News / Asia

    Focus on the Little Guy Could Boost Islamic Banking in Indonesia

    Multimedia

    Audio

    Indonesia's central bank has recently embraced new regulations for Islamic banking, which it sees as key to building on last year's strong economic growth. In a country that is home to more than 200 million Muslims, the potential for expansion is enormous, although Islamic finance still accounts for a small part of the country's financial market.

    Over the past six years Islamic banking has averaged 36 percent annual growth in Indonesia. But its $7 billion in assets makes up only 2.5 percent of the country's total banking sector.

    Banking analysts say unclear regulations on banking that conforms to Islamic law and pervasive corruption have kept investors away from Indonesia.

    The central bank, Bank Indonesia, wants that to change. It has drafted a blueprint that includes expanding Islamic lending to small and medium-sized enterprises, scrapping a tax law that imposes extra costs on Islamic banking transactions and improving risk management.

    Under Islamic, or Sharia, law, charging or paying interest is banned, as are investment in businesses that Islam finds unacceptable, such as liquor companies.

    Some financial experts say Islamic banking principles, which limit the use of sophisticated derivatives and require transactions to be backed by real assets, could prevent the excessive leverage that undermined the global financial system two years ago.

    Bank Indonesia senior bank researcher Dadang Muljawan says those characteristics helped convince the government to develop its dual-banking system. "The Islamic bank can survive very well the economic crisis. This is maybe what has been seen by the Indonesian government as an opportunity …. If we have two systems that can work together and then if one goes bust - I hope not - the other one can sustain," he says.

    That does not negate the need for better supervision. The system still requires proper supervision. "Jokingly we sometimes say that we can't say Islamic banks are too holy to fail … it's not the magic word," he says.

    Bank Indonesia expects more banks to enter the Islamic market after April, when the new tax law takes effect. Research head Dhani Gunawan says the central bank also hopes to draw in foreign investors to increase the funds available for infrastructure projects and for small and medium-sized businesses. "Islamic banks are focused on small and micro-financing, more close(ly) with real sector financing, so it will support the economy," he says.

    If Indonesia is to meet the central bank's goal of seeing Islamic banking account for 10 percent of the market by 2015, it will have to look for high-profile investors, especially in China and the Middle East.

    But Dadang says Islamic banks in the country need to focus on the small customers. "We have to also give sufficient attention to micro-finance. Why? Because well, maybe 40 percent of the Indonesian community will still need financial services - capital, bank financing. Most of them are still unbankable (can not access banks), they have the potential to produce something, but they need capital for them to be more efficient, to start a business," he says.

    This is where domestic banks can help. B.S. Kusmuljono is a bank executive and chairman of the national committee for microfinance empowerment. He wants to expand an existing system that extends up to $500 in credit to small entrepreneurs, mostly farmers looking to develop their production. "Our aim now is to eradicate poverty and to train as many people as possible to be entrepreneurs. That means the borrower should have a capacity building process. He has to be educated to be a businessman," he says.

    But that requires training and added oversight to monitor lending to more than 40 million business owners. Kusmuljono says that may be part of the reason Indonesia has not seen more growth in Islamic finance. "We see that the development is not what we expected 10 years ago. We thought it would grow rapidly. But we are optimistic that the Sharia banking will take an important role because most of the banks in Indonesia have a Sharia affiliate," he says.

    Many conventional banks in Indonesia have opened Islamic banking units, as a way to enter the market.

    For now, the focus will remain on building small and medium-sized businesses in the financial sector. But there is hope that improved regulations and new government measures could see Indonesia grab a bigger slice of what the central bank says is a $900 billion global market for Islamic banking.
     

    You May Like

    Video Democrats Clinton, Kaine Offer 'Very Different Vision' Than Trump

    In a jab at Trump, Clinton says her team wants to 'build bridges, not walls'; Obama Hails Kaine's record; Trump calls Kaine a 'job-killer'

    Turkey Wants Pakistan to Close Down institutions, Businesses Linked to Gulen

    Thousands of Pakistani students are enrolled in Gulen's commercial network of around two dozen institutions operating in Pakistan for over two decades

    AU Passport A Work in Progress

    Who will get the passport and what the benefits are still need to be worked out

    This forum has been closed.
    Comments
         
    There are no comments in this forum. Be first and add one

    Featured Videos

    Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
    In State of Emergency, Turkey’s Erdogan Focuses on Spiritual Movementi
    X
    July 22, 2016 11:49 AM
    The state of emergency that Turkish President Recep Tayyip Erdogan has declared is giving him even more power to expand a purge that has seen an estimated 60,000 people either arrested or suspended from their jobs. VOA Europe correspondent Luis Ramirez reports from Istanbul.
    Video

    Video In State of Emergency, Turkey’s Erdogan Focuses on Spiritual Movement

    The state of emergency that Turkish President Recep Tayyip Erdogan has declared is giving him even more power to expand a purge that has seen an estimated 60,000 people either arrested or suspended from their jobs. VOA Europe correspondent Luis Ramirez reports from Istanbul.
    Video

    Video Scientists in Poland Race to Save Honeybees

    Honeybees are in danger worldwide. Causes of what's known as colony collapse disorder range from pesticides and loss of habitat to infections. But scientists in Poland say they are on track to finding a cure for one of the diseases. VOA’s George Putic reports.
    Video

    Video Wall Already Runs Along Parts of US-Mexico Border

    The Republican Party’s presidential nominee, Donald Trump, gained the support of many voters by saying he would build a wall to keep undocumented immigrants and drugs from coming across the border from Mexico. Critics have called his idea impractical and offensive to Mexico, while supporters say such a bold approach is needed to control the border. VOA’s Greg Flakus has more from the border town of Nogales, Arizona.
    Video

    Video New HIV Tests Emphasize Rapid Results

    As the global fight against AIDS intensifies, activists have placed increasing importance on getting people to know their HIV status. Some companies are developing new HIV testing methods designed to be quick, easy and accurate. Thuso Khumalo looks at the latest methods, presented at the International AIDS conference in Durban, South Africa.
    Video

    Video African Youth with HIV Urge More Support

    HIV, the virus that causes AIDS, is the top killer of teens in sub-Saharan Africa. But many youths say their experience with the virus is unique and needs to be addressed differently than the adult epidemic. VOA South African Correspondent Anita Powell reports.
    Video

    Video Poor Residents in Cleveland Not Feeling High Hopes of Republican Convention

    With the Republican Party's National Convention underway in Cleveland, Ohio, delegates and visitors are gathered in the host city's downtown - waiting to hear from the party's presidential candidate, Donald Trump. But a few kilometers from the convention's venue, Cleveland's poorest residents are not convinced Trump or his policies will make a difference in their lives. VOA's Ramon Taylor spoke with some of these residents as well as some of the Republican delegates and filed this report.
    Video

    Video Pop-Up Art Comes to Your Living Room, Backyard and Elsewhere

    Around the world, independent artists and musicians wrestle with a common problem: where to exhibit or perform? Traditional spaces such as museums and galleries are reserved for bigger names, and renting a space is not feasible for many. Enter ArtsUp, which connects artists with venue owners. Whether it’s a living room, restaurant, office or even a boat, pop-up events are bringing music and art to unexpected places. Tina Trinh has more.
    Video

    Video With Yosemite as Backdrop, Obama Praises National Parks

    Last month, President Barack Obama and his family visited some of the most beautiful national parks in the U.S. Using the majestic backdrop of a towering waterfall in California's Yosemite National Park, Obama praised the national park system which celebrates its 100th anniversary this year. He talked about the importance of America’s “national treasures” and the need to protect them from climate change and other threats. VOA’s Julie Taboh reports.
    Video

    Video Counter-Islamic State Coalition Plots Next Steps

    As momentum shifts against Islamic State in Iraq, discussions are taking place about the next steps for driving the terrorist group from its final strongholds. Secretary of State John Kerry is hosting a counter-IS meeting at the State Department, a day after defense ministers from more than 30 countries reviewed and agreed upon a course of action. VOA Pentagon correspondent Carla Babb reports.
    Video

    Video Russia's Participation at Brazil Olympic Games Still In Question

    The International Olympic Committee has delayed a decision on whether to ban all Russian teams from competing in next month's Olympic Games in Brazil over allegations of an elaborate doping scheme. The World Anti-Doping Agency recently released an independent report alleging widespread doping by Russian athletes at the 2014 Winter Olympics in Sochi. So far, only Russian track and field athletes have been barred from the Summer Games in Brazil. VOA's Zlatica Hoke has more.
    Video

    Video Scotland’s Booming Whisky Industry Fears Brexit Hangover

    After Britain’s vote to leave the European Union, Scotland’s government wants to break away from the United Kingdom – fearing the nation’s exports are at risk. Among the biggest of these is whisky. Henry Ridgwell reports on a time of turmoil for those involved in the ancient art of distilling Scotland’s most famous product.
    Video

    Video Millennials Could Determine Who Wins Race to White House

    With only four months to go until Americans elect a new president, one group of voters is getting a lot more attention these days: those ages 18 to 35, a generation known as millennials. It’s a demographic that some analysts say could have the power to decide the 2016 election. But a lot depends on whether they actually turn out to vote. VOA’s Alexa Lamanna reports.

    Special Report

    Adrift The Invisible African Diaspora