Indonesia: The Tiger Economy of Islamic Banking

Indonesia, an archipelago made up of approximately 17,508 islands, and is located in South-East Asia. The country has a population of approximately 230 million, making it the fourth most populous country in the world; its capital city is Jakarta, which is located on the island of Java. Since the majority of the population of Indonesia are Muslims, Indonesia can be considered the largest Islamic state in the world in terms of population. The Indonesian economy is classified as a developing economy, and is known as a "Tiger Cub Economy" which is a group that also includes Malaysia, the Philippines, and Thailand. This is a reference to the more economically advanced "Asian Tiger Economies" that include Hong Kong, Singapore, South Korea, and Taiwan.

The Asian Tigers gained this name after attracting foreign investment and achieving impressive growth in their economy, manufacturing industries, and capital development. However the East-Asian economies suffered a financial crisis in 1997 as a result of so-called "hot money" [speculative funds], affecting both the Tiger and Tiger Cub economies, and causing the value of their currencies to collapse. By 1998, the Indonesian Rupiah – which was the currency most affected by this crisis – had lost around 74 percent of its value. This led to a decline in the Asian Tigers financial markets, as a result of the large sales that had been made by speculators.

The Asian Tigers stock market decreased by around 65 percent, which translated into overall losses that reached around 700 billion dollars in less than a year. Indonesia was also politically and economically affected by this, but it has since recovered and begun to experience growth once more. Indonesia has great economic potential, and this is due in no small party to the great international support that it enjoyed during the 1997 financial crisis, particularly from the US. The US had invested around 300 billion dollars into Indonesia, and it was not prepared to lose this.

Indonesia learned its lesson well, and so was able to withstand the global financial crisis that engulfed the world in 2007. It overcame the economic downturn with minimal damage, and this [financial] storm was one that hardly touched Indonesia. By mid-2009, the Indonesian financial markets have reached amazing heights, surpassing all other Asian markets with the exception of Mumbai and Shanghai. The Indonesian Rupiah had recovered most of its losses against the dollar, and Indonesia's 2009 budget deficit stood at less than 1.6 percent of GDP. In 2010 – just as the Indonesian Central bank predicted – the economy is well on the way to achieving growth rates of 7 percent.

Despite all of these positive figures and statistics with regards to the Indonesian economy, national decision-makers do not have a long-term strategic vision in place to exploit the country's favourable geographic location, and nurture its social environment in order to transform Jakarta into the capital of Islamic Finance in East Asia, which is a position that Jakarta is well-qualified to hold. The importance of this issue is further underlined by Indonesia's neighbour, Malaysia, which through development over a number of years has been able to become the gateway and capital of the Islamic banking industry in East Asia.

Indonesia has known of the potential of the Islamic banking industry since 1992, when it founded its first Islamic bank, Bank Muamalat Indonesia (BMI). Yet the industry’s growth rates [today] do not exceed the growth witnessed by the industry between 2000 and 2009, which stood at between 2.5 percent and 5 percent growth. By the end of 2009, there were a total of 6 Islamic banks and 25 Islamic windows in conventional banks in Indonesia, in addition to 138-state owned provincial Islamic banks. However, Indonesian decision-makers have not paid attention to the financial strength of this promising industry until recently. They are now seeking to keep up with their neighbours by stimulating this industry and granting it the attention that it deserves. They have enacted relevant legislation, and the government has issued several independent Islamic Sukuk funds.

The government’s measures to stimulate the industry have led to an unprecedented growth in its [Islamic banking] assets, with the growth rate at the end of 2009 seeing an increase of around 37 percent compared to 2008. The growth rate in 2010 is expected to stand at around 81 percent, according to a report published by the Indonesian newspaper, The Jakarta Post.

But even with the high growth rates recently achieved in Indonesia thanks to Islamic banking assets, these assets still only make up less than 2.5 percent of Indonesia's total financial industry. This is not proportionate with the incentives put in place by the Indonesia state to achieve growth in this industry.

The Indonesian government is therefore expected to seek to increase Islamic banking's share of its financial industry by offering increased tax incentives, enacting further legislation, issuing more independent sukuk bonds. Thus, Indonesia will become Islamic banking's tiger economy.

Source: Aawsat.com

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