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INDONESIAN ISLAMIC FINANCIAL MARKET:
FACTS AND CHALLENGES IIFM Specialized Sessions on Islamic Finance
Indonesian Sharia Economic Festival Surabaya, November 7, 2017
Dr. Rifki Ismal Department of Islamic Economics and Finance
Bank Indonesia
OUTLINE
1. Developing the Indonesian Islamic Economic and Finance
2. Roles of Bank Indonesia in Islamic Finance
3. Performance of the Islamic Financial Markets
4. Islamic Financial Market Deepening
5. Recent Regulation Related to Islamic Money Market
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1. Developing the Indonesian Islamic
Economic and Finance
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DEVELOPING THE INDONESIAN ISLAMIC FINANCIAL MARKET
DEVELOPING ISLAMIC ECONOMIC AND FINANCE
EXPECTED CONDITIONS
CHALLENGES
CHALLENGES
OPPORTUNITIES
OPPORTUNITIES
National Environment
• Fragility of the
conventional economic
system.
• Huge potential of the
global halal market.
• Tight global liquidity.
• Downturning of the
global trade.
• Varieties of Islamic
school of thought .
• Establishement of KNKS.
• Potential of halal industry.
• Potential of Islamic social
fund
• Establishmnt of KEKS
• Imbalance business
opportunities.
• High business
concentration.
1. Less understanding on Islamic
economy
2. Islamic economic conditions
Top 10 markets (GIEI) in each halal
industry
but not a top player. Islamic economic
share
is still small .
3. Islamic finance is dominated by
banking
sector with small Islamic banking share
(5.3%)
2. Less utilization of Islamic social funds.
Suboptimal collection and distribution of
Islamic social funds.
5. Not strong enough national policy and
political will on Islamic economics (no
specific institution and initiatives).
1. Improved public understanding
• Higher Islamic economics literacy
2. Islamic Economics
Performances
• Top 10 players in each halal
industry
• Increase share in Islamic business.
3. Islamic Financial Market
Performance
• Increase share in Islamic financial
market.
• Improved share in Islamic money
market.
2. Optimal collection and
distribution
of Islamic social funds (ZISWAF).
5. National level of Islamic
Economics policy
CURRENT CONDITIONS
Global Environment
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• Islamic Economic sector.
• Deepening the Islamic financial market.
• Developing the Islamic social sector
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DEVELOPING THE INDONESIAN ISLAMIC FINANCIAL MARKET
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Islamic
Productive
Funds Allocation
Economy
Excess
Liquidity
Real
Sectors
Islamic finance
Less Optimal
Economic
Performance
Well integrated
Commercial & Social
Islamic finance
Link to & based on
Contribute to Due to
Islamic Financial
Market Deepning
Islamic Money
Market
Commodity
Market Islamic
Stock Market
Islamic
Forex Market Sukuk
Market
Economic and Finance Conditions
- Bank Indonesia - Ministry of Finance
- Financial Services Authority - JFX
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2 3
4
• Excess liquidity in the economy can be managed in some Islamic financial markets.
• However, it goes through a cooperation among regulators and market players
• Such an excess liquidity is then linked with productive activities
ROLES AND CHALLENGES OF ISLAMIC FINANCIAL MARKETS
Islamic Productive
Funds Allocation
Economy
LKS
Islamic Banks Non Islamic
Banks
Sukuk Market
Sovereign
Sukuk
Sukuk
Corporation
Money Market
Interbank BI Instrument
Forex Market
Spot Hedging
Social Funds
Zakat Wakaf
Excess
Liquidity
Financial market deepening
Challenges: • Economic performance
• Less competitive to
conventional bank
• Less optimal public trust
• Less occupying Islamic
financial market
Challenges: • Hold to maturity
• Limited Corporate Sukuk
• Less optimal SBSN
• No pricing benchamrk
• Lesser role in monetary
operation
Challenges: • Less variety of instrument
• Less participation of iB
and investors
• Less active (freq, vol)
• Less prefered option for
liquidity mgt
• Lack of infrastructures
Challenges: • Limited instruments
• Limited forex supply
• No pricing benchmark
• Less active (freq, vol)
• Less forex financing
• Lack of infrastructures
Challenges: • Lack of information
• Public trust on amil
• Integration of commercial
& social funds
• No involment of Islamic
securities
• Less optimal portfolio
allocation
Real
Sectors
• Less supportive Islamic finance to Indonesian economy
• Limited role of Islamic instruments in economic policies
• Less optimal Islamic social sectors to solve social economic problems
Islamic finance
Less Optimal
Economic
Performance
Well integrated
Commercial & Social
Islamic finance
Link to & based on
Contribute to Due to
Roles of KNKS, mainly:
• Bank Indonesia
• Ministry of Finance
• Financial Authority
(OJK)
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2. Roles of Bank Indonesia in Islamic
Finance
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Monetary Policy Macroprudential Policy SP – PUR Policy
Bank Indonesia Main Policies
Achive and Maintain
Rupiah Stability
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Developing instrument, infrastructure,
regulation & investor based in:
• Islamic Money Market
• Islamic Forex Market;
Include engaging social sector through
Islamic securities.
Developing infrastructure, regulation &
real sector based monetary instrument.
Encouraging the development of sukuk
market.
Developing real sector-return indexes as
a benchmark.
SPN establishment, regulation,
implementation and supervision
including with Islamic Banks.
Non-cash payment instrument and
infrastructure which comply with
Islamic principles.
Islamic Banks regulation and macro
prudential supervision.
Strengthening Islamic business:
• Economy empowerment in pesantren
(Islamic boarding school)
• Increasing Islamic corporations’ business
• Increasing mustahik’s business.
including the optimization of ziswaf.
Encouraging the integration of commercial
and Islamic social finance.
REGIONAL POLICY OF ECONOMY AND FINANCE INTETRNATIONAL POLICY
1. Involvement and membership in IDB, OIC, IIFM, IILM, IFSB forum, etc.
2. Actively involve in Int’l WG (zakat-waqaf core principles).
3. Establishment of Islamic Inclusive Financial Service Board (IIFSB) and
encourage to establish World Islamic Infrastructure Bank (WIIB).
1. Developing Islamic economy and finance research and studies in the
regional level.
2. Strengthening Islamic economy empowerment.
3. Empowering ZISWAF and microfinance.
4. Strengthening and education of Islamic economy and finance in the
regional level. 8
ISLAMIC ECONOMIC AND FINANCE POLICIES IN BANK INDONESIA
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Islamic Social
Finance Actual Output
Input Regulation/
Corrective Action
Targeted
Performance
Standard
Supervisory
Process
Research and
Development
Data acquisition through on- and off-
site supervisory process
Sector respond to
policy
Corrective action
New settings points
New techniques for data aquisition
Data and information
Data and information
+ -
Deviation
Corrective action because
of deviation
Supervision
Reg
ula
tio
n
Business Model
Development
Bank Indonesia Involvements
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3
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Project Development in
Zakat and Waqf
Information System
Waqf Core Principles (WCP)
Development and Technical
Notes (IIFSB)*
BI involvement in regulation and
supervision process in
Islamic Social Finance
*) Islamic Inclusive Financial Services Board (IIFSB)
Linkage program
and instrument
development
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Indonesia Wakaf
Board
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DEVELOPMENT OF ISLAMIC SOCIAL FINANCE
3. Performance of the Islamic Financial
Markets
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6
ISLAMIC MONEY MARKET
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0
0.02
0.04
0.06
0.08
0.1
0.12
0
200000
400000
600000
800000
1000000
1200000
1400000
1600000
1800000
3804…
3829…
3853…
3877…
3902…
3926…
3950…
3975…
3999…
4023…
4048…
4072…
4096…
4121…
4145…
4169…
4194…
4218…
4243…
Volume (million Rp)
Return on SIMA (%)
SIMA (Vol and Return)
0.0000
0.0001
0.0002
0.0003
0.0004
0.0005
0.0006
0.0007
0.0008
0.0009
0.0010
0
0.02
0.04
0.06
0.08
0.1
0.12
38
04
7.0
38
29
2.0
38
53
4.0
38
77
7.0
39
02
2.0
39
26
4.0
39
50
8.0
39
75
3.0
39
99
5.0
40
23
8.0
40
48
3.0
40
72
5.0
40
96
9.0
41
21
4.0
41
45
6.0
41
69
9.0
41
94
4.0
42
18
6.0
42
43
0.0
42
67
5.0
Return on SIMA (%)
variance
SIMA (Return and Risk)
0%
2%
4%
6%
8%
10%
12%
0
2000000
4000000
6000000
8000000
10000000
12000000
38
04
7.0
38
26
1.0
38
47
3.0
3
86
87
.0
38
89
9.0
39
11
4.0
3
93
26
.0
39
53
9.0
39
75
3.0
3
99
65
.0
40
17
9.0
40
39
1.0
40
60
3.0
4
08
17
.0
41
03
0.0
41
24
4.0
4
14
56
.0
41
67
1.0
41
88
3.0
4
20
95
.0
42
30
9.0
42
52
2.0
Volume (million Rp)
Return on SBIS (%)
SBIS (Vol and Return)
SBIS (Vol and Return)
0
0.0001
0.0002
0.0003
0.0004
0.0005
0.0006
0.0007
0.0008
0.0009
0.001
0
0.02
0.04
0.06
0.08
0.1
0.12 38
047.
0
3826
1.0
3847
3.0
3868
7.0
3889
9.0
3911
4.0
3932
6.0
3953
9.0
3975
3.0
3996
5.0
4017
9.0
4039
1.0
4060
3.0
4081
7.0
4103
0.0
4124
4.0
4145
6.0
4167
1.0
4188
3.0
4209
5.0
4230
9.0
4252
2.0
Return on SBIS (%)
Variance
• Islamic money market is getting more active with increasing volume and lower risk
• However, it still is dominated by placement in Bank Indonesia instrument
ISLAMIC REPURCHASE (REPO)
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Government Sukuk (Vol and Average Price)
Islamic Repo (Repo Rate and Price)
• Islamic repo is the new transaction mechanism stipulated under Bank Indonesia Regulation (PBI) Number 17/4/PBI year 2015.
• It has been applied by Islamic banks and conventional banks.
• The Islamic repo transactions are ranged between Rp20 – Rp180 billion
• In the 1 quarter of 2016, there has been more than Rp1.1 trillion Islamic repo transactions between Islamic banks and conventional banks
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4. Islamic Financial Market Deepening
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DEVELOPING INSTRUMENTS AND INFRASTRUCTURES
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Islamic Monetary
Operations
Deepening Islamic
Money Market Deepening Sukuk
Market
Deepening Islamic
Forex Market
Existing:
- Spot
- Islamic hedging
Existing:
- SBSN (Govt Sukuk)
- Conventional Bank
Sukuk
- Islamic Bank Sukuk
- Corporate Sukuk
- State Owned
Enterprise (SOE)
Sukuk
Existing:
- SIMA (Mudarabah)
- SIKA
- Repo syariah
(SBSN, Corporate
Sukuk )
Existing:
- SBIS (joalah)
- Fasbis
- Repo SBIS
- Repo SBSN
- Reverse repo
- Islamic forex term
deposit
Islamic Financial Market Instrument
- OMO instrument
- Money market instrument
- Forex market instrument
- Sukuk market instrument
- Social fund instrument
Existing
Areas of Development
• There have been some Islamic instruments in the Islamic money, forex and sukuk market.
• Bank Indonesia Islamic monetary operation has occupies sukuk as well.
• The improvement of the instruments would capture those markets.
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DEVELOPING INFRASTRUCTURES AND INVESTORS
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Existing:
- Mini MRA Syariah (for Islamic repo)
- Islamic Financial Market Code of Conducts (iCOC)
- Settlement system for Islamic repo
- Islamic Accounting for Islamic repo and Islamic
hedging
Islamic Market Infrastructure Islamic Financial Market Investors
- Islamic benchmark rate
- Islamic social fund information system
- Treasury certification
- Managing non government Sukuk for
collateral
Domestic
Investor
Foreign
Investors
Existing:
- Bank konvensional
Existing:
- Individual via local bank
- Corporate via local bank
Domestic Investors:
- Bank and Non Bank
- Individual
- Government,
- Quasy Government
Foreign Investors
- Bank and Non bank
Areas of Development Areas of Development
• Infrastructures are going to be developed in some areas (benchmark rate, treasury, etc.
• There is also a plan to expand domestic and foreign investors
DEVELOPING INSTRUMENTS AND INFRASTRUCTURES
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Islamic Financial Market Regulations
BI Regulations on Trading
in Islamic Money Market BI Regulations on
Trading of
New (proposed) Money
Market
Instruments
BI Regulations on
Islamic Instruments
Existing:
- Interbank trading
- BI & Bank (reverse
repo SBSN)
Existing:
- Instrumen moneter
syariah BI (SBIS)
- Operasi moneter
dengan Sukuk
Islamic Money Market
Islamic Forex
Market
Sukuk Market
Islamic Monetary Operation
Areas of Development
• Regulations stand in 3 things: regulations for the existing instruments, new (proposal of) instruments and trading of instruments in the islamic money market.
• Such regulations are coordinated with related regulators.
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2. Recent Regulations Related to Islamic
Money Market
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ISLAMIC REPO (PBI No.17/4/PBI/2015)
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Bank A promises to sell sukuk to Bank
B in an agreed time (1st leg)
Bank B agrees and promises to
purchase sukuk in the 1st leg and will
resell it in the 2nd leg
First leg (time T)
Committment time
Second leg (time T+n)
• Islamic repo is based on true sale of Sukuk (government and corporate) with a mutual promise to resell/repurchase in an agreed time
• It can be applied by any bank (conventional and Islamic) having Sukuk
• Strong committment among parties are needed.
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ISLAMIC HEDGING (PBI No.18/2/PBI/2016)
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Simple Hedging (Tahawwuth al basith):
By usng Forward Agreement (Al-Muwa’adat li al-’Aqd al-Mustaqbal) followed by Spot in the maturity time.
Commitment time: Each party mutually agrees (muwa’adah) to exchange (trade) the currency in an agreed time including currencies, nominal, exchange rate and premium and, settlement time
Maturity time: Each party trade (exchange) the currencies (Spot transaction) with an agreed committment followed by delivery
Complex Hedging (Tahawwuth al Murakkab):
By using a subsequent spot transaction and Forward Agreement followed by another Spot transaction in the maturity time.
On the spot time: Each party conducts spot transaction and then mutually agrees to re-exchange (re-trade) the currency in an agreed time including currencies, nominal, exchange rate and premium and, settlement time
Maturity time: Each party trade (exchange) the currencies (Spot transaction) with an agreed committment followed by delivery
• Islamic hedging can take forms of simple and complex hedging.
• Those are based on mutual promise among parties
• There are consequences for a party who breaches the contract.
Thank you
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