Equitable access to the practices of the Islamic economic principles in Aceh Province, Indonesia as the only province out of 34 provinces in the country that has been granted to implement shariah law in all aspects of daily life is very important to improve the welfare of the provincial community. Islamic financial institutions and local governments act as intermediaries in generating an optimal economy, to solve the problem of Islamic financial exclusion in the province. Aceh province has implemented Qanun (Law) No. 11 of 2018, which requires all financial service institutions in the province should apply Islamic principles in their operations. The Qanun also stipulates its object or scope, which includes institutions that carry out activities in the banking sector, non-banking finance sector and other informal financial sectors according to shariah principles.

Islamic financial institutions are required to play an active role in offering products and services based on Islamic tenets, including savings, financing and investment. Islamic financing offered by Islamic financial institutions is expected to have an impact on the revival of the micro-and macro-economy so that there is a balance between financial and real economic sectors. The widespread use of Islamic financial products and services would support public financial and business activities and reduce speculative financial transactions because the Islamic financial system upholds the value of justice.

The Micro, Small and Medium Enterprises (MSMEs) sector helps people who need business capital, creates job opportunities so that it has an impact on reducing movement and poverty as well as increasing economic growth. In terms of quantity, the number of MSMEs in Aceh Province, Indonesia continues to show an increasing trend. In 2016, there were 75,207 units of MSMEs, a fairly high increase compared to the year 2014 of 48,882 units of MSMEs. In terms of financing, in 2016, people's business loans disbursed reached IDR626 billion for 32,388 MSMEs from various sectors [1].

The existence of digital finance and financial technology (Fintech) can assist in accessing and expanding the equitable reach of Islamic financial institutions, such as digital applications or Islamic finance-based financial technology features, especially in financing offerings. As stated by Affandi et al. [2], the development of Fintech in Indonesia is in line with technological developments, which are marked by the continued development of the use of cellular phones and internet services. Likewise, digital finance refers to the combination of the provision of financial services and payments that are delivered and managed using mobile technology or web technology and a network of agents or third parties [3]. The presence of Islamic financial services in the community based on digital finance and Fintech is not easy to get a good response from the community. Constraints on understanding the product or financing of Islamic financial services will be faced in the early stages of accessing Islamic financial services. Understanding of a product or financing in Islamic financial services or what is called Islamic financial literacy is a problem that must be solved by Islamic financial service actors.

Islamic financial literacy indicates a better understanding of people on Islamic finance and finally, they would select Islamic financial institutions. The Islamic financial literacy among the community is still considered low, even though many people have used financial service products. Based on the results of a survey conducted by the Financial Services Authority [4], indicated that the majority of people have used financial products or services without fully understanding the characteristics of the products in question. Only 21% of the community in Aceh Province, Indonesia has a good Islamic financial literacy and a financial inclusion rate of 41%.

Many factors affect Islamic financial literacy in the community such as geographical location, access to financial services, the role of local governments and various other factors. Since there is no comprehensive research on this topic focusing on Islamic financial institutions in the province of Aceh, Indonesia, this research aims to measure and analyze the influences of Islamic financial literacy on digital finance, fintech and financial exclusion. In addition, this study also aims to measure and analyze the influences of digital finance and fintech on financial exclusion.

The results of this study are expected to fill the gaps of previous researches by providing empirical evidence related to the topics of financial exclusion, financial literacy, digital finance and fintech in Islamic financial institutions. The results of this study are also expected to provide benefits for policy-makers to reduce financial exclusion among the people of Indonesia.

Theoretical Underpinnings

Financial Exclusion: Leyshon and Thrift [5], define financial exclusion as a process that prevents social groups and individuals from gaining access to the formal financial system, whereas financial inclusion is the antithesis of financial exclusion. Financial exclusion affects the breadth of various products that are accessible to humans so that they can be used appropriately, after considering the situation and capabilities [6]. Bank Indonesia established the Financial Inclusion Index (FII) as an alternative way of measuring financial inclusion by using a multidimensional index from macroeconomic data, especially in the range of banking sector services. The measurement of the FII is an effort made by Bank Indonesia by combining various indicators of the banking sector so that the FII can combine some information on various dimensions of an inclusive financial system, namely access (access), use (use) and quality (quality) of banking services [7].

Financial Technology (Fintech)

Financial technology (fintech) is defined as the application of digital technology to financial intermediation problems [8]. According to Dorfleitner et al. [9], fintech is a very fast and dynamic industry where there are many different business models. Fintech system of Bank Indonesia regulation No. 19/12/PBI/2017 is the use of fintech that produces new products, services, technology, and/or business models and can have an impact on monetary stability, financial system stability, efficiency, smoothness, security and payment system reliability. Fintech providers include payment systems, market support, investment management and risk management, loans, financing and capital providers and other financial services. The types of fintech are divided into three namely payment systems through third parties, peer-to-peer lending and crowdfunding to assist in providing financial services [10].

Financial Digital

Digital finance is a financial service delivered via mobile phones, the internet, or cards [11]. The payment system and transaction patterns in the economy are changing. Technological advances in the payment system have shifted the role of cash as a more efficient and economical means of non-cash payments [12]. According to Gomber et al. [13], digital finance covers a large number of new financial products, business finance, financial-related software, new forms of communication and customer interaction delivered by fintech companies and innovative financial service providers. Although there is no standard definition of digital finance, there is some consensus that digital finance includes all products, services, technology, and/or infrastructure that enable individuals and companies to have access to payments, savings and credit facilities via the internet (online) without the need to visit a bank branch or without dealing directly with financial service providers. Digital finance can also be interpreted as payment and financial service activities that use digital technology facilities such as cellular or web through third parties.

The Digital Finance Institute states that digital finance includes the fields of financial technology, digital payment systems, digital financial products such as digital derivatives, digital securities, digital carbon credits and various digital forms of traditional financial products [13]. Digital finance can be measured on three important dimensions, namely, the business function dimension, the technology dimension and the institutional dimension.

Financial Literacy

According to the Financial Services Authority Regulation No. 76/POJK07/2016 concerning increasing financial literacy and inclusion in the financial services sector for consumers/community, financial literacy is knowledge, skills and beliefs that influence attitudes and behavior to improve the quality of decision-making and financial management to achieve prosperity.

Chen and Volpe [14], define financial literacy as knowledge to manage finances to live more prosperously in the future. Remund [15], states that the four most common things in financial literacy include budgeting, savings, loans and investment. Byrne also said that low financial knowledge will lead to wrong financial planning and cause a bias in achieving welfare at a non-productive age.

The study of Islamic financial literacy can be considered as a new concept in the field of financial literacy. Until now, Islamic financial literacy does not have a generally accepted meaning [16]. Islamic financial literacy is closely related to a person's understanding and belief in choosing sharia-based financial products or services for decision making and financial management. Islamic financial literacy must refer to Islamic tenets in the selection of financial products, namely based on Islamic law.

Of the 23 regencies/cities in the province of Aceh, Indonesia, this study selected six regions in Aceh which represent two regions in the central zone and one area each in the north zone, east zone, southeast zone, south zone and west zone. Of the 2,415.714 population in the six regions, 208 respondents were selected as samples in this study using Multistage Random Sampling, which is a combination of Cluster Random Sampling and Purposive Sampling. This study uses primary data collected by distributing questionnaires to selected respondents.

This study involves four variables, namely Islamic Financial Literacy (FL), Digital Finance (DF), Financial Technology (FT) and Islamic Financial Exclusion (FE). In this study, FE and FT were measured by three dimensions and 10 indicators, respectively, DF and FL were measured by 4 dimensions and 10 indicators, respectively. A five-point Likert scale from strongly disagree (1) to strongly agree (5) is used to measure the variables.

More specifically, this research has two main objectives. First, this study measures and analyzes the influence of financial literacy on digital finance, financial technology and financial exclusion using the following regression equations:

DF = g11FL + e₁

(1)

FT = g21FL + e₂

(2)

FE = g31FL + e₃

(3)

Meanwhile, the second objective of the study, which is to measure and analyze the influence of digital finance and financial technology on financial exclusion, will be estimated using the following regression equation:

where DF is digital finance, FT is financial technology, FE is financial exclusion, FL is financial literature, gii is estimated regressors and ei is structural error terms.

To estimate the equations (1) to (4) above, this study uses the Structural Equation Model (SEM) method with the help of Analysis of Moment Structures (AMOS) software. The use of SEM in this study is due to its ability to confirm the dimensions of a concept or factor that is very commonly used and its ability to measure the influence of existing relationships theoretically [17].

Respondents’ Perception on Financial Exclusion, Digital Finance, Fintech and Financial Literacy

The problem of Islamic financial exclusion has occurred in Aceh with an average value of 3.05 which is included in the "not good" category, especially in the use of Islamic financial services according to the average value of 1.95, namely the use of Islamic financing products. There are still few people who use Islamic financing in starting a business, especially in the Micro, Small and Medium Entrepreneurs (MSMEs) as the driver of the economy. In this case, the role of Islamic financial institutions must be more active in accessing the community people to use Islamic financing, such as offering financing that is following the application of digital finance and providing clear information regarding the use of financing so that the Acehnese do not hesitate in using Islamic financing. Not only that, Islamic financial institutions must be able to improve the quality of Islamic savings products to investment. This is because the community already has a lot of sharia savings with an average value of 4.03). This will be an opportunity for Islamic financial institutions to introduce other Islamic financial products such as investment.

The community that resides in remote areas becomes an obstacle in obtaining clear information about fintech. Access to fintech services, especially the offering of Islamic savings and sharia financing products with an average value of 1.46, indicating many people still do not know fintech. The limited use of smartphones makes it difficult for Islamic financial institutions and other financial companies that use fintech to offer products to the community. The presence of online frauds on behalf of financial institutions in the community would add to the doubts about the use of fintech. Although the community knows that the use of fintech is more effective and efficient, according to the results obtained with an average value of 4.01.

Digital financial services such as ATMs, CDMA, mobile banking and others become fast mediations in accessing and making it easier for the public to touch Islamic financial services. Community still does not use digital finance to its full potential; this can be seen with an average value of 1.32. The limited understanding and the costs offered to make people hesitate in using digital financial services. Such as the cost of cutting digital advice, transfer fees to the quality and security of digital financial networks.

Therefore, Islamic financial institutions must use digital financial services optimally, for example reducing costs, providing fast services in overcoming digital problems, improving better network quality to facilitate financial transactions so that community feels safe and comfortable. Islamic financial institutions are more focused on utilizing digital finance in providing Islamic financing. This is in accordance with the average result of 3.46 which shows that the community who has taken financing more often uses digital financial services in financial transactions.

Knowledge and understanding of Islamic finance are needed to reduce the problem of exclusion of Islamic finance; the community only recognizes and uses savings or financing products according to their needs. The people of Aceh do not use investment and insurance products in the selection of future financial management, as shown by the results of the study where the community invests a small amount in Islamic instruments and becomes the Islamic insurance customers. This means that Islamic financial institutions increase clearer information directly or indirectly regarding investment and insurance such as Sukuk investment, Islamic mutual funds, Islamic life insurance and others by offering more optimal benefits.

Islamic financial institutions can focus more on increasing public understanding through savings products because people who use Islamic deposits are already good at understanding sharia deposits. This result is shown in the average result of 3.78. Increasing Islamic financial literacy would drive the use of digital finance as well as the use of fintech. With good Islamic financial literacy and supported by good digital finance, the exclusion of Islamic finance could be reduced.

Effects of Financial Literacy on Digital finance, Fintech and Financial Exclusion

Table 1 reports the findings of the effects of financial literacy on digital finance, financial technology and financial exclusion from the Islamic financial institutions in Aceh, Indonesia based on the SEM technique.

As illustrated in Table 1, Islamic financial literacy was found to have a positive influence on digital finance at a significance level of 1%. This shows that this study rejects the null hypothesis, Ho and does not reject the alternative hypothesis, Ha. The results of this study mean that if Islamic financial literacy increases by 1 unit on the Likert scale, then the use of digital finance increases by 0.870 units on the Likert scale.

The rapid growth of digital finance and complexity requires households to be equipped with financial knowledge and literacy. The analysis found that a level of financial knowledge can drive digital finance through increasing access to Information and Communication Technology (ICT) and digital trust and tolerance for new technologies. Digital finance in emerging markets can meet the needs of underserved customer segments, including entrepreneurs, by providing them with solutions for key areas of their life and business, such as banking and payments [18].

Therefore, Islamic financial institutions must make more efforts to provide information and improve services to the people of Aceh to better understand Islamic finance, as well as improve facilities related to digital finance to make it easier for people to transact financially so that the movement of the economy is better. Not only that, but the government also supports and provides programs to improve Islamic financial literacy both in socialization, educational programs and others.

Furthermore, Table 1 also finds evidence that Islamic financial literacy has a negative effect on financial technology at a significance level of 1%. When viewed from the estimated value on the standardized regression weights of -0.467, this indicates that the increase in Islamic financial literacy by 1 unit has caused a decrease in the use of financial technology by 0.467 units on the Likert scale. This means that when people already have good Islamic financial literacy, they prefer to transact directly with Islamic financial institutions compared to transacting using fintech facilities. This is due to several reasons, such as, the people of Aceh who do not all have smartphones, the level of IT literacy in the people of Aceh is relatively low, they are still comfortable and feel safe when transacting at financial institutions directly and the limited internet network in remote rural areas.

In a study conducted by Panos and Wilson [19], the development of fintech can also undermine financial well-being by triggering impulsive consumer behavior when interacting with technology and financial platforms. For example, mobile applications can attract impulsive and unsophisticated individuals who do not have the necessary skills to forecast future preferences. Thus, mobile applications can cause individuals to make wrong decisions under circumstances of "acting suddenly" or under sales pressure. In such cases, the purchase and consumption of financial services tend to be detrimental to consumer welfare.

Table 1 also shows that Islamic financial literacy has a negative effect on Islamic financial exclusion at a significance level of 1% with an estimated coefficient of -1.557. This means that the increase in Islamic financial literacy by 1 unit on the Likert scale has caused a decrease in the exclusion rate of Islamic finance by 1,557 on the Likert scale. The reduction in the exclusion of Islamic finance will occur if there is an increase in the understanding of Islamic finance in the community, where the use of Islamic financial institutions as intermediary institutions that drives the economy in realizing prosperity.

The results of this study are in accordance with what was stated by Beverly et al. [20], that healthy financial behavior is indicated by good financial planning, management and control activities. Indicators of good financial behavior can be seen from the way/attitude of a person in managing the entry and exit of money, credit management, savings and investment. The Financial Services Authority stated that the increase in Islamic financial literacy will be followed by the growth of the Islamic financial inclusion index.

Table 1: The Findings of Standardized Regression Weights based on SEM

Note: *** and *** show significant levels at 1% and 5%, respectively

Effects of Digital Finance Dan Financial Technology on Financial Exclusion

Table 1 also reports the estimated SEM findings of the effects of digital finance and financial technology on financial exclusion. As observed from Table 1, digital finance was found to have an effect on the exclusion of Islamic finance at the 5% level with an estimated coefficient of 1.209. This shows that an increase in the use of digital finance by 1 unit on the Likert scale has led to an increase in the exclusion of Islamic finance by 1,209 units on the Likert scale. In this case, the expansion of the use of digital financial services will cause problems with the exclusion of Islamic finance, such as people who do not want to use digital financial services due to additional costs and the convenience and security of financial services. The results of this study are in line with the study of Geanch et al. which states that the use of digital financial services through smartphones and internet networks that are accepted by the public will be able to reduce the problem of financial exclusion in the application of low costs and the level of security of financial services.

Finally, referring to Table 1, this study did not find a significant effect of financial technology on Islamic finance. The results of this study are in line with the results of research conducted by Buckley and Webster [21], on the development of fintech in developing countries. Fintech finance companies find it difficult to grow in developing countries because they rely solely on an intuitive understanding of what users of financial services might need. It is difficult for fintech financial services to obtain information related to financial products that are in accordance with the needs of financial service users. Potential Community knowledge and understanding, as well as the level of financial literacy, are the keys to the successful design and implementation of fintech products and services in developing countries.

Financial literacy and technology literacy affect the acceptance and use of fintech. Financial technology can be used as a mediator if the community already has a good understanding of finance, supported by a fairly good understanding of technology and facilities. This will make it easier to access financial services effectively and efficiently to reduce the problem of Islamic financial exclusion.

This study examined the effects of Islamic financial literacy on digital finance, financial technology and financial exclusion in the Islamic financial institutions in Aceh, Indonesia. It also attempted to measure and analyze the effects of digital finance dan financial technology on financial exclusion. Based on the Structural Equation Modelling (SEM) analysis, the study found that the use of digital finance was positively influenced by Islamic financial literacy, while fintech and financial exclusion were negatively affected by Islamic financial literacy. In addition, the study documented that digital finance positively affected the financial exclusion, while financial fintech is found to have an insignificant effect on financial exclusion from Islamic financial institutions. 

The findings of the study showed that to reduce the financial exclusion and enhance the use of digital finance of the Islamic financial institutions, Islamic financial literacy needs to be further improved. Islamic financial institutions are suggested to improve public understanding of Islamic finance and their services quality and shariah compliance. Government support is needed in socializing the understanding of Islamic finance to the public and issuing effective Islamic financial policies for the convenience and security of transacting monies with Islamic financial institutions.

To offer more comprehensive empirical evidence on this topic, future studies are suggested to consider digital finance and fintech as the mediating variables between financial literacy and financial exclusion. Covering a broader research area and comparing Islamic financial institutions to their conventional counterparts would also provide a better picture on the issue of financial inclusion and its relation to financial literacy in Indonesia.

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