Islamic Financial Inclusion and Human Development in Indonesia: Constructing an Islamic Financial Inclusion Index and Evidence from Long-Run Time Series Analysis

Fikram Rasyad; Lintang Pertiwi Abadi; Syifa Yumi Adhali

doi:10.35878/jiose.v5i2.2357

Fikram Rasyad Universitas Islam Negeri Sunan Gunung Djati Bandung
Lintang Pertiwi Abadi Universitas Islam Negeri Sunan Gunung Djati Bandung
Syifa Yumi Adhali Universitas Islam Negeri Sunan Gunung Djati Bandung

DOI: https://doi.org/10.35878/jiose.v5i2.2357

Keywords: Islamic Financial Inclusion Index, Human Development Index, FMOLS, Time Series, Indonesia

Abstract

This study analyzes the effect of the Islamic Financial Inclusion Index (IFII) on the Human Development Index (HDI) in Indonesia from January 2013 to December 2024 using a time series econometric approach. The IFII was constructed using the Sarma (2008) method, integrating the dimensions of availability, penetration/accessibility, and Islamic financial services availability. Two estimation methods were employed: Ordinary Least Squares (OLS) as the baseline model and Fully Modified Ordinary Least Squares (FMOLS) as the main estimator for long-run relationships, controlling for Trade Openness, Inflation, Gini Ratio, Regulatory Quality, and a COVID-19 dummy. The Augmented Dickey-Fuller test confirmed that all variables are integrated at order I(1), while the Johansen cointegration test identified seven long-run cointegrating equations. The OLS model exhibited heteroskedasticity and autocorrelation, reinforcing the suitability of FMOLS. The FMOLS results show that IFII has a positive and significant effect on HDI, as do Regulatory Quality and the COVID-19 dummy (negative effect), while Trade Openness and Inflation are not significant. These findings suggest that Islamic financial inclusion should be integrated into national human development policy.

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