Do Global Economic Policy Uncertainty and Geopolitical Risk Affect Islamic Financial Development? Evidence from Indonesia

Abstract

This study examines the impact of Global Economic Policy Uncertainty (GEPU) and Geopolitical Risk (GPR) on Islamic Financial Development (IFD) in Indonesia. Using quarterly time series data from 2015 to 2024, this research applies a quantitative approach through multiple linear regression analysis, incorporating inflation and exchange rate as control variables. The findings reveal that GEPU has a positive and statistically significant effect on Islamic financial development, indicating that increasing global uncertainty may stimulate the growth of Islamic finance as an alternative and relatively resilient financial system. In contrast, geopolitical risk shows a negative but statistically insignificant effect, suggesting that its impact on Islamic financial development in Indonesia remains limited. Additionally, inflation is found to have a positive and significant influence, while the exchange rate does not exhibit a significant effect. The model demonstrates strong explanatory power, although diagnostic results indicate the presence of autocorrelation. Overall, the study highlights that Islamic financial development in Indonesia is influenced by global uncertainty dynamics and exhibits adaptive characteristics in response to external shocks.