Indonesia’s potential as a global hub for Islamic compliant or Shariah finance has long been touted given the country’s status as the world’s largest Muslim majority nation. With some 85% of Indonesians classifying themselves as Muslim and a significant portion of the population remaining ‘unbanked’, Islamic finance has a large potential to not only increase in terms of assets, but also in playing a role in the country’s long-term vision for inclusive economic development. The UK and Malaysia have managed to pull ahead in securing accolades as global Islamic financial centres; however in June 2015, Indonesia’s Financial Services Authority (OJK) set the target of increasing Shariah compliant banking assets to 15% by 2023 and established a new roadmap for Indonesia’s Islamic banking industry. Central to this blueprint are training and education programmes to address the gap in public awareness, yet it is qualified human resources which will be vital to Indonesia realising its ambitious goals as well as to establish the country as a leader and not a follower in global Islamic finance.
In June 2015 the OJK laid out its five-year plan to strengthen Indonesia’s Islamic banking industry focused on the immediate goal of increasing Shariah compliant banking assets from the current stagnant share of 5% to 15% in 2023 (See Islamic Banking in Indonesia – A Giant Waking Up). Such a goal still lags well behind its counterparts with Malaysia’s Islamic banking sector accounting for 20% of total assets and 50% in Saudi Arabia. The central pillars of the plan involve improving coordination among regulatory bodies which has often been viewed as a key obstacle to developing commercially attractive Shariah compliant products. Regulations governing the sector will therefore be streamlined and more clearly defined to cover rights and obligations of underlying assets for sukuk (Islamic bonds) (See The Rise of the Sukuk in Indonesia’s Islamic Finance Industry) as well as a legal framework for Shariah securities trading by 2017. Margin trading, repurchase agreements and hedging under Shariah law will also be introduced with accompanying rules and regulations. Oversight by the OJK in cooperation with the National Shariah Board so as to centralise the authority relating to Shariah financial products will also be reinforced under a recently signed agreement between the bodies. Public education and financial literacy programmes are also due to be launched to increase awareness of the choices available to consumers.
These plans certainly provide a stronger foundation from which the sector can grow and indeed facilitating the entry of more local investors within the capital market. Expediting the progress of Islamic banking in Indonesia to reach the 2023 target and to develop beyond it will be dependent on the country’s capacity for training sufficient numbers of bankers specialised in Islamic finance to elevate the sector from a niche industry. This presents opportunities for collaboration with higher education organisations and for the development of executive training programmes to cater to this high potential yet still ill-equipped segment of the economy.
The lack of centralised authority and an absence of clearly defined regulations have also made Islamic finance a challenging subject in which to develop a curriculum and indeed to develop innovative products given the uncertainty around compliance with subjective interpretations of Shariah law by different bodies. The industry has thus come to rely on in-house training of conventional bankers which involves a certain degree of catch up which has held back progress as well as exemplifying a mismatch between education and the human resource needs of the industry.
The introduction of specialised training programmes in Islamic finance in Indonesia has only recently taken hold in the country with a slow trickle of universities and business schools offering it as an option or specialised module within Master’s degree and MBA programmes as well as for doctorate degrees. Examples include the state Islamic University Universitas Islam Negeri, the University of Indonesia, and Prasetiya Mulya School of Economics and Business. The Indonesian Banking Development Institute (LPPI) also established the International Centre for Development in Islamic Finance to offer training sessions for professionals in line with regulations introduced by the OJK and Bank Indonesia.
The lack of awareness as well as narrow availability of courses means that Indonesia only produces 3,000 graduates annually in Shariah economics and finance related subjects (LPPI) which is insufficient to support the OJK’s growth plans. Indonesia’s broader economic vision of strengthening its micro, small and medium enterprises (MSMEs) as the backbone of the economy is predicated on the expansion of Islamic banking whose profit sharing model is better suited to MSMEs lending. A World Bank survey of MSMEs in Indonesia undertaken in 2012 showed that over 50% of the MSMEs surveyed already utilised Shariah banking products. The low level of financial literacy in Indonesia requires financial service providers to offer face to face contact to educate and build relationships among the community in order to thrive. Further efforts will therefore have to be undertaken to promote Shariah finance as a career to graduates in parallel with increasing public awareness of Shariah banking products to ensure the industry’s success on a nationwide scale.
Indonesia is behind the curve in Islamic finance education placing its institutions in a prime position to work with educational and professional institutions around the world that have already taken up the baton. This extends across joint programmes and research with international universities to provide students on both sides with exposure to varied models of Shariah banking to establish a more global approach to the subject. Collaboration in the field of professional and vocational education is a further area of extensive potential as Indonesia’s existing Islamic banks seek to grow more rapidly and further Shariah banking units spin off to form independent entities keen to carve out their competitive niche in the industry.
Shariah compliant services beyond Islamic finance should also not be overlooked given the size of the market. Halal tourism (See The Rise of Halal Tourism in Indonesia) is a further area where Indonesia has plenty of scope to explore such as developing expertise in Shariah compliant hospitality. The country’s burgeoning creative industries also provide fertile ground to explore marketing and advertising techniques that target the modern Muslim consumer as the fastest growing consumer segment worldwide accounting for 1.7 billion people. With the right frameworks in place, Indonesia’s halal industries offer excellent opportunities for educational alliances with institutions worldwide seeking to understand and develop products and services for both the Muslim and non-Muslim world.
Global Business Guide Indonesia - 2015
Number of Tertiary Education Institutions: 4,384 (2015)
Type: 91.5% Private, 8.5% Public
Students in Higher Education: 6,959,622 (2015)
Net Enrolment Rate in Tertiary Education: 20.18% (2014)
Relevant Law: Higher Education Law No. 12 of 2012 provides universities with the autonomy to set their own tuition fees and authorising the set up of foreign universities in partnership with Indonesian institutions.