When Prime Minister Datuk Seri Najib Razak addressed the 12th World Islamic Economic Forum (WIEF) in Jakarta earlier this month, he had a clear message for delegates, including his host, Indonesian President Joko Widodo.
Politics and the state of the Muslim world aside, Najib put a strong business case for the Muslim world and Asean:
THE world’s Muslim economy grew at almost double the global rate in 2014/2015, and Muslim consumer spending is set to reach US$2.6 trillion (RM10.5 trillion) by 2020;
IN Asean, gross domestic product growth was robust at 4.5 per cent last year. Despite the prevailing global uncertainty, it is expected to grow marginally higher this year;
THE global Islamic economy is thriving, with more Muslims becoming active as investors, manufacturers, bankers, traders and suppliers;
MUSLIM consumer spending is rising as demand increases for ethical financial services, halal food, modest fashion and halal tourism; and,
ISLAMIC finance is growing not just in Muslim-majority nations, but also in international financial centres, such as London and Hong Kong. More people are recognising that it can be a model for socially responsible and sustainable investment and contribute to financial stability.
Malaysia boasts an Islamic capital market totaling RM1.7 trillion and continues to be the global leader in the sukuk (Islamic bonds) market, commanding 54.3 per cent of the global sukuk outstanding at the end of last year.
But, what was interesting in Jakarta is that Najib stressed that his government has “identified Islamic wealth management as the new growth area” for the global industry. Equally revealing is that Najib flagged opportunities to collaborate in the Islamic finance sector “with other jurisdictions, as well as with industry and academia, to expand international connectivity, strengthen talent and capabilities, and grow the global Islamic capital market for the benefit of all”.
His timing could not have been more perfect. This month also saw the publishing of Indonesia’s comprehensive Islamic finance master plan, aimed at kick-starting the country’s syariah finance sector and take it to the next level.
While Malaysia is widely acknowledged as the most advanced Islamic finance market, complete with public policy, legal, regulatory, financial market, auditing and consumer protection oversight, the same cannot be said of Indonesia, the world’s most populous Muslim nation.
Islamic finance has been active in Indonesia for two decades, and despite government support, its penetration has been limited to about five per cent market share of the total banking system.
Despite tax incentives and regulatory amendments introduced over the last year by the Joko government to support the Islamic finance industry, it has failed to take that meaningful leap forward to the next level, especially in financing economic development and infrastructure. Despite its strong year-on-year growth, the overall size of the industry and its impact on the national economy remain modest compared with conventional finance.
In contrast in Malaysia, the Islamic finance industry has a 24 per cent market share of the banking system, which is set to reach 30 per cent by the end of the decade.
The challenge for the global Islamic finance industry, as Najib suggested, is how to achieve that elusive international connectivity, presumably without stepping on petty nationalism, rivalries and duplication.
Countries have tried to build bridges, and erstwhile, former Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz even mooted the initiative of a Silk Road for Islamic Finance, linking China to the Muslim countries and beyond into Africa and Europe.
Unfortunately, this has not materialised in any traction, with countries trying to cooperate more on a piecemeal basis involving bilateral arrangements. Where there are multilateral initiatives, such as the Member Country Partnership Strategy of the Islamic Development Bank with its inbuilt operating principles of proactiveness, inclusiveness and prioritisation, this is oft weighed down by the sheer politics and bureaucracy of the institution and its paymasters. The Islamic Development Bank (IDB) since its inception has been the epitome of a rigid top-down management, too easily influenced by its top equity subscribers.
Coming back to Indonesia, it is important not only because it is the largest Muslim country, but because of the structure of its geography and economy.
It is also a member of the G20 (together with Saudi Arabia and Turkey) and an important commodity producer.
To its credit, the Indonesian government has been one of the most proactive issuers of sukuk in the international and domestic markets. Indonesia, for instance, issued its latest offering — a two tranche Sukuk Wakalah totalling US$2.5 billion in April this year under its US$10 billion Trust Certificate Issuance Programme.
On the domestic sovereign sukuk front, the Indonesian Finance Ministry auctioned its latest series of Islamic debt securities on July 26, thus raising 5.42 trillion rupiah (RM1.65 billion) from five series of syariah securities out of total bids received of 21.355 trillion rupiah in the process.
But in most other respects, it lags and the perception remains that the Indonesian Islamic finance industry lacks market depth and product innovation, and, at best, has developed in a piecemeal way, as highlighted by lack of coordination even between government departments.
The recent appointment of noted economist Sri Mulyani Indrawati, an erstwhile managing director of the World Bank, as the country’s new finance minister augurs well for the Indonesian Islamic finance industry. While at the World Bank, part of Sri Mulyani’s mandate was to develop and oversee the institution’s Islamic finance proposition, especially in promoting financial stability, financial inclusion and infrastructure financing.
As such, the launching of the “Master Plan for Indonesian Islamic Financial Architecture” could not be more timely. It is a comprehensive plan with 10 years’ strategies to strengthen the Islamic finance industry in Indonesia and increase its market share from circa five per cent at present to 20 per cent in the next 10 years.
The plan addresses the Islamic banking and non-banking sectors, including microfinance and Takaful, capital markets/sukuk and asset management, but more interestingly, also for the first time, social and religious funds, including haj funds, zakat, sadaqa and waqf.
Several obstacles to the growth of the industry are identified, including disjointed government policy, lack of market awareness and education, shortage of quality human capital, under-capitalisation of Islamic financial institutions, under-developed Islamic capital market and lack of transparency and disclosure. Indonesia, stresses the plan, has more regulations pertaining to Islamic finance than any other country, but they are scattered and sometimes split between too many regulators.
Its conclusion may be a tad too ambitious, if not optimistic, while its recommendations cover the usual suspects in public policy, legal and regulatory oversight, human capital and syariah governance.
Malaysia has much to offer to connect the two neighbours — one the most advanced market in the world and the other the largest Muslim nation in the world. That does provide the basis for a nascent Silk Road. A good start is to export the structure and success of Lembaga Tabung Haji, let alone the core Islamic finance institutions, products and services. Hitherto, the experience of Maybank and CIMB Bank in Indonesia, and the IDB as well, have not been encouraging.
The plan is reminiscent of Malaysia’s 10-year Islamic Finance Master Plan (with an allied Islamic Capital Market Master Plan) with the same target of achieving 20 per cent market share.
Could Sri Mulyani yet turn out to be the Zeti of Indonesian Islamic finance? The thought is indeed intriguing!
Mushtak Parker is an independent London-based economist and writer