Sharia Banking Development Policy and Road Map
After achieving relatively-high growth in the previous years, in 2013-2014 sharia banking confronted a challenge from the slow growth. Challenges to face by the sharia banking industry in the coming years are not a trivial and easy matters, given that the global economic environment has not yet shown a significant recovery, it even has to face new challenges from oil price action movement. We certainly are optimistic that the domestic economy will keep recovering consistent with the government policies in improving the fiscal posture and infrastructure development policies and other government priority projects. In addition, several policies implemented by the authorities in enhancing the economy will keep moving, as the Indonesian economy is internationally acknowledged such as Indonesia’s good rankings with the rise of Indonesia’s competitive advantage in the eyes of the world. This indicates that the prospect of the Indonesian economy is relatively good in the future. The sharia banking industry must be able to take advantage of the global and domestic economy dynamics and participate in the national development more actively.
In an effort to improve the growth of the sharia banking business activities and achieve a vision to contribute to the sharia banking for significance to the national economy, it is important to prepare the directions and policies on sharia banking development as a reference for industry and stakeholders in the conduct of activities in years ahead in order to achieve a common vision of the national sharia banking development. The direction of the sharia banking development, called the 2015-2019 Indonesian Sharia Banking Roadmap, presents strategic issues or fundamental problems that remain in the sharia banking industry, and the direction of policies and program activities that support the achievement of policy directions and involve various stakeholders to build the sharia banking industry that can contribute significantly to the national economy based on the sustainable economic growth, equitable development, financial system stability and highly-competitive sharia banking industry.
Preparation for the Sharia Banking Roadmap also contemplates the economic and sharia banking characteristics, such as the preparation for policies that observes the philosophy of the existence of sharia banks encouraged by a desire for the availability of financial services within the sharia principles by creating the banking system that is spared the interest practice (considered identical to usury (riba)), gambling (maysir) and uncertainty (gharar) and other practices that are not consistent with the sharia principles (haram). In addition, the development of sharia banking is also encouraged by the intention to organize the economic and financial activities in accordance with the sharia guidelines, and as response to the crisis phenomenon sparked by bad behavior in economics by ignoring ethics, religion and moral values, which are not only taught by Islam, but also essentially taught by other religions. The sharia principles in economics also care about the public interest and the environment so as not to cause imbalance in the distribution of welfare and the occurrence of the environmental damage.
The Financial Services Authority (OJK) will, in its capacity as regulator and supervisor of the financial services industry, keep observing the changes in the environment and economic situations that may affect the condition of the national financial services industry, including the sharia banking. Conditions and situations that might affect the national financial services, including sharia banking, are (i) Global conditions, the continuously-changing political and world economic trends that make the global financial system very dynamic. The global financial crisis or international political conditions directly or indirectly affect the global financial sector which in the course of time have impacts on the national banking and financial sector. The national banking industry and the sharia banking must therefore have resilience in order to deal with any change and uncertainty; (ii) International standards and commitments, Indonesian membership in a number of forums such as the G20 in cooperation with the Financial Stability Board, Islamic Development Bank (IDB) and several standard setting bodies, such as the Basel Committee on Banking Supervision (BCBS) and the Islamic Financial Services Board (IFSB) should enable Indonesia to follow the international standards, with due regard to the national interest. Adaptation to these international standards will make the national sharia banking standards equal to other advanced countries and show Indonesia’s commitment as an active contributor; (iii) The integrated financial sector, the existence of the ASEAN Economic Community (MEA) in 2015 and the ASEAN Economic Community for the banking/financial sector in 2020 will integrate the economy of ASEAN countries, including Indonesia. In addition, in the context of financial integration of various financial services sectors which does not only cover banking development, but also the capital market and non-bank financial industry, it is necessary to make synergy and harmonization of development and supervision more integrated, including for sharia banking and finance; (iv) Sustainable development, to improve more sustainable growth, it requires support from the financial services sector in the real sector and focus on the growth that creates added value. To that end, it requires harmony between the economic, social and environmental interest in carrying out the economic activities, in which the interconnectedness of these matters becomes the characteristic already existing in the context of the sharia banking and finance; (v) Equitable development, the territory of Indonesia which is archipelagic becomes the challenges in terms of the equitable development among regions in Indonesia, whereas the development remains to concentrate in several regions, especially the islands of Java, Sumatera and Bali, until today. Development in regions which is unevenly distributed must be addressed by the allocation of development and financing funds that are in the right place. Sharia financial institutions such as sharia banking should be able to contribute actively in the process of distribution of welfare and even distribution to the public; (vi) Financial stability, with the demand of growth and product variations, this also demands better risk management in order to create the financial system stability. Besides, the implementation of coordination among the authorities also needs to be improved in order that the policy could be realized through the appropriate implementation to finally create the financial system stability; (vii) Demographic Bonuses, the demographic bonus phenomenon that occurs in the period of 2015-2035 has several important implications for the improvement of the sharia banking industry. This implication include the increasing availability of manpower and public savings due to the increasing number of Indonesia’s middle class in the future; (viii) Financing gap, potential and financial deepening, with Indonesia’s credit/GDP ratio below 50%, while neighboring countries such as Singapore, Malaysia and Thailand have a credit/GDP ratio above 100%, this has caused the potential bank financing for financing various economic sectors still wide open, but the increase in the financing requires a more various funding source that allows banks not only to rely on the short-term funds, which in this context, the financial deepening is needed; and (ix) Public literacy about national financial services, according to the 2013 OJK’s National Financial Literacy Survey, only 22% of the Indonesian population understands banking services and 57% of the population has used banking services.
As time passes, even though the market share of the national sharia banking and finance industry has not yet reached the expected level, in terms the magnitude of sharia financial assets, Indonesia has reached the ninth largest position in the world with assets of approximately USD35.6 billion (2013). In addition, Indonesia has received recognition and appreciation from the international world along with UAE, Saudi Arabia, Malaysia and Bahrain which are now considered to be in the position to offer lessons to other countries in the world for the sharia financial development and the Financial Services Authority (OJK) has received an award as the best regulator in promoting sharia finance.
Various kinds of strategic issues dealt with and have an impact on the development of the national sharia banking must be of concern among the stakeholders. The strategic issues above are as follows: (i) There is no uniform vision and lack of coordination between the government and authorities in the development of sharia banking. The government and authorities and key stakeholders have taken multiple steps, commitments and efforts to support the growth of sharia banking and finance but the objectives and strategies adopted are limited/sectoral in nature and there is no national vision or national objectives to which a joint reference may be used; (ii) Inadequate capital, banking industry and individual banks with a small scale and low efficiency. The limited capital becomes a crucial factor that causes low expansion of the sharia banking assets. Today, of the 12 sharia commercial banks, ten sharia commercial banks have core capital of less than Rp2 trillion, and no sharia commercial bank has core capital above Rp5 trillion. This causes sharia banks to be less flexible to open branch offices, develop infrastructure, and develop service segments; (iii) High cost funding that have an impact on the limited financing segment. The limited capital and funding structure of sharia banking, which is generally not so efficient as the conventional commercial banks, are reflected in the composition of lower cash and savings accounts (CASA), as a result, in general, the sharia banking business model focuses on the retail segment, including micro, small and medium business and consumers, and lacks a variety of financing segments such as corporations and investment; (iv) Products with no variation and services that miss public expectation. Although the various sharia banking products and services are quite developing, especially in the retail segment, sharia banking products receive less welcome from the public as compared to the conventional commercial banking products, due to factors such as features not so complete as the similar products by conventional commercial banks’, the price and quality of services do not match those of the conventional commercial banks, and customers’ limited access and knowledge; (v) Inadequate quantity and quality of Human Resources (HR) and information technology (IT) not supporting the product and service development. HR and IT are the two main factors that bring the success in developing banking products and services, and banking operation in general. It is anticipated that the quality of HR and IT in sharia banks in general is below the quality and capacity of HR and IT of the conventional banking. Moreover, sharia banking faces its own challenges to meet the quality and capacity of HR and IT that can understand and implement the sharia principles; (vi) Poor public understanding and awareness. Poor public understanding and awareness of the services offered by sharia banking is one of the fundamental issues, and sharia banking also often faces public misperception, such as those in connection with the complexity of contracts and terms and expensiveness; and (vii) Suboptimal regulation and supervision. A relevant framework and regulatory and supervisory system are needed to be made current with the global economic development, and harmony among the financial services sub-sectors, including cross-sectoral regulation (cross sectoral issues). Todays’ regulation and supervisory implementation are still suboptimal to respond to the challenges from the more dynamic economic conditions and financial industries.
Given the strategic conditions and issues faced by the national sharia banking industry, there has been prepared the vision for the national sharia banking development: “Creating sharia banking that contributes significantly to the sustainable economic growth, equitable development and financial system stability and high competitiveness.” The development vision is elaborated in the form of directions and the working programs and planned timing of the implementation, which consists of seven directions, i.e.:
- Strengthening the synergistic policy between the authorities and the government and other stakeholders through the working programs such as encouraging the creation of a National Committee on the Sharia Finance Development and the creation of a sharia banking and finance research and development center.
- Strengthening the capital and business scale and improving the efficiency through the working programs, such as: (i) revision of the minimum core capital policies and Business Classification-Based Commercial Banks (BUKU) - Sharia Commercial Banks and (ii) encouraging the formation of sharia BUMN/BUMD banks and (iii) optimized role and increase in the commitment of the conventional commercial banks to develop the sharia banking services to achieve shares of at least 10% of the assets of the parent conventional commercial bank.
- Improving the fund structure to support the expansion of the financing segment, through the working programs, such as the optimized management of hajj funds, waqf/zakat/infaq shodaqoh through the sharia banking, encouraging the involvement of sharia banks in the management of the central/regional government funds and BUMN/BUMD funds, and encouraging the placement of funds as the proceeds of the emission of Islamic bonds with sharia banks.
- Improving the quality of services and diversity of products through the working programs, such as: (i) the increase in the role of the Sharia Banking Working Groups in the development of sharia banking products; (ii) improving the regulation of new products and activities; and (iii) improving the service excellence and customizing products following the development of consumer preference.
- Improving the quantity and quality of HR & IT and other infrastructure through the working programs, such as: (i) the development of sharia banking curriculum standards in higher education institutions; (ii) the mapping of competency and review of sharia bankers’ competency standard study and review of the bank’s HR development budget allocation policy; (iii) Evaluation of policy/regulation concerning the use of IT sharing facility between the parent and subsidiaries; and (iv) the policy in the scope of inter-operability development, especially between the parent and sharia subsidiaries and/or within one group.
- Improving the public literacy and preference through the working programs, such as the establishment of Sharia Public Markets and strengthening the collaboration with Consumer Education and Protection compartments (EPK) and key stakeholders in the improvement of sharia financial literacy or the sharia banking socialization program for key opinion leaders.
- Strengthening and harmonizing regulation and supervision through the working program, such as: (i) revision of the policy concerning financing to value (FTV); (ii) development and revision of the product standards (including documentation) of sharia banks according to business characteristics; (iii) development of application of Early Warning System (EWS) of sharia commercial banks (BUS) and sharia business units (UUS); and (iv) revision of regulations concerning the institutions of sharia commercial banks (BUS) and sharia business units (UUS) along with the supervision and licensing guidelines.
The preparation for this Indonesian sharia banking Roadmap along with the working programs with the implementation of the activities in it, which will be a reference for stakeholders for the next five years, is expected to gain momentum for the revival of new growth in the national sharia banking amid the slow growth during 2013-2014. The Financial Services Authority remains optimistic about the future economic situation and the prospects for the development of national financial services including sharia banking, and hopes that the Indonesian sharia banking Roadmap has benefits for the development of financial services and contributes more significantly to the national economic development, and it is expected that this Indonesian sharia banking Roadmap gives the national banking and sharia finance a reference for the development of the world sharia finance.
Fig: Issues on Strategies for Sharia Banking Development