Indonesia could be Asia's next Islamic finance hub

Jakarta: Indonesia ended 2020 with record highs in Islamic finance development, with the State of the Global Islamic Economy Report (SGIER) 2020-2021 raising the ranking of Indonesia's Islamic finance industry to 4th from 5th, after Malaysia, Saudi Arabia, and the UAE.
The Islamic finance development indicator (IFDI) for 2020 revealed that Indonesia's rankings also rose from 4th to 2nd in Islamic finance development and from 8th to 7th in Islamic financial assets, with the latter increasing 15 percent to USD 99 billion.
The National Islamic Economics and Finance Committee (KNEKS), which acts as the conductor of a giant orchestra that comprises Indonesia's Islamic economics architecture, has developed an integrated map of the country's Islamic economics and finance ecosystem that gives an eagle's eye view of the roles and positions of stakeholders, players, regulators, infrastructures, IT, human resources and the public.
It has done a tremendous job in encouraging every aspect of the ecosystem to make considerable improvements, despite its modest political power. In Islamic commercial finance, Indonesia entered 2021 with a plan for a grand transformation: the megamerger of the country's three largest Islamic banks, Bank Syariah Mandiri (BSM), BNI Syariah, and BRI Syariah, to establish the state-owned Islamic bank Bank Syariah Indonesia (BSI) in February 2021.
Creating a bank with Rp 21.5 trillion (USD 1.5 billion) in equity (as of November 2020), the BUKU III category BSI will have strong capital to compete in Indonesia's Islamic banking sector. The merger will scale up its capability and capacity to compete at both national and international levels and thereby step up the sector's game, which has long been deemed as having snail's pace growth.
While it will be the only Indonesian Islamic bank in the BUKU III category (the rest are still BUKU II or BUKU I), BSI plans to step up to the highest rank of BUKU IV by the second quarter of 2022. With Rp 232.5 trillion in assets, amounting to almost half of Indonesia's total Islamic banking assets, BSI will be counted among the top 10 banks in Indonesia as well as the top 10 Islamic banks in the world. Stronger capital, wide-ranging and substantial transformations in IT infrastructure, and digitalization of products and services, as well as significant employee upskilling, are some critical points BSI should be aware of to win the battle.
In Islamic social finance, Indonesia has tons of potential in faith-based social funds for zakat (obligatory alms) and voluntary charitable donations like waqf, infaq, and sadaqah. While struggling to collect zakat (realising only 4.4 percent of potential zakat in 2019), Indonesia has been giving more attention to waqf. Indonesia is estimated to have Rp 180 trillion in potential cash waqf and 11,000 hectares in current land waqf. Recently, it introduced waqf sukuk, or cash waqf-linked Sukuk (CWLS), an Islamic bond financed by waqf.
The government in March 2020 issued CWLS SW001, its first CWLS, through a private placement scheme with the Indonesia Waqf Board (BWI). In Islamic microfinance, micro waqf bank (BWM) is the current trend, with Vice President Ma'ruf Amin recently asking the industry to boost their development. BWM is not a bank, but waqf-based microfinance. Mirroring Bangladesh's microfinance pioneer, Grameen Bank, BWM follows the basic microfinance model of financing micro-enterprises excluded from formal financial institutions because they lack physical collateral.
The group lending model based on peer pressure (if one member defaults, the other group members will not get their loans) acts as social collateral that substitutes physical collateral. Unfortunately, Indonesia's Islamic microfinance institutions (IMFI) have less favorable reputations due to mismanagement as a result of a lack of regulation and oversight.