Agus D W Martowardojo: Enhancing financial inclusion through Islamic
finance
Keynote address by Mr Agus D W Martowardojo, Governor of Bank Indonesia, at the IFSB
International Seminar "Enhancing Financial Inclusion through Islamic Finance", Jakarta,
31 March 2015.
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Bismillahirrahmanirrahiim,
• His Excellency: Mr Jaseem Ahmed, Secretary General - Islamic Financial Services
Board;
• His Excellency: Dr. Muliaman D Hadad, Chairman of OJK, Board of Commissioners;
• Prominent speakers,
• Distinguished Delegates and all participants,
Assalamualaikum Warahmatullah Wabarakatuh,
A very good morning to all of you.
Greeting
1. It is a great honor for me to deliver a keynote address in this IFSB international
seminar that is emphasizing on the need to enhance financial inclusion through
Islamic finance. Having observed that providing greater financial access is very
crucial in delivering equitable opportunities to all segments in the society and
preserving more sustained economic development, I am pleased to observe that
Islamic finance has a great concern over having a better outreach in delivering
financial services. The international seminar that we have today may serve as one
of the efforts to deliberate ideas on how Islamic finance could formulate its roles
through better financial products and regulations.
Recent development of Islamic financial industry
Distinguished Guests, Ladies and Gentlemen,
2. We have already witnessed that Islamic financial industry has been rapidly
developing in terms of economic sectors, asset size, physical outreach, and financial
products offered. Islamic financial products have been used in commercial retail
products, corporates, and government. The products of Islamic banks, takaful, and
capital market have been widely used in various economic sectors including
agriculture, manufacturing, trade finance, transportation, infrastructure development,
and others. Branches of Islamic financial institutions have also been established to
reinforce physical presence in the market; besides technological advancement that
allows the customers to enjoy sophisticated Islamic financial products such as
mobile banking and e-finance. The global Islamic financial industry is expected to
reach the total assets of USD 2 Trillion this year. The industry is growing at about
17.3 percent compounded average growth rate. It is almost twice as much as the
conventional industry has achieved.
3. The development of Islamic financial services industry is still dominated by the
2 major industries, namely the Islamic banking sector and Islamic capital market
with the share of 80 percent and 15 percent respectively. The interest of non-Muslim
populated countries like the United Kingdom, South Africa and Luxembourg to issue
global Sukuk has been monumental. The total of Sukuk issuance in 2014 has
reached the amount of USD 114.7 Billion. At the regulatory and infrastructure side,
we could also see some significant progress taking place. The Islamic Financial
Services Board has consistently produced regulatory references that are beneficial
to enhance governance of the industry. Those cover prudential measures for Islamic
banking, takaful (or Islamic insurance), and Islamic capital market.
4. The latest efforts coming into plates are the Guidance Note on Liquidity Risk
Management and the core principles of Islamic banking supervision. Those
regulatory references are expected to further streamline Islamic finance operations
globally and serve as a basis for assessing the strength and effectiveness of
regulation and supervision. The International Islamic Liquidity Management
Corporation has also shown its presence by increasing its sukuk issuance that can
be used for liquidity management of the internationally operating Islamic banks more
efficiently. Despite some exogenous disturbing factors like geopolitical crises and
shocks to oil prices, we could expect that the industry could sustain its development
until it reaches its significant role as one of key drivers of the global economic
development.
5. Cross sector activities between Islamic banking and capital market in terms of
Basel III compliant sukuk, "green" sukuk issuance, and social based sukuk have
also indicated progressive innovation in the industry. The central banks have also
equipped themselves with some innovation allowing them to perform monetary
operations using sharia compliance financial instruments and enriching the industry
with more compatible products such as sharia compliance repurchase agreement
(repo). At the industry level, we could also see the involvement of Islamic
Development Bank as one of the Multilateral Development Banks deserves
appreciation. It was through its initiatives that the establishment of supporting
institutions like the Islamic Financial Services Board (IFSB), International Islamic
Financial Market (IIFM), the Accounting and Auditing Organization for Islamic
Financial Institutions (AAOIFI), and the International Islamic Liquidity Management
(IILM) was successfully arranged. The latest Ten-Year Framework and Strategies
tries to consolidate all the efforts into a well-developed program.
Current global Islamic financial industry development
Distinguished Guests, Ladies and Gentlemen,
6. The global economy is still trying to regain its momentum for the economic
development in the last 5 years. The economic recovery is surrounded by
uncertainty which could easily affected by economic policies of advanced
economies and other disturbances. The tapering of the US quantitative easing and
the shock of international oil price caused a destabilizing force to the emerging
economies that are fundamentally sustained by domestic demands well-formulated
monetary policy. The growth in the capital market has also been challenged by the
oil price decline and low interest policy in the advanced market.
7. Despite the uncertainty faced by the industry, I am confident that the Islamic
financial industry could maintain its pace of growth in years to come. There are at
least five driving forces to sustain the industrial development including the growth of
emerging economies, cross-border financial transactions, innovative Islamic
financial products, regulatory advancement driven by more advanced and
comprehensive regulatory standards, and continuous growth of Muslim population.
Achieving greater sustainability in the economic development and financial outreach
Distinguished Guests, Ladies and Gentlemen,
8. The development of Islamic finance is expected to provide benefits to wide range of
customers. Those include the low income society that currently does not have
access to the financial system to make their life better. According to some studies, it
is found that there are quite many people in OIC member countries that still live
under poverty line. Most of them is unable to upgrade their quality of life and turn
themselves into productive society due to the lack of assets in hand and the
absence of financial products and services with low cost of funds.
9. Moreover, due to lacks of other resources, they are also remote from supportive
education program and health facilities that are potential to strengthen the basic
necessities to gain quality in human capital. Without properly designed poverty
alleviation program that particular group of people may be trapped in the poverty for
ages. In some occasion, low income society has been perceived as involving high
risk and too expensive to manage since it requires an extensive effort to manage
highly dispersed customers. As a matter of fact, if proper mechanism and
procedures supported by well-developed regulation, microfinance industry can also
be highly lucrative.
10. Islamic finance with a wider application of equity-based financing and micro-finance
products can facilitate greater outreach to medium, small and micro enterprises to
promote entrepreneurship and value-creating activities. Conceptually, greater
access to financial services can be provided by commercial based Islamic financial
institutions such as Islamic banks providing microfinance products or micro takaful
provided by takaful institutions. Other steps can be formulated such as integrating
commercial sector with Islamic social sector to come up with financial services that
are reachable by the micro entrepreneurs and low income society in general. The
program is aimed at improving social welfare arrangement through variety of
vehicles such as optimization of awqaf funds, innovative zakat disbursement
program that is contributive to the job creation initiatives and poverty alleviation
program.
11. Conceptually, the practice of Islamic finance signifies its favor to financial stability
and quality economic development which is characterized by the use of risk-sharing
concept, discouragement to excessive debt, the emphasis on ethical investment
activities, and other sharia specific preferences. The emphasis on equity based
investment underlines the importance of reinforcing the basic relationship between
financial sector and real economy.
12. The development of Islamic financial sector could reduce over-reliance to the debt
funding and excessive speculation. Having observed from the past economic crises,
it has been evidence that excessive debt funding and speculation significantly
contributed to the financial system fragility. In relation to the formulation of public
preference, the principle to the prohibition of excessive debt taking could serve as a
medium of public education that could create positive effect on the moderation of the
aggregate demand; and thus more stable macroeconomic condition.
13. The application of risk-sharing principle could give more gravity to partnership in the
society rather than creating lender-debtor relationship. Despite the requirement to
have a favorable environment that promotes more symmetric market, the application
of sharing concept could offer the potential to reinforce the link between financial
sector and the real economy which base the financial contracts on value creation
and viability of the enterprises. Once the transparency and governance are in place
to allow better partnership, over-creation of financial engineering can be minimized
since the financial activities will be focused on the intrinsic value added offered in
the financial contracts.
14. From the governance perspective, the risk sharing concept strengthens the
incentive to the financial institutions to exercise appropriate due diligence to the
financial transactions assuring that the expected profits commensurate their risk
taking. Supported by sound information and reporting system, the risk-sharing
contract opens up opportunities for the entrepreneur and the financier to monitor
and calculate the intrinsic values of the financial transaction that is reflected by its
expected profit, cash-flow, risks involved and other influencing factors to the
projects. This concept promotes greater discipline and responsibility to all
contracting parties to assure its success. The combination of good governance,
greater transparency and well-designed risk management would shape trust-based
relationship that is essential to make the intermediation process efficient.
15. The attention of the IFSB towards enhancing the role of microfinance in the Islamic
finance industry deserves appreciation. The Islamic financial institutions should be
able to play significant roles in the economic development covering all segments in
the society. The availability of standards on the microfinance activities is important
to ensure operational prudence practiced by the Islamic financial institutions when
extending their facilities to the low income society. Some regulatory incentive needs
to be created in terms of relatively lower risk weighted asset to provide lower cost of
capital when entertaining the micro-entrepreneurs. Although, further research need
to take place to find the optimal number and prerequisites when applying the
incentives.
Closing
16. Finally, please allow me to wish you all a productive discussion and deliberation in
this important seminar. I am confident that supported by internationally reputable
academics and players, we can achieve significant outcomes that are beneficial to
promote development in the area of microfinance for Islamic finance. I wish this
program a great success. Thank you very much.
Wassalamu'alaykum warahmatullah wabarakatuh.