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IFSB programmes to facilitate the development of the Islamic financial services industry     
Press Release > 2016

Keynote Speech by H.E. Dr Hendar, Deputy Governor, Bank Indonesia at the IFSB’s Regulators Forum 2016

Date posted: 10 May 2016

Date : 10 May 2016
Event / Venue : IFSB Regulators’ Forum 2016 | Kuala Lumpur, Malaysia
Speaker : H.E. Dr Hendar, Deputy Governor, Bank Indonesia

Praise to Allah the Almighty, the Most Gracious and the Most Merciful, for His Blessing so that we are able to take part on this meeting in good health and high spirits. Prayers and peace be upon the Last Prophet of Allah, the prophet Muhammad, his family, his companions and followers.

It is such a great honour for me to give a remark for the launch of IFSB Islamic Financial Services Industry Report 2016. I am pleased to see that the development of Islamic financial industry could take place in many frontiers including asset size, products and services, and also financial sectors.

This forum demonstrates how the industry commits towards a better quality in delivering their services. Supported by internationally qualified experts, I wish that strategic initiatives and policy measures could be delivered in order for Islamic financial services industry to play more significant roles to support the sustainable economic development through this IFSB forum. Therefore, the theme of “Islamic finance in 2016 and beyond: challenges, opportunities, and evolving regulatory focus” is very timely and relevant for us to think through the future directions of the industry in the midst of global economic uncertainty.

[The performance of Islamic finance in the midst of global economic uncertainty]

It has been eight years since the peak of the 2008 global financial crisis. Signs of economic recovery have indeed materialised and we have entered “the new normal” regime. Some experts say also the “the new (ab)normal era”. Nevertheless, the economic uncertainty has risen as indicated by, amongst others, slower economic growth in United States and China, decreasing commodity and energy prices, and re-pricing the investment risk appetite as a result of the Fed normalisation policy.

In spite of challenging global economic outlook, the global Islamic finance industry is able to preserve its overall total worth at USD 1.9 trillion by the end of 2015 from the previous year. Within Islamic finance landscape, Islamic banking and takāful segments are the contributing factors for positive development to the overall growth although the double digit growth was absence. Whilst, Islamic capital market segments performance composed of sukūk and Islamic mutual funds was slowing down in 2015, the response for sukūk has been well responded by the investors in the first quarter 2016.

[Lesson from Global Financial Crisis and response from global regulatory development]

Given the picture of challenging global economic environment, it is indeed the right time for us to stop and reflect what if the next crisis comes whilst we are underprepared. On that note, we should learn from the past 2007/2008 Global Financial Crisis (GFC) experience, in which it provides a valuable lesson to us on the importance of a policy mix between monetary and macro-prudential policy in achieving macroeconomic and also financial system stability. This is based on the fact that monetary policy alone has been insufficient for the central bank as the source of crisis has shifted from macro side (fiscal and monetary) to micro side (economic agent).

For this reason, global regulatory development has well responded to put safety net measures and curb any excessive risk taking behaviour in the financial system. It was a call from G20 financial summit to the Financial Stability Board (FSB), the Basel Committee on Banking Supervision (BCBS) and other standard-setting bodies for a better institutional arrangement, tools and instruments to promote effective monetary and macro-prudential policy.

In the area of Islamic finance, the call has also been made in the high level committee of the IFSB member countries. A set of IFSB standards so far has been useful for Islamic finance development in equipping with a better regulatory infrastructure, liquidity framework, capital management, and also interlink between financial and productive sectors, in line with the renowned international regulatory standards.

By equipping the Islamic financial industry with the issuance a number of prudential regulations, the industry would be more competitive with its conventional counterpart. Hence, it is indeed crucial that the growth of our industry is built upon robust financial regulation as well as a unified and transparent manner across the globe, in order to promote global financial stability and sustainable economic development. Indonesia, as a G-20 member, has fully committed to implement new regulatory development and assess its viability to complement with national systems.

[Indonesia experience with Islamic economics and finance development initiatives]

In this opportunity, please allow me to share the experience of Bank Indonesia with Islamic economics and financial development initiatives. To anticipate any future crisis, Bank Indonesia believes that Islamic economics and finance system could be the answer, as the system has the salient characteristics of close link between real sector and financial sector. Pro-growth, pro-poor, and pro-financial stability characteristics on Islamic Economics and Finance can be manifested into broadening production base, unemployment reduction and greater inclusion of economic development. For that reason, Bank Indonesia has developed 5 holistic key strategies to drive Islamic economics and finance development in Indonesia.

First strategy is to boost Islamic financial and liquidity instrument innovation with the spirit of Islamic financial deepening such as Sharī’ah deposit certificate, Shari’ah repo, and waqf linked sukūk, and many other products in the pipeline. We already issued regulation for Islamic hedging instrument that can be beneficial for the Islamic financial industry in managing market volatilities. We also have enhanced money market regulation through introducing Sharī’ah repo.

Second strategy is to increase education and socialisation to strengthen the competence and intellectual of human resources in Islamic financial industry for resources allocation optimisation. We do this strategy by cooperating with relevant stakeholders (such as Ministry of Religion) to construct Islamic economics and finance education module.

Third strategy is to strengthen regulation framework and an integrated supervision framework of Islamic economics and finance with the coordination of other relevant authorities such as product development for Islamic money market instrument and also regulation harmonization across financial sector and social sector. To date, we have initiated international zakah and waqf core principles aiming at regulating and improving the zakah and waqf institutions at the international level. We are also conducting a study of how to utilise waqf fund to be source of national development financing.

Fourth strategy is to drive the market for real sector and small medium enterprise (SME) development through formulation of the optimal Islamic financing model as well as designing the entrepreneurship and business model development through Islamic school (pesantren).

Fifth strategy is to support an efficient industrial structure by an active participation in formulating an efficient Islamic financial system architecture, initiating an establishment of international body that can support Islamic social finance, and strengthening strategic alliance with relevant stakeholders in Indonesia for further promoting Islamic economic and finance development in Indonesia.

[Conclusion and closing remark]

To conclude, Bank Indonesia as one of founding members of IFSB, would stress the importance of early detection for the economic crisis. Mutual cooperation is needed amongst the regulatory and supervisory authorities and other stakeholders in various jurisdictions by providing detailed analysis of various indicators in a large number of countries. Therefore, the IFSB Islamic financial services industry 2016 report is beneficial for the reference on how to shape the uniform perception in safeguarding the stability of Islamic financial industry as this report for the first time is incorporated with Prudential Structural Islamic Financial Indicators (PSIFIs) that provides us with reliable and accurate financial indicators at the global and country level. On that note, I appreciate for the valuable efforts undertaken by IFSB.

Furthermore, I also remind of the importance of financial inclusion as part of financial stability. In my opinion, Islamic Social Finance provides many structures to explore and be part of global financial inclusion. Zakah, waqf, and other Islamic business models can be solution for “new abnormal world”.

Last but not least, we also should pay attention on the huge development of financial technology. As we know that many start-ups provide financial services with lower cost and easier requirements. In mainstream views, this arrangement will leads to increasing risks. Some start-ups also begin using Islamic finance as their business model. To this phenomena, we must realise that the development of the digital economy cannot be inhibited. In my views, regulation should follow developments, not vice versa. In other words, we should implement one eye open and one eye close policy. Some key regulatory agendas should be discusses as electronic signature, electronic KYC, better clarity on P2P lending, and access, and control of financial data.

Before I end my speech, allow me to express my sincere appreciation to IFSB and related parties for arranging this important and useful forum. My appreciation and sincere gratitude also to distinguished speakers for their willingness to share their expertise and knowledge for the betterment of Islamic financial industry. May Allah almighty bestow us the strength and patient to persevere in fulfilling our duty for a better future.

Thank you very much and I wish you all very successful and fruitful deliberations in today’s forum.


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