Role of Islamic Banking and Conventional Against Poverty with The Dual Banking System

Abstract

Islamic banking in Indonesia is present in a dual banking system. Islamic banking is expected to contribute more in the process of economic development and improving people’s welfare. The main objective of this study is to analyze the role of financing Islamic banking and conventional banking credit to the improvement of people’s welfare as measured by reductions in poverty. The study was conducted using the explanatory method, applying the panel regression estimation techniques simultaneously with the Two Stage Least Square method (TSLS) using data from the period 1992-2012. Results of the study reveals that the increased of financing Islamic banking and conventional banking credit assign roles to poverty reduction in Indonesia. The role of Islamic banking financing is lower than conventional bank credit role in reducing poverty. In addition to improve financing and credit, changes should be applied in the value of the instruments of monetary policy, economic growth, unequal distribution of income and the depreciation of the local currency that contribute towards poverty conditions.