The Effect of Islamic Financing, Indonesia Sharia Stock Index
(ISSI), and Distribution of Zakah, Infaq and Sadaqah (ZIS)
on Economic Growth in Indonesia
Fera Widyanata, Sa’adah Yuliana
Economic Faculty, Sriwijaya University, Palembang-Prabumulih street KM 32 OI, South Sumatera, Indonesia
Keywords: Islamic Financing, Indonesia Sharia Stock Index (ISSI), Zakah Infaq and Sadaqah (ZIS), Economic Growth,
GDP, Error Correction Model (ECM)
Abstract: This research aims to analyze the effect of the short-run and long-run of Islamic Financing, Indonesia Sharia
Stock Index (ISSI), and the distribution of Zakah, Infaq and Sadaqah (ZIS) on Economic Growth during the
period 2011 to 2015. This research uses secondary data, it is a quarterly time series data with 24 quarterly
observation period, since the first quarter of 2010 until the fourth quarter of 2015. The analysis techniques
of this research is Error Correction Model (ECM). The result of the research shows that there is effect or an
equilibrium between the short-run towards the long-run of the independent variable Islamic Financing on
the dependent variable GDP. While the independent variable Indonesia Sharia Stock Index (ISSI) only gives
long-run effect on the dependent variable GDP. Conversely, the independent variable Zakah, Infaq and
Sadaqah (ZIS) only gives short-run effect on the dependent variable GDP. Thus, Islamic Financing and
distribution of Zakah, Infaq and Sadaqah contribute to the increase of economic growth in the short-run.
Indonesia Sharia Stock Index (ISSI) and Islamic Financing contribute to the increase of economic growth in
the long-run.
1 INTRODUCTION
Economic growth is the development of
activities in the economy where goods and services
produced in the community grows. The high
economic growth is the desires and goals for each
country. When a country's economic growth has
increased by a certain time, it can be said that the
country's economy is increase or has a positive
value. Economic growth calculated through the GDP
(Gross Domestic Product) might be an indicator of
the rate of the economy, in terms of demand and
aggregate supply, consumption and saving, as well
as the level of investment (Todaro, 1997). Economic
growth is strongly influenced by the policies of the
government in order to balance the economic
condition of a country. The government policy can
be either monetary or fiscal policy.
Bank is an institution that has an important role
in monetary policy. When the Islamic banks funding
the community through Islamic financing for the
productive economic sectors, this will increase the
capital of economic sectors to increase its
productivity in order to support economic growth.
There is a significant character of Islamic financing
that has positive impact on the real sector and
economic growth, Islamic financial institutions put
more emphasis on improving productivity. Islamic
financial institution is financial institution that
emphasize the concept of asset and production based
system as the main idea. Through that financing
pattern then the real sector and the financial sector
will move in a balanced manner. The greater the
performance of Islamic banking, the greater the
contribution to economic growth (Habibullah &
Eng, 2006).
Besides the banking sector, the existence of
capital market in a country has very important role
as economic driving force. It is because the capital
markets function provides the facility to ease
companies and emitens to raise funds, and for
investors to distribute funds with the expectations of
356
Widyanata, F. and Yuliana, S.
The Effect of Islamic Financing, Indonesia Sharia Stock Index(ISSI), and Distribution of Zakah, Infaq and Sadaqah (ZIS) on Economic Growth in Indonesia.
DOI: 10.5220/0008440203560367
In Proceedings of the 4th Sriwijaya Economics, Accounting, and Business Conference (SEABC 2018), pages 356-367
ISBN: 978-989-758-387-2
Copyright
c
 2019 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved

gaining profit sharing. The Islamic capital market
investment in Indonesia is become more lively with
the presence of Indonesia Sharia Stock Index (ISSI).
It is published by Bapepam-LK and the National
Sharia Council of Indonesian (DSN-MUI) on May
12, 2011. ISSI is Islamic stocks consisting of all
shares listed on Indonesia Stock Exchange and
incorporated in the List of Islamic Securities. When
it was first established, the number of ISSI shares is
214 stocks. These days the development of ISSI for
each period is significant.
The government has also an important role in
running the economy by setting policy. One of the
government policy to boost the economy is fiscal
policy. In the Islamic economic system, the fiscal
policy has been applied since the ancient time of
Prophet Muhammad. In the reign of Rasulullah, the
income of the country not only came from tax, but
also from the Zakah, Infaq and Sadaqah. Revenue
from Zakah, Infaq and Sadaqah is different from tax,
and is not treated like a tax. Zakah is a Muslim
obligation, it is part of The Five Pillars of Islam.
Infaq and Sadaqah is a reflection observance of a
Muslim to Allah. Zakah, Infaq and Sadaqah is a
fundamental element in Islam which is the
imperative of the pillars of Islam. In the reign of
Rasulullah and Khulafaurrasyidin Zakah was the
main state revenue as an obligation of Muslim
people, while the non-muslim people was required
to pay tax. The effective of state revenue and the
efficient of allocation of state assets have led to
prosperity and peaceful among the people at that
time.
Based on Baznas and IPB research in 2015, the
annual potential zakah is estimated to reach Rp 217
trillion nationwide (Asworo, 2015). This number is
based on GDP in 2010. As GDP rises, the potential
of Zakah increases as well.
Table 1 and 2 show the growth of GDP, the total
of Islamic Financing, the total capitalization of
Indonesia Sharia Stocks Index (ISSI), and the total
distribution of Zakah, Infaq and Sadaqah (ZIS)
within the last five years.
Table 1: The Growth of GDP and Islamic Financing 2011-
2015
Year
GDP (Rp, billion)
Islamic Financing
(Rp, billion)
2011
7.287.635
102.655
2012
7.727.083
147.505
2013
8.158.194
184.122
2014
8.568.116
199.330
2015
8.976.932
212.996
Source: BPS, BI 2016
Table 2: The Growth of ISSI and ZIS 2011-2015
Year
ISSI (Rp, billion)
ZIS (Rp, billion)
2011
1.968.091
38,5
2012
2.451.334
39,8
2013
2.557.847
44,3
2014
2.946.893
55,9
2015
2.600.851
26,5
Source: OJK, BAZNAS 2016
Table 1 and 2 show that during the period 2011-2015
the growth of GDP, Islamic Financing, ISSI, and ZIS
tends to increase significantly each year. Any increase in
economic instruments whether it is big or small will have
an impact on the economy of the country. The increase in
total Islamic Financing, Indonesia Sharia Stocks Index
(ISSI), and the total distribution of Zakah, Infaq and
Sadaqah (ZIS) either directly or indirectly will have an
impact on the economy in Indonesia. This study aims to
analyze more deeply the effect of Islamic Financing,
Indonesia Sharia Stocks Index (ISSI), and the total
distribution of Zakah, Infaq and Sadaqah (ZIS) on
Economic Growth.
2 THEORITICAL FRAMEWORK
2.1 Economic Growth
Generally, economic growth is defined as an
increase in the ability of an economy to produce
goods and services. Economic growth refers to the
change in quantitative and is usually measured by
using data of Gross Domestic Product (GDP) or
national income or output per capita. GDP is the
total market value of all goods and services
produced by all economy units of a country in a
certain period (Nanga, 2001).
GDP calculation using the two kinds of prices,
the GDP at current prices (nominal GDP) and GDP
at constant prices (Real GDP). GDP at current prices
describe the value added of goods and services
which is calculated by using the prevailing price
every year, while the GDP at constant prices
calculated using prices in a certain year as the base
year. GDP at constant prices used to determine
economic growth from year to year, while the GDP
at current prices used to see economic shifts and
economic structure. There are three approaches in
calculating GDP. They are expenditure approach,
income approach and production approach (Nanga,
2001).
The calculations of GDP by Expenditure
Approach is the amount of expenses incurred for
household consumption and private non-profit
The Effect of Islamic Financing, Indonesia Sharia Stock Index(ISSI), and Distribution of Zakah, Infaq and Sadaqah (ZIS) on Economic
Growth in Indonesia
357

institutions, government consumption, gross fixed
capital formation, changes in inventories/stocks, and
changes in net exports (exports minus imports).
Calculations of GDP by the Income Approach is
the amount of compensations received by production
factors which participate in the production process in
a country in a certain period of time (usually one
year). The compensations and benefits include
wages and salaries, rent for land, capital interest, and
profit, all before income tax and other direct taxes.
In this definition, GDP includes depreciation and net
indirect taxes (indirect taxes minus subsidies).
The calculation of GDP by Production Approach
is the added value of final goods and services
produced by the various production units (total
output) in the territory of a country in a certain
period of time (usually one year). The calculation
method with this approach is to divide the economy
into sectors of production. Total output of each
sector is the output of the entire economy. To avoid
double counting or even multiple counting. So that,
calculation of GDP by production method is the total
sum of value added in each sector. Value added is
the difference between the output values with
inbetween-value.
Conceptually, the calculation of GDP by these
three approaches will give the same result. Thus, the
amount of expenditure will be equal to the amount
of final goods and services produced and should be
equal to total income for the factors of production.
In practice, the calculation of GDP that is often used
is the expenditure approach.
2.2 Economic Growth According to
Islamic Economics
Economic growth in Islam is not only about
material production activities, but it is overall
production activity which is closely related to the
justice of distribution. Moreover, economic growth
is not only measured by economic aspects, but
human activity aimed to growth and progress of
material and spiritual sides at once. In Islam known
as the real welfare concerning the happiness of the
world and the hereafter. Islamic Economics in the
sense of an economic system (Nidhom al-Iqtishad) is
a system that can take humanity to the real Falah or
real welfare. Therefore, in analysing the economic
welfare in Islam must recognize how the interaction
of instruments waqf, Zakah, infaq and Sadaqah in
improving the welfare of the people. In essence,
Islamic economy should be able to provide a way to
measure economic prosperity and social welfare
based on moral and social system of Islam
(Sudarsono, 2003).
In the perspective of Islamic economics,
guidance how to achieve material prosperity within
the framework of Islamic values requires (Chapra,
1998):
1. Not to be achieved through the production of
goods and services that are not in accordance
with Islamic moral standards.
2. Not widen the social gap between the rich and
the poor.
3. Not pose a danger to present and future
generations with the physical and moral
damage to the environment.
In the paradigm of Islamic economics, economic
growth must be consistent with justice and equitable
distribution of income. Islam emphasizes social-
economic justice in economic growth. So that the
wealth is not concentrated in certain people because
a high economic could be only in the hands of a
particular conglomerate. This is in accordance with
the Quran surah Al-Hashr verse 7 which means:
"Wealth should not be only continuously circulated
among rich people".
2.3 Islamic Financing
Islamic financing is banking product that is
based on Islamic principles. Financing instrument in
Islamic bank is different from conventional bank.
Islamic financing apply interest-free financing
instrument based on two principles, the profit and
loss-sharing and the principle of additional margin
(mark-up margin). Meanwhile, the conventional
bank apply loan based on the interest (riba’) (Rivai
& Arifin, 2009).
The significant character of Islamic financing
that has positive impact on the real economy sector
and economic growth is Islamic financial institutions
put more emphasis on increasing production. Islamic
financial institutions are financial institutions that
emphasize the concept of asset and production based
system. Through the financing pattern, then the real
economy sector and the financial sector can move in
a balanced manner.
The theory of The Growth-Led Finance
Hypothesis or The Demand-Following View
developed by Robinson explains that the
development of the financial sector following the
economic growth, or entrepreneurial activity
(enterprise) encourage the growth of the financial
sector (Robinson, 2003). If the economy expanded,
the demand for banking products and services will
also increase, so the banking sector will also
increase by itself. One of the empirical research
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supports this hypothesis is the research conducted by
Habibullah and Eng in Asian countries found that
Malaysia, Myanmar and Nepal support The Growth-
Led Finance Hypothesis (Habibullah & Eng, 2006).
2.4 Islamic Stocks
Islamic stocks are securities that represent equity
into a company. The equity inclution conducted on
the companies which business activities and the
management is not contrary to Islamic principles.
The stock is halal if the stocks issued by a
companies whose business activities are in line with
Islamic principles and/or the intention of the stock
purchase is for investment, not for speculation
(Soemitra, 2009).
Rules and norms of Islamic stocks trading
guideline refers to buying and selling goods in
Islamic trade. The fulfilment of the pillars, terms and
conditions, aspects of 'an taradhin, protected from
the elements maysir, gharar, riba’, haram and
najasy. The transaction practice such as forward
contracts, short selling, options, and insider trading
are not allowed in Islamic stocks trading.
Furthermore, the concept of preferred stock is also
not allowed because of the fixed gain
(predeterminant revenue) is categorized as riba’.
Another reason is that the owner of preferred stock
get the privilege, especially when the company is
liquidated. It is considered as injustice (Andri
Soemitra, 2016).
Generally buying and selling stocks in the capital
market has two main functions, the economic
function and financial functions. In the function of
the economy, the stocks market provides a facility to
reconcile the two interests, those who have excess
funds (investors) and those who need the funds
(emiten). At the capital markets, the parties that have
excess funds may invest with expectation of gaining
halal profit and appropriate with Islamic law, while
the emiten may use the funds for the benefit of the
company's operations. In the function of the
financial, the stocks markets provide the possibility
and the opportunity to obtain a compensation for
investors in accordance with the characteristics of
the selected investments. The capital market is
expected to boost economic activity, because the
capital market is an alternative to long term
financing for the company, so the company can
operate with a larger scale and eventually will
increase its profit and prosperity of the wider society
(Sholahuddin, 2004).
2.5 Zakah, Infaq and Sadaqah
Etymologically the word Zakah means evolve
(an-namaa), purify (at-thabaratu) and blessing (al-
barakatu). In terminology, the concept of Zakah is
giving some treasure to poor people (mustahik) with
certain requirements (Hafidhuddin, 2011). Zakah is
an obligation for muslims who are grown-up
(baligh), sensible and already have sufficient tresure
(nishab) in 12 months (haul).
According to Hidayat the concept of Infaq is
someone’s voluntary donation every time he gets
sustenance as much as he pleases (Hidayat, 2014),
while according to Hafidhuddin Infaq comes from
the word "anfaqa" which means give out something
valuable (treasure) for certain interest, e.g., the
construction of mosques, school, home-library etc
(Hafidhuddin, 2011).
Sadaqah is a voluntary donation from people to
others, especially to the poor (Hidayat, 2014).
Sadaqah is sunnah, therefore, to distinguish it from
zakah (obligation), the fuqaha use the term sadaqah
or an ash shadaqah nafilah (Hafidhuddin, 2011).
ZIS funds can be distributed on two activities,
consumptive activities and productive activities.
Productive activity is the provision of funds for
productive business activities so that it could give
medium and long-term impact for mustahik
(Antonio, Hermawan, Hendri, & Ghofur, 2017).
Figure 1: The Utilization of Zakah, Infaq and Sadaqah
ZIS can play a very significant role in the
distribution of income and wealth in muslim society.
The implications of Zakah is the growing wealth due
to zakah can be explained through its influence on
income, consumption, savings, investment and labor.
Another implication of Zakah is the multiplier effect
to the whole economy (Pramanik, 2002).
ZIS contribute to economic growth both through
aggregate demand and aggregate supply lines. The
combination of ZIS impact on consumption and
investment will boost aggregate demand through the
multiplier effect in the economy, this will lead to an
increase in national income. The purchasing from
ZIS will increase the consumption of the poor,
which would trigger an increase in the production of
goods and services. The increase in production will
The Effect of Islamic Financing, Indonesia Sharia Stock Index(ISSI), and Distribution of Zakah, Infaq and Sadaqah (ZIS) on Economic
Growth in Indonesia
359

certainly drive the economy broadly a demand for
input factors of production such as labor, physical
capital, energy, raw materials and demand for
intermediary input, especially the basic needs of
goods and services which are generally produced by
domestic manufacturers. Application of the ZIS will
also have a positive effect on the savings of the poor
and at the same time giving a neutral impact on the
savings of the rich. Thus, in aggregate, national
savings will increase. The increase of savings will
encourage an increase in investment. The increase in
investment eventually will result an increase
production of goods and services, lower the prices
and increase the real incomes of society
(Mohammed Yusoff, 2010).
3 REVIEW OF THE LITERATURE
Yunan in his research entitled "Analysis of
Factors Affecting Economic Growth in Indonesia"
concluded that GDP of Indonesia GDP will increase
significantly if the banking credit, government
spending and the labor force increased (Yunan,
2009).
Hidayati in her research entitled "Analysis of
Financial Systems Performance Relationship
(Banking and Capital Markets) towards Indonesian
Economic Growth Period 1990-2008". The results
indicate the bi-directional causality or correlation
interplay between economic growth and
development of the volume of bank credit, as well as
a one-way causal relationship between the
development of the stock market capitalization and
economic growth (Hidayati, 2008).
Densumite and Yusoff conducted a study entitled
"Zakah Distribution and Growth in the Federal
Territory of Malaysia". By using Granger causality
test and VECM concluded that Zakah has a long-
term relationship positively to real GDP and
indicates that zakah could boost GDP in the federal
territory of Malaysia both for short term and long
term (Yussof & Densumite, 2012).
Research conducted by Rachmawati and Laila
entitled "The Macroeconomic Factors Affecting
Stock Price Movement in Indonesia Sharia Stock
Index (ISSI) at the Indonesia Stock Exchange (BEI)"
concluded that the exchange rate gives significant
negative effect on ISSI (Racmawati & Laila, 2015).
Research conducted by Noverianto and
Ratnawati, entitled " Analysis of Effectiveness of
Islamic Financing towards GDP of Small and
Medium Enterprises in Indonesia" by the method of
Vector Auto Regression (VAR) concludes that
Islamic financing contributed the most to the
increase in GDP of Small and Medium Enterprises
(Noverianto & Ratnawati, 2014).
Juita, Wardi and Aimon in their study about
"Analysis of the Economic Growth and IHSG in
Indonesia" by using the method of simultaneous
equations. The result concluded that (1) Investment
and exchange are simultaneously significant effect
on economic growth in Indonesia; (2) Exchange
rate, money supply, SBI interest rates and economic
growth are significant effect on IHSG (Juita, Wardi,
& Aimon, 2014).
Research conducted by Hamzah and Syahnur
entitled "The Impact of Productive Zakah on
Poverty Alleviation in North Aceh”. The results of
the study revealed that the provision of productive
zakat in the form of venture capital had a positive
impact and could reduce the poverty rate in North
Aceh Regency by 0.02% (Hamzah & Syahnur,
2013).
Kader, Harun and Suprayitno in their research
entitled "The Impact of Zakah on Aggregate
Consumption in Malaysia" concluded that zakah has
a positive impact on aggregate consumption, but the
effect is only short-run (Suprayitno, Kader, &
Harun, 2013).
Furthermore, Yusoff conducted a study entitled
"Zakah Expenditure, School Enrolment and
Economic Growth in Malaysia" by using panel data
methods. The result concludes that zakah and the
increase of school enrolment are important factor of
economic growth in Malaysia (Yusoff, 2011).
Furkani in his research entitled "Improving
Indonesia's Gross Domestic Product through Zakah
Empowerment" with a qualitative descriptive
approach. The result concluded that zakah can
improve Indonesia's GDP through income,
consumption and production approach (Furkani &
Islam, 2010).
Research conducted by Muttaqiena entitled
"Productive Zakah Optimization as an Effort to
Solve Inequality of Income Distribution" with a
qualitative descriptive approach resulted in the
conclusion that optimizing zakah can increase
aggregate demand, aggregate supply, expanding
employment, improving output and eventually
encourage the social balance (Muttaqiena, 2010).
Yusoff conducted a study entitled "An Analysis
of Zakah Expenditure and Real Output: Theory and
Empirical Evidence". By using a data panel
regression method gives results that zakah
significantly increase production, zakah is a
potential instrument of fiscal policy in stabilizing the
macro-economic conditions (Yusoff, 2010).
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360

Suprayitno’s research, entitled "The Effect of
Zakah on Indonesia Macroeconomic Variables" by
using a simultaneous equation model and the
aggregated data across the province in the year 2000
concluded that the amount of zakah distributed by
BAZ/LAZ in each province gives positive and
significant impact on the increase of aggregate
consumption as well as reducing the number of poor
people in the area (Suprayitno & Si, 2004).
The Model Framework of the research
Figure 2: The Framework Scheme
Islamic financing that emphasize the concept of
asset and production based system where the funds
is used for business purpose may increase capital
investment in the productive sectors of the
economy. Through the financing pattern like that
then the real economy sector and the financial sector
will rise together in a balanced manner, which will
eventually increase the GDP.
Indonesia Sharia Stock Index (ISSI) can role as
driving force for national economy by facilitating
the companies that need funds (emitens) and
investors who have excess funds. So that companies
obtain long term financing that can be used to
increase working capital and production.
Furthermore, investors also gain profit sharing for
the funds invested. This can increase the activity of
the national economy that would contribute to an
increase of GDP.
Distribution of Zakah, Infaq and Sadaqah (ZIS)
can be used for consumptive and productive
activities. ZIS in Indonesia is more widely used for
consumptive activities. ZIS for consumptive
activities contribute to the improvement of both
aspects of consumption in GDP (aggregate demand)
as well as from the aspect of investment (aggregate
supply) through a multiplier effect in the economy.
The purchasing from ZIS will increase the
consumption of the poor, which would trigger an
increase in the production of goods and services.
The increase in production will certainly drive the
economy broadly a demand for input factors of
production such as labor, physical capital, energy,
raw materials and demand for intermediary input,
especially the basic needs of goods and services
which are generally produced by domestic
manufacturers. This will eventually increase the
GDP.
4 METHODOLOGY
The scope of this study to analyse the effect of
Islamic Financing, Indonesia Sharia Stock Index
(ISSI), Zakah, Infaq Zakah and Sadaqah (ZIS) on
Economic Growth. The data used in this research is
secondary data in the form of quarterly time series
with 24 quarters observation period during the first
quarter of 2010 until the fourth quarter of 2015. The
type of secondary data to be processed include GDP
at constant prices in 2010; total Islamic Financing;
Indonesian Islamic stocks total capitalization of
ISSI; total distribution of ZIS. Due to limited data
published of ZIS, the observation period can only be
carried out until 2015. Source of data is obtained
from various official publications, they are BPS,
Bank Indonesia, OJK, and BAZNAS.
This study uses Error Correction Model (ECM)
in order to see the effect of short-run and long-run.
Error Correction Mechanism is the analysis of time
series data is used for variables that have a
dependency that is often referred to cointegration.
ECM method used to balance short-run economic
correlation between variables that have had long-run
economic correlation. Cointegration test between
variables intended to indicate a long-run
correlation/balance of the independent variable on
the dependent variable. However, in the short-run
there is a possibility that an imbalance between these
variables. The imbalance is often encountered in
economic behaviour due to the inability of economic
agents to quickly adjust the changes that occur in the
behaviour of economic variables. Because of this
imbalance, the Error Correction Model mechanism
is used. ECM mechanism using residual/error of
long-run to balance short-run. Error Correction
Model (ECM) dividing equation of mutually-
cointegrated variables into two equations, they are
long-run equation and short-run equation (Nachrowi
& Usman, 2002).
This study uses an ECM Domowittz-Elbadawi
model, it is based on the fact that the economy is in a
state of imbalance. This ECM model assumes that
economic agents will always find that what is
planned is not always the same as reality. This
deviation is likely to occur because of the shock
The Effect of Islamic Financing, Indonesia Sharia Stock Index(ISSI), and Distribution of Zakah, Infaq and Sadaqah (ZIS) on Economic
Growth in Indonesia
361

variable, so the variable Y is not always equilibrium
with X (Widarjono, 2013).
ECM Domowittz-Elbadawi used in this
study is:
∆Y
t
= β
0
+ β
1
∆X
t
+ β
2
X
t-n
+ β
3
ECT
(1)
Changes of Y or ΔY
t
present (t) is affected by
changes in the variables X or ΔX
t
present and
previous changes of variable X (X
t-n
), and also by
errors imbalance or error correction term (ECT).
Equation (1) is ECM model that can be adjusted on
the first difference (
t-1
) or to continue formulate
ECM on a second difference (
t-2
), depending on the
stationary test and cointegration test earlier.
According to this model, the model ECM is valid if
the sign of ECT coefficient is positive and lies
between 0 and 1.
The coefficient β in equation (1) is a short-run
analysis. While the coefficient on the level which is
the level of long-run coefficients (equilibrium) are as
follows:
Y
t
= h
0
+ h
1
X
t
(2)
h
0
= B
0
/B
3
h
1
= (B
2
+B
3
)/B
3
The period of time in variables that have a short-
run balance is adjusted to the time intervals of time
series data observed. While the period of time on a
variable that has a long-run balance is above 5 or 10
years for monthly or quarterly time series data.
The Empirical Model
This study describes the effect of long-run and
short-run between Islamic Financing (IF), Indonesia
Sharia Stock Index (ISSI) and Zakah, Infaq, Sadaqah
(ZIS) on Economic Growth (GDP). The model is
formed into a dynamic model that includes a lag,
known as Model ECM Domowittz-Elbadawi, as
follows:
LnGDP
t
= β
0
+ β
1
DIF
t
+ β
2
DISSI
t
+ β
3
DZIS
t
(3)
+ β
4
IF
t-2
+ β
5
ISSI
t-2
+ β
6
ZIS
t-2
+β
7
ECT
GDP = Gross Domestic Product
IF = Islamic Financing
ISSI = Indonesia Sharia Stock
ZIS = Zakah, Infaq and Sadaqah
β
0
= Constants
β
1
– β
7
= Regression Coefficients
D = Short-run Effect
(t-2) = Long-run balance adjustment or
backward lag operator
ECT = Error Corection Term
In the model above, the changes of IF, ISSI and
ZIS to GDP in the long-run would be offset by ECT.
In the equation DP, DSSI, DZIS describe
'interference' short-run of IF, ISSI and ZIS, and t-2 is
an adjustment to the long-run balance. Thus, if the
coefficient β4, β5, β6 significant, the coefficient will
be the adjustment of the variables were observed
between short-run leading to long run correlations.
5 RESULT AND DISCUSSION
5.1 Result
By discovering there is phenomenon of long-run
relationships to each variable (see Appendix) then
the next step is to approach Error Correction Model
(ECM) to see whether there is any relationship
between variables in the short-run. ECM is an
approach to analyse the time series model that is
used to see consistency between the short-run
relationships with a long-run relationship of the
variables tested. To determine whether the ECM
model is valid or not, the coefficient of Error
Correction Term (ECT) should be significant.
From the results of ECM data processing, Table
2 shows that the ECT coefficient is 0.123450 with
probability 0.0384. The sign is positive and is
between 0 and 1, as well as significant at confidence
level of α 0.05. Therefore, the model of ECM is
valid.
Table 3: The Result of Error Correction Model Test
Dependent Variable: D(GDP)
Method: Least Squares
Sample (adjusted): 2011Q1 2015Q4
Included observations: 20 after adjustments
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
0.062954
0.045841
1.373317
0.0419
D(IF)
1.046657
6.84E-07
1.531159
0.0151
D(ISSI)
8.382811
6.24E-09
1.343751
0.2039
D(ZIS)
0.003856
0.001091
3.534841
0.0041
IF(-2)
3.269057
1.76E-07
1.860594
0.0375
ISSI(-2)
1.699364
4.60E-09
0.369240
0.0284
ZIS(-2)
0.004922
0.001334
3.688057
0.7031
ECT
0.123450
6.06E-09
1.854443
0.0384
R-squared
0.632282
Mean dependent var
0.013373
Adjusted R-
squared
0.417780
S.D. dependent var
0.024549
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362

S.E. of
regression
0.018732
Akaike info criterion
4.827990
Sum squared
resid
0.004211
Schwarz criterion
4.429697
Log
likelihood
56.27990
Hannan-Quinn criter.
4.750239
F-statistic
2.947670
Durbin-Watson stat
2.438460
Prob(F-
statistic)
0.048234
The coefficient of ECT also indicates that the
difference between the actual values of current GDP
with short-run equilibrium value of 0.123450 will be
adjusted within 3 months. It is adapted to the
interval period of the observed time series data.
Furthermore, the amount of long-run regression
coefficients are as follows:
Table 4: The Result of ECM Coefficient Calculation
Variable
Symbol
Coefficient
Short-run
Long-run
Constants
C
0.062954
0.50995545
Islamic
Financing
IF
1.046657
27.4808181
Indonesia
Sharia Stock
ISSI
8.382811
14.7656055
Zakah,
Infaq,
Sadaqah
ZIS
0.003856
1.0387039
Based on Table 4, the ECM regression equation
in the short-run and long-run are as follows:
D(GDP)=0.062954+1.046657D(IF)+8.3828
11D(ISSI)+0.003856D(ZIS)+27.
4808181IF(
-2
) +14.7656055ISSI(
-
2
)+1.0387039ZIS(
-2
) + 0.123450
ECT
(4)
Short-run constant value of 0.062954 indicates if
the value of the independent variables constant, the
amount of revenue for the short-run GDP increased
by 0.062954 percent. Long-run constant value of
0.50995545 indicates if the value of the independent
variables constant, the amount of revenue for long-
run GDP increased by 0.50995545 percent.
5.1.1 The Effect of Islamic Financing on
GDP
Short-run : The coefficient of D(IF) is 1.046657
with a probability 0.0151 which means significant at
α 0.05 implies that there is a short-run equilibrium
correlation between variables Islamic Financing and
GDP, where the increase of one percent Islamic
Financing will affect to GDP in the short-run by
1.046 657 percent within 3 months.
Long-run : From the calculation of the ECM
coefficient on IF (
-2
), the results 27.4808181 with the
probability 0.0375 which has been significant at α
0.05. This implies that there is a long-run
relationship between the variables Islamic Financing
and GDP, which if Islamic Financing increased by
one percent will increase long-run GDP by 27,
4808181 percent within a period of 10 years.
Thus, there are significant short-run and long-
run. In other words, there is consistency or the
balance between short-run leading to long-run
correlations of variables Islamic Financing and
GDP. Where in the long-run Islamic Financing gives
significant positive effect on GDP.
5.1.2 The Effect of Indonesia Sharia Stock
Index (ISSI) on GDP
Short-run : The coefficient of D (ISSI) is
8.382811 with a probability 0.2039 which means the
probability is not significant at α 0.05 implies that
there are no short-run equilibrium correlation
between variables ISSI and GDP.
Long-run : From the calculation of the ECM
coefficient on ISSI (-
2
), the results 14.7656055 with
the probability 0.0284 which has been significant at
α 0.05. This implies that there is a long-run
relationship between the variables ISSI and GDP,
which if ISSI increased by one percent will increase
long-run GDP by 14.7656055 percent within 10
years.
Thus there is only long-run effect between
variables ISSI and GDP. Where ISSI gives
significant positive effect on GDP in the long-run.
5.1.3 The Effect of Distribution of Zakah,
Infaq and Sadaqah on GDP
Short-run: The coefficient of D (ZIS) is
0.003856 with a probability 0.0041, which means
significant at α 0.05 implies that there is a short-run
equilibrium relationship between variables ZIS and
GDP, where the increase of one percent Zakah,
Infaq and Sadaqah will affect to GDP in the short-
run by 0.003856 percent within 3 months.
Long-run: From the calculation of the ECM
coefficient of ECM on ZIS (
-2
), the results
1.03987039 with probability 0.7031 which means
not significant at α 0.05. This implies that there are
The Effect of Islamic Financing, Indonesia Sharia Stock Index(ISSI), and Distribution of Zakah, Infaq and Sadaqah (ZIS) on Economic
Growth in Indonesia
363

no long-run relationship between the variables of
Zakah, Infaq and Sadaqah on GDP.
Thus, there is only short-run effect between
variables ZIS and GDP. Where in the short-run
Zakah, Infaq and Sadaqah gives significant positive
effect on GDP.
5.2 Discussion
Islamic Financing gives significant positive
effect both in short-run and long-run on economic
growth. This means if Islamic Financing increases
both in the short-run and long-run, the economic
growth will also increase, and vice versa, if there is a
decrease on the Islamic Financing, the economic
growth will decline. This is consistent with the
theory of The Growth-Led Finance Hypothesis by
(Robinson, 2003), which states entrepreneurial
activity encourages the growth of the financial
sector, followed by a rise in economic growth. This
results are consistent with the results of (Habibullah
& Eng, 2006) which concluded that the financing in
Islamic banking is more positive impact on the
growth of the real sector in Malaysia, Myanmar and
Nepal. This results are also consistent with research
conducted by (Noverianto & Ratnawati,
2014),(Yunan, 2009) and (Hidayati, 2008) which
concluded that the Islamic and conventional
financing contributed to revenue growth of small
and medium enterprises (SMEs) and the economy.
ISSI or Indonesia Sharia Stock Index is not
significantly affect on economic growth in the short-
run. This means that the increase or decrease in the
short-run of ISSI does not give any effect on
economic growth in the short-run, while in the long-
run there is an effect on economic growth. This
means that if buying and selling of ISSI increased in
a long-run, economic growth will rise, and vice
versa, if the buying and selling of ISSI decline,
economic growth will decline as well. ISSI can
contribute to economic growth due to the emitens
that have listed their shares on Indonesia Stock
Exchange obtain substantial funding from investors
who are interested to invest in these companies. This
fund is an alternative to long run funding that is
sufficient to increase company productivity and to
improve the company's operations. The results are
consistent with the theory of economic growth stated
by many economist. Harrod-Domar, Solow and
Romer agreed that investment has a very important
role in increasing productivity, especially affecting
on economic growth for the long-run.
The distribution of Zakah, Infaq and Sadaqah
(ZIS) gives a significant positive effect on economic
growth only in the short-run, although the effect is
not as big as on the Islamic Financing and ISSI. If
the distribution of ZIS increases in the short-run then
economic growth will also increase, and vice versa,
a decrease in the distribution of ZIS will affect the
decline of economic growth in the short-run. While
in the long-run ZIS does not effect on economic
growth. Distribution of ZIS is divided into two: for
consumptive and productive activities. They have an
impact on both aggregate demand and aggregate
supply, so the ZIS has a multiplier effect in the
economy. Consumptive activities from distribution
of ZIS effect on economic growth in the short-run
through aggregate demand, while productive
activities from distribution of ZIS effect on
economic growth in the medium to long-run through
aggregate supply. In this study, ZIS effect in the
short-run due to the distribution of ZIS in Indonesia
are mostly used for consumptive activities, so that
the mechanism of multiplier effect in increasing the
economic growth is effectively limited to only short-
run. The result of this study is not consistent with the
research of (Yussof & Densumite, 2012) that zakah
has a positive long-run correlation on real GDP. Yet,
this study is consistent with the research of
(Suprayitno et al., 2013) that the distribution of
zakah only has small influence in short-run. This
research is also in accordance with the theory
presented by Mark Skousen in (Yusoff, 2010) and
(Pramanik, 2002) that ZIS has a multiplier effect in
the economy.
6 CONCLUSION
The positive and significant effect of Islamic
Financing on the economic growth both in the short-
run and long-run, so it is suggested that Islamic
banks keep continuing to improve its performance
on funding, so that the contribution of Islamic
banking to economic growth is more obvious and
noticeable.
The positive effect of Indonesia Sharia Stock
Index on economic growth in the long-run shows
that ISSI is an alternative to long-term funding, so it
is suggested that IDX–as an intermediary for Islamic
stock exchange–collaborates with DPS and DSN-
MUI need to increase socialization to community
regarding to investment in Islamic stock exchange.
The more emitens included in ISSI, the more
investors to join. Thus, ISSI can be a driving force
for national economic growth.
There is an interesting finding that zakah does
not give effect on economic growth in the long run,
SEABC 2018 - 4th Sriwijaya Economics, Accounting, and Business Conference
364

whereas the major population of Indonesia is
Muslim. It means the awareness to pay zakah still
needs to be improved. Another factor is because
most mustahik uses ZIS as consumptive zakah. This
means Badan Amil Zakat Nasional (BAZNAS) as an
official institution which is authorized by the
government to collect and distribute ZIS has a big
task to increase the potential and distribution of ZIS
in Indonesia, because the effect will be great on
economic growth. BAZNAS should be actively
socialize and establish BAZNAS provincial,
district/city and Lembaga Amil Zakat (LAZ), as well
as disseminate to the Muslim in Indonesia to
distribute ZIS through BAZNAS or LAZ.
It is suggested that BAZNAS and LAS should
perform actively on fundraiser of ZIS and promoting
the utilization productive zakah for mustahik, so the
effect on economic growth is greater. It is can be
done by innovation and creativity through unique
programs to attract muzakki, IT infrastructure
support, an excellence management of ZIS, a
transparent and accountable of ZIS financial reports,
the bureaucratic system, administrative system,
monitoring and regulation system which is able to
ensure the management of ZIS funds is entirely for
the benefit of the people (ummat).
There are three pillars of the sector should be
built so that the economy is getting stronger and
growing. They are the real sector; financial sector
and zakah, infaq, sadaqah and waqaf sectors. The
inequality one of these three sectors will hamper the
entire economic development. It would be better if
the government could create an Islamic economic
national committee to connect these sectors, so that
the economy in Indonesia is becoming increasingly
strong. This committee is expected to provide
direction for the development of economic and
Islamic finance in Indonesia, so that all sectors of
the economy and Islamic finance can be integrated
and connected to one another.
Due to the limited data available, future research
is suggested to be able to extend the observation
period, especially on ZIS and ISSI. Further, the data
coverage can be added to ZISWAF (Zakah, Infaq,
Sadaqah and Waqaf) because the discussion on
ZISWAF and ISSI from a macroeconomic
perspective is still rare.
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APPENDIX
Stationarity Test (Unit Root Test)
Based on the table of ADF Unit Root Test, it can be
seen that almost all data (at Current Level) are not
stationary, except for the ZIS. So it can be concluded
that there are unit root problems on variables at the
Current Level (the original data), so the data needs
to go to next level of Degree of Integration Test on
the first or second difference.
Table of Unit Root Test (Augmented Dickey-Fuller)
on Current Level
Varia
ble
ADF test
ADF Mc.
Kinnon
CV 5%
Probabil
ity <
0.05
Explanati
on
GDP
-1.296877
-2.998064
0.6130
Not
Stationary
IF
-1.497554
-3.004861
0.5161
Not
Stationary
ISSI
-1.361096
-2.998064
0.0051
Not
Stationary
ZIS
-3.240607
-2.998064
0.0304
Stationary
Degree of Integration Test
Based on the table of ADF Unit Root Test on
First Difference, it can be seen that variable GDP,
ISSI and ZIS are stationary. It is proved by the
absolute value of the ADF test is greater than Mc.
Kinnon Critical Value 5% and also the probability is
less than 0.05. However, the variable IF is not
stationary, because the absolute value of the ADF
test is smaller than Mc. Kinnon Critical Value 5%
and the probability is greater than 0.05.
Table of Unit Root Test (Augmented Dickey-Fuller)
on First Difference
Varia
ble
ADF test
ADF Mc.
Kinnon
CV 5%
Probab
ility <
0.05
Explanati
on
GDP
-14.21517
-3.012363
0.0000
Stationary
IF
-2.102834
-3.004861
0.2454
Not
Stationary
ISSI
-3.582688
-3.004861
0.0150
Stationary
ZIS
-9.233006
-2.91263
0.0000
Stationary
The conclusion of the data processed that H
0
is
accepted, because variable IF is not stationary at the
level of the first difference, so it needs to go to the
next level (Second Difference).
Table of Unit Root Test (Augmented Dickey-Fuller)
on Second Difference
Varia
ble
ADF test
ADF Mc.
Kinnon
CV 5%
Probab
ility <
0.05
Explanati
on
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366

GDP
-10.14272
-3.020686
0.0000
Stationary
IF
-5.738628
-3.012363
0.0001
Stationary
ISSI
-4.636657
-3.020686
0.0017
Stationary
ZIS
-10.61563
-3.020686
0.0000
Stationary
Based on the table of ADF Unit Root Test on
Second Difference, it can be seen that all variables
are stationary. It is proved by the absolute value of
the ADF test is greater than Mc. Kinnon Critical
Value 5% and also the probability is less than 0.05.
The conclusion of the data processed that H
0
is
rejected which all variables are stationary at the
Second Difference, so the test can go to the next test.
It is Cointegration Test.
Cointegration Test
This Cointegration Test is to see long-run correlation
from the model. In this study used the method of
Engle-Granger cointegration.
Table of Cointegration Test
Null Hypothesis: D(RESIDCOINTEGRATION,2)
has a unit root
Exogenous: Constant
Lag Length: 1 (Automatic - based on SIC,
maxlag=1)
t-Statistic
Prob.*
Augmented Dickey-Fuller test
statistic
-7.385041
0.0000
Test critical
values:
1% level
-3.808546
5% level
-3.020686
10% level
-2.650413
*MacKinnon (1996) one-sided p-values.
Cointegration Test shows that the absolute
value of the ADF test > Critical Value 5% .
It is│-7.385041 │> │-3.020686│, with a
probability of 0.0000 so H
0
is rejected. This means
the residual of the equation has been stationary on
the second degree of integration. So that each
variable is cointegrated, in other words, there are
indications of long-run correlations.
The indication of long-run correlations cannot
be used as evidence that there is an equilibrium
correlation between the variables in the short-run
and to determine which variable cause changes in
another variable, then using Error Correction Model.
The Effect of Islamic Financing, Indonesia Sharia Stock Index(ISSI), and Distribution of Zakah, Infaq and Sadaqah (ZIS) on Economic
Growth in Indonesia
367