The Role of Banks in Income Disparity Reduction in Indonesia: Islamic vs. Conventional Banks

This study aims to analyze the effect of Islamic and conventional banking in reducing income disparity in Indonesia. Based on the test using ARDL model, this study found two primary results. First, variables in Islamic banking such as total financing and third-party funds significantly reduce income disparity both in the long run and short run, while variables such as non-performing financing, and return on assets, contribute in the short run only. Second, variables in conventional banking such as total credit, non-performing loans, and third-party funds have a significant long-run impact on income disparity reduction, whereas all conventional banking variables significantly reduce income disparity in short run. The study's results have profound implications. Islamic banking institutions should strategically utilize their core principles to promote inclusion and effectively respond to the evolving requirements of society. Conventional banking institutions have the capacity to include socially responsible activities in order to achieve equitable outcomes. Finally, policymakers should foster a diverse financial sector, supporting Islamic banking growth and encouraging conventional banks to prioritize fairness. This approach aligns with Indonesia's socio-economic goals for a balanced financial landscape.