Keynote Speech by Chairman of Indonesia Financial Services Authority at IFSB Seminar on Enhancing Financial Inclusion through Islamic Finance

Bismillahirahmanirahim,

1. Ladies and Gentlemen, allow me to take this opportunity to thank the organiser, the IFSB, for a bringing together all of us here today on a very pertinent topic that affects the global population and the muslim ummah in general.
2. As we become more and more aware of the indicators of Financial Inclusion, a rather bleak picture emerges, from a holistic perspective; we must understand the choices being made, whether it is a Voluntary Exclusion or is it Involuntary Exclusion?
3. To do so, we must begin by reaching out. And by doing so we will have a clearer picture as to what our structural impediments are in achieving greater financial inclusivity. Each market will need to map out the access frontier and define the necessary intervention strategies taking into account the respective distribution in product and services offering and market reach of financial intermediaries/agents.
4. How do we as policy makers balance the Social Role of Market Development that is entrusted upon us to ensure that the Unreached will be served? This, Ladies and Gentlemen will require a strategic cooperation between the State and the Agents. Regulators will need to look into how can we have a more Socially Responsible Financial Agents, who beyond its profit making objective, has a predefined role to reach out into these segments.
5. Financial and Institutional Stability must go hand in hand to ensure that Agents are able to serve these target market. To the Agents, questions on economic viability dominate their mind. This is where I believe that the development in telecommunication and information technology that has transformed the cost structure of Agents will act as a positive catalyst towards greater Financial Inclusivity.
6. As it is, about half of the world population does not have access to basic financial services and if we were to exclude the more mature markets and focus on emerging economies, I believe that the official numbers do not do justice to reflect the situation that we are facing. The numbers for the OIC, is not encouraging either. To bring into context the magnitude of the challenge before us, in 2011 Pew Forum estimates that “Muslim-majority countries overall are among the poorest in the world, as measured by gross domestic product (GDP) per capita in U.S. dollars adjusted for purchasing power parity (PPP). Their median GDP per capita of $4,000 is substantially lower than the median for more-developed countries ($33,700) and just slightly higher than the median for less-developed countries where Muslims are in the minority ($3,300)”¹.
7. One may ask, are these people voluntarily excluding themselves? Or is this purely an economic problem that we are facing?

Ladies and Gentlemen,

8. IMF recent working paper identified that “Worldwide financial exclusion for religious reasons seems relatively small, but the share varies notably across countries and can be particularly high in certain Muslim countries. For example, the share of adults citing religious reasons for not having an account is 34 percent in Afghanistan, 26–27 percent in Iraq and Tunisia, and 23–24 percent in Djibouti and Saudi Arabia. However, other Muslim countries exhibit relatively low levels of religious self exclusion: virtually zero in Malaysia, 2½–3 percent in Kuwait and the United Arab Emirates, and 4½ percent in Sudan”².
9. The Question before us, Ladies and Gentlemen is “Can Islamic Finance be the Panacea?” and “Can we as Financial Policy Makers work hand in hand with the various supporting institutions whether formal or informal to deploy the necessary intervention strategy to correct this Global Imbalance?”
10. Islam, since the time of Prophet Muhammad S.A.W., has always advocated its core principle of Social Justice. As such we must look into the available tools at our disposal since time immemorial. Fundamentally, Islam approaches inclusivity with either the principles of Risk Sharing or the Principles of Redistribution. Either may be deployed as an intervention tool to address the lack of inclusion.
11. But before we inquire further into the feasibility, we must ask ourselves if these tools can operate effectively and be competitive with its Conventional counterparts. Why so? One core area is the pricing of risk, Islamic Finance risk pricing is still looking into time value of money rather than pricing the transactions as per the underlying asset. This creates a systemic disconnect between the value of risk and the transaction cost. At an aggregate level, it is operationally impossible to deploy a more accurate risk pricing mechanism without proper alternative benchmark (e.g.: Mortgages Tied to The Price of Collateral vs Price of Money, Project Finance pricing tied to the Project Profitability and Risk).
12. Such an initiative requires the collective efforts of Regulators and Financial Agents, perhaps we need to draw some experience from the Insurance Industry whom over the years has been harnessing aggregated industry data to better price their products. Can such concept be adopted in the Islamic Finance? How will this add to the overall cost of the industry and can they remain competitive vis a vis the Conventional market that is able to access a more liquid market with an established risk pricing methodology?

Ladies and Gentlemen,

13. On the redistribution side, we must have a comprehensive introspection into the operation of Zakat and Sadaqah by the respective institutions. We need to understand deeper about how these transfers affects the needy and how we can ensure a sustainable approach towards improving the opportunity curve to lift the Ummah. This can only be done with better infrastructure to identify the needy, a more tailored solution rather than the traditional bullet payment which does not address their financial security and income stability.
14. Apart from Zakat and Sadaqah as a tool of redistribution, Qard al-Hasan (benevolent loan) is a very fascinating structure that captures how Islam views Social Justice and Inequality. By design, it empowers the Consumers, rather than the financial institutions, a borrower determines the term of the loan rather than the lender. Exploration into the use at Macro Level would be the right approach at this stage, as Individual Financial Institutions are still induced by their profit seeking nature. We have seen this being explored in various jurisdiction where a dedicated fund is setup to address financing needs of specific target group.

Ladies and Gentlemen,

15. We must strive further and explore the many possibilities of using Qard al-Hasan as a means to target financial exclusions, alleviate poverty and to some extent Social Infrastructure Financing. Regulators may for instance use this instrument to alter the Reserve Assets of Financial Institution, allow me to indulge you on this. As you may be aware, the Global Interest Rate market remains depressed ever since the 2008 crisis, and it came as no surprise when back in February, The German Republic issued their Bond without any promise to pay any interest. Now, imagine if a series of non tradable Qard al-Hasan instruments are introduced as a core requirement to meet regulatory capital and liquidity risk parameters for Islamic Financial Institutions, the proceeds of these instruments can be redistributed more efficiently to address specific financing needs of the needy. Such as concept can also be extended to disaster/catastrophe relief financing, where Governments are able to tap the market in times of need and Financial Institution step forward as the Socially Responsible Islamic Financial Institutions that they are.
16. Ladies and Gentlemen, apart from addressing the issue from the supply side perspective, we must as I mentioned earlier understand the demand side. Take for instance, Indonesia, the Largest Muslim country with the most advance Islamic Microfinance delivery still faces the lack of take up in demand of these services as evidenced by a research commissioned by Bank Indonesia in 2011 which concludes that “there is no indication that the establishment of Islamic banks in Indonesia was preceded by broad popular demand for Sharī`ah-based Islamic financial services.”
17. That particular study also revealed that in some areas consumers make choices based on proximity and convenience rather than religion. To me, this is where the role of Market Developer by the State needs to be enhanced and supported by the Industry.
18. OJK has embarked on a Nationwide Financial Literacy Strategy. The programme emphasises on three core aspects which includes (i) promoting financial literacy education via public campaigns; (ii) improving financial infrastructure; and, (iii) providing more access and affordable financial products. In line with the technological developments in Finance as well as Mobile penetration into our society, OJK is advocating greater use of technology as a way to expand the reach of financial product and services to the Unreached.

Ladies and Gentlemen,

19. A gargantuan task lies ahead for all of us. I think we could all agree that a more concerted effort will be required by all stakeholders. For instance, the IFSB role as an aggregator and advocate on the Global Level will be crucial towards greater awareness in cross jurisdiction approaches, whereas the Islamic Development Bank should be encouraged to work with the many formal and informal institutions to further advance the spread of financial knowledge of the Ummah.
20. In conclusion, Ladies and Gentlemen. The first steps towards this should always begin with the individual jurisdiction willingness to escalate this as a matter of National Importance. Without prioritisation and dedicated commitments from all stakeholders, we run the risk of perpetuating these imbalances on the Global Scale. I hope that this Seminar may plant the seeds towards greater coordination among members towards addressing a matter of paramount importance for all of us.

Thank you.

Wabillahi taufik walhidayah, wassalamu alaikum warrahmatullahi wabarakaatuh

¹ Future of Global Muslim Population (here)
² Can Islamic Banking Increase Financial Inclusion? IMF Working Paper (here)