With Islamic finance currently showing a high level of growth globally, the industry is looking to capture untapped areas to improve the quality of economic development.

Islamic finance experts emphasize the quality of Islamic finance, and also that its future growth is expected to stay true to its essential norms and values.

Amid this backdrop of growth, it is timely that Bank Indonesia is holding an international seminar on Islamic finance, with the theme, '€œA New Phase of Islamic Finance; Capturing the Untapped Area to Improve the Quality of Economic Development.

The two-day conference opened on Thursday in Nusa Dua with a panel discussion on improving the quality of Islamic finance and the government role in the sector.

This central bank'€™s seminar, which has brought together experts from around the world, is expected to revisit the essence and purpose of Islamic finance, and also explore new sources of growth to maintain the current high level of growth in the Islamic finance industry.

Islamic financial industries are lacking in certain areas, such as financial markets and consumer banking. As such, other potential products and segments that correlate with the economic growth and stability of the financial system should be the next expansion targets.

Poverty alleviation and the distribution of economic wealth issues have not yet been properly addressed by the rapid growth of Islamic finance in many countries. In fact, the Islamic financial industries have the potential to be involved in ensuring economic equality through the improvement of financial access, experts say.

Islamic finance should be beneficial for underprivileged communities and small-micro economic groups, as the nature of the Islamic financial system is to not only provide services in the commercial finance sector but also in the social sector.

In this regard, Bank Indonesia has shown its support for the development of Islamic finance by highlighting Islamic banking as one of the flagship programs to achieve higher economic development and to support the Indonesian Economic Development Acceleration Masterplan (MP3EI).

Moreover, the central bank has also taken part in various international activities related to Islamic finance in support of the development of Islamic banking and finance with the Developing Eight (D-8) organization, the Statistical, Economic and Social Research and Training Centre for Islamic Countries (SESRIC-OIC) and the Islamic Development Bank (IDB) program.

In the global scene, Islamic finance is showing tremendous development on all fronts; Islamic banking, the Islamic capital market and the takaful industry with significant developments in terms of assets, variety of products and regulatory framework

'€œBank Indonesia has been active in supporting the establishment of an international regulatory standard setter, such as the Islamic Financial Services Board [IFSB] and other supporting institutions like the International Islamic Financial Markets [IIFM] and International Islamic Liquidity Management [IILM],'€ Bank Indonesia governor Agus Martowardojo said.

The Islamic social sector, which includes zakat, waqaf and Islamic microfinance, which all play an important role in the Islamic financial system, have also shown positive trends.

As a system, Islamic finance has a huge potential to serve as a common platform for economic development that incorporates norms and values for all society.

In order to gain the maximum benefit, the Islamic financial system should develop a comprehensive and systemic development approach to be relevant to economic development in general.

'€œIslamic finance should not be considered as a niche market disconnected from mainstream policy, it serves as an integrated part of the financial system and as another pillar to sustain economic growth,'€ the governor said.

In the area of Islamic finance, the Indonesian government put serious efforts into developing this financial system within its mainstream policy, such as laying a strong legal foundation with the Islamic Banking Act; the sukuk, zakat and waqaf acts; and the establishment of financial infrastructure '€” including a comprehensive Islamic financial regulation and supervision that complies to international standards and practice.

The country'€™s financial authorities walk hand-in-hand in the development of the Islamic financial sector, providing Islamic monetary instruments and Lender of the Last Resort (LOLR) facilities, as well as a deposit insurance scheme for Islamic banking.

Based on the understanding that the development of an Islamic financial system needs to include important elements comprising the Islamic banking industry, takaful industry, Islamic capital and money markets, the Indonesian government chose to synergize all the elements to develop a progressive and sustainable Islamic financial system.

These efforts have been fruitful. The Islamic banking industry has been growing above 35 percent annually with low non-performing financing and Indonesian Islamic banking assets topping Rp 214 trillion (US$24 billion).

Islamic banking '€” consisting of Islamic banks, Islamic windows or Islamic finance services in a reguler bank. Shariah Rural Banks '€” constitutes 4.89 percent of the total national banking share, concentrated mainly in urban areas.

The psychological threshold of a 5 percent market share is expected to be achieved within this quarter.

Islamic financial assets in Indonesia reached around $38.1 billion, comprising mainly of banking (54 percent) and sukuk (36 percent), with the rest consisting of insurance, multi-finance and mutual funds.

In the fiscal sector, the government regularly issues sukuk in domestic and foreign currency under the ijarah- and project-based schemes.

In the zakat sector, according to a report by the National Zakat Board (Baznas), annual collections of $140 million were secured. This may serve as an important component of the Indonesian financial safety net and financial inclusion. This inclusion is also supported by around 5,500 Islamic microfinance institutions that are spread across the country.

The strategy for the development of the Indonesian Islamic banking industry is prescribed in the Islamic banking blueprint that emphasizes: setting the appropriate regulatory incentives for development; infrastructure development; developing infrastructure to provide accurate market information; customer education and protection; and product development to facilitate a variety of transactions.

Indonesia provides ample opportunity to develop Islamic financial institutions. Factors include the large Muslim population (more than 200 million) and a growing middle class, stable economic growth and huge resources. With potentials such as these, Indonesia could develop into an international hub for the Islamic finance industry.

To accelerate the Islamic banking market, Bank Indonesia also encouraged the parent companies of Islamic banks to increase their roles when improving Islamic bank capital, provide technical assistance and allow office channeling to subordinate Islamic banks in order to accelerate the development of Islamic banks and Islamic banking windows.

Furthermore, the central bank will also create the appropriate business conditions for Islamic banks to optimize investment-based financing by providing real sector index, establishing advisory facilities and harmonizing Islamic banking and Islamic financial institutions regulations.

Popular

RI, Australia strengthen partnership on taxing crypto assets

Analysis: Indonesia denies normalization with Israel to enter OECD

Citroen to produce electric cars in Indonesia