JAKARTA - An official of Indonesia’s National Committee for Islamic Economy and Finance (KNEKS) says that Islamic social finance instruments and domestic retail sukuk are more sustainable financial support alternatives for COVID-hit MSMEs than loans from multilaterals such as the Asian Development Bank.
Indonesia’s government last week announced a 405.1 trillion rupiah ($24.65 billion) financial package to support households and businesses affected by the coronavirus pandemic. It has not indicated that it will reach out to multilateral lenders for financing.
Dr. Sutan Emir Hidayat, KNEKS’ Director of Education and Research told Salaam Gateway that considering the important role micro and small enterprises play in the economy, the government should start a “massive effort” to collect and distribute Islamic social finance funds to help them through the pandemic.
The potential of zakat in Indonesia is valued at around 286 trillion rupiah a year, according to the national zakat body BAZNAS. But actual collection is a far cry, at around only 9.5 trillion rupiah ($577.3 million) in 2019.
For waqf, Around 70% are tied up in land worth around 2,000 trillion rupiah, but these are not managed and used productively because of the unavailability of funds for their development, according to the national body Badan Wakaf Indonesia.
On the possibility of a domestic retail sukuk to support COVID-hit businesses, Dwi Irianti, the director of Islamic finance at the Ministry of Finance told Salaam Gateway that discussions among relevant authorities, including the central bank, are currently ongoing on the instrument’s structure and mechanisms.
Indonesia’s MSMEs are worse hit by the COVID-19 pandemic than they were by the Asian financial crisis of 1997/98 and the global financial crisis of 2007/8, according to Dr. Sutan. Around 90% of businesses in Indonesia are MSMEs.
“Currently, according to many economists from Europe and U.S. surveyed by the London School of Economics the world is facing an aggregate demand and aggregate supply race that can lead to a new recession. Since many countries impose lockdown and social distancing, there is no unnecessary demand (consumption) among Indonesian people,” said Dr. Sutan.
“There is a sharp downturn in terms of daily transactions in society and MSMEs are the most affected segment since they deal daily on a cash basis. If there are no transactions they will not be able to continue their business and might fall into poverty.”
“They can drop from the muzakki level (zakat giver) to the mustahik level (zakat beneficiary),” he added.
A micro business with three workers or a small business with five staff could let go of their employees if they can’t pay their wages, said Dr. Sutan. There are currently more than 60 million MSMEs in Indonesia that could potentially face this situation if the economy goes into recession. Indonesia’s finance minister on April 1 said the economy could contract by 0.4% this year in the worst case scenario.
Dr. Sutan said he has heard anecdotally from Islamic bankers that their institutions face the risk of losses this year.
“Most of their capital are from deposits that are considerably pricier capital compared to other sources, which is why they channel it into higher risk or pricier financing such as to MSMEs,” he said.
“In the current situation, even after the government delays loan payments for MSMEs, non-performing loans will rise and then their asset quality will decrease. To increase asset quality, they need to write-off all NPFs at one go, which will use up their provisions (back up for losses). That’s why their capital and profitability are at risk.”
Several parent companies have already injected additional capital into their subsidiaries to maintain their capital adequacy ratios, including Bank Negara Indonesia that on March 27 announced in a stock exchange filing it had pumped 255 billion rupiah into BNI Syariah.
(Reporting by Yosi Winosa; Editing by Emmy Abdul Alim firstname.lastname@example.org)
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