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Advances in Social Sciences Research Journal – Vol. 10, No. 7
Publication Date: July 25, 2023
DOI:10.14738/assrj.107.15088
Febrianti, I. R., Hakim, L., & Rahayu, S. A. T. (2023). An Analysis of Finance and Banking Development to Indonesia Economic Growth
(Montly Production Index): VECM. Advances in Social Sciences Research Journal, 10(7). 217-228.
Services for Science and Education – United Kingdom
An Analysis of Finance and Banking Development to Indonesia
Economic Growth (Montly Production Index): VECM
Ika Rahma Febrianti
Sebelas Maret University, Road Ir. Sutami No.36,
Kentingan, Jebres, Surakarta City 57126, Indonesia
Lukman Hakim
Sebelas Maret University, Road Ir. Sutami No.36,
Kentingan, Jebres, Surakarta City 57126, Indonesia
Siti Aisyah Tri Rahayu
Sebelas Maret University, Road Ir. Sutami No.36,
Kentingan, Jebres, Surakarta City 57126, Indonesia
ABSTRACT
Sustainability of finance growth is supported by a good finance system. Finance
inovasion eases user with more efficient service. Referring to some economic
literatures, it has been found that there are different perspectives between the
relationships of finance development and economic growth. In responding to those
phenomena, this research aims to investigate the influence of the total credit from
conventional banks, the total credit of micro small dan medium enterprises, the
amount of debit or ATM transaction and the amount of electronic transaction to the
Indonesia electronic growth either in a short term or in a long term. The data that
is used in this research are monthly time series from January 2015 to March 2022
by using sample from 87 months. The used method is qualitative descriptive by
using Vector Error Correction Model and the result shows that in a long term, total
credit from conventional bank has a significant impact for the economic growth,
while the transaction amount through ATM/debit tends to have negative impact for
the economic growth. Independent variables are significant and able to explain the
dependent variables as much as 68% and the remaining 32% are influenced by
other variables that are not used in this research.
Keywords: finance, monthly production index, economic growth, and VECM
INTRODUCTION
The finance system, which works properly, is considered as one of the main foundations for
sustainabily economic development (Kunt in Bist, 2018). Referring to some economic
literatures, it has been found that there are different perspectives between the relationships of
finance development and economic growth. The first perspective comes from Scumperter who
argued that a finance development is substantial for an economic development (Bist, 2018).
The results from similar research were also showed by other researchers nowadays (Durusu- ciftci et al., 2016), such as them in Australia, Canada, Denmark, Germany, Malaysia, Portugal,
and Thailand. Appearantly, there is long term cointegration between a finance development
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Advances in Social Sciences Research Journal (ASSRJ) Vol. 10, Issue 7, July-2023
Services for Science and Education – United Kingdom
and an economic growth in low-income countries. The development of finance is proxied by
credit into provate sectors which have some positive impacts and significant for the economic
growth (Bist, 2018). A finance system development can be defined as the development of
measurement, efficiency, market stability that align with the increase of access to the finance
market that can give double benefit for economy. For instance, a good growing finance market
will be able to distribute economic saving for beneficial investment (Stiglitz et al dalam Guru,
2019: 3), to reduce information cost in order to gain a better capital allocation (Greenwood et
al dalam Guru, 2019: 3) and to reduce the management company cost (Bencivenga dalam Guru,
2019: 3). Moreover, a sophisticated financial intermediary is able to improve the technology
innovation by giving some achievements for businessmen (King et al dalam Guru, 2019: 3). A
research conducted by Guru et al (2019) in BRICS, Ibrahim & Alagidede (2018) in 29 Africa sub
saharan countries and Olilingo et al (2020) in Indonesia.
The second perspective comes from a neo classic group that believes that finance is not the only
element of economic growth (Lucas dalam Bist, 2018). It was proved by the research results
that were conducted by Chow et al., (2017) in all provinces in China and Kerimov, (2021) in
Ukraine. The result showed that credit brings negative impacts for economic growth.
The perception of the traditional economy about innovation growth is finance innovation can
boost the product quality and finance (McGuire dalam Qamruzzamanand & Jianguo, 2017: 5).
Beside that, finance department efficiency will affect the development of finance through a
better payment mechanism which will be able to stimulate national and international trade
(Sabandi dalam Qamruzzamanand & Jianguo, 2017: 5). Innovation, in this context, does not only
consider the creation of a new thing, but it also includes some enhancement for economic issues
in a long term period (Kotsemir in Qamruzzamanand & Jianguo, 2017: 5). Schumpeter (1912)
demonstrate that innovation can happen in a new form of product, process, market, raw
material, distribution method, or even organization structure. That finance system
development then becomes a key to carry out finance efficiency with economic growth
(Qamruzzamanand & Jianguo, 2017: 5). Besides accelerating the process of finance
development, an innovation in finance sector can support the capital accumulation as well. By
the end, this innovation will determine sustainable economic growth, either in the short term
or in the long term. In contrast with that belief, another research results showed that there is a
negative relation between the electronic transaction and the economic growth such as stated in
the research of Suresha et al (2019) in India and Wulandari et al (2020) in Indonesia. After all,
starting from those beliefs, this research focuses on the investigation of the credit access
influence given by conventional banks and the electronic payment system to Indonesia
economic growth.
Economic development in a country can be seen from its economic growth. An economic growth
is a benchmark for a country to see whether the government policy was reached or not
(Wulandari et al., 2020). It is obvious that the main priority for the growth, such as physical
accumulation and human resources, technology development and innovative projects, need an
efficient finance intermediation that can be developed well. (Š kare & Šinkovic , 2019).
In a decade, in Indonesia, some varied finance systems have been launched, mainly in banking
sectors, such as the launching of the different payment products by using card, mobile banking,
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Febrianti, I. R., Hakim, L., & Rahayu, S. A. T. (2023). An Analysis of Finance and Banking Development to Indonesia Economic Growth (Montly
Production Index): VECM. Advances in Social Sciences Research Journal, 10(7). 217-228.
URL: http://dx.doi.org/10.14738/assrj.107.15088
a particular payment option to promote entrepreneurship, internet banking, agent banking and
the form of non-bank finance institutions to support institution credit for investment.
Innovation in the finance sector does not only accelerate the process of finance development, it
also helps capital accumulation. A technology innovation, which is by the end, will be directed
to the sustainability of economic growth either in the short term or in the long term. (Chou et
al dalam (Qamruzzamanand, 2017: 2)
The needs of electronic payments from the society which can be expected for its preciseness, its
speed, and its safety for every transaction and technology development will lead to the creation
of electronic payment. From its history, payment tools have experienced some development in
its forms. Štarted from the metal shape, paper conventional money, to digital currency (Adiyanti
dalam Achir & Kusumaningrum, 2021).
THEORETICAL FOUNDATION
Relationship between Total Credit in Conventional Banks and The Economic Growth (Monthly
Production Index)
The theory of Keynes money supply stated that the amount of money that are circulating in a
society is able to be applied in banking. In this case, the offered product in credit is money. Thus,
a credit given by a bank is the same as money that is given to the debtor in order to be used for
capital to increase the economy. Money that is circulating in society is controlled by the
government, central bank, conventional banks, and society itself (Yuda et al dalam Permana &
Mulyati, 2021).
Relationship between Total Credit of Micro Small and Medium Enterprises and the Index of
Economic Growth (Monthly Production Index)
Schumperter theory emphasizes the importance of the entrepreneur roles in realizing
economic growth. Entrepreneurs are regarded as a group that will continuously create some
changes and innovation in economic activity.
Hubungan antara Jumlah Transaksi Debit dengan Pertumbuhan Ekonomi (Indeks Produksi
Bulanan)
Technology plays an important role in economic growth as a support. The technology of
electronic payment influences economic stability, especially in the financial sector. It also
influences economic growth entirely ( Kumari dalam Wulandari et al., 2020).
Relationship between Number of Electronic Transactions and Economic Growth (Monthly
Production Index)
The electronic payment system is functioned to facilitate the mobility of the flow of funds, with
an efficient, fast and secure payment system that will encourage productivity. (Saraswati dalam
Mashabi, 2021).