GLOBAL ISLAMIC FINANCE REPORT 2019
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 middle-income 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 (see Table for the Top 10 Islamic financial markets).
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.
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.
STATE OF THE GLOBAL ISLAMIC INDUSTRY
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 market.
HOW INDONESIA IS LEADING THE GLOBAL ISLAMIC FINANCIAL MARKET
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 finance 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 frameworks 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 level-playing field for Islamic banking and finance in the country.
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, respectively.
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.
RETAINING LEADERSHIP
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.
