Indonesia Looks to New Roadmap for Islamic Finance Boost
JUNE 10, 2015
Jakarta. Indonesia’s capital market regulator has published a five-year strategy for the Islamic finance industry, its latest effort to shake the sector out of its niche status in the world’s most populous Muslim country.
The roadmap from Indonesia’s Financial Services Authority (OJK) charts an extensive agenda ranging from reducing fees on sharia-compliant products to developing education and training programs.
It aims to encourage an Islamic finance market that lags behind Indonesia’s peers: Islamic banks hold roughly 5 percent of total banking assets in the country, compared with more than 20 percent for neighbor Malaysia and well behind the 50 percent in Saudi Arabia.
Authorities want Indonesia’s Islamic banks to hold at least 15 percent of the market by 2023, an ambitious target considering the sector’s growth is stalling.
“Its difficult to see how they would achieve that target without substantial reforms within the Islamic banking space,” said Khalid Howladar, Moody’s global head of Islamic finance.
“Overall globally, its still a positive growth story. Indonesia in particular has a lot of potential, but it’s had a lot of potential for a long time.”
Part of the problem lies with low financial literacy among the public, with Islamic finance further behind, according to a nationwide survey commissioned by the OJK.
The roadmap would expand on education and promotion activities, while developing rules and industry certification for religious experts that endorse Islamic financial products.
Rules on rights and obligations regarding underlying assets of Islamic bonds (sukuk) would be developed this year, while a law on Islamic securities would be drafted by 2017.
The OJK will also speed up the registration of Islamic securities and relax limits on holdings by Islamic mutual funds.
It will also publish rules on sharia-compliant versions of margin trading, repurchase agreements and hedging.
Coordination among the various government bodies is also set to increase, including the central bank and the ministry for national development planning.
With the exception of Malaysia, a lack of coordination in most majority-Muslim countries has been a persistent drag on the industry’s development, Howladar said.
“If these new developments represent a change in that thinking, then we think that would be positive for the sector.”
In November, the OJK signed an agreement with the country’s national sharia board to strengthen oversight of the Islamic finance industry, supporting a centralized approach being favored elsewhere around the globe.