The jury is out on whether a group helmed by President Joko Widodo can revive stalled growth in Indonesia’s Islamic finance industry.
The head of the world’s biggest Muslim population is chairing a new committee tasked with bringing fragmented regulations under one roof and taking action to spur the market, according to the Cabinet Secretariat. Shariah-compliant banking assets increased less than 1% in the first 10 months of 2015, compared with 6.8% overall.
“The fact that it’s being led by Jokowi demonstrates the seriousness,” said Raj Mohamad, managing director at Singapore-based consultancy Five Pillars Pte. “But as they say, the devil is in the details, as we have yet to see the blueprint.”
Indonesia’s ambition to rival Malaysia as a regional hub for finance catering to Muslims is being hindered by a lack of progress in scrapping double taxation on sukuk and a delay in creating an Islamic megabank. The success of the new oversight body may test Jokowi’s credentials after he faced opposition in parliament over reforms since taking office in 2014.
Financial products governed by religious tenets currently have to comply with the regulations of Bank Indonesia, the Financial Services Authority and the National Ulema Council of Shariah scholars. The heads of those institutions will also be part of the new committee, which will be charged with encouraging development, improving endowment mechanisms and raising public awareness, National Planning Minister Sofyan Djalil told reporters in Jakarta on January 5.
Indonesia’s Islamic finance industry is slowing even after a five-year blueprint was unveiled in 2014 to strengthen the capital base of banks, improve the management of funds used for the annual pilgrimage to Mecca and increase the number of experts.
Assets rose 0.4% through October to 273tn rupiah ($19.7bn), after increasing 12% in 2014, 24% in 2013 and 34% in 2012, data from the Financial Services Regulator show. That’s a far cry from Malaysia’s 672.6bn ringgit ($152bn).
“Islamic finance in Indonesia is still far short of the potential,” minister Djalil said. “What we need is synergy among the participants.”
The Southeast Asian nation is also susceptible to a global slowdown just like any other regional economy, making it more imperative that Indonesia boosts its Shariah-compliant industry. More than five years after the central bank asked the tax department to look into the issue of double taxation on sukuk, companies interested in selling such debt are still in limbo and offerings have to be considered on a case-by-case basis.
A plan to create an Islamic megabank by merging the Shariah units of PT Bank Mandiri, PT Bank Negara Indonesia, PT Bank Rakyat Indonesia and PT Bank Tabungan Negara has also been pushed back, with various officials touting different target dates to achieve it. Financial Services Authority director Dhani Gunawan Idat said last month that such an entity will be established in 2017.
“There are many areas that the committee will need to consider and attempt to address,” said Suhaimi Zainul-Abidin, a founding member of the Gulf Asia Shariah Compliant Investments Association in Singapore. “With President Jokowi chairing the committee and given the membership composition, it should be much easier for the different stakeholders to reach a consensus of what needs to be done, and to thereafter activate the appropriate levers to make things happen.”