Indonesia, which holds the presidency of the G20 group of major economies this year, wants to use this position to increase the role of Islamic finance worldwide, to boost consumer access to affordable financial products and services.
Jakarta: Financial inclusion is one of the goals of the G20, made more important by the COVID-19 pandemic widening inequality for the most financially vulnerable and underserved groups, said Dian Triansyah Djani, Indonesia’s ‘co-sherpa’ (diplomatic coordinator) for the G20.
“There’s no specific Islamic finance agenda at the G20, but Islamic finance plays a significant role in the global economy,” Dian told Salaam Gateway.
“At the G20 we want to move forward the financial inclusion agenda, with a focus on wider access to funding for small and medium enterprises, and this is closely linked to Islamic finance,” he said.
As a result, Indonesia will host the 6th Annual Islamic Finance Conference as a G20 side event in Jakarta on 9 September. Two months later, Bank Indonesia (the country’s central bank), the Saudi Arabian Monetary Authority (another central bank), and the Saudi Arabia-based Islamic Development Bank (IsDB) are scheduled to hold a seminar on Islamic finance and digitisation on the Indonesian resort island of Bali, in another G20 side event.
A greater role for Islamic finance could be a catalyst for social and economic to achieve the UN sustainable development goals (SDGs), Indonesia's finance ministry told Salaam Gateway in a written statement. One of the important ways it can be done is through standardisation of best practices, it said, noting: “As the holder of the G20 presidency this year, Indonesia has an opportunity to promote greater growth in Islamic economics and finance, including the halal industry.”
“The attainment of SDGs is closely related to Sharia-based finance, including sustainable finance and digital financial inclusion. The Indonesian government has implemented several programmes that are in line with SDGs commitments and Sharia economic development, such as the issuance of green retail sukuk and ultra-micro financing for underserved communities such as women and micro-enterprises,” it added.
Such globally coordinated policies as shepherded by the G20 are important, given the turnover of the global Islamic finance industry is projected to reach $3.7 trillion by 2024, said Muhammad Al Jasser, IsDB president.
“We believe that Islamic social funding can stimulate economic activity and promote social welfare, financial inclusion, and shared prosperity by utilizing the traditional instruments such as zakat, sadaqah, waqf and microfinance through modern tools such as blockchain, fintech, and artificial intelligence,” he told the Global Islamic Investment Forum (GIIF), in Jakarta, in March – an event staged within Indonesia’s G20 presidential programme.
Al Jasser said awqaf - assets that are donated, bequeathed, or purchased for being held in perpetual trust for charitable causes - could be an alternative social finance framework, and reaffirmed the bank’s commitment to work with Indonesia's G20 team to bring the effort to fruition.
In 2020, the Islamic banking sector grew 4.3% year on year, reaching more than $2.7 trillion in total assets, according to Qardus, a UK-based Sharia-compliant business financing platform.
Islamic banking accounts for over 6% of the global banking market and comprises 68.2% of the total market of the global Islamic financial services industry, Qardus noted.
Continued growth in these banking services could help expand the halal sector, which according to the State of Global Islamic Economy Report 2022, involved Muslims spending $2 trillion in 2021 across the food, pharmaceutical, cosmetics, fashion, travel and media/recreation sectors.
This is especially the case in Indonesia, the world’s largest domestic halal economy market and home to nearly 230 million Muslims, with domestic spending across halal economy products and services of $184 billion in 2020, according to the Indonesia Halal Markets Report 2021/2022.
According to a 2020 census, only 40.3%, about 80.3 million people, in Indonesia have a bank account, up 50% from 2014. “Islamic finance plays an important role in meeting the financing needs to achieve the sustainable development goals,” said Tomi Soetjipto, a spokesman for the United Nations Development Programme (UNDP), in Jakarta.
“Therefore, in the past few years we have worked together with Islamic institutions to channel funds for SDG projects in Indonesia,” he told Salaam Gateway.
He noted that the Islamic finance sector in Indonesia has been growing between 10-12% annually across instruments such as sharia-compliant banking, asset management, sukuk and takaful.
Non-commercial instruments such as zakat, sadaqah and waqf “have also attracted the interest of the global community,” he added. The Indonesian government wants to ease payments of zakat and sadaqah through the banking system (both Sharia-compliant and conventional), plus mobile payment apps and online marketplaces. And its G20 presidency has also been an opportunity to push for the digitisation of small-and-medium enterprises (SMEs), which will aid the facilitation of these payments. Indonesia has set three priority issues for its G20 presidency on digitisation: connectivity and post-Covid recovery; digital skills and literacy; and cross-border data free flows with trust, said the country's communications and information technology minister Johnny G. Plate at a G20 digital economy working group meeting in March.
Indonesia is also advocating dialogue between countries on the governance of the global digital ecosystem. Dima Djani, CEO of Indonesia-based Alami, a Sharia-compliant peer-to-peer lending platform, said: “SMEs are the driver of the economy and have proven to be resilient in the face of the Covid-19 pandemic and it should be the government’s priority to increase access to funding for them.”
Digitisation is a major driver of economic transformation, with financial technology and e-commerce transactions valued at an estimated $24.8 billion in Indonesia last year, said Dima.
Alami has disbursed Indonesia Rupiah IDR2.6 trillion ($179.8 million) in sharia financing to SMEs across the country’s 32 provinces since it began operations in 2019.
“With increased financial inclusion it is important that we also increase the financial literacy of the people, so that they will manage their money more wisely,” she said. It is a sign of optimism that such a grassroots benefit can be yielded from global policy making at the G20.
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