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Developing Islamic finance through research
Striking the right note: West Java governor Ahmad Heryawan strikes a gong to open this yearâs Financial Services Authority (OJK) Islamic Finance Research Forum at Bogor Institute of Agriculture (IPB)
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span class="inline inline-center">Striking the right note: West Java governor Ahmad Heryawan strikes a gong to open this year's Financial Services Authority (OJK) Islamic Finance Research Forum at Bogor Institute of Agriculture (IPB). IPB dean of economics and management Yusman Syaukat (left), IPB rector Herry Suhardiyanto and OJK commissioner Firdaus Djaelani witnessed the ceremony in mid-October. Courtesy of OJK
In response to the slow growth of Islamic banking and finance, OJK organized the Islamic Finance Research Forum. Scholars and students are expected to take part in developing the Islamic financial sector.
The Financial Service Authority (OJK), in cooperation with the Bogor Agricultural University (IPB), recently organized the seventh Islamic Finance Research Forum to boost Indonesia's Islamic financial services sector by stimulating research, development and innovation.
The forum, held from Oct. 14 to 16 at the IPB campus, brought together students, scholars and practitioners of Islamic finance industry to exchange new ideas to help propel the sector's performance.
The three-day forum also featured two prominent scholars in the Islamic finance sector, namely the professor of Islamic economics and finance at Hamad Bin Khalifa University in, Qatar, Mabid Ali Al Jarhi, and Savas Alpay, the director general of the Statistical, Economic and Social Research and Training Centre for Islamic Countries (SESRIC), which is a subsidiary of the Organization of Islamic Cooperation (OIC), to provide insights based on their experiences in their respective jobs.
Indonesia's Islamic financial services industry
The Islamic financial services industry in Indonesia displays an interesting paradox. Indonesia is a country with the biggest Muslim population in the world, with approximately 202.9 million Indonesians out of a total of more than 240 million people identifying themselves as Muslims, making up 88.2 percent of the population.
However, the Islamic financial services industry - that consit of Islamic banking, insurance, mutual funds, financing companies, pawning and pension fund - market remains small, at only around 3.0 to 6.0 percent. The Islamic banking as the frontier of this sector reach only 4.9 percent market share. Furthermore, the total assets managed by Islamic banks in Indonesia amount to only US$24 billion, lagging behind that of Malaysia, which stands at US$135 billion.
The total assets of Indonesia's Islamic banks are only slightly larger than those of England's six Islamic banks, which hold US$19 billion-worth. This is ironic given that England's Muslim population is much smaller than that of Indonesia. The high growth of the industry's performance in England is partly due to the establishment of a Task Force for Islamic Finance. The task force, established in 2013, is led by ministerial-level public officials. Malaysia also has one.
Indonesia, however, does not have such a high-level coordination arrangement.
Aside from the absence of a special task force, the OJK has recently pinpointed several causes behind the industry's slow growth in Indonesia.
Among the causes of Islamic finance's slow growth are the lack of capitalization driven by a paucity of high-quality human capital and a shortage of innovation and creativity.
Stimulating new ideas
The OJK disclosed that the root problems -- the lack of highly qualified human capital, innovation and creativity -- can be solved by, inter alia, sound research and development activities, which are still lacking in the Islamic finance industry.
Forum committee head and IPB's Dean of Economic and Management Yusman Syaukat said that the forum was intended to produce more new ideas and researchers in the field of Islamic finance.
'[The lack of research and innovation in the field of Islamic finance] has been partly caused by the paucity of competent scholars who focus their studies in Islamic finance,' he told the forum in his opening remarks.
According to him, the need to stimulate the interest of scholars and students in the field of Islamic finance was one of the reasons behind the holding of the forum.
This is why, he said, that aside from inviting senior researchers and experienced practitioners, the university also invited students to share their research results in its call for papers for the young researchers program.
There were six young researchers that made it to the forum committee final selection cut, presenting their ideas in front of forum participants.
Aside from that, as many as 132 universities from across Indonesia also sent their students to participate in the event.
OJK commissioner Firdaus Djaelani expressed the hope that once a solid research tradition has been established in the Islamic finance sector, there should be close cooperation among scholars, the government and business practitioners to further push the growth and market share of the sector in Indonesia.
'Scholars can be great partners for the government and practitioners. They can contribute their academic thoughts in efforts to develop new Islamic finance products and create highly qualified human resources in the sector,' he said.
There were several goals that OJK set in the field of Islamic finance in Indonesia, which scholars can help to attain through their research activities, according to Firdaus.
The total assets held by Islamic banks in Indonesia, for example, account for some 4.9 percent of the country's total bank assets. He said his organization is aiming to increase the figure to fifteen percent by 2020.
Meanwhile, corporate sukuk or Islamic bonds total value of issue accounts for 3,17 percent of the total coprporate bonds in Indonesia's capital markets and the value of its mutual funds accounts for only 4.49 percent.
'There are still a lot of great opportunities for the Islamic finance sector to increase its value in the marketplace through research and innovation efforts,' he said.
He applauded the forum, saying that the organization had already conducted similar events since 2010 to open new doors to a lot of untapped research areas in the Islamic finance sector.
'There are still a lot of areas in the Islamic finance sector that can be developed: for example, how the Islamic finance system can be utilized to fund infrastructure projects. We must note that our state budget (APBN) allocates only 29 percent of its total budget to fund infrastructure projects. This is a good opportunity,' he said in his opening remarks during the forum.
Empowering the agricultural sector
Aside from financing infrastructure projects, Islamic finance can also form partnerships with the agricultural sector. This explains why this year's forum was held at the IPB campus.
IPB rector Herry Suhardiyanto said that although agriculture was the university's core competence, Islamic finance was a huge part of its academic program since the sector was closely related to the lives of farmers.
Islamic finance's interest-free capital loans could be a great help for farmers, who might be burdened by conventional banks' high interest rates, thereby facing difficulties to gain access to capitalization.
'This is why we are committed to developing solid Islamic finance research in our campus,' he said in his speech during the forum's opening ceremony.
West Java Governor Ahmad Heryawan said in his keynote address during the forum that the Islamic finance sector had a responsibility to develop the agricultural sector.
'By empowering the agricultural and fisheries sectors, the Islamic finance industry can help to end some 50 percent of Indonesia's economic problems, as these two sectors are the backbone of our economy,' he noted.
