Islamic Fintech Growth Prospects in Accelerating MSMEs Growth: Evidence in Indonesia

Islamic fintech plays a role in encouraging the growth of micro, small and medium enterprises (MSMEs) in Indonesia with their financing segments. The bigger the Islamic fintech, the faster the growth of MSMEs in Indonesia. This study aims to identify macroeconomic factors such as gross domestic product (GDP), interest rates and inflation in driving the growth of Islamic fintech. Using the Ordinary Least Squared (OLS) regression method, the results show that GDP and inflation have a positive effect on the growth of Islamic fintech, while interest rates have a negative effect on the growth of Islamic fintech. Improving macroeconomic conditions will encourage the growth of Islamic fintech which in turn will contribute to the growth of MSMEs, which are the main segment of Islamic fintech financing.


Introduction
The disruptive era marked by the rapid development of digital has begun.Various changes in the business world that were previously unimaginable have occurred and changed many peopleʹs lifestyles.Financial technology (fintech) is one of them.Based on data from the Financial Services Authority (OJK), over the past 3 years there has been a significant development in peer to peer lending (P2P lending) in Indonesia, it can be seen from the total number of fintech assets as well as the number of players (OJK, 2020a).This is in line with data from BPS which shows the high rate of digital transactions since March 2020, namely when many provinces in Indonesia implemented a Large-Scale Social Restriction (PSBB) policy (Badan Pusat Statistik, 2020).Digital transactions are considered as a solution in addressing the problems of community needs when most places of business experience closure due to this policy (EconMark, 2020).
In Indonesia, fintech regulations are regulated in the Financial Services Authority Regulation number 13 of 2018 concerning Digital Financial Innovation in the Financial Services Sector.
There are also other regulations, namely POJK Number 37 of 2018 concerning Crowdfunding Services through Information Technology-Based Shares and POJK Number 35 of 2018 concerning Financing Company Business Operations.Both were created because fintech crowdfunding and fintech P2P lending activities are very prevalent in Indonesia, especially P2P lending, in November 2020 there were 153 fintechs in Indonesia with total assets of 3.57 trillion rupiah.Of these, there are 10 Sharia fintechs with total assets of 1.66% of the total assets (OJK, 2020b).The existence of Islamic fintech is still relatively new when compared to conventional fintech, although its growth is relatively progressive when compared to conventional fintech.As can be seen in Figure 1, the growth chart for Islamic fintech assets tends to increase rapidly, while the growth of conventional fintech assets is relatively slow.Of course, this indicates an increasing stretch of the existence of Islamic fintech.
Based on a report from PwC (2019), with the worldʹs fourth largest population and a productive age of more than 60%, Indonesia has great potential for growth, but there is a gap that causes Indonesiaʹs growth achievement in 2031 is estimated to be only 32% of that of the United States.This gap can be covered by community productivity in its real form, namely entrepreneurship, where micro and small enterprises (MSEs) contribute 99% of the total number of companies in Indonesia (Kemenkop & UKM, 2019).
In Indonesia, the high number of companies included in micro, small and medium enterprises (MSMEs) is that the majority of MSMEs have not yet had access to financial services.Therefore, the role of fintech in accelerating financial inclusion for the public is very significant because fintech has various approaches in assessing creditworthiness or financing for its customers (Fenwick et al., 2017).Based on the DSResearch (2020), one of the biggest consumers of fintech lending is MSMEs.Fintech supports financial inclusion programs in which two thirds of Indonesians do not yet have access to financial institutions and the majority of these two thirds are MSMEs.The lack of access is because MSMEs do not yet have the capability to reach banking services and the presence of fintech is able to bridge the needs of MSMEs that do not yet have this capability (Fenwick et al., 2017;Jagtiani & Lemieux, 2017).On the other hand, Sharia fintech has great potential for growth because in Islamic countries, including Indonesia, the number of people who have not accessed banking services is still large (World Bank Group, 2020).However, fintech with the offer of easy access to finance for MSMEs provides a new climate in entrepreneurship with the entry of new players into the business world (Sathish et al., 2011).
Research in 2019 has proven that the existence of fintech start-ups for 10 years has a positive correlation with economic growth in Indonesia (Narayan, 2019).Fintech is able to reduce inflation and cause a real appreciation of the rupiah, even though its effect on exchange rate changes is delayed (Narayan & Sahminan, 2018).In measuring the impact of financial inclusion on economic growth, by comparing the impact of the access, depth and efficiency variables on gross domestic product (GDP), it is found that the relaxation of these three variables separately can have a positive impact on GDP, but the relaxation of the three actually has a negative impact (Dabla-Norris et al., 2015).
On the other hand, research by Yang & Chang (2020) states that there is an asymmetrical impact on the development of financial intermediaries on economic growth in various countries classified according to their per capita income, specifically, progress in finance is the driving force for the economy in developed countries.However, not in developing countries, Commented [RVW7]: Be careful, this sentence can be biased!Provide a comprehensive description supported by references to provide information.

Commented [RVW8]:
In my opinion, the growth graph of Conventional Fintech Assets and Sharia Fintech Assets is not strong enough to show the rise of Islamic fintech in Indonesia.This graph can create a bias as if the Islamic fintech market is large and on par with the conventional fintech market.Especially when September-October 2020 shows conventional fintech asset has an upward trend, but sharia fintech has a fell trend.Provide a comprehensive description supported by references to provide information.

Commented [RVW9]:
Write the written word or phrase first or full name, then arrange the abbreviation.
similarly, Cheng & Hou (2020) conveyed the results of a similar study and recommended nonfinancial intermediary activities to drive economic growth.
Apart from GDP and inflation, the benchmark interest rate is also an important macroeconomic instrument.Although interest is prohibited in the practice of Islamic finance, it cannot be denied that the investor community still refers to the interest rate in placing their funds, including Sharia financial institutions.Sudarsono & Saputri (2018) proves that interest rates have a positive effect on Islamic banking financial performance, although according to Mohd Yusof et al. (2015) the effect is only in the short term and is more due to its attachment to the real economy.
Therefore, this study was made in order to examine the relationship between the growth of Islamic fintech in Indonesia and economic indicators, namely GDP, inflation and interest rates.Some of the questions in this study are summarized as follows: 1) How does GDP affect Islamic fintech assets ?; 2) How does inflation affect Islamic fintech assets ?; 3) How does the interest rate affect Islamic fintech assets?

Methodology
Based on the type, this study uses an associative quantitative approach to explain the relationship between variables (Sugiyono, 2019).Meanwhile, based on the objective, this research is categorized as a hypothesis testing research that wants to provide empiric evidence of an existing theory (Sekaran & Bougie, 2016), in this case the relationship between macroeconomic variables and the growth of Islamic fintech assets.The type of data used is secondary data which includes Islamic fintech assets (SIZE), Gross Domestic Product (GDP), interest rate (RATE), and inflation (INF).Data is collected from various sources, such as Islamic fintech statistics issued by the Financial Services Authority (OJK), the benchmark interest rate from Bank Indonesia (BI) and inflation from the Central Bureau of Statistics (BPS).The sample data period available for Islamic fintech assets is from December 2018 to September 2020, so other variables are adjusted accordingly.
The data analysis technique used is multiple linear regression with the ordinary least squared (OLS) approach.Where this technique requires classical assumptions to ensure that the proposed model is suitable to be used to explain the effect of the independent variable on the dependent variable (Gujarati et al., 2017).Fulfillment of the classical assumptions of the OLS model includes the assumption of normally distributed residuals, and the freedom of the model from autocorrelation, heteroscedasticity and multicollinearity.The equation of the regression model from this study is as follows:

Result
Commented [RVW10]: BPS in English is not Central Bureau of Statistic.See the website of BPS in English!

Commented [RVW11]:
The author must build other assumptions (out classical assumptions) so that this research can be accepted.Pandemics as the irregular disturbance is not a negligible source of variation for this data.Analysis for variation patterns like this is usually not a good system because it takes a very long time to get long data.

Description of Research Variables
Based on the results of the data analysis conducted, Table 1 presents descriptive statistics of each research variable.Islamic fintech assets during the observation period had an average of 34.872 billion rupiah.The highest value of Islamic fintech assets occurred in September 2020.
When compared to conventional fintech assets, the value of Islamic fintech assets is still very far away.The market share of Islamic fintech is only 2.17% of the total fintech assets in Indonesia, which is already more than 3.346 trillion rupiah.The same is the case with the Islamic banking industry in Indonesia, whose market share is also relatively small, even though Muslims in Indonesia are the majority.When viewed from its growth, the average growth of Islamic fintech assets can reach 23.6% every month, even more than 500% annually.
However, this value is not high enough to increase the market share of Islamic fintech in Indonesia.

Classic Assumption Test
The three macroeconomic variables that are indicators of Islamic fintech asset growth will be proxied in the regression model.In order to get a regression model with a proper OLS approach or Best Linear Unavailable Estimate (BLUE), a test will be carried out on the the three variables is below 10 and even below 5.This indicates that multicollinearity does not occur, so the assumption is free from multicollinearity has been fulfilled.The autocorrelation assumption test uses the Breusch-Godfrey Langrage Multiplier (LM) test.
The autocorrelation test results are shown in Table 4, showing that the F-Statistics number is not that big.Even so, the probability value of F-Statistics is still greater than alpha 0.05, which means that there is no autocorrelation in the model.So it can be concluded that the OLS model is free from autocorrelation.The last assumption test is the heteroscedasticity test.Table 5 shows the results of the heteroscedasticity test using the Breusch-Pagan-Godfrey approach.The F-Statistics and Obs*R-Squared values that are not too large have the same probability value.Both the F probability and the Chi-Squared probability are both above 0.05.This shows that the model does not occur heteroscedasticity, thus the assumption of the model is free from heteroscedasticity has been fulfilled.This means that the four classical assumptions have been fulfilled, thus the regression model for the growth of Islamic fintech assets can be continued to the next stage.

Goodness of Fit Model
The results of the regression model estimation with the OLS approach can be seen in Table 6.
The results of the F-test as a form of model feasibility test have an F-Statistics value of 29,249 which is significant at 1% alpha (because the probability value is less than 0.01).This means that the estimated OLS model can be used to explain the effect of the independent variable Gross Domestic Product (GDP), interest rate (RATE), and inflation (INF) on the dependent variable of Islamic fintech assets (SIZE).The three independent variables have a significant effect on the dependent variable of Islamic fintech assets.The GDP and RATE variables have both probability values less than 0.01, meaning that GDP and the interest rate have a significant effect on alpha 1%.The variable INF has a probability value of less than 0.1, which means that inflation has only a significant effect on alpha 10%.Prob(F-statistic) = 0.00000 The ability of GDP, interest rate and inflation in predicting the size of Islamic fintech assets is not more than 90%, however, the value is relatively large, up to 82.98%.There is still around 17.02% which is influenced by other variables outside the model.These variables are likely to be obtained from the fintech performance indicators themselves, such as the number of borrowers, lenders and outstanding financing channeled by Islamic fintech.

Macroeconomic Influence on Islamic Fintech Growth
From the estimation results of the OLS model, it can be seen that GDP has a positive effect on the growth of Islamic fintech assets.The greater the economic growth, the greater the growth of Islamic fintech assets, while slower economic growth in Indonesia will hold back the growth rate of Islamic fintech assets.These results indicate that the growth of Islamic fintech in Indonesia is highly dependent on Indonesiaʹs economic growth itself.Every 1% increase in economic growth will encourage Islamic fintech growth by 12% and vice versa, every 1% decrease in economic growth will reduce Islamic fintech growth by 12%.
The growth of Islamic fintech assets indicates the significance of the addition of current assets in the form of funds loaned or invested to borrowers, where the borrower is MSE entrepreneurs whose numbers dominate the Indonesian economy, so that the growth of these assets is indicated to boost GDP by spurring production, on the other hand, with higher production.increase, the household expenditure also increases.This finding is in line with the theory put forward by Narayan & Sahminan (2018), and not in line with that put forward by Cheng & Hou (2020) and Yang & Chang (2020).
The interest rate has a negative effect on the growth of Islamic fintech assets.Every increase in the interest rate will hold back the growth rate of Islamic fintech assets, and vice versa, any decrease in the interest rate will encourage the growth rate of Islamic fintech assets.A decrease in the interest rate of 1% will boost the growth rate of Islamic fintech assets by 1.49%.
Meanwhile, a 1% reduction in the interest rate will slow down the growth of Islamic fintech assets in Indonesia.
Interest rate is one of the government policy instruments in regulating supply-demand financing or credit.Even though Islamic financing activities do not use an interest instrument, business actors indirectly still use the interest rate as a comparison to the size of the capital costs required from the proposed financing.Like other Islamic banks and Islamic finance institutions, Islamic fintech also charges a fee for financing disbursed either in the form of a margin or profit sharing.A decrease in the interest rate will reduce the cost of capital which will then be followed by an increase in the amount of financing.The higher the financing channeled by Islamic fintech, the greater the profits will be obtained and in the end the fintech assets will increase itself.that interest rates have a positive and significant effect on the development of deposits in financial institutions.
Inflation has a positive effect on the growth of Islamic fintech assets.The increase in the inflation rate will encourage the growth of Islamic fintech assets, while the decrease in inflation will also restrain the growth rate of Islamic fintech assets.A one percent increase in inflation will increase Islamic fintech assets by 0.47%, while a 1% decrease in inflation will reduce the growth of Islamic fintech assets by 0.47%.
Inflation is an indicator of the ups and downs of economic activity in a region.One of the causes of inflation is the high demand which is a result of growing economic activity in the economy in the region.The high level of economic activity will encourage the high demand for capital supplied by financing, where Islamic fintech is one of the alternatives.Along with the high level of financing channeled by fintech, it will automatically increase the growth of fintech assets itself.This is in line with the research of Narayan & Sahminan (2018).
The growth of Islamic fintech is in line with the macroeconomic conditions of a country.The better the macroeconomic condition of a country, the better the growth of Islamic fintech in that country.At least this is happening in Indonesia.This harmonious and in-tune condition creates a harmonious synergy between government programs in advancing the MSME sector with the growth of Islamic fintech.The fintech segment in MSME financing is a common thread that the economic growth of a country will be enjoyed by MSME players.
Apart from conducive macroeconomic conditions, the growth of Islamic fintech must also be supported by several other factors, such as: regulations, technology development, and the digital financial ecosystem.Completeness of the rules for implementing fintech will maintain sustainability and security for both fintech actors and customers (Minerva, 2016;Vartsaba & Zaslavska, 2020).Technology development in order to optimize service and security is the key to fintech development (Hiyanti et al., 2020;Mukhlisin, 2019;Prestama et al., 2019;Rusydiana, 2018).Meanwhile, continuous collaboration in the digital financial ecosystem is believed to be able to accelerate the growth of fintech (Haris et al., 2020;Rusydiana, 2018).Strengthening these factors becomes a complete package in order to encourage the growth of Islamic fintech in Indonesia.

The Impact of the Covid-19 Pandemic on the Growth of Islamic Fintech
As previously explained, the growth of Islamic fintech assets can reach 23.6% every month.
However, the growth of Islamic fintech assets does not always show a positive trend.As seen in Figure 2, the trend of changes in Islamic fintech assets has fluctuated.Fluctuations also occurred at the beginning of 2020, which initially went down, then increased again.But it fell back, and in the end it continued to increase.The turmoil that occurred in the first quarter of 2020 was presumably an effect of the imposition of Large-Scale Social Restrictions (PSBB) which led to sluggish economic activity.However, this incident did not have a profound effect

Commented [RVW16]:
This discussion seems to ignore the existence of a pandemic in the research period.Even though the pandemic condition is the 'strength' of this article which must be sharp and logical in the analysis.

Commented [RVW17]:
The existence of a pandemic which is also analyzed in the discussion must also appear in the title, abstract, and conclusion.
on the growth of Islamic fintech.Even though there was a decline in Islamic fintech assets, the numbers could still grow until the end of 2020, when the Covid-19 pandemic conditions have not ended.Based on the results of the Chow test as shown in Table 7, the probability value of F-Statistic and Chi-Squared which is below 0.05 indicates that the model experienced a change in slope in February 2020.As it is known that in that period there began to be restrictions on physical business activities.as a result of the Covid-19 pandemic.The impact of limiting business activities does have an increasing impact on digital financial activities, but on the other hand it reduces peopleʹs economic activities both in terms of consumption and production.The decline in economic activity marked by lower economic growth had an impact on the growth of Islamic fintech.The impact of economic growth in the entire observation period on the growth of Islamic fintech assets is smaller than the impact of economic growth before the pandemic.The GDP slope for the entire observation period was 12.00, while in the prepandemic observation period it was 40.69 (more than three times that amount).These results indirectly confirm that the post-pandemic GDP slope must be less than 12.00.The slowing down of the impact of macroeconomic conditions on the growth of Islamic fintek assets can still be masked by the high public awareness of using Islamic fintech services.This has contributed to the continued growth of Islamic fintech assets, although not as fast as before the pandemic.The growth of Islamic fintech assets will increase their management capacity, which in turn will increase the outstanding loans extended to MSMEs.Thus, Islamic fintech can still support the growth of MSMEs even during the pandemic.

Conclusion
GDP, interest rate and inflation affect the growth of Islamic fintech assets.Sustained economic growth will encourage the growth of Islamic fintech assets which in turn will encourage the growth of MSMEs.Likewise, a reduction in low interest rates will stimulate the distribution of financing and Islamic fintech becomes one of the motors in financing distribution in the MSME sector.Finally, inflation also plays an important role in the growth of Islamic fintech.
Increasing the rate of inflation which is driven by demand will automatically drive the growth of Islamic fintech.
Although the growth of Islamic fintech is relatively slow, it is still in line with changes in macroeconomic conditions.In order to accelerate the role of Islamic fintech in growing MSMEs in Indonesia, the government must make policies that are pro to economic growth and stability.In addition, it also stimulates the development of fintech, especially in terms of regulations that facilitate the development of Islamic fintech while still paying attention to aspects of customer security and convenience.

Achnowledgment
Our gratitude goes to the Ministry of Research, Technology and Higher Education (RISTEKDIKTI) of the Republic of Indonesia for funding this research.Apart from that, we would also like to thank Perbanas Institute for accommodating us in completing this research.

Commented [RVW18]:
In conclusion, a pandemic situation must be raised because it is an extraordinary event as irregular variations during this research period.

Figure 1 :
Figure 1: Comparison of Conventional Fintech and Islamic Fintech Assets

Table 1 :
Descriptive Statistics The inflation rate has decreased in line with the decline in peopleʹs economic activity during the Covid-19 pandemic which began at the end of the first quarter of 2020.
In macroeconomic terms, Indonesia is one of the countries with relatively high economic growth rates.In 2019, in the emerging market and developing countries group, Indonesia ranks fourth after India, the Philippines and China with economic growth reaching 5% per year.The average GDP per month is 901.775 trillion rupiah, or the equivalent of 62.19 billion dollars.Meanwhile, the interest rate in Indonesia is relatively stable at 5.14%, with a maximum value of 6% and a minimum of 4% in the last two years.Meanwhile, the inflation rate in Indonesia is also relatively stable at less than 3%.The highest inflation in the study period occurred in August 2019, while the lowest inflation also occurred in the same month a year later.

Table 2 :
The results of the normality test can be seen in Table2.The normal distribution test of the OLS model residuals has a Jarque Bera (JB) t-statistic value of 0.7905 with a probability of 0.67.The probability value is greater than alpha 0.05, thus it can be said that the residual is normally distributed.This means that the OLS model that is formed has met the assumption of normality.Normality Test Result: Jarque Bera The next classical assumption test is multicollinearity.The multicollinearity test results in Table3show that the VIF values for the three independent variables of Gross Domestic Product (GDP), interest rate (RATE), and inflation (INF) are relatively small.The VIF value of

Table 6 :
OLS Estimation Result This is in line with what was stated by the research results of Mohd Yusof et al. (2015), and is not in line with Sudarsono & Saputri (2018) research which states