The contribution of Islamic and conventional rural banks to Indonesia’s regional economic growth

Purpose This study aims to investigate the role of Islamic rural banks (IRBs) and conventional rural banks (CRBs) in driving regional economic development in Indonesia. In this context, the banks’ contribution pertains to the financial services extended by IRBs and CRBs, including investment loans, working capital loans and consumption loans. Design/methodology/approach The IRB sample encompassed 25 provinces over the 2009–2023 period, yielding an unbalanced panel data set comprising 355 IRB-year observations. Conversely, the CRB sample included 33 provinces during the same timeframe, resulting in a balanced panel data set with 495 CRB-year observations. The data set was analyzed using the Feasible Generalized Least Squares (FGLS) estimation method. Findings The findings reveal that loans extended by IRBs and CRBs contribute to the regional economic growth of Indonesia. Specifically, the results indicate that IRBs’ investment loans, both IRBs’ and CRBs’ working capital loans and CRBs’ consumption loans exert a positive influence on regional economic performance. In contrast, CRBs’ investment loans and IRBs’ consumption loans do not exhibit a measurable impact on Indonesia’s regional economic growth. Originality/value This study is original in exploring the financial services of Islamic and CRBs, which have been largely overlooked in previous research. Unlike existing studies focused on commercial banks, this research examines how rural banks, particularly through loans to micro, small and medium enterprises, contribute to regional economic growth in Indonesia. By focusing on loan types – investment, working capital and consumer loans – provided by IRBs and CRBs, it fills a critical gap in the literature and offers new insights for banking practitioners and policymakers.