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Home / Insights

Featured Insights

Islamic Finance

Indonesia's key initiatives in waqf financing

04 Sep 2023
Insight

Islamic Finance
Islamic private equity: Has it come of age?
31 Aug 2023
Insight

Islamic Finance
Saudi Arabia eyes global Islamic finance hub status through new index
04 Aug 2022
Insight

Islamic Finance
Sponsored
Embedded Islamic finance: Back to the roots to reshape the future
28 Jul 2022
Insight

Islamic Finance
Sponsored
Collaboration between Islamic finance incumbents and Islamic fintech challengers
28 Jul 2022
Insight

Islamic Finance
Lack of good practice solutions hinders development of Islamic social finance
20 Jul 2022
Insight

Islamic Finance
International standards and tribunals being developed to solve global Islamic finance disputes
12 Jul 2022
Insight


All Other Insights
Islamic Finance
Indonesia's key initiatives in waqf financing

Multiple stakeholders across Indonesia are gearing up to boost social Islamic financing in the country, especially for waqf purposes. 

The latest initiative comprises organizing awqaf business matching exercises between relevant stakeholders, such as nadzir (waqf manager), mauquf alaih (waqf recipient), entrepreneurs and investors. 

Indonesia’s National Sharia Economy and Finance Committee (KNEKS) and Gerakan Wakaf Indonesia assembled more than 32 participants from nadzir, entrepreneur and investor circles around Jakarta, West Java, Central Java and East Java on August 12, KNEKS’s Sharia social finance director, Ahmad Juwaini told Salaam Gateway. 

The initiative helped foster seven social Islamic financing agreements, valuing more than 3.3 billion rupiah ($216,520). The participants included Gerakan Wakaf Indonesia, Mojokerto-based cooperative BMT Permata, Sidoarjo-based laundry equipment seller Stupontplus, Arabic language learning app BISA, Sidoarjo-based orphan foundation Yatim Gemilang and The Indonesian Muslim Merchants Association or ISMI.

“We conducted awqaf business matching in Surabaya to facilitate nadzir. For example, those who own land but need to raise money or capital to start a business, or cash waqf nadzir who need a place or buildings to manage their livestock - we led them to investors. Also, fellow nadzir interacted to learn about awqaf management models,” added Juwaini.

Each business matching transaction is capped at 10 billion rupiah ($656,457), as it is simply a prototype to be replicated across other regions. Indonesia has a huge opportunity in awqaf collection across both land and cash waqf, he explained. 

Data from the Indonesian Waqf Agency (BWI) showed that the total value of productive waqf in the country currently totals 180 trillion rupiah ($11.8 billion) per year. Meanwhile, based on the overall waqf land valuation, the potential has reached 2,000 trillion rupiah ($131.3 billion) annually. 

“Apart from awqaf business matching, Indonesia, through the Haj Fund Management Agency (BPKH), also invested more than $11.5 million in Islamic Development Bank's (IDB) Awqaf Properties Investment Fund, and has already received a dividend of more than $100,000 annually,” Juwaini added.

Societal contributions

Several facets of the society have also been chipping in. Bank Syariah Indonesia (BSI) conducted initiatives in expanding social Islamic finance, especially cash waqf. Through its CSR arm, BSI Maslahat, that is also registered as nadzir at BWI, BSI collected cash waqf from individuals to be invested in productive instruments such as the Cash Waqf Link Sukuk (CWLS). It also distributed its dividends across beneficiaries. 

Rizqi Okto Priansyah, director of waqf and digital platform at BSI Maslahat, told Salaam Gateway that the dividend has been deployed for purposes of health, scholarship or/and business capital of the mauquf alaih. More than 192 million rupiah ($12,643) cash waqf has been collected through the program till now.

BSI has also been appointed as a distribution agent for the government's retail CWLS issuance series SWR001 and SWR002. Dividend from the former series has been channeled for the cause of the underprivileged. Meanwhile, business capital for 50 micro, small and medium enterprises (MSMEs) was funded via dividends accumulated from the latter series.   

Room for growth 

Imam Nur Aziz, Commissioner at the Indonesdian Waqf Agency emphasizes that Indonesia still has to implement a solid model for social Islamic financing, especially waqf. He refers to Thailand’s Pattani project as a viable waqf and commercial concept.

One of the unique traits of the Pattani project is that it combines the concepts of waqf and commerce. The 300-hectare land area has been acquired by a Sharia cooperative and later donated to the Medina Al Salaam Foundation. 

A residential property and an educational institute (Fatoni University) have been constructed on the land, alongside facilities for a mosque or Islamic centre, a sports area (stadium), hospital, a convention centre, Asean Mall and others. The development and management of most of these projects are commercially cooperative.  

“As a result of this long-term commercial and operational cooperation, most of the profits will be returned to the waqf. And Pattani Asean Mall, which was built on waqf land but operated commercially, will be developed in other ASEAN countries through the Pattani Jaya Commercial institution, one of the subsidiaries of Pattani Jaya Holding (PJH), along with the Madinah Al Salaam Foundation,” Nur Aziz.

The Pattani province, with five of its districts namely Yala, Narathiwat, Songkhla, Patani and Satun, is a Muslim-majority area. Therefore, the urgency of establishing a space that can offer solutions to fulfil basic needs has become a shared obligation. However, the project has a broader goal: To send a message that waqf can perhaps be a key contributor to developing societies.   

“Within a limited spectrum, Pattani, with a population of 3.8 million people with various limitations, is able to provide examples of productive waqf. How about Indonesia, which already has BWI with legal standing and set of rules regarding waqf? This is where BWI's challenge is, to create quality waqf entrepreneurs with high social impact,” added Nur Aziz.

 
04 Sep 2023
Insight
Islamic Finance
Islamic private equity: Has it come of age?

The private equity (PE) industry has experienced some extraordinary periods in recent years, fuelled by resilient fundraising and growing economic activity.

Momentum created in the year 2021, in the wake of the Covid-19 pandemic, cascaded into the first half of 2022.

It was a purple patch for the Islamic economy space as well. Investments across halal food, halal cosmetics, travel, pharmaceuticals, media and recreation, modest fashion and Islamic finance, totaled $25.7 billion in 2020/21, up from $11.8 billion recorded in 2019/20, the State of the Global Islamic Economy Report 2022 (SGIE), published by  DinarStandard, revealed. Of the 210 deals recorded during 2020/21, 114 were venture capital (VC) transactions.

Source: State of the Global Islamic Economy Report 2022
Investments overview - 2020/21
Sector Deal values ($000s)
Halal food 3,972,086
Islamic Finance 17,033,932
Media 1,289,113
Travel & Tourism 1,262,275
Halal Pharma 2,060,839
Modest Fashion 28,290
Halal Cosmetics 20,307
  25,666,842

 

Amid growing awareness and a rise in the adoption of Shariah-compliant financial instruments, the Islamic PE space has gained considerable momentum.

“Private equity and venture capital (VC) will continue to be vital engines to boost the growth of the Islamic economy. Availability of PE and VC funding and expertise has helped innovative startups to get off the ground and scale, creating a vibrant and diverse economic landscape,” notes Adela Mues, partner, Global Corporate Group at Reed Smith.

“The infusion of Islamic finance principles in the PE and VC space has contributed to the popularity of private funding structures in Islamic economies. One successful example is the rise of Shariah-compliant funds, which provide an ethical investment approach, and resonate with a wide range of investors.”

Key alignments

Private equity, via its various strategies such as venture capital, growth equity and leveraged buyouts (LBOs), has been a significant mode of investment, fuelling innovation, growth, and impact.

However, realigning it to Shariah values warranted structural modifications, which included strong oversight on permissible sectors and lines of business of the target company as well as acceptable Islamic instrument structures.

The most typical form of Islamic private equity and venture capital investment structure includes contracts such as Mudarabah – a contract between an investor (rab-al-maal) providing capital and an entrepreneur (mudarib) running the venture; and Musharakah – a partnership in which all parties fund the business and share profits and losses.

A lesser deliberated and often overlooked fact, however, is that the conventional private equity and venture capital structure essentially mirrors a Mudarabah contract. Investors are, in essence, limited partners (LPs), while the general partner (GP) is the PE firm itself.

“The GP/LP structure is the most vivid example of a Mudarabah structure in modern finance. The simple dynamics of a GP/LP structure is very much in the spirit of Islamic finance because it includes the 'mudarib', better known as the general partner, who invests capital on behalf of the investors and has a share in profits,” Dr. Aamir A. Rehman, chair, Innate Capital Partners tells Salaam Gateway. 

The ‘leverage’ conundrum

As is largely perceived, Shariah law is not categorically opposed to debt. Rather, Islamic finance helps create sustainable levels of debt, pursued through a Shariah-compliant route. This has paved the way for leveraged buyouts to enter the fray, in which a company looks to acquire another business largely on borrowed money (leverage). 

Shariah debt financing instruments such as Murabahah (cost-plus-financing facility) are lending themselves to this cause.

The key difference, however, lies in the way leverage is created in a Shariah-compliant buyout deal. “In an Islamic LBO transaction, the leverage that's put on the target company must directly finance specific assets that the company will use. Debt, is thus limited, to the value of assets being financed. A conventional LBO, by contrast, is more like a general-purpose debt facility. A free cash flow analysis of the target company is conducted. Based on that, banks agree to a level of debt, which is typically expressed as a multiple of earnings and can be used for any purpose,” adds Dr. Rehman.

Companies under non-Muslim ownership leaning towards Shariah-compliant PE offerings has added to their visibility and growth – 40% of the notable Aston Martin deal was financed through a Murabahah instrument, arranged by German lender WestLB AG, back in 2007.

A decade later, Shariah-compliant refinancing of an office accommodation owned by Youngberry Properties in Scotland, was furnished. The funding was achieved via a commodity Murabahah facility, with properties let out to Petrofac and NHS Scotland.

Essential support

To propel the Islamic private equity and venture capital space, several Muslim-majority countries have chipped in, via initiatives and incentives.

In 2008, Malaysia's Securities Commission introduced new guidelines and best practices to develop the Islamic venture capital industry. The country also offers a five-year tax exemption on registered VC companies. In the UAE, Dubai Silicon Oasis, a government-owned free zone, supports 'Islamic digital' and 'Arabic content' initiatives, pursuant to which, the freezone’s regulatory body offers venture capital funding and other incentives to startups operating in these domains.

“Policy makers and public sector leaders should recognise the role private equity and venture capital play in the business ecosystem and encourage more players. This includes both allocating funds for PE investment and raising awareness of its benefits within the broader business community. Aligning PE with the values of stakeholders – including both investors and business owners – is an important part of enhancing its relevance. In that context, Islamic PE firms have a lot to offer,” explains Dr. Rehman. 

Sector focus

From a sector perspective, the Islamic finance space has proven to be a sweet spot for PE/VC investment. Of the 346 Islamic finance professionals quizzed by IslamicMarkets.com in August 2022, 41% predicted a dramatic growth in PE and VC investments in the sector over the next five years. According to the SGIE report, Islamic finance and halal food comprised 66.4% and 15.5% of the total 2020/2021 investment deal value, respectively.

“The global Islamic finance industry continues its growth path. We expect around 10% growth across the industry in 2023-2024 after expanding by a similar number in 2022. However, we note that the Gulf Cooperation Council (GCC) countries - notably Saudi Arabia and Kuwait - largely fuelled this performance,” says Dr. Mohamed Damak, senior director and head of Islamic finance at S&P Global Ratings.

Reed Smith’s Mues adds that startups creating digital platforms for Shariah-compliant banking, lending, and investing services, have witnessed particular interest, mainly due to the level of demand within a large, underserved Muslim population across the globe, and the general shift towards digitisation in the financial sector. 

“While other industries, such as the halal food industry and Islamic tourism have also seen PE involvement and investor interest, the potential for scalability and high returns in Islamic fintech is making this sector particularly attractive for private capital investment.” 

What's in store? 

Muslims are a formidable consumer force, with a strong imprint on the world’s business ecosystem. To cater to this burgeoning segment, new halal values-based players will seek to enter the market, in tandem with existing ones looking to expand their offerings.

In essence, both are expected to seek suitable financing options, industry expertise and added strategic value. This signals immense growth potential for the Islamic PE space.   

“I look forward to seeing a thriving ecosystem of Islamic private equity, where we have a diverse range of managers, pursuing different strategies and mandates. Private equity is, by definition and legacy, a specialised business. We should expect to see an array of PE managers focusing on different strategies (growth equity, buyouts, etc.), as well as specializing in various sectors and regions. There is immense need – and thus opportunity – for asset managers in the real economy with specialized expertise,” explains Dr. Rehman.  

31 Aug 2023
Insight
Islamic Finance
Saudi Arabia eyes global Islamic finance hub status through new index

Newly launched Tadawul Islamic index adds to growing index universe as kingdom eyes Islamic finance hub status.

 

London: Saudi Arabia is working to become a regional and global hub for Islamic finance. To achieve this, the kingdom is keen to develop the sector as well as attract investment from local and international Islamic investors and funds.

In response to growing demand for Sharia-compliant tools and investment services, Tadawul, the country’s stock exchange, launched its first ever Islamic index last month.

The TASI Islamic Index will track the performance of Sharia-compliant companies listed on the Saudi Exchange. The TASI Islamic Index is constructed from the Tadawul All Share Index “TASI” and will be screened for Sharia compliance, which are approved by the exchange’s Sharia Advisory Committee. The committee will be responsible for overseeing and approving the list of Sharia-compliant listed companies on a periodic basis.

The proliferation of Sharia indices makes sense, according to Redha Al Ansari, Head of Islamic Finance Research, Data & Analytics at the London Stock Exchange Group.

“In the past two or three years so many retail and institutional investors started to invest,” he said. “And with Saudi being one of the largest Islamic finance markets globally, you need to actually provide more investment opportunities for Islamic financial institutions beyond sukuk and real estate.”

Companies within the index are screened by an independent screening provider under the supervision of Tadawul’s recently formed Sharia Advisory Committee that include representatives from leading financial institutions.

Tadawul did not respond to a request by Salaam Gateway for further information about the methodology that will be adopted for the index.

The index will also act as a tool for investors and other stakeholders to guide and inform decisions when analysing investments. It will also help asset managers benchmark the performance of their Sharia-compliant portfolios.

One Riyadh-based portfolio manager said that the new Islamic index is a natural step given that a large proportion of companies on Tadawul are already inherently Sharia compliant.

“Most money managers were using the IdealRatings index for performance evaluation, now they can be measured vs a published index which most (retail) investors can track,” he said, requesting anonymity.

Monem Salam, executive vice president/portfolio manager at US-based Saturna Capital, said that any step that is taken towards Sharia compliance benefits the industry.

“It is still a bit unclear as to which methodology they will be using,” he said. “They mention a panel of scholars from various institutions. My experience from Saudi Arabia is that the institutions have varying guidelines, so it will be interesting to see what consensus they come up with. However, coming up with guidelines can be very beneficial for individual/retail investors and I applaud this move.”

But a Dubai-based multi-asset portfolio manager said that whilst the TASI Islamic index is positive it is not a game changer given the small number of global funds with a Sharia-only mandate as well as the small size of the Saudi stock exchange in comparison to other equity markets worldwide.

In addition to benchmarking, the new index can also serve as a base for financial instruments like derivatives and Exchange Traded Funds (ETFs).

Tariq Al Rifai, CEO of the Quorum Centre for Strategic Studies, a London-based think tank, said that the Saudis establishing their own benchmarks gives them a strategic advantage, since the country has the largest market cap in the Middle East and North Africa (MENA) region.

“This is because index providers may not know your objectives for a particular benchmark and more importantly, you own the data. That’s where the money is,” he said.

Adding to Islamic index universe

The TASI Islamic Index will join a growing number of Islamic indices that track regional and global equities as well as other asset classes. Providers like S&P, IdealRatings, MSCI and FTSE offer their own Sharia-compliant indices.

The most notable global Islamic indices include Dow Jones Islamic Market index and the MSCI World Islamic Index. In addition, providers also offer regional indices such as the Dow Jones Islamic Market GCC index. FTSE also offers Sharia indices in other jurisdictions like Malaysia and Taiwan.

“It is important to have Sharia-compliant indices as there is a big, growing market for Sharia-compliant investments and investors would need credible benchmarks to compare the returns,” explained Faisal Hasan, CIO and Head of Asset Management at Dubai-based Al Mal Capital.

“This is a positive move that help in measuring the performance for Sharia-compliant investments. I’m sure there will be more Sharia indices that will be coming in future as the market become more diverse and deeper,” he added.

Becoming an Islamic finance hub

The launch of the new TASI Islamic index is part of a wider drive by Riyadh to position the kingdom as the Islamic finance capital of the world by 2030.

Bashar Al Natoor, Global Head of Islamic finance at Fitch Ratings said that launch of the TASI Islamic index is not a surprise and was set out as one of the kingdom’s Financial Sector Development Programme (FSDP) initiatives relating to Islamic finance, part of its Vision 2030.

“This is part of the international positioning goals that aims to enhance Saudi Arabia’s international position as the leader in Islamic finance, along with other strategic goals and initiatives that aim to enhance and develop the Islamic finance industry’s governance, educational and research institutions to support growth of the sector,” he said.

The launch of the TASI index follows the formation of Tadawul’s Sharia Advisory Committee in April. The Committee consists of representatives from the country’s largest financial institutions to ensure independency and transparency.

Fitch’s Al Natoor reiterated that the progression and development of the kingdom’s Islamic finance industry is part of a wider objective of economic diversification.

“Beyond Islamic finance the FSDP aims to develop a diversified and effective financial sector to support the development of the national economy, diversify its sources of income, and stimulate savings, finances and investments,” he said.

© SalaamGateway.com 2022. All Rights Reserved

04 Aug 2022
Insight
Islamic Finance
Embedded Islamic finance: Back to the roots to reshape the future

Dr. Moutaz Abojeib is Director of Operations at IFAAS, and Dr. Shaher Abbas is the CEO of IFIN.

 

The fourth industrial revolution is changing the world around us at a faster pace than ever experienced before. While the COVID-19 pandemic pushed the boards of financial institutions to accelerate the digitalization agenda, the management are still struggling in their adoption and implementation. With the constantly increasing number of digital solutions and Fintechs available in the market, the decision on which solution or Fintech to go with becomes more difficult.

One of the newly emerging solutions is embedded finance. Embedded finance is defined as a seamless integration of financial services by businesses. The primary purpose of embedded finance is to streamline customer experiences by eliminating extra steps to obtain financing in which the customer can get the product and the financial service at one stop. While embedded finance is a new concept, it is indeed not a strange notion for Islamic economics. In fact, one could claim that embedded finance is a core philosophy of the Islamic economics and transactions theory.

It is well established that Islamic economics does not promote separating financing process from real economy business transactions. While interest-based conventional finance industry concentrates on making money out of lending money; hence, disconnecting the financing from real economy trading/manufacturing process, Sharia does not allow charging fees on pure lending (Qard). Shariah rather promotes risk-sharing and allows money-making out of commercial and investment transactions only. In fact, the whole modern Islamic banking industry has been designed to bring back the connection between financing and businesses by using trading and investment contracts, such as Murabaha and Mudaraba. These Islamic financial principles create a bridge between finance and business which is the core philosophy behind embedded finance. However, it is important to note here that the Islamic finance industry in practice did not succeed so far in building such bridge due to the extensive use of Tawarruq that works in reality to disconnect the Islamic finance from the real economy.

Understanding the importance of embedded finance, IFIN (the first of its kind Sharia- compliant, cloud-based Fintech solution) has been designed to be the bridge connecting all types of Islamic Financial Institutions with all types of retailers (whether in physical stores or online and whether offering goods or services) allowing customers to submit their finance applications and get them approved instantly. The whole financing process including signing the required contracts can be completed within few minutes. IFIN is a game-changing innovative solution that is geared to redefine the way Islamic finance is being done, making it more efficient and inclusive. With such digital solution, Islamic finance becomes more accessible to all segments of the community at any place and any time.

Through full digitalization, IFIN does not only help Islamic financial institutions reduce transactional cost and operational risk (as no staff intervention is required) but also helps them offer unprecedented customer experience and widen their outreach to new areas and communities that they would not be able usually to reach using their normal distribution channels.

28 Jul 2022
Insight
Islamic Finance
Collaboration between Islamic finance incumbents and Islamic fintech challengers

Ashar Nazim is the CEO of Aion Digital.

 

Presently, financial inclusion is a primary objective of the banking sector. Naturally, Islamic finance is continuously increasing in global relevance as it pertains to a defining demographic of 1.8 billion Muslims worldwide and a broader global ethical finance community (World Bank, 2020). It is important to consider that Fintechs have created a space for enablement and innovation which is disrupting the banking industry, and on the other hand incumbents are hampered by siloed processes and legacy systems. Hence, collaboration is the key to mutually benefit both parties and achieve the intersection of a Venn diagram.

Islamic Fintechs are largely targeting a new customer base that is the younger Muslim population around the world that have been highlighted as a critical determinant of Islamic Fintech prospects as they account for 29% of the global population that are under 30 (Religion Information Data Explorer | GRF, 2022) (United Nations - Population Division, 2019). This younger demographic is highly technologically adept, due to their high-level access and usage of mobile and internet services in comparison to the world average. Further, Incumbents powered by Fintechs have also enabled people who are unbanked or underbanked. Temenos is an excellent illustration of this, as they deliver 8 million new users to the STCpay clientele in the Saudi region (Temenos, 2022).

Innovation is a key emphasis for Islamic Fintechs. A major prospect is the facilitation of Zakat (obligatory donation) and Sadaqah (voluntary donation) which can accumulate $200 Bn to 1 trillion globally, and this could play a tremendous role to alleviate global poverty (World Bank, 2020). Last Ramadan, Saudi’s national charity foundation ‘Ehsan’ generated approximately $493 million in the span of a month via 24 million voluntary donations. Ehsan’s donations were made exclusively through digital channels (ArabNews, 2022).

Fintechs must tackle a complex set of requirements to guarantee compliance with Shariah law. Interest, or riba, is not tolerated. Investments in the stocks of companies benefitting from alcohol, guns, cigarettes, and gambling are also unacceptable. For instance, ‘Wahed’ is an Islamic Fintech that offers Halal investing options to 200,000 clients globally. Currently, they are also partnering with other Fintechs such as ‘Niyah’ to promote their investment pathways. Considering, Ethical and Sustainable investing is a by-product of the Shariah law which creates the principles of Islamic Fintechs, it is garnering interest from Western societies that are eager to join into this endeavour.

The future demands innovation and Incumbents know that in order to stay ahead of the curve and provide the best banking services to customers, they need to select the right vendors and partners. It is impossible for them to innovate on every front and partnering with Fintechs is the only quick way to provide a new feature or service without reinventing the wheel which costs time and money.

28 Jul 2022
Insight
Islamic Finance
Lack of good practice solutions hinders development of Islamic social finance

The potential of zakat is not being maximised in the fight against poverty.

 

Tokyo: The lack of a common international Islamic financial regulatory system is hindering the development of Islamic social finance instruments, causing a dearth of good practice solutions that could effectively fight poverty, say experts.

In the February 2021 issue of the International Sharia Research Academy (ISRA) International Journal of Islamic Finance, Abdulsalam Ahmed Sawmar and his co-authors say the key element of Muslim charity, zakat (obligatory charity), has historically “been an integral part of the Islamic economic system because of its sizable impact in achieving social harmony and preserving decent living standard for the needy segments of Muslim communities”.

However, the potential of zakat is not being maximised and its management faces challenges including various regulatory frameworks in different Muslim countries, the paper warned.

One impact was “a significant gap” between the estimated potential of zakat proceeds and its collection through formal institutions.

UK-based international aid agency Islamic Relief is one group trying to create a common good practice in Islamic social finance. It offers a definition for Islamic social finance, saying the sector aims to improve social justice through wealth distribution and fair financial dealings.

It bans problematic practices such as gharar (uncertainty, deception and risk), while promoting philanthropy that includes zakat, sadaqah (voluntary charity) and waqf (endowment).

The UK’s National Zakat Foundation, another body laying down advice on Islamic social finance, stressed how zakat, one of the five pillars of Islam, requires Muslims to give 2.5% of their qualifying wealth (money and property) annually.

The Zakat Foundation of America has been offering guidance in the USA, outlining eight categories of people eligible to receive zakat-based assistance based on the Quran. The non-profit organisation includes the poor, debt-ridden and the displaced among its recipients.

It also promotes waqf or hubous, noting how it typically involves donating a building, plot of land or other asset for Muslim or charitable purposes to a religious, educational or charitable cause.

The Islamic Development Bank states the annual global zakat contributions amounts to $500 billion, but in 2019 only one third of the then-33-strong membership of global advocacy platform World Zakat and Waqf Forum (WZWF) (formerly World Zakat Forum) had laws on zakat, potentially hindering its development according to the WZWF.

National governments and international organisations are trying to establish the extent of the problem and offer solutions to increase zakat collections.

In Indonesia, the world’s largest national Muslim population, the zakat collected is just 0.03% of gross domestic product (GDP) against a potential 1.59%, according to the 2019 International Sharia Scholars Forum’s Regulatory Framework of Islamic Social Finance.

Taking into account the latest World Bank economic statistics on Indonesia, these sums are large – $3.57 billion collected against the $186 billion potential. However, the framework also states Indonesia’s zakat collective collection has increased more than 31 times in the past decade.

Greget Kalla Buana, Islamic finance specialist of the United Nations Development Programme (UNDP), told Salaam Gateway Indonesia offers “the most recent example of regulatory reforms in zakat management,” including the government’s creation of a Badan Amis Zakat Nasional, a public agency whose sole objective is zakat management.

In Malaysia, Singapore and Brunei, state-created majlis (entities) are solely responsible for the collection and distribution of zakat, while Pakistan operates a dual system whereby zakat is paid to the state for some wealth and income types and to the state and private zakat bodies for others, said Buana.

Meanwhile, despite being home to more than 200 million Muslims, India does not have a formal institutional or regulatory framework for zakat management. Buana says the government does not seek to intervene as zakat is entirely voluntary and collected by religious schools and institutions.

With such disparity of frameworks, Buana said the Zakat Core Principles, launched in 2016 by Bank Indonesia, Badan Amil Zakat Indonesia (Indonesia’s National Zakat Agency), the Islamic Research and Training Institute of Islamic Development Bank and countries participating in an international working group, was a positive step.

He said they “help in effective operation and supervision” of zakat, but added there was an additional need for “detailed technical guidance that aligns with each country’s local jurisdiction, rules and regulations”.

Globally, WZWF works “to address the lack of a standard international system for cross-border services and financial transactions in Islamic Social Finance,” said Buana, adding it carries out awareness-raising of instruments, such as zakat and waqf.

It also responds to the need for international consolidation in the practice of zakat and waqf, including the possibility of any cross-country collaboration, south-south cooperation and business-to-business partnerships.

A three-year memorandum of understanding signed by the WZWF and the UNDP, in November 2019, intends to help national and international partners “leverage and align” Muslim philanthropy, particularly the zakat, with the UN’s sustainable development goals (SDGs). Under the pact, both bodies promised to promote zakat’s potential to tackle goals one, two and 10, namely poverty, hunger and inequality.

A 2021 Global Islamic Finance Report by Cambridge Institute of Islamic Finance and Ajman University Centre for Excellence in Islamic Finance also noted a link between Islamic social finance and “the SDGs, climate remediation and circular economy,” pointing out zakat could help fund important environmental initiatives and progress.

Still, with such traditional Islamic social finance practices already established as a pillar of Islam, the 2019 International Sharia Scholars Forum suggested compliance incentives for zakat (such as tax incentives). A proper enforcement of penalties for non-compliance in jurisdictions where Zakat is compulsory could be another solution to improving regulatory systems.

Other operational improvements, including better zakat institution governance, have been advised.

“Greater public trust, transparent and effective governance and openness towards the formal zakat institution’s performance are critical for zakat to achieve its full potential,” said Buana in a 2020 Global Islamic Finance Report from Cambridge International Finance Advisory with its Cambridge Institute of Islamic Finance.

While significant work is required to develop a global Islamic social finance model, the fact serious experienced minds are debating the issue may yet yield fruit.

© SalaamGateway.com 2022. All Rights Reserved

20 Jul 2022
Insight
Islamic Finance
International standards and tribunals being developed to solve global Islamic finance disputes

Shifts in political structures, widely varying legislation and jurisprudence, and demands to straddle two legal obligations causing significant complications.

 

Dubai, Jakarta and Ottawa: International legal arbitration systems and judicial standards are emerging to solve complex Islamic finance disputes, while national judicial and informal dispute resolution systems continue developing in civil and religious law institutions.

Informal dispute resolution processes can resolve disagreements without recourse to damage payments and potentially without harming valuable reputations, while avoiding litigation can pay dividends in Islamic finance.

Islamic financial services developers face jurisprudential complexities given their simultaneous grounding in traditional commercial civil law and in Sharia law for which different courts may apply.

Muslim-majority countries also have widely varying legislation and jurisprudence impacting Islamic finance with laws and precedents spanning the traditions of Arab monarchies and former French, UK and Dutch colonies.

Their legislation, judicial and political systems have dramatically changed over the past 60 years, resulting in profound difficulties in solving Islamic finance disputes, especially those with an international component.

Building international standards

Aware this can hinder the global development of Islamic finance, there is a move to build international standards and create transnational dispute resolution systems. While there is no globally dominant Islamic finance international tribunal, expert minds have been assessing the possibilities – looking to codify laws governing Islamic finance to formulate a global body of law.

One key issue is developing common principles for dispute resolution. The Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) has developed more than 100 standards on Sharia law, accounting, auditing, ethics and governance issues for international Islamic finance.

It works with the central banks and regulatory authorities, financial institutions, accounting, auditing and legal firms from more than 45 countries. A recent development is a Sharia standard on gold trading that categorises the metal and explains Sharia parameters for its trading and Sharia rulings for using gold-based financial products in Islamic finance institutions.

Its accounting standards include those on recording sukuk (Islamic bonds) investments and financial reporting for zakat charitable donations.

One solution floated by Gordon Blanke, founding partner Blanke Arbitration LLC, an arbitration specialist operating from London, Paris, Dubai and further afield focused on international commercial and investment arbitration, is developing semi-secular arbitration systems.

These can potentially combine civil and Sharia law rather than “settling for one or the other option, devoutly Sharia or entirely secular” that can be the initial hurdle for arbitration. Writing in Arbitration: The International Journal of Arbitration, Mediation and Dispute Management, he said tribunals need banking and finance and, if a three-member panel, “it might be sufficient only for the chairperson to have Islamic finance experience or expertise”.

Solid examples for dispute resolutions emerging from the UAE

The UAE is leading the way in developing dispute resolution systems and jurisprudence. Here, Islamic finance disputes can be resolved through litigation, arbitration or other alternative processes. Mediation (wasata) and arbitration (tahkim) are deeply rooted in the Islamic culture that values reconciliation (sulh) and a discreet settlement of conflicts, noted Antonin Sobek, counsel at the Dubai International Arbitration Centre (DIAC) and dispute resolution lecturer at the Paris-based Sciences Po University.

Last year Dubai issued a decree to consolidate all local arbitration centres under a revamped DIAC with Sobek indicating the centre is exploring opportunities to become the parties’ choice for Islamic finance dispute resolution.

He says in consultation with major global Islamic finance industry players, the DIAC can design sector-specific services including dedicated dispute resolution rules. It can also establish a list of arbitrator experts in Islamic law, banking and finance.

This development could be important given the UAE does not operate Sharia courts for Islamic finance disputes. Sobek says commercial and finance disputes are currently resolved by the civil courts, but there is potential for establishing specialised Islamic finance courts.

“Such courts could ensure Sharia compliance and contribute to developing consistent approaches to Islamic finance, thereby bolstering the attractiveness of the Islamic finance sector,” he says.

Industry not fully behind arbitration

However, the Islamic finance industry has not fully embraced arbitration.

“Islamic financial institutions may be reluctant to have their disputes resolved by private arbitrators in accordance with Sharia law. They may also be unfamiliar with the advantages of arbitration and the services available to deliver a Sharia-compliant dispute resolution process,” Sobek told Salaam Gateway.

The rapid growth of the global Islamic finance market has been accompanied by an increasing sophistication and proliferation of Islamic finance offerings. These factors inevitably create potential for future domestic and cross-border disputes between financial institutions and between these institutions and their clients and third parties.

Such concerns may have inspired the launch in 2005 of the Dubai-headquartered International Islamic Centre for Reconciliation and Arbitration to assist in resolving, through reconciliation or arbitration, disputes arising from the Islamic finance industry.

Parties to IICRA-administered proceedings are mainly from the Gulf Cooperation Council (GCC) countries and Malaysia, although Sobek noted claims that the “IICRA is yet to achieve widespread acceptance in the Islamic finance community”.

“In the absence of casework statistics, IICRCA’s popularity and international outreach remain uncertain,” he said.

Another proposal anticipates disputes resolved via dedicated rules and experienced Sharia scholars

Another option on the table is establishing a Dubai World Islamic Finance Arbitration Centre (DWIFAC) specialised in settling Islamic finance disputes; equipped with a dedicated set of arbitration rules and staffed by experienced Sharia scholars.

First proposed in 2013 by Camille Paldi, CEO of the Franco-American Alliance for Islamic Finance, the institution would be assisted by a jurisprudence office entrusted with developing a unified Islamic banking law.

While the centre has yet to be established, Sobek believes this proposal may have “nourished the debate about the need to design Sharia-compliant dispute resolution processes and harmonise Islamic finance standards and practices”.

The discussions led to a tangible initiative in May 2020 to build a unified global legal framework for Islamic finance. Announced by the UAE ministry of finance in partnership with the Islamic Development Bank and the now-defunct Dubai Islamic Economy Development Centre (DIEDC), the project aims to adopt an international treaty or global Islamic finance code.

Ultimately, it will expand the global reach of Islamic finance by integrating local differences in Islamic finance standards, practices and product offerings. A steering committee held its first meeting in November 2020 with participation from multiple global Islamic finance bodies.

More talks on the cards

Sobek says while dissolving the DIEDC in 2021 and transferring its duties, assets, rights and obligations to Dubai’s department of economic development may have slowed down progress, more talks will be staged.

He added a global Islamic finance code is currently being drafted in consultation with international strategic partners and with due regard to the AAOIFI’s non-binding Sharia standards. He expects arbitration and mediation to progressively gain traction as a mechanism for resolving Islamic finance disputes, especially as they provide significant advantages compared to litigation.

For instance, the UAE announced in March it would join the Singapore Convention on Mediation that provides its signatories from 55 countries with a mechanism for enforcing settlement agreements in other jurisdictions.

This might boost Islamic arbitration worldwide including in Indonesia where Amran Suadi, chair of the religious chamber at Indonesia’s Supreme Court, notes disputes involving Islamic finance are usually settled in religious courts for litigious cases and Sharia arbitration bodies plus the country’s Financial Services Sector Alternative Dispute Settlement Agency for non-litigious disputes.

The Supreme Court oversees the country’s regular and religious courts.

Amran said Islamic finance disputes handled by the religious courts had steadily increased from 229 in 2017 to 562 in 2020. Cases were becoming increasingly varied from simple ones involving sales and profit-sharing contracts to more complex subrogation and novation issues.

The country has more than 1,300 judges certified to handle Sharia finance cases, some trained in Saudi Arabia and Bahrain. Under Supreme Court rules, a dispute involving money less than $34,300 must be settled in 25 days.

“Thank God many disputes involving Sharia banks and customers are now settled through mediation. They don’t have to be decided by courts and that’s better,” he said.

Indonesia boosting its judges’ capacity

Indonesia’s Supreme Court has continued improving the capacity of its judges to handle Sharia finance cases via training conducted in co-operation with Indonesia’s Financial Services Authority (OJK – Otoritas Jasa Keuangan) and other authorities including Saudi Arabia and Morocco.

The LAPS SJK began operating on 1 January 2021, replacing six such agencies and simultaneously expanding the settlement scope to include the fintech sector. It works alongside the National Sharia Arbitration Board (Basyarnas-MUI) established in 2003 by the Indonesian Council of Ulema (MUI - Majelis Ulama Indonesia), a semi-official authority on Islam, amid rapid growth in Indonesia’s Islamic finance sector.

The board is tasked with resolving disputes in trade, finance, law, industry and services based on Sharia principles and provides binding legal opinions at the parties’ request. Basyarnas-MUI now has representative offices in 20 of the country’s 32 provinces.

Mochammad Buchori Muslim, head of the MUI Sharia economic department, said the council regularly issued fatwas (edicts) on points of Islamic finance.

“The Supreme Court conducts annual deliberations where our recommendations are included in the court’s circulars. Universities with law faculties have also been engaged in discussions on dispute settlement via theses, dissertations and journals,” he says.

Progress in Malaysia

In November the Kuala Lumpur-based Asian International Arbitration Centre (AIAC) in November introduced the i-Arbitration Rules 2021, a neutral international framework for resolving disputes related to Islamic finance. Malaysia’s national news agency Bernama quoted the prime minister’s department (parliament and law) minister Seri Wan Junaidi Tuanku Jaafar saying the rules meant the AIAC had pioneered the development of global disput resolution.
“This method is believed to help consumers around the world bring an integrated approach in dispute resolution and provide continuity in conventional business practices as well as Sharia requirements for such transactions,” he said.

© SalaamGateway.com 2022. All Rights Reserved

12 Jul 2022
Insight
Islamic Finance
Global Islamic finance sector moves towards incorporating ESG concerns

Islamic finance industry looking for growth in new areas.

 

London: Global Islamic finance industry observers are predicting significant growth in Sharia-compliant environmental and social governance (ESG) investment, as the demand for institutions to ethically deploy funds, along with an awareness of climate change and social justice, expands.

According to research conducted by Maybank Islamic Berhad, the Islamic banking arm of Malaysia’s Maybank Group, and IslamicMarkets.com, a UK-based financial intelligence and investing platform, more than a third (36%) of Islamic finance professionals expect “dramatic growth” in combined ESG/Sharia compliance funds over the next two years.

The research, published in a report called Driving Sustainable Impact Through Islamic Finance in March this year also showed 73% of those surveyed believe the Islamic finance market has yet to meet the demand for ESG investment strategies.

They add there is ample room for new Sharia-compliant ESG products. The Maybank findings also indicated the majority of these new funds could be bought by non-Muslim investors whose appetite for ESG investments will potentially outstrip Islamic investors given the comparatively larger non-Muslim finance market.

These investors are also unconcerned about whether the key ESG component is Sharia compliant.

Research by Refinitiv, an American-British global provider of financial market data owned by the London Stock Exchange (LSE), also published in March, claims 2021 was a particularly busy year for the launch of Sharia-compliant funds with an ESG focus.

Refinitiv points to the establishment of new funds in Saudi Arabia (SEDCO Capital), Switzerland (Lombard Odier) and Malaysia (Pheim Global ESG Islamic Fund – PPGEIF) as examples of some of the most recent launches.

The group identifies Saudi Arabia as the global hotspot for Sharia-compliant capital aimed at ESG. The kingdom’s favoured approach to ethical investment has been to issue ESG-focused sukuk (Sharia-compliant bond-like instruments used in Islamic finance).

Refinitiv’s data shows in the first two months of 2022, the kingdom issued ESG sukuk totalling $1.5 billion, more than any other country. The Refinitiv league table names next largest sukuk issuers were Indonesia, Malaysia and the United Arab Emirates (UAE) as the next largest sukuk issuers.

Muhammed-Shahid Ebrahim, a professor of finance at Durham University’s Business School in the UK, said part of the reason the Islamic finance market was playing catch-up with ESG-focused investment opportunities was that “financial literacy” in the Muslim community had not been historically widespread to support growth in Sharia-compliant ESG investments.

Unlike the non-Muslim finance industry, partly driven towards ethical investments by retail investors, individual shareholders and pension fund members, the appeal of ESG-focused investments in the Islamic finance market has been mostly limited to institutional and sophisticated investors.

“ESG-focused assets use a general value system instead of a religious value system. An average Muslim consumer is keener on an investment approved by religious scholars than one based on general values,” Ebrahim explained, adding a lack of development of theory in Islamic finance had similarly restricted the expansion.

Despite this partial hesitancy of the Islamic finance market to embrace ESG investing, according to some experts, incorporating ESG principles into Islamic finance was a natural fit. A central pillar of Islamic finance is to screen Sharia-compliant products to avoid industries deemed unlawful (haram) under Islamic guidance and law. This includes tobacco, alcohol, weapons and gambling – areas theoretically also prohibited in ESG investing.

Amanjit Fagura, a Dubai-based partner at US-headquartered international law firm Morgan Lewis, says because ESG-focused and Islamic investments are guided by principles of morality, transparency, and fairness, it was possible for an investment to be simultaneously Sharia and ESG compliant.

However, the two concepts do not always overlay each other perfectly. Fagura cited investment into a highly leveraged solar energy project.

“(This) may be a sound ESG investment, but would not be Sharia-compliant due to the prohibition on riba (earning interest on loans),” she said.

Improving access

Fagura acknowledges there is currently a lack of access to investment opportunities that explicitly satisfy both sets of values, but this is changing as financial institutions respond to market demand.

“While green investments that tick the boxes of ESG and Sharia compliance may currently be limited, the rise in innovative structured solutions that allow for exposure to certain ESG investments not otherwise Sharia compliant are increasingly being used by family offices, regional banks and institutional investors,” Fagura said, noting this could further bridge the gap between Islamic finance and ESG investing.

A 2019 report published jointly by the World Bank and Securities Commission Malaysia suggests such innovative structures could include sukuk designed exclusively to manage green projects, mortgage-backed securities that could act as a new asset class to bridge sustainability and profit; waqf (a special philanthropic deed that involves donating a fixed asset to produce a financial return or provide a benefit) and zakat (an annual obligation to donate a proportion of wealth to charitable causes) funds structured into broader financing purposes that give impacts on social and environmental dimensions.

Another solution to the access issue could be developing Islamic fintech that promises to bring retail investing to Muslim consumers who have hitherto lacked the opportunity to participate in financial markets.

Bashir Yusuf Ahmed, founder and CEO of eTijar, a Nigerian Sharia-compliant fintech platform providing Islamic investment and saving services to Muslims and non-Muslims, expects young Islamic consumers to be attracted by the prospect of making direct ethical choices about their investments.

eTijar screens for Sharia-compliant investments and mutual funds to offer its users, allowing customers to build their portfolios using its platform and earn profit rather than interest.

“For the general ethical user, (our screening process means) they know we are playing by ESG rules and not dealing with anything that conflicts with (Islamic) principles and beliefs,” Yusuf explained.

However, he admits there is work to do to persuade potential investors to choose ethical investments.

“Some people think when you talk about halal or ethical (investing), this means there is no return on investment, but in fact there is the possibility of very good returns. Some of the industries or companies that qualify (as ESG investments) are dividend-paying entities,” said Yusuf.

Ebrahim thinks breaking down cultural barriers and better financial education would allow Muslims to make informed and participate more in financial markets while broadening the appeal of Islamic finance to the wider market.

“The integration of the Muslims with the rest of the society can lead to the development of ESG Sharia funds. There are issues in the Islamic scripture and traditions … not understood or applied by the religious scholars or political Islamists. If these issues are understood in their proper context, it will expand the scope of ESG Sharia funds and attract non-Muslims,” he added.

Standardisation

An issue repeatedly cited as a barrier to the growth of ESG investing in Islamic finance is the lack of agreed standards for what constitutes an ESG investment and how that maps across to Sharia principles.

According to the Maybank report, 72% of recipients felt introducing a global standard for ESG and Sharia would boost the demand for ESG investment opportunities among Islamic investors. However, immediate progress in this area was not anticipated.

“Respondents are concerned about the lack of a global standard for ESG and Sharia,” it said, with 55% of respondents believing the launch of a global standard was two years or more away.

While global ESG standards were under development by bodies including the newly established International Sustainability Standards Board (ISSB) that incorporate work developed by the older Sustainability Accounting Standards Board (SASB), there was no current move to link these standards to Sharia rules.

Meanwhile, standards were being set in individual markets, presenting the challenge of harmonisation. A joint 2019 report by the United Nations-supported Principles for Responsible Investment (PRI) and the CFA Institute, a US-based finance education organisation, stock exchanges are developing reporting guidance and listing standards for ESG that impact Islamic finance.

According to the report titled ESG and Islamic Finance: Complementary Investment Approaches, this standardisation method has been followed by the Dubai Financial Market (DFM), a Sharia-compliant exchange. In 2019 it updated its DFM Shari’a Standards to cater to investors’ growing interest in sustainability and a green economy and in 2020 launched its own ESG Index.

In principle, until more comprehensive regulation is approved, especially internationally, anything can be marketed as an ESG/Sharia investment and it was up to investors to decide if they agreed – a situation that makes some Muslim investors uncomfortable.

Fagura said, “Investors will likely conduct their due diligence on any Sharia-compliant opportunities claiming to be ESG investments to ensure such investments do comply with their investment aims and are not misled by greenwashing”.

Some national regulators are taking steps to tackle this issue by personally vetting ESG claims. Securities Commission Malaysia launched the FTSE4Good Bursa Malaysia Sharia index in July 2021 that measures the companies demonstrating strong ESG practices.

It seems likely Sharia-compliant and ESG investing are destined to remain separate approaches for the time being, but will increasingly converge as market factors and financial and technological innovations break common ground.

Ebrahim said the Islamic finance industry had a long way to go before seeing “a truly Islamic financial architecture” that could comfortably accommodate ESG investing.

© SalaamGateway.com 2022. All Rights Reserved

30 Jun 2022
Insight
Islamic Finance
Newly merged Indonesian Islamic bank has potential for the world’s largest Muslim market

Aims for Bank Syariah Indonesia (BSI) to be among the world’s top Islamic banks within three years.

 

Jakarta: Despite its promising outlook and early results, Bank Syariah Indonesia (BSI), Indonesia’s largest Islamic bank, has its work cut out to achieve the economies of scale demanded to compete nationally and globally where the knowledge of Sharia-compliance banking systems remains poor.

BSI was formed in February 2021 following the merger between the Islamic banking units of Indonesian state-owned banks Bank Syariah Mandiri, BRI Syariah and BNI Syariah, producing the country’s seventh largest bank with a 2.5% share of industry assets. Medium-term plans are to be among the top 10 Islamic banks globally by 2025.

However, analysts and officials said this could be challenging as the share of Islamic services in the overall Indonesian banking market remains stagnant – less than 7% over the past few years. This is despite its status as the world’s largest Muslim-majority nation with nearly 90% of its 270 million people following the faith.

By contrast, the market share of Islamic banking in neighbouring Malaysia is around 30%.

“The merger has not resulted in an increased market share for Islamic banking in Indonesia. There are more steps that need to be taken by the government to that end, including increasing capitalisation of Islamic banks to improve the economies of scale and make them more competitive vis-à-vis conventional banks,” Aziz Setiawan, a researcher in Islamic finance at the SEBI School of Islamic Economics, West Java, told Salaam Gateway.

This includes unique business models; investment into digitisation and improved human resources as key elements to future growth. He said for Indonesia to be a global Sharia financial hub, it must increase the market share of its Islamic banks and make bold regulatory steps.

Among its innovations to achieve goals would be allowing Islamic banks to improve product and service quality by working in synergy with conventional banks in areas like information technology (IT), networking and other infrastructure.

Setiawan believes this would enable BSI to expand on the real growth that has occurred since its launch. The bank recorded a 33% increase in net profits in the first-half of 2022, boosting confidence in sustainable future growth, the bank said in a statement late April.

Hery Gunardi, SBI president director (CEO), added that cost efficiency and expansion of cheap funds had supported healthy and solid financing.

Earlier this year BSI opened a representative branch office in Dubai, United Arab Emirates, as part of its efforts to tap into the Middle Eastern Islamic banking market and expand its customer base.

“This proves people are increasingly interested in experiencing Islamic banking services in all segments. The growth is also an injection of enthusiasm for BSI to expand its market globally with Dubai being the first,” Hery said.

The bank’s assets grew 15.73% year-on-year in the first quarter of 2022 to Rp 271.29 trillion rupiah ($18.6 billion), while capital adequacy rose to 150.09% and the efficiency ratio to 75.35%.

BSI operates under the Islamic tenets that forbid charging and paying interest, as well as trading assets deemed haram. In Islam wealth can only be generated through legitimate trade and investment in assets meaning making money from money is forbidden.

Hery said this year BSI would focus on developing the Islamic ecosystem by expanding its reach to mosques, hajj and umrah pilgrimage travel industry, alms and donation payments, Islamic educational institutions, as well as the modest fashion and halal industries.

He added this was a potential segment on which BSI must continue to work; having the uniqueness and characteristic to develop a halal and Muslim ecosystem.

Meanwhile, the number of people using the bank’s BSI mobile app (available to any device with an Indonesian phone number) grew 124% year-on-year to 3.77 million in the first quarter of 2022. The bank said the increase was driven by people switching to BSI mobile e-channels from ATMs and internet banking with more than 96% of its customers now digital savvy.

Going digital, expanding global network

The bank had also taken steps to improve online user experience, allowing customers to not only use basic features such as opening accounts or making payments, but also access “spiritual” features including prayer times; the direction toward Mecca for prayer and technical assistance when contributing to charities.

It was also creating a network of financial institutions to raise its profile. In March the bank signed cooperation agreements with several Dubai-based banks including the Abu Dhabi Islamic Bank, UK-based Standard Chartered Bank’s Islamic section and Malaysia’s Maybank Islamic to expand its network.

These innovations will enable BSI to improve its position, but its small domestic market base may mean it takes time to realise the ambitious growth goals, said Lucky Ariesandi, analyst at Fitch Ratings, the global credit rating agency.

“Growth potential for BSI is big in line with the potential for the Islamic banking sector due to its small market share and a strong preference for Islamic banking. However, growth will be gradual because there are still many processes that need to be addressed before Islamic banking can reach its potential,” he said.

Notably, Indonesia is a long way off from becoming a global hub for Islamic finance, he said. BSI’s focus was on improving its local competitiveness to compete for less exploited banking sub-segments like corporate and retain banking. Given the bank’s current phase, the Indonesian Sharia ecosystem may still require time to improve.

Lucky said BSI might help small Muslim entrepreneurs, currently reluctant to bank because of their religious views, gain access to funding. However, this would only benefit BSI if the bank could reach and provide value-add to those communities.

This included providing loans with affordable yields without sacrificing pricing for the risks the bank took.

Yet, there is little doubt Islamic banking was growing in Indonesia. Overall assets grew 12.3% in 2021 to Rp 646.2 trillion ($44.4 billion), according to the Financial Services Authority of Indonesia (OJK – Otoritas Jasa Keuangan).

“There are growing opportunities for Islamic banking development, supported by a vast growing in the halal industry and rapid technological advancement,” said the OJK in its Indonesia Islamic Banking Development Roadmap 2020-2025 report.

However, the OJK warned it may struggle to maintain such growth, given “the strategic issues currently facing Islamic banks, such as …low competitiveness”. Islamic banking in Indonesia was impeded by a lack of business model differentiation, sub-par manpower quality and low financial inclusion and literacy, said the regulator.

Islamic banking services also lacked digitalisation compared with conventional banks, stemming from lower supporting IT infrastructure capacity. However, as with any challenge in an immature market, should solutions be discovered, success would follow.

The OJK said following its 2019 regulation on banking synergy that allows Islamic banks and their affiliated conventional banks to optimise resources, Islamic banks are expected to leverage the available infrastructure from any corresponding parent bank.

This meant they performed a gap analysis of existing digital banking services and compiled an action plan for services to be developed. While BSI does not have a parent, should it follow such a sensible strategy, growth will surely follow.

© SalaamGateway.com 2022. All Rights Reserved

01 Jun 2022
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