With finance at the core, Indonesia’s action plan for development of integrated Islamic economy to go to Cabinet Jan 2020

JAKARTA - Indonesia launched its 443-page Shariah Economy Masterplan (MEKSI 2019-2024) in May as a reference to develop its Islamic sectors’ contribution to the overall economy. The agency mandated to coordinate its implementation told Salaam Gateway it will submit an action plan to achieve the masterplan’s goals to Cabinet in January at the soonest.

The action plan is being built based on Indonesia’s integrated approach towards the development of its Islamic economy, with the understanding that all sectors must support one another, and finance is positioned at the core.

The development of the Islamic economy is part of Indonesia’s Medium-Term National Development Plan RPJMN 2019-2024. The masterplan identifies four top-line goals: 1) expand the scale of Islamic economy businesses, including to double the asset size of the industry in five years; 2) climb national and global Islamic economy rankings; 3) increase economic independence; and 4) improve the country’s well-being standing.

These are currently being broken down into actionable plans and the coordinating agency, the National Islamic Finance Committee (KNKS), is conducting focus group discussions with related ministries to determine and clarify who does what.

“If this Shariah economy and halal industry development is an orchestra, KNKS wants to become the conductor," Afdhal Aliasar, KNKS Director of Islamic Economy Development and Halal Industry told Salaam Gateway.

The “orchestra” includes a long list of government bodies: the ministries of state-owned enterprises, agriculture, cooperatives and SMEs, industry, religious affairs, finance, national development planning, and the coordinating ministry of economic affairs, as well as the Financial Services Agency (OJK), Bank Indonesia, Indonesia Deposit Insurance Corporation, and the fatwa body DSN-MUI.

KNKS the “conductor” would follow the tune set by its chairperson, the president of Indonesia, who has stressed that government agencies must be structurally reformed to become simpler and act faster.

The plan for the action plan is that related ministries detail measurable initiatives, with their own budgeting, towards meeting the goals of the masterplan.

"With this implementation plan, I hope these ministries can lead the development of the Shariah economy and halal industry. They must execute strategic programmes with clear direction, knowing how to do it and achieve it,” Afdhal said.

For its part, KNKS already has eyes on several initiatives designed to better link and grow Islamic economy sectors.

ISLAMIC FINANCIAL SOLUTIONS FOR DAILY LIVING

One project that’s been in the works is the Shariah-compliant version of LinkAja, the state-owned e-wallet.

LinkAja Syariah is currently under review by the regulator Bank Indonesia, the central bank, and Afdhal is confident it will be given a licence by December.  

For now, LinkAja Syariah has secured a recommendation from the national fatwa body DSN-MUI, as a result of complying with key requirements: 1) using Islamic bank accounts for floating fund placements; 2) using Shariah-compliant contracts for all transactions, and 3) executing Shariah-compliant marketing campaigns.

According to Afdhal, the central bank is reviewing LinkAja Syariah’s technology infrastructure and confirming its DSN-MUI recommendation.

He believes there should not be any hurdle from the regulatory perspective, referring to a central bank requirement for a certain percentage of e-money service's floating money to be held in banks in the Buku IV category, which are the biggest banks holding at least 30 trillion rupiah in core capital. 

"Although currently there is no Islamic bank BUKU IV, basically PBI No.20/6/2018, article 77 gives a relaxation that e-money services can place at least 30% of its floating money in Islamic banks or Shariah business units affiliated (owned) by banks in the IV category.

"So we hope LinkAja Syariah will receive its licence from the central bank in December at the latest," said Afdhal.

He believes LinkAja Syariah will have a “massive” impact on the day-to-day Islamic lifestyle as it allows users to pay for a wide range of products and services, including ride-hailing, toll roads, petrol, and insurance.

More specifically for the Islamic economy, LinkAja Syariah will also allow users to pay for social funds zakat, waqf, infaq, and sadaqah, and it will also be linked to BPNT, the country’s cashless food assistance programme.

FINTECH FOR SOCIO-ECONOMIC GOOD

Furthering the belief that Islamic finance must deliver useful tools for society and focus on the daily halal lifestyle, KNKS aims to launch the country’s Islamic fintech roadmap in the third quarter of 2020.

In the meantime, the agency encourages more Islamic fintech players through the Indonesia Syariah Fintech Association (AFSI). 

"I told them (fintech operators) not to repeat mistakes made by our Islamic banking industry,” said Afdhal, showing a clear signal of the government’s direction for fintech.

“We see Islamic banks operating for more than 20 years yet overall, the [Islamic banking] industry share is still around 5-6% compared to the conventional sector. Why is it difficult for them to move forward?” he asked.

“I think it’s because they rely too much on the demands of the conventional market, and sacrifice their own Shariah values.”

Islamic banks face their own challenges as part of a highly-regulated banking industry, which KNKS is hopeful Shariah-compliant fintech can overcome.

“They should really improve the quality of Shariah finance and economy, regardless if they are P2P lenders, market aggregators, e-commerce, payments and so on.

“They should show strong Shariah values and keep becoming inclusive, and not concern themselves only with transaction volume growth," he added, referring to another KNKS priority – financial inclusion.

The need for now is to speed up the process of licensing Islamic fintech operators, that requires the input of two agencies: Financial Services Authority (OJK) demands requirements such as proper risk management and robust infrastructure to ensure consumer protection, and DSN-MUI looks for Shariah compliance.

In its role as coordinator of the Islamic economy action plan, KNKS wants to accelerate Islamic fintech development by ensuring the two state agencies work more efficiently together.  

"This collaboration between industry players, OJK, and DSN-MUI, needs to be strengthened, and this is where we (KNKS) stand,” said the director.

HALAL INDUSTRY DEVELOPMENT

In the halal F&B, pharma, and cosmetics sectors, certification has always been a hot topic, which the Indonesian government is addressing with its own new halal authority BPJPH. But Afdhal believes this is not the main hurdle that holds back the industry.

He believes the main challenge is to develop the halal sectors in terms of quality, value, volume, and sustainability.

KNKS conducted benchmarking exercises against countries like Malaysia, Thailand, and advanced economies, and it has come to the conclusion that there needs to be integrated distribution channels to strengthen Indonesia’s own halal industry.

As a result, a key focus for the development of the halal sectors involves halal industrial estates, which KNKS will work with the ministries of industry, religious affairs, and finance, to build.

So far, six locations including Batamindo Industrial Estate, Bintan Industrial Park, Jakarta Industrial Estate Pulogadung, and Modern Cikande Industrial Estate, are already part of the halal industrial zone, with more to come. Makassar Industrial Estate (KIMA), for example, is planning to expand its industrial estate to KIMA 2.

"When we visited Makasar (KIMA) we offered them to be a part of the halal industrial zone and I think they should focus on this because in fact, most processed materials produced from the Eastern part of Indonesia are halal, like caught fish, cultured fish, agriculture and so on," said Afdhal. 

So far, these are the only activities and commitments already in place. Other plans are yet to take off.   

KNKS says it will encourage the Ministry of Cooperatives and SMEs to establish more industry clusters, for example, for batik in Java, agriculture in Sulawesi, and vegetables in Bandung.

The cluster ecosystems would work best if they connect SMEs with mid-sized and big companies within the halal industrial zone to ensure continued business for entrepreneurs and smaller companies.

For now, the work involves getting the industrial estates up and running to spec.

The halal industrial zone will provide all the must-have facilities for businesses, including utilities and waste management, but more specifically for the halal industry, the plan is to outfit it with an integrated halal certification service.

“For this, I hope BPJPH (the national halal certifier) can take their role here,” said Afdhal.

“They can have their own representatives, or maybe (the former certifier) LPPOM MUI, can also take part,” he added.

In line with the integrated approach to developing the Islamic economy, KNKS is also focusing on attracting Islamic financing.

“Integrated Islamic financing, Islamic banks or bigger Islamic consortiums can finance any working capital for any producers that need raw materials and that have orders from buyers, for example,” said Afdhal.

“This is the kind of integrated ecosystem we are trying to build," he said.

BRINGING IN THE INVESTORS

Attracting investments into the halal sector means improving the macro climate and investability on both sides – for the investor as well as the investee.  

KNKS aims to invite more private and industrial players to business matching sessions to increase their levels of literacy with regards halal businesses.

The coordinating agency found that the majority of halal F&B producers in big halal export countries such as Brazil, Thailand, and Australia are non-Muslims, leading the agency to realise that local investors and industry players don’t fully understand their opportunities within the Islamic economy, both for the domestic and international markets.

"For the business community, as long as there are good returns, they certainly will come and support. The problem with us is, their literacy about Indonesia’s halal industry is still low,” said Afdhal.

“That’s why we must improve their knowledge to become more familiar with Shariah instruments, or Shariah financing, for example.”

On the other hand, local industry players should also understand that the halal industry offers the same big opportunities as the conventional sector, said Afdhal.  

"Local halal industry players find it hard to promote themselves or to persuade investors they are eligible for investments. That’s why we see very rare direct investment in halal industry projects,” he said.

The challenge is to show them their business is attractive to foreign investors such as the Islamic Development Bank and others from the Middle East, he added.

What’s needed to attract investors is to show that Indonesia has the right Shariah-compliant investment instruments for its halal industry, said Afdhal.

He admits it is not easy for investors to enter Indonesia and even less so for them to properly determine their investments are on track.

Afdhal may say that, but in 2018, Indonesia was the top Muslim-majority country for foreign direct investments, according to data from U.N. agency UNCTAD, attracting $22 billion in FDI last year, up 6.8% from 2017.

Indonesia government statistics show $29.31 billion in FDI for 2018, but give no breakdowns for Islamic economy sectors. As an indication, 1,377 food industry projects benefitted from $1.31 billion in FDI, 1,001 projects in pharmaceuticals attracted $1.94 billion, and 2,188 hotel and restaurant projects brought in $868.89 million.

While KNKS and other agencies work to improve the halal industry’s invest-ability, another potential solution is for more private companies to issue sukuk, which KNKS believes will make the underlying projects easier to track.

"That’s why we are also talking to the Indonesia Stock Exchange about a second board to support more halal industry and Shariah economy players in accessing funding from the capital market," Afdhal added.  

(Reporting by Yosi Winosa, Editing by Emmy Abdul Alim emmy.abdulalim@salaamgateway.com)

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