Islamic financial inclusion, fintech and poverty reduction: a dynamic panel analysis from a newly constructed provincial index in Indonesia

Purpose This study aims to develop a provincial-level Islamic Financial Inclusion Index (IFII) for Indonesia and empirically examine the relationship between Islamic financial inclusion, fintech development and poverty reduction across 33 provinces from 2015 to 2023. Design/methodology/approach A mixed-method approach is used. The IFII integrates Islamic banking, Islamic microfinance and Islamic social finance across accessibility, availability and usage, using Delphi-based weighting and geometric mean aggregation. The empirical analysis applies the two-step System Generalized Method of Moments to account for poverty persistence, potential endogeneity and unobserved heterogeneity. An alternative lagged specification is used as a robustness check. Findings The direct associations of Islamic financial inclusion and fintech development with poverty reduction are statistically insignificant. However, their interaction is negative and statistically significant, indicating that the relationship between Islamic financial inclusion and poverty is conditional on fintech development. Marginal-effects analysis shows that this association becomes negative and statistically significant at relatively high levels of fintech development. The alternative lagged specification produces a similar negative interaction. Practical implications The findings highlight the importance of integrating Islamic financial institutions, Islamic social finance and digital financial development. Policymakers should strengthen institutional coordination, digital infrastructure and digital and Islamic financial literacy, particularly in underserved provinces in Indonesia. Originality/value This study constructs a new multidimensional index, the Islamic IFII, at the provincial level and presents dynamic evidence showing that the relationship between Sharia financial inclusion and poverty reduction varies systematically with the development of fintech.