The government will mend the legal framework on the development of sharia finance to unlock the untapped potential of the sector.

In his address at the Indonesia Sharia Economy Festival held in Jakarta on Wednesday, Vice President Ma'ruf Amin said improvements to the regulatory framework would be made through a revision of Presidential Regulation (Perpres) No. 91/2016 on the National Committee for Sharia Finance.

He expressed hope the revision would allow business players in sharia finance to maximally benefit from the country’s large Muslim population.

"The revision of Perpres No. 91 will expand its scope [from only sharia finance] to sharia economy, in which the president will serve as the chairman and the vice president the managing director of the National Committee for Sharia Finance," the former chairman of the Indonesian Ulema Council (MUI) said.

He said he believed the sharia economy could help decrease the wealth gap and boost financial inclusion.

Ma'ruf said the government would help promote the sharia economy in the country's halal industry, namely in tourism, food and beverages, fashion and social funds such as zakat and waqf — a form of endowment specifically intended for charitable causes, usually given in the form of assets such as land or buildings.

"Through this initiative, we hope that stakeholders can work together to strengthen the industry," said Ma'ruf, adding that the current market share of the sharia economy was 8.6 percent while the share of sharia banks was 5.6 percent.

Meanwhile, Bank Indonesia (BI) Governor Perry Warjiyo called for strong commitment among industry players and sharia banks to mitigate the risks of the global economic slowdown driven by the trade war between the United States and China.

"Around 40 percent of Indonesia's population has yet to enjoy [the benefits of] financial and economic inclusion, that is the market and potential segment [of the sharia economy] that we need to develop to boost our national economy [during the global economic slowdown]," Perry told reporters on the sidelines of the festival.

"We are asking pesantren [Islamic boarding schools], MSMEs [micro, small and medium enterprises] and tourism sector players to support the growing sharia economy to mitigate the risks of the global economic slowdown."

Perry said the central bank, through the festival, would conduct a business matching program to facilitate meetings between Indonesia's MSMEs and pesantren with international customers from Japan, the Middle East and Saudi Arabia. "This shows that the country's sharia economy is going global."

The central bank has also launched a number of initiatives to increase the market share of the sharia finance to 20 percent by 2023. BI's initiatives include developing the halal value chain, providing short-term global sukuk (Islamic bonds), utilizing zakat assets and waqf through homemade QR Code Indonesian Standard (QRIS) and developing a halal lifestyle campaign and sharia finance curriculum.

Based on the 2019 Islamic Finance Development Indicator (IFDI) released on Tuesday by the Islamic Corporation for the Development of the Private Sector (ICD) and financial market data provider Refinitiv, Indonesia’s ranking jumped six places to fourth from 10th in 2018, after Malaysia, Bahrain and the United Arab Emirates.

According to the report, the jump was driven by several factors, including the establishment of Indonesia's Sharia Economy Masterplan 2019 to 2024 by the government, which encompasses a development framework, strategies and action plans for the country’s Islamic finance industry.

"Regulatory frameworks are also being enhanced," the report stated.

The master plan, launched in May by President Joko “Jokowi” Widodo, is intended to empower Indonesia’s halal value chain and turn the country into a net producer instead of a market for halal goods and services.

Despite the achievement, the country continues to struggle to tackle the challenges of developing sharia finance and the sharia economy. Some of the challenges come from a lack of participation from sharia banks in financing infrastructure projects, low optimization of waqf and zakat, as well as a higher rate of spending on halal products compared to production.

According to the Financial Services Authority (OJK), as of July 2019, Islamic financial assets (not including Islamic shares) were valued at Rp 1,359 trillion (US$97.07 billion), a 5 percent increase from the beginning of this year.

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