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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

4 4

• 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

2

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

2

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

11

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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