Indonesia, the sleeping giant of Islamic finance, has finally awakened. Now that its laws on sukuk (akin to bonds) and sharia banking are firmly in place, the country has sent a clear signal to the financial world it is serious about developing the Islamic financial market here.
It has also joined an exclusive club of countries -- the other member being Malaysia -- that is pushing the industry's development through statute.
With a proactive Indonesian government, many initiatives can now be implemented to drive the Islamic finance industry's expansion. The new political will and commitment shown by the Indonesian government toward the industry is very exciting to market players, many of whom will now see Indonesia as a viable place to transact Islamic banking and finance business.
Indonesia, which has the largest Muslim population in the world and the largest economy in Southeast Asia, has the potential to become the largest indigenous Islamic financial market and, in particular, the largest Islamic debt capital market in the world.
Of course, in order to really develop the industry, it is not enough to simply pass the enabling laws for the government to issue sukuk and for banks to engage in sharia banking. This is an excellent beginning, but more needs to be done.
The government's proposed issuing of rupiah and U.S. dollar sukuk are anticipated to provide a good benchmark for the Islamic debt capital market. With this benchmark in place, more corporations will be enticed to issue their own sukuk. To facilitate this, the government needs to develop a corporate sukuk law and the relevant Islamic securities guidelines.
Further, statutory provisions to allow for tax neutrality and transaction cost neutrality vis-…-vis conventional bonds must be introduced by the Indonesian House of Representatives. This is critical to ensure corporations do not take a hit by issuing sukuk instead of conventional riba bonds which yield interest.
Statutory provisions which state "all costs, including taxes, in an Islamic financial transaction which are over and above the cost that would have to be paid by the bank and client under an equivalent conventional riba-based financial transaction shall be exempted from payment" would suffice to provide the desired competitive neutrality for the corporate sukuk market specifically and the Islamic financial market generally.
The beauty of such a tax and cost neutrality provision is the Indonesian government would not need to lose any income nor expend funds to spur and facilitate the industry's growth. With the stroke of a pen, it puts the Islamic financial market at par with the conventional financial market so all players are on a level playing field, without giving preferential treatment to sharia banking players and customers.
Indonesian corporations have already issued about 20 sukuk and the expectation is more will enter the market once a corporate sukuk law is passed and regulations for tax and cost neutrality are enacted.
Under the new sharia banking law, the penultimate authority on sharia for the industry rests with the Dewan Syariah Nasional (DSN); all industry products and services must be approved by the DSN through Bank Indonesia. This forms a very strong framework for the market, akin to what Malaysia already has, though in Malaysia authority rests with the Shariah Advisory Council under the central bank, Bank Negara Malaysia.
No other countries in the world have installed the framework which Malaysia and Indonesia have.
Nonetheless, to ensure credible and sustainable growth, the sharia governance and regulatory framework must be supported with the right approach to sharia matters. As long as the industry acts in a manner which does not contradict Islamic religious tenets, these financial activities are to be allowed. This means all sharia principles, as interpreted under any sharia school of law whatsoever -- be they majority or minority views -- may be practiced within the Islamic financial market.
So, there should be no need to hold time-wasting debates on which interpretation is better or more halal than another. All interpretations should be acceptable, though, of course, the industry will continue to debate how to improve applications of sharia within the parameters extant in a particular market.
The Indonesian government's effective and full-fledged entry into the Islamic financial market this year has excited the world. Indonesia has arrived at last and the global Islamic financial market is the better for it. We now await the government's next steps for the industry.
