Bank Indonesia (BI) announced recently its plan to issue waqf based bonds as a social welfare mechanism. The Indonesian Muslim Intellectual Association (ICMI) will also launch the very first waqf venture bank this June. Waqf may become the new trend in Islamic banking for several reasons. Waqf funds can be utilized for equity-based financing, a financial structure considered ideal for Islamic values, but undervalued in the current Islamic banking and finance architecture. The nature of longterm waqf funds for investment will make a good source of funding for venture capital and private equity. The amount of money potentially generated under a waqf system is indeed huge. The value of waqf land is estimated to reach Rp 300 trillion. This highlights the need for a professional and well-governed management to create a waqf bank that functions well and is successfully implemented.
In #Indonesia high-ranking officials announced they were preparing to establish the National Committee of Sharia Finance (KNKS) that would be directly chaired by President Joko Widodo. Bank Indonesia Governor Agus Martowardjo noted that human resources quality would determine the success of the KNKS, including its system and management’s regulation. He added that the committee would be established this month and also aims to involve 22,000 Islamic boarding schools across the archipelago. Boarding school graduates will be expected not only to become knowledgeable in religious affairs, but also to understand sharia economics and develop their entrepreneurship skills.
According to #Indonesian Economic Coordinating Minister Darmin Nasution, the development of the country’s sharia finance industry will increase female participation in the economy. He said Indonesian fashion and halal cosmetics were among the well-performing industries and most businesspeople in the two industries were women. Indonesia is one of the top five Islamic fashion industries in the world, with a total spending of US$12.7 billion annually. It is also in the world's top five regarding the sharia cosmetics/pharmaceutical industry with an average spending of $4.8 billion per year, according to data from Bank Indonesia (BI). BI deputy governor Hendar said inspite of the global slowdown, Indonesia's sharia industry was still giving positive signals.
Bank Indonesia (BI) unveiled a waqf-based sukuk, aimed at developing social property assets to be commercially self-sustaining. BI Deputy Governor Hendar said the sukuk could further finance the development of commercial buildings such as office towers or shopping centers over waqf land. The coupon will be paid from the recurring income of the assets. According to Muhammad Anwar Basori, BI head of the sharia economic and finance department, waqf land was traditionally used for social and public purposes such as cemeteries, mosques, or schools. Waqf-based sukuk could be a solution and could provide cash to cover maintenance costs. Basori added there are 400,000 hectares of waqf land in Indonesia, 90% of which are cost centers. In Kuwait and Singapore, they have built many productive assets on waqf land.
#Indonesia's state-owned infrastructure financing company Sarana Multi Infrastruktur (SMI) will establish a sharia business unit to meet demand for Islamic infrastructure financing. SMI president Emma Sri Martini said the documentation and legal matters had been completed, but the company had to wait for the appointment of a sharia supervisory board by the government. SMI will inject Rp 500 billion (US$38.42 million) into the business unit. All of the money will come from internal funds. Currently, SMI's assets total Rp 35 trillion. Before year-end, the business unit will structure some sharia products from direct placement to sukuk.
Underprivileged citizens today live in an economy that exposes them to certain risks, like unpredictable incomes and high daily expenses. With around 70% of the population still excluded, Indonesia has taken major leaps to improve the situation. Since the preceding high-level talks in 2010, Bank Indonesia (BI) and the Financial Services Authority (OJK) have focused on how to provide better access to financial services. The disproportional knowledge between the banking industry and the population in general is quite severe, and a product to address the specific needs of the economically active poor and micro entrepreneurs is essential. Moreover, the challenges of financial inclusion do not stop when formal financial services are provided. It goes beyond service provision to educating and empowering the community to understand finance. Financial inclusion cannot be achieved through isolated efforts. Collaboration between private companies, the government and civil society is necessary.
A tax waiver is needed, especially on asset transfers, to make Islamic financing in Indonesia more competitive with conventional financing. According to Qudeer Latif, a partner at law firm Clifford Chance, in the UK and Malaysia, the asset transfer tax is annulled, they categorize the asset transfer in the Islamic financing structure as a financial transaction, rather than a sales and purchase transaction. Another problem, he continued, stemmed from the high building transfer fee, which varied from 5% to 7%. The central government had tried to reduce it to 2.5%, but some regional governments still objected to it. According to the expert, changing the taxation rule will create a level playing field between Islamic and conventional financing.
Lender Maybank Indonesia has called on the Indonesian government to promote Islamic financing as an alternative funding to boost infrastructure projects in the country. Its president director Taswin Zakaria said infrastructure projects covered tangible assets such as land and equipment that could be securitized for Islamic financing such as sukuk.
"We view Islamic financing as an alternative, not a substitute, that can be used simultaneously with conventional financing […] We’re looking to finance more government projects using Islamic loans," he said during Maybank's Invest ASEAN 2016 event on Wednesday in Jakarta. Islamic financing, he further said, would attract money from the Islamic world, such as from Middle Eastern investors in Indonesia as the infrastructure projects were mostly supported by the government.
Maybank's sharia unit, Maybank Syariah, disbursed 80 % of its Rp 10.8 trillion (US$ 817.25 million) loans in the first half of 2016 to the infrastructure sector. However, it is currently struggling with unsafe gross non-performing financing (NPF) of 5.58 %.
In #Indonesia fintech startups will be invited to a safe space where they can test any service under the supervision of the central bank before it issues regulations and allows full authorization. The safe space, known as a "regulatory sandbox", has been adopted in many countries around the world. The central bank will also set up a designated fintech office to overlook the sandbox. The Indonesian Fintech Association applauded the planned sandbox approach as it will serve as a tangible platform for all fintech initiatives to be tested into the regulatory system. The association's secretary-general Karaniya Dharmasaputra said this concept was a good one as shown by many countries implementing it toward success.
In #Indonesia the National Police have warned the public to be on guard against fraudulent investment companies. Criminal Investigation Department director Agung Setya said investors who understood investment often fell prey to fraudsters because of greed, while other were lured by religious symbols and public figures. He cited as an example the 2007 Gama Smart Karya Utama case and the 2012 Langit Biru cooperative case, in which the founders claimed to be spiritual leaders. Data show that fraudulent investments lead to billions of rupiah in losses per year. In 2007, losses amounted to Rp 16.13 trillion (US$1.21 billion), but decreased to Rp 604 billion in 2008. In 2011 and 2012, losses rose to Rp 68.62 trillion and Rp 10.22 trillion, respectively, but declined to Rp 235 billion (2014) and 285 billion (2015).
In #Indonesia deposit insurance is an integral part of the financial fractional-reserve banking system. This structure was put into place twelve years ago through the enactment of the Indonesia Deposit Insurance Act 2004. Islamic deposit insurance has become more relevant of late due to the worldwide development of Islamic finance. Related to the implementation of the fractional banking reserve system in Islamic banking institutions (IBIs), there are issues to do with the reserve structure that is incompatible with sharia principles. Deposit insurance does involve the exchange of money for money and the exchange occurs with different values and at different times. Hence, some sharia scholars would argue that it is an interest-based transaction and therefore non-permissible.
In #Indonesia the Islamic banks’ market share has remained below 5% for the last several years, despite having existed since the 1990s. Now the State-Owned Enterprises Ministry is mulling a proposal to allow Islamic lender subsidiaries owned by the four state-run banks to be merged into two new entities. The ministry’s assistant Gatot Trihargo said the state would still control the two new sharia lenders as majority shareholders. He added that at least two of the four sharia banks should be merged in order to become a BUKU III lender, which has capital between Rp 5 trillion and Rp 30 trillion. Bank Aceh, a regional development bank, is currently in the process of being converted into an Islamic lender, while Bank Syariah Mandiri is seeking strategic investors from the Middle East.
Crowdfunding is a way to connect ordinary individuals with the innovative projects they support. It is possible for retail investors to become venture capitalists and probably own shares in the next giant tech company. In Indonesia, however, this method of raising money might face some challenges. Firstly, Indonesians have trust issues with money transactions carried out over the internet. Secondly, there is a lack of crowdfunding education among retail investors. The government needs to undertake supervisory and regulatory functions to respond to the problems.
The Financial Services Authority (OJK) is considering providing a legal basis for Islamic real estate investment trustees (REITs), hoping that it will attract more property investors, especially from the Middle East. OJK deputy director of sharia market Muhammad Touriq said Takaful companies are interested in investing in the REITs, but have failed to do so as the existing REITs are not sharia-compliant. The Indonesian government is working on an incentive for the Islamic REITs that allows investors to pay only 0.5% income tax. So far 11 developers have expressed their interest including Ciputra, Summarecon and Ciptadana Asset Management.
The Indonesian Economist Association (ISEI) and the Indonesia Chamber of Commerce and Industry (Kadin) have drafted a new scheme to improve the income of 1 mn farmers in various commodity industries by 2020. PISAgro, which stands for Partnership for Indonesia's Sustainable Agriculture, aims to reach more than 445,000 farmers in 2016. ISEI chairman Muliaman Hadad said farmers were currently experiencing stagnant productivity from inadequate access to finance, as well as good quality seeds and fertilizers. Kadin chairman Rosan Roeslani said the program would give support in plantation infrastructure, provision of seeds and fertilizers, mentoring and the strict implementation of good farming practices.
The Islamic Development Bank (IDB) has committed US$5.2 billion worth of loans until 2020 to aid Indonesia’s priority development projects. Finance Minister Bambang Brodjonegoro said the prioritized sectors include energy, transportation, urban development, higher education and skills development, private sector development and Islamic financial broadening. The IDB will work with other lenders, including the World Bank, the Asian Development Bank (ADB) and China-backed Asian Infrastructure Investment Bank (AIIB). Going forward, the IDB will prioritize efforts to shift away from dependency on commodities.
The Islamic Development Bank (IDB) is planning to establish the Islamic Infrastructure Bank, which would be led by Indonesia and Turkey. Indonesia plans to spend US$300 mn on equity participation in the project. However, Turkey has committed to surpass Indonesia’s capital in a bid to bring the new bank’s headquarters to Ankara. Indonesian Vice President Jusuf Kalla expressed his support for the Islamic Infrastructure Bank. The IDB has recently elected Bandar bin Mohammed bin Hamza Asaad Al Hajjar as its new president, following the retirement of Ahmad Mohamed Ali. Bandar will hold the position for a five-year term.
Indonesia has become one of the leading sukuk issuers in the world, with issuance totaling Rp 503 trillion (US$38 bn) since its debut in 2008. Finance Minister Bambang Brodjonegoro said total outstanding sukuk was at Rp 380 trillion ($29 bn), which accounts for 15% of total government securities. He added that the latest dollar sukuk, issued in March, received a very good response from investors. For the $2.5 bn issuance, total subscription reached $8.6 bn or around 3.5 times.
The issue of sustainable development goals (SDGs) was discussed intensely at the annual meeting of the Islamic Development Bank (IDB) in Jakarta. Finance Minister Bambang Brodjonegoro said many aspects of the SDGs were covered by Islamic finance, arguing that most customers served by Islamic micro-finance were poor people who were not in the banking system. Bank Indonesia Governor Agus Martowardojo added the size of Islamic finance is still very small, representing only 1% of total global finance.
Indonesia lacks the political commitment needed to develop Islamic finance, causing it to lag behind Malaysia in that area, experts have said. In Malaysia, there is a top-down approach, the government aims to be the global Islamic financial hub," Senior economist for the British Embassy in Jakarta, Edi Wiyono said. Meanwhile, in Indonesia, Islamic finance has grown from the bottom-up, with the public-initiated establishment of Bank Muamalat, the first sharia bank in Indonesia, he added. Indonesia is still the biggest retail sharia market in the world but the contributions of sharia finance in big projects, such as infrastructure, are still lacking.