Keynote Speech
"Integrating Islamic Commercial and Social Finance to Strengthen Financial
System Stability"
Agus D.W. Martowardojo
Governor of Bank Indonesia
at International Seminar and the 2nd JIMF Call for Papers
Surabaya - Indonesia, 27-28 October 2016
Distinguished Speakers, Seminar Participants, Ladies and Gentlemen,
Assalamualaikum Warahmatullahi Wabarakatuh,
And very good morning to all of you.
[Introduction]
1. It is a great honour for me to be here today and to have this
opportunity to welcome you in this International Seminar on Islamic
and Finance, which also facilitate the 2nd Call for Paper Conference for
the Journal of Islamic Monetary Economics and Finance in 2016.
2. As we have already seen across the globe, many people are in a search
for a comprehensive formulation of Islamic economics and finance
which can be developed not only conceptually, but also
implementable to support the economic development in complement
to the existing one.
3. The financial turbulence that has deeply impacted to the global
economy is still waiting for a momentum to regain its strength and
stability. The economic challenges that we are facing today has
proven that even for the long standing conventional economics, new
approaches and formulations are required to address and to
overcome the challenges, such as sustainability of the economic
growth and inclusive economic development.
4. The new approach in economic development concept, including the
development of Islamic economic concept, should be able to address
current issues and to provide credible solutions to the government.
This conference serves as one of effective vehicles to facilitate
exchange of thoughts and to formulate possible new approach that
are worth-considering to complement the existing economic policy to
come up with greater inclusiveness and sustainability.
Distinguished ladies and gentlemen,
5. The development of Islamic economic and finance has been
promising. The three sectors covering Islamic banking, Islamic capital
market and also takaful could serve as additional pillars to foster the
Islamic economic development. Those three elements have shown
tremendous progress in terms of business volume, financial products
and also the wider networks to entertain the customers.
6. The Global Islamic commercial finance still dominated by Islamic
banking sector, which is accounted for 80% of the whole system. While
Islamic banking sector has demonstrated its resilience aftermath the
global financial crises by delivering a strong average growth of 17.1% in
2008 to 2011, the latest development showed a moderation pace of
growth with an average of 13.8% during 2011 to 2014, or in particular
10% for 2013 and 2014. Nevertheless, the first half of 2015 has posted a
non-annualized upswing growth of 7.96% and therefore, global Islamic
banking assets growth in 2015 is expected to once again sustain its
double-digit rate.
7. However, subdue global macroeconomic outlook poses considerable
risks to global banking sector performance in general. Similar with the
performance of Islamic banking sector, the global Sukuk market also
experience a slowdown after reached record years for global Sukuk
issuances in 2012 and 2013. In 2014 the Sukuk market slowed down to
just over USD100 billion issuances, and the downward trend continue
to 2015 where the issuance slides 43% to just around USD60 billion.
8. The development of Islamic commercial finance in Indonesia has
similar down trend as the development of global Islamic commercial,
especially in 2012-2015, where the growth of Islamic banking reached
its lowest of 8.8% annually in 2015, compare to 9.2% annually of its
conventional counterpart. However, by July 2016, the growth of
Islamic banking has rebounded to reach 12.0% y.o.y, while its
conventional counterpart still showed down trend to reach 7.2% y.o.y.
Meanwhile, the share of Islamic banking has been stagnant at 4.8%.
9. Nevertheless, Islamic banking in Indonesia is claimed to be the biggest
retail Islamic banking in the world with more than 18 million customers
and more than 4.500 branches in 2015.
10. The development of Sukuk in Indonesia showed a slight down trend
for corporate sukuk in 2009-2014 and for government sukuk in 2011-
2014. However, the growth of sukuk has rebounded to 39.4% in 2015
and 29.8% by July 2016 for corporate sukuk, as well as 39.7% in 2015
and 36.28% by July 2016 for government sukuk. The share of sukuk by
July 2016 has reached 3.8% for corporate sukuk and 15.6% for
government sukuk.
11. The Islamic social finance sector comprises zakat, awqaf and non-
profit microfinance institutions. Although development around
Islamic social finance sector is not globally well documented,
countries data indicates promising potential. Research by the Islamic
Research and Training Institute of IDB (IRTI-IDB) shed some light for
the development of global Islamic social finance.
12. It is estimated that the potential zakat collection in South Asian and
South East Asian countries is around USD30 billion in 2011, while in
Sub-Saharan Africa countries it could reach around USD24 billion in
2013. On the other hand, the process of estimation of potential
resources from awqaf is more challenging due to gross absence of
data in most countries.
13. The Islamic social finance allows the government to reach wider
segment to entertain, particularly the low income society that have
been neglected due to inability to provide low cost funds. Henceforth,
it becomes our real challenge to better formulate and define the
concept of Islamic economics to reach compatibility in both concept
and implementation, so that it can be integrated in to the mainstream
economic policy. In this international seminar, the Islamic social sector
becomes the center point of discussion after considering its potential
to further equip the government in delivering prosperity to the
society.
Distinguished guests, ladies and gentlemen,
14. Zakat enables those who are considered poor and extremely poor to
fulfill their basic needs. Zakat can also be a mean of empowering the
poor capable of doing work for producing goods and/or services, but
have no or little access to the formal financing. so that the self-
employed poor will be empowered to take care for himself and his
family. Hence, poverty could be alleviated.
15. Similar to zakat, the management of awqaf also contributes to socio-
economic wellbeing. Traditionally, the charitable purpose of awqaf
includes educational institutions, orphanages, roads, graveyards, and
religious establishment such as mosques. However, in the modern
days, the institution of awqaf is encouraged to make awqaf either
cash or estates more productive.
16. Through awqaf, charitable clinics, medical centers, shopping complex
and commercial centers can be established. This large social-
commercial projects finance by the raising awqaf in a planned manner
are considered as an important instruments to improve socio-
economic wellbeing in a sustainable way.
17. Unlike the other commercial sources of funds, the zakat funds would
never cause unnecessary burden to the economy since the type of the
funds is not commercially claimable, and hence, no excessive social
costs will occur. The same also goes to the awqaf sector, where, as a
matter of fact, more people are endowed with low cost assets. With
this huge potential of zakat and awqaf land, we can expect Islamic
social finance a significant drive to economic development.
18. Both zakat and awqaf as Islamic social finance can become a buffer as
well as an economic stabilizer. Zakat funds provide a transfer payment
to the hardest hit poor and needy people caused by recession. Since
zakat is a levy on both income and wealth, the redistribution of wealth
will always be functional and operative in an Islamic economy due to
wealth zakat irrespective of the phase of business cycle.
19. Transfer payments to needy people will continue when the economy
faces further recession. Due to its simple and certain collection and
also religious obligations than just an involuntary tool of fetching
wealth, zakat is always available in good time (peak) and bad time
(recession).
20. On the macroeconomic level, proportional zakat linked with income
acts as an automatic stabilizer. When personal disposable income
decreases due to recession, obligatory zakat also decreases. They do
not have to pay the same proportional amount as before, thereby
providing an automatic relief for income earners.
21. On the contrary, when aggregate personal disposable income
increases (boom period), more zakat is collected and more amount
remains at the disposal of government to allocate as transfer
payments. Thus zakat enables the distributive allocation works
independently and help stabilize the extreme business cycles. As for
awqaf, since the principal of awqaf will always increase from time to
time, due to return of productive activities and new awqaf collection,
awqaf could act as shock absorber of economic shocks.
Distinguished guests, ladies and gentlemen,
22. Despite the potential, we also realize that in order to manage zakat
and awqaf efficiently and prudently so that poverty alleviation and
socio-economic wellbeing can be materialized, the regulatory
framework of this sector has to be improved. To this end, Bank
Indonesia jointly together with Islamic Research and Training Institute-
Islamic Development Bank (IRTI-IDB) and Baznas has established
International Working Group on Zakat Core Principles in 2014.
23. Alhamdulillah, the Core Principles initiative has been finalized and
launched in the World Humanitarian Summit of United Nations in
Istanbul on May 23rd, 2016. The Core Principles serve as the main
reference to further elaboration of Zakat regulations. Meanwhile, the
development of Awqaf Core Principles has also been underway,
following the success of Zakat Core Principles.
24. Realizing the potential of this Islamic social sector, Bank Indonesia
puts greater attention to enhance zakat and awqaf system nationally
and internationally. The Islamic economic and finance development
program has put as one of the strategic objectives of Bank Indonesia
Strategic Function 2024 and enhance inter-institutions cooperation
and coordination programs including the development of inclusive
finance and MSME, as well as Islamic economics and finance. Bank
Indonesia has set a vision of Indonesia to become a center of Islamic
Finance Center in the region.
Distinguished Guests, Ladies and Gentlemen,
[Closing]
25. Relating to the Journal that we are trying to develop, this conference
serves as the platform to communicate and to elaborate the topics
compiled in the Journal. We wish the journal can play a role as one of
main compiler of repository knowledge in the area of Islamic
economics and finance.
26. Up to this point, Alhamdulillah, we have an honor to facilitate
important discussion attended by prominent scholars, representatives
of several embassies, colleagues from governmental insitutions,
researchers, and academicians on integrating Islamic commercial and
social finance to strengthen financial system stability, which is a timely
topic nowadays.
27. In this special moment, I am pleased to inform you that this
Conference is conducted concurrently with "Indonesia Sharia
Economic Festival (ISEF) 2016" which choose "Leading Roles in the
Development of Islamic Economic and Finance to Achieve the
Prosperity of the Nations" as the theme of the conference. This
Festival will be held here in Surabaya, 25-30 October, 2016.
28. Allow me to conclude my speech by expressing my appreciation and
sincere gratitude to all speakers and participants for the willingness to
join this special event. I also would like to wish you all a productive
discussion and deliberation in this important event. I am confident
that supported by all participants in this room, we can achieve
significant outcomes that are beneficial to promote development in
the area of Islamic commercial and social finance.
29. Finally, I am delighted to officially open "International Seminar and
the 2nd Journal of Islamic Monetary Economics and Finance Call for
Papers", please enjoy the discussion and the rest of the session at this
second biggest Metropolitan city in Indonesia and also known as "City
of Heroes", due to the importance of the Battle of Surabaya in
galvanizing Indonesian and international support for Indonesian
independence during the Indonesian national revolution.
Thank you very much.
Wassalamu'alaikum warahmatullahi wabarakatuh.
Surabaya, 27 October 2016
Agus D.W. Martowardojo
Governor of Bank Indonesia