Indonesian Islamic Finance System And And Its Potential For Türkiye

Islamic finance is an important subsystem in the Indonesian economy

COUNTRY PANORAMA 07.04.2022, 15:43
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Indonesian Islamic Finance System And And Its Potential For Türkiye

Indonesia Financial Services Authority (OJK) is established with the objective so that the overall activity in the financial services sector is held in an orderly, fair, transparent, and accountable manner, as well as capable of realising the growth of the financial system that it grows in is sustainable and stable and able to protect the interests of consumers and public. With this objective, OJK is expected to support the interests of the national financial services sector in order to enhance national competitiveness. In addition, OJK must be able to maintain national interests, among other things, including human resources, management, control and ownership in the financial services sector, with due consideration of the positive aspects of globalization.

INDONESIAN ISLAMIC FINANCE STRUCTURE AND REGULATION

The Indonesian Islamic financial system generally includes regulation, supervision, payment systems, and dispute resolution. Therefore, the Indonesian government has built the infrastructure to develop the Islamic finance sector in order to become a strong system, capable of supporting the national economy. Islamic financial institutions that collect third-party funds, must be under the regulation and supervision of OJK. In determining the Islamic aspect, Islamic finance in Indonesia is based on a fatwa issued by the National Islamic Council- Indonesian Ulema Council (DSN-MUI). The monetary and macroprudential policies, including payments that happen between people and Islamic financial institutions, are regulated by Bank Indonesia. If there is a dispute that occurs in Islamic banking activities, the dispute will be handled by the Islamic Economic Judge at the Supreme Court (Mahkamah Agung). Indonesian Islamic finance is divided into four sectors, including Islamic banking, Islamic non-bank financial industry (IKNBS), Islamic capital market, and Financial Technology/Digital Financial Innovation Industry.

THE URGENCY OF ISLAMIC FINANCE IN INDONESIA

In December 2021, Indonesia's total Islamic financial assets reached 143.70 billion dollars, growing 13.82 percent (y-o-y) with a market share of 10.16 percent of Indonesia's total financial assets. Indonesian Islamic finance for the last five years has grown up to more than 10 percent per year on average. The Indonesian Islamic finance industry is supporting the Indonesian economy and recorded positive growth during the two years of the COVID-19 pandemic. For this reason, Islamic finance is an important subsystem in the Indonesian economy. Conventional and Islamic finance have the same goal and function to improve the economy. However, Islamic finance is not only an alternative system but has the potential to become the main choice for people in the economy. One of the advantages of the Islamic financial system is its attention to sustainability. Islamic finance in general and Islamic banking in particular, are very selective about the type of its business partner. Islamic finance focuses on a sustainable and beneficial business sector for mankind. Therefore, the Islamic financial system will encourage an economy not only bigger but also higher in quality.

Since 2017, Indonesia has issued green bonds and green sukuk frameworks, and in 2019 Indonesia issued the world's first government-issued retail green sukuk. In 2021, the new issuance of Green Sukuk Retail managed to sell 350.41 million dollars. The positive investors in the capital market grew more than the previous year amid the pandemic. Indonesia is also developing Islamic Microfinance Institutions (LKMS) which empowers people around Islamic boarding schools (pesantren), where financing is unsecured with a joint responsibility scheme in groups and providing skills development with a profitsharing margin as low as 3 percent. This institution really helps improve the economy of the community around the Islamic boarding schools without being burdensome.

RELATIONS BETWEEN INDONESIA AND TÜRKİYE

Indonesia and TÜRKİYE have extensive bilateral relations in the fields of defence, education, social and economic affairs. Both countries are members of the Organization of the Islamic Conference (OIC). Besides the OIC, the two countries are in international forums such as the World Trade Organization (WTO), the United Nations Conference on Trade and Development (UNCTAD) and G20. TÜRKİYE, as one of the 20 largest economies in terms of Gross Domestic Product (GDP), referring to the World Bank (2022), has a GDP of 719.95 billion dollars in 2020, a population of 75.9 million people, and an economic growth of 1.79%. TÜRKİYE's GDP per capita of USD8,536 in 2020 is higher than Indonesia's, which was USD3,869. This data shows that the purchasing power of the Turkish is greater than the Indonesian. This shows that TÜRKİYE has the potential to become a promising trading partner.

Trade improvement with TÜRKİYE is partly because Indonesia recorded a trade surplus against TÜRKİYE. As a step to increase trade, it is necessary to establish trade cooperation that optimizes the trade value of Indonesia and TÜRKİYE, one of which is by determining the priority products of cooperation. The right form of cooperation is expected to be able to streamline trade based on the leading export products of Indonesia and TÜRKİYE. Some of Indonesia's leading export products to TÜRKİYE include palm oil, tin, staple fibres of viscose rayon, natural rubber, single yarn, cocoa powder, desiccated coconut, and frozen skipjack. Meanwhile, products that TÜRKİYE can offer include tobacco, wheat, ice cream, automatic household appliances, ceramics, olive oil, electric transformers, and aluminium hydroxide. The total value of Indonesia's non-oil and gas trade to TÜRKİYE for the January– October 2021 period was recorded at 1.67 billion dollars. Meanwhile, Indonesia's total non-oil and gas exports to TÜRKİYE amounted to 1.34 billion dollars. On the other hand, Indonesia's import value from TÜRKİYE was 325.7 million dollars, so that Indonesia recorded a surplus of 1.01 billion dollars.

Efforts to encourage an increase in the value of trade with TÜRKİYE can also be pursued through trade cooperation channels considering the relatively high tariffs in TÜRKİYE. Currently, Indonesia and TÜRKİYE are accelerating cooperation through the Indonesia TÜRKİYE Comprehensive Economic Partnership Agreement (ITCEPA) which covers the fields of economy, defence, health, and visa-free regulation.

INDONESIA TÜRKİYE INTERNATIONAL TRADE

Indonesia imported goods from TÜRKİYE amounting to 274.17 million dollars in 2020. Meanwhile, the value of TÜRKİYE's exports to the world reached 169.66 billion dollars, so the share of TÜRKİYE's total exports to Indonesia was 0.16 percent. TÜRKİYE also imported goods from Indonesia amounting to 1.184 million dollars in 2020 with a total value of Turkish imports from around the world amounting to 219.51 billion dollars.

TARIFF RATES

Currently, trade between Indonesia and TÜRKİYE is experiencing barriers through the application of import tariffs. This import tariff will reduce the competitiveness of Indonesian products entering TÜRKİYE. The benefits of lowering import tariffs will increase the welfare potential for TÜRKİYE because consumers in TÜRKİYE will get cheaper prices for goods. This reduction in import tariffs is important because 45 percent of the value of Turkish imports of goods from Indonesia is subject to a minimum tariff of more than 5 percent. This shows that Indonesia's exports to TÜRKİYE, which are still subject to high tariffs are still quite large and cause the price of imported goods from Indonesia to be expensive.

HALAL INDUSTRY COOPERATION

As a fellow country with a Muslim majority population, cooperation in the halal industry is an area that both TÜRKİYE and Indonesia should strive for. The potential in the halal industry, between Indonesia and TÜRKİYE, can be established in terms of Halal Food, Islamic Fashion and Halal Travel. In Indonesia itself, halal food from TÜRKİYE is very popular and Turkish tourism is one of the most popular travelling targets for Indonesian tourists. Increasing cooperation in the halal industry will increase Islamic finance in both countries as a supporting system that supports the halal industry. Cambridge Institute of Islamic Finance in its official publication, Global Islamic Finance Report (GIFR) 2021, places Indonesia in first place in the Islamic Finance Country Index (IFCI). Indonesia's Islamic social finance sector is considered to be the most dynamic in the world. The State of The Global Islamic Economy Report (SGIE Report) 2020-2021 raises Indonesia by one rank in the Global Islamic Indicator to rank fourth from the previous year. Appreciation from the international organization for the quality of Indonesian Islamic finance is proof that Indonesia is very serious about developing Islamic finance.

Indonesia Financial Services Authority OJK

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