Home / This Week / Cover Stories / Right push to make Indonesia an Islamic financial hub

Right push to make Indonesia an Islamic financial hub

Country is moving towards creation of a supportive framework for Shariah-compliant banking

The world’s most populous Muslim nation, so far a laggard in developing a comprehensive Islamic finance industry, took a big leap towards the creation of a supportive framework for Shariah-compliant banking on July 27. It was the day when the country’s President Joko Widodo inaugurated the National Committee for Shariah Finance or KNKS for its abbreviated Indonesian name, as part of the government’s push to make Indonesia a global hub for the Islamic financial industry.

The KNKS has been tasked to accelerate, expand and develop Shariah-compliant financial services to support the country’s development, National Development Planning Minister Bambang Brodjonegoro said in a statement. The ministry is the one that introduced its master plan for the development of the country’s Islamic finance future last year.

Indonesia does have some kind of a barely regulated Shariah-finance infrastructure that currently comprises 12 general Shariah banks, 22 Shariah business units of conventional banks, 58 Takaful operators, 163 Shariah people’s credit banks, or rural Islamic lenders, around 5,500 rural cooperatives, seven Islamic finance-based investment firms, an Islamic microfinance portal and even one Shariah-compliant pawn shop, according to the ministry. This is the highest number of Shariah-compliant banking institutions of any country in the world.

Despite this, Indonesia’s Islamic finance sector maintained a meager market share of just 5.3 percent of the country’s total banking assets as of 2016, compared to 51.1 percent in Saudi Arabia, 33 percent in Qatar, 23.8 percent in Malaysia and 19.6 percent in the UAE. It also has just 23 million customers out of a total population of around 260 million.

The reasons for the low market share are mainly the fact that there are no big Islamic banks with a strong brand name and access barriers owing to a lack in Islamic banking infrastructure, poor Islamic finance literacy and little development potential due to a missing regulatory framework.

According to President Widodo, the industry just needed the ‘right push.’ “I am convinced that if the Shariah finance industry is really driven, it can be one of the main solutions in financing the development in our country, be it the people’s economic development, infrastructure, roads, bridges, ports, power plants, and in financing poverty alleviation programs, as well as reducing social inequality,” he noted.

The planning ministry also found out that to increase demand for Islamic finance, it should push it in sectors that are traditionally related to it, namely the real estate industry.

Planning Minister Brodjonegoro adding that the KNKS will initially focus on developing Shariah-compliant finance solutions and a framework for the real estate sector, one of Indonesia’s industries with the currently highest growth rates where demand creation for Islamic finance should be most promising.

Another field would be a better utilization of religious social funds, such as Zakat and Waqf. The planning ministry noted that there currently exist 4.3 billion square metres of Waqf property in the country, the majority of which is not being utilized productively in one way or the other and also not been tapped for the improvement of the economic situation of communities in need.

Relief could be provided through new Islamic finance solutions such as Waqf-backed investment funds offered to retail and institutional investors that use their proceeds to upgrade infrastructure or for the operation of schools and hospitals.

 

The next step would be to acquaint the broader population with Islamic finance by creating some form of meaningful narrative for the sector, support Islamic banks to grow bigger in size and services and develop their brand names. This could be done by executing the existing plan to merge the Islamic units of three of Indonesia’s large state-controlled banks, Bank Rakyat Indonesia, Bank Mandiri and Bank Negara Indonesia, into one large Islamic bank which then would have assets under management of $8 billion and boost Indonesia’s Islamic banking market share over time.

The Islamic banking industry, then, would have the leeway to become more inclusive and able to meet the financing needs of small and medium enterprises and larger corporations, and eventually develop a blossoming Islamic capital market.

The government in Jakarta has not defined ideal targets for the sector, but the ambition is to get things on their feet by 2019 by which the market share of Islamic finance in the country should have reached a benchmark of 10 percent.

Indonesia central bank will give banks greater flexibility in managing liquidity and credit in new rules that are aimed at getting banks to lend more, officials said.

Bank Indonesia cut its benchmark policy rate 200 basis points in 2016 and 2017, but banks’ loan growth has remained well below the double-digit rates of earlier years. Annual bank credit grew 8.2 per cent in February.

The banking industry tends to follow an economic cycle and the new instruments will act as tools to help guide them to counter the cycle.

In the current ‘lethargic condition’, Ms Hendarta said credit growth will not reach BI’s 2018 target of 10-12 per cent without the new rules. The central bank has no more room to support growth in South-east Asia’s largest economy by further trimming its benchmark rate, but it will try to do it with looser macroprudential policy, deputy governor Mirza Adityaswara reiterated.

The new rules should encourage banks to put excess liquidity in financial market assets, while also reducing the volatility in the overnight money market, Mr Waluyo said.

BI also revised rules on the loan-to-funding ratio and, instead, introduced the “macroprudential intermediation ratio”(MIR).

Islamic banks will be given similar flexibility in managing both their liquidity and credit, but with different ratios for reserve requirements.

In short world’s most populous Muslim nation is moving towards the creation of a supportive framework for Shariah-compliant banking.

Check Also

UAE vision 2021 – a path to be on the global stage

UAE vision 2021 – a path to be on the global stage

UAE Vision 2021 was launched by H. H. Sheikh Mohammed bin Rashid Al Maktoum, Vice-President …

Leave a Reply