The Impact of MSMEs Financing in Islamic Bank on Unemployment in Indonesia
Authors: Mohammad Zen Nasrudin Fajri  , Rofiqo Azidni , Rizqon Abdul Latif , ` Raditya Hasan 
Published: October 2023

ABSTRACT
One of the contributions of the Islamic banking sector to Indonesia’s economy is channeling funds to MSMEs in the form of financing since a number of them could not access financial services. Interestingly, the MSMEs grew as the Islamic Banking sector rose. However, no single study analyzes such an impact on unemployment in both rural and urban areas. This paper aimed to reveal the effect of MSMEs financing in Islamic banks on unemployment in Indonesia. It further aimed to discover such an effect on unemployment in Indonesia's urban and rural areas separately. Dynamic panel GMM two-step analysis is used in this research to estimate cross-province data in Indonesia between 2010 and 2019. The results of the study reveal that MSMEs financing in Islamic Banks contributed significantly to the reduction of unemployment in Indonesia as a whole. It is also found that the unemployment in urban areas is reduced by MSMEs financing in Islamic Banks. On the other hand, there is no significant relationship between MSMEs financing in Islamic Banks and unemployment in rural areas. These findings can be the basis for Islamic banks to increase MSMEs financing and for the government to expand Islamic banks' role in every part of Indonesia to reduce unemployment, especially in rural areas.
Keywords: MSMEs Financing, Islamic Bank, Unemployment, Urban, Rural.

ABSTRAK
Salah satu kontribusi sektor perbankan syariah dalam perekonomian Indonesia adalah penyaluran dana kepada UMKM dalam bentuk pembiayaan, karena beberapa dari mereka tidak dapat mengakses layanan keuangan. Menariknya, UMKM tumbuh seiring dengan bangkitnya sektor Perbankan Syariah. Namun, tidak ada satu studi pun yang menganalisis dampak tersebut terhadap pengangguran di pedesaan dan perkotaan. Penelitian ini bertujuan untuk mengungkap pengaruh pembiayaan UMKM di bank syariah terhadap pengangguran di Indonesia. Hal ini bertujuan untuk mengetahui lebih jauh pengaruh tersebut terhadap pengangguran di daerah perkotaan dan pedesaan secara terpisah di Indonesia. Analisis dua langkah GMM panel dinamis digunakan untuk mengestimasi data lintas provinsi di Indonesia antara tahun 2010 dan 2019. Hasilnya mengungkapkan bahwa pembiayaan UMKM di Bank Syariah berkontribusi signifikan terhadap pengurangan pengangguran di Indonesia secara keseluruhan. Ditemukan juga bahwa pengangguran di perkotaan berkurang dengan pembiayaan UMKM di Bank Syariah. Di sisi lain, tidak ada hubungan yang signifikan antara pembiayaan UMKM di bank syariah dengan pengangguran di pedesaan. Hasil penelitian ini dapat menjadi dasar bagi bank-bank syariah dalam meningkatkan porsi pembiayaan UMKM dan dasar bagi pemerintah untuk memperluas peran perbankan syariah di seluruh bagian Indonesia untuk mengurangi pengangguran, khususnya di area pedesaan.
Kata Kunci: Pembiayaan UMKM, Bank Syariah, Pengangguran, Perkotaan, Pedesaan.

REFERENCES
Abisuga-Oyekunle, O. A., Patra, S. K., & Muchie, M. (2020). SMEs in sustainable development: Their role in poverty reduction and employment generation in sub-Saharan Africa. African Journal of Science, Technology, Innovation and Development, 12(4), 405–419. doi:10.1080/20421338.2019.1656428
Alaabed, A., Masih, M., & Mirakhor, A. (2016). Investigating risk shifting in Islamic banks in the dual banking systems of OIC member countries: An application of two-step dynamic GMM. Risk Management, 18(4), 236–263. doi:10.1057/s41283-016-0007-3
Almula-Dhanoon, M., Dhannoon, M. A. M., Al-Salman, M. M., & Hammadi, M. F. (2020). Do FDI and domestic investment affect unemployment in MENA countries? Dynamic panel data analysis. Journal of Contemporary Iraq and the Arab World, 14(3), 223–236. doi:10.1386/jciaw_00031_1
Apergis, N., & Ozturk, I. (2015). Testing environmental Kuznets curve hypothesis in Asian countries. Ecological Indicators, 52, 16–22. doi:10.1016/j.ecolind.2014.11.026
Arslan, M., & Zaman, R. (2014). Unemployment and its determinant: A study of Pakistan economy (1999-2010). Journal of Economics and Sustainable Development, 5(13), 20–25.
Ayyagari, M., Demirguc-Kunt, A., & Maksimovic, V. (2011). Small vs. young firms across the world: contribution to employment, job creation, and growth. World Bank Policy Research Working Paper Series, 1–57. doi:10.1596/1813-9450-5631
Azolibe, C. B., Dimnwobi, S. K., & Uzochukwu-Obi, C. P. (2022). The determinants of unemployment rate in developing economies: does banking system credit matter? Journal of Economic and Administrative Sciences. doi:10.1108/jeas-01-2022-0021
Baumol, W. J., Litan, R. E., Schramm, C. J., & Strom, R. J. (2011). Innovative entrepreneurship and policy: Toward initiation and preservation of growth. The Economics of Small Businesses, 3–23. doi:10.1007/978-3-7908-2623-4_1
Bayrak, R., & Tatli, H. (2018). The determinants of youth unemployment: A panel data analysis of OECD countries. The European Journal of Comparative Economics, 15(2), 231–248. doi:10.25428/1824-2979/201802-231-248
Benbekhti, S. E., Boulila, H., & Bouteldja, A. (2021). Islamic finance, small and medium enterprises and job creation in Turkey: An empirical evidence (2009-2017). International Journal of Islamic Economics and Finance (IJIEF), 4, 41-62. doi:10.18196/ijief.v4i0.10490
Blanchflower, D. G., & Meyer, B. D. (1994). A longitudinal analysis of the young self-employed in Australia and the United States. Small Business Economics, 6(1), 1–19. doi:10.1007/BF01066108
Badan Pusat Statistik/BPS. (2021). Keadaan angkatan kerja di Indonesia. Retrieved from https://www.bps.go.id/publication/2021/12/07/ee355feea591c3b6841d361b/keadaan-angkatan-kerja-di-indonesia-agustus-2021.html
Chapra, M. U. (2011). The global financial crisis: Can Islamic finance help? In: Langton, J., Trullols, C., Turkistani, A.Q. (eds) Islamic Economics and Finance (pp. 135-132). London: IE Business Publishing. doi:10.1057/9780230361133_5
Dusuki, A. W. (2008). Banking for the poor: The role of Islamic banking in microfinance initiatives. Humanomics, 24(1), 49–66. doi:10.1108/08288660810851469
Edmiston, K. D. (2007). The role of small and large businesses in economic development. SSRN Electronic Journal, 73-97. doi:10.2139/ssrn.993821
Elasrag, H. (2016). Islamic Finance for SMES. SSRN Electronic Journal. doi:10.2139/ssrn.2842160
Faggio, G., & Silva, O. (2014). Self-employment and entrepreneurship in urban and rural labour markets. Journal of Urban Economics, 84, 67–85. doi:10.1016/j.jue.2014.09.001
Fajri, M. Z. N., Muhammad, A. A., Umam, K., Putri, L. P., & Ramadhan, M. A. (2022). The effect covid-19 and sectoral financing on Islamic bank profitability in Indonesia. Journal of Islamic Economic Laws, 5(1), 38–60. doi:10.23917/jisel.v5i1.17181
Feldmann, H. (2012). Banking deregulation around the world, 1970s to 2000s: The impact on unemployment. International Review of Economics and Finance, 24, 26–42. doi:10.1016/j.iref.2012.01.003
Folawewo, A. O., & Adeboje, O. M. (2017). Macroeconomic determinants of unemployment: Empirical evidence from economic community of West African States. African Development Review, 29(2), 197–210. doi:10.1111/1467-8268.12250
Göçer, İ. (2013). Relation between bank loans and unemployment in the European Countries. Europan Academic Research, 1(6), 981-995.
Hassanein, A., & Mostafa, M. M. (2023). Bibliometric network analysis of thirty years of Islamic banking and finance scholarly research. Quality and Quantity, 57(3), 1961–1989. Doi:10.1007/s11135-022-01453-2
Kayed, R. N., & Hassan, M. K. (2011). The global financial crisis and Islamic finance. Thunderbird International Business Review, 53(5), 551–564. doi:10.1002/tie.20434
Khairina, N. N., Syarief, M. E., & Setiawan. (2020). Peran perbankan Syariah dalam penyerapan tenaga kerja pada sektor riil. Human Falah: Jurnal Ekonomi dan Bisnis Islam, 7(1), 117–137. doi:10.30829/hf.v7il.6812
Kongolo, M. (2019). Job creation versus job shedding and the role of SMEs in economic development. Global Journal of Business Management, 13(7), 1–8.
Lyu, H., Dong, Z., Roobavannan, M., Kandasamy, J., & Pande, S. (2019). Rural unemployment pushes migrants to urban areas in Jiangsu Province, China. Palgrave Communications, 5(1). doi:10.1057/s41599-019-0302-1
Manser, M. E., & Picot, G. (1999). The role of self-employment in U.S. and Canadian job growth. Monthly Labor Review, 122(4), 10–23.
Mucuk, M., & Demirsel, M. T. (2013). The effect of foreign direct investments on unemployment: Evidence from panel data for seven developing countries. Journal of Business, Economics & Finance, 2(3), 53–66.
Mumani, H. F. (2014). Islamic finance for SMEs in Jordan. Thesis of Master of Science in Banking and Finance, Eastern Mediterranean University.
Nasr, S., & Rostom, A. M. (2013). SME contributions to employment, job creation, and growth in the Arab World. Policy Research Working Paper. doi:10.2139/ssrn.2361164
Neumark, D., Wall, B., & Zhang, J. (2011). Do small businesses create more jobs? New evidence for the United States from the National Establishment Time Series. The Review of Economics and Statistics, 93(1), 16–29. doi:10.1162/REST_a_00060
Oyelana, A. A., & Adu, E. O. (2015). Small and medium enterprises (SMEs) as a means of creating employment and poverty reduction in fort beaufort, Eastern Cape Province of South Africa. Journal of Social Sciences, 45(1), 8–15. doi:10.1080/09718923.2015.11893481
Ritsilä, J., & Tervo, H. (2002). Effects of unemployment on new firm formation: Micro-level panel data evidence from Finland. Small Business Economics, 19(1), 31–40. doi:10.1023/A:1015734424259
Roodman, D. (2009). How to do xtabond2: An introduction to difference and system GMM in Stata. Stata Journal, 9(1), 86–136. doi:10.1177/1536867x0900900106
Saifurrahman, A., & Kassim, S. (2021). Islamic financial literacy for Indonesian MSMEs during COVID-19 Pandemic: Issues and importance. Journal of Islamic Finance, 10(1), 45–60.
Shabbir, G., Anwar, S., Hussain, Z., & Imran, M. (2011). Contribution of financial sector development in reducing unemployment in Pakistan. International Journal of Economics and Finance, 4(1), 260-268. doi:10.5539/ijef.v4n1p260
Sherif, S. (2013). Macroeconomic policy, localization and reducing unemployment: The crucial human resource issues for the UAE. Competitiveness Review, 23(2), 158–174. doi: /10.1108/10595421311305352
Siddiqui, D. A., & Ahmed, Q. M. (2013). The effect of institutions on economic growth: A global analysis based on GMM dynamic panel estimation. Structural Change and Economic Dynamics, 24, 18–33. doi:10.1016/j.strueco.2012.12.001
Singh, R. (2018). The cause of unemployment in current market scenario. Vivechan International Journal of Research 9(1), 81-86.
Startiene, G., & Remeikiene, R. (2009). The influence of demographical factors on the interaction between entrepreneurship and unemployment. Inžinerinė Ekonomika, 4, 60–70.
Syed, A. A. S. G., Shah, N., Shaikh, K. H., Ahmadani, M. M., & Shaikh, F. M. (2012). Impact of SMEs on employment in textile industry of Pakistan. Asian Social Science, 8(4), 131–142. doi:10.5539/ass.v8n4p131
Thurik, A. R., Carree, M. A., van Stel, A., & Audretsch, D. B. (2008). Does self-employment reduce unemployment? Journal of Business Venturing, 23(6), 673–686. doi:10.1016/j.jbusvent.2008.01.007