992-2018 sources: cbos, annual reports, (1992-2018). 0 50 100 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 capital and reserves to liabilities ratio (c&r/tl)% ratio of total finance to total assets(tf/ta)% ratio of total finance to total deposits(tf/td)% ratio of total deposits to total liabilities (td/tl)% year (c&r/tl)% (tf/ta)% (tf/td)% (td/tl)% 1992 9.30 22.7 35.1 64.4 1993 3.90 12.7 31.5 40.2 1994 6.70 17.5 42.9 40.7 1995 5.00 14.0 35.0 40.0 1996 7.00 21.0 50.0 37.0 1997 6.00 18.0 43.0 41.0 1998 6.00 14.0 39.0 37.0 1999 5.70 11.0 32.8 35.0 2000 9.00 22.0 40.2 55.0 2001 10.5 24.5 40.6 60.2 2002 12.1 31.6 18.6 59.4 2003 14.0 37.3 62.3 59.9 2004 13.7 41.8 67.4 61.9 2005 12.0 45.7 71.6 63.8 2006 16.8 48.1 90.5 53.2 2007 17.6 49.6 93.2 53.2 2008 17.1 48.8 90.6 53.9 2009 18.2 49.5 87.1 60.0 2010 17.3 47.8 79.6 59.7 2011 19.4 49.2 82.3 59.7 2012 16.2 45.5 76.4 59.3 2013 17.0 48.6 84.5 57.5 2014 16.0 48.0 82.9 57.9 2015 14.9 49.1 84.3 58.2 2016 13.9 51.0 85.2 59.9 2017 10.8 48.7 73.5 66.3 2018 6.90 37.4 54.8 68.4 mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │266 table 2 and figure 2 shows that, capital and reserves to liabilities ratio during the period (1992-2018) ranged between (3.9%-19.4%). it is note that since 2011, it started to decline at a decreasing rate, reaching 6.9% in 2018 due to the devaluation of the local currency for the reason of south sudan secession. throughout 1992-2018, ratio of total finance to total deposits ranged between (18.6%-9.32%) and it declined from 73.5% in 2017 to 54.8% in 2018 due to increase of foreign deposits by 367.1% (cbos,2018, p.82). in general, the reduction of this ratio it’s a good indication because if a bank relies on deposits to the provision of finance might increase its profitability but may expose the bank to lsr. during 1992-2004, total finance to total assets ratio ranged between (11%41.8%) and it is note that total finance of icbs is approximately equivalent to 50% of total assets during 2005-2017 and once again it declined to 37.4% in 2018 due to increase of foreign assets and deposits of icbs with the cbos by 309.7% and 363.4% respectively (cbos,2018, p.82). during 1994s, total deposits to liabilities ratio ranged between (35%-40%) but it rapidly increased to range between (53%-68%) during the period (2000-2018) indicating clearly that icbs in sudan highly depends on their depositors’ funds. this is possibly one of the reasons that led to the liquidity shortage crisis in 2018. 4.1.2. position of banking deposits 1992-2018 icbs in sudan deal with three major customers including: federal and state government, public enterprises and private sector. the following table describes the types of weighted accepted deposits during 1992-2018. mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │267 table 3. progress of banking deposits (1992-2018) percentage% year federal government public enterprises private sector total deposits current deposits savings & investment deposits current deposits savings & investment deposits current deposits savings & investment deposits current deposits savings, investment deposits 1992 4.1 0.65 0.58 2.4 95.3 96.9 53.6 46.4 1993 5.5 2.8 3.8 7.9 90.6 89.4 38.3 61.6 1994 4.9 0.43 3.3 17.7 91.7 70.2 42.1 65.7 1995 2.8 0.86 9.5 17.3 87.7 81.9 70.4 29.6 1996 6.2 1.1 5.0 9.1 88.8 89.9 75.9 24.1 1997 1.7 0.5 1.3 6.6 96.9 92.9 66.4 32.1 1998 1.4 2.2 1.9 2.5 96.3 98.9 69.6 30.9 1999 1.7 2.0 2.1 2.6 94.1 96.1 55.2 44.8 2000 3.4 2.4 3.2 2.4 93.6 95.4 43.7 56.3 2001 4.1 2.1 4.0 2.7 91.4 95.2 41.2 58.8 2002 2.6 0.1 1.2 5.9 96.3 94.1 35.6 64.4 2003 6.6 0.1 2.3 7.9 91.2 91.9 31.6 68.4 2004 8.6 0.9 3.4 8.5 87.9 94.7 36.1 63.9 2005 22.1 1.1 2.3 6.8 75.6 92.1 41.4 58.6 2006 6.4 0.6 0.8 18.3 92.8 81.0 49.5 50.5 2007 4.0 0.2 1.4 17.4 94.9 82.5 97.8 50.5 2008 5.9 6.5 4.6 1.6 89.5 91.9 50.4 49.6 2009 6.2 3.2 6.1 7.8 87.7 89.0 47.1 52.9 2010 7.2 3.7 6.0 6.8 86.1 89.5 46.8 53.2 2011 3.1 1.3 6.2 7.2 90.7 91.5 50.4 49.6 2012 3.3 3.2 3.7 5.3 93.0 91.5 49.5 50.5 2013 3.2 3.6 4.1 4.3 92.7 92.2 50.1 49.9 2014 3.1 2.8 3.4 4.0 93.4 93.2 48.9 51.1 2015 3.9 2.5 3.6 3.3 92.5 94.1 49.1 50.9 2016 4.2 2.5 4.3 2.6 91.5 94.9 49.8 50.2 2017 4.1 1.7 4.6 3.3 91.3 95.0 50.1 49.9 2018 3.3 1.3 4.6 1.9 92.1 96.7 58.9 41.1 source: author’s calculation mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │268 figure 3. trend of banking deposits 1992-2018 source: author’s calculation as seen in table 3 and figure3, total current deposits of icbs ranged between (31.6%-97.8%) of the total banking deposits, whereas savings and investment accounts ranged (24.1%-68.4%). current, savings and investment deposits of private sector represented about (70.2%-96.7%) of the total banking deposits indicating the heavy reliance of icbs activities on the private sector transactions. current, savings and investment deposits of public enterprises showed about (0.58%-18.3%) of the total banking deposits. current, savings and investment deposits of federal and state governments demonstrated about (0.1%-22%) of the total banking deposits. in general, there is a decrease in deposits of state governments and public enterprises compared to an increase of private sector’s deposits as a result of the implementation of the privatization and economic liberalization policy since the beginning of 1992. 4.1.3. key indicators of monetary policy 1992-2018 the best way to assess the efficiency of monetary policy is to analyze the components of money supply (ms) and inflation rate. economically, there are three reasons that call on the central bank to print the currency or increase supply of money, which are a). printing to replace the damaged currency, b). printing and c). issuing currency to meet the gdp growth and printing to finance the deficit of the public budget of the state. the latest procedure resulted in inflationary effects on the economic (khartoum electronic media centre, 2018). 0 50 100 150 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8 current deposits of federal government percentage of total deposits savings & investment deposits of federal government percentage of total deposits current deposits of public enterprises percentage of total deposits savings & investment deposits of public enterprises percentage of total deposits current deposits of private sector percentage of total deposits mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │269 table 4. key monetary policy indicators (1992-2018) percentage% year (m2/gdp)% inflation% (currency with banks/m2)% (currency with public/ m2)% 1992 35.2 107.5 37.4 30.7 1993 31.3 115.9 24.5 35.2 1994 23.2 104.9 24.5 36.4 1995 17.1 116.1 23.8 35.2 1996 11.4 81.3 24.2 66.3 1997 10.1 117.3 27.1 36.6 1998 10.3 65.4 23.5 39.7 1999 10.5 29.7 25.2 40.1 2000 10.03 19.6 26.7 40.9 2001 10.3 11.03 27.2 35.6 2002 11.8 6.6 28.2 34.4 2003 13.2 6.9 29.7 32.7 2004 13.9 7.8 31.2 31.7 2005 16.9 8.5 31.7 26.7 2006 18.5 8.4 28.9 29.9 2007 18.5 7.5 29.1 28.6 2008 18.4 12.0 29.9 29.6 2009 20.9 14.0 28.4 28.5 2010 21.9 13.0 27.2 28.4 2011 29.9 18.1 28.7 30.7 2012 26.4 17.0 24.3 28.6 2013 21.8 22.9 24.8 28.9 2014 17.4 25.7 25.4 30.0 2015 16.1 12.6 27.1 29.4 2016 17.4 30.6 27.7 32.0 2017 24.6 55.6 29.3 30.2 2018 35.1 72.9 27.8 26.2 source: cbos, annual reports, (1992-2018). figure 4. monetary policy indicators 1992-2018 source: cbos, annual reports (1992-2018) 0 100 200 300 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8 currency with the public percentage of m2 currency with the banks percentage of m2 inflation rate m2 percentage of gdp mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │270 table 4 and figure 4 display that, the proportion of currency with public to m2 measures the extent of banking awareness and public confidence (people’s behavior) in dealing with the banking system. this measure during (1992-2018) ranged between (20.2%-00.1%) leading to the liquidity shortage crisis in 2018. the proportion of currency with icbs to m2 is a good indicator to measure ability of banks to attract people to deposit their excess money. this measure during (1992-2018) ranged between (23.5%-37.4%) indicating a significant quantity of money outside the banking system. all through 1990s and 2000s, except (2002-2007) sudan economy faced a high inflation (more than two digits). in general, a higher inflation reduces the purchasing power of money; to caused people demanded more cash withdraw to meet their basic needs as happened in 2018. except 1992,1993 and 2018, the proportion of m2 to gdp ranged between (10.1%-29.9%) and it sharply increased from 24.6% in 2017 to 35% in 2018 that caused an increase in inflation rate from 55.6% to 72.9%. 4.1.4. reasons of banksʹ liquidity shortage in sudan -2018 since secession of south sudan in july 2011, sudan economy has been exposed to economic crisis resulted in shortage of cash in both local and foreign currencies. as a result of separation, the state lost foreign exchange resources due to losses of oil exports. oil revenue up to 2011 fed the public budget of the state by 70% of the total revenues. furthermore, loss of oil exports revenues led to the erosion of foreign reserves. at the same time increase of demand for the hard currencies u.s dollar led to the deterioration of domestic currency. so in the year 2018 there is a high increase in demand for cash withdrawals from the different types of deposits in order to use dollar as store of value. table 5. some economic indicators after secession of south sudan (2011-18) year exchange rate sdg/usd deficit of the public budget share of gdp deficit of trade balance share of gdp 2011 2.88 5.2 1.13 2012 4.40 3.4 1.82 2013 5.70 2.1 1.29 2014 6.04 0.9 0.85 2015 7.50 1.2 0.92 2016 15.15 1.6 0.65 2017 21.6 1.9 0.53 2018 46.5 3.1 0.29 source: authors calculation and cbos (2018, p.225). mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │271 figure 5. trend of economic indicators after secession of south sudan 2011-18 source: author’s calculation and (cbos,2018, p225). data in table (5) and displayed by figure (5) shows that south sudan secession left a negative impact on sudan economy, moreover, it led to worse the liquidity position of icbs for the following reasons: value deterioration of the local currency against u.s dollar where the exchange rate increased from sdg2.88 per dollar in 2011 to sdg46.5 per dollar in 2018 motivating people to withdraw their money from their bank’s accounts (current, investment or savings) to buy dollar in order to protect the real value of their liquid assets. the highest deficit of public budget of the state reached 5.1% of gdp in 2011 at the time of secession. but it gradually reduced to 3.1% in 2018 consequently the cbos has expanded the supply of money to 35.1% in 2018 to finance the deficit. this procedure led to pull up inflation and increase demand for local currency. trade balance deficit increased from 1.13% in 2011 to 1.82 in 2012 as share of gdp as result of reduction of sudan’s oil exports which contribute to shortages of hard currency. administrations of icbs were unsystematic expanding provision of finance focusing on their customer’s deposits. it ranged between (54.8%-85.2%) of total deposits during 2011-2018. icbs determined the maximum limit of cash withdrawal from the bank accounts not to exceed sdg 2000 (equivalent $43) per day and the situation deteriorated to sdg 300 per day by the end of december 2018. 0 10 20 30 40 50 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 exchange rate sdg/usd deficit of the public budget percentage of gdp deficit of trade balance percentage of gdp mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │272 icbs failed to fill atms with cash to provide their customers with enough cash, so they failed to meet the demand for money (cbos,2018). loss of customer’s confidence in the banking system accelerates withdrawals of cash and refrain from deposits in bank accounts leading to increase of money outside banks (cbos,2018). cbos continued printing and injecting currency into the economy to meet the rush for cash withdrawal (cbos, 2018, p.39). lack of confidence in other methods of payment (electronic transfer of funds from account to another account) hence, a very small proportion of the public uses the sales points and electronic payment. however, these reasons led to the emergence of lsr in icbs in sudan. however, it was accentuated by many other factors beside the drop in oil revenue, such economic resources mismanagement. 4.2. results of multiple estimation model the results of the estimated parameters using ols showed in the following table. as seen in table (6), the results ols showing that: the durbin watson (dw) statistic shows that regression does not suffers from autocorrelation because the value of dw approximately 2.0 means that the sample free of autocorrelation. the value of the regression standard error (s.e 1.09: fall within plus/minus 2) indicating that the regression model is on average used the data of the response variable or the observations are closer to the fitted line. table 6. ordinary least squares regression results dependent variable: roa method: least squares, date: 03/20/20 time: 21:04 sample: included observations: 27 variable coefficient std. error t-statistic probabilit y c 10.36715 5.255208 1.972739 0.0612 cd/td -0.088094 0.055436 -1.589119 0.1263 inf -0.020939 0.006965 -3.006146 0.0065 la/ta 0.075921 0.025047 3.031133 0.0061 tf/td -0.005562 0.014024 -0.396618 0.6955 r-squared 0.555279 akaike info criterion 3.188538 adjusted r-squared 0.474421 schwarz criterion 3.428508 s.e. of regression 1.096960 durbin-watson stat 2.236163 f-statistic 6.867317 prob(f-statistic) 0.000957 source: author’s calculation mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │273 the value of akaike information criterion is 3.1, representing that the optimal model is selected compared to the value of r2 or adjusted rsquared. the value of schwarz criterion (3.4) is moderated compared to the value of akaike information criterion. it helps select the least complex probability model among multiple options. the value of adjusted rsquared is 47, showing that the explanatory powers (la/ta, cd/td, tf/td and inf) are explained about 47% of total changes in the financial performance (measured by roa). the variable of liquid assets to total assets (la/ta) showed a positive sign (probability of 0.0061) representing that a rise of liquid assets will leads to reduce the lsr and would probably improve the performance of icbs by (0.075921) percent. the estimated parameter of current deposits to total deposits ratio (cd/td) has a weak a negative signal in its relations to the performance of icbs because the probability value is greater than 0.05 (0.1263), representing that an increase of current deposits might lead to improving liquidity position and reducing lsr but it is likely to negatively affect the performance by (0.08) percent. the estimated factor of total finance to total deposits (tf/td) appeared with a negative mark and it has probability value of (0.6955) telling that if icbs expand grant financing based on their customers’ deposits would probably lead to improving the profitability but if client fail to pay back the principal investment or the financing, this situation may lead to lsr consequently adversely affecting the performance of icbs. the projected parameter of inflation (inf) performed a high a negative influence on the profitability of icbs because the probability value of inflation is less than (0.05) approximately (0.0065) displaying that the increase of inflation rate by one percent maybe lead to reduction the financial performance by (0.020939) percent. thus, in inflationary period icbs prefer to choose not give out financing or credit. the depreciation of local currency has a negative influence on roa. so, banks which operating in countries suffering from hyperinflation as happened in sudan in 2018 where inflation reached 72.9% therefore banks faced high cash withdrawal from their costumers’ accounts. in such situation, lsr will take place exhibiting a lower financial performance of icbs. mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │274 4.3. analysis the model mentioned in table (6) aimed to investigate the impact of liquidity shortage risk and inflation on the performance (roa) of islamic commercial banks in (1992-2018) period in sudan. the intercept or the constant term (c) is significant because it has value >0 equivalent to (10.36715) and the probability value of (c) is approximately 0.05 indicating that there is a linearity between the dependent variable and independent variables as assumed in the method/methodology of the research. all the coefficientsʹ value (-0.088094, -0.020939, 0.075921 and -0.005562) of the independent variables (cd/td, inf, la/ta and tf/td) respectively, have value <1, indicating that the independent variables have influence on roa. the independent variables (cd/td, inf, la/ta and tf/td) have standard error (0.055436, 0.006965, 0.025047 and 0.014024), t-statistic ( -1.589119, 3.006146, 3.031133 and -0.396618) and probability value of (0.1263, 0.0065, 0.0061 and 0.6955) respectively. statistically, when the variable has low value of standard error, high value of t-statistic and probability value< 0.05, we can judge that the variable is significant. therefore, except cd/td, set of independent variables have a significant influence on roa. the comparison between adjusted r-squared (0.474421) and the value of fstatistic (6.867317) shows that some variables are not included in the model, therefore, explanatory powers (la/ta, cd/td, tf/td and inf) clarified about 47% of the banksʹ performance variation. but the overall regression is effective and significant because, the value of fstatistic is high (6.867317) and it has probability of (0.000957). this results approves the works of almumani (2013), moussa (2015), mustafa (2019b) and mustafa (2019a) because their methodologies were used the financial data/ratios to measure the liquidity position of banks as was done in this study. v. conclusions and recommendations 5.1. conclusions the study found that the indicators of liquidity shortage risk (lsr) in terms of the ratios of current deposits to total deposits (cd/td), total finance to total deposits(tf/td) and inflation (inf) had negative relationships with the financial performance of icbs measured by return on assets (roa). these results are agreed with the results of almumani (2013), moussa (2015) and mustafa (2019a) that the inflation rate have a significant negative influence on bank’s liquidity in jordan, and tunisia and sudan respectively. whereas mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │275 the ratio of liquid assets to total assets (la/ta) had positive relationships with roa. this agrees with the work of mustafa (2019b). for the question why (cd/td) affect negatively roa sudan banks? because the increases of current deposits of private sector (equivalent 85% of the total current deposits of banks on average as mentioned by the central bank in its annual report for the year 2018) improves liquidity position of icbs and reduces lsr. but tradebetween liquidity and profitability will take place. thus, with higher liquidity ratios, the financial performance of banks with will be declined. this totally agrees with raina (2013), moreover, the expansion of financing based on customer’s deposits (current) exposes banks to lsr. despite the high ratio of liquid assets to total assets of 52% in 2018, icbs were exposed to lsr due to inability to liquidate assets to meet cash withdrawals. banking deposits represent 45.7% of money supply in 2018; this means that there is a huge quantity of money outside the banks system indicating the reduction awareness and confidence of public in banking system or in another word clients’ behavior changed. the central bank of sudan implemented an expansionary monetary policy through increasing the money supply that reached 35% of gdp in 2018. this action led to increase inflation rate to72.9% caused a poorer value of domestic currency. high inflation motivated depositors to withdraw more cash from their bank accounts and buy dollars to protect their liquid assets, which exposed icbs to lsr. therefore, the monetary policy was not effective in reducing icbs’ exposure to lsr, especially in 2018 due to the rapid increase in money supply that caused hyperinflation. the study found that the secession of south sudan in the year 2011 and the changed of the political system in 2018 (political and economic instability) is the main factor behind this correlated series of negative effects on the sudan economy in general and the banks particularly through the following transmission channels: during 1992-2010: sudan economy and banking sector were in stable position. since 2011: south sudan secedes and sudan loosed oil exports. the public budget of the state loosed more 75% of its oil revenues (were the major source of obtaining hard currency). beyond 2011: the public budget of the stated faced a chronic deficit (equivalent 5.2% of gdp in 2011 and 3.1% in 2018). also sudan’s trade balance achieved large deficit (equivalent 1.13% of gdp in 2011). the state began to search for a new internal funds resources to cover the deficit such mining gold but external funds not allowable for the state due to american sanction on sudan economy. mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │276 to meet the deficit, the central bank became forced to print more amounts of money than the actual need. the interrelated effects exhibit hyperinflation reached more than 72% by the end of 2018. the public and costumers of the banks lost their confidence in local currency, banking system and the state. a huge cash has been withdrawal from banks accounts in order to converted to dollar (as store of value). in such a position, banks find themselves unable to meet customers ’cash withdrawals, therefore, liquidity shortage risk actually occurred in 2018. 5.2. recommendations 5.2.1. recommendations for central bank of sudan (cbos)  banks in sudan are operating under high inflationary pressures; therefore, cbos have to implement contractionary monetary policy to monitor/control inflation by reducing supply of money to appreciate local currency.  cbosʼ methodologies of measuring the supply of money (m1, m2 and m3) may need to update/re-evaluate and includes: new definitions, different measures, instruments to assess, control and monitor.  to reduce demands for cash, cbos need to activate of electronic payment systems such force banks to increase the number of atm, atms cards, point of sales and e-purse cards.  cbos should issuance policies aimed at keeping and sustaining financial solvency and stability of the banks to complies with the international standard ratio of capital adequacy, which can be achieved through the activation of banking supervision especially banks’ liquidity management. 5.2.2. recommendations for inter-banks liquidity management fund (iblmf) iblmf was founded in aug 2015, with an opening capital of sdg 750.0 million, of which 40% of the contribution paid in cash and 60% in marketable government securities. iblmf started its work in sept 2016, and increased its capital in october 2016 to reach sdg 900.0 million, because of the contribution of all the working banks in sudan; with a nominal value sdg 1,000 for the share. iblmf aims at assisting the banks in managing their short period surplus/shortage liquidity, and encourages the instruments exchange between them, and reaching appropriate return from the fund’s investment. the study recommends iblmf to increase its capital to the level that suits the member banks’ assets and liabilities. moreover, iblmf should mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │277 activate islamic financial engineering to develop new financial instruments that help banks to invest their funds in times of excess liquidity. 5.2.3. recommendations for bank deposit security fund (bdsf) bdsf was founded in light of its 1996 act, with a share of capital paid by the cbos and ministry of finance and economic planning. bdsf aims at providing islamic banks with islamic insurance for their deposits. the study recommends bdsf to extend its aims not only to insurance costumers’ deposits in the event of bankruptcy but also to cover the risk resulted from the overall acute shortage of liquidity that islamic banks may be faced. 5.2.4. recommendations for islamic commercial banks (icbs)  to reduce lsr, icbs should not expand in the provision of finance depending on customersʹ current deposits because their ability to meet cash withdrawal will reduce. as a result, the performance will deteriorate as well.  to ensure profitability and improving the financial performance, icbs need to use prudent lsr management.  in light of acute shortage of liquidity as happened in 2018, icbs need more efforts towards completion the guiding principles of bcbs in the context of capital adequacy to support ability of regulatory capital to contend with lsr.  diversification of financial assets (with high liquidity) protects icbs from exposure to lsr.  in order to support the costumers’ confidence on the icbs, the return on investment accounts and on other financial products (subject to islamic rule) need to be protected. because the beneficiaries are compare between return and inflation rate. if inflation is hyper and greater than return, simply depositors will withdraw their deposits quickly and convert them into other stable assets such buying dollar, gold or real-estate. this exactly what happened in 2018 as banks were in a complex dilemma.  islamic banks needs to develop instruments help them to utilization of surplus of liquidity. moreover, acquire return helping in period of liquidity shortage and reduces the dependency on the central banks as lender of last resort. 5.2.5. recommendations for further research in light of the importance of liquidity risks management in general and the risks of liquidity shortage in particular, the study suggested conducting further research in the following areas: mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │278  updating the methodologies of measuring costumers’ behaviour and confidence on islamic banks regarding to liquidity shortage risk.  how islamic central banks act as lender of last resort in light of prohibition of interest rate.  efficiency of interislamic banks liquidity management funds.  assessment the efficiency of interislamic banks market. acknowledgements the author would like to thank mr. othman al-khader mustafa (economist), dr. ishraqa khatab (director of research centre: sudan academy for banking and financial sciences) and dr. mustafa mohammed musnad (head department of banking and financial studies: sudan academy for banking and financial sciences) for their helpful comments and proofreading. mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │279 references adam, m. h. 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(2019b). the conflict between liquidity and profitability and its impact on the banking finance: an empirical investigation from sudan (2000-2018). global academic journal of economics and business,1(1),27-32. mustafa, o. a. (2020). why do islamic banks concentrating finance in murabaha mode? performance and risk analysis (sudan: 1997-2018). international business research,13(7),208-223. peprah, m., & mensah, o. (2017). performance evaluation of the ordinary least square (ols) and total least square (tls) in adjusting field data: an empirical study on a dgps data. south african journal of geomatics, 6(1),73-89. rania, a. (2013). risk management for islamic banks. edinburgh: university press. resti, a., & sironi, a. (2007). understanding and measuring liquidity risk, bancaria, 63(11), 2–17. scannella, e. (2016). theory and regulation of liquidity risk management in banking. international journal of risk assessment and management,19(1/2), 4-21. shen, c., chen, y., & kao, l. (2009). bank liquidity risk and performance. retrieved march 3, 2020, from https://www.researchgate.net/publication/228366383 sinkey, j. f. (1992). commercial bank financial management: in the financialservices industry. new york: macmillan. tutino, f. (2012). liquidity management in the bank. bologna: il mulino. yaacob, s., abdul, r. a., & abdul, k. z. (2016). the determinants of liquidity risk: a panel study of islamic banks in malaysia. journal of contemporary issues and thought, 6(1), 73-82. https://www.researchgate.net/publication/228366383 mustafa│ impact of liquidity shortage risk on financial performance of sudanese islamic banks international journal of islamic economics and finance (ijief), 3(2), 251-282 │282 this page is intentionally left blank international journal of islamic economics and finance (ijief) vol. 3(2), page 305-334, july 2020 the potential of fintech in enhancing the use of salam contract in islamic banking aishath muneeza inceif (international centre for education in islamic finance), malaysia corresponding email: muneeza@inceif.org zakariya mustapha university of malaya, malaysia, zakariyamustapaha@gmail.com article history received: april 24 th , 2020 revised: july 11 th , 2020 accepted: july 20 th , 2020 abstract an islamic banking system employs different shariah contracts to develop and offers products and services in different jurisdictions. one of such contracts is salam which is a forward sale contract. this study aims to examine the practice of salam as an instrument of islamic banks financing and how technology can be used to enhance its application thereto. a qualitative approach is employed in this research where primary data sources on salam contract were examined, along with content analysis of relevant secondary data sources on the contract and how its practiced in islamic banking. in furtherance of that practice, salam instrument can be leveraged on technology, mainly the blockchain. this would enhance its operation by bringing about automation, transparency, fair pricing, saving time and cost as well as enabling widespread access of islamic bank financing to smaller enterprises to promote societal well-being. this research reveals that salam instruments cater for different clients’ needs and enjoy patronage in many jurisdictions even though it is currently the least utilized contract in islamic banks financing due to divergence of juristic views on its general permissibility. also, salam is an exceptional contract for islamic banks financing of agriculture and related enterprises among others. the research offers an insight for islamic banks to leverage on technology in utilizing salam contract towards providing financing for variety of clients, particularly poor farmers. similarly, jurisdictions not practicing salam stand to learn of the benefits of using salam to offer technologically innovative yet affordable islamic banking products/services for variety of clients. keywords: blockchain technology, exceptional contract, fintech, islamic banking, salam jel classification : z19; p19; p29; p48; p49 @ ijief 2020 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.3231 web: https://journal.umy.ac.id/index.php/ijief/article/view/8685 citation: muneeza, a., & mustapha, z. (2020) the potential of fintech in enhancing the use of salam contract in islamic banking. international journal of islamic economics and finance (ijief), 3(2), 305-334. doi: https://doi.org/10.18196/ijief.3231 mailto:zakariyamustapaha@gmail.co https://doi.org/10.18196/ijief.3225 https://doi.org/10.18196/ijief.3225 muneeza & mustapha │ the potential of fintech in enhancing the use of salam contract in islamic banking international journal of islamic economics and finance (ijief), 3(2), 303-334│ 306 i. introduction 1.1. background islamic banking is a system of banking introduced and developed by islamic scholars from islamic commercial jurisprudence as a substitute to conventional banking. this is with view to enable muslims attain economic empowerment via lawful means of financing. these means of financing are formulated using varieties of shariah contracts for commercial activities. there are different shariah contracts upon which varieties of islamic financial services and products are structured to suit the needs of customers. these include mudarabah, musharakah, ijarah, istisna, bai bithaman ajil (bba), baiʽ as-salam or salam as it is commonly called, etc. in its literal meaning as an arabic word, the word salam means to advance. however, in the islamic commercial parlance, salam specifically connotes a contract where a purchaser pays price for a subject matter in advance and its delivery is postponed to a specified future time. it may be regarded as an islamic banking’s equivalent of forward sale contract (amine, 2008). salam is one kind of a shariah contract that is, to a large extent, used for islamic microfinance (obaidullah, 2015; ehsan & shahzad, 2015) and comparatively least utilized in commercial islamic banking (muneeza et.al., 2011). this is not unconnected with the fact that salam contract is susceptible to risks more than other shariah contracts used in commercial islamic banking. thus, in certain jurisdictions including malaysia, one finds no islamic bank utilizing this contract in providing financial services and products (muneeza et.al., 2011; p.139). accordingly, the use of salam contract in islamic banking is generally limited and risk mitigation tools are strategically employed while applying this contract in islamic banking (obaidullah & mohamed-saleem, 2008). islamic banking has the objective of serving both rich and poor for the improvement of people living standard. furthermore, islamic banking equally seeks to develop economy by increasing real economic activities as the backbone of any economy through engaging in real business activities including sale, lease or partnership engagements with customers/clients. as such, islamic banking products are, in both theory and practice, always formulated in order to cater for the needs of different segments of society and always linked to activities that have positive impact on the real economy. it is undeniable that islamic banking has been successfully implemented in the world today and it has gained the confidence of muslims and nonmuslims alike. however, this does not mean that the number of islamic banking products available in most local markets and even globally are diverse enough to cater for the need of poor members of the society. it is contemplated in this regard that if salam contract can be practically applied muneeza & mustapha │ the potential of fintech in enhancing the use of salam contract in islamic banking international journal of islamic economics and finance (ijief), 3(2), 303-334│ 307 in islamic banking, such poor people, who constitute the largest number of farmers in many societies, can be greatly helped thereby developing agriculture as an important segment of the real sector of the economy. in salam contract, one of the objectives is generally to fulfil the needs of farmers and merchants who require money for farming and the production of agricultural produce as well as other fungible things. usually, advance payment via salam for such produce enables acquisition of farming facilities and equipment by the farmers and to provide for their families till harvesting time. salam contract also can be employed to assist traders in exports and imports trading. in salam for trading, traders would sell goods in advance to undertake their business with the cash price received. here, salam appears to be beneficial and offers an advantage to both traders and buyers the traders receive the sale price beforehand and the buyers pay a price that is usually below one to be paid in spot sales (meezan bank, 2019). salam-based financing instruments have great potentials to bring about economic development. a simple illustration of salam and its impact on the economy is made by abdul rahman when he stated that: “this model is used to finance the cost of future production of a manufactured product or an orchard. the customer will agree with the riba free (rf) finance company to forward the cost of future production. the rf financial institution would come to an agreement to buy the production of an orchard, a farm or a manufactured product (like equipment or automobiles) before it is produced, at an agreed upon price. the money is paid in advance to the producer. the producer, in turn would use the money as a working capital to purchase the basic services, pay wages and buy raw materials necessary for the production. this way, rf financial institution would help in the growth of the economy by providing the liquidity needed by the producing entity” (abdul rahman, 2010; p.58). salam is one of the most least used and hence, researched contract in islamic finance including islamic banking. the main reason for the less frequent usage of this contract in islamic finance is due to the high risk involved in the execution of the contract. in the era of fintech, there is potential to explore the ways in which the usage of salam contract could be increased. since there is a gap in the literature in this regard, this research attempts to fill this gap by presenting the possible ways in which fintech could enhance the use of salam contracts in islamic banking. so far none of the existing studies have attempted to do so and as such, this is a novel research that would pave way to begin research in this area. 1.2. objective in view of the foregoing, this research aims to study existing practices of salam application in islamic banks’ financing and how to employ emerging muneeza & mustapha │ the potential of fintech in enhancing the use of salam contract in islamic banking international journal of islamic economics and finance (ijief), 3(2), 303-334│ 308 technologies to enhance it. the concept of salam has traditionally been associated with agricultural produce due to the fact that it is directly mentioned in a ḥadith on a related case. however, since from buyer’s point of view the process of production is not significant, then the distinction between agricultural production and industrial or manufacturing production is considered immaterial in applying the concept of salam in islamic banking (tahir, 2013). this paper consists five parts. the first part is an introduction to the work that provides a background thereto as a stepping stone. following the introductory part, the second part of the paper explores relevant literature to provide an overview of salam contract from shariah perspective and/or under islamic law. the third part of the paper deals with methodology while the fourth part discusses the results and analysis which is followed by conclusion and recommendation. ii. literature review 2.1. background theory salam or bai’ salam is literally defined as “a sale or purchase of a deferred commodity for the present price (bay ajilin bi ajil)” (ibn abidin, 1996; p. 209; amine, 2008; p.63; kettel, 2011; p. 137). in its classical conception, a salam contract arises where contracting parties agree for a sale of goods for which immediate cash payment is made on executing the agreement but they would be delivered in future time (aburaida, 2014; p.161; amjad, 2015; p.42). for the purpose of islamic banking, the bank negara malaysia defines salam contract as “an agreement whereby an islamic banking institution purchases from an obligor a specified type of commodity, at a predetermined price, which is to be delivered on a specified future date in a specified quantity and quality” (paragraph 2.73 of capital adequacy framework for islamic banks (risk-weighted assets), bank negara malaysia, 2018). in this context, an islamic bank will make payment of price in full at the execution of a salam contract and stand as a purchaser of a commodity to be produced. salam is a shariah contract whose permissibility is ordained in a passage of a hadith narration where ibn ‘abbas (ra) recounted: “when the holy prophet muhammad (saw) came to madinah, people used to pay two or three years in advance for dates. he (the holy prophet) said:” “whoever pays for anything in advance, let him pay for a specified measure and a specified weight, to be delivered at a specified time” (al-bukhari, 2240 and muslim, 1604). it was on these conditions that the prophet (saw) allowed the farmers to engage in salam. on this point, it should be noted muneeza & mustapha │ the potential of fintech in enhancing the use of salam contract in islamic banking international journal of islamic economics and finance (ijief), 3(2), 303-334│ 309 that the general rules of shariah applicable to sale contracts are that, at the time of sale, existence of subject matter must be ascertained and that same must be in seller’s ownership. however, salam has a unique nature as a shariah contract and takes an exception to these rules which allows for a leeway from the general rule (ahmed, 2007). the prophet (saw) permitted salam in order to provide ease for the farmers and traders in their dealings on the stated conditions. although the premise of the permissibility of salam was originally in agriculture, the islamic jurists have not confined its application to only agricultural goods as per the hadith mentioned above. islamic jurists are unanimous that any goods that can be measured, weighed and/or ascertained by given specifications could be subject of salam as well. accordingly, the list of ‘salamable’ items has been expanded by the jurists to include all goods or items precisely ascertainable by quality and quantity (mansuri, 2006; p.201). similarly, in all schools of islamic law, strict shariah rules and conditions are observed while engaging in a salam contract. nonetheless, there are differences of opinion among islamic jurists with respect to some aspects of salam in its practice. available literatures on islamic finance are replete with discussions on salam as an islamic financing concept, for the most part, in agricultural financing (saiti, et.al., 2018; hisham & jaffar, 2017; dchieche & aboulaich, 2016; ebrahim & rahman, 2005). relevant literatures provide elucidation on the practice of salam contract in islamic finance generally and in islamic banking in particular, which is the perspective of this research. from a perspective, islamic banking plays an integral role in the establishment and development of halal and shariah compliant equivalent of industries that are imperative for the efficient operation of modern society. in this regard, the agriculture industry and often times manufacturing industry stand most critical. bank financing of agriculture and or manufacturing is key to the commercial success of these industries as it is to all others (saqib, 2011; saqib et.al., 2014). islamic banks financing via salam instrument has been identified by several authors (utama, t.al., 2019; ajmal, et.al., 2017; kaleem & ahmad, 2016) as an important function that will play vital role in that regard. therefore, islamic banks need rethink financing for agriculture for the production of both non-crop and crop produce (saqib, 2011). from another perspective, the manufacturing industry is a peculiar industry with regard to contract for goods ordered to be produced and or manufacture. this would include custom-built goods or merchandise of particular customized specifications. this is an area that salam instrument has been deployed by islamic banks to cater for customers/clients demands in that respect (ajmal, et.al., 2017; yusoff & kamdari, 2016; miah & suzuki, 2018). asides being readily compatible with modern banking, salam is one instrument that offers added advantages over other instruments of islamic banking like musharakah muneeza & mustapha │ the potential of fintech in enhancing the use of salam contract in islamic banking international journal of islamic economics and finance (ijief), 3(2), 303-334│ 310 and bai bithaman ajil (bba) when it comes to financing the agricultural sector of the economy (kaleem & wajid, 2009). despite these roles and benefits derivable therefrom however, salam contract remains largely under-utilized in islamic banking as some studies established mainly due to a misconstrued notion about its viability and risk as a financing instrument (hassan et.al., 2011; suayb, 2008). this misconception has discounted the social value and usage as well as of salam among islamic bank in many jurisdictions (hassan et.al., 2011). 2.2. essential conditions of salam contract salam is conceptually meant to assist and provide financing for future products by purchasing such products through advance payment of sale price. as such, a buyer is required pay full price of the goods as agreed to at the sale, there and then. this is a fundamental requirement that prevents the transaction slipping into the forbidden transaction of sale of debt against debt (razali, 2012). in the same vein, quantity, quality and other specifications of the goods subject of salam are required to be stated with certainty for the avoidance of ambiguity. this applies to place and delivery date as well although they can be mutually altered or adjusted. the subject matter of salam comprises of only those goods or items technically referred to as ‘dhawatul-amthal’. these are items, whose units are homogenous in characteristics, i.e. they can be measured, weighed or counted while traded in accordance with applicable trade custom and usages. thus, other products such as livestock and precious stones cannot be subject of salam. it is worthy of note that deferment of delivery is vital in salam; as such items that are by nature of spot transaction whose delivery is required to be simultaneous, cannot be subject of salam. thus, exchange of silver with gold or rice with wheat for instance cannot be salam. moreover, ownership of salam products cannot be validly transferred by buyer to any entity before taking actual or constructive of them. it should also be noted that salam and parallel salam are independent of each other and so no stipulation can be made in such a way that one is tied to the other as to affect respective obligations and rights arising from each of them. on the part of the bank, a security or collateral may be required in order to ensure the farmer(s) or seller(s) deliver salam goods as agreed. the bank can resort to disposing of such a security or take legal action in court against delay in delivery by the farmer or seller (usmani, 1999; p. 129-131). in this case, the court may, on its own discretion, award damages to the bank which is to be determined based on direct and actual loss cost incurred by the bank. alternatively, a penalty can be provided for in the salam agreement against such an event. for this purpose, it can be provided in the salam contract that the seller shall be liable to pay a penalty, muneeza & mustapha │ the potential of fintech in enhancing the use of salam contract in islamic banking international journal of islamic economics and finance (ijief), 3(2), 303-334│ 311 to be calculated at a certain agreed rate. regardless of such a provision in the contract, in the event that a penalty is realised from the seller due to delay in delivery, that penalty shall be used by the bank; it shall be separated from the bank’s earnings and used for the purposes of charity only (muneeza et.al., 2019; p.6-7). 2.3. practice of salam and parallel salam in islamic banking salam is such an adaptable instrument/product that can employed to support all classes of farmers as well as craftsmen or traders in the society, especially the poor ones or those with little or no capital. however, for islamic banking practice, parties to be provided with salam financing include legal persons or corporate bodies besides natural persons. as an instance, an islamic bank may be approached by a farmer and expresses desire for financing and selling the produce to be realised from the financing. the bank will analyse the farmer’s credibility and may accept to buy the farmer’s produce to be produced at a specified future time and agree to provide the sale price for financing the production. the price, quantity, quality and delivery time would be negotiated and determined. thereafter, a salam agreement would be sealed. the bank pays the full sale price on the spot and in cash upon sealing the salam agreement. at the agreed date, the farmer delivers the products in accordance with the agreement and that completes and concludes the salam contract. the bank then sells the products at a different price to any interested buyer and the margin in the selling price is going to be the profit for the bank (al-zaabi, 2010). a risk for the bank here is where the bank could not find a buyer and/or the products need to be stored which means additional cost against the bank. it may be that the bank does not have storage facilities, or the goods are perishable and could deteriorate with storage. in order to avoid the likely event of not finding a buyer and its attendant risks, a type of salam has been devised for that purpose. known as a ‘parallel salam’, it is a kind of contract whereby an islamic bank would, after sealing a salam contract with a farmer as in the above instance, enter a separate sale agreement with a buyer through wa’ad. wa’ad signifies a willing promise to purchase the products immediately they are delivered to the bank by the farmer (kurniawansyah & agustia, 2017). in this way, the bank is saved the risk of loss. this kind of salam mitigates a risk of the bank in the operation of salam as it does away with the need of storage for the products. nonetheless, there is another risk for the bank to contend with where the farmer defaults in delivering the products at the specified time as the buyer may take legal action against the bank for breach of agreement. it is a muneeza & mustapha │ the potential of fintech in enhancing the use of salam contract in islamic banking international journal of islamic economics and finance (ijief), 3(2), 303-334│ 312 condition of validity in parallel salam for the bank to negotiate two different and independent contracts, one with the farmer that receives financing via advance payment of sale price and the other one with a third party (mansuri, 2006). similarly, buy-back is not allowed in salam as it is only permissible with a third party. the position of this rule equally remains even where the parallel salam involves a distinct legal person i.e. a company but is owned by the seller in the first salam. thus, the seller(s) or farmers(s), including their subsidiaries, in the salam contract can never be the buyer(s) under a parallel salam. nevertheless, the seller(s) and the buyer(s) can enter into a separate sale transaction on their own free accord after the delivery of the subject matter which completes the salam. see figure 1 below for illustration. there are several risks associated with salam which constitute the reason islamic banks in many jurisdictions are disinclined to employing it as a financing product (sundararajan, 2013; izhar & hassan, 2013). these risks comprise among others delivery and counterparty risk, marketing risk, price risk, asset-holding risk and risk of early or premature termination. however, as a versatile commercial engagement tool and couple with the popular principle of business that liability or risk is associated with every gain, salam should be treated like any other business instrument. it is also common in the commercial context that risk taking decision always comes at a cost. besides, it takes regular and common prudence in addition to managerial skills to mitigate the risks associated with salam (muneeza et.al., 2011; ayub, 2007). figure 1. salam and parallel salam transaction source: author’s own muneeza & mustapha │ the potential of fintech in enhancing the use of salam contract in islamic banking international journal of islamic economics and finance (ijief), 3(2), 303-334│ 313 figure 2. composition of financing by shariah contracts in malaysia source: bank negara malaysia (2016) the use of salam contract in islamic banking varies from jurisdiction to jurisdiction. for example, the product composition of islamic finance contracts in malaysia illustrated in figure 2 below illustrates that salam contract is not widespread in malaysia. however, in jurisdictions like pakistan and uae, salam contract is used by islamic banks for financing. figure 2 (above) states that all other unspecified islamic financing concepts which compose of bai’ dayn, bai’ salam, bai’ sarf, istisna, kafalah, mudarabah, qard, rahn, ujrah and wakalah contracts constitute only 12.5 percent of the total financing via shariah contracts. this indicates the negligible usage of salam contract in islamic financing in general and particularly its non-usage by islamic banks in malaysia. regardless of this fact, salam contract comes both handy and relevant in islamic banking for the following factors. firstly, a separate murabahah may be impracticable to use for all procurements in islamic bank financing. secondly, using profit and loss sharing (pls) as an option is supposedly imprudent for being not so compatible with all clients’ needs or modes of production and procurements among other reasons. thirdly, there are standardized outputs resulting from production activity for which there are willing buyers and suppliers (tahir, 2013). salam contract can thus be used to finance industrial activities that can be compatible with the nature of salam transaction such as production of sugar, automobile, textile, cement, paper and similar goods. salam contract offers a lot of benefits for and is quite invaluable in agricultural sector financing for crops and non-crop production by large-scale industrial farmers, as well as wholesale and export trades financing. in addition, salam financing is equally practicable and compatible with project financing in addition to fixed assets financing needs of industries among other sectors of economy (harran, et al., muneeza & mustapha │ the potential of fintech in enhancing the use of salam contract in islamic banking international journal of islamic economics and finance (ijief), 3(2), 303-334│ 314 2010). salam instrument can accordingly be applied wherever advance payment with client in terms of output to be produced is not only compatible but practicable and beneficial. furthermore, salam stands as a better means of providing personal financing for local individual farmers who are predominantly poor and yet constitute the largest number in this respect. in view of the potential areas where salam contract can be employed in islamic banking, it is observable that salam is used for different financing purposes in different islamic finance jurisdictions across the world. below are some examples of salam instruments and/or products that are developed and practiced in different countries. 2.3.1. pakistan: salam based model for shipping of goods-currency-based salam transaction (usmani, 2019) a currency-based salam is used for the purpose of shipping goods for export in accordance with contract terms constituted by a letter of credit (lc). here, the exporters need not wait to receive payment at a future date for the shipping made to a foreign country. the exporters get cash in local currency as payment by getting the relevant bill of exchange ‘discounted’ at and against an islamic bank via the currency-based salam. muslim jurists hold divergent views on this. according to imam maliki and adherent scholars, salam is not sanctioned to be executed in fuloos due to fact that sarf ruling is applicable to it and taking possession on both counter values is a precondition thereto. to imam ahmad bin hanbal however, executing salam on fuloos is authorised provided the ras ul maal comes in form of goods since, as a rule, verdicts of sarf are not generally applicable to fuloos. more so, fuloos are not thaman genetically, so execution of salam thereon is considered lawful. in addition, as ahnaf is reported to have narrated, while sarf ruling is not applicable on fuloos, executing salam in numbers is only legitimate where the fuloos are traded against one another. the transaction will however be illegitimate where both counter values are homogeneous. this is because it is a precondition in this case that possession is taken on both counter values while it is not the case in salam contract. so, given that they are traded against their opposing genus then it is a prerequisite that one single value be taken possession of, and it will be legitimate howsoever excessive. the process involves the islamic bank purchasing on a market rate the foreign currency from the exporters, which will be transferred at an agreed date, for the instant payment made to them in the local currency. thus, while the exporters receive the local currency instantly, it remains a liability on them to be settled by paying the foreign currency to the islamic bank when received at the agreed date. this process flow is summarized in figure 3 below. muneeza & mustapha │ the potential of fintech in enhancing the use of salam contract in islamic banking international journal of islamic economics and finance (ijief), 3(2), 303-334│ 315 figure 3. process flow of currency based salam source: author’s own sindh bank limited of pakistan uses salam contract as a mode of financing with an option for bill discounting in the sense it is used by conventional banks. usually after shipping goods, exporters are normally disinclined to hold on for the lc proceeds which come at a future date. they bring the export documents to a conventional bank’s counter and get them discounted or get equivalent of the lc proceeds in local currency at a discount. however, bill discounting is not permissible by shariah. a such, sindh bank uses an alternative of export sight bill discounting based on salam. in this transaction, the bank purchases the foreign currency from the exporter and effect instant payment in pakistani rupees (pkr). in relation to the foregoing and as a regulatory backing thereof, state bank of pakistan’s circular no. 02 of 2014 entitled “shariah compliant solutions for foreign bill discounting” states that “the salam of foreign currency is not a preferred transaction, however if some ibis are interested in doing this transaction, the same shall be executed at the market rate of the day. for the purpose of such transactions, the market rate shall mean the exchange rate used to carry out normal ready transactions of at least usd 50,000 or more by the ibi with its clients. further, the ibi’s shariah advisor (shariah boards from 1st oct. 2014) shall ensure, through regular reviews that the exchange rate(s) applied in currency salam transactions of any day are/is not different in any material way from the exchange rate(s) applied for ready transactions of usd 50,000 or more executed by the ibi during that day” (state bank of pakistan, 2014). muneeza & mustapha │ the potential of fintech in enhancing the use of salam contract in islamic banking international journal of islamic economics and finance (ijief), 3(2), 303-334│ 316 2.3.2. pakistan: salam based financing for farm/crop production purposes the state bank of pakistan has issued guidelines titled as the manual for salam based financing for farm/crop production purpose (state bank of pakistan, 2011; hereinafter referred to as the manual). the manual states that “the farmers at their discretion may enter into single or multiple salam transactions based on their specific funding needs. under single salam the total funds needed by the farmer will be disbursed/credited to the farmer’s account in lump sum. whereas, under the multiple salam transactions the funds would be disbursed in tranches as and when needed by the farmer by executing various/multiple salam. however, the farmer would have the option to choose the single or multiple salam depending upon his/her convenience and preference” (paragraph 1.1 of the manual). under the manual, all farmers are qualified to get salam financing from an islamic banking institutions (ibis) (paragraph 1.2 of the manual). banks are required to undertake an objective and thorough assessment of farmers financing needs and expected production in a salam transaction (paragraph 1.3 of the manual). an average of 1 to 3 years market value is to be allowed while purchasing from the farmer whose produce shall be purchased by not less than 75% of total production (paragraph 1.4 of the manual). the procedure or process flow for the transaction involves an initial execution of a master salam agreement, among other documents, based on a memorandum of understanding (mou) which prescribes the framework for individual salam contract. the agreement details the parties’ obligations and rights as well as the specifications of the produce. at the execution of the contract, the bank pays the sale price to the farmer who at maturity delivers the produce or commodity to the bank (paragraph 2.1 of the manual). an islamic bank under the manual may secure its financing via security or collateral from the farmer which may include charge on land, mortgage of property, hypothecation of assets such as machinery and even lien on deposited money or liquid security such as gold etc. with the bank. alternatively, an individual or group or corporate guarantee is acceptable (paragraph 2.2 of the manual). there are provisions for parallel salam as well for the bank (1 paragraph 3.2 of the manual). to ensure safeguarding the interests of both the bank and farmer, the manual requires crop takaful/insurance (paragraph 4.1 of the manual). the salam financing matures per cropping cycle but can be provided usually for a period of 6 to 8 months. an exception is made with respect sugarcane whose period of financing can go up to 18 months (paragraph 3.3 of the manual). muneeza & mustapha │ the potential of fintech in enhancing the use of salam contract in islamic banking international journal of islamic economics and finance (ijief), 3(2), 303-334│ 317 2.3.3. sudan: salam for financing of agricultural goods al-barakah bank of sudan practices salam for providing financing for farmers. as stated in the bank’s official website (albaraka bank, n.d.), “sale of salam are good for agricultural operations. the bank directly deals with farmers who expect good production of a certain commodity or, in case the production is not good enough, can obtain same commodity from other farmers to settle bank debts.” in this product, the customer makes an application to the bank offering for sale certain commodity providing detailed description of the commodity, its quantity and price. the customer expresses willingness for and guarantees delivering the commodity to a specified place at a later date. thereafter, the bank meticulously examines the application and if it is satisfied of its seriousness, then fixes its own suitable conditions as well and guarantees approving finance. afterward, the bank and the customer execute the salam contract and the bank and pays the amount agreed immediately. at the agreed later date, delivery of the commodity would be made to the bank by the customer in accordance with the salam agreement and completes the transaction. 2.3.4. united arab emirates (uae) salam for personal financing as the world’s first islamic bank, dubai islamic bank (dib) has developed an islamic financing service for personal liquidity solution, tagged ‘al islami salam finance’, based on salam contract. al islami salam finance provides a whole suite of personal as well as corporate and business finance solutions. structure for personal liquidity solution as used by the dib was initially proposed by a leading contemporary shariah scholar in the person of dr. hussein hamid hassan who had used the salam structure for certain corporate deals (global islamic finance report, 2011). during those deals, he understood that if this product was to be practiced in islamic banking, then challenges associated with documentation, delivery, storage, etc., which are encountered in satisfying shariah requirements would be overcome. dr. hussein invented a structure that offers suitable solutions for the abovementioned glitches in islamic banking. to gain wider acceptability, dr. hussein presented the proposed structure in the meeting of the unified shariah committee of the uae, an umbrella body of shariah scholars from all islamic banks and other financial institutions in the country. the committee objected to the proposition to use metal of the london metal exchange (lme) as the subject matter of the salam sale. this is because it is not possible for the parties in salam to be in actual possession and direct control of the commodities. it is remarkable to observe in this muneeza & mustapha │ the potential of fintech in enhancing the use of salam contract in islamic banking international journal of islamic economics and finance (ijief), 3(2), 303-334│ 318 regard that using commodities for tawarruq model is allowed, and the transactions therein (sale and purchase) are, on constructive possession basis, regarded as shariah compliant. in addition, the element of agency in the structure was also objected to, although it forms an important part of tawarruq. eventually the committee agreed to guidelines removing the agency and lme-based commodities in the structure. basically, this structure involves a salam sale between the bank customer (seller) and the bank (buyer) based on the usual obligations and rules governing salam sale. however, in order to make sure the customer is capable of effecting delivery at due date under the structure, the customer is obliged to get a sale undertaking given out by provider of the salam commodity to the effect that the provider undertakes to offer the commodity for sale to the customer immediately the customer requires him to sell based on a pre-arranged price. at each agreed delivery date, the customer buys the commodity from that provider and sends same to the bank. the bank on its part usually secures a purchase undertaking from a broker (different from the commodity provider) to ensure it is capable of disposing the commodity upon receipt. the broker buys the commodity in accordance with a schedule that tallies with dates of delivery in the main sale undertaking given out by the provider. this is for the bank to ensure it is capable of disposing the commodity upon receipt. this arrangement guarantees the bank instantly disposes the commodity on its part (global islamic finance report, 2011; p.52). the dubai islamic bank has removed the agency element and lme from the structure it uses in providing salam-based cash financing product to retail customers. in addition, dib uses any commodity obtainable locally with the aim that both the bank and the customer are not only capable of taking actual possession but also exercising control over the commodity. in this regard, the dib largely uses refined sugar as the subject matter due to the fact that raw sugar is brought into the country in millions of tons and sold to distributors after refinement. abu dhabi commercial bank (adcb) also uses salam for personal financing. the modus operandi of this product is explained in the official website as provided in figure 4 below. muneeza & mustapha │ the potential of fintech in enhancing the use of salam contract in islamic banking international journal of islamic economics and finance (ijief), 3(2), 303-334│ 319 national bank of ras al khaimah (rakbank) uae also uses salam to provide personal financing. on 2nd may 2012, the shariah supervisory board of rakbank has approved the following product structure based on salam for personal financing. the approved process flow is illustrated in figure 5 below. figure 4. modus operandi of adcb bank’s salam personal financing product source: author’s own figure 5. process flow of salam-based personal financing for rakbank source: author’s own muneeza & mustapha │ the potential of fintech in enhancing the use of salam contract in islamic banking international journal of islamic economics and finance (ijief), 3(2), 303-334│ 320 salam as used for personal financing is termed organized salam (abozaid, 2010). it is argued that that the profit received from personal financing cannot be considered as earnings for islamic banks as it goes against the injunction prohibiting riba (usury/interest) in shariah. it is observed that these types of personal products of islamic banks have been materialized only in an effort to imitate products of conventional banking. in contrast however, this kind of financing does not match the recognized shariah contracts for sale of usufructs or goods such as ijarah, istisna’, murabahah, etc. moreover, where customers demand financing for services, goods and usufructs, islamic banks can finance them only through the appropriate shariah contracts. it is obvious in this regard, as abozaid maintained, that in practice executing a sale contract in organized tawarruq and salam is done only on paper short of any realistic impact on the goods, not even at least a change of place or movement symbolic of such a sale. thus, as it is generally known, goods sold only on paper are subject of an invalid sale. this is coupled with the fact that all parties involved including the client, customer or the broker and the islamic banks are fully aware that the goods are supposedly contemplated in this process for the single reason of releasing money by the bank to the client who returns same to the bank with an increase. the goods would not in any way be impacted upon as no effect of sale whatsoever is intended in that regard. regardless of the fact that some scholars view and claim otherwise about this process, it is an obvious fact that the overall transaction flow and or process is such that it makes possible earning returns on cash advancing or cash financing alone which all parties know from initiation of the contract. in this regard, it is accordingly maintained that islamic finance approves of cash financing for individuals or institutions through no other means except qard (kahf & mohamed, 2017). iii. methodology a qualitative methodology, drawn on content analysis, is employed in conducting this research. this approach generally encompasses examination and qualitative interpretation of documented data from primary as well as secondary sources to arrive at conclusion (beer and faulkner, 2014; mayer, 2015). from both sources, non-empirical data on current application and practice of salam contract alongside its theoretical underpinnings was examined in this research. accordingly, data analysed in this research were obtained mainly from texts of documents catalogued in libraries (inceif and university of malaya) as well as online academic databases including scopus, web of science, lexisnexis, heinonline, ebsco, google scholar among other muneeza & mustapha │ the potential of fintech in enhancing the use of salam contract in islamic banking international journal of islamic economics and finance (ijief), 3(2), 303-334│ 321 internet resources (chermack and passmore, 2005; hutchinson, 2015). thus, as a research in shariah contract, the primary sources examined in this regard comprised of prophetic hadith and islamic banking regulatory provisions on salam. the secondary data sources consulted include journal articles, books, conference papers, magazines and salam product documents of some shariah banks which specifically provide description and information on practical application of salam in islamic banking and general use of technology to deliver financial services (webley, 2010; onwuegbuzie et al., 2010; moser et al., 2018). through content analysis, text of information solely from the identified data sources were systematically studied and analysed without employing any statistics (cownie and bradney, 2013; drisko and maschi, 2016, pp. 81-82). through this process, not only obvious substance on islamic banking and fintech were addressed but also core ideas and themes relevant for technology-based application of salam contract in islamic banking, upon which proposal for enhancement was proffered including the recommendation and conclusion of the entire research. iv. results and analysis 4.1. results the advent of industrial revolution 4.0 has seen the emergence and development of technologies that today play an essential role in human activities with improvement in human lives. prominent among the technologies in this regard include blockchain technology, internet of things (iot), artificial intelligence, robotics among others. blockchain is an automated system of generating and keeping transactions record, monetary and otherwise, in form of blocks that are linked to each other as a chain by cryptography and operates as a distributed or decentralized public or private digital ledger (pilkington, 2016; yu, et al., 2017). a distributed ledger in this context, largely typified by the blockchain, is a consensus mechanism that entails replication, sharing and synchronization of digital data dispersed across multiple locations or sites without any centralized pivot or administrator (skwarek, 2019; p.162). by decentralization, it means the transactions are recorded across numerous computers that render it impossible to retroactively alter the record unless all subsequent blocks in the chain are accordingly altered i.e. alteration cannot be done without consensus of the blockchain network comprising of computers called nodes. at the same time, a consensus algorithm of the blockchain network enables making and addition of new transaction blocks into existing blocks to form a continuous chain of blocks. therefore, using muneeza & mustapha │ the potential of fintech in enhancing the use of salam contract in islamic banking international journal of islamic economics and finance (ijief), 3(2), 303-334│ 322 specified algorithm, each block in the chain is designed in such a way that its data record is resiliently unmodifiable and carries a cryptographic hash of the block before it, a timestamp and dataset of the transaction (zheng, et.al., 2017). from its conception, the blockchain technology is utilized for the digital currency bitcoin (nakamoto, 2008). however, with subsequent development from its earliest features, the blockchain technology comes to be a universal platform for creating digital assets and smart contracts that enable automation of other numerous transactions, financial and otherwise (tapscott & tapscott, 2016; babkin, et.al., 2019). with automation via smart contract algorithm, the blockchain has accordingly operationalised a concept of ‘trustless’ world where parties can conduct transactions with one another that hitherto required trust or personal knowledge between parties concerned. everything therein operates without human involvement, but a series of incorruptibly programmed rules. that said, the blockchain technology thus keeps parties that are strangers to one another, honest and consistent in any transaction and tracking such transactions based on digital trust, without having to know one another (calcaterra & kaal, 2020; giancaspro, 2017). according to szabo, the smart contract in its original coinage is “a set of promises, specified in digital form, including protocols within which the parties perform on these promises” (szabo, 1996; p.2). moreover, same protocol can be employed to incorporate contracts of all types of properties by digital means. in this way, smart contracts operate as the protocols deployed on and secured by blockchain that digitally authenticate and execute the contracts between or among contracting parties (mendi, et.al., 2019; hoffmann & skwarek, 2019). in other word, the smart contract basically encompasses a series of self-executing codes stored in the blockchain that effect particular operation when certain conditions and or predetermined terms are met (wang, 2019). smart contracts typically enforce certain encoded agreements that are established on blockchain platform to bring about automation of salam transactions. by and large, transactions embedded onto blockchain are encoded via specified smart contract algorithm with traceability and auditability functions. the blockchain and related technologies have so far found application, even though at infancy stage, in virtually all industries such as healthcare, finance, insurance, logistics and agriculture, besides plans to introduce and adopt same by many others in the nearby future (sonnenfeld, 2019). for the most part, smart contract cryptography features as an important aspect of blockchain automation and digitization (peters & panayi, 2016; christidis & devetsikiotis, 2016). internet of things or iot as it is commonly shortened refers to connectivity of objects with a network (the internet) for exchange of information and muneeza & mustapha │ the potential of fintech in enhancing the use of salam contract in islamic banking international journal of islamic economics and finance (ijief), 3(2), 303-334│ 323 communication. iot has enabled the interconnectivity of billions of devices often described as smart objects that proficiently collect information or data and communicate same with other systems that are on the internet. iotbased devices or applications have been developed and enabled for use to operate, control and monitor variety of domain including process, smart cities, smart homes, smart phones, smart farming and such other systems usually tagged ‘smart’ in related context (awan, et.al., 2019). such iot devices or applications are normally empowered by artificial intelligence and machine learning to generate information that is saved on blockchain to support farmers make decision timely. smart farming is an emerging farming model that refers to management of farms using blockchain-compatible technologies comprising of iot, artificial intelligence (ai), machine learning, robotics, drones among others to monitor operations and boost quality as well as quantity of products while optimizing the human labour needed for production (sciforce, 2019). it is a synergy of blockchain, iot and artificial intelligence that results in the all-important outcome of smart farming where operations are automated and monitored from cultivation and irrigation (including weather and soil conditions) to harvesting, storage and sale of crops. mobile computing can be employed by farmers to access data stored by means cloud computing for monitoring and controlling activities in the farm. cloud computing entails the deployment of computer or any information technology (it) infrastructure based on the internet for providing services and platforms for managing, sharing and storing data or any resources (banerjee, 2019; awan, et.al., 2019). in this regard, mobile phones, hand-held devices and/or computers and related gadgets serve as the farmers’ machines and interface on their own end for the control and monitoring of their farms (sciforce, 2019). 4.2. analysis in this part of the paper, discussion is presented on possible roles that can be played by such technologies as blockchain and iot among other related technologies for the enhancement of salam transactions. blockchain technology can have a wide scope of application in islamic banking to enhance salam contract and make it an innovative yet profitable product. from the onset, the blockchain can used in order to digitize salam operations and automate business/farming activities the subject of the salam. digitization will bring about convergence of processes and technologies including blockchain, artificial intelligence, internet of things and machine learning to render salam operations effortless via automation. in this convergence, blockchain technology stands as the enabler as well as a platform that enables the automation (shaun crawford, et.al., 2019). thus, muneeza & mustapha │ the potential of fintech in enhancing the use of salam contract in islamic banking international journal of islamic economics and finance (ijief), 3(2), 303-334│ 324 salam can be automated with digitization based on blockchain, iot and artificial intelligence. this way salam can be enhanced by addressing issues related thereto and improving it from the perspectives of both the banks and clients. for the islamic banks in particular, blockchain can offer a panacea where parallel salam contract could be eliminated in the process so that salam can be executed using a single contract. a critical reason why parallel salam is being used in agricultural goods for instance, is to mitigate operational risk of storing delivered agricultural goods and to ensure that all goods received by the banks will be fully sold. with blockchain’s traceability and auditability functions, the banks would only need to ensure a ready market for the agricultural products by engaging with buyer(s) that require the goods preparatory to partaking in a blockchain-based salam contract. this would require the banks to be familiar with the market for the agricultural goods concerned and understand its pricing economics in order to market them. in this regard, the banks would need to promote the goods to interested buyers among its clients and the relevant industry for the goods. the banks can sell the goods/products directly via standing order to households and industries including corporations, enterprises, restaurants and related businesses and get them efficiently distributed by logistics firms. involvement of logistics firm(s) for haulage and distribution supports salam and professionally facilitates selling the goods to all categories of buyers who can pay for them either in advance or at delivery at the due time. accordingly, the banks would engage logistics company for haulage and distribution of the goods upon delivery by the farmers or producers at due time. these processes may involve cost to the banks which may as well be recovered from the sale of the goods eventually. as a principle of shariah, islamic banks are not out to make profit and cater for themselves alone. they have higher objective of ensuring societal welfare. the additional costs in this case is to facilitate and sustain salam transaction which may likely involve poor farmers of the society. the costs may be considered part of the banks’ societal welfare objective in helping such people to earn a living in this way. in addition, there is risk on the part of the farmers due to certain factors including unreliable rainy season and crop diseases/pests among other misfortunes which may affect production. these can be addressed with the development of blockchain’s smart contract enhanced via artificial intelligence, iot and related technologies to assist farmers establish a sustainable smart farming. this can mitigate the risk of failure to produce required goods to a large extent by detecting and preventing such misfortunes. additionally, farmers/producers can have crop insurance (takaful). the insurance for this purpose is digitized and automated, whereby farmers can claim and get benefits automatically from the insurance firm muneeza & mustapha │ the potential of fintech in enhancing the use of salam contract in islamic banking international journal of islamic economics and finance (ijief), 3(2), 303-334│ 325 which is on the same technologically operated platform as the farmers through the biot. this insurance would credibly support the practice and enhance profitability of salam. accordingly, within an all-encompassing blockchain-based iot ecosystem, all parties can monitor and keep track of the salam goods or subject matter to be produced. in addition, clients or buyers (actual and potential) as well as other stakeholders including logistics firm on the part of the banks and insurance company on the part of the farmers/producers, are aware of the products' progress and keep up with its development up to its due time. the parties, including buyers and all stakeholders, are integrated into the blockchain-based iot ecosystem via user applications on smart devices. the smart devices, usually mobile, provide user interfaces or dashboards that enables all involved in any of the processes, to login into and interact with the system and maintain access thereto, on real time with mutual control access. the synergy of blockchain and internet of things works credibly well and this is illustrated in figure 6 below. figure 6. illustration of salam on blockchain-based iot source: author’s own muneeza & mustapha │ the potential of fintech in enhancing the use of salam contract in islamic banking international journal of islamic economics and finance (ijief), 3(2), 303-334│ 326 v. conclusion and recommendation 5.1. conclusion bai salam is one of the islamic finance contracts currently used by islamic banks for different financing purposes in several countries. in many others however, the banks are disinclined to employing salam in their financing services for its obvious associated risks. regardless, this research has established that financial products developed from salam contract are viable, vibrant and innovative. hence, islamic banks that do not provide salam can learn and appreciate its practice by the banks that provide such financing services. in this regard, the practices and use cases of salam by islamic banks in the uae, sudan and pakistan are good models to adopt. in the uae, salam contract is used as an alternative for tawarruq or commodity murabahah to meet personal financing needs of customers. it is nevertheless cautiously maintained that salam is not to be used for personal or cash financing; the permitted alternative and the best for that purpose is qard. in sudan, salam is used for financing agricultural goods. meanwhile in pakistan, there is salam-based model for shipping of goods (or currency-based salam financing) as well as salam for financing farm/crop production. these jurisdictions have provided use cases on salam financing that stand as model for products development of similar purposes where required. 5.2. recommendation the advent of blockchain technologies, iot and their application in salam contract operations can enhance the operation of salam. the working of these technologies can do away with the risks associated with salam such as lack guarantee, uncertainty in or late, delivery, additional cost on storage etc. on the whole, digitization and automation of salam instruments and transactions thereon can bring about tremendous enhancements in all aspects of salam-based agricultural supply chain activities and export/import business. these enhancements are in turn beneficial to all parties including the islamic bank, farmers, distributors (transportation), retailers and even consumers. benefits to be derived in this regard include saving transaction cost and time, ease and certainty of processes, safety and security of goods subject of salam, support to small farmers, prevention/reduction of waste of produce, better supervision and management of supply chain. by and large, this research demonstrates that a technologically enhanced salam transaction is possible and can be used to structure shariah compliant products for islamic bank financing. such products can accordingly be developed and tailored to meet the need of clients in any particular society. muneeza & mustapha │ the potential of fintech in enhancing the use of salam contract in islamic banking international journal of islamic economics and finance (ijief), 3(2), 303-334│ 327 it is thus expected that the research will motivate islamic banks in countries that do not practice salam to learn from those islamic banks in jurisdictions that practice salam and adopt salam contract to structure products for their respective use cases. it is important to reiterate however, that the broad range of activities to be taking on the blockchain and iot for the operation of salam are no more than a showcase of the possible areas in which stakeholders can venture into in pursuit of innovation. the research envisions the working of a technologically-based salam and demonstrate how to go about it. as robust as the synergy of blockchain and iot is demonstrated to be, no use case is known to the authors at the moment, and so at best it is futuristic. in essence, the blockchain and related technologies are emerging projects in an early development phase. researches are ongoing on key areas pertaining to vulnerability, security and privacy to be improved and practicalized to attain desired security, scalability and decentralisation of the ecosystem as it is often characterised. despite its immutability, auditability, incorruptibility features and the all-powerful smart contract, the blockchain and the related technologies are indeed disruptive for the banking and financial services industries. they cannot be taken for granted. they consequently face multiple challenges including legal, regulatory and competition barriers to achieve market penetration and as financial intermediation media. therefore, more research initiatives, sandbox trials and multidisciplinary research collaborations in the field of shariah, islamic commercial jurisprudence, computer science and internet are needed. such a collaboration would ensure the technologies can attain their potential, realize their commercial viability and eventually to be adopted in the mainstream. muneeza & mustapha │ the potential of fintech in enhancing the use of salam contract in islamic banking international journal of islamic economics and finance (ijief), 3(2), 303-334│ 328 references abdul rahman, y., (2010). the art of islamic banking and finance, usahoboken: john wiley finance. & sons, inc. abozaid, a. 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(2007). financial transactions in islamic jurisprudence, vol. 1 (english translation) 2nd edition, damascus: dar al fikr. international journal of islamic economics and finance (ijief) vol. 3(2), page 1-30, special issue: islamic social finance and ethics millennials behaviour towards digital waqf innovation dudun anugerah wadi universitas indonesia, indonesia, corresponding email: dudun.aw@gmail.com mohamad soleh nurzaman universitas indonesia, indonesia, dedenmsn@gmail.com article history received: june 4 th , 2020 revised: july 19 th , 2020 accepted: august 28 th , 2020 abstract high growth of internet and smartphone users has resulted in the emergence of various digital start-up companies. those innovation has changed people’s habit, one of which is the online donation habit. however, waqf as a form of islamic endowment has not been much in demand by the public. today’s existing digital waqf platform has not succeeded in cultivating waqf in communities, specifically for millennials which will dominate 70% indonesia’s workforce in 2020-2030. this research aims to find millennials determinants of waqf technology adoption using modified utaut2 model. to build respondent perception of waqf and innovation proposed, a short video was used since its rise as marketing tool. this research also examines video marketing effectiveness using epic model. result from data analysis using pls sem model shows that performance expectancy, effort expectancy, and social influence are major determinants toward waqf technology acceptance. video marketing is also found to be very effective as a marketing tool for digital waqf. keywords: digital waqf, utaut2, epic model, ads effectiveness jel classification: c31, m31, o35, z12 @ ijief 2020 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.3232 web: https://journal.umy.ac.id/index.php/ijief/article/view/8953 citation: wadi, d. a., & nurzaman, m. s. (2020). millennials behaviour towards digital waqf innovation. international journal of islamic economics and finance (ijief), 3(2), 1-30. doi: https://doi.org/10.18196/ijief. 3232 mailto:dedenmsn@gmail.com https://doi.org/10.18196/ijief.3225 wadi & nurzaman │millennials behaviour towards digital waqf innovation international journal of islamic economics and finance (ijief), 3(2), si, 1-30│2 i. introduction 1.1. background the growth of digital start-up in indonesia has been significant in recent years. kemenristekdikti reported the number of online start-up in 2018 was 956 companies, a sharp increase from 2015 which was only 52 companies (prayogo, 2019). indonesia is listed as the fifth largest country with digital start-up company in the world. startupranking.com (2020) says that indonesia has a total of 2,176 digital start-up. high growth digital industry in indonesia is predicted to continue in line with the growing number of people who are able to enjoy internet access. not less than 171.17 million people in indonesia are actively using the internet or 64.8% of the total population of indonesia (apjii, 2018). today’s digital industry has also entered social services. various social service platforms are present to facilitate donation. nevertheless, there are still very few platforms engaged in waqf (islamic endowment). existing waqf platform is considered to be not succeeding in cultivating waqf. (nursalikah, 2019) reported only 225 billion rupiah of waqf funds have been collected from a potential of 77 trillion rupiah per year. this huge gap is an obvious sign that we need to have a better understanding about waqf technology adoption. most researches in waqf issue so far have been only focusing on traditional/ conventional waqf participation. whereas, knowledge related to these are important to know considering the current trend transformation towards digital conducted by various institutions. moreover, when the target market of a product is millennial which is very close to technology and sensitive to its changes (deloitte, 2019). millennial generation deserves to be the target market considering in 2020 to 2030, this generation is predicted as dominant workforce in indonesia, which is more than 70% (bps, 2018). indonesia as the largest country with muslim population in the world has big potential related to waqf. (carabain & bekkers, 2012) state that a muslim tends to have high philanthropic behavior. in fact, indonesia was ranked 10 th as the most generous countries by 2019 (charity aid foundation (caf), 2019). nasution (2005) in (hasim, lubis, & ali, 2016) conducted a simulated calculation of the potential cash waqf in indonesia. as a result, with only rp.5000, rp.100,000 per month, indonesia could have 3 trillion rupiahs cash waqf per annum. unfavorably, this enormous potential is challenged by poor waqf literacy issue (fauziah & el ayyubi, 2019) (ekawaty & muda, 2015) (jazil, rofifah, & nursyamsiah, 2019). hence, succession of waqf fund raising also demanded to effective marketing activities. waqf institutions should have effective media in terms of marketing waqf product. wadi & nurzaman │millennials behaviour towards digital waqf innovation international journal of islamic economics and finance (ijief), 3(2), si, 1-30│3 one of the rising stars of effective marketing tools today is video marketing. the trend of video marketing has rose significantly due to popularity of youtube and social media recently. in early 2020, 92% marketing staff stated the importance of using video in marketing their products. this figure increased from 2015 which was only 78% (carter, 2020). in indonesia, video and film are the most visited entertainment content on the internet during 2018 at 45.3% (apjii, 2018). therefore, video marketing is believed to be effective for marketing waqf product. however, to the best of author knowledge, there is no research has been done to empirically measures the effectiveness of video usage in promoting waqf in indonesia. knowledge on this issue is necessary for waqf fundraising activities. this research aims to find millennials determinants of waqf technology adoption using modified unified theory of acceptance and used of technology (utaut2) model. a short video marketing was used to build respondent literacy of waqf and their perception on innovation proposed. in addition to determinants of waqf technology adoption, this study also measures the effectiveness of a video in attracting waqif (person who do waqf) interest using epic model (nielsen, 2008). a better understanding on the video marketing effectiveness in attracting potential waqif and the determinant of digital waqf technology potentially will increase participation in waqf. finally, the raise of waqf asset specifically in the productive sector will eventually contribute to the realization of the social welfare (al-arif, 2012) and support government to actualize sdg’s (abdullah m., 2018). it is believed that this paper is the first paper which examines determinant of digital waqf technology and the effectiveness of video usage in marketing waqf product in indonesia. 1.2. objectives as technology becomes addicted by millennials, this study aims to find determinant of millennials in digital waqf technology adoption. secondly, this study measures quantitatively the effectiveness of video marketing in promoting waqf among millennials. this paper starts with conducting review of utaut2, as the latest theory of technology acceptance model. epic model as measurement tool of ads effectiveness also discusses at this part. construct variables then were proposed based on the model and from previous research results. second part of this study discusses methodology and research model. third part of this study explains data analysis from statistical calculation and output from wadi & nurzaman │millennials behaviour towards digital waqf innovation international journal of islamic economics and finance (ijief), 3(2), si, 1-30│4 smartpls 3.0 software. then, a brief discussion from the result is available on the next part. at the end of this paper, summary of this study is presented with some practical implications proposed. ii. literature review 2.1. background theory 2.1.1. unified theory of acceptance and use of technology 2 (utaut2) this study adapted modified version of utaut2 model (venkatesh, thong, & xu, 2012) for use in waqf-based philanthropy products. moderating variables of utaut2 were eliminated (age, gender, and experience) since the research object is millennial. meanwhile, the construct of the utaut2 variable and its modifications are as follow: performance expectancy (pe) performance expectancy (pe) is described as how much technology usage give benefit to users on certain activities (venkatesh, morris, davis, & davis, 2003). pe concept is the development of the previous theory that accommodates perceived usefulness, relative advantage, job fit, outcome expectation, and extrinsic motivation. performance expectancy factors are often found to play an important role in people’s intention to accept technology such as reported in researches conducted by (bendi & andayani, 2013) (macedo, 2017) (arain, hussain, rizvi, & vighio, 2019) (chang, liu, huang, & hsieh, 2019) (huang & kao, 2014) (shaw & sergueeva, 2019). on this research, pe is explained as: how much benefit will be received by waqif (people who do waqf) when conducting waqf through digital platforms; and whether contributing waqf through the platform reduce their productivity. h1: performance expectancy positively affects behavioural intention. effort expectancy (ee) effort expectancy is a level of ease when using new technology which consists of perceived ease of use, complexity, and ease of use (venkatesh et al., 2003). (jazil et al, 2019) and (shukor, anwar, aziz, & sabri, 2017) stated that the ease and convenience of donating waqf affected someone intention in waqf contribution. however, those studies were not about technology acceptance. ee factor often appears as a dominant factor in technology acceptance for instance research result conducted by (chang et al., 2019). this research used platform features that are considered as easiness on waqf wadi & nurzaman │millennials behaviour towards digital waqf innovation international journal of islamic economics and finance (ijief), 3(2), si, 1-30│5 contribution which are: auto debit feature; and a wide selection of payment channels. h2: effort expectancy positively affects behavioural intention. social influence (si) social influence is how one looks at the believe of others in using new technology (venkatesh et al., 2003). this variable consists of variables derived from previous technology acceptance studies: subjective norms, social factors, and image. some studies using utaut2 model reported si as major determinant, as reported on research results conducted by (chang et al., 2019). similar study related to social influence on the intentions of waqf was conducted by (nurdany, 2019) who linked the amount of waqf land with the number of mosques, the ratio of muslim population, and the number of cleric. this research (nurdany, 2019) found that the number of cleric positively influence the number of waqf land. hence, this study used the influence of family member, cleric, as well as islamic community/ organization as indicators of si construct. h3: social influence positively affects behavioural intention. facilitating condition (fc) this variable indicates how far user is convinced that the infrastructure and technical support for using a new technology is easily accessible and available near the user (venkatesh et al., 2003). the constituent variables are: perceived behavioural control, facilitating conditions, and compatibility. several studies using utaut2 approach reported fc factor as a major determinant as seen on research conducted by (chang et al., 2019) (gunawan, muchardie, & liawinardi, 2019). to the best of authors knowledge, there has been no research related to waqf which attempt to examine supporting facilities in accessing waqf technology. this research described fc construct to: smartphone proprietorship; and the ownership of common payment accounts which is widely used in online shopping platform. h4: facilitating condition positively affects behavioural intention. hedonic motivation (hm) hedonic motivation is defined as the pleasure derived from using new technology (venkatesh et al., 2012). several result studies related to utaut2, put hm as an important factor in determining the acceptance and use of technology as reported by (huang & kao, 2014) (chang et al., 2019) (gunawan et al., 2019) (shaw & sergueeva, 2019). on this study, hm construct was assessed using application’s features: reward points earned at wadi & nurzaman │millennials behaviour towards digital waqf innovation international journal of islamic economics and finance (ijief), 3(2), si, 1-30│6 a time when shopping on platform seller’s network; as well as potential income from completing mission available on apps. h5: hedonic motivation positively affects behavioural intention. spiritual motivation (sm) sm construct is a new construct added in the research as a counterbalance of hm. if hm wants to detect the tendency of someone in pleasure point of view, sm describes more spiritual motivation. thus, sm is the opposite of materiality (plato in (van niekerk, 2018)) which is analogous to hm. spirituality is specifically defined by (sheldrake, 2005) as an awareness of relationships with god, through the dwelling of spirits to those who believe it. spiritual necessity is defined as something desired by a person to find the purpose and meaning of life (monod, et al., 2011). in this study, sm indicated by: afterlife reward, sense of usefulness for society, and eternal reward. h6: spiritual motivation positively affects behavioural intention. habit (h) habit is degree to which one tends to behave automatically due to previous learning (venkatesh et al., 2012). someone who is accustomed to using a smartphone will easily learn new applications that run on it. this is different from someone who is relatively new at it. several studies related to utaut2, put h as an important factor in determining the acceptance and use of technology, as research result conducted by (chang et al., 2019). on this research, the h indicator is described with habit of giving cash, as well as online donation habits. h7: habit positively affects behavioural intention. perceived waqf as moderating variable (pw) this variable illustrates how a person views the waqf in its entirety in terms of law, implementation, and usefulness. this variable is important to measure because if someone feels that cash waqf is not important or not recommended, any technological innovation or product will not be accepted by him. according to (amalia & puspita, 2018), religious understanding plays 54% role in determining interests of jakarta’s resident in cash waqf contribution. furthermore (fauziah & el ayyubi, 2019) (jazil et al., 2019) (ekawaty & muda, 2015) stated that the low level of waqf literacy affects intention to participate in waqf. nevertheless, there have been no studies linking perceived waqf as a factor affecting the intention of using digital waqf innovation. therefore, perceived waqf could act as a moderation variable that is expected to encourage a person to use digital waqf innovation. wadi & nurzaman │millennials behaviour towards digital waqf innovation international journal of islamic economics and finance (ijief), 3(2), si, 1-30│7 h8: perceived waqf positively affects h1, h2, h3, h4, h5, h6, h7 as moderating variable to behavioural intention. religiosity as moderating variable (r) people’s religiosity degree is predicted to have an effect on their intention to waqf participation. previous studies have shown that this variable influences someone’s decision related to religious activities such as: choosing islamic banks (wan-ahmad, ab-rahman, ali, & che-seman, 2008); influencing consumer behaviour (abdullah & abd-majid, 2003); and participation in online waqf (amin, rahman, supinah, & ramayah, 2014). furthermore, (jazil et al, 2019) (rizal & amin, 2017) (dennis, qoyum, & sakti, 2018) (osman, mohammed, & amin, 2014) stated that religiosity is an important determinant that influences one's decision on doing waqf. to the best of authors knowledge, there has been no research that directly relates religiosity factor to acceptance of digital waqf innovation. this research examined this construct as a moderation variable that allegedly affects the intention of someone in receiving digital waqf innovation. h9: religiosity positively affects h1, h2, h3, h4, h5, h6, h7 as moderating variable to behavioural intention (bi). behavioural intention (bi) the construct is described as how much the user wishes or intends to use the technology continuously with the assumption that there is access to information (jati & laksito, 2012). this research was adjusted to end at bi construct, considering that the innovations tested had not been used by the prospective waqif. 2.1.2. video marketing, ads effectiveness, and epic model video marketing is the future of marketing products and services. a video marketing has the potential to be viral (wendt, griesbaum, & kolle, 2016) in a matter of days with the help of the internet. this remarkable potential is a result of video’s ability to arouse emotions and process complex information (wendt et al., 2016). according to (appiah, 2006), video engages consumers differently than pictures and writing. the use of video is obviously better for promotional considering interpersonal communication is believed to be more interesting than indirect mass communication (arndt, 1967). a video advertisement will be considered effective if: ad is able to represent and be a manifestation of a marketing strategy; based on the value desired by the consumer; persuasive wadi & nurzaman │millennials behaviour towards digital waqf innovation international journal of islamic economics and finance (ijief), 3(2), si, 1-30│8 and unique in order to penetrate the market; not promising something excessive and difficult to be met (honest); and avoiding creative ideas arising from excessive strategy (shimp & andrews, 2013). meanwhile, according to (rangkuti, 2009), advertising is considered effective if able to achieve the objectives of informing or providing information to make decisions, as well as persuading users to choose the products/ services offered. in this regard, a marketing agency (nielsen, a. c, 2008) developed an ad effectiveness measurement instrument called epic model. epic model divides the effectiveness of advertising based on four dimensions: 1. empathy empathy illustrates two things: whether the target consumer likes the advertisement; and how consumers perceive their relationship between and their personal. in this dimension, ads must contain dimensions of affection and cognition (pancaningrum & sari, 2019). 2. persuasion the persuasion dimension describes the changing attitudes, beliefs, and desires of consumers resulting from a promotional advertisement (peter & olson, 2010). 3. impact impact shows how well an advertisement provides knowledge to the consumer regarding the product/service offered. furthermore, consumer desires will increase to seek additional information that ultimately leads to product/service selection (nasution & suyanto, 2016). 4. communication communication measures how many consumers remember the important message of an advertisement, the understanding of advertising, and the impression left. related to this, the cognitive process will affect the marketing strategy (pancaningrum & sari, 2019). 2.2. previous studies discussions regarding cash waqf in indonesia are still very limited. (rusydiana & al-farisi, 2016) stated that only 38% of scientific journal articles discuss cash waqf throughout 2011 to 2015. majelis ulama indonesia issued a fatwa regarding legality of cash waqf on 11 may 2002. this fatwa was then supported by the government through pp no. 41 of 2004, which was revised by pp no. 42 of 2006, and most recently renewed through pp no. 25 of 2018. the fact shows that cash waqf literacy in indonesia is still low as it becomes major difficulties in cash waqf fund raising. wadi & nurzaman │millennials behaviour towards digital waqf innovation international journal of islamic economics and finance (ijief), 3(2), si, 1-30│9 as stated earlier, waqf researches so far have much been focused on traditional/ conventional waqf participation. whereas, conventional waqf determinant research approach is relatively different from the technological determinant research approach. as technology commonly has some certain prerequisites to be used so as to bring up other factors as determinants. closest related research conducted by (amin et al., 2014) about factors influencing online acceptance of waqf in malaysia found perceived usefulness, perceived ease of use, perceived religiosity, and amount of information significantly influence the acceptance of online waqf. however, this research used technology acceptance model (tam) approach and pls sem as statistical method. unfavourably, object of research was focused on malaysian banking customers assuming that they are familiar with the concept of islam. the used of tam’s approach as technology acceptance model made it interesting to have further research using different approaches such as utaut2, as the latest technology acceptance model. utaut2 accommodates tam variables and other technology acceptance models such as theory of planned behaviour (tpb) & utaut (previous version of utaut2). 2.2.1. determinant of conventional (offline) waqf fund rising conventional cash waqf fund rising faces various challenges on its development. some of these challenges are: transparency and accountability of waqf institutions (rusydiana & rahayu, 2019); low public literacy towards waqf (fauziah & el ayyubi, 2019) (ekawaty & muda, 2015) (jazil et al, 2019) which are influenced by education (nizar, 2014); social cultural factors and lack of promotion (adeyemi, ismail, & sabariah, 2016); issues related to waqf institutions and their legal instruments (hasim, lubis, & ali, 2016); religious factors (jazil et al, 2019) (rizal & amin, 2017) (dennis et al., 2018) (osman et al., 2014), trust in waqf management institutions, and convenient in performing endowments/ supported facilities (jazil et al, 2019) (shukor et al., 2017); uncertified and less qualified nazir (waqf manager) as many nazir treat their profession as side job (huda, rini, mardoni, hudori, & anggraini, 2017) (rusydiana & rahayu, 2019); and the lack of creative and innovative marketing strategies (rusydiana & rahayu, 2019). meanwhile, different research result was found in islamic egalitarianism and its relationship to waqf participation. (rizal & amin, 2017) stated that islamic egalitarianism has positive effect on the participation of waqf, while (dennis et al., 2018) stated it has no significant effect. the performance of the institution, in this case, can be interpreted as trust in the waqf institution was also found to be not significant to waqf fund raising (jazil et al, 2019). tax incentives was also reported to have no significant effect according to previous research. wadi & nurzaman │millennials behaviour towards digital waqf innovation international journal of islamic economics and finance (ijief), 3(2), si, 1-30│10 results of above studies indicate that people intention towards waqf can be categorized into three categories: internal factors, external factors, and supporting factors. internal factors are factors related to personal waqif such as literacy, education level, and religiosity. external factors are factors relating to other parties such as trust on nazir institution, nazir certification issue, and legal instruments that are not yet available. supporting factors are factors outside external and internal factors such as convenience and lack of marketing strategies. iii. methodology 3.1. data this study uses a questionnaire instrument that is distributed online using google form. all respondents are required to have a jabodetabek id and live in the area. a total of 166 respondents from a total of 202 respondents who participated in this study were declared valid. before filling out the questionnaire, respondents were asked to view 6 minutes 40 seconds video followed by ads effectiveness and technology acceptance questionnaire. this video contains waqf literacy and teaser of digital waqf innovation. the majority of survey questions were adopted from the research of (venkatesh et al., 2012). indicators of construct religiosity were from research (mathur, 2012) & (rydz, walesa, & tatala, 2017) while spiritual motivation were from research (king, et al., 2006). all research questions have been adjusted to the research topic, cash waqf innovation. ads effectiveness measurement used questions adopted from (nielsen, ac, 2008) and from several related studies for instance (pancaningrum & sari, 2019), (amira & nurhayati, 2019), (nasution & suyanto, 2016) (pancaningrum & rahayu, 2017) and (girsang, 2017). since the duration of filling out the questionnaire has been truncated by video views, some questions were dropped out from the questionnaire to prevent respondent exhaustion. in total, determinant technology acceptance test used 22 questions and 9 questions were used to test ad effectiveness. thus, the total survey questions amounted to 31 questions. wadi & nurzaman │millennials behaviour towards digital waqf innovation international journal of islamic economics and finance (ijief), 3(2), si, 1-30│11 3.2. model development figure 1. research model notes: pe = performance expectancy, ee= effort expectancy, si= social influence, fc= facilitating condition, hm= hedonic motivation, sm= spiritual motivation, h= habit, r= religiosity, pw= perceived waqf, bi= behaviour intention. the research model was adopted from utaut2 (venkatesh et al., 2012) with addition of religiosity (r), perceived of waqf (pw), as moderating variables, and spiritual motivation (sm) replacing price value (pv). the research model is illustrated in figure 1. 3.3. method to test the research hypothesis, two steps of statistical analysis were used. first, ads effectiveness was measured using simple tabulation analysis following epic model calculation procedure (pancaningrum & sari, 2019). second, the pls sem statistical method was used to measure the determinant of waqf technology adoption. according to (astrachan, patel, & wanzenried, 2014), the pls sem method has several advantages compared with cb sem and for thus, is appropriate for this research: 1) it can be used for predicting or developing new theory; 2) it can be used in small set of (r) (pe) (ee) (si) (bi) (fc) (hm) (sm) (h) video waqf (pw) wadi & nurzaman │millennials behaviour towards digital waqf innovation international journal of islamic economics and finance (ijief), 3(2), si, 1-30│12 data; 3) it suits with recursive model for both recursive or reflective indicators; and 4) it does not require normal data distribution. the calculation used smartpls 3.0 software (ringle, wende, & becker, 2015). calculation procedure was following (hair, hult, ringle, & sarstedt, 2016) as follow: 1) assessment of outer model: measured by individual item reliability; internal consistency (construct reliability); average variance extracted (ave); and discriminant validity. 2) assessment of inner model (structural model): measured by collinearity assessment; path coefficient; coefficient of determination (r 2 value); effect size (f 2 ); predictive relevance (q 2 ); and effect size (q 2 ). iv. result analysis and discussion 202 completed questionnaires were returned, but only 166 remained due to lack of jabodetabek id. from the remaining questionnaire, 70% respondents were residents of dki jakarta (116), while the rest were residents of; bekasi 18 respondents (11%); tangerang & tangerang selatan 17 respondents (10%); depok 9 respondents (5%) and bogor 6 respondents (4%). in monthly earnings, 35.5% respondents (59) were earned between rp. 2.500.001 – rp. 5.000.000 per month; 29 respondents (17.4%) were earned below rp. 2.500.000; 47 respondents (28.3%) were earned between rp. 5.000.001 – 10.000.000; and 31 respondents were earned above rp. 10.000.000 per month. 4.1. ads effectiveness (epic rate) the value of epic rate is derived from the calculation of the average score per dimension (durianto, 2003): empathy, persuasion, impact, and communication which can be seen in table 1 below. epic rate can be calculated as follow: epic rate = (x empathy + x persuasion + x impact + x communication)/ 4 epic rate = (4,280 + 4,183 + 4,081 + 4,345)/ 4 = 4,222 the result then inputted to epic model scale as follow: wadi & nurzaman │millennials behaviour towards digital waqf innovation international journal of islamic economics and finance (ijief), 3(2), si, 1-30│13 figure 2. epic model scale notes: ste = very ineffective (in scale range between 1.00-1.80); te = ineffective (in scale range between 1.80-2.60); ce = quite effective (in scale range between 2.60-3.40); e = effective (in scale range between 3.40-4.20); se = very effective (in scale range between 4.20-5.00) table 1. epic rate of waqf video marketing no item mean remark empathy (e) 1. e1 4,397 4,280 very effective 2. e2 4,162 persuasion (p) 3. p1 4,228 4,183 effective 4. p2 4,138 impact (i) 5. i1 4,331 4,081 effective 6. i2 3,831 communication (c) 7. c1 4,301 4,345 very effective 8. c2 4,463 9. c3 4,271 source: primary data analysis figure 3. epic model waqf video marketing ste te ce e se 1,00 1,80 2,60 3,40 4,20 5,00 4,222 wadi & nurzaman │millennials behaviour towards digital waqf innovation international journal of islamic economics and finance (ijief), 3(2), si, 1-30│14 based on epic rate above, waqf video used on this research can be categorized as “very effective”. hence, the use of video is proven could attract millennials intention to participating in waqf. epic model from waqf video marketing can be seen on figure 3. 4.2. results of structural equation modelling (sem) 4.2.1 outer model figure 4 shows research result on smartpls 3.0 software. outer model testing is conducted to assess the validity and reliability of research instruments consisting of convergent validity and discriminant validity (hair et al., 2016). the measurement of convergent validity uses 3 indicators: individual item reliability using standardized loading factor; internal consistency reliability by using composite reliability (cr) values which according to (hair jr., sarstedt, hopkins, & kuppelwieser, 2014) are better than cronbach alpha values; and average variance extracted (ave). as seen on figure 4, all indicators of the research questions have factor loading value > 0.7 which mean ideal. the cr value of the variable construct obtained values above > 0.6 so that it can be accepted (cronbach & meehl, 1955). for ave, all constructs in the study have values above 0.5 so they can be accepted. figure 4. research result on smartpls 3.0 wadi & nurzaman │millennials behaviour towards digital waqf innovation international journal of islamic economics and finance (ijief), 3(2), si, 1-30│15 the cr and ave values can be viewed in table 2. for the measurement of discriminant validity, the fornell larcker criterion and cross loading was used with acceptance result. discriminant validity value can be seen on table 3 and table 4. 4.2.2 inner model inner model testing based on the procedure (hair et al. 2016) obtained 7 constructs that have a vif value > 5 so that it is omitted from research because it has a collinearities issue. the 7 constructs are derived from perceived waqf moderation in ee, h, pe, and sm, and 3 based on religiosity moderation in ee, pe, and sm. the r square test was performed and a value of 0.607 was obtained so that it belongs in good category. the next step is to measure the effect size value f 2 . from the results obtained, it appears that structurally, the variable facilitating condition, perceived waqf, religiosity, and spiritual motivation do not have a significant effect on behavioural intention (bi). meanwhile, the effort expectancy, habit, hedonic motivation, performance expectancy, and social influence variables have little influence on behavioural intention. the effect size f 2 can be referenced in table 5. table 2. cr and ave value composite reliability > 0.7 average variance extracted (ave) > 0.5 behavioural intention 0,954 0,873 effort expectancy 0,874 0,697 facilitating condition 0,816 0,689 habit 0,830 0,709 hedonic motivation 0,940 0,888 pw->ee-bi 1,000 1,000 pw->fc-bi 1,000 1,000 pw->h-bi 1,000 1,000 pw->hm-bi 1,000 1,000 pw->pe-bi 1,000 1,000 pw->si-bi 1,000 1,000 pw->sm-bi 1,000 1,000 perceived waqf 0,896 0,811 performance expectancy 0,934 0,875 r->ee-bi 1,000 1,000 r->fc-bi 1,000 1,000 r->h-bi 1,000 1,000 r->hm-bi 1,000 1,000 r->pe-bi 1,000 1,000 r->si-bi 1,000 1,000 r->sm-bi 1,000 1,000 religiosity 0,913 0,839 social influence 0,904 0,825 spiritual motivation 0,895 0,809 source: primary data analysis from software smart pls 3.0 wadi & nurzaman │millennials behaviour towards digital waqf innovation international journal of islamic economics and finance (ijief), 3(2), si, 1-30│16 table 3. cross loadings source: primary data analysis on smart pls 3.0 ee-bi fc-bi h-bi hm-bi pe-bi si-bi sm-bi ee-bi fc-bi h-bi hm-bi pe-bi si-bi sm-bi bi1 0 .9 4 6 0.6** 0.5** 0.4** 0.4** -0.1* 0.0** -0.0* -0.1* -0.1* -0.1* -0.1* 0.4** 0.6** -0.0* 0.0** -0.0* -0.0* -0.0* -0.0* -0.1* 0.3** 0.4** 0.3** bi2 0 .9 3 7 0.6** 0.5** 0.4** 0.6** -0.1* 0.0** -0.0* -0.1* -0.1* -0.1* -0.1* 0.3** 0.5** -0.0* 0.0** -0.0* 0.0** -0.0* -0.0* -0.1* 0.3** 0.4** 0.3** bi3 0 .9 2 0 0.5** 0.5** 0.4** 0.4** -0.1* 0.0** -0.0* -0.1* -0.2* -0.1* -0.2* 0.4** 0.6** -0.0* -0.0* -0.0* 0.0** -0.1* -0.1* -0.2* 0.3** 0.5** 0.4** ee1 0.6** 0 .8 3 2 0.5** 0.3** 0.5** -0.2* -0.1* -0.1* -0.2* -0.2* -0.2* -0.0* 0.5** 0.6** -0.0* -0.0* -0.0* -0.0* -0.0* 0.0** -0.0* 0.3** 0.4** 0.3** ee2 0.5** 0 .8 3 8 0.5** 0.3** 0.4** -0.3* -0.0* -0.2* -0.2* -0.3* -0.0* -0.2* 0.5** 0.6** -0.1* -0.0* -0.1* -0.0* -0.1* 0.0** -0.2* 0.3** 0.3** 0.4** ee3 (expi1) 0.5** 0 .8 3 6 0.6** 0.3** 0.5** -0.0* 0.1** -0.0* 0.0** -0.0* 0.0** -0.0* 0.3** 0.5** 0.0** 0.1** 0.0** 0.0** 0.0** 0.0** -0.0* 0.2** 0.4** 0.3** fc1 0.5** 0.6** 0 .8 7 8 0.2** 0.4** -0.0* 0.1** -0.0* -0.0* -0.0* -0.0* -0.0* 0.3** 0.5** 0.0** 0.1** 0.0** 0.0** 0.0** 0.0** -0.0* 0.2** 0.4** 0.3** fc2 0.4** 0.4** 0 .7 8 0 0.4** 0.3** -0.0* 0.1** 0.0** -0.0* -0.0* -0.0* -0.0* 0.2** 0.4** -0.0* 0.0* -0.0* 0.0** -0.0* -0.0* -0.0* 0.2** 0.2** 0.2** h1 0.3** 0.3** 0.4** 0 .8 4 7 0.3** -0.0* 0.0** -0.0* 0.0** -0.1* -0.0* -0.1* 0.2** 0.3** -0.0* -0.0* -0.2* 0.0** -0.1* -0.1* -0.1* 0.3** 0.2** 0.3** h2 0.3** 0.3** 0.2** 0 .8 3 7 0.3** -0.2* -0.0* -0.1* -0.0* -0.1* 0.0** -0.2* 0.3** 0.3** -0.1* 0.0** -0.2** 0.0** -0.0* 0.0** -0.1* 0.4** 0.2** 0.3** hm1 0.5** 0.5** 0.4** 0.3** 0 .9 3 7 -0.1* -0.0* 0.0** -0.0* -0.1* -0.0* -0.0* 0.3** 0.4** 0.0** 0.0** 0.0** 0.0** 0.0** 0.0** -0.0* 0.2** 0.5** 0.2** hm2 0.5** 0.5** 0.3** 0.3** 0 .9 4 7 -0.1* -0.0* -0.0* -0.0* -0.2* -0.0* -0.1* 0.3** 0.5** -0.0* 0.0** -0.0* 0.0** -0.0* 0.0** -0.1* 0.2** 0.4** 0.2** pw1 0.3** 0.4** 0.3** 0.3** 0.2** -0.4* -0.3* -0.3* -0.2* -0.5* -0.3* -0.6* 0 .8 8 2 0.5** -0.3* -0.2* -0.2* -0.1* -0.5* -0.3* -0.6* 0.6** 0.3** 0.6** pw2 0.4** 0.5** 0.3** 0.3** 0.3** -0.4* -0.2* -0.2* -0.3* -0.4* -0.2* -0.3* 0 .9 1 9 0.6** -0.2* -0.0* -0.0* -0.1* -0.1* -0.1* -0.2* 0.5** 0.3** 0.4** pe1 0.6** 0.6** 0.5** 0.3** 0.5** -0.2* -0.0* -0.2* -0.1* -0.2* -0.1* -0.3* 0.6** 0 .9 3 9 -0.1* 0.0* -0.1* -0.0* -0.1* -0.0* -0.2* 0.5** 0.4** 0.5** pe2 0.6** 0.6** 0.5** 0.3** 0.4** -0.1* -0.0* -0.0* -0.163 -0.2* -0.1* -0.2* 0.5** 0 .9 3 2 -0.0* -0.0* -0.0* 0.0** -0.1* -0.1* -0.2* 0.4** 0.4** 0.5** r1 0.3** 0.3** 0.2** 0.4** 0.2** -0.1* -0.1* -0.1* -0.1* -0.3* -0.1* -0.4* 0.5** 0.4** -0.1* -0.0* -0.2* -0.2* -0.4* -0.3* -0.4* 0 .9 1 5 0.2** 0.5** r2 0.3** 0.3** 0.2** 0.4** 0.2** -0.3* -0.2* -0.2* -0.2* -0.4* -0.2* -0.5* 0.6** 0.5** -0.3* -0.2* -0.2* -0.3* -0.5* -0.3* -0.5* 0 .9 1 7 0.2** 0.5** si1 0.4** 0.4** 0.4** 0.2** 0.4** -0.0* -0.0* 0.0** -0.0* -0.1* -0.0* -0.1* 0.3** 0.4** 0.0** -0.0* -0.0* 0.0** -0.1* -0.0* -0.1* 0.3** 0 .8 9 7 0.2** si2 0.5** 0.4** 0.4** 0.3** 0.5** -0.1* -0.0* 0.0** -0.0* -0.1* -0.0* -0.0* 0.2** 0.4** 0.0** 0.0** -0.0* 0.0** -0.0* 0.0** -0.1* 0.2** 0 .9 1 9 0.2** sm1 0.3** 0.4** 0.4** 0.3** 0.2** -0.1* -0.0* -0.1* -0.1* -0.3* -0.1* -0.4* 0.6** 0.5** -0.2* -0.1* -0.0* -0.2* -0.4* -0.2* -0.5* 0.5** 0.2** 0 .9 2 5 sm2 0.3** 0.4** 0.3** 0.4** 0.2** -0.3* -0.1* -0.4* -0.0* -0.3* -0.1* -0.5* 0.5** 0.4** -0.3* -0.2* -0.3* -0.0* -0.4* -0.2* -0.5* 0.4** 0.1** 0 .8 7 4 social influence * perceived waqf -0.1* -0.1* -0.0* 0.0** -0.0* 0.4** 0.5** 0.1** 0.6** 0.5** 1 .0 0 0 0.2** -0.3* -0.1* 0.2** 0.4** 0.1** 0.4** 0.4** 0.6** 0.3** -0.2* -0.0* -0.1* social influence * religiosity -0.0* 0.0** 0.0** -0.0* 0.0** 0.2** 0.3** 0.1** 0.3** 0.4** 0.6** 0.4** -0.2* -0.1* 0.4** 0.5** 0.1** 0.5** 0.7** 1 .0 0 0 0.5** -0.4* -0.0* -0.2* spiritual motivation * perceived waqf -0.1* -0.1* -0.0* -0.2* -0.0* 0.5** 0.4** 0.6** 0.3** 0.7** 0.2** 1 .0 0 0 -0.5* -0.2* 0.6** 0.4** 0.5** 0.3** 0.8** 0.4** 0.8** -0.5* -0.1* -0.5* spiritual motivation * religiosity -0.1* -0.1* -0.0* -0.1* -0.1* 0.4** 0.3** 0.4** 0.3** 0.7** 0.3** 0.8** -0.4* -0.2* 0.5** 0.4** 0.4** 0.3** 0.8** 0.5** 1 .0 0 0 -0.5* -0.1* -0.5* effort expectancy * perceived waqf -0.1* -0.2* -0.0* -0.1* -0.1* 1 .0 0 0 0.6** 0.6** 0.7** 0.7** 0.4** 0.5** -0.4* -0.2* 0.7** 0.4** 0.5** 0.4** 0.4** 0.2** 0.4** -0.2* -0.1* -0.2* effort expectancy * religiosity -0.0* -0.0* 0.0** -0.1* -0.0* 0.7** 0.5** 0.7** 0.5** 0.5** 0.2** 0.6** -0.2* -0.0* 1 .0 0 0 0.6** 0.5** 0.6** 0.6** 0.4** 0.5** -0.2* 0.0** -0.2* facilitating condition * perceived waqf 0.0** -0.0* 0.1** 0.0** -0.0* 0.6** 1 .0 0 0 0.4** 0.5** 0.6** 0.5** 0.4** -0.3* -0.0* 0.5** 0.6** 0.4** 0.3** 0.3** 0.3** 0.3** -0.1* -0.0* -0.1* facilitating condition * religiosity 0.0** 0.0** 0.1** 0.0** 0.0** 0.4** 0.6** 0.4** 0.3** 0.4** 0.4** 0.4** -0.1* -0.0* 0.6** 1 .0 0 0 0.3** 0.4** 0.5** 0.5** 0.4** -0.1* 0.0** -0.1* habbit * perceived waqf -0.0* -0.1* 0.0** -0.1* -0.0* 0.6** 0.4** 1 .0 0 0 0.3** 0.4** 0.1** 0.6** -0.3* -0.1* 0.7** 0.4** 0.7** 0.2** 0.4** 0.1** 0.4** -0.1* 0.0** -0.3* habbit * religiosity -0.0* -0.0* 0.0** -0.2* 0.0** 0.5** 0.4** 0.7** 0.2** 0.4** 0.1** 0.5** -0.1* -0.1* 0.5** 0.3** 1 .0 0 0 0.1** 0.3** 0.1** 0.4** -0.2* -0.0* -0.2* hedonic motivation * perceived waqf -0.1* -0.1* -0.0* -0.0* -0.0* 0.7** 0.5** 0.3** 1 .0 0 0 0.6** 0.6** 0.3** -0.3* -0.1* 0.5** 0.3** 0.2** 0.6** 0.3** 0.3** 0.3** -0.1* -0.0* -0.1* hedonic motivation * religiosity -0.0* -0.0* 0.0** 0.0** 0.0** 0.4** 0.3** 0.2** 0.6** 0.3** 0.4** 0.3** -0.1* -0.0* 0.6** 0.4** 0.1** 1 .0 0 0 0.5** 0.5** 0.3** -0.3* 0.0** -0.1* performance expectancy * perceived waqf -0.1* -0.2* -0.0* -0.1* -0.1* 0.7** 0.6** 0.4** 0.6** 1 .0 0 0 0.5** 0.7** -0.5* -0.3* 0.5** 0.4** 0.4** 0.3** 0.6** 0.4** 0.7** -0.4* -0.1* -0.3* performance expectancy * religiosity -0.0* -0.0* -0.0* -0.1* -0.0* 0.4** 0.3** 0.4** 0.3** 0.6** 0.4** 0.8** -0.3* -0.1* 0.6** 0.5** 0.3** 0.5** 1 .0 0 0 0.7** 0.8** -0.5* -0.1* -0.4* hm pw pebi ee fc h r si sm moderation of perceived waqf moderation of religiosity wadi & nurzaman │millennials behaviour towards digital waqf innovation international journal of islamic economics and finance (ijief), 3(2), si, 1-30│17 table 4. fornell larcker criterion source: primary data analysis on smart pls 3.0 ee-bi fc-bi h-bi hm-bi pe-bi si-bi sm-bi ee-bi fc-bi h-bi hm-bi pe-bi si-bi sm-bi bi 0 .9 3 4 ee 0.6** 0 .8 3 5 fc 0.5** 0.7** 0 .8 3 0 h 0.4** 0.4** 0.4** 0 .8 4 2 hm 0.5** 0.5** 0.4** 0.3** 0 .9 4 2 pw->ee-bi -0.1* -0.2* -0.0* -0.1* -0.1* 1 .0 0 0 pw->fc-bi 0.01* -0.0* 0.1** 0.0** -0.0* 0.6** 1 .0 0 0 pw->h-bi -0.0* -0.1* 0.0** '0.1* -0.0* 0.6** 0.4** 1 .0 0 0 pw->hm-bi -0.1* -0.1* -0.0* -0.0* -0.0* 0.7** 0.5** 0.3** 1 .0 0 0 pw->pe-bi -0.1* -0.2* -0.0* -0.1* -0.1* 0.7** 0.6** 0.4** 0.6** 1 .0 0 0 pw->si-bi -0.1* -0.1* -0.0* 0.0** 0.0* 0.4** 0.5** 0.1** 0.6** 0.5** 1 .0 0 0 pw->sm-bi -0.1* -0.1* -0.0* -0.2* -0.0* 0.5** 0.4** 0.6** 0.3** 0.7** 0.2** 1 .0 0 0 pw 0.4** 0.5** 0.4** 0.3** 0.3** -0.4* -0.3* -0.3* -0.3* -0.5* -0.3* -0.5* 0 .9 0 1 pe 0.6** 0.7** 0.5** 0.3** 0.5** -0.2* -0.0* -0.1* -0.1* -0.3* -0.1* -0.2* 0.6** 0 .9 3 6 r->ee-bi -0.0* -0.0* 0.0** -0.1* -0.0* 0.7** 0.5** 0.7** 0.5** 0.5** 0.2**93 0.6** -0.2* -0.0* 1 .0 0 0 r->fc-bi 0.0* 0.0** 0.1** 0.0** 0.0** 0.4** 0.6** 0.4** 0.3** 0.4** 0.4** 0.4** -0.1* -0.0* 0.6** 1 .0 0 0 r->h-bi -0.0* -0.0* 0.0** -0.2* 0.0** 0.5** 0.4** 0.7** 0.2** 0.4** 0.1** 0.5** -0.1* -0.1* 0.5** 0.375** 1 .0 0 0 r->hm-bi '0.0* -0.0* 0.0** 0.0** 0.0** 0.4** 0.3** 0.2** 0.6** 0.3** 0.4** 0.3** -0.1* -0.0* 0.6** 0.4** 0.1** 1 .0 0 0 r->pe-bi -0.0* -0.0* -0.0* -0.1* -0.0* 0.4** 0.3** 0.4** 0.3** 0.6** 0.4** 0.8** -0.3* -0.1* 0.6** 0.5** 0.3** 0.5** 1 .0 0 0 r->si-bi -0.0* 0.0* 0.0** -0.0* 0.0** 0.2** 0.3** 0.1** 0.3** 0.4** 0.6** 0.4** -0.2* -0.1* 0.4** 0.5** 0.1** 0.5** 0.7** 1 .0 0 0 r->sm-bi -0.1* -0.1* -0.0* -0.1* -0.1* 0.4** 0.3** 0.4** 0.3** 0.7** 0.3** 0.8** -0.4* -0.* 0.5** 0.4** 0.4** 0.3** 0.8** 0.5** 1 .0 0 0 r 0.3** 0.3** 0.2** 0.4** 0.2** -0.2* -0.1* -0.1* -0.1* -0.4* -0.2* -0.5* 0.6** 0.5** -0.2* -0.1* -0.2* -0.3* -0.5* -0.4* -0.5* 0 .9 1 6 si 0.5** 0.4** 0.4** 0.2** 0.5** -0.1* -0.0* 0.0** -0.0* -0.1* -0.0* -0.1* 0.3** 0.4** 0.0* 0.0** -0.0* 0.0** -0.1* -0.0* -0.1* 0.3** 0 .9 0 8 sm 0.3** 0.4** 0.4** 0.4** 0.2** -0.2* -0.1* -0.3* -0.1* -0.3* -0.1* -0.5* 0.6** 0.5** -0.2* -0.1** -0.2* -0.1* -0.4* -0.2* -0.5* 0.6** 0.2** 0 .9 0 0 hm pw pe bi ee fc h r si sm moderation of perceived waqf (pw) moderation of religiosity (r) wadi & nurzaman │millennials behaviour towards digital waqf innovation international journal of islamic economics and finance (ijief), 3(2), si, 1-30│18 table 5. effect size f 2 value behavioural intention behavioural intention effort expectancy 0.044 facilitating condition 0.001 habit 0.039 hedonic motivation 0.022 pw->fc-bi 0.015 pw->hm-bi 0.005 pw->si-bi 0.007 perceived waqf 0.002 performance expectancy 0.072 r->fc-bi 0.000 r->h-bi 0.000 r->hm-bi 0.001 r->si-bi 0.001 religiosity 0.000 social influence 0.035 spiritual motivation 0.001 table 6. path coefficient original sample (o) sample mean (m) standard deviation (stdev) t statistics (|o/ stdev|) p values effort expectancy -> behavioural intention 0.245 0.244 0.105 2.338 0.019 facilitating condition -> behavioural intention 0.031 0.046 0.089 0.351 0.725 habit -> behavioural intention 0.164 0.171 0.086 1.921 0.055 hedonic motivation -> behavioural intention 0.129 0.131 0.087 1.484 0.138 pw->fc-bi -> behavioural intention 0.151 0.143 0.095 1.587 0.113 pw->hm-bi -> behavioural intention -0.074 -0.054 0.108 0.679 0.497 pw->si-bi -> behavioural intention -0.083 -0.053 0.107 0.776 0.438 perceived waqf -> behavioural intention -0.044 -0.049 0.110 0.403 0.687 performance expectancy -> behavioural intention 0.300 0.291 0.107 2.805 0.005 r->fc-bi -> behavioural intention -0.018 -0.024 0.094 0.196 0.845 r->h-bi -> behavioural intention 0.011 0.012 0.062 0.170 0.865 r->hm-bi -> behavioural intention 0.026 0.030 0.098 0.261 0.794 r->si-bi -> behavioural intention -0.030 -0.054 0.098 0.311 0.756 religiosity -> behavioural intention -0.018 -0.006 0.104 0.168 0.867 social influence -> behavioural intention 0.153 0.140 0.070 2.192 0.028 spiritual motivation -> behavioural intention -0.032 -0.040 0.079 0.402 0.688 source: primary data analysis on smart pls 3.0 wadi & nurzaman │millennials behaviour towards digital waqf innovation international journal of islamic economics and finance (ijief), 3(2), si, 1-30│19 table 7. effect size q 2 value q included q excluded q 2 effect size effect to model effort expectancy 0,482 0,466 0,031 small facilitating condition 0,482 0,479 0,006 habbit 0,482 0,473 0,017 hedonic motivation 0,482 0,488 (0,012) perceived waqf 0,482 0,496 (0,027) small performance expectancy 0,482 0,460 0,042 small religiosity 0,482 0,501 (0,037) small social influence 0,482 0,469 0,025 small spiritual motivation 0,482 0,486 (0,008) path coefficient analysis conducted with 5000 subsamples found performance expectancy, effort expectancy, and social influence are the main factors influencing someone to use digital waqf technology (refer to table 6). blindfolding analysis with d = 9 gets a q 2 value of 0.482 which means the model is significant in predicting. finally, manual calculation was made to measuring the effect size value of q 2 . results obtained from this manual calculation can be seen in table 7. 4.2.3 moderating factor religiosity (r) and perceived waqf (pw) from 7 moderating factors left, the significance value of those factor can be seen on table 8. based on table 8, both variable religiosity and perceived waqf found were not significant. meanwhile, its moderating effect also found to be not significant since all value are above 0.05. therefore, all moderating variables in this research categorized as predictor moderator (sharma et al., (1981) as cited in (bryan & haryadi, 2018)). table 8. moderating variable value original sample (o) sample mean (m) standard deviation (stdev) t statistics (|o/stdev|) p values pw->fc-bi -> behavioural intention 0.151 0.143 0.094 1.605 0.109 pw->hm-bi -> behavioural intention -0.074 -0.055 0.109 0.678 0.498 pw->si-bi -> behavioural intention -0.083 -0.055 0.106 0.782 0.434 r->fc-bi -> behavioural intention -0.018 -0.022 0.093 0.198 0.843 r->h-bi -> behavioural intention 0.011 0.013 0.061 0.175 0.861 r->hm-bi -> behavioural intention 0.026 0.031 0.095 0.268 0.789 r->si-bi -> behavioural intention -0.030 -0.056 0.098 0.310 0.757 religiosity -> behavioural intention -0.018 -0.008 0.102 0.171 0.864 perceived waqf -> behavioural intention -0.044 -0.050 0.109 0.406 0.685 source: primary data analysis on smart pls 3.0 wadi & nurzaman │millennials behaviour towards digital waqf innovation ijief: international journal of islamic economics and finance, 3(2), si, xx-xx│20 4.3. analysis outer model assessment is used for examining validity and reliability research instrument. all research questions were above 0.7 for loading factor value, which categorized as valid. even so, few researches sometimes use lower score (0.5) and keep the question as valid. square value of loading factor commonly known as communalities, which described how well factors describe variable’s variance. cr value was chosen for assessing internal consistency reliability since it is reported to has better performance than cronbach alpha (hair et al., 2014). all indicators cr value was above 0.8 which is categorized as very good. smartpls also reported ave value above 0.5, interpreted as all laten variables can represent more than 50% of variable’s variance. table 3 and 4.3 clearly shows that discriminant validity was established since indicators correlation have highest score on its internal construct rather than others construct. it means that all indicators are best representing its laten variable than other variables. next, collinearity assessment using vif value reported 7 constructs were above 5. in this case, smartpls criterion is higher than spss (10). when vif score of a laten variable is higher than 5, it means that the construct is highly correlated with others and will potentially resulting biased. r 2 value which was 0.607 indicating that independent variables can represent 60% of dependent variables variance (bi). this score is categorized as very good since on consumer behaviour research, value of 0.2 is already accepted (hair et al., 2016). on the next step, f 2 assessment result that can be seen on table 5 indicates significance of a predictor variable in affecting entire model on structural level. result obtained from 5 constructs ee, h, hm, pe, and si on range 0.02 – 0.15 can be categorized as small impact (cohen as cited in (hair et al., 2016)). meanwhile, other factors have no significance impact on structural level. furthermore, from path coefficient analysis with criterion p value <0.05 (5% significance level) and t value > 1.96, obtained pe, ee, and si have significance effect on bi (refer to table 6). from those 3 constructs, pe construct was found as the strongest factor influences bi. blindfolding analysis then conducted to obtain stone geisser value (q 2 ). this assessment is needed to evaluating r 2 value and whether the model used has robust predictive relevance. q 2 value of 0.482 > 0 shows that the model has large predictive. finally, q 2 effect size assessment reported ee, pw, pe, r, and si has small effect on endogenous latent variables q 2 . wadi & nurzaman │millennials behaviour towards digital waqf innovation international journal of islamic economics and finance (ijief), 3(2), si, 1-30│21 4.4. discussion the use of video as a marketing tool for waqf has proven to be very effective in attracting interests of millennials. the result of this research is in accordance with previous research stating that video is better due to interpersonal communication (arndt, 1967). video is also very likely to be viral (wendt et al., 2016) because of its ease to be shared within consumer circles. furthermore, the large number of youtube users and digital marketer trends that require video marketing skills, further reveals the importance of waqf institution to begin leveraging this medium. related to the content, based on video used in this study, a good waqf video should: succeed in making prospective waqif see the similarities / relationship between things that waqf could solve and their personal needs (empathy); change the paradigm of waqf and expand the dimensions of waqf distribution in strategic areas -not limited to mosques and funeral land (persuasion); highlighting the benefits of waqf through the digital platform compared with conventional nazir (impact); and easily memorized by giving a profound impression (communication). on the determinant of waqf technology, there are 3 main factors that are indicated to have a significant effect on intention to use waqf innovation technology. these three factors are: performance expectancy, effort expectancy, and social influence. meanwhile, the two moderating variables, religiosity and perceived waqf which were predicted to affect one's intention to use waqf technology were found to be insignificant. these results indicate that a person can accept waqf technology even though he does not understand the details of what waqf is and is not religious person. these results can be used as a reference for digital waqf practitioners to market their products in wider community networks without dependency on religiosity level, for instance car owners club, golf player club, etc. the emergence of the performance expectancy variable as the most dominant factor refers to how waqf applications can provide more value in one's charity activities without wasting time & productivity. online waqf participation could increase millennial involvement, considering that they do not need to meet nazir or mauquf alaih (waqf recipient) directly (offline). the bustle and high congestion in the jabodetabek region make every hour valuable for the millennials. waqf in conventional way will be troublesome. this conclusion supports research suggestion from (kencana & hadi, 2016) which refers pick-up ball method in waqif house as an effort to cultivating cash waqf. wadi & nurzaman │millennials behaviour towards digital waqf innovation international journal of islamic economics and finance (ijief), 3(2), si, 1-30│22 on the effort expectancy, the waqf platform should be able to indulge the millennial waqif with features that suit their style. millennial is known as a lazy generation and love to do cashless transaction (hidayatullah, et al., 2018). online waqf should adopt a variety of easy payment methods such as e-money, convenience store, virtual accounts, etc. the auto debit mechanism of rp. 15,000,also has positive effect on digital waqf innovation acceptance. most of respondents do not mind to give waqf of rp. 15,000, routinely per month. significant value also found in the social influence (si) construct. this can be utilized by promoting waqf products through the official youtube channel and social media accounts of ustadz, kyai, cleric, or islamic organizations to increase millennials participation. recently, many ustadz (cleric) are favoured by the community, specifically millennials. family and friend opinions are also found essential for millennials. this result is in line with the earliest and most fundamental theory of technology acceptance, theory of reasoned action (tra) developed by (flanders, fishbein, & ajzen, 1975). according to (flanders et al., 1975), one person's behaviour is determined by the subjective norm which is interpreted as someone's perception that an important person thinks that he must do or not do something. if we look at three significant constructs from the results of this study, we can assume that the results of the research on acceptance of waqf technology tend to follow the technology acceptance model (tam) developed by (davis, 1989) with relatively same construct but in different names: perceived usefulness, perceived ease of use, and subjective norm. tam is a development of tra (flanders et al., 1975) and tpb (ajzen, 1985). meanwhile, the tpb theory has been widely used to predict human behaviour in giving including waqf as seen on research conducted by (osman et al., 2014). thus, it can be stated that in the acceptance of waqf technology (in relation to giving behaviour), the tam model is more suitable to be used than the utaut2 model. in addition, various constructs of utaut2 model are often found to have no significant effect on technology acceptance such as: performance expectancy (pe) in research (gunawan et al., 2019); construct effort expectancy (ee) in research (gunawan et al., 2019) (shaw & sergueeva, 2019) (arain et al., 2019); social influence constructs on research (gunawan, et al., 2019) (shaw & sergueeva, 2019) (arain et al., 2019) (bendi & andayani, 2013); construct facilitating condition (fc) in research (shaw & sergueeva, 2019) (arain et al., 2019); and the habit construct (h) in research (gunawan et al., 2019) (shaw & sergueeva, 2019). based on this explanation, it can be presumed that the utaut2 model is not always suitable for all types of technology acceptance wadi & nurzaman │millennials behaviour towards digital waqf innovation international journal of islamic economics and finance (ijief), 3(2), si, 1-30│23 tests. the results of this study are evident that in some cases, earlier theories such as tam are more suitable for predicting technology acceptance. finally, the moderation test on the variables of religiosity (r) and perceived waqf (pw) showed different results from existing hypotheses and theories. the results of this study indicate that a person can contribute to waqf on a particular platform without the need to know the details of the waqf or has high religiosity. the use of certain applications based on this research only focuses on what users will get (pe) and (ee). social influence (si) in the case of technology usage is more influential than (r) and (pw). video marketing in this research was successful to touch (empathy) and right on target (communication) so that it can triggered prospective waqif without prerequisite of (r) and (pw). v. conclusion & recommendation 5.1. conclusion this research shows that the use of video marketing as a tool for market waqf products is "very effective" based on the epic model criterion. the final score of epic rates is 4,222 (very effective) consists four dimensions rate: 4,280 (empathy); 4,183 (persuasion); 4,081 (impact); and 4,345 (communication). based on pls sem analysis using smartpls 3.0 software, it was concluded that all tested variables namely: effort expectancy (ee), facilitating condition (fc), habit (h), hedonic motivation (hm), performance expectancy (pe), perceived innovation (pi), perceived waqf (pw), religiosity (r), social influence (si), spiritual motivation (sm), there are three variables that have a significant effect on behavioural intention (bi), namely performance expectancy (pe), effort expectancy (ee), and social influence (si). the moderation assessment for religiosity (r) and perceived waqf (pw) that allegedly moderate one's willingness to contribute in digital waqf innovation surprisingly have no significant effect. therefore, the variables (r) and (pw) are acted as moderator predictors. this research also revealed tendency of the result commensurate with technology acceptance model (tam) constructs instead of utaut2. wadi & nurzaman │millennials behaviour towards digital waqf innovation international journal of islamic economics and finance (ijief), 3(2), si, 1-30│24 5.2 recommendation the results of this study indicate the urgency of waqf campaigner for instance badan wakaf indonesia (bwi) and waqf fund raiser to start using video marketing. as mentioned before that video has various advantages over other tools such as its potential to become viral; the ability to arouse emotions and process complex information; contains verbal and non-verbal information; and the ability to build interpersonal communication. the video marketing of waqf should: contains waqf literacy; waqf implications when successfully raised from ummah; offers easiness, convenience, and productivity. millennials in jabodetabek region are proven to love this type of marketing model. the rise of social media usage and rapid growth of youtube visitors potentially could save waqf advertising budgets that might previously have been highly spent on expensive billboards and banners. the use of billboards on the road, besides requiring a lot of budget, cannot convey much information due to space limitations. hence, the waqf institution is strongly recommended to have creative video maker team on its marketing division as well as digital marketer. to increase the participation of millennials, waqf institution, waqf digital platform, and nazir can maximize the three variables found in this study, namely (pe), (ee), and (si). (si) factors can be maximized by using the influence of endorsers, celebgram, or utilizing the public figures who are much in demand by millennials. variables (pe) and (ee) can be maximized by focusing marketing content on the ease, efficiency, productivity, and other advantages that will be obtained by waqif when contributing their waqf through digital platform. small amount of cash waqf contribution could results growth of millennials participation significantly. good collaboration between conventional nazir and digital waqf platform players is needed to attract public interest in waqf. most often, nazir institutions do not have sufficient capacity to enter digital industry. they commonly do not have skills and knowledge on how to build a good application or market digital products. meanwhile, the digital platform players also do not have nazir waqf certification. a good collaboration between these two waqf stakeholders can be key successful factor to make waqf as a new online donation habit among millennials. further research can be developed by adding more variables and widen the research area to outside jabodetabek. willingness of using waqf technology innovation should also be tested on existing waqif and another group of ages to gain comprehensive view on waqif behaviour. wadi & nurzaman │millennials behaviour towards digital waqf innovation international journal of islamic economics and finance (ijief), 3(2), si, 1-30│25 references abdullah, m. 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(2016). product advertising and viral stealth marketing in online videos: a description and comparison comments on youtube. aslib journal of information management, 68(3), 250-264. ijief: international journal of islamic economics and finance vol. 3(1), pg 21-50, january 2020 quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria daud mustafa federal university dutsin-ma (fudma), nigeria, mdaud@fudutsinma.edu.ng/mdaud1431h@gmail.com abubakar jamilu baita yusuf maitama sule university, nigeria,abubakarbaita@gmail.com hussaina datijjo adhama yusuf maitama sule university, nigeria, hussainaadhama@gmail.com article history received: november 15, 2019 revised: january 4, 2020 accepted: january 7, 2020 abstract nigeria is the largest economy in africa and yet, a poverty-ridden oil-producing country. thus, poverty remains a persistent macroeconomic challenge in nigeria with devastating consequences, especially in the muslim populated states like kano. surprisingly, kano state, which is the most populated state in nigeria with more than 15 million people, is one of the 14 most poverty-ridden states in nigeria, despite the practice of zakah institution (zi). therefore, this study empirically evaluates the revenue base and impacts of zi on poverty alleviation in kano state. hence, 1,230 copies of questionnaires were administered and seven high profile zakah payers were interviewed. meanwhile, the data analysis was accomplished using descriptive statistics, correlation, and regression techniques, among others. the major findings indicate that the enormous revenue base of zi for poverty alleviation exists, because of the significant zakah payment by high ability zakah payers. similarly, zi positively impacts on poverty alleviation. all in all, the findings lend credence to the zakah-effectiveness hypothesis. hence, this study recommends that kano state government should exemplify more accountability and transparency in zakah management. moreover, a ministry of zakah and hubusi affairs should be established with the mandates of poverty alleviation and economic empowerment in the state. keywords: nigeria, poverty alleviation, regression model, zakah-effectiveness hypothesis, zakah institution jel classification: o57; i32; c21; z12 @ ijief 2020 published by universitas muhammadiyah yogyakarta, indonesia all rights reserved doi: https://doi.org/10.18196/ijief.2120 web: http://journal.umy.ac.id/index.php/ijief/article/view/7488 citation: mustafa, d., baita, a. j., & adhama, h. d. (2020). quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria. ijief: international journal of islamic economics and finance, 3(1), 2150. doi: https://doi.org/10.18196/ijief.2120 mailto:mdaud@fudutsinma.edu.ng/mdaud1431h@gmail.com mailto:abubakarbaita@gmail.com mailto:hussainaadhama@gmail.com http://journal.umy.ac.id/index.php/ijief/article/view/7488 mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|22 i. introduction 1.1. background nigeria is the largest economy in the african continent and the most populated black nation in the world. also, nigeria is the 11th largest producer of petroleum in the world, the 8th largest exporter of petroleum and the 10th largest owner of proven oil reserves globally (hadejia, 2017; mustafa, sabiu & bello, 2017a). despite all these amiable socio-economic features, nigeria is one of the poorest oil-producing countries with a wide array of unexploited mineral resources like natural gas, coal, gold, iron ore, tin, bauxite, tantalite, limestone, lead and zinc among others. interestingly, the socio-political and economic characteristics of the country reveal a mixed economy with an emerging market and a federating unit of 36 states and federal capital territory (fct) abuja as the federal capital. nigeria is also made-up of two broad regions known as northern and southern regions (hadejia, 2017; mustafa et al., 2017a; wali, 2013). in this connection, the consequences of under-exploitation and under-utilization of resources coupled with bad governance and dwindling oil revenue from the federation account are substantially responsible for the high level of poverty in nigeria with kano state – a major victim. in this regard, kano state which is serving as the state of interest in this study is the most populated in nigeria with an estimated population of more than 15 million people and a muslim majority of about 95%. the state is the commercial nerve centre of the northern region and even sub-saharan africa region with historic flourishing manufacturing and industrial sectors but which seem now to be in comatose. surprisingly, kano state is one of the 14 most poverty-ridden states in the country, despite her natural endowments and vibrant religious economic legacy like zakah institution (zi), waqf and hisbah, among others, which dates back to the 19th century dawlatul-usmaniyyah – sokoto caliphate (1804-1903). also, the state accounts for a high level of poverty of more than 70% (mustafa et al., 2017a; wali, 2013). nonetheless, the state represents islamic religious front-liner in the practice of islamic economic institutions like zakah, which is a potent and sustainable islamic social security measure for tackling poverty in muslim economies like kano state. it is, however, instructive to state that poverty is a universal socio-economic phenomenon that seems obvious in virtually all countries of the world including developed economies. it is assumed easier to comprehend but difficult to define due to academic and ideological leanings of the analysts. notwithstanding, it is generally agreed that poverty means a lack of basic needs and services like food, shelter, bedding, clothing, basic healthcare, mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|23 and education, which implies a lack of minimum standard of living (sadeq, 1990; maidugu, 2002; mustafa & adewale, 2014). therefore, the conceptualization of poverty in this study is both human and income poverty in line with undp (2000) cited in mustafa and adewale (2014). as rightly noted by ahmed (2004), islam considers the improvement in the material well-being of man as having a direct positive impact on his spiritual wellbeing. this is even the fundamental reason why islam places a lot of attention to poverty and the various poverty alleviation measures like the zakah institution. underscoring the efficacy and historical antecedent of zakah institution as a potent and veritable measure for poverty alleviation in muslim societies, nadzri et al. (2012) submit that, “history proves that with proper management, zakat is capable to eliminate poverty” (p. 71). in this direction, some studies have established a positive effect and significant link between both zakah institution and poverty alleviation in muslim societies. they also observed that zakah potentials are yet to be fully tapped in muslim countries, especially in nigeria with muslim population of over 90 million (aliyu, 2002; maidugu, 2002; abdullahi, 2006; amuda, 2013; wali, 2013; ibrahim, 2015; mustafa & idris, 2015; mustafa & maiyaki, 2011, 2016; adamu & saad, 2016; kefeli, johari, ahmad, mohd daud & shah zaidi, 2017; mustafa et al., 2017a among others). at this juncture, it is instructive to mention that the most populated state in malaysia known as selangor (with 6.38m people as at 2017) realized rm13.8m as zakah revenue in 1991 (equal to n690m) and in 2010, the amount generated rose to rm336.8m (i.e. n16.84 billion by n50 exchange rate to rm1 as at 2010) (mustafa et al., 2017a; ab rahman, alias & syed omar, 2012). whereas the highest zakah collection of n16.14 million was generated by the kano state zakah and hubusi commission in 2012, which later dropped to a miserable n6.54 million in 2015 (see kano state zakah and hubusi commission, 2004, 2006, 2010, 2015). as rightly noted in a conceptual and theoretical study by mustafa et al. (2017a), the potentials to generate as much as n25 billion (i.e. us$81.97m at n305 per us$1) exists in kano state if qualified zakah payers of one million people (from a population of almost 15million people) will pay n25,000 each from their zakatable cash of n1,000,000 only. this amount is certainly a huge sum for poverty alleviation if compared to the highest zakah collection of n16.14m. mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|24 1.2. objective in this connection, this study empirically evaluates the revenue base and impacts of zakah institution on poverty alleviation in kano state. it also examines the zakah-poverty alleviation nexus and ascertains whether prudent management of zakah institution (zi) has a positive influence on poverty alleviation in the state. as such, the hypotheses to be validated are h1: zakah institution has an enormous revenue base for poverty alleviation in kano state; h2: zakah institution has positive impacts on poverty alleviation in kano state; and h3: prudent management of zakah institution is germane for poverty alleviation. ii. literature review 2.1. background theory theory of obligation among the theories of zakah institution discussed by al-qardawi (2000) in his famous work on fiqh az-zakah is the theory of obligation. this theory states that zakah is an obligatory act of worship like salah, sawm, and hajj, among others. as such, allah (swt) who is the sole creator of man has the right to instruct his servants to perform any obligation in thankfulness to him (q2:43). thus, those who are rich have been commanded to give zakah as a way of appreciating the bounty of richness, which is not their making. therefore, when the rich transfer a prescribed portion of their wealth to the poor, they are simply showing gratitude for this bounty and on the other hand, it is a form of compensation to the poor to assist them to live a reasonable life. also, it is meant to enhance their socio-economic and religious welfare, which are germane to a meaningful and prosperous life. the amount generated from zakah shall be distributed to the eight categories of zakah expenditure shown in figure 1 (which has been introduced in this section to underscore the relevance of the theory under discussion). from figure 1, the zakah mobilization region can be considered as the supply side (revenue region) of the zakah institution while the zakah distribution region shall be regarded as the demand side (expenditure region) because the beneficiaries are found in the region. thus, the quantum amount of zakah revenue generated from the rich (i.e. mobilization region) shall greatly determine the amount to be available for the distribution region, especially for poverty alleviation in kano state. mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|25 zakah mobilization region zakah distribution region figure 1. the eight heads of zakah expenditure and the various zakatable items source: adapted from gusau (1992). theory of solidarity this theory was espoused by al-qardawi (2000) in his celebrated work on fiqh az-zakah. the theory serves as an important theoretical underpinning for vibrant and educative discourse on zakah. the theory states that human beings are social creatures (i.e. homo sociologicus) and that in the process of becoming an important personality in life or acquiring ones' wealth, society and environment play a crucial role. as such, the people surrounding us should benefit from the wealth acquired. furthermore, ibn khaldun cited in dusuki (2011) submits that the principle of solidarity suggests a group-based model (gbm), which makes individuals responsible for collective interests and makes them subservient to the general will and interest of the people. agricultural products zakah mines zakah cash zakah animals zakah traded goods zakah gold & silver zakah total zakah funds other zakatable items al-fuqara’ (the poor) al-masakin (the needy) al-aamilin (the collectors) wafisabilillah (for allah’s sake) muallafatil-qulubuhum (new converts to islam) wafirriqab (to free captives) walgharimin (those in debts) wabnus-sabil (the wayfarers) mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|26 also, this principle is in harmony with islamic brotherhood (al-ukhwah– 49:10) and the principle of cooperation (ta’awun – q5:2). importantly, this theory establishes that society contributes to the wealth of the rich and thus, by way of appreciation, the society should be compensated through transfer of certain portions of the wealth for the benefit of the society and by extension the less endowed. this position is consistent with the principle of compensation in welfare economics. essentially, this is what zakah system does in society with the prescribed 2.5% of the zakatable cash of the endowed ones in muslim societies. hence, the rich and the poor shall become mutual gainers of the institution of zakah, in terms of welfare improvement and economic prosperity. through this circular flow of wealth therefore, the society is saved from socio-economic and political crises like hatred, begging, prostitution, poverty, and unemployment, among others. 2.2. previous studies some of the empirical studies on zakah institution and poverty alleviation include a study by abdullahi (2006), which examines the impact of zakah on beneficiaries in six (6) local government areas of kano metropolis. questionnaire and key informant interview (kii) methods were adopted for data collection with the use of 577 as respondents and six (6) for kii. the findings from the study show that zakah institution contributed to the enhancement of the well-being of the respondents but did not take them out of poverty. other findings revealed that 17% of the respondents were dissatisfied with the management of zakah in terms of distribution by the kano state zakah and hubusi commission. another study by ashafa (2014) investigates the distribution of zakah in lagos and ogun states, nigeria. the study examined the activities of ngos working on zakah collection and distribution. the methods of data collection adopted by the study were simple random sampling and interviews with seven (7) muslim ngos in lagos and ogun states. the findings show that zi has a positive effect on the beneficiaries, who were empowered to become business owners and students got scholarships into various higher institutions. nevertheless, the study revealed that zi is confronted with challenges like inefficient management, lack of proper record-keeping by the zakah agencies, circumvention by eligible payers and lack of trust, among others. a similar study by abdussalam, johari, and alias (2015) examined the effectiveness of zakah on poverty reduction in kwara state, nigeria with focus on the womenfolk. the study adopted a mixed method by utilizing 360 copies of questionnaire and an interview for data collection. the findings from the study were not consistent with the zakah-effectiveness hypothesis because zakah does not have a significant impact on poverty alleviation among most recipients. however, the study notes that ineffective zakah management in mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|27 the state was responsible because zakah is being managed by an individual muslim scholar and more so, the amounts distributed were also not significant enough to alleviate poverty among the poor and needy, especially the womenfolk. thus, if zi is to make any meaningful impact on the beneficiaries, the rules and regulations for its operations must be faithfully be followed. another study was conducted by ahmad, othman and salleh (2015) on the zakah distribution and the satisfaction level of zakah recipients on zakah management in malaysia, having the majority of the respondents as poor and needy people. the study adopted the questionnaire method to generate data using six (6) likert scale. the findings indicate that the recipients are positively impacted by the zakah gesture. nevertheless, the beneficiaries expressed dissatisfaction over the waiting period (i.e. three weeks) before they could receive zakah. although the beneficiaries expressed appreciation for receiving zakah, they were disappointed with the management of zakah in general by the zakah agency. in another study by ali and saaid (2016), they investigated the impact of zakah on poverty alleviation in sudan with the use of a structured questionnaire of 50 copies to collect data. their findings indicate that despite some operational inefficiencies and challenges confronting the sudanese zakah chamber, zakah positively and significantly impacts on poverty. furthermore, a pilot study on the institution of zakah for poverty alleviation in kano state by mustafa et al. (2017b) utilized 165 copies of the questionnaire in three (3) local government areas of kano metropolis (i.e. dala, fagge and kano municipal) to gauge the opinions and perceptions of zakah payers. the findings from this study revealed that the four-dimensional constructs satisfy the reliability and validity tests. also, the study indicates that 98.65% of the respondents are businessmen and women with some of them paying as much n100million as zakah in the last 15 to 20years. in the same vein, 80% of zakah payers are relatively young people of 25 to 55years with some of them being old beneficiaries of zakah. this finding is an indication of zakah's impact and potentials in kano state, which must be optimized. in a more recent study on the role of zakah distribution programs on poverty alleviation and income inequality reduction in west java (indonesia), which was conducted by ayuniyyah, pramanik, md saad and ariffin (2018); they adopted the questionnaire method using 1,309 zakah beneficiaries managed by the national zakat board of indonesia (baznas). the study revealed that zakah distribution programs by baznas are capable of significantly alleviating poverty and reducing income inequality. this is because the material and spiritual conditions of the observed households both in the urban and rural areas were improved one year after their enrolment into the mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|28 zakah distribution programs. thus, the falah index adopted indicates an approximately 60% increase in the well-being of the beneficiaries. this finding, therefore, supports zakah-effectiveness hypothesis in the literature. 2.3. conceptual framework flowing from the conceptual understanding of zi and poverty alleviation in this study, the conceptual model of zainal, abu bakar and saad (2016) was adapted. in this direction, the conceptual model is hereby presented in figure 2, which is based on poverty alleviation as the dependent variable while zakah payers’ awareness and perceptions (zap), their zakah payments (zp) and zakah management (zm) serve as the independent/explanatory variables. figure 2. conceptual model of zakah institution for poverty alleviation in kano state source: adapted from zainal, abu bakar and saad (2016). the eight (8) metropolitan local government areas in the state were selected for investigation utilizing questionnaires and key informant interview (kii) methods for data collection. essentially, this study makes some interesting contributions through a quantitative economic approach for a better understanding of the socio-economic and finance significance of zi as a potent and viable islamic social finance and security measure for poverty alleviation. awareness on zakah zakah payment poverty alleviation zakah management mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|29 iii. methodology kano state is the most populated state in nigeria with an estimate of over 15million people and a muslim majority of about 95%. the state is one of the oldest states in the country with official creation in may 1967. her islamic heritage of civilization, commerce, and scholarship dates back to the period of dawlatul usmaniyyah (1804-1903) as an eminent emirate as of 1860 (muktar, 2017; mustafa et al. 2017a). kano state is a commercial nerve centre with the manufacturing and agricultural sectors as dominants. the state also commands over 3million hectares of cultivable land, which are usable for the production of groundnuts/peanuts, rice, grains, and livestock among others. kano state is made up of 44 local government areas (lgas), which are divided into urban (kano metropolis) with eight and rural 36 lgas. the last national census of 2006 was 9,383,682 people (national population commission, 2006; mustafa et al., 2017a). considering the population density of the state, time constraint and paucity of financial resources, kano metropolis of eight (8) lgas (with 2,828,861 people), has been chosen as the study area (see appendix i for the distribution of the population). importantly, the justifications for the choice of kano metropolis as the study area are rooted in the fact that they constitute a more educationally advanced and islamically informed population with commercial and business orientations as well as accommodating high ability zakah payers. 3.1. data given the paucity of data and empirical works in this area, especially as it relates to kano state, this study utilized primary data through questionnaire administration and key informant interview (kii) in kano metropolis. the population adopted for this study consists of the entire households in kano metropolis, who are all potential zakah payers. according to the 2006 national population census for kano metropolis, the population was 2,828,861 (see appendix i for the distribution of the population). in this connection, the determination of the sample size for this study adopted the recommendation of krejcie and morgan (1970) that 384 copies of questionnaires for a population of 1,000,000 people and above are appropriate. as such, since the population is almost 3million people, the recommendation of krejcie and morgan (1970) of 384 was multiplied by 3 and approximated to 1,230 copies of questionnaires to take care of sampling error. in this connection, the questionnaires of abdullahi (2006) and nadzri, abdrahman and omar (2012) were adapted and a structured questionnaire with a seven (7) point likert scale was adopted to generate data from zakah payers in kano metropolis. mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|30 table 1. distribution of sample size in kano metropolis s/n local government area no. of sample size % share 1. fagge 250 20.3 2. dala 220 17.9 3. kano municipal council (kmc) 220 17.9 4. ungogo 100 8.1 5. gwale 120 9.8 6. kumbotso 100 8.1 7. tarauni 100 8.1 8. nassarawa 120 9.8 total 1230 100 source: authors’ computation (2018). therefore, table 1 provides the breakdown of the sample size distributed to the eight (8) lgas. also, secondary data was obtained from various published sources like the annual reports of the kano state zakah and hubusi commission (kszhc) and various journal articles available on zakah institution and poverty in nigeria and beyond. 3.2. model development this study seeks to empirically investigate the potential revenue base of the zakah institution for poverty alleviation in kano state. also, the study accounts for the positive effect of zakah institution on poverty alleviation and ascertain whether prudent management of zakah institution is germane to achieving poverty alleviation in kano state. in this direction, the three (3) hypotheses to be validated are: h1: zakah institution has an enormous revenue base for poverty alleviation in kano state. h2: zakah institution has positive impacts on poverty alleviation in kano state. h3: prudent management of zakah institution is germane for poverty alleviation. flowing from the conceptual framework presented in figure 2, the economic specification of zakah-poverty alleviation nexus is provided in line with the model specification of mustafa, baita and mamman (2018) and zainal et al. (2016): pov = f(zap, zp, zm) 1 here: pov = poverty alleviation zap = zakah awareness zp = zakah payment zm = zakah management mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|31 against this background, the econometric specification of the model for estimation in this study is hereby given as a multiple regression model, which is in conformity with the conceptual model provided in figure 2 and the model specification of mustafa, baita and mamman (2018) and zainal et al. (2016). as such, the model is specified as follows: 𝑃𝑂𝑉𝑖 = 𝛽0 + 𝛽1𝑍𝐴𝑃𝑖 + 𝛽2𝑍𝑃𝑖 + 𝛽3𝑍𝑀𝑖 + 𝜀𝑖. 2 3.3. method the copies of the questionnaire administered comprised two (2) major parts. part "a" contains demographic information of the respondents while part "b" provides information on the four (4) dimensional constructs adopted in this study with 23 items. also, key informant interview (kii) was utilized to gather useful information from some selected high ability zakah payers from the business group and the academia. to capture the identified variables, which were considered germane to the econometric model, multiple regression model was adopted in line with earlier studies like mustafa, baita and mamman (2018) and zainal et al. (2016). as rightly noted by wooldridge (2009), multiple regression analysis is more amenable to ceteris paribus analysis because it provides for explicit control of other factors that simultaneously affect the dependent variable. in this regard, he posits that “the multiple regression model is still the most widely used vehicle for empirical analysis in economics and other social sciences” (p. 68). furthermore, to achieve robust responses, multistage and convenience sampling methods were employed for the allocation and distribution of questionnaires. as rightly noted by wedgewood and sansom (2003), a multistage sampling technique is appropriate when big cities, wider geographical areas across cities or urban and rural settlements are involved in a study. in line with the rule of thumb for conducting a large scale study of this nature, the survey instrument was subjected to pilot study for its validity and reliability tests by administering 165 copies of the questionnaire in selected three lgas (i.e. dala, fagge and kmc). in this regard, the validity test, which is made-up of face and content analysis was achieved. similarly, the reliability test was successful by recording an overall reliability score of 0.81 for the four (4) dimensional constructs. table 2 provides more information on the reliability test conducted. mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|32 table 2. result of pilot study on reliability test for the dimensional constructs dimensional constructs before removing the items after removing the items no. of items cronbach's alpha no. of items cronbach's alpha zakah awareness 7 0.79 6 0.80 zakah payment 9 0.73 7 0.82 zakah management 6 0.74 5 0.77 poverty alleviation 7 0.60 5 0.67 source: mustafa et al. (2017b). in this vein, the six items removed from the survey instrument, which makes it 23 items include: item 1 from zakah awareness and perceptions (zap) construct, items 9 and 11 from zakah payment (zp) construct, item 22 from zakah management (zm) construct and items 27 and 29 from poverty alleviation (pov) construct. iv. results and analysis 4.1. results outcomes of administered questionnaire this study utilized 1,230 copies of the questionnaire, which were administered in eight (8) lgas of kano metropolis with each local government allocated according to its peculiarities as noted in appendix a. nevertheless, 1,129 copies of questionnaire were returned but only 899, which represents 73% could be used for analysis. as such, table 3 presents the breakdown of the copies of the questionnaire distributed to the sampled local governments. the table indicates that fagge lga received the highest copies of the questionnaire (250) and also, returned the highest number of usable questionnaires (232), which represents 25.81%; followed by dala = 220 with 21.13% usable and kmc = 220 with 17.69% usable. mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|33 table 3. rate of response on administered questionnaire local government allocated questionnaires returned questionnaires usable questionnaires % share fagge 250 243 232 25.81 dala 220 217 190 21.13 kmc 220 215 159 17.69 gwale 120 100 87 9.68 nassarawa 120 94 28 3.11 tarauni 100 96 82 9.12 kumbotso 100 75 55 6.12 ungogo 100 89 66 7.34 total 1230 1129 899 100 source: authors’ computation (2018). surprisingly, the least usable copies of the questionnaire were from nassarawa (3.11%); even though, the most populated among the lgas in the state. this is so because of its peculiarities in terms of the existence of small markets in the lga as compared to fagge, dala and kmc lgas with big markets. also important to be stated is that most usable copies of the questionnaire for this study emanated from three (3) lgas of fagge, dala, and kmc because they accounted for 581 copies of the questionnaire (i.e. 64.6%). profile of respondents the demographic characteristics of the respondents are presented in table 4. adopting crosstab analysis, the results from the table indicates that 92.89% are males while only 7.11% are females. in terms of educational status, most of them are secondary school certificate holders = 311, which represents 35.18%, very few are ph.d. holders (0.90%) and 10.86% represents the other educational levels not indicated in the options. mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|34 table 4: demographic characteristics of the respondents demographic status frequency percentage education level primary secondary degree masters ph.d. non-formal others total 145 311 145 38 08 141 96 884 16.40 35.18 16.4 4.30 0.90 15.95 10.86 100 occupation business civil service others total 710 94 37 841 84.42 11.18 4.40 100 age 21-30 31-40 41-50 51-60 60 and above total 88 309 264 176 53 890 9.88 34.68 29.63 19.75 5.95 100 gender female male total 62 810 872 7.11 92.89 100 major beneficiaries of zakah poor & needy orphanage family & friends zakah commission others more than one category total 370 42 162 14 13 283 884 41.86 4.75 18.33 1.58 1.47 32.01 100 once a beneficiary of zakah no yes total 551 327 878 62.76 37.24 100 source: computed by the authors (2018). also, most of the respondents are businessmen and women in terms of occupation = 710 (84.42%), civil servants are just 11.18% (94) and other types of occupation represent 4.40% (37). in general, 34.68% (309) of the respondents fall within the age group of 31-40 years, which represents the highest respondents and 29.63% (176) captures those within the age bracket of 41-50 years. furthermore, majority of the zakah beneficiaries are the poor and needy, which represents 41.86%, other beneficiaries include orphanage (4.75%), zakah commission barely attracted 1.58% (14) of the respondents for zakah payment; this means a lot for the commission in terms of efficiency and public trust. mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|35 descriptive statistics and preliminary tests (i.) summary of descriptive statistics table 5: summary statistics of the variables statistics criteria zakah awareness zakah payment zakah management poverty alleviation observations 899 899 899 899 mean 5.9100 6.4587 5.8846 6.0392 median 6.0000 6.5714 6.0000 6.0000 standard deviation .88763 .54101 .86682 .75516 skewness -1.538 -2.856 -1.115 -1.018 kurtosis 3.373 2.146 2.195 2.225 minimum 1.00 1.00 1.20 1.60 maximum 7.00 7.00 7.00 7.00 source: computed by the authors (2018). the summary statistics of dependent and independent variables are presented in table 5. the total observations used for analysis are 899 and the mean scores for all four (4) variables fall within 5.885 and 6.459. the variable of zakah payment recorded the highest mean score of 6.459 with a minimum of 1 and a standard deviation of .541. this depicts the highest perceptions of zakah institution and poverty alleviation with the least variability of perceptions among the respondents. the mean score for zakah management is the least with 5.885, a minimum of 1.20 and the highest standard deviation of .867. this implies that zakah management has the least perception among the respondents, which also accounts for the low patronage of the zakah commission because only 14 respondents gave their zakah to the commission (see table 4). this scenario could be explained by a lack of public trust and confidence in the management of the zakah commission. in this direction, the data obtained for this study could be considered as symmetric and normally distributed as evident in table 5. (ii.) reliability test the score of the overall reliability test has cronbach's alpha score of 0.8, which is greater than the benchmark of 0.6 adopted for this study (see sekaran, 2003). thus, with this high level of reliability score, it can safely be concluded that internal consistency exists among the four major dimensional constructs adopted for this study. furthermore, the result in table 6 shows the reliability scores for the individual dimensional constructs with zakah payment having the highest score of 0.8 followed by zakah awareness and zakah management having 0.7 each and poverty alleviation has the least mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|36 table 6. result of reliability test variables cronbach’s alpha score no. of items zakah awareness 0.7 6 zakah payment 0.8 7 zakah management 0.7 5 poverty alleviation 0.6 5 source: computed by the authors (2018). score of 0.6. the four constructs are reliable for this study and as such, whatever results emanating from this study should, therefore, be considered reliable and acceptable because the reliability test satisfied the rule of thumb. (iii.) correlation matrix the correlation matrix has been adopted to show the direction of the relationship between dependent and explanatory variables and even among the explanatory variables. therefore, the sign of the coefficient ranges from 1 to 1 and this implies that a negative coefficient connotes an indirect relationship while a positive coefficient means a direct relationship. hence, the closer the value of the coefficient is to 1 or -1, the stronger the correlation. in this direction, table 7 shows that all the coefficients are positive implying direct correlation among all the variables. more importantly, the coefficient of zakah management concerning poverty alleviation has the highest value of 0.54, which is the closest to 1. it can be deduced that zakah management strongly and positively correlates with poverty alleviation, which suggests that better management of zi shall positively influence poverty alleviation in kano state. also, the coefficient of zakah payment as it relates to zakah management is 0.42, which represents the second highest value in the table. in the same vein, zakah payment positively correlates with zakah management, which implies that the patronage level of zakah management agency like kszhc is determined by the level of perceptions and trust the zakah payers have in the management of zakah. thus, it implies that the prudent management of zakah shall lead to higher payment of zakah to the zakah commission. this further suggests that adequate and proper management of zi shall go along in increasing the patronage level and trust in zakah commission by zakah payers. furthermore, zakah payment also positively correlates with poverty alleviation at an impressive value of 0.41. it connotes that more payment of zakah shall have positive impacts on poverty alleviation. mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|37 table 7. result of correlation analysis variables zakah awareness zakah payment zakah management poverty alleviation zakah awareness 1 zakah payment 0.283 1 zakah management 0.317 0.421 1 poverty alleviation 0.236 0.412 0.543 1 source: computed by the authors (2018). high ability zakah payers and new zakah payers (i.) high ability zakah payers from the data collected, it shows that 707 zakah payers fall into the category of high ability zakah payers from ₦75,000 – ₦1m and above, which represents 78.6%. this is certainly an indication of a high level of potential revenue base of zakah institution in the state. breaking the total figure of 707, it means that those who make average payment of ₦1m and above per annum are 93 zakah payers while those who paid ₦75,000 -₦999,999 are 614, which represents 68.3%. also, zakah payers from ₦25,000 to less than ₦1m are 795, which says a lot about zakah revenue potentials. interestingly, fagge lga produced the highest number of high ability zakah payers with 225 respondents, which represents 31.8%. this finding is expected because fagge hosts the biggest markets in the state. other lgas with similar record like fagge include dala (161), kmc (106), and gwale (61) among others. thus, it is obvious that high revenue potential of zakah exists in the metropolis. (ii.) new zakah payers one of the outcomes this study is expected to verify is the possibility of whether old beneficiaries of zakah in kano state are paying zakah, which is capital “yes” from the result. a total of 327 new zakah payers have been identified, which represents 36.7% of the 899 respondents and 84 of them fall in the category of high ability zakah payers of ₦1million and above with dala lga recording the highest number of zakah payers (56) in this category. the economic implication of this finding is that the poor and needy who were once beneficiaries of zakah some few years ago are now zakah payers i.e. they have shifted from being at the deficit unit to surplus unit, and thereby qualified to pay zakah. this finding is certainly very interesting for poverty alleviation through zakah. regression analysis and diagnostics test (i.) regression results the result of the regression model presented in table 8 indicates that all the explanatory variables have a positive effect on poverty alleviation with zakah mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|38 table 8. result of regression estimates variables coefficients standard error t-stat p-value constant 1.420 0.286 4.965 0.000 zakah awareness 0.035 0.027 1.313 0.189 zakah payment 0.331 0.048 6.936 0.000 zakah management 0.386 0.029 13.485 0.000 r-square adjusted r square std. error of the estimate fstatistics prob (fstatistics) durbin – watson 0.341 0.339 0.618 141.211 0.000 1.507 source: computed by the authors (2018). payment and zakah management exhibiting a high level of significance level of 1% but zakah awareness demonstrates no significance level. in this regard, zakah payment recorded 0.331 coefficient, which connotes that a one-unit increase in zakah payment will translate to 0.331-unit increase in poverty alleviation. in the same vein, zakah management recorded the coefficient of 0.386, which suggests that a one-unit increase in the level and style of zakah management in kano state will lead to 0.386-unit increment in poverty alleviation. (ii.) diagnostics tests the diagnostics tests carried out include multi-collinearity, heteroskedasticity, normality, and autocorrelation. thus, the results for both multicollinearity and heteroskedasticity are presented in table 9. in this direction, the variance inflation factor (vif) or the tolerance criteria are often used to determine multi-collinearity and since acceptance condition of less than 5 for vif or less than 1 for tolerance has been satisfied; it could be concluded that the assumption of no multi-collinearity is not violated. also, the presence of heteroskedasticity is established since the significance levels of the t-statistics are less than 0.05. therefore, to fix the problem of heteroskedasticity, which is common in cross-sectional analysis and which was unavoidably recorded, robust regression analysis was employed to obtain robust standard errors (see appendix ii). furthermore, the result for the normality of the residual error term is based on shapiro-wilk statistics of 0.958 at the significance level of 0.000. hence, it could be inferred that the residual error term is not normally distributed. also, autocorrelation based on the durbin-watson criterion of 1.507, implies the rejection of the null hypothesis of no positive autocorrelation. mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|39 table 9. result of diagnostics test variables tolerance vif heteroskedasticity zakat awareness 0.883 1.133 -3.098 (0.002) zakat payment 0.790 1.265 2.939 (0.003) zakat management 0.768 1.302 -6.328 (0.000) source: computed by the authors (2018). note: the significance levels are in parentheses. outcomes of interview with high profile zakah payers key informant interview (kii) method was adopted to gauge information from strategic stakeholders of zi in kano metropolis, especially from academia and the business class. in this regard, after a lot of attempts and follow-up due to their tight schedules, only seven (7) of the high profile zakah payers (i.e. three among the academia and four from the business class) could be engaged for interview. importantly, three professors were interviewed. the two male professors have other occupational engagements apart from lecturing like estate management, consultancy, and authoring of books, among others. as a matter of fact, among the most interesting discoveries of this interview are: (i.) that a leading businessman in kano state distributed as much as over ₦200million as zakah for the year 2017 to various categories of beneficiaries; (ii.) that academics despite their meagre resources and salary payments still have religious desire and commitment to paying zakah to the poor and needy around them; and (iii.) the case of a leading woman transporter in the northern part of nigeria who started her business life with traditional grinding, laundry, crushing and cutting of woodlog at the age of 12 years and now 51 years old, makes a special appeal. interestingly, she has two (2) driving schools and 130 employees directly working under her. she has economically empowered over 9,000 people in various capacities. to this end, other key issues discussed with the high profile zakah payers are hereby thematically presented. (i.) impact of zakah on the beneficiaries it is important to recall that the fundamental objective of zakah is to alleviate poverty and economically empowered the poor and needy in muslim societies (see figure 1 for the stipulated zakah beneficiaries as contained in q9:60). according to the high profile zakah payers, they all agreed that zakah payment has made both short-run and long-run significant and positive impacts in the lives of the beneficiaries more than government empowerment projects. this is because some of the beneficiaries are now economically stable and self-contented. for instance, zakah serves as an initial capital with which some of them are now proud mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|40 owners of their businesses, houses and even paying zakah to others as a result of the zakah given to them some years ago. in this vein, it could safely be concluded that zi is a capital enhancement mechanism, which can be used to promote and stimulate the muslim economy. this submission also validates h2 on the positive link between zi and poverty alleviation. (ii.) reservations on zakah management and the ways out the interviewees noted that the government agency vested with the management of zakah lacks the trust and confidence of the zakah payers and the beneficiaries due to some problems such as inadequate publicity, lack of proper record-keeping, lack of proper management of zakah revenue, insincerity and time-wasting by the workers and a host of others. to overcome the problems, the following suggestions were proffered: (i.) trusted and sincere people should be brought into the commission because it is not an ordinary agency of government that every tom, dick and harry like politicians should be involved in its management; (ii.) creating more public awareness on the significance of zakah and the role of the commission; (iii.) more education and training for the workers, the payers and the beneficiaries on how to productively utilize the zakah fund; (iv.) insufficient amount being disbursed to beneficiaries; and (v.) adequate supports from kano state government to the commission for enhanced operations and quality service delivery to all and sundry, especially to the zakah payers and beneficiaries. (iii.) means and methods for enhancing zakah management in kano state given the educational background, experiences and exposure of the high profile zakah payers, they were able to provide real and practical means by which zakah institution could be revamped in kano state; since zakah institution is very strategic and fundamental to the faith and lives of muslims. hence, they identified the following models through which zi can efficiently and effectively be managed in kano state and nigeria at large. the models include: (i.) management by individual zakah payer as the case with all our interviewees; (ii.) committee of trusted and sincere personalities or muslim ngo to collect and distribute zakah; and (iii.) government agency as the case with kano, sokoto and zamfara states among others in nigeria with qualified and trusted workers to manage zakahfunds. however, this study holds that the three models could be adopted for a society like kano state. this is to allow for more participation in zakah management, which is a necessary condition for now. mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|41 4.2. analysis discussion of empirical findings from table 4, it can be inferred that a young and vibrant generation of zakah payers between the age group of 31-50 years, which represents 64.31% exists in the state. this result implies that zakah payment is sustainable considering the ages of this category of zakah payers “if and only if” the state government promotes good governance, positive fiscal incentives and persistent public advocacy and awareness on the significance of zi in islam and muslim society. among the most interesting results emanating from table 4 is that 327 respondents (37.24%), which is a very significant number, who are old zakah beneficiaries are now zakah payers. this means that they have been alleviated from poverty and thus, financially and economically buoyant enough to now pay zakah. this result consistent with the result presented in table 8 and thus, validates h1: that zakah impacts positively on poverty alleviation in kano state. this finding also underscores the revenue potentials of zi in the state. generally from table 4, it can be deduced that the respondents represent a quality human capital development (hcd) in terms of their educational qualifications because the majority of them are secondary school certificate holders, degrees, masters and phd holders, which collectively accounts for 56.7%. by the results of the demographic characteristics, it could be deduced that the potential revenue base of zakah exists. however, it needs to be revamped by the state government through good governance, especially through the zakah commission. also, more public enlightenment and advocacy must be embarked upon by the commission and other stakeholders like the emirate and scholars, to optimally explore the available revenue potentials of zi in the state. moreover, the findings from the regression results presented in table 8 indicate that all the explanatory variables have a positive effect on poverty alleviation with zakah payment and zakah management exhibiting a high level of significance level of 1% but zakah awareness demonstrates no significance level. in this regard, zakah payment recorded 0.331 coefficient, which connotes that a one-unit increase in zakah payment will translate to 0.331-unit increase in poverty alleviation. this finding validates h2 of this study, which supports earlier findings by ashafa (2014), ahmad et al. (2015), abdussalam et al. (2015), ali and saaid (2016), kefeli et al. (2017) and ayuniyyah et al. (2018) on the positive effect of zakah on poverty alleviation in nigeria and malaysia respectively. in the same vein, zakah management recorded the coefficient of 0.386, which suggests that a one-unit increase in the level and style of zakah management in kano state will lead to 0.386-unit mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|42 increment in poverty alleviation. it is instructive to mention that zakah management, which recorded the highest coefficient equally demonstrates the highest level of correlation. hence, it can be concluded that zakah management is the strongest determinant of poverty alleviation. this finding validates h3, which is consistent with the findings of ibrahim (2015) and mustafa et al. (2017a). therefore, to achieve prudent management of zakah, which is germane for poverty alleviation, men of sincerity and religious understanding and commitment are needed to run the affairs of the zakah commission with islamic and conventional backgrounds in islamic sciences and accounting/business management/ economics/finance. it is worthy to state that the explanatory variables demonstrate joint significance in explaining the dependent variable because the probability value of f-statistics is 0.000. similarly, the goodness of fit reveals that the adjusted r2 is 34%, which is appropriate and considered moderate for primary data. also, the durbin-watson statistic of 1.507 is within the acceptable range and this implies that there is positive autocorrelation. the results presented on the fitness of the model established that the model used for this study is appropriate and reliable. nevertheless, it needs to be stated that the 66% unaccounted for in the adjusted r2 could largely be due to other variables not included since this study focus on zakah payers and zakah management only. other variables that future studies need to investigate to account for the 66% are zakah beneficiaries, zakah rules, and regulations and a host of others. nevertheless, the r2 score attained is consistent with the rule of thumb as noted by falk and miller (1992) and chin (1998). analysis of qualitative findings essentially, the interview with the seven (7) personalities through the use of kii method proved to be very thoughts provoking and educative. in general, those interviewed fall within the age group of 47-65 years and they have been paying zakah in the last 10-30years. on average, the high profile zakah payers have paid between ₦3m to ₦3.5billion as zakah to various beneficiaries like the poor and needy, women, orphans, relatives and friends. this gesture of the high profile zakah payers has impacted positively on the well-being of the beneficiaries. by this submission, it implies that zakah has positive impacts on the lives of the beneficiaries, which confirm h1. however, it is perturbing to state that only one of the high profile zakah payers has ever patronized the zakah commission. this is connected to the lack of trust and confidence in the management of zi as espoused by many of the interviewees. some also complained of lack of awareness and mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|43 publicity of its activities. at this juncture, it is important to state that the kii method adopted has brought to limelight the genuine concerns of the rich people on the inadequate management of zakah system. nonetheless, some of the rich gave as much as ₦5m to individual beneficiary to set-up personal business, which took such individual out of poverty. this is what al-qardawi (2000) refers to as permanent rehabilitation of zakah beneficiaries, which will make them also become zakah payers in the future. this supports the empirical findings of this study (see section 4.1.4). contributions of this study to the economics of zakah discourse it is not a gainsaying that the results and findings attained in this study are certainly very interesting and a major contribution ahead of the study of abullahi (2006), which also studied the same kano metropolis, especially on the methodology adopted. this is in view of the large sample size adopted (i.e. 1,230 copies of the questionnaire as compared to his 577 copies), and certainly provides for less sampling error by the rule of the thumb. also, the robustness and multiple techniques of analysis adopted (like descriptive statistics, correlation matrix, regression estimate, diagnostics test, and crosstab analysis) gave this study a major edge above previous studies like abdullahi (2006), wali (2013), ashafa (2014), abdussalam et al. (2015) and mustafa et al. (2017b) on nigeria, ali and saaid (2016) on sudan, ahmad et al. (2015) and kefeli et al. (2017) on malaysia and ayuniyyah, pramanik, md saad and ariffin (2018) on indonesia. in the same vein, this study also contributes in terms of the conceptual model (see figure 2), which is the first of its kind in zakah discourse, especially in nigeria. even though this study adapted the conceptual framework of zainal et al. (2016), it has introduced new variables like zakah awareness and perception, zakah payment and zakah management, in contradistinction to what zainal et al. (2016) used in their framework. thus, the conceptual model adapted in this study is, therefore, a new contribution to the body of knowledge, which future studies can adopt in better understanding the phenomena of zakah institution and poverty alleviation nexus in their climes. furthermore, this study has also contributed to the empirical literature on zakah institution, particularly as it relates to the nigerian society and economy. most of the studies on zakah institutions in nigeria are largely historical, conceptual and theoretical (see appendix iii). this study has enriched the empirical literature on zakah institution and poverty discourse in muslim academic discourse by bringing in the nigerian peculiarity and dimension of the subject matter. all in all, this study has made three important contributions: (i.) conceptual contribution by way of mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|44 introducing a new conceptual model on zakah-poverty nexus; (ii.) methodological in terms of adopting multiple techniques of data analysis, in order to attain robustness of results; and (iii.) empirical literature addition, have been achieved in this study. v. conclusion and recommendation 5.1. conclusion this study empirically investigates the revenue base of zakah institution and its impact on poverty alleviation in kano state, nigeria. in this direction, both questionnaires and key informant interview (kii) methods were adopted for the collection of data. for robustness to be achieved, five (5) techniques of analysis were adopted. therefore, from the foregoing discussions and analyses of facts and figures, it is clear from the major findings that the potentials of zi as a potent and sustainable source of public revenue for poverty alleviation is enormous. this is because of the significant zakah payment from high ability zakah payers and old beneficiaries. this finding also supports the forecasting hypothesis of mustafa et al. (2017a) that zi in kano state has the revenue potentials of generating over ₦25billion per annum. furthermore, the positive link between zi and poverty alleviation is also established. again, the finding that prudent management of zi is germane for poverty alleviation is indeed very instructive. this is because the zakah management variable recorded a strong statistical significance level of 1% with the highest coefficient of 0.386. essentially, the findings from this study lend credence to the zakah-effectiveness hypothesis. to this end, the submission of mustafa and maiyaki (2016) supports the central thesis of this study that, “the kano state case study has revealed that the institution of zakah portends a lot of potentials if given governmental supports and backing” (p. 11). 5.2. recommendation flowing from the findings in this study, it is hereby recommended that zi in kano state needs to be greatly promoted among high ability zakah payers through increased public advocacy and awareness as well as fiscal incentives and motivations. moreover, kano state government as a major stakeholder in zakah management through the zakah commission should take the lead through exemplifying good governance in the form of more accountability and transparency in the management of zakah revenue. more importantly, considering the revenue potentials of zi, which cannot be managed by just a commission, a ministry of zakah and hubusi affairs is hereby proposed for establishment in the long-run, which should completely take charge of mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|45 poverty alleviation, economic empowerment, and other related matters. the proposed ministry should be headed by a seasoned scholar of integrity with islamic and conventional backgrounds possibly in islamic social and management sciences. similarly, a council of stakeholders should be put in place within the ministry to assist in mobilizing supports and public trust for the ministry. the council should have representatives from the emirate council, council of ulamas, academia, business class, islamic organizations, women organizations, and the media. furthermore, this study has only addressed the fundamental issue of zakah payers and partly, zakah management. therefore, future studies should focus on other issues like zakah beneficiaries and the impact of zakah on their well-being, impact of zakah management on the beneficiaries, zakah system and corporate organizations and a host of others. 5.3. acknowledgments the research team profoundly acknowledges the islamic research and training institute (irti), islamic development bank (idb) group, for the sponsorship. there is no doubt, the wealth of experiences gathered shall forever be useful in our future academic undertakings. similarly, we appreciate tertiary education trust fund – tetfund (nigeria), for the international conference sponsorship in sunway university, malaysia (2019). mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|46 references abdullahi, s. a. 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(2017a). re-engineering the institutions of zakah and waqf for economic empowerment in kano state, nigeria. northwest journal of social and management sciences,1(1), 34-53. mustafa, d., baita, a. j., sabo, m., & adhama, h. d. (2017b). zakah system for poverty alleviation in kano state, nigeria: pilot study on the validity and reliability of survey instrument. paper presented at the international conference on regional economic integration, kano nigeria. mustafa, d., baita, a. j. & mamman, a. (2018). zakah institution and poverty alleviation nexus in kano state, nigeria: a structural equation model approach. abuja journal of economics and allied fields, 9(5), 156-171. nadzri, f. a. a., abdrahman, r., & omar, n. (2012). zakat and poverty alleviation: roles of zakat institutions in malaysia. international journal of arts and commerce, 1(7), 61-72. national population commission (2006). population census. abuja: author. wali, h. n. (2013). utilization of zakat and islamic endowment funds for poverty reduction: a case study of zakat and hubusi commission, kano state-nigeria. journal of economics and sustainable development, 4(8), 141-147. wedgwood, a., & sansom, k. (2003). willingness-to-pay surveys – a streamlined approach: guidance notes for small town water services. water, engineering and development centre (wedc), loughborough university. wooldridge, j. m. (2009). introductory econometrics: a modern approach (fourth edition). south-western: cengage learning. zainal, h., abu bakar, a., & saad, r. a. (2016). reputation, satisfaction of zakat distribution, and service quality as determinants of stakeholder trust in zakat institutions. international journal of economics and financial issues, 6, 72-76. mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|49 appendix i statistics about the population of study s/n lga population size number of markets allocated questionnaires 1. nassarawa 596,669 small = 4 120 2. dala 418,777 big = 4 220 3. kano municipal council (kmc) 365,525 big =4 and small = 2 220 4. ungogo 369,657 small = 2 100 5. gwale 362,059 small = 4 120 6. kumbotso 295,979 big = 1 and small = 2 100 7. tarauni 221,367 big = 1 and small = 2 100 8. fagge 198,828 big = 4 250 total 2,828,861 big = 14 small =16 1230 source: national population commission (2006) and authors’ compilation (2018). appendix ii result of robust regression estimates variables coefficients robust standard error t-stat p-value constant 1.921 0.521 3.69 0.000 zakah awareness 0.111 0.041 2.70 0.000 zakah payment 0.386 0.077 4.98 0.007 zakah management 0.211 0.051 4.12 0.000 rsquare f-statistics prob (fstatistics) number of observations 0.2205 27.36 0.000 862 source: computed by the authors (2018). mustafa, baita, & adhama|quantitative economic evaluation of zakah-poverty nexus in kano state, nigeria ijief: international journal of islamic economics and finance, 3(1), 21-50|50 appendix iii sample of academic works on zakah institution in nigeria s/n name of author (s) year type methodology 1. adetona, l. m. 1999 descriptive and analytical library-based and content analysis 2. balogun, s. u. 1999 exploratory and analytical library-based and historical analysis 3. aliyu, s. u. r. 2002 conceptual and theoretical content and historical analysis 4. maidugu, a. s. 2002 exploratory and analytical library-based and content analysis 5. abdullahi, s. a. 2006 empirical mixed method 6. akanni, a. a. 2006 analytical and descriptive content and historical analysis 7. adebayo, r. i. 2011 conceptual and theoretical content analysis 8. mustafa, d. & maiyaki, a. a. 2011 exploratory content and historical 9. amuda, y. j. 2013 analytical and descriptive content and historical 10. wali, h. n. 2013 empirical mixed method 11. ammani, s. a., abba, s. a. & dandago, k. i. 2014 exploratory and descriptive library-based and content analysis 12. ashafa, s. a. 2014 empirical mixed method 13. adamu, s. & saad, r. a. 2015 conceptual and theoretical library-based and content analysis 14. ahmad, m., rashid, s. k., ibrahim, u. & oseni, u. a. 2015 analytical and descriptive qualitative legal research method 15. abdussalam, o. i., johari, f. & alias, m. 2015 empirical mixed method 16. ibrahim, s. m. 2015 descriptive and analytical library-based and historical 17. mustafa, d. & idris, m. 2015 analytical and descriptive content and historical 18. adamu, s. m. & saad, r. a. 2016 analytical and descriptive qualitative and analytical 19. mustafa, d. & maiyaki, a. a. 2016 analytical and descriptive library–based and historical 20. mustafa, d., sabiu, t. t. & bello, a. i. 2017a analytical and descriptive historical and content analysis 21. mustafa, d., baita, j. a., sabo, m. & adhama, h. d. 2017b empirical quantitative source: adapted from mustafa and abdullahi (2018).