Market Review gif Islamic Banking and the Economy of Indonesia Source: GlobalIslamicFinanceMagazine.com A


s the Islamic financial industry is estimated to be worth $2 tril- lion dollars or potentially more by 2012 many countries around the world are tapping into a slice


of the pie. Indonesia has made key devel- opments in the Islamic financial sector, fol- lowing their successful neighbour Malaysia which is already established tself as an un- precedented Islamic financial hub.


Indonesia has a population of of approxi- mately 230 million, making it the fourth most populous country in the world; its capital city is Jakarta, which is located on the island of Java. Since the majority of the population of Indonesia are Muslims, Indonesia can be considered the largest Islamic state in the world in terms of popula- tion. The Indonesian economy is classified as a developing economy, and is known as a “Tiger Cub Economy” which is a group that also includes Malay- sia, the Philippines, and Thailand.


By 1998, the In- donesian Rupiah – which was the cur- rency most affected by this crisis – had lost around 74 percent of its value. This led to a decline in the Asian Tigers financial markets, as a result of the large sales that had been made by speculators. The Asian Ti- gers stock market decreased by around 65 percent, which translated into overall losses that reached around 700 billion dol- lars in less than a year.


Indonesia was also politically and economi- cally affected by this, but it has since recov- ered and begun to experience growth once more. Indonesia has great economic poten- tial, and this is due in no small party to the great international support that it enjoyed during the 1997 financial crisis, particularly from the US.


The US had invested around 300 billion dol- lars into Indonesia, and it was not prepared to lose this. Indonesia learned its lesson well, and so was able to withstand the glo- bal financial crisis that engulfed the world in 2007.


Despite all of these positive figures and sta- tistics with regards to the Indonesian econo- my, national decision makers do not have a long-term strategic vision in place to exploit the country’s favourable geographic loca- tion, and nurture its social environment in order to transform Jakarta into the capital of Islamic Finance in East Asia, which is a posi- tion that Jakarta is well-qualified to hold.


The importance of this issue is further un- derlined by Indonesia’s neighbour, Malaysia, which through development over a number of years has been able to become the gate- way and capital of the Islamic banking in- dustry in East Asia. Indonesia has known of


It overcame the economic downturn with minimal damage, and this [financial] storm was one that hardly touched Indonesia. By mid-2009, the Indonesian financial markets have reached amazing heights, surpassing all other Asian markets with the exception of Mumbai and Shanghai. The Indonesian Ru- piah had recovered most of its losses against the dollar, and Indonesia’s 2009 budget def- icit stood at less than 1.6 percent of GDP. In 2010 – just as the Indonesian Central bank predicted – the economy is well on the way to achieving growth rates of 7 percent.


the potential of the Islamic banking industry since 1992, when it founded its first Islamic bank, Bank Muamalat Indonesia (BMI). Yet the industry’s growth rates [today] do not exceed thegrowth witnessed by the industry between 2000 and 2009, which stood at be- tween 2.5 percent and 5 percent growth. By the end of 2009, there were a total of 6 Is- lamic banks and 25 Islamic windows in con- ventional banks in Indonesia, in addition to 138-state owned provincial Islamic banks.


However, Indonesian decision makers have not paid attention to the financial strength of this promising industry until recently. They are now seeking to keep up with their neighbours by stimulating this industry and granting it the attention that it deserves. They have enacted relevant legislation, and the government has issued several independent Is- lamic Sukuk funds.


The government’s measures to stimu- late the industry have led to an un- precedented growth in its [Islamic bank- ing assets, with the growth rate at the end of 2009 seeing an increase of around


37 percent compared to 2008. The growth rate in 2010 is expected to stand at around 81 percent, according to a report published by the Indone- sian newspaper, The Jakarta Post.


But even with the high growth rates recently achieved in Indonesia thanks to Islamic banking assets, these assets still only make up less than 2.5 percent of Indonesia’s total financial industry. This is not proportionate with the incentives put in place by the Indo- nesia state to achieve growth in this indus- try.


The Indonesian government is therefore ex- pected to seek to increase Islamic banking’s share of its financial industry by offering increased tax incentives, enacting further legislation, issuing more independent sukuk bonds. Thus, Indonesia will become Islamic banking’s tiger economy.


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2011 February Global Islamic Finance 65


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