Finance & Banking


Dubbed as the rising star in Islamic finance, Indonesia
has now asserted a leadership role in the world of
Islamic finance. As the fourth most populous country
in the world with the biggest Muslim nation; coupled
with favourable demographics, transition to a middleincome country and unwavering support from the
government; Indonesia is now the number 1 Islamic
financial market in the world as ranked by Islamic
Finance Country Index (IFCI) 2019.

The IFCI is the oldest index for ranking different
countries with respect to the state of Islamic banking
and finance and their leadership role in the industry
on a national level and benchmarked internationally.
The Index was first published in the Global Islamic
Finance Report (GIFR) 2011, which is the oldest
yearbook in Islamic finance, and is now regarded as
the gold standard for intelligence in Islamic finance.

Indonesia’s huge leap from number 6 in 2018 to pole
position this year on IFCI 2019, makes Indonesia
the top ranked country in terms of its leadership
and potential in global Islamic banking and finance.
With Indonesia taking the leadership position as the
most influential country in the global Islamic finance
industry, Malaysia is now placed 2nd on the IFCI 2019
rank, followed by Iran at number 3.

Several factors led to its elevation to the top rank
including regulatory developments with improved
ecosystem for Islamic banking and finance, strong
political support from the government and the huge
potential that Islamic economy offers.

Islamic finance as an industry, has been witnessing
substantial growth in the past decade, but its growth
rate had steadily declined since 2013 from 11.16% to
6.02% in 2017. After five years of declining trend, the
industry has once again picked up to register annual
growth in assets of 6.58% during 2018. The GIFR
2019 estimates that the global size of Islamic banking
and finance (IBF) stood at US$2.6 trillion at the end of
2018 from US$2.4 trillion at the end of 2017. In dollar
terms, there was a net increase of US$160 billion in
the global stock of Islamic financial assets.

As reported in previous GIFRs (2016 and 2018), the
slowdown in growth was attributed to several factors
such as historically low oil prices, a natural slowdown
in IBF due to maturity of the industry and political
conflicts in a number of Muslim countries. However,
structural issues and stifled innovations have also
contributed to this phenomenon. In some of the vibrant markets for IBF, Islamic financial institutions
have fast exhausted the captive Shari’a-sensitive
market (those who patronise Islamic financial
services purely for religious reasons) that they have
relied on to remain profitable.

The report also recorded a growing gulf between the
potential and actual size of the global Islamic financial
services industry as the gap has now more than
doubled. With the potential size of US$9.4 trillion
against US$2.6 trillion, the catchup time required for
the industry to realise its potential is ever-increasing
from an estimated 17 years (as reported in GIFR
2014) to well beyond 40 years at the present state
of the industry.

With the growth in Islamic banking and finance
declining year-on-year, a fresh solution is required
with emphasis on the adoption of new business
models that will ensure sustainable growth. This is
expected to come in the form of Islamic financial
technology (Fintech), which can provide the means in
boosting interest in Islamic finance and in increasing
its accessibility to the wider Muslim world. Another
area that Islamic finance can tap into for future
growth is Islamic social finance. These are amongst
some of the factors that have elevated Indonesia’s
ranking as a leader in the global Islamic finance

The new wave of development, backed by strong
political support, lends consideration to the building
of a robust legal and regulatory framework for the
development of a comprehensive Islamic finance
ecosystem in Indonesia. For example, the government
of Indonesia has established the National Islamic
Finance Committee known as KNKS, which is
mandated to lead, coordinate and synergise the
efforts of all stakeholders within the Islamic economy.
Given the important role that the committee plays,
KNKS is directly chaired by His Excellency President
Joko Widodo himself. The establishment of KNKS
is evident of the strong commitment from the
government to support Islamic finance advancement.

In another development that showcased the strong
political support from the government was the
launch of the Indonesian Islamic Economy Masterplan
2019-2024 by the National Development Planning
Agency or BAPPENAS and KNKS. The masterplan
recommends four strategic steps for the development
of the Islamic economy in the country, with the goal
of elevating Indonesia’s leadership role as a major
producer in the global halal industry by 2024.

The formation of Badan Pengelola Keuangan Haji (BPKH) or Hajj Financial Management Board is
viewed as a boon for Shari’a investments and
considered as the growth driver to propel Islamic
fi-nance in Indonesia to its next stage of growth.
The establishment of BPKH is expected to create
tectonic shifts across the capital markets as BPKH
primes itself to become the world’s largest Hajj
fund manager within the next decade. BPKH, which
manages about IDR100 trillion (US$6.57 billion), is
now mandated to invest 50% of this outside of the
banking industry.

Indonesia has in placed a robust Islamic finance
regulatory ecosystem. The ecosystem for Islamic
banking and finance has improved significantly in
the country. Halal tourism, zakat collection and
distribution, waqf, sukuk and related regulatory
framework are just a few examples of the impressive
recent track record of Indonesia in Islamic finance.

Regulatory developments in the field of Islamic
banking and finance have also greatly helped
the country in becoming the top Islamic finance
market. Financial Services Authority (Otoritas Jasa
Keuangan or OJK) has announced various new
regulations, including on sukuk, fintech, takaful and
asset management. Both regulators — OJK and Bank
Indonesia, have closely worked to create a levelplaying field for Islamic banking and finance in the

The digitisation of Islamic banking in the country has
borne witness to significant progress. For example,
the government has announced plans to digitise
the traditional sadaqah donation system used by
mosques, and develop a digital platform for zakat and
waqf payments to help Islamic finance cooperatives
better manage and distribute funds. In this space,
KNKS plans to connect the mosque sadaqah database
to a new zakat and waqf platform it is developing to
better manage and distribute Islamic social finance
funds. The planned zakat and waqf databases
will be integrated into the management of Islamic
financial cooperatives, or the Baitul Maal wat Tamwil
(BMT). These initiatives, once implemented fully, are
expected to boost the market share of Islamic banking
in the country.

Jakarta is also leading the world in the issuance of
sovereign Green Sukuk. In February 2019, Indonesia
returned to the global sukuk market when it raised
US$2 billion through a dual tranche Global Green
Sukuk and a regular Global Sukuk. The two sukuk
issuances comprised of US$750 million Global Green
Sukuk with a tenor of 5.5 years maturing on 20 August
2024, and a US$1.25 billion regular Global Sukuk with
a tenor of 10 years maturing on 20 February 2029,

Islamic social finance has seen expansion and
significant development in recent years. The
Indonesian government introduced sukuk waqf, a
facility linked to Islamic endowments, which will
return funds to donors upon maturity but reinvest
the proceeds to manage waqf assets. This follows
the release of the Waqf Core Principles, a joint work
of the Indonesian government with Islamic Research
and Training Institute (IRTI), the research arm of the
Islamic Development Bank (IsDB), providing clarity
and guidance on how Islamic endowments should be
managed and how they can be utilised to meet public
needs. Similarly, launch of the Zakat Core Principles
are a starting point for the frameworks and standards
of the best practices of zakat-based governance.
These two core principles are Indonesia’s contribution
to the development of Islamic social finance and better
zakat and waqf regulation standards in the world.

One of the main variables in IFCI is the presence of an
educational environment conducive to the operations
of Islamic banking and financial institutions. In the
areas of education, various initiatives have been
implemented and planned to strengthen research and
education related to Islamic finance and economy,
in particular, integrating them with the requirements
of the industry. The recent announcement on the
establishment of the Indonesian Network for Islamic Economic Studies (INIES) by KNKS is indeed
commendable. Aimed at streamlining research
efforts and boosting their relevance to policymakers
and other industry stakeholders, the centre will
facilitate links and synergies between existing
research centres and the government, regulators, as
well as market players.

Qualified and competent human resources remains
vital to Indonesia in cementing its leadership role
within the global Islamic finance community. In this
regard, the quality assurance and standardisation
of Islamic finance curriculum is critical for industry
growth. Realising this importance, KNKS has
formed a working group committee comprising
representatives from 10 universities across the
country to develop a standardised curriculum in
Islamic economy.
This initiative signifies a positive development
for future growth in the country’s Islamic finance
industry as lack of standardised curriculum and
education in Islamic finance present in many
countries has resulted in a mismatch between the
graduates produced and the skills required by the
industry. Such initiative by KNKS is the right step in
the right direction in the development of skilled and
sustainable talent for the industry.

Indonesia faces tough competition from Malaysia and
Iran (and to some extent from Saudi Arabia) to retain
its leadership position in Islamic banking and finance.
In particular, neighbouring Malaysia has remained
a very competitive market for Islamic finance.
Indonesia, however, is arguably the best market for
Islamic social finance in the world. Developing a
global Centre of Excellence for Islamic social finance
is something where no other country will be able to
compete with Indonesia. Setting up something like
Jakarta Islamic Financial Centre, developed around
the concepts of Dubai International Financial Centre,
Astana International Financial Centre and Qatar
Financial Centre; may also help Indonesia cement its
leadership position in the world of Islamic finance.
The proposed Islamic Financial Centre for Indonesia
may very well be incorporated in the development
plans of the new capital city to be built in Kalimantan.
But the key is to retain the momentum of all the
good things Indonesia has initiated, which should
ensure that Indonesia continues to rise in the global
Islamic financial services industry.

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