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Rising role of sharia economy in Indonesia

Rising role of sharia economy in Indonesia

Muslim fashion showed in an exhibition held on the sideline of Sharia Fair in Surabaya, East Java recently. ANTARA PHOTO/Moch Asim/wsj.

We can see that the role of sharia economy has continued to increase, thereby necessitating to put in place a reliable instrument, and we can develop this
Indonesia is indubitably catching up with other countries in the development of the sharia economy, although the world's largest Muslim population nation was considered as being rather late in paying heed to Islamic economics.

The world's fourth most populous country has realized the need to tap the potential of sharia economy, as the State of Global Islamic Economy Report 2020-2021 indicated that Muslim consumers' expenditure on halal food, beverage, pharmaceuticals, and tourism had reached US$2.02 trillion in 2019.

With a population of 271 million, of which almost 90 percent are Muslims, Indonesia is the world's biggest market for halal products, especially food, tourism, pharmaceuticals, and cosmetics.

Refusing to be a mere market, Indonesia is determined to play a bigger role in the sharia economy domestically and also globally, by developing four aspects: halal industry, sharia finance, sharia social finance, and sharia entrepreneurship.

The government's support is apparent from the several policies to develop the halal industry, including establishment of the Special Economic Zones (KEK) for the halal industry.

Moreover, President Joko Widodo, as head of the National Islamic Finance Committee (KNKS), had launched the Indonesian Islamic Economics Master Plan (MEKSI) 2019-2024 in May 2019, which is the country’s first road map for Islamic economy that aims to strengthen the national economy.

In February 2020, the KNKS was transformed into the National Committee for Sharia Economy and Finance (KNEKS).

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Drawing attention to the rising role of the sharia economy in Indonesia, Finance Minister Sri Mulyani Indrawati has emphasized the need for a reliable instrument to proffer benefits to the public.

"We can see that the role of sharia economy has continued to increase, thereby necessitating to put in place a reliable instrument, and we can develop this," the minister noted during a national seminar on sharia economy and finance on April 21, 2021.

Speaking in connection with the sharia social finance, the minister affirmed that the government had encouraged the collection of alms (zakat), infaq, and endowment.

Zakat collection has reached Rp10.2 trillion in 2019, while the Religious Affairs Ministry had recorded 53,273 hectares of endowment land and Rp819 billion of endowment funds in 2020.

Moreover, the government has applied the principle of justice, considered the main value of a sharia-based Islamic economy, to support recovery of the country's economy battered by the COVID-19 pandemic.

"We have implemented Islamic values while designing economic recovery policies," the minister stated.

The government is striving to build a more inclusive and just Indonesian economy by according priority to vulnerable groups in the fields of education, economy, and health, according to the minister.

"Those are the dimensions of sharia which, in my opinion, are very important for us to continue and to showcase in various roles for supporting and strengthening the Indonesian economy to recover from the COVID-19 pandemic," the minister emphasized.

In the sharia finance industry, the government has made unwavering efforts to develop the industry, including through the merger of three sharia banks -- Bank Mandiri, BRI, and BNI into Bank Sharia Indonesia (BSI) -- that is expected to reach and serve a wider customer base.

The nation has recorded considerable growth in the first quarter of 2020, with the share of sharia finance reaching 9.89 percent of the total national financial services, barring sharia bonds.

Bank Indonesia (BI), particularly, has worked hard to boost transformation of the sharia economy and finance (EKSyar) as a new source of economic growth.

"The EKSyar transformation was conducted optimally to contribute to the national economic growth," BI Governor Perry Warjiyo remarked at the launch of the 2020 Sharia Economic and Financial Report (LEKSI) book held virtually last March.

The report's theme "Synergize in Building Sharia Economics and Finance" is deemed pertinent to bolster the momentum of national economic recovery.

Minister of State-Owned Enterprises (BUMN) Erick Thohir targets BSI to rank among the world's top 10 Islamic banks, as its assets surpassed Rp240 trillion.

"Owing to this merger, Bank Syariah Indonesia has assets of more than Rp240 trillion and is targeted to be included in the top 10 Islamic banks in the world. Hence, we pray for and continue to support the management of BSI to be able to realize the noble ideals in order to create a comprehensive sharia ecosystem not only in Indonesia but also in the world," Thohir noted.

Although in comparison with other nations, Indonesia began implementing the Islamic financial system rather late, but as a country, with the largest Muslim population, it has its own advantages.

"Indonesia is projected to have a population of 184 million Muslim adults, of which over 50 percent are from the upper middle class and most work in the private sector," Thohir expounded.

The general chair of the Sharia Economic Community also expounded that Islamic financial services are growing at a swift pace even as the pandemic ploughs on.

Islamic banking assets in 2020 grew by 10.9 percent, while conventional ones only clocked a 7.7-percent growth. A similar trend was observed with third-party funds, with Islamic banking recording an increase of 11.56 percent, slightly superior to conventional banks that registered a rise of 11.49 percent.

"In terms of financing, Islamic banking recorded the largest growth of 9.4 percent, far ahead of conventional banking that only grew by 0.55 percent. In addition, market share of the Islamic capital market has reached 17.39 percent, and the number of cooperatives for savings and loans and sharia financing reaches 4115 units," the minister noted.

On the other hand, Thohir believes that the development of Islamic economics and finance in Indonesia also drew accolades from the international community during 2020.

This was apparent from the Islamic Finance Development Report 2020 that placed Indonesia in the second place globally and the Global Islamic Economy Indicator 2020 that placed Indonesia in the fourth position globally.

As for the halal industry, the government is eyeing to make Indonesia the world's biggest producer of halal products by 2024.

The State of Global Islamic Economy Report 2019-2020 highlighted an improvement in Indonesia’s ranking as the world’s producer of halal products, from 10th and rising up to fifth-largest scoring 49, after Malaysia, the United Arab Emirates, Bahrain, and Saudi Arabia.

The COVID-19 pandemic has indeed offered a momentum to boost marketing and transactions through digitization transformation.

In accordance with the framework set by KNEKS, opportunities and challenges in the digitization of the sharia economy are focused on the four areas of halal industry, use of big data, artificial intelligence, and block chain in supporting the development of the halal industry from upstream to the downstream levels as a new source of growth for the Indonesian economy

"In 2020, payments for halal products in the e-commerce marketplace were mostly made up of electronic money and bank transfers, which respectively reached 42.10 percent and 23.08 percent of the market share," Vice President Ma'ruf Amin disclosed recently.

By March 2021, the number of digital financial transactions in the banking industry in Indonesia reached 553.5 million, up 42.47 percent from the same period last year. Meanwhile, the value of transactions also rose 26.44 percent year-on-year to reach Rp3.025 trillion.

Overall, the halal industry has been able to record a positive performance despite pressure on economies around the world owing to the COVID-19 pandemic. It recorded a growth of 3.2 percent, or higher than the global economic growth at 2.3 percent in 2019 before the pandemic.

Sharia economic development was also supported by some priority sectors in the halal value chain ecosystem, particularly food and agriculture.

Furthermore, strengthening the halal value chain, Islamic finance, MSMEs, and digital sector are the four key strategies of the digital economy society.

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