Q&A: What is the Sharia Financial Literacy Index, and what other tools does Indonesia use to inform its Islamic economy strategy?

Indonesia launched its 443-page Shariah Economy Masterplan in May 2019, a move that signalled the country’s serious intent to develop its Islamic economy in a structured way. The development of the Islamic economy is part of Indonesia’s Medium-Term National Development Plan RPJMN 2019-2024. The masterplan was many years in the making, with a lot of smaller steps cumulatively forming the sum of its parts. One of those steps is the national survey to measure financial literacy and financial inclusion.

Why you should read this: This Q&A with Dr Sutan Emir Hidayat, Director of Education and Research of the National Islamic Finance Committee (KNKS), will inform you about the Islamic component of the Financial Literacy Index, as well as what you can expect from the government this year with regards the Islamic economy.

1. When was Indonesia's Sharia Financial Literacy Index developed, and by whom?

In general, the Indonesian Sharia Financial Literacy index is basically part of a national survey of literacy and financial inclusion. Historically, the national survey began in 2013 with 8,000 respondents spread across 40 regions in 20 provinces in Indonesia while in 2019 it had involved 12,773 respondents in 34 provinces and 67 cities or districts. In Implementation, the Survey was initiated and conducted by the Financial Services Authority (OJK) in accordance with the mandate of Law Number 21 of 2011.

2. What is the purpose of the Index?

Generally, there are two purposes of the index. First, it is used as an input for the Financial Services Authority (OJK) and other stakeholders in planning and implementing policy related to financial literacy and inclusion. Second, it is used as a tool to evaluate the effectiveness of financial literacy and inclusion programs. (Editor’s note: According to the World Bank’s most recent Global Findex in 2017, 49% of adults in Indonesia had at least one bank account.)

Thus, the Index results will become guidelines for OJK and other stakeholders in carrying out activities in an effort to increase the literacy and financial inclusion of Indonesian people to be more effective and on target.

3. How is the Index formulated and constructed?

The index is formulated and constructed through the result of the national survey of 12,773 respondents in 34 provinces and 67 cities or districts of Indonesia. The respondent profile of the survey includes gender, age, occupation, stratum (rural / urban), education and expenditure.

The financial literacy index uses parameters of knowledge, skills, beliefs, attitudes and behaviors, while the financial inclusion index uses usage parameters.

4. Which organisation or government body maintains the Index?

According to Law Number 21 of 2011 concerning the Financial Services Authority (OJK), it is mandated that the Financial Services Authority (OJK) regulates and oversees the financial services industry while protecting the interests of the community in interacting with financial services industry players. Thus, because of that, the Financial Services Authority (OJK) conducts the survey and comes out with the index for National Financial Literacy Strategy Indonesia every three years.

5. How is the Index used?

The index is used to identify the financial literacy and inclusion of people, the extent of the people's numeracy ability related to financial products and services, public financial attitudes related to financial goals, and public financial behavior in achieving financial goals.

6. Could you give us one example how findings from the Index were taken up and translated into policy that is planned or has been implemented?

After identifying the results of the financial literacy and financial inclusion (including Shariah financial literacy and inclusion) index by province, the government will prioritize programs in the selected provinces as outlined in Indonesia's Shariah Economy Masterplan 2019-2024 based on the development potential.

7. What is the current state of Shariah financial literacy in Indonesia, according to the Index?

Based on the survey, Shariah financial literacy reached 8.93% in 2019. This figure is up from the 2016 OJK survey result when it stood at 8.1%.

8. Is this level, and growth, satisfactory to the Indonesian government especially in regard to its goals and strategy for Islamic finance and Islamic economy?

The fact that there is an increase in the Shariah financial literacy index is something that we need to be thankful. However, there is still a lot of potential for improvement. Thus, the government, through the National Committee of Islamic Finance (KNKS) and other stakeholders have continuously held a range of financial education through different types of activities. KNKS and other stakeholders also have recently developed a national strategy to enhance literacy on the Islamic economy through the education system, which is expected to enhance not only Shariah financial literacy but also literacy on the Islamic economy in general.

9. Other than the Index, what other quantitative tools do the KNKS and other relevant policy-making bodies in Indonesia use to inform Islamic finance and Islamic economy policy for the country?

Currently, the index that is used for the country is financial literacy and inclusion index by the Financial Services Authority (OJK).

However, in 2020, the National Committee of Islamic Finance (KNKS) plans to have the Indonesia Islamic Economic Report whereby this will be a reference for the development of the Islamic economy for provinces across Indonesia. There will be the same measurement of development indicators across provinces, so that they are aligned throughout the provinces. Thus, when a local government wants to focus on developing the Islamic economy, there are guidelines or measures that must be achieved. The calculations will include in terms of Islamic finance, fashion, tourism, food, and others.

10. What are the biggest policies and implementation plans we can look forward to in 2020 with regards to Islamic finance and its link to the real Islamic economy in Indonesia?

The government through the National Committee of Islamic Finance (KNKS) together with all stakeholders of Islamic economy in Indonesia have just completed structuring the implementation plans of Indonesia's Islamic Economy Masterplan for the next five years. From these implementation plans, there are several strategic initiatives. These strategic initiatives include:

1. Establishing blueprint of the national halal industry development strategy
2. Establishing a halal industrial area and integrating the licenses
3. Strengthening MSMEs in the halal industry sector, including through Islamic boarding schools
4. Accelerating development of Islamic finance through affirmative policies
5. Improving of Shariah banking and insurance law products
6. Developing and improving asset and waqf governance
7. Improving zakat mobilization and governance
8. Increasing literacy, promotion and international halal events
9. Harmonizing regulatory working group
10. Establishing and improving Islamic-based human resources development system
11. Linking and matching research and halal industry needs

These strategic initiatives will be implemented during the 2020-2024 period to boost the Islamic economic and financial industry in Indonesia and many parties such as ministries, government organisations or bodies will be involved in implementing those initiatives.

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