decentralising growth,

A SPECIAL PUBLICATION PRODUCED IN CONJUNCTION WITHTHE 12TH ISLAMIC ECONOMIC FORUM, JAKARTA, INDONESIA AUGUST 2-4, 2016

WWW.THEWORLDFOLIO.COM

AN INSIGHT INTO THE ISLAMIC WORLD’S CONTRIBUTIONS TO THE GLOBAL ECONOMY:

FINANCE I TRADE I INVESTMENT I INTERNATIONAL COOPERATION

DECENTRALISING GROWTH,EMPOWERING FUTURE BUSINESS

INDONESIA, THE WORLD’S MOST POPULOUS MAJORITY MUSLIM COUNTRY HOSTS THE PREMIER INTERNATIONAL BUSINESS DIALOGUE ON KEY ECONOMIC

ISSUES AFFECTING THE GLOBAL MUSLIM COMMUNITY IN 2016

01 cover.indd 1 21/07/16 13:29

With over 160 awards in the past three years Bandung is now Indonesia’s most internationally

recognised city. Bandung’s commitment to creating a world-class smart city by incorporating

technology and innovation into governance has led to the unprecedented ease of doing business. The new dedicated

area for ICT companies, Bandung Technopolis, has already seen large foreign investors taking advantage of Bandung’s young, well educated

talent pool. As the capital of creative economy, Bandung is the new hub for international business in Indonesia.

www.bandung.go.id

DiskominfoBdg

Bandung home of Indonesia’s

creative minds

Indonesia-USAT-Bandung-WIEF2016-4.indd 1 21/07/16 14:58

3 The Worldfolio WIEF

With the collapse of commodity prices, the slowdown in China and Russia, a post-Brexit Europe in crisis and diminishing investment in emerging economies, the 12th WIEF offers a crucial platform for leaders and delegates from the world’s Muslim nations to come together and form a collective response to the grave challenges the global economy faces as a result of the uncertain political and economic backdrop.

Discussions at the 12th WIEF, themed “Decentralizing Growth, Empowering Future Business”, will focus on ways to end the inequality caused by the global domination of multinational corporations, and to strengthen the role of SMEs to elevate inclusive economic growth around the globe. Particular attention will be put on improving SMEs’ access to credit, such as through Islamic (sharia-compliant) financial instruments and crowdfunding, and exploring new opportunities for global and digitized trade.

The concept of the Islamic economy has increasingly gained global traction in the past few years. It continues to grow while adhering to the underlying principles of fairness and equality. The 12th WIEF will continue to promote the ethical and equitable Islamic economic model, as it convenes world leaders, government representatives, economists, academia, and the business community to address pressing global economic and social issues.

Organized by:Hosted by:

Government of Indonesia

Hosted by:

03 Intro.indd 3 21/07/16 13:37

ÁLVARO LLARYORAChairman, The Worldfolio

JONATHAN MEANEYChief Editor, The Worldfolio

KRISTIN KJELLGARDHead of Journalism Dept., The Worldfolio

Art Direction & Graphic Design: EDUARDO BERTONE, IGNACIO PLASENCIA

Contributing writers: BENJAMIN JONES, AYLIN PARLA, MARKO RANKOVIC, RETNO MARUTI (SENIOR ECONOMIST , INDONESIAN MINISTRY OF FINANCE), TUN MUSA HITAM, (CHAIRMAN, WORLD ISLAMIC ECONOMIC FORUM FOUNDATION)

Indonesia Country Directors:GEOFFREY FLUGGE, MIRIAM LLORCA CASTRO

Regional Directors:LEANDRO CABANILLAS, FATIMA RUIZ MORENO

Special Thanks To:THE INDONESIAN MINISTRY OF FINANCE AND INDONESIA INVESTMENTS

STAFF

05 Value of the global Islamic economy to surge to $5.8 trillion over next four years

11 Indonesian government enactsprogressive pro-business reforms

20 Islamic banking in indonesia: ample room for growth

14 An interview with Dr. Bambang Per-madi Soemantri Brodjonegoro Indone-

sian Minister of Finance

32 Crowdfunding: the lifeline of small businesses

47 Indonesia’s “Family friendly”Halal tourism boom

TABLE OF CONTENTS

4The Worldfolio WIEF

04 Table.indd 4 21/07/16 16:58

$5.8 TRILLION


urgeoning uslim o ulation, ne finance methods o eying the rece ts of Islam-ic elief, a ra idly gro ing uslim middle class ith increasing s ending o er and ne avenues of trade among uslim ma ority nations are fueling the glo al Islamic economy, and governments and the rivate sector are taking notice

Consider the numbers: By the year 2050, the number of Muslims is ex-pected to reach 2.8 billion, or double the average global population growth, and will account for nearly a third of the world’s total inhabitants.

Logically, this population boom will fuel the already expanding Islamic economy which experts predict will surge in value to a staggering $5.8 tril-lion over the next four years.

Indeed, the almost 60 Muslim-majority nations from Indonesia in the east to Morocco in the west, account for more than trillion in GDP, a figure that will certainly increase as the re-gion includes some of the world’s fast-est-growing economies, many govern-ments of which are using their vast oil revenues to overhaul their own econo-

mies and establish investment-hungry sovereign wealth funds.

And at the same time, prospering Muslim minorities in Western nations and Asian non-Muslim majority coun-tries are fast becoming major economic players in the domestic markets of the United States, the European Union, China, India, Russia and many others.

Islamic finance, a concept largely unknown in the West just a few decades ago, is the root of the Islamic economy and fast becoming one of the leading global financial sectors.

Defined by the International Mon-etary und as the provision of finan-cial services in accordance with Sharia Islamic law, principles and rules,” Is-lamic finance rejects common practic-es in estern finance such as interest,

risky investments or activities consid-ered harmful to the public good.

“Instead,” the lending agency says, “the parties must share the risks and rewards of a business transaction and the transaction should have a real eco-nomic purpose without undue specu-lation, and not involve exploitation of either party.”

Lofty standards perhaps, but prov-ing to be practical and profitable as the sector is going from strength to strength and growing around 10 per-cent annually. Two years ago the Is-lamic finance market was worth 1.8 billion and should almost double that to $3.2 billion by 2020.

Currently, these assets are concen-trated mainly in the Gulf Cooperation Council economies, along with Malay-

VALUE OF GLOBAL ISLAMIC ECONOMY TO SURGE TO

OVER NEXT FOUR YEARS

Halal Food: a or , a anese, iss, anish, rench and e ican food multina-

tionals are targeting this orld ide market ith halal food and everage offerings ran-

ging from reakfast cereal and chocolate ars to fast food urgers and gourmet coffee

05-09 Global Islamic Economy.indd 5 21/07/16 14:55


THE GLOBAL ISLAMIC ECONOMY

GLOBAL ISLAMIC FINANCE

GROWTH OF GLOBAL ISLAMIC FOOD AND LIFESTYLE SEGMENTS BY 2020

45%Halal food

65%Islamic travel

42%Islamic fashion

34%Islamic culture and recreation

1.6 BILLIONGlobal Muslim population (2010)

2.8 BILLIONProjected global Muslim population (2050)

$3.6 TRILLION Value of global Islamic economic sector (2014)

$5.8 TRILLIONProjected value of global Islamic economic sector (2020)

$1.35 TRILLIONValue of global Islamic banking assets (2014)

$2.6 TRILLION BY 2020Projected value of global Islamic banking assets (2020)

12%Average annual growth of Islamic banking assets

6%Average annual growth of Sukuk bonds

Source: World Islamic Economic Forum


sia and Iran, and as they account for less than 1 percent of global finance assets, economists note that growth over the coming years is practically unlimited.

Also by 2020, Islamic banking as-sets are forecast to reach $2.6 trillion as

haria-compliant financing will contin-ue to increase market share in emerg-ing markets like Turkey, Indonesia, Malaysia, the United Arab Emirates, Saudi Arabia and Qatar.

In a recent report, the IMF noted that Islamic banking had outperformed conventional banking over the previous decade, boosting its penetration rate to an unprecedented 15 percent in ten countries in Africa and the Middle East.

But challenges remain and sector analysts say one of the biggest is for Is-lamic banks to join the digital banking revolution as more and more clients, both corporate and private citizens, pre-fer to do their banking online whether making deposits, purchasing insurance and other products or transferring funds.

Along with banking, Islamic fi-nance encompasses investment funds, insurance, securities (or sukuk), leasing and micro finance, with banking and se-

curities representing an estimated 95 percent of total Islamic finance assets.

But the Islamic economy extends well beyond finance and the financial services sector and other industries in-volving Muslim-majority economies or adhering to Muslim principles are also contributing to the big picture.

An Ancient TraditionSince the days of the Silk Road which had its origins thousands of years ago with merchants crisscrossing Eurasia from the Mediterranean to China and beyond in the first stage of globali a-tion, trade has helped fuel Muslim economies. These days commercial ties between the 57 member states of the Organization of Islamic Coopera-tion (OIC) are estimated to represent 20 percent of the total trade of these countries.

And as their economies continue to register regular growth, trade by these nations with all countries, Muslim and non-Muslim alike, will naturally in-crease as performance figures indicate.

In one recent year, total merchan-dise exports rose to the record amount

of $2.2 trillion, well above the pre-crisis high of $1.9 trillion in 2008 and higher than the world average. eflecting the same trend, intra-OIC trade is consis-tently increasing while exported goods from these countries are becoming more diverse as oil-producing mem-bers diversify their economies.

According to the Islamic Center for Development of Trade, an OIC subsid-iary based in Casablanca, Morocco in charge of promoting commercial ties and fostering investment, this trade should increase over the coming years by around 7 percent. But the Center points out that trade could really take off if certain obstacles such as trans-portation problems, logistic constraints and tariff barriers could be removed and financing issues are resolved.

One organization working to solve those issues is the Islamic Trade Fi-nance Corporation (ITFC) that facili-tates both private and public resources to encourage economic development through trade.

“The corporation helps entities in member countries gain better access to trade finance and provides them

Fashion: on uslim international layers in the retail fas-hion industry such as ango, ommy ilfiger and are

roducing hat is called modest fashion ith the uslim oman in mind



with the necessary trade-related capac-ity building tools in order to help them compete successfully in the global mar-ket,” the ITFC’s mission statement says.

As an example of its activities, the organization recently engineered an agreement to finance imports of crude oil, refined petroleum products and ag-ricultural products to Mali, from which the ITFC will also fund exports from of farm commodities.

Growing DemandOn a much more personal level, the Is-lamic economy also incorporates such consumer sectors as lifestyle, food, lei-sure, fashion and travel with Muslim and non-Muslim companies working hard to satisfy the growing demand. While there has always been a market for Sharia-compliant products in Mus-lim-majority markets, the rise in Mus-lim populations in countries outside of Asia, the Middle East and Africa is hav-ing a major effect.

Globally, the Islamic food and life-style sector is expected to reach $2.6 trillion by 2020, up from $1.6 trillion in 2014. Halal food products do not

contain pork, alcohol or other prohib-ited ingredients and must be produced, processed and stored using equipment, utensils and facilities cleaned accord-ing to Islamic laws.

These products were worth $1.1 trillion two years ago (or almost 17 per-cent of global expenditure) and should grow to $1.6 trillion in the next four years – a 45 percent increase. With this expansion in mind, many companies in non-Muslim majority countries are get-ting into the game.

Australia, for example, is the third-biggest producer in the world of halal food mainly due to its huge volume of meat exports to Muslim countries and its sterling reputation for strict adher-ence to halal practices in processing, handling and shipping.

Major U.S., Japanese, Swiss, Span-ish, French and Mexican food multi-nationals are targeting this worldwide market with halal food and beverage offerings ranging from breakfast cereal and chocolate bars to fast-food burgers and gourmet coffee.

But with so many producers, a ma-jor problem confronting the interna-

tional halal food sector is global stan-dardization as government-designated production and process methods can vary from country to country whether Muslim-majority or not.

Sector analysts explain that issues include whether certifiers continually monitor production practices or only carry out spot checks.

And there is increasing concern over fraud, with experts citing cases in which food products were falsely la-beled as Sharia-compliant when they actually contained pork or were pro-cessed in unsanitary conditions.

Availability of halal food and bever-ages away from home is an issue facing Muslim travelers who are increasing as incomes rise and international travel becomes much easier, sector experts say. In 2014, the Islamic travel industry was worth $142 billion, or 11 percent of global expenditure, and is predicted to rise to by 65% to $233 billion.

One study pointed out that if Muslim travel source market was considered a country, it would be the third-largest tourism source market after China and the United States. In recent years, the



leading Muslim-majority source mar-kets were Saudi Arabia, Iran, the United Arab Emirates, Indonesia and Kuwait.

Sector analysts say that interna-tional travel by wealthy Muslims is nothing new and that rich Arabs with their entourages have been a com-mon sight in luxury hotels on the Cote d’Azur, in London and other Western cities for many years.

But a new generation of Muslim travelers, many second or third gen-eration immigrants to the West, are eschewing their parents’ annual visits back to their homelands like Pakistan or Turkey and choosing instead to see the rest of the world.

According to Dinar Standard, a re-search, advisory and business media consultancy based in New York which studies Muslim consumers, top non-Muslim source markets in recent years were Germany, Russia, France and the United Kingdom.

And although they may live in the West, they still want a Muslim-friendly travel environment and so are looking for hotels, restaurants and travel ser-vices which respect their wishes.

As evidence that these tourists are being heard, more and more hotels are offering halal selections in their restaurants, providing information on local mosques and prayer times and scheduling gender-segregated sessions for swimming pools and other onsite sports facilities. But this raises a dilem-ma for some destination operators who wish to attract Muslim clients without alienating non-Muslim guests.

One solution, practiced by the Indo-nesian resort island of Lombok which is known as the “island of 1,000 mosques” and so attracts many Muslim travelers, is to have designated Muslim areas where revealing swimsuits are prohibited and family activities are promoted. As the is-land is also famed for its breathtaking beaches and other tropical attractions it also lures many Western visitors so sep-arate “Western” areas have been set up where rules about clothing and alcohol are more lax.

A Move to ModestyModesty is the driving consideration in the growing Islamic fashion sector as the number of Muslim women who

can afford chic and practical clothing adhering to their religious tenets in-creases.

Worth $230 billion in 2014, or 11 percent of global expenditure, the Is-lamic clothing industry is forecast to rise to $327 billion by 2020 – a 42 per-cent increase.

And, as with the food and travel sec-tors, non-Muslim international players in the retail fashion industry such as Mango, Tommy Hilfiger and D are producing what is called “modest fash-ion” with the Muslim woman in mind.

At the same time, the business of Muslim fashion designers is growing by leaps and bounds and online retailers specialized in the sector like Hijup and Aab are not only making it easier for women to shop for the clothes they want which combine traditional and trendy elements, the companies are also con-tributing to the Islamic digital economy.

Among Muslim-majority nations, Turkey ranks highest in expenditure on clothing at $25 billion, followed by the United Arab Emirates, Nigeria, Saudi Arabia and Indonesia.

The U.A.E.’s high ranking is espe-cially noteworthy as it has a very small population compared to those of the other markets.

Muslims in Western European countries – Germany, France, the Unit-ed Kingdom and Italy – plus the United States lead the non-Islamic world in clothing and footwear purchases to the tune of $22 billion, with the United States alone accounting for almost $7 billion of the total.

It is evident that the Islamic econ-omy is in robust health and as the number of Muslims around the world increases and as Muslims themselves continue to prosper, join their coun-tries’ middle classes and enjoy rising disposable incomes, the sector will continue to flourish creating clear op-portunities for both Muslim and non-Muslim businesses and investors.

Tourism: In , the Islamic travel indus-try as orth illion, or ercent of glo al e enditure, and is redicted to rise y

to illion y




After more than six months as Chief of Staff what would you say are the Jokowi administration’s top priorities at the moment? President Jokowi is now focusing on economic development. The three major priorities are infrastructure, deregulation and human resources development, we hope investment will in-crease, SMEs will be developed and our economy will grow.

ndonesia aces significant challenges in in rastructure de elo -ent ut the enefits eyond connecti ity are well nown with

heightened s ending on in rastructure li ely to ha e a ositi e a ect in terms of economic growth. Our target economic growth when President Jokowi came to power was 7 percent, but now, after the global slow down, we have revised that figure to between 5 and percent. Infrastructure spending will be focused on a number of key areas, including power generation through the 35,000-megawatt program, but also toll roads, rail-ways, harbors and ports. Connectivity created by infrastructure we build is very important to minimize the cost of logistics. Currently we have some issues regarding the cost of logistics, for example the distribution of the logistics from west to east leaves a large gap. This has led to uneven economic growth between the western and eastern islands of Indonesia. The high cost of logistics also makes us less competitive. So, building infrastructure will have a huge positive impact on our economic growth.

The position of Chief of Staff is a recent one in Indonesia. What is your main role?

e are not an implementation agency we are the back office of the President. We have to make sure that the ministries will im-plement all of the President’s agenda and promises. We interact with planning and budgeting on the ministerial level. Our core function is to influence the policy of the government based on the President’s priority and vision.

We need to make sure that the President’s priority programs are implemented. We have monitoring and evaluation programs for all of the ministries. We report to the President if we have found any problems in the implementation. o, this office is also taking part in the revision of certain programs, which means the job is not easy. Sometimes we have to take over certain func-tions of subordinate entities to ensure that implementation runs smoothly. I think the main problem of our government has previ-ously been lack of coordination between different organizations, which is part of the reason the anti-corruption agenda and bu-reaucratic reform is so important. We want to make sure that our bureaucracy is efficient, transparent and we want Indonesia to be attractive for investors.

How is Indonesia progressing in terms of its ease of doing busi-ness ranking? Indonesia’s ease of doing business is now ranked 10 and the President has instructed all of the ministries to work together to achieve a ranking of 40. e are working together with the Coor-dinating Ministry of Economic Affairs to achieve this target and I am also the chairman of the working group for deregulation, which will accelerate this process.

e have announced 12 economic policy packages thus far and we are still evaluating whether or not all the 12 packages will have a large impact on our economic growth target. If it is only a small impact, we will need to change it. We have to look at what the investors need in terms of incentives.

ow is the go ern ent consulting and wor ing with the ri ate sector? We have communicated with the private sector and consulted with them about what steps the government should take, and which policy should be reformed to improve the ease of doing business. They are very interested in the development of our infrastructure, especially in power generation I think we have the biggest project in the world in power generation now 35,000 megawatts.

ndonesia has re iously had uite a low rofile on the international scene. What is your current focus in communicating internationally? Our focus now is to communicate our priorities to the target groups such as investors and the private sector. That’s why we are focused on deregulation, to make the investment climate better. What we do know is that the President has made a num-ber of high profile international trips and he is always very clear that Indonesia is open for business and investment friendly. e are inviting investors to actually come and join us, to work with us. Indonesia’s growth is actually one of the highest in the re-gion, even though for us it is still low.

urthermore, Indonesia has a reputation as a leader in de-mocratization and pluralism. We are a moderate Muslim coun-try and we are tolerant because we are aware that Indonesia is very diverse.

‘BUILDING INFRASTRUCTURE WILL HAVE A HUGE POSITIVE IMPACT ON OUR ECONOMIC GROWTH’

The position of Chief of Presidential Staff was recently created by President Joko Widodo (Jokowi) and Mr. Teten Masduki is the second to take on the role. He sits down with The Worldfolio to talk

about his new role, infrastructure investment and Indonesia’s improving business climate

Teten Masduki with President Joko Widodo

10 Chief of Staff.indd 10 21/07/16 17:04


INDONESIAN GOVERNMENT ENACTS

PROGRESSIVE PRO-BUSINESS REFORMS

These have been especially pronounced in 2016, with commodity prices remaining low, and reduced demand from China maintain-ing the trend for the foreseeable future. Indonesia’s economy has been long reliant on natural resource exports, such as coal palm oil and rubber. As a result, growth for the first half of the year has hovered just under 5 percent. Although Q1 growth for this year is higher than that of 2015, buoyed by increased government invest-ment, it is not enough to meet the job creation needs of the coun-try’s growing population.

To face these issues, President Joko Widodo (Jokowi) has applied the same hands-on approach that made him successful as a self-made businessman and then mayor of Surakarta and Governor of Jakarta. During this time he became famous for pro-actively engaging the population and addressing issues such as flooding, education, infrastructure and corruption.

ot someone to shy away from difficult problems, okowi has tackled the country’s economic woes most notably through a hardware and software approach: building infrastructure and applying deregulation.

A dozen economic stimulus packages have been imple-mented over the last year to this end. These have mainly been focused on reducing and removing bureaucratic red tape, in-creasing tax incentives for commerce and a number of other ini-tiatives improving the overall ease of doing business (A full table detailing these measures can be found on page 13).

However, public spending on infrastructure has been the shot in the arm that is boosting growth. Altogether, approx-imately $22 billion has been allocated to infrastructure de-velopment. This amount represents the largest infrastructure budget allocation in history of the country. A small portion of the $22 billion has been allocated to irrigation development but the lion’s share is focused on transport linkages including roads, railways, airports and maritime ports. As an archipel-ago nation of over 17,000 islands, the latter is particularly im-portant for overall connectivity.

President Joko Widodo’s administration has taken concrete steps towards increasing the ease of doing business, attracting foreign investment and encouraging trade. These measures, implemented by the Jokowi administration over the last 12 months have come in response to global shifts working to the detriment of Indonesia’s economy

Photo Credit: Pemerintah Provinsi DKI Jakarta (Provincial Government of Jakarta)

President Joko Widodo (Jokowi) has applied

the same hands on approach that made him

successful as a self-made businessman and

then mayor of Surakarta and Governor of Ja-

karta. During this time he became famous for

proactively engaging the population and ad-

dressing issues such as flooding, education,

infrastructure and corruption

11-12 Indonesia Economy.indd 11 21/07/16 17:00


“As one example (of the economic stimulus packages) we were able to cut the dwelling time in Tanjung Priok (Indone-sia’s largest port in Jakarta) from seven days to three days. This is important, because it reduces the cost of logistics. Of course the effect is more medium term rather than immedi-ate, as it is impossible to change these things over night. We need to be patient and persistent, but I would say that inves-tors are already seeing significant benefits, explains Dr. i al

amli, Indonesia’s Coordinating Minister of Maritime Affairs who is also a trained economist.

The 13th economic stimulus measure, pending final ap-proval, is The One Million Houses Program. This five-year ini-tiative is aimed at providing housing to the country’s low-income segment. Government agencies, as well as the state budget will provide the necessary funds for this ambitious project.

Over the long term, Indonesia’s moves towards deregu-lation are perhaps of greater interest to the domestic and foreign business community. Suharto’s 30-year reign saw a culture of corruption, collusion and nepotism (KKN) become ingrained in government agencies. Subsequent presidents have worked to reduce this corporate culture, but none with as much vigor as Jokowi.

In fact the Presidents’ chief of staff, Teten Masduki spent his career as an activist heading various human rights and anti-cor-ruption organizations. His knowledge of the debilitating effect of graft and state mismanagement, which saw billions plundered from the republic as well as grave injustice perpetrated, has clearly influenced presidential priorities.

Beyond being a moral and rule of law issue, the economic implications of this reform are far-reaching, as Mr. Masduki ex-plains, “The deregulation program, the second of our priorities, is very important. It is to make sure that our bureaucracy is effi-cient and more transparent. We want Indonesia to be attractive for investors. o we fight corruption and take out more proce-dural bureaucracies.

The effect this plethora of reforms will have on small and medium enterprise ( M ) growth, as well as big business is significant. ess red tape and opportunity for corruption as well as reduced taxation on a range of sectors has seen the po-tential for bribe elicitation from government agencies dimin-ish. urthermore, the implementation of soft loans for M s, and reduced energy tariffs for labor-intensive industries (a typical characteristic of Indonesian M s) has boosted the competitiveness of the sector. Protection measures for M s have also been implemented.

treet vendors, the ubiquitous Indonesian M have also benefited from reforms. ree leasehold certificates have been issued in 34 zones in an effort to boost economic activity. Consid-ering President Jokowi himself was a self-starter businessman before entering politics, such an M focus is hardly surprising.

Of course, despite being the world’s fourth most populous nation, Indonesia cannot function without extensive foreign investment and trade. Traditionally nationalist elements in politics have limited foreign ownership and excluded areas of the economy from foreign investment. This has also been amended by the Jokowi Administration, which has revised the negative investments list – expanding the sectors available to foreign business interests.

Facilitating foreign trade has also been a focus for the gov-ernment, which plans to complete negotiations on the Indo-nesia- uropean nion Comprehensive conomic Partnership Agreement (I -C PA) by 201 , and announced its intention to join the Trans-Pacific Partnership.

ith the cabinet reshuffle in 2015, there was again some cautious optimism and we got the news that there were going to be reforms and economic policy packages, which were well received by the business community. The message from the Jokowi team was very positive and from a trade perspective, perhaps the most important announcement was that Indonesia would consider joining TPP. We think both that announcement and the reform packages have really set the right tone from the top and it seems Indonesia really recognizes that foreign invest-ment can be good for the country, says rian Arnold, President of the American Chamber of Commerce in Indonesia.

The economic stimulus packages have also opened the world’s most populous Muslim country to Islamic finance op-portunities. The importance of sukuk loans as a means of fi-nancing M s cannot be understated. Islamic microfinance has played a huge role in boosting fledgling businesses in economies analogous to Indonesia. It is hoped that this will soon become a widely adopted and effective boost to grass roots commerce across the archipelago.

“The deregulation program, the second of our priorities, is very important. It is to make sure that our ureaucracy is efficient and more transparent. We want Indonesia to e attractive for investors o e fight cor-ruption and take out more procedural bu-reaucracies”

Teten Masduki, President’s Chief of Staff

“The most important announcement was that Indonesia would consider joining TPP. We think both that announcement and the reform packages have really set the right tone from the top and it seems Indonesia re-ally recognizes that foreign investment can be good for the country”

Brian Arnold, President, American Chamber of Com-merce in Indonesia.

11-12 Indonesia Economy.indd 12 21/07/16 17:00


Source: Indonesia Investments

ECONOMIC STIMULUS PACKAGES OF THE INDONESIAN GOVERNMENT:

PACKAGE UNVEILED MAIN POINTS

1st 9 SEPTEMBER 2015 oost industrial co etiti eness through deregulation urtail red ta e nhance law en orce ent usiness certainty

2nd 30 SEPTEMBER 2015 nterest rate ta cuts or e orters eed u in est ent licensing or in est ent in industrial estates ela ation i ort ta es on ca ital goods in industrial estates a iation

rd 7 OCTOBER 2015 ut energy tari s or la or intensi e industries

th 15 OCTOBER 2015 i ed or ula to deter ine increases in la or wages o t icro loans or s all ediu e ort oriented la or intensi e usinesses

th 22 OCTOBER 2015 a incenti e or asset re aluation cra dou le ta ation on real estate in est ent trusts eregulation in sla ic an ing

th 5 NOVEMBER 2015 a incenti es or in est ent in s ecial econo ic ones

th 4 DECEMBER 2015 ai e inco e ta or wor ers in the nation s la or intensi e industries ree leasehold certificates or street endors o erating in state owned designated areas

th 21 DECEMBER 2015 cra inco e ta or categories o air lane s are arts ncenti es or the de elo ent o oil refineries y the ri ate sector ne a olicy to har oni e the utili ation o land

th 27 JANUARY 2016 ingle illing syste or ort ser ices conducted y s ntegrate ational ingle indow syste with ina ortnet syste andatory use o ndonesian ru iah or ay ents related to trans ortation acti ities e o e rice di erence etween ri ate co ercial and state ostal ser ices

th 11 FEBRUARY 2016 e o ing oreign ownershi ca on usinesses rotecting s all ediu enter rises as well as coo erati es

th 29 MARCH 2016 ower ta rate on ro erty ac uired y local real estate in est ent trusts ar oni ation o custo s chec s at orts to curtail dwell ti e o ern ent su sidi es loans or e ort oriented s all ediu enter rises oad a or the har aceutical industry

th 28 APRIL 2016 nhancing the ease o doing usiness in ndonesia y cutting rocedures er its and costs

13 Indonesia Table.indd 13 21/07/16 15:05

THAT IS WHAT WE OFFER’The Worldfolio sits down with Indonesia’s Minister of Finance Dr. Bambang Permadi

Soemantri Brodjonegoro to discuss the recent tax amnesty legislation, current economic prospects for Indonesia after the announcement of 12 economic policy packages, as well as

Indonesia’s role in hosting the 12th World Islamic Economic Forum in Jakarta

Recently there have been a number of key victories for the government with the approval of a new budget, as well as the tax amnesty law. What impact do you an-ticipate this will have on Indonesia’s eco-nomic outlook for 2016? Basically we are still pushing through this global economic slowdown, as well as a domestic economic slowdown. It is challenging to find new sources of growth, especially after the collapse of the commodity price, as well as weak-ening global demand. On top of this, we have had increased market volatility as a result of rexit. ithin this weak and uncertain position globally, Indonesia needs to find alternative growth and of course, there are sectors like manufac-turing that we can capitalize on to create higher growth. e also have huge poten-tial in the tourism and maritime indus-try; however these industries will need some time to properly develop.

In the meantime, we need capital inflow yesterday, not even today. To get capital inflow is far from easy because the traditional investors to Indonesia in mining and oil and gas have their own problems to deal with after the end to the commodities boom. This means that capi-tal inflow will be limited in the economy, for example in the financial sector, with the end of the . . (quantative easing) program, it is clear that there is no longer a global stimulus. This has resulted in a trend of liquidity leaving emerging mar-kets and returning to advanced markets.

However, there are many individu-als and companies in Indonesia that have vast fortunes in assets and banks abroad, even though the income or rev-enue was from Indonesia. This has re-sulted in limited liquidity domestically, and if we want higher growth we need that capital back in the economy. From our point of view, to bring back the In-

donesian money from overseas, we can-not force them to bring the money back, because of legal limitations in Indonesia.

e need to persuade them, which means giving an incentive, which in our case is the tax amnesty. ith the tax amnesty, companies and individuals will repatri-ate or bring capital back to Indonesia, or declare the unrecorded asset to the Indo-nesian tax authority.

I think the tax amnesty will have impact on the budget both in the short and the long term, because the amnesty is limited to the end of this year, so in the short term the tax amnesty fee will help any budget revenue short fall that we might have seen this year.

The Government has gone beyond the tax amnesty in terms of new legislation, with the announcement of 12 economic policy packages that will be improving the ease of doing business. However, after the rat-ings upgrade disappointment from S&P, Indonesia still seems to be lacking recog-nition of this positive change on the inter-national stage. How will the 12 economic policy packages impact the business envi-ronment in Indonesia?

egarding the decision by P, it is clear they are way behind the curve. hen they made the decision to announce that our position had not changed, we were just getting ready to issue our uro ond. However, it is clear that investors no lon-ger really care about P when it comes to Indonesia, because our uro ond was still investment grade and the yield is also investment grade. As a result it was over-subscribed by four times and in the end we were able to upsi e it from 2 billion euros last year to 3 billion euros this year. It is clear that the latest rating decision does not affect our economy at all.

ith regards to the packages, we are trying to show the external world that

Indonesia is serious about taking care of investors and the business environment.

e are serious about any complaints from the private sector and we want to ensure that our reforms improve the ease of doing business both internally and ex-ternally. Of course we cannot expect the investment to be coming in the same day that we make the reform announce-ment, these things take time. It takes time to convince people that Indonesia has changed. e need to do more than just talk about it there needs to be proof.

This government is trying to finish unfinished business because there are many projects that have been stopped for quite some time, and now we have reactivated these projects and we are completing these projects.

What would you like to see Indonesia take away from the WIEF?The I has been hosted all over the world, including once in London. I think

I is really about how we can take the opportunities the Muslim world offers from both the financial and non-finan-cial sector. e need to broaden our rela-tionship with other Muslim countries. If you look at the export destinations of In-donesia, apart from Malaysia, there are no Muslim countries in the top 10. This is despite Indonesia having the largest Muslim population in the world.

‘ENDLESS INVESTMENT OPPORTUNITY:


14-15 Min of Finance.indd 14 21/07/16 17:02


e have not taken advantage of that position and we do not have close ties to other Muslim countries and especially the Middle ast. e are also not very aggres-sive in the Islamic related market. ith

I it is time for Indonesia to show our identity in the community of Muslim coun-tries, and secondly we need to capitalize on the potential of the Islamic economy. This was my thinking in hosting the I in Indonesia, and originally we wanted to host it back to back with the Islamic Devel-opment Bank annual meeting in May.

The idea behind both events is try-ing to promote Indonesia to the Mus-lim community, sending a message that Indonesia is a reliable economy with a lot of potential. eyond this, Indonesia is even now in a position to invest in other countries, so it is not just about

DI (foreign direct investment). e are honored to be hosting the I this year it is expanding every year and it will eventually be competing for a po-sition not so different from the orld

conomic orum in Davos.

Part of this year’s theme for the WIEF is about e owering s ow can sla ic finance improve inclusiveness in the economy?

In trying to develop our Islamic economy our preference is to speciali e in Islamic finance that is more inclusive. e want to focus on things like Islamic microfi-nance. This is where we really could ex-cel internationally; we could become an example for the rest of the world.

sla ic finance also resents o ortuni-ties in things li e in rastructure financing through sukuk. Is that something that Indo-nesia is taking advantage of? Our sukuk now has already been upgraded into a sukuk project, meaning that there is a special sukuk which has been issued by the government specifically for project fi-nancing, toll roads, airports, transmission, etc. The idea is to have Islamic finance re-ally push itself and meet the market and we will try and support that from the gov-ernment side in terms of development.

Where do you see the greatest opportuni-ties for development of halal or “Muslim-friendly” industries? I think in Indonesia, there are great opportunities in halal tourism, or as we prefer to call it, Muslim-friendly tourism. I think fostering this Muslim-friendly tourism should be a number

one priority. As I mentioned before, our relationship has not been strong enough with other Muslim countries and this needs to change.

e are making these changes, and if we take ombok as an example, they are going to make a resort area like the one in ali the only difference will be that the area will be designated as a Muslim-friendly tourism one. o the hotels will not sell liquor and the cuisine will be ha-lal. e are way below our potential, and we will really be looking to boost this side of things.

Beyond tourism, I think Muslim fashion is a sector that will be increas-ingly important. There is already a re-ally huge market for it and it will be the focus of one of our sessions here at the I . e hope that business people will see what Indonesia has to offer for them and take these oppor-tunities.

How would you describe Indonesia’s brand to investors?Any company or investor will do well here and to describe our brand in a few words, I would say, ‘endless investment opportunity’. That is what we offer.

Bank Indonesia’s twin towers in central Jakarta

14-15 Min of Finance.indd 15 21/07/16 17:02



THE ASEAN ECONOMY: ASIA’S EMERGING GLOBAL ENGINE OF GROWTH

INDONESIA: ROOM TO GROW

625 MILLIONTotal population of ASEAN

7THLargest combined global economy

$2.6 TRILLIONCombined GDP of ASEAN (2015)

4THLargest economy in the world by 2050

$136 BILLIONForeign direct investment in the region (2014)

$110 BILLIONASEAN infrastructure investment required annually

Indonesia and ASEAN:

A GROWING REGION

255 MILLIONEstimated population (2015)

29Median age of the population

$888.5 BILLIONGDP (2014)

16THLargest economy in the world

4.9%Projected GDP growth 2016 (IMF)

5XIncrease in foreign direct investment (2009-2013)

16-17 WIEFInfograph.indd 16 22/07/16 11:22



SMEs make up 96% o all registered fir s in

86%of SMEs in Indonesia using internal fundsOnly 6%of SMEs in Indonesia acquire bank funding

SMEs, Funding and Digitization

DIGITIZING INDONESIA’S SMEs

36%

37%

18%

9%

ARE OFFLINE

HAVE INTERMEDIATE ENGAGEMENT ONLY BASIC DIGITAL CAPACITY

ADVANCED ENGAGEMENT WITH E-COMMERCE CAPABILITIES

FUNDING

In Indonesia, SMEs make up 60% of GDP and 90% of the workforce

They Employ 62% of the ASEAN workforce

50% o s are underser ed y financial institutions SMEs in the ASEAN receive only 18.7%of total bank loans

DIGITAL GROWTH IN INDONESIAN SMEs

17Xmore likely to be innovative

2%total potential increase in GDP from digitizing Indonesia’s SMEs

80%higher growth in revenue for SMEs

adopting digital technology

150%likelihood of increased

employment

16-17 WIEFInfograph.indd 17 22/07/16 11:22


Before you were Mayor of Bandung, you were a professional architect and aca-demic. How did you come to be mayor? Within the context of the World Islamic Economic Forum, what role can Bandung play in creating better relations and un-derstanding around Islam?I have never considered myself a smart person, but I have always been a quick learner, I love to learn. Before I was Mayor of Bandung, I was an architect and a uni-versity professor, so bureaucracy is some-thing new for me. After three years in the job, I am amazed to see how power can change civilization when it is practiced in the right way.

I am the product of direct elections. In Indonesia we are adopting this West-ern form of democracy, which means peo-ple like me, who are outside the political norm, have a chance to be elected. I am not a political party member, I am not a movie star, I’m just a regular guy, but I was the only one in the campaign using Youtube, Facebook, Instagram and Twitter. This is an important message to the West, that in a Muslim country, we have direct elections that are peaceful and democratic.

I was educated in the U.S. at UC Berk-ley and I am part of a generation that was educated overseas and then returned to the country with a global perspective. In that sense I see Bandung as the perfect diplo-matic vehicle to the world in a time of global uncertainty around Islam. I really want to send a message to the West: come to Indo-nesia, come to Bandung to talk about Islam.

In the future Indonesia needs to be included as a larger part of the dialogue, and Bandung should be used as a set-ting for this. andung is well qualified for the position; in 1955 Bandung hosted the Asia-Africa conference that liberated many countries in Asia and Africa. For this reason we are called the solidarity capital of Asia and Africa. We need to talk about Indonesia beyond just the economic per-spective; lets send a message to the world that we have an open invitation to discuss these complex issues.

Bandung has undergone a remarkable trans-formation during your time as mayor, how have you initiated and funded your projects? Well one example is that I built the city square not using public money but us-ing CSR (corporate social responsibility) money. This year I also built four junior high schools, a record number for schools in one year, also with CSR money. This

shows that building the country does not necessarily need to be dependent on government resources. I was part of an international business before this, I had projects in the Middle East, in China and I have used this network to help Bandung, which is why in the last three years I have received more than 50 international insti-tutions that want to engage Bandung.

Now as a city of 2.4 million, and with six million people visiting the city every year, we require better infrastructure. I am focusing on transportation projects in-cluding the monorail, LRT, cable car, elec-tric buses, highways and hospitals. Band-ung is the capital of West Java, so with healthcare and education, we also need to cater to the surrounding areas.

These projects will require a signifi-cant budget, but in the last few years I have found a problem in the way Indone-sian cities spend their money. Our cities are not progressive enough we finance 100 percent through the central govern-ment, which is not nearly enough.

ast year I flew to ondon and I learned about public-private partnerships (PPPs) in Nottingham. I went to Spain and many other places to find a way to build a city without relying too much on govern-ment funds. There are really two options, municipal bonds or PPPs. Indonesia is not really ready for municipal bonds, but with PPPs you bring the products and you al-ready deliver the highway and the monorail and then we pay for the long-term lease.

andung is the first city to really push this agenda. I lobbied the President and I said that Bandung needs at least $4 billion, and if you multiply that by the 500 cities in Indonesia, that is $2 trillion for city infra-structure. That number needs to be com-municated to the world, we need to invite investors to Indonesia and tell them that be-sides federal projects there are city projects. So in Bandung we have set up a PPP center so investors will have an independent unit set up to accommodate the process.

I am inviting investors all over the world to come to Indonesia to take this op-portunity and get involved in city and re-gional infrastructure projects. Bandung is growing at nearly 8 percent and economi-cally it is a great city to be a part of.

The city of Bandung is the capital

and economic heart of West Java.

In this interview with The World-

folio, Mayor Ridwan Kamil, a

former architect and lecturer, dis-

cusses how Bandung has become

Indonesia’s ‘smart city’ and a hub

for ICT and the creative economy.

e also discusses ro ect financ-

ing and invites investors to be

a part of the city’s remarkable

transformation

Mayor Kamil overseesBANDUNG’S REMARKABLE TRANSFORMATION

“I am inviting investors all over

the world to come to Indonesia

to take this opportunity and get

involved in city and regional

infrastructure projects. Band-

ung is growing at nearly 8

percent and economically it is a

great city to be a part of”

18-19 Bandung.indd 18 21/07/16 17:06


What is the main strength of Bandung in terms of its people? What makes it such an attractive investment destination? In terms of the economy, Bandung does not have natural resources or energy resources, so human capital resources are our focus, which means I am fo-cused on having a more creative econ-omy in Bandung. Part of this is our aim to become the Mecca for Muslim fash-ion. This is only logical as the biggest Muslim population is Indonesia and the most fashionable city here is Band-ung. We have the talent and we have the fashion industry nearby. So we can become the Paris of Indonesia, a real Muslim fashion hub in the next five to 10 years.

Another part of this creative economy is at-tracting international businesses to Band-ung to use it as a base. What success have you had with this so far? Anything related to creative economy should be based in Bandung. The creative economy has thirteen different sectors and one of the thirteen is ICT. I am cre-ating these ICT hubs everywhere, much of it hidden, where we have fitted out old buildings with the best technology. They are our so-called ‘guerilla workshops’.

eyond this, one of our flagship projects is the new ICT park, which is six hectares dedicated solely to technology and called Bandung Technopolis.

This year I secured $100 million in in-vestment from UTC, an aerospace produc-

tion company in the U.S. They are going to be based in Bandung Technopolis. They chose our city because we have world-class engineers that live in Bandung and beyond that our population is young; 60 percent are under 40, and highly edu-cated, as we have 50 universities and re-search institutes here. Investors can use Bandung to tap into the 50 million middle-class Indonesian consumers, or they can use it like UTC, which does not actually sell into the Indonesian market.

Currently, I am in talks with Ap-ple, which is thinking about opening a startup workshop in Bandung, similar to the ones they have in Brazil. I am coordi-nating with MENKOMINFO (the Ministry of Communication and Informatics) to use Bandung as the base. Additionally, I have already secured an animation busi-ness for Bandung with 600 employees. It is clear that investors are already seeing the value.

Bandung is Indonesia’s smartest city, with innovation at the center. How will you take Bandung to the next level of smart city? I define smart cities into three types, 1.0, 2.0, 3.0. or 1.0, which is already finished, we digitized data and made that data open to the public so people in Bandung can now see how much I spend in my budget. For 2.0, which is what we are do-ing now, it is about interaction with the public. Initiatives include the scorecard for feedback and checking the progress of projects online. Another thing is trans-

portation apps for people to check bus schedules and capacity. These are simple things that help people in their daily lives and create less stress. The next level is the smart city 3.0, which is building ma-chine-to-machine communication. For example, I am building apps that can check things like a leaking pipe, which would be sent to the relevant mainte-nance crew and fixed. This is very excit-ing for us in terms of the amount of things we will be able to handle.

Bandung is certainly a model city, how are you sharing this success with the rest of Indonesia? Of course, I do not want the success of Bandung to be ours alone, I have reached out to and spoke with all the Mayors of Indonesia and told them that we have 300 apps, and they don’t have to budget them for themselves. Twenty cities have already signed MOUs (memorandums of under-standing) with me to use my software. Two months ago the Ministry of Internal Affairs, and MENKOMINFO voted us the smartest city in Indonesia. Now, my mis-sion this year is to spread the smart city to all underprivileged cities that do not un-derstand the smart city concept. Bandung is also the President of the Smart City Alli-ance for Asia and Africa and that is where my practice of smart cities is being spread globally. This really supports our position as the solidarity capital of Asia and Africa; in 1955 it was about decolonization, now it will be about smart cities.

A central part of any smart city, Bandung has its own technologically advanced command center

18-19 Bandung.indd 19 21/07/16 17:06

ISLAMIC BANKING INDUSTRY INDONESIA

Ninety percent of Indonesia’s population is Muslim, yet Is-lamic financial institutions account for only five ercent of total banking assets. This means there is ample room for growth of the sharia-compliant banking industry

Despite having the world’s largest Muslim population and forming a dynamic emerging economy, Indonesia plays a mi-nor role in the global Islamic banking industry, also known as sharia banking (referring to banking that is in line with Islamic principles). Not only does Indonesia’s Islamic fi-nance industry lag far behind Islamic finance industries in other countries that contain a big Islamic community (such as Malaysia and Saudi Arabia), but it also lags far behind the country’s domestic convention-al banking industry. In this sec-tion we explain the principles of Islamic finance and present an overview and analysis of this industry in Indonesia.

What is Islamic Finance/Banking?Islamic finance is banking that is consistent with the prin-ciples of sharia (Islamic law). For example, the prohibition of interest (riba) payments and excessive uncertainty (gharar) or gambling (maysir). Instead, risks and rewards should be shared by the stakeholders and the transaction should have real economic purpose without undue specification. Islamic banking involves banking, leasing, sukuk (Islamic bonds) and equity markets, investment funds, insurance and micro finance. However, the banking and sukuk assets account for about 95 percent of total Islamic finance assets. In recent years, the global market for sharia-compliant financial in-struments has risen sharply.


BETWEEN THE YEARS 2010 AND 2014, ISLAMIC BANKING ASSETS IN SOUTH-EAST ASIA’S LARGEST ECONOMY GREW FROM IDR 100 TRILLION (APPROXIMATELY $8 BILLION) TO IDR 279 TRILLION (APPROXIMATE-LY $22 BILLION), OR AT A COMPOUND ANNUAL GROWTH RATE OF 29.2 PER-CENT

20-23 Islamic Banking.indd 20 21/07/16 17:07


Based on data from the International Mone-tary und (IM ), the world’s Islamic finance assets have climbed by annual double digit growth rates from $200 billion in 2003 to $1.8 trillion in 2013. The Organization of Islamic Cooperation (OIC) expects total as-sets to grow to $3.5 trillion by 2018. How-ever, the Islamic banking industry is still mainly concentrated in the Middle East (particularly Iran and Saudi Arabia) and Malaysia. Other countries that have a rela-tively high share of global Islamic banking assets are UAE, Kuwait, Qatar, Turkey, Bah-rain, Indonesia, Bangladesh and Egypt.

Islamic Banking in Indonesia - Untapped PotentialRemarkably, the market share of sharia banking in Indonesia remains low while nearly 90 percent of the population ad-heres to Islam. In absolute terms, it means that the country, Southeast Asia’s largest economy, contains more than 210 mil-lion Muslims. However, as of 2015, assets controlled by Islamic financial institutions in Indonesia only account for five percent of the nation’s total banking assets. For comparison, in Malaysia - where only 61 percent of a population that numbers just

over 30 million people is Muslim - Islamic financial institutions control 20 percent of the country’s total banking assets. This is a remarkable contrast and shows both the underdevelopedness of the Islamic finance industry and Indonesians’ low awareness of Islamic banking. Meanwhile, in Saudi Arabia (which contains the world’s larg-est Islamic finance industry) Islamic banks account for over half of the country’s total banking assets. On the other hand, these facts show that there is still ample room for growth of Indonesia’s sharia-compliant financial services industry.

Coming from a low base, Indone-sia’s Islamic finance industry has shown rapid growth in recent years on the back of growing awareness of Islamic banking as well as government support programs. Between the years 2010 and 2014, Islamic banking assets in Southeast Asia’s largest economy grew from IDR 100 trillion (ap-proximately $8 billion) to IDR 279 trillion (approximately $22 billion), or at a com-pound annual growth rate (CAGR) of 29.2 percent. This growth pace is considerably higher than growth posted in other Islamic banking markets. It is also interesting to note that Indonesia’s conventional bank-

ing assets expanded at a much slower pace (with a CAGR of 16.9 percent over the same period).

Indonesian Government Increases Support of the Domestic Islamic Banking IndustryThe Indonesian government is eager to turn Indonesia into a major global hub for Islamic banking as this would deepen the country’s financial markets, hence making the nation less vulnerable to the negative effects of global economic turmoil.

In this context, Indonesian authorities stepped up efforts to boost the Islamic bank-ing industry. Indonesia’s Financial Services Authority (OJK) developed and launched a five-year roadmap in early 2015. This road-map targets tripling the market share of Is-lamic banks to 15 percent by 2023 through various strategies, such as the reduction of fees on sharia-compliant banking prod-ucts and the development of educational and training programs (as the institutional framework and human resources within this industry need to be improved). It also involves intensifying coordination between the central government and the private sec-tor as well as strengthening monitoring in the Islamic banking industry and enhanc-

DIFFERENCES BETWEEN CONVENTIONAL AND ISLAMIC BANKINGCONVENTIONAL BANKING

Money is a commodity besides medium of exchange and store of value. Thus, it can be sold at a price higher than its face value and it can also be rented out

Time value is the basis for charging interest on capital

Interest is charged even in case the organization suffers losses by using banks’ funds. Thus, it is not based on

rofit or loss sharing

hile dis ursing cash finance running finance or wor ing ca ital finance no agree ent or e change o goods & services is made

Conventional banks use money as a commodity which leads to in ation

ISLAMIC BANKING

Money is not a commodity though it is used as a medium of exchange and store of value. Thus, it cannot be sold at a price higher than its face value or rented out

rofit on trade o goods or charging on ro iding ser ice is the asis or earning rofit

sla ic an s o erate on the asis o rofit loss sharing In case the businessman has suffered losses, the bank will share these losses ased on the ode o finance used (Mudarabah, Musharakah)

The execution of agreements for the exchange of goods & services is a must, while disbursing funds under Murabaha, Salam & Istisna contracts

Islamic banking tends to create a link with the real sectors of the economic system by using trade-related activities. Since the money is linked with the real assets it therefore contributes directly to economic development

Source: Indonesia Investments


ing legal certainty. This roadmap also sup-ports the consolidation of state-owned and commercial Islamic banks, which will in turn increase the size of the banks’ capital bases, enhance cost efficiency, and allow in-creased underwriting in the corporate and infrastructure sectors.

A huge $8 billion sharia bank, created by merging existing Islamic units of state-controlled banks Bank Rakyat Indonesia (BRI), Bank Mandiri, and Bank Negara In-donesia (BNI), would reduce operating costs and make it possible to offer more competi-tive rates, while making integration between Indonesia’s Islamic banks and the global fi-nancial system easier (for example by revis-ing capital requirements in order to bring risk management at Indonesian Islamic banks in line with international standards). This mega Islamic bank would also quadru-

ple Islamic banks’ market share in Indonesia to 20 percent by 2018 according to the OJK. The three aforementioned banks together currently account for about 40 percent of In-donesia’s Islamic banking assets.

In 2015 the Islamic banking industry of Indonesia comprised 12 general sharia banks, 22 sharia business units of conven-tional banks and 163 sharia people’s credit banks (rural Islamic banks).

Apart from launching the roadmap and the ‘I Love Sharia Finance Program’ in 2015, Indonesian financial authorities are also considering easing foreign owner-ship limits on local Islamic banks (currently foreign investors cannot own more than 40 percent of local Islamic banks) and promot-ing new sharia-compliant financial tools in a bid to make the country’s Islamic finance industry more attractive to foreign investors

and Indonesian companies (in April 2015 Indonesia’s national sharia board approved sharia-compliant currency hedging tools and a standard contract template for sharia-compliant repurchase agreements, which allows the use of government-issued sukuk as collateral, was launched by Islamic banks in Indonesia).

The target of Indonesian authorities to raise the market share of Islamic finance to (at least) 15 percent of the country’s total banking assets by 2023 is considered a too ambitious target by analysts who say it will require sub-stantial reform in the country’s Islamic bank-ing industry for the target to be achieved.

The Indonesian government plans to issue about IDR 13.7 trillion (approximately $1.4 billion) worth of Islamic bonds (known as sukuk) in 2016, nearly double the amount of sharia-compliant sovereign debt paper in



IN 2015 THE ISLAMIC BANKING INDUSTRY OF INDONESIA COM-PRISED 12 GENERAL SHARIA BANKS, 22 SHARIA BUSINESS UNITS OF CONVEN-TIONAL BANKS AND 163 SHARIA PEOPLE’S CREDIT BANKS (RURAL ISLAMIC BANKS)

2015. Proceeds will be used to finance infra-structure development (such as roads, ports, power plants, rail lines, bridges and Islamic universities). Demand for Islamic bonds may be stronger than demand for their conven-tional counterparts as sukuk usually offers a yield advantage (with a relatively identical risk). Indonesian sukuk is also less volatile compared to conventional bonds as investors tend to hold sukuk until the maturity date.

Indonesia also announced to be co-founder (together with Turkey and Saudi-based Islamic Development Bank) of the Is-lamic Investment Infrastructure Bank (IIIB), a new cross-border Islamic infrastructure bank that is to start operations in the second half of 2015. Indonesia contributes over $300 million for start-up capital of the new bank which aims to boost infrastructure develop-ment in various countries.

What Blocks More Rapid Development of Indonesia’s Islamic Finance Industry?One key problem in Indonesia’s banking sector (not only confined to the Islamic banking sector) is the low financial lit-eracy of the Indonesian population, hence (general) banking penetration remains at a relatively low level. Based on data from the World Bank, only 36.1 percent of Indo-nesia’s adult population owned a bank ac-count in 2014.

Another obstacle is that Islamic banks or banking units are unevenly distributed across Indonesia. Most of these banks are located on Java, the most populous island of Indonesia. In the less populous eastern parts of Indonesia most people lack access to Islamic banking services. However, it also needs to be emphasized that conven-tional banking services are also scarce in

the eastern part (“under-banked”) and it also has to be noted that there are much fewer Muslims in the eastern region (both in absolute and relative terms) although adhering to a different religion does not mean that a person cannot use Islamic banking services.

Islamic banking in Indonesia has also had difficulty expanding due to weak government management (a lack of min-isterial-level coordination), an uncertain legal environment and the lack of highly qualified human capital, innovation and creativity in the country.

The Worldfolio would like to thank Indo-nesia Investments for its kind ermission to reproduce this article that originally appeared on its website, www.indonesia-investments com



The current Jokowi administration is focused on economic liberalization and boosting infra-structure. How do you see the Government’s progress towards reform and liberalization?We are very happy with the current admin-istration. I don’t know what others are feel-ing, but from my point of view, the current administration, especially the President, is a very honest person. He is the kind of man that wants to work hard for his people. He never lectures people to be perceived as smart; he speaks with simple and honest language. He is very proactive with infra-structure projects, which we hoped could be done by the previous administration. It shows that now Indonesia is very different.

The President never criticizes the previous administration; he looks ahead at the challenges and finds a way to solve them. Unfortunately the world is currently facing economic crisis and instability, not only Indonesia. The tax amnesty program, although some politicians criticize it, is a breakthrough from President Jokowi. He al-ways said that he supports this initiative and business people in the private sector could

see that this is very important. There has always been a large amount of Indonesian money abroad that could actually be used to develop our nation. Of course, if people see it from the legal perspective, it is not proper, but if we see it from an economic point of view, we need reconciliation.

o you thin the finance sector is ready to recei e that large ca ital in ow ro the ta amnesty? Is Panin Bank ready?Yes, hopefully we will be one of the banks that are appointed by the government as a gateway for the repatriation of money. Cur-rently we are working with some companies in our group, especially the securities com-pany and asset management company, to find out how we will approach this. e see

the law of the tax amnesty in its final form as very positive; there are no restrictions other than keeping it in Indonesia for three years. This is also a good opportunity for Indone-sians to be in peace with the tax authority.

2015 was a fairly good year for Panin Bank, with trillion illion rofits which were used to strengthen operations and capital. What are your priorities for 2016? One thing you should know about Panin Bank is that although we are not the big-gest bank in Indonesia, Panin Bank is one of 10 major national banks, number 8 in terms of assets, we are the only bank that has never had any help from the govern-ment. We are very proud of that, we never had a bailout and we are quite conserva-


PANIN BANK GROUP WELCOMES EXPERTS TO BECOME

TRAILBLAZER IN INDONESIAN ISLAMIC BANKING

Panin Bank is Indonesia’s eighth largest bank in terms of

assets, and has been publicly traded on the Indonesian Stock

Exchange since 1982. In this interview with The Worldfolio, President Director Mr. Herwi-

dayatmo praises the policies of President Jokowi’s administra-

tion and explains how the bank is dealing with non-performing loans in the face of slower busi-

ness activity. He also speaks about working with Dubai Is-lamic Bank to extend Panin’s

Islamic banking unit, Panin Syariah, which became the first

full-fledged Islamic lender on the stock exchange in 2014,

with an initial public offering (IPO) of shares valued at 475 billion rupiah ($39.3 million)

o efully the I ill re ect ositively on the Islamic anking

community in Indonesia and change their perspective on the potential

of the industry. Something needs to happen in the industry that should

change and improve and I know that (Finance) Minister Bambang

Brodjonegoro is open-minded on how to develop this opportunity”

24-25 Panin Bank.indd 24 21/07/16 17:09

tive and that is why we gain trust from our customers. This is why our valued cus-tomers choose Panin Bank.

In terms of challenges we are facing now, to be honest, we are currently care-fully watching the NPL (non-performing loan) position, because for the first semester in 2016, we experienced growth of NPLs al-though it is still very low. Our NPL ratio by the end of 2015 was 2.4 percent and the reg-ulation stipulates that the maximum should be 5 percent. We put our own threshold at a maximum of 3 percent. In the first se-mester of 2016, the NPLs moved up to 2.7 percent, so for us this was an indicator that we should watch very carefully. Business activity is slowing down in Indonesia and consequently we have lower demand for loans. We are still showing positive growth in assets, although not as much as before. We do hope that our performance this year will be slightly better compared to last year.

Obviously a big part of attracting customers and retaining customers is good product offer-ings. What impact will technology and innova-tion have here?We are very proud of our banking technology. We have a strong Internet and mobile bank-ing system we just launched. Beyond this, we have over 560 branches all over Indonesia. So, we want to optimize our presence, not only in Jakarta, but also all over Indonesia. We are preparing not only for the tax am-nesty, but also working with some compa-nies in the securities market and insurance industry to have greater collaboration.

Panin Group has an insurance com-pany, Panin Dai-ichi Life, which is in co-operation with a Japanese company that

is performing well. We will also sign an agreement with airfax and the official announcement for that is to be made soon. Panin is very open to working with inter-national institutions. Hopefully this open-ness will mean we can give better value to the country.

In the case of Panin Syariah, what role will Is-lamic banking and that subsidiary play in the group moving forward? Panin Syariah (Panin’s Islamic banking unit) is the first sharia bank in Indonesia to IPO. Further to this, we are very opti-mistic about our cooperation with Dubai Islamic Bank. Together we will contribute much to the growth of Islamic banking in Indonesia. There is currently a 5 percent trap for Islamic banking in Indonesia and if I may tell you honestly, there are some issues on Islamic banking in Indonesia. The regulation and the law focus more on sharia banking systems, instead of grow-ing the business itself. The issue is how to grow the business of Islamic banking.

We are not experts in Islamic banking, which is why we need Dubai Islamic Bank to bring their expertise in Islamic banking operations and products. Although Dubai Islamic Bank only controls 40 percent of the Panin Dubai Islamic Bank, we have given them a more active role in developing the bank together with us. The Chairman of the bank is the CEO of Dubai Islamic Bank. He will bring the technical and business expertise to Indonesia and we can combine that with our local knowledge of the busi-ness environment. With this, we hope that we can show the advantages of the industry to the Indonesian people.

The World Islamic Economic Forum hosted here in a arta will e an e citing e ent or the finance sector hat do you thin the brings to the industry? Hopefully it will reflect positively on the Is-lamic banking community in Indonesia and change their perspective on the potential of the industry. Something needs to happen in the industry that should change and im-prove and I know that (Finance) Minister Bambang Brodjonegoro is open-minded on how to develop this opportunity. Indo-

nesia has the largest Muslim population in the world, but the Islamic banking industry never really grew here significantly. I do hope this conference will change the per-spective of the professionals who are work-ing in the industry.

There is a lot of interest in investment into In-donesia. Is that something that you are looking to take advantage of in a gateway capacity? The changes made by the government in liberalization should have been done a long time ago. The President himself wants to abolish all the regulations that block foreign investment. The current President listens to the problems of the business community and he has commit-ted to change the regulations that give a hard time to the business community. We support this initiative and we will cer-tainly be ready to facilitate this foreign investment into Indonesia.

During the Bambang Yudhoyono era, Indonesia was branded ‘Remarkable Indonesia’. Things have changed much since then, so if it were up to you to brand Indonesia and speak directly to investors, what would you say is Indonesia’s defining o ortunity or trait? We are the biggest country in the ASEAN and we have a population of 250 million. We have a demographic bonus, in which the majority of our population is still of a productive age. That is a good market opportunity for any production. We also have a lot of spots that are attractive for tourism and the country has become more open to this investment. The government is very honest; they want to lis-ten to the business community.


“We are very proud of our

banking technology. We have

a strong Internet and mo-

bile banking system we just

launched. Beyond this, we

have over 560 branches all

over Indonesia. So, we want

to optimize our presence, not

only in Jakarta, but also all

over Indonesia”

“We are the only bank that

has never had any help from

the government. We are very

proud of that, we never had

a bailout and we are quite

conservative and that is

why we gain trust from our

customers”

24-25 Panin Bank.indd 25 21/07/16 17:09

WIEF-2016-TWF-Jakarta-WIEF-3.indd 1 20/07/16 16:47

PEACE AND UNDERSTANDING

The Fund has pioneered development projects across the world, from constructing infrastructure, to health and edu-cation, and continues to expand its support network to help people in need.

Although Kuwait had been providing development assis-tance prior to declaring independence in 1961, it was in that year that The Kuwait Fund was formally established. The country itself had just entered the oil era and was slowly im-proving its own dire economic situation at the time. Despite this, it immediately began to devote vast sums of money to assisting neighboring countries in the region.

As Robert McNamara, former U.S. Secretary of Defense and President of the orld ank recalled, hen first estab-lished in 1961, the Kuwait Fund was without precedent. Here was Kuwait, a tiny country, until recently among the poorest places on earth, establishing a development fund in the year of its political independence. While welcoming its new-found prosperity it was declaring a willingness to share its future wealth with its Arab neighbors.”

However, KFAED has gone far beyond its original man-date of assisting the transition of post-colonial countries in the Middle East by constructing vital infrastructure, provid-ing health services and improving access to, and the quality

of education. KFAED rapidly expanded beyond the Arab World during more than half a century of operations. Today, the fund has supported the financing of more than 00 projects in 105 developing countries, providing about $19 billion for their im-plementation across the Middle East, Africa, Asia, Europe and Latin America, as the country’s appetite to help people in need grew with its economy.

“We are blessed here in Kuwait, we found a place where we were good traders and very open minded. We created a very close community and I believe that is how it started, we were helping each other, sharing our wealth,” says Abdulwa-hab A. Al-Bader, Director General of KFAED.

Throughout its history, the Kuwait Fund has been held up as a premier example of South-South cooperation – that is, col-laboration directly between developing countries.

Unlike most assistance of this kind, the issuing of grants are not contingent on religion, ethnicity or political belief, but instead is based strictly on the depth of need. The list of recipi-ents continues to grow with the rise and fall of economies and the emergence of new nations.

According to Mr. Al-Bader, “We signed an agreement with our 105th country last year - with outh udan. ometimes things grow on you. I think that helping others and giving is something that has become a part of us, of our DNA. If we went without it, it would be like we were missing something”.

Given the decline in oil price and diminishing state bud-gets for oil exporting economies such as Kuwait’s, some ex-perts have predicted that contributions will be curtailed. To this, Sheikh Salman Sabah Al-Salem Al-Homoud Al Sabah, Ku-wait’s Minister of Information and Minister of State for Youth Affairs begs to differ, “Of course with low oil prices we are contemplating our future, but on humanitarian matters Ku-wait will not hesitate to support any needs from the interna-tional community.”

The historical generosity of The Kuwait Fund was instru-mental in turning worldwide opinion in favor of Kuwait when it was occupied by Iraq in 1 0. Ama ingly A D continued to operate even during this period, and its activities were ex-panded following the U.S.-led liberation in 1991 and ramped up significantly over the last 25 years.

Global recognition for Kuwait’s role in humanitarian aid and development is a point of pride for the nation and per-sonally for Mr. Al-Bader, who points out that, “The world has recogni ed the efforts of H.H. the Amir and indeed the whole country, and I am sure that we will continue our good work and participate fully and actively in development activities, because we understand how fortunate we are.”

THROUGH DEVELOPMENT The Kuwait Fund for Arab Economic Development (KFAED) has shared the nation’s wealth for over 54 years with a focus on South-South cooperation, regardless of religion, ethnicity or political belief


Abdulwahab A. Al-Bader, Director General of KFAED

27 Kuwait Fund.indd 27 21/07/16 15:20


In 2016 investors will be able to purchase about IDR 13.7 trillion (approximately $1.4 billion) worth of Islamic bonds (known as sukuk) to be issued by the Indonesian government. This amount is nearly double the amount of planned sharia-compliant sover-eign debt paper this year (IDR 7.14 trillion). Indonesia will use proceeds from next year’s bond sales to boost the nation’s infra-structure development (such as roads, ports, power plants, rail lines, bridges and Islamic universities).

Suminto Sastrosuwito, Islamic Financing Director at the Debt Management Office of the Indonesian inance Ministry, said the issuance of sukuk is a good strategy to finance much-needed infrastructure development in Southeast Asia’s largest economy. Moreover, with nearly 90 percent of the total popu-lation adhering to Islam, Indonesia contains the world’s largest Muslim population.

Government-led infrastructure development is regarded as key to overcome the current process of slowing economic growth that has been plaguing Indonesia since 2011. Direct private sector involvement in infrastructure projects remains sluggish as Indone-sia’s investment climate contains bottlenecks (for example land ac-quisition remains a big obstacle to infrastructure projects). More-over, large-scale infrastructure projects are usually not favored by investors as it usually requires huge capital while it can take many years before projects are completed and revenue is generated.

The issuance of debt paper is one of the strategies to col-lect funds for these projects. Demand for Islamic bonds may in fact be stronger than demand for conventional bonds as sukuk usually offers a yield advantage (with a relatively identical risk). Indonesian sukuk is also less volatile compared to conventional bonds as investors tend to hold sukuk until maturity.

It is remarkable that the market share of sharia banking in Indonesia remains low while roughly 210 million Indonesians are followers of Islam. Assets controlled by Islamic financial institutions account for only about 5 percent of the nation’s to-tal banking assets (in Malaysia this figures stands at 20 percent while ‘only’ 61 percent of the Malaysian population is Muslim). As such, there is still ample room for growth in Indonesia’s sharia-compliant financial services. ecently, the Indonesian government has started to raise efforts to promote Islamic bank-ing (for example the ‘I Love Sharia Finance Program’ launched in une 2015), thus deepening the country’s financial markets and make Indonesia less vulnerable to the effects of global eco-nomic turmoil.

The Worldfolio would like to thank Indonesia Investments for its kind permission to reproduce this article that originally appeared on its website, www.indonesia-investments.com

USING ISLAMIC BONDS TO BOOST INFRASTRUCTURE DEVELOPMENTIN INDONESIA

The issuance of sukuk bonds is seen as a good strategy to fund vital infrastructure development in Indonesia, which is key to overcome slowing economic growth

Port of Tanjung Priok, Jakarta

28 Sukuk.indd 28 21/07/16 15:22

ISLAMIC FINANCE IN INDONESIA

Prospects for 2016The Masyarakat Ekonomi Syariah (Islamic Economic Society), a Jakarta-based non-profit organi ation focused on the sociali ation, advocacy, advisory, consultation and education to enhance the Islamic banking industry in Indonesia, predicts that Islamic finance (banking that is consistent with the principles of sharia) in Indonesia will grow around 15 percent year-on-year (y y) in 201 . This projection is made with the assumption that Indonesia’s economic growth will reach 5.0-5.3 percent (y y), infla-tion at 4. percent (y y), and a rupiah exchange rate at ID 13, 00 per . . dollar.

The Masyarakat konomi yariah (M ) designed three scenarios (a positive, pessimistic and normal one) regarding the development of Islamic banking in Indo-nesia this year. In the normal scenario, Islamic banking is projected to grow up to 15 percent (y y) in 201 , while Islamic banking assets are expected to grow about 13.5 percent. Assets controlled by Islamic financial institutions in Indonesia are ex-pected to remain just below the 5 percentage point mark (of the nation’s total bank-ing assets), showing that despite having the world’s largest Muslim population Indonesia’s Islamic banking industry lags far behind its conventional counterpart.

GROWTH OUTLOOK: INDONESIA’S ISLAMIC BANKING INDUSTRY IN 2016

INDICATOR

ASSETS

FINANCING

THIRD-PARTY FUNDS

FINANCE-DEPOSIT RATIO

MARKET SHARE

NORMAL

12.8 - 14.6%

13.1 - 15.0%

12.8 - 14.7%

90.9 - 99.7%

4.4 - 4.6%

OPTIMISTIC

14.6 - 17.1%

15.1 - 17.0%

14.7 - 16.6%

99.7 - 105.6%

4.6 - 5.5%

SOURCE: MASYARAKAT EKONOMI SYARIAH (MES)

PESSIMISTIC

10.9 - 12.8%

11.1 - 13.1%

10.9 - 12.8%

82.0 - 90.9%

4.2 - 4.4%

Coming from a low base, the market share of Islamic banking in Indonesia is expected to rise as foreign investors are eager to tap this industry, while Bank Aceh will become a full-

edged sharia ank in


29-30 Islamic Finance 2016.indd 29 21/07/16 17:10

Coming from a low base, the market share of Islamic bank-ing in Indonesia is expected to rise as foreign investors are eager to tap this industry, while ank Aceh will become a full flung sharia bank in 201 . This bank, majority owned by the local Aceh province, controls more than ID 20 trillion ( 1.5 billion) in as-sets. Islam is the dominant religion in the province of Aceh (on the northern tip of umatra) where about 8 percent of the local population adhere to Islam. This region has been given a spe-cial status (autonomy) by the central government in 2001 (which made it possible for Aceh to implement sharia-law).

Due to the low penetration rate, Islamic finance in Indo-nesia is an attractive investment prospect. Currently, foreign investors cannot own more than 40 percent of Islamic banks in Indonesia. However, the country’s financial authorities are con-sidering raising the ceiling in order to boost the Islamic bank-ing industry in outheast Asia’s largest economy. The Dubai

Islamic ank increased its operational activities in Indonesia in October 2015, while Al araka from ahrain is expected to do the same. The Abu Dhabi Islamic ank is considering entering the Indonesian market in 201 .

Dinno Indiano, Head of usiness Development at the Indone-sian haria anks Association (Asbisindo), said Islamic micro fi-nance was rather stagnant over the past two years, growing by an annual single-digit only. This is in stark contrast to the target set by Indonesia’s inancial ervices Authority (O ) which initially projected a 25.8 percentage point (y y) growth in Islamic finance. Indiano said the Islamic gross non-performing financing ratio is too high at 4. 3 percent in August 2015.

The Worldfolio would like to thank Indonesia Investments for its kind permission to reproduce this article that originally ap-peared on its website, www.indonesia-investments.com

ISLAMIC BANKING ASSETS IN INDONESIA (IN TRILLION IDR)

ISLAMIC COMMERCIAL BANKS & ISLAMIC BUSINESS UNITS

ISLAMIC RURAL BANKS

TOTAL ASSETS

2011

145.5

3.5

149.0

2010

975

2.7

100.3

2012

195.0

4.7

199.7

2013

242.3

5.8

248.1

2014

272.3

6.6

278.9

SOURCE: FINANCIAL SERVICES AUTHORITY (OJK)


29-30 Islamic Finance 2016.indd 30 21/07/16 17:10

TGAIS-WIEF-2016-Jakarta.indd 1 20/07/16 16:47

Crowdfunding is nothing new. It has been around for years but was called by a term in vogue at that time and done on different plat-forms. ome examples interest schemes in Arowana fish farming in Malaysia and investment schemes in overseas properties through companies like Jardin Smith International and Walton International.

The first crowdfunding project, a true example of crowdfunding in the 21st Century, is that of American ja musician, Maria chnei-der, who raised about 130,000 from her fans to finance the produc-tion of her album Concert in a Garden via Artist hare, a website for musicians to source donations from fans to produce digital record-ings or to organise a concert. Her successful campaign led to the birth of many reward-based crowdfunding platforms such as Kick-starter and Indiegogo, the two best-known in the world.

This alternative and revolutionary channel of raising capital has indeed helped defeat the conventional banking system for those, who have been turned away by financial institutions because of their in-ability to meet lending criteria. Now with the growing phenomenon of crowdfunding, small enterprises, M s and startups will not have to pin their hopes on government grants or angel investors or ven-ture capitalists when the banking route fails.

Studies done by the Asian Development Bank revealed that only 18. per cent of all bank loans in outheast Asia were granted to M s, a dwindling trend since the financial crisis in 200 . AD also reported that a whopping nine million small businesses have limited access to financing. In the event that these nine million M s jump on to the crowdfunding bandwagon, imagine the waves they will make in the crowdfunding industry and their countries’ economic growth.

Crowdfunding is certainly a realistic solution to the financial woes of M s and entrepreneurs, helping this group of underserved people start a venture or expand their business; and who ultimately will be contributors to the country’s GDP growth.

Crowdfunding is a game changer in the financial world, as it de-mocrati es finance. Money lending is no longer the sole purview of financial institutions. The progress of financial technology (fintech), the increasing penetration of mobile devices and big data, the grow-

ing popularity of social networks and the ease and speed of alterna-tive fundraising have changed the way business is being done today. It has disrupted the conventional banking system and banks that are feeling the threat have started to explore how they can get a share of this rapidly growing pie by collaborating with P2P lending platforms.

The crowd on social network, in the form of retail investors are willing to invest in a small way in projects that are of interest to them. These investors can take their pick from the myriad of crowdfund-ing portals and select campaigns that promise a reward or pre-sale of products or one that offers equity purchase or peer-to-peer (P2P) lending. This form of financing works very well for the small entre-preneur as he does not have to worry about the collaterals he will have to mortgage to the bank, high interest rates, or his ability to re-pay the loan.

Current TrendsMassolution’s 2015 Crowdfunding Industry eport revealed that the global crowdfunding industry raised .1 billion in 2013, and in 2014, the growth accelerated by 1 percent, to record a figure of 1 .2 bil-lion. The report projected another year of unprecedented growth in 2015 for the industry that will be more than double that of the previ-ous year with more than 34.3 billion being raised globally.

This goes to show that more and more micro-businesses and M s are turning to this new alternative finance that has taken the

world by storm and in the process, giving the banks a run for their money. This growing force will soon see developing economies catching up with the developed world.

Allied Crowd’s anuary 2015 report stated that the developing nations’ share of the huge crowdfunding pie is only just 430 million and is slated to grow by 53 percent. Once the underserved or un-banked group pick up on crowdfunding, the growth will be explosive.

Today, the real estate industry has turned to crowdfunding as an alternative means and is proving to be one of the most lucra-tive. The global real estate sector is now one of the fastest-growing segments of the booming crowdfunding industry. According to the 2015 Massolution eport, the sector raised over 1 billion globally in 2014 and the outlook for 2015 was expected to triple, up 2.5 billion. Crowdfunding has reshaped the way individuals find and invest in properties.

Islamic crowdfunding is another growing trend. It focuses on important Islamic values such as profit and loss sharing as well as building online Islamic communities and promoting ethical and social responsibility. or the industry to mature and grow, both Muslims and non-Muslims must participate to create an ecosystem that is haria-compliant or ethics-based, one that will benefit self, humanity and society as a whole.

CROWDFUNDING, THE LIFELINE OF SMALL BUSINESSESAN AWAKENING FORCE IN FINANCING

Crowdfunding is an awakening force in fund raising for micro-businesses, startups, social causes and social develop-ments. Designed for the collection of many small contribu-tions via a website, crowdfunding has proven to be the lifeline of many, presenting bite-sized investment opportunities for the small investor who is willing to invest a modest sum in return for a reward


by Tun Musa Hitam, Chairman, World Islamic Economic Forum Foundation

32-33 WIEF.indd 32 21/07/16 15:26

Islamic crowdfunding took time to get off the ground but in the last two years, many Islamic crowdfunding platforms have emerged. Amongst them are Ata Plus in Malaysia, Club this and apital oost in ingapore and several others in Indonesia, the Middle ast, u-rope and the U.S.

The World Bank predicted that the Muslim world may be one of the first markets in which crowdfunding investment could be truly game-changing. Could this be the force to drive Muslims to create an ecosystem that is Sharia-compliant?

Success of CrowdfundingHarnessing the powers of fintech and social networking has un-leashed a potent new force in the funding ecosystem that will benefit micro-businesses and M s.

Crowdfunding has worked well for the music industry, film, video and photography projects, startups, disaster relief, and social causes. It has proved highly successful for real estate, too.

In the wake of the Nepal 7.8-magnitude earthquake in April 2015, relief funds amounting to 23 million were raised in quick time, within 0 days. There were hundreds of individual campaigns on crowdfunding sites like Crowdrise, Indiegogo, Go undMe and Glob-alLiving. Campaigns are still running to raise funds online for resto-ration and rebuilding of the affected areas in Nepal.

Possibly one of the biggest success story, is that of Pebble Tech-nology that ran two campaigns raising a total of 30 million. Its campaign for Pebble Time hit its goal of 500,000 in just 1 minutes, breaking the record for the fastest campaign to be funded.

Future of CrowdfundingThe crowdfunding industry has made giant strides in the last three years and is set to grow exponentially worldwide. On the Asian front, the 2015 Massolution Crowdfunding Industry eport showed that Asia contributed much of the tremendous growth in the global industry, accounting for 3.4 billion, an astounding increase of 320 percent. This surpasses that of urope thus plac-ing Asia as the second region behind the U.S.

Crowdfunding is slowly gaining traction in outheast Asia, and though still in its infancy, the government of ingapore, In-donesia and Thailand have initiated regulatory framework for the industry which only bodes well as retail investors will now have more confidence.

In Malaysia, six equity crowdfunding platforms ( CPs) were licensed by the ecurities Commission last une, making Malay-sia the first country in outheast Asia to do so. The six CPs are Alix Global, Ata Plus, Crowdonomic, ureeca, pitchI and Propellar Crowd+.

The Malaysian landscape for crowdfunding is set to grow and will be fuelled by the mushrooming of startups and M s the acceleration of social and mobile-savvy Malaysians; the in-creased use of e-commerce and e-finance and the high investor optimism. Malaysia provides a ripe platform for growth, having the largest number of tech IPOs in outheast Asia, and is home to the fastest growing startups in the region.

The World Bank also estimated that crowdfunding would reach 0 billion by 2020. It looks like crowdfunding, truly an awakening force, is not going away anytime soon.

ConclusionThe picture that I have painted may seem rosy. However, it is not as easy as it looks if we were to examine the crowdfunding process further. There is a lot of hard work involved. One has to

find the right platform, develop a strategic marketing campaign, share the story behind the concept to garner ‘buy-in’ and decide on the kind of rewards to be given.

Crowdfunding has proven to be successful with the many who did due diligence, had a product or concept that is wanted and put in the hours to promote the campaign. But what about those who failed? They probably did not fully understand how crowdfunding works. Did the campaign lack the detailed information because the entrepreneur is worried about his idea being stolen? Is the product not of interest to retail investors? Was the chosen platform suitable? Did they actively market and promote their product on social net-work? Did they set a high enough reward level to draw the investors?

Here in Malaysia, the nascent crowdfunding industry is fraught with challenges though opportunities abound. At the moment, funds can only be raised through the six licensed CPs, where people in-vest in an opportunity in exchange for a small stake in the business, project or venture. The Malaysian public is not yet educated enough and is sceptical about such mode of investment. So the industry is still looking at venture capitalists and angel investors as the main players, thus it will be quite difficult for the crowdfunding industry to really take off in the immediate future.

More needs to be done to educate and to cultivate a new mindset among retail investors. The orld Islamic conomic orum ( I )

oundation recogni es the value of crowdfunding and its inherent benefits to micro and small businesses, and also the challenges faced by the industry. As such we have incorporated the issue of crowd-funding into its discussion groups, programs and initiatives in an ef-fort to bridge the gap.


The growing phenomenon of crowdfunding is certainly something to be explored at the 12th WiEF in Jakarta this year as the Forum has a focus on SMES. Themed Decen-tralizing Growth, Empowering Future Business, the 12th WIEF will have a session on Equity Crowdfunding and Startups on Day 2 at the 12th WIEF IdeaPad. The session will be an in-depth look into equity crowdfunding in Malaysia, the progress since six Eq-uity Crowdfunding Platforms were licensed by Securities Commission Malaysia last June, the challenges faced and the opportunities offered. It will also be a platform for startups to learn about equity crowdfunding and how it can help them raise funds.

EQUITY CROWD FUNDING

$880 MILLIONRAISED GLOBALLY IN 2010

$16 BILLIONRAISED IN 2014

$90 BILLIONRAISED BY 2020

MALAYSIA, INDONESIA, SINGAPORE, THAILANDLEAD THE WAY IN ECF PLATFORMS IN ASEAN

32-33 WIEF.indd 33 21/07/16 15:26

You were appointed recently to this Min-istry, which is new itself. What was your initial reaction to being appointed? Well when I was offered the job, in fact my first reaction was to refuse it, because it’s not my forte. I’m a trained economist. I’ve been in government before as the Coordinating Minister of Economy and then Minister of Finance. I was on the advisory board of the UN for the last 7 years. The President was able to per-suade me to join him because he said he needed people who understand, people who have the guts to change things.

The President has a goal of creating a glob-al maritime axis. How are you undertaking this as Coordinating Minister of Maritime Affairs?Looking at the portfolio, we are one of the largest maritime countries in the world and the President has this dream of making Indonesia a global maritime axis. For this to happen we need a trans-formation of culture, because for the past few hundred years we have been focused inland. We have to start loving the sea again. In the past, in the 13th century or earlier, Indonesia’s Kingdom of Sriwijaya was a strong maritime power, our influ-ence reached as far as Thailand and dur-ing the Majapahit in the 13th century, we had influence over Malaka. o we have to revive again the history of the past in order to explore our strength in marine resources and marine economy.

e need to have maximum use of marine resources for the welfare of Indo-nesia. nfortunately, in the past there has been significant amounts of illegal fishing and as a result the country loses about 20 billion annually. Combating this has

meant that in just a few months tradi-tional fisherman have doubled their catch from 200 tons a day to more than 400 tons

a day. This will give us the opportunity to invest in and develop our own industry, including processing, and canning. The government has also opened the fishing industry to 100 percent foreign ownership to support this goal.

Of course a major priority for me is connectivity and maritime access, which is not an easy job because the country is so wide. In the last one and a half years, we built more than 150 small and me-dium ports, mostly in ast Indonesia. e are also starting to initiate regular ship-ping lines to visit small islands all over Indonesia. This is the first time in history that we have regular shipping and it has helped a lot. Basic food prices in East In-donesia are much more expensive than those in Java, and after the sea toll ac-cess the price of rice has been lowered by 22 percent, sugar by 28 percent, and cooking oil by 15 percent. o the fact that there is a regular shipping line helps lower the price for the basic needs in east Indonesia. o this Tol aut, or ‘ ea Toll’ helps them a lot. e have also built 26 small airports in the last one and a half years.

In the medium term, because there are regular lines to some of these is-lands, people in these islands are going to be able to sell their commodities and products. This will be key to reducing the gap between west and east Indonesia. In the past all of our infrastructure develop-ment was ava-centered, because 0 per-cent of the population is in ava and 85 percent of the money is in Java, so every-thing is always Java-centric. The Jokowi government wants a change of paradigm from this Java-centric development to Indonesia-centric.

Part of the global maritime axis concept is better protection of maritime resources

and enforcing maritime sovereignty. How are these efforts being supported in co-operation with the U.S. and other regional stakeholders?

irstly, we want peace and we are neu-tral. So we will do whatever is necessary to facilitate the dialogue and agreed

OP within key regional waters such as the outh China ea. If there are in-cidents, we want maritime diplomacy.

e encourage several aval exercises in this area and a few months ago we organi ed 32 countries to have naval exercises in Mentawai, est umatra. Japan, China, Korea and U.S. sent their people and this means that among the commanders, they know each other, therefore a small problem will not es-calate into conflict because they know each other personally.

‘GLOBAL MARITIME AXIS’The Worldfolio met with Dr. Rizal Ramli, Coordinating Minister of Maritime Affairs, to

discuss the Government of Indonesia’s focus on improving infrastructure and connectivity in the archipelago nation and consequently doubling the number of tourist’s by 2019

INDONESIA AIMS TO BECOME A


“OF COURSE A MA-JOR PRIORITY FOR ME IS CONNECTIV-ITY AND MARITIME ACCESS, WHICH IS NOT AN EASY JOB BECAUSE THE COUN-TRY IS SO WIDE. IN THE LAST ONE AND A HALF YEARS, WE BUILT MORE THAN 150 SMALL AND MEDIUM PORTS, MOSTLY IN EAST INDONESIA”

34-35 Min of Maritime Affairs.indd 34 21/07/16 17:12


Another important part of regional devel-opment will be tourism. What is the new strategy of the ‘10 new Balis’?When I started in this Ministry I won-dered why we have this so-called Min-istry of Tourism with an annual budget that is adequate, but there is no tour-ism development except in Bali. We re-viewed the existing strategies and we found that in the past there was no real focus. That money was spread over 80 primary locations and about 200 second-ary locations, so it was small money here and small money there. So, I came in and said we should focus only on 10 new lo-cations beyond Bali. That way we have enough money and resources to build basic infrastructure, to build airports, to build marinas, and telecommunication systems, which are all essential for tour-ism development.

The second step I took was to give 1 countries free visas, meaning you can easily travel to Indonesia without paying anything. Initially there was a lot of controversy between the govern-ment a lot of people resisted us, but the positive impact is already significant. e have seen delegations from Japan and

urope bring up to 10 times the si e of their normal delegation because of these better visa regulations.

urther to this, there are a lot of cruises all over the world, around 10,000 but nobody comes to Indonesia. They go to Malaysia, Penang, Singapore, Thailand and then they go back. Nobody goes to Indonesia, even though Indonesia’s mari-time beauty is the best in the region. This was because it took four months to get a license for a cruise to come in. ow, we

have an online system for yachts and in 24 hours you can get the required license.

For tourism and particularly the ten new Balis, how will the government enhance infrastructure, facilities and development?One example of what we will be doing with these 10 destinations is at Danau Toba, an exceptionally unique and beau-tiful lake. In terms of infrastructure im-provement, we will be building a new airport nearby, that way there will be no need for transfers through other cit-ies. e are also building a toll road from Medan to increase the flow of domestic tourism. eyond this we are really look-ing after the environment and in parts of the lake that are polluted due to large scale fishing we will be improving the quality of water and designating a 500 hectare ecotourism one.

Another one of the 10 new Balis is orobudur, which already sees .5 mil-

lion tourists yearly. However, we want to change the concept of orobudur into re-ligious tourism. If you are a Muslim you are required to visit Mekkah before you die, if you are Christian you are required to visit erusalem at least once. e want to make sure that the 00- 00 million

uddhists visit orobudur at least once. If that concept is implemented, it is easy to get 10 million tourists a year.

hat are the ain enefits o increased investment in tourism? The main benefit is that it is the cheap-est way to create jobs, because Indonesia has a naturally competitive edge. To cre-ate jobs in tourism, investment is 1,000

U.S. dollars per job, whereas in other sec-tors, such as manufacturing, it is closer to 50,000-100,000 . . dollars per job. Over the next five years our target is to increase direct jobs to seven million, and indirect jobs will increase around double that.

This is achievable if we can pro-mote ourselves in the right way and double the amount of tourists visiting Indonesia, from 10 million to 20 mil-lion in five years. Of course beyond em-ployment there will be other benefits, including boosting foreign exchange revenues from 10 billion . . dollars to more than 20 billion U.S. dollars.

The tourism sector has been a benefac-tor of the 12 economic policy packages that the government has announced to improve the investment climate of Indo-nesia. What is your perspective on the 12 economic policy packages?The 12 economic policy packages are es-sentially designed to make business eas-ier. President Jokowi came from small business, so he knows the challenges that businesses face in things like licens-ing. We really wants to make things simpler, cut regulations and improve our standing on the orld ank’s ase of Doing usiness Index. e are now at 105th and the President would like to see us on at 0th. o, it is a big and ambitious job, but it is possible to make it happen.

From your perspective, what makes Indo-nesia so unique when you look at the rest of the region? Indonesia has a richness, diversity and culture like no other country in the re-gion, or even the world.

“70 PERCENT OF THE POPU-LATION IS IN JAVA AND 85 PERCENT OF THE MONEY IS IN JAVA, SO EVERYTHING IS ALWAYS JAVA-CENTRIC. THE JOKOWI GOVERNMENT WANTS A CHANGE OF PARA-DIGM FROM THIS JAVA-CEN-TRIC DEVELOPMENT TO INDONESIA-CENTRIC”

34-35 Min of Maritime Affairs.indd 35 21/07/16 17:12

After your appointment in 2014 what have been your key priorities as the Minister of Defense?As the Minister for Defense I should focus on the state’s de-fense, and to do that I need to identify any threat that our coun-try is exposed to. I don’t see any threat of war for Indonesia and in the region. Threat of war will become reality if the na-tion’s sovereignty, safety and integrity are disturbed. However, I perceived those threats as a non-factual threat, because to the north side of Indonesia we have ASEAN countries as our neighbors. We already have the consensus within ASEAN that we are not going to be provoked into any kind of conflicts and together we have proven after 48 years that we can solve prob-lems through diplomacy. To the south of Indonesia, we have Australia and New Zealand, neither is perceived as a threat and after a year as Minister, I keep in close communication with them. Of course, these non-factual threats can evolve to become factual threats whenever the nation’s sovereignty, in-tegrity and safety have been disturbed, and we must have the capabilities to handle these non-factual threats.

Indonesia does face factual threats, including terrorism, natural disaster, natural resources poaching, insurgencies or rebellions, pandemic diseases, espionage and cyber war, and drugs or narcotics abuse. Of these factual threats, terrorism has been the most visible in recent times. The threat of terrorism is very real and it continues perpetuating. Indonesia is also very susceptible to natural disasters because of our location on the ring of fire. In terms of natural resources poaching, the major issue has been maintaining our maritime sovereignty in the face of illegal fishing. Pandemic disease is also a factual threat because we are located in a tropical area, so we are susceptible to any kind of outbreak affecting tropical countries. In terms of

drug abuse, everyday 50 people die as a result of drugs, which is 18,000 people in a year. This has led us to consider the drug threat on the same level as the terrorist threat.

For both the non-factual and factual threat, we are pre-paring ourselves to face these threats by renewing our major equipment, revamping and upgrading our technological ca-pacity so we can meet the demands of modern military and security services.

What sort of equipment and procurement are you undertaking to make sure that you are ready to tackle these threats? As one of the largest and most expansive nations in the world, we must build our defense capabilities to reflect our si e and objectives, meaning major equipment needs to be modern and advanced. Our number one priority is therefore to replace the major obsolete equipment, including our 30-year-old fighter jets, as well as our older vessels and ships. It is also important to ensure that the armament these new acquisitions carry are up to modern standards and capabilities.

Indonesia is a country that doesn’t like war; we love peace. However, we need to be aware of any incursion into our terri-tory, so we need to deploy a radar system that will fully cover our territory. We would also like to develop our airlift capabil-ity. This will be very important when faced with natural disas-ters, for example a landslide in any part of Indonesia; we need to be ready to send Rapid Deployment Forces. We cannot afford to let any people die because we are late in helping them. We have to come as soon as possible to reduce any casualties in these areas. This airlift capability serves a dual purpose in that if there is any military threat or incursion we can send rapid deployment troops to the affected area.

In 2014 we were very fortunate that we could meet the private companies that were working with the Ministry of Defense to ful-fill ndonesia s de ense needs ow is ndonesia rogressing in reaching its goal o de ense sel su ficiency?The more private companies involved the better, so that they can compete to provide the best equipment, and especially maintain the major equipment. There are 200 shipyards in In-donesia, but only 20 are appointed to build ships and vessels for us. e can ask them to build Armed Personnel Carriers, vital aircraft, vessels and drones.

With new regulations meaning 49 percent of an Indonesian defense company can be foreign owned, there are also oppor-tunities for greater partnerships and technology transfer. We are currently in partnership with some Italian companies to build an armament factory. We would of course welcome fur-

The Worldfolio sits down with General Ryamizard Ryacudu, Minister of Defense, to discuss current strategies in defense, including equipment modernization, and en-

hanced protection against “factual and non-factual threats”


The INDO DEFENCE EXPO & FORUM 2016 takes place 2 - 5 November at the Jakarta International Expo (PRJ) Kemayoran, Jakarta, Indonesia. Hosted by the Ministry of Defense, Indonesia’s No.1 International Defense Industry eventwill welcome over 20,000 delegates

INDONESIA UPGRADES ITS MILITARY

36-37 Min of Defense.indd 36 21/07/16 17:11


ther partnerships like this where there is also a high degree of technology transfer. eyond these defense specific companies, we also have the capability to redirect strategic industries to be converted to defense industry if the need were to arise.

Indo Defense Expo & Forum 2016 is approaching soon, what would the Ministry of Defense like to see as an outcome of this event?Primarily the event is to showcase our defense industry capa-bility both in private and public sectors. Beyond that it is an opportunity to share knowledge and expertise from both sides. We try to seek for potential partners with whom we can col-laborate together in the future to build our major equipment. The most important thing is what we can learn from other com-panies and deepen cooperation with them.

hen resident o owi isited the in there was an an-nouncement of a strategic partnership between the Indonesia and the articularly in ariti e de ense coo eration ow will this artnershi enhance ndonesia s coo eration and ca a ilities? To follow the strategic partnership formed between President Obama and President okowi, we signed a partnership with the . . in the defense field. This Mo (memorandum of un-derstanding) stipulates the depths of the cooperation and we agreed on areas where we should tackle these common fac-tual threats together, the primary factual threat being terror-ism. To tackle terrorism we have to have a collective effort and response between countries. We cannot do it alone, we have to have cooperation between countries. Beyond terror-ism, we also have agreements to tackle drug trafficking and cybercrime, through sharing information and expertise.

Another major area of cooperation is in the maritime sphere. We agreed that we should exchange our coast guard,

A AM A (Maritime ecurity Agency), and work closely with the coastguard of the U.S. We would like for sure to step up our cooperation in these areas that I mentioned.

You have a very unique approach to defense theory, particularly when it co es to terroris ell us a out the ela egara rograYes, we are unique in how we are tackling terrorism. In every country I visit, they said that terrorists should be put down with anti-terrorist troops. or me, I believe we need to first tackle the belief system that sees people radicali ed. e have to come back to our identity and our nation. Our identity is Pancasila, which celebrates our great diversity. It is not true when ISIS said that killing could take us to heaven, it is not written anywhere in any religion. That is why I said we need the A GA A program (literally defending the coun-try”). This is a program created by the Ministry of Defense to ensure growth in Indonesian’s nationalism based on Pancasila and the 1 45 Constitution of the epublic of Indonesia. A NEGARA becomes our signature in tackling terrorism. It turns out that there are several countries that want to learn about this with us, for example imbabwe, the Philippines, and the

. ach country is unique, and what makes us unique is Pan-casila. That is why I keep on touring around Indonesia to so-ciali e and communicate the A GA A concept through the true teachings of Islam.

Imagine, Indonesia’s population is 250 million and from 250 million, we have a Muslim population of 200 million. The

I I group has not more than 200,000 people all over the world and only 30,000 are the hardcore jihadists. ith these numbers, they can already shake and threaten the world. Can you imag-ine if only 1 percent of Indonesian’s Muslims became radical? It would be the end of the world. So, it is my role as the Minister of Defense to remind them the true Islamic teachings and to come back to our identity, Pancasila.

“As one of the largest and most expan-sive nations in the world we must build our defense ca a ilities to re ect our si e and objectives, meaning major equip-ment needs to be modern and advanced”

“We are unique in how we are tackling terrorism. In every country I visit, they said that terrorists should be put down with anti-terrorist troops. For me, I be-lieve e need to first tackle the elief sys-tem that sees people radicalized”

36-37 Min of Defense.indd 37 21/07/16 17:11


QCB ASSURES CONFIDENCE IN QATAR with a solid financial framework

An interview with Governor of Qatar Central Bank Sheikh Abdulla Bin Saoud Al-Thani

What have been the achievements of the Na-tional Development Strategy (2011-16) and what challenges still remain?The implementation of the Strategic Plan is being led by Qatar Central Bank (QCB), supported jointly by the Qatar Financial Markets Authority (QFMA) and Qatar Fi-nancial Centre Regulatory Authority (QF-CRA). Together the three regulators, with close coordination through the Financial Stability and Risk Control Committee (FSRCC), are committed to maintaining a stable financial environment for business and investment, while also improving protection for investors and consumers.

ithin this favorable climate, the finan-cial services industries continue to sup-port the various needs of a growing pri-vate sector and to benefit from a growing population as diversification progresses.

A number of important regulations, based on asel III, have been issued to strengthen the banking sector in recent years. In addition to capital standards, maintenance of the liquidity coverage ra-tio, net stable funding ratio and loan-to-deposit ratios, as well as capital charges for domestic systemically important banks (DSIBs), etc., are prescribed.

Further, the QCB conducts regular stress tests of banks under various scenar-

ios, while internal stress tests conducted by banks are reviewed at our end. At the same time, macroprudential oversight is being strengthened, while work is simul-taneously ongoing to develop an early warning system for the financial sector.

ating agencies and investors have continued to have confidence in atar’s financial sector, as, for example, is evi-dent from the maintenance of atar’s high credit rating and the upgrade to emerging market status by leading rating agencies. More recently, the establishment of Qatar as the first regional enminbi clearing center will play an important role in de-veloping the financial industry domesti-cally and internationally.

Work is to continue on our macro-prudential framework, supervision of

insurance, deposit insurance, and do-mestic credit rating, among others, to enhance the business and investment environment.

What has been the economic impact of the lift-ing of sanctions on Iran and the Fed’s raising of interest rates on the Qatari Economy?Developments in atar’s economy are influenced by the changes in oil prices, as in any other GCC economy. Major fac-tors that contributed to the persistently low oil prices were weaker demand from advanced and emerging economies, in-creased supply from Iran after the lifting of sanctions, and increased production by other oil producers to retain their market share. ven though the influence of these factors continue to impact the price of oil

Governor of Qatar Central Bank Sheikh Abdulla Bin Saoud Al-Thani explains the dynamic changes, both internally and externally, affecting the coun-try s economic and financial landscape and why it still holds great appeal to investors and ratings agencies alike

38-40 QCB Q&A.indd 38 21/07/16 15:32


in the first half of 201 , once the market rebalances, we expect the price of oil will reach a comfortable level. On the positive side, the lifting of sanctions will open up trade and investment opportu-nities in both directions.

evertheless, recogni ing the continuance of low oil prices, the gov-ernment is in the processes of making structural adjustments in expenditure without affecting the planned infra-structure developments.

Regarding domestic growth, the ongoing economic diversification strat-egy planned under the 2030 is pro-viding an impetus to increased growth in the non-hydrocarbon sector, which grew by around 7.8% in the third quar-ter of 2015. The Ministry of Develop-ment Planning and tatistics’ atar co-nomic Outlook estimates the economy (real GDP) to grow by 3. in 2015 and increase to 4.3 in 201 .

The ed eserve’s shift from the ero interest rate regime in December

2015 by increasing their policy rate by 25 basis points has not impacted much on the domestic interest rate structure. Given the volatile global financial mar-ket conditions and not so encouraging growth prospects of the global economy, the probability of further increases in the interest rate in the near term is lim-ited. Nonetheless, the QCB has space to act flexibly given the gap between C ’s policy rate and that of the Fed. Further-more, the large stock of T-bonds/bills from earlier issuances provides C with the flexibility in liquidity manage-ment, and thereby help ensure comfort-able liquidity in the banking system and help banks meet private sector credit demand in line with strong non-hydro-carbon sector growth.

Moody’s forecasts that average real GDP growth will remain robust at around 5% until 2017. What is the strategy to ensure Qatar’s position as the most competitive economy in the region?As noted earlier, the proactive diver-sification strategy initiated in 2011 is yielding positive results. The ma-jor contributor to economic growth shifted from the hydrocarbon sector to

the non-hydrocarbon sector. Needless to say, infrastructure developments are providing the required growth mo-mentum. Education, health and other services are also growing at significant pace. A business friendly environment is being developed to attract more in-vestments as well as to increase the scope for private sector participation in the growth process.

MSCI has upgraded Qatar to Emerg-ing Market (EM) status, which facilitates a higher access to funds from various spec-tra of foreign investors. The ownership of foreign investors in listed companies increased to 49% from the earlier limits of 25 . Memorandums of understanding (Mo s) with various countries are also being signed so as to improve trade and investments relations with them.

The Renminbi clearing house launched in Doha, the first of its kind in the region, will attract higher cross-bor-der investments and trade through atar.

To support the competitiveness of the economy, our monetary policy is kept accommodative, and financial sta-bility is ensured through improved reg-ulations and macro prudential policies.

avorable tax regimes and ease of doing business coupled with a fundamentally strong financial environment are ex-pected to continue to make Qatar a pre-ferred investment destination.

How do you manage liquidity in the market?In order to safeguard the financial market conditions, C has an effective liquidity management framework. The framework includes a host of instruments.

irst, we have three policy rates QCB Deposit Rate (QCBDR), QCB Lending Rate (QCBLR), and QCB Repo.

econd, since May 2011 we have introduced Treasury Bills (T-Bills), and medium-term government bonds is-sued in March 2013.

Third, the QCB also prescribes a eserve equirement that has remained

at 4. 5 since 2008.The issuances of T-bills and medi-

um-term government bonds ensure a better transmission of monetary policy, and strengthen the mechanism of coor-dination between monetary and fiscal

policies. They also support the banking and financial system by enhancing the balance sheet liquidity position of do-mestic banks in line with the require-ments of Basel III.

Could you tell us more about the role of financial institutions in atar s di ersifi-cation strategy?The persistence of low oil prices poses challenges to all the oil and gas export-ing countries across the globe. A re-versal of this trend will happen when the recessionary headwinds subside and oil exporters unanimously de-cide to moderate the supply overhang. However in atar, thanks to the well-planned diversification strategy initi-ated in 2011, domestic growth, though moderate, remains at a strong position among its regional peers.

Involvement of small and me-dium enterprises ( M s) in the overall growth of the economy is envisaged in the ational ision 2030 and the role of the financial sector to support this strat-egy is paramount. Identifying a uniform definition for M s across the finan-cial institutions will ease the hurdles for SMEs to get access to credit from banks and mobili e resources from pri-vate placements and the venture capital market. atar Development ank and other government agencies are actively participating in the process of promot-ing the SME sector.

Could you provide some information about the new law enacted in 2015 to op-timize the use of public funds and Qatar’s implementation of Basel III measures?The new law, aw o. 2 of 2015 on pub-lic finance, aims to moderni e the tate financial management system as well as align it with the developments in the global economic and financial system.

The law constitutes a comprehen-sive audit policy and intends to improve the coordination between various stake-holders in the processes of preparing and implementing the budget. The law is also expected to enhance the efficiency of public spending by tracking income and expenses accurately and continuously. A macro-economic unit is also being set

38-40 QCB Q&A.indd 39 21/07/16 15:32

up to monitor the overall economic plan-ning and investment program.

In line with international best prac-tices, the fiscal calendar has also been changed from April-March to January-December, starting anuary 201 . This will provide compatibility with the re-quirements of the private sector and in-ternational financial institutions.

In anuary 2014, C issued the fi-nal Basel III circular, which introduced a minimum capital adequacy ratio of 12.5 .

ational banks have also been evaluated on the extent to which they are domestic systemically important banks (D-SIBs). These D-SIBs are required to maintain capital charges of 0.5 to 2.5 in different D-SIB buckets. These instructions will be implemented in 201 in a phased manner. Further, Basel III framework on liquidity is also being implemented. Banks were advised to maintain the liquidity coverage ratio ( C ) with a minimum of 0 by the end of 2014. ith an increment of 10 points every year the C will reach the required 100 level by the end 2018. On similar lines we have advised the banks to maintain a net stable funding ratio as envisaged by asel III liquidity framework with a minimum of 0 by the end of 2015 and to achieve 100 limit by 2018.

How do you view the launch of the Sharia-com-pliant exchange-traded funds in the world?The demand for Sharia-compliant funds is an increasing trend of late. Global fi-nancial crises have changed the invest-ment hori on of conventional investors who look for low-risk and low-cost funds.

haria-compliant exchange-traded funds ( T ) provided investors an op-portunity to explore the conventional equity markets while strictly following

haria investment principles. Over the past few years, these T s, have shown

low volatility and outperformed their conventional counterparts.

What are the future prospects of Islamic finance as ran enters the ar et?Over the past decade, Islamic finance has recorded exponential growth, thanks to the economic growth in GCC countries prior to the oil price downturn. It even attracted traditional conventional banks also to come out with Islamic financial products to tap a large number of the pop-ulation who otherwise was underserved. Islamic finance products to support small and medium-si ed enterprises were also designed by putting emphasis on as-set-backed finance. Despite the increased interest in Islamic finance, most of these assets are concentrated in GCC countries, Malaysia and Iran. Based on the latest in-formation it represents only 1 of global financial products. Accordingly, ample scope remains for Islamic finance to grow, and definitely lifting sanctions on Iran with a population of around 5 million will pro-vide opportunities for investors as well as Islamic financial institutions.

What is the level of participation of foreign banks in the local market and that of Qatari banks in international operations?The structure of the banking sector in Qatar remained more or less stable dur-ing the last couple of years. The share of the assets of foreign bank branches is below 4% of the total banking sector assets. They contribute to the economy through financial innovation and pro-vide liquidity to the interbank market.

Competition in the domestic bank-ing sector remained healthy as indicated by a stable net interest margin (NIM) of 2.5 during the last few years. In view of the healthy growth and resilience of the domestic banking system, banks

are looking for global outreach strate-gically through cross-border transac-tions. Around one-fifth of the domestic banking sector assets relates to banking businesses outside Qatar. In addition, banks operate through their branches, subsidiaries and associates.

As a regulator, QCB processes the banking sector’s intentions for foreign in-terest on a case-by-case basis and provides necessary guidance consistent with its reg-ulation and prevailing market conditions.

What investment opportunities are there or financing a or in rastructure ro-

grams to boost the economy as the FIFA World Cup 2022 approaches?Infrastructure development is in its full swing as we progress towards the 2022 World Cup. Along with the public sector, involvement of the private sector is also very critical for the development. The major focus of the infrastructure develop-ment includes the construction of roads, rail, and development of sea airports, etc. This entails increased financing require-ments for the real estate and construction sectors. Banks are able to support this in-creased credit demand, where the credit to this sector (real estate and contractors) grew by around 2 .5 in 2015.

In addition, investments are also focused on industrial ones, ICT, edu-cation, health, etc. These developments are expected to stimulate the domestic economy and provide substantial in-vestment opportunities for private sec-tor including foreign investment.

The upgrade of Qatar from frontier market status to emerging market sta-tus by MSCI also came in the right time. The upgraded status will improve the depth and liquidity in the equity market and is expected to attract further invest-ment flows.

40The Worldfolio WIEF“The demand for Sharia-compliant funds is an increasing trend of late. Global financial crises have changed the investment hori on of conventional investors who look for low-risk and low-cost funds. Sharia-compliant exchange-traded funds (ETF) provided investors an opportunity to explore the conventional eq-uity markets while strictly following Sharia investment principles”

38-40 QCB Q&A.indd 40 21/07/16 15:32

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CAN INDONESIA BECOME THE MECCA OF ISLAMIC FASHION?

Ahead of the Islamic Ramadan and Idul Fitri celebrations, consumption tends to increase in Indonesia. One of the prod-ucts that is searched for by Indonesian consumers (those who adhere to Islam) is Muslim fashion such as clothes and the veil. In fact, the Indonesian government wants the nation to become Asia’s center for Muslim fashion by the year 2018 and the world’s Muslim fashion leader by 2020. Muslim clothes are also envisaged to become a key export product. Currently, In-donesia’s Muslim fashion exports are still rather insignificant.

Based on the ‘State of the Global Islamic Economy Report 2015-2016’, the world’s Muslim fashion market was valued at $230 billion in 2014 and is estimated to be worth $327 billion before 2020, implying that Muslim fashion is among the fast-est growing industries worldwide.

Obviously those nations that harbor a large Muslim pop-ulation have the potential to become an important force with regard to Muslim fashion. Indonesia is one of these coun-tries. This nation – Southeast Asia’s largest economy – has the largest Muslim population in the world with more than 210 million Muslims (nearly 90 percent of the total population), implying the market is huge (although there are also millions and millions of nominal Muslims in Indonesia who do not fol-low the Islamic teachings strictly – or not at all – and prefer to follow Western fashion trends).

However, data shows that demand for Islamic fashion is on the rise in Indonesia. Currently, the nation ranks fifth in terms of the world’s largest Muslim fashion markets with a value of $12.7 billion. The leading nations are Turkey, United Arab Emirates, Nigeria and Saudi Arabia (see table below).

WORLD’S LARGEST ISLAMIC FASHION MARKETS:

COUNTRY VALUE (USD BILLION)

TURKEY 24.84UNITED ARAB EMIRATES 18.24NIGERIA 14.99SAUDI ARABIA 14.73INDONESIA 12.69RUSSIA 10.92EGYPT 10.73PAKISTAN 10.52INDIA 9.78IRAN 8.99

SOURCE: STATE OF THE GLOBAL ISLAMIC ECONOMY REPORT 2015-2016

However, as an exporter of Muslim clothes Indonesia’s role on the world market is still rather insignificant. Ac-cording to data from Indonesia’s Trade Ministry, Indonesia’s Muslim clothes exports were worth $4.63 billion in 2014 (up 2.3 percent from the value in the preceding year). However, exports declined slightly to 4.5 billion in 2015. In the first month of 2016 exports of Islamic fashion was back on track, rising 2.13 percent, year on year.

Key export markets of Indonesia for Islamic clothing are the U.S.A., Japan, Germany, South Korea, Britain, Australia, and Canada. However, Indonesia still lags far behind the leading Islamic fashion exporting nations i.e. China, India, and Turkey.

INDONESIA

INDONESIA’S EXPORTS OF ISLAMIC FASHION:

2013 2014 2015 JANUARY 2016

EXPORT MUSLIM 4.53 4.63 4.57 0.37FASHION(IN USD BILLION)

SOURCE: TRADE MINISTRY OF INDONESIA

Key export markets of Indonesia for Islamic clothing are the U.S.A., Japan, Germany, South Korea, Britain, Australia, and Can-ada. However, Indonesia still lags far be-hind the leading Islamic fashion exporting nations i.e. China, India, and Turkey

42-43 Islamic Fashion.indd 42 21/07/16 15:35

The Indonesian government wants to have turned Indo-nesia into the ‘Mecca of Islamic fashion’ by 2020, one of the many (perhaps overly) ambitious targets of the government. However, becoming the center of the global Islamic fashion industry implies becoming the trendsetter in this industry, be-coming the (quality) standard, the production hub, the center of consumption, and one of the leading exporters. To overtake established powers such as China and Turkey seems a very difficult undertaking. or example, production costs in China and Turkey where there already exists major production cen-ters are much lower compared to Indonesia (Indonesia still needs to import 60 percent of raw materials required to pro-duce Muslim fashion).

Indonesia does have strong points as well. Not just be-cause of the huge amount of Islamic consumers who live in the country – constituting a great market – but also because

there exists a major pool of creativity within Indonesia con-sidering that Islam has blended with the various local pre-Is-lamic cultures.

At the Muslim Fashion Festival Indonesia (MUFFEST) 2016, held in Jakarta between 25-29 May, there were 50 de-signers – originating from countries including Turkey, Italy, Russia, United Arab Emirates and Bangladesh – showcasing more than 200 brands. This event was organized by Indone-sia’s Trade Ministry in cooperation with the Indonesian Fash-ion Chamber (IFC) and supported by Hijabers Mom Commu-nity (HMC). This event also included workshops, seminars, a design competition and much more.

The Worldfolio would like to thank Indonesia Investments for its kind permission to reproduce this article that originally ap-peared on its website, www.indonesia-investments.com


Indonesia does have strong points as well. Not just because of the huge amount of Islamic consumers who live in the country – constituting a great market – but also because there exists a major pool of creativity within Indonesia considering that Islam has blended with the various local pre-Islamic cultures

The Indonesian government

wants the na-tion to become

Asia’s center for Muslim fashion by the year 2018 and the world’s Muslim fashion leader by 2020

42-43 Islamic Fashion.indd 43 21/07/16 15:35

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Recently, Indonesia has shown a greater openness to trade: it has expressed an interest in joining the Trans Pacific Part-nership (TPP) and has also started the ne-gotiation process on Comprehensive Eco-nomic Partnership Agreements with both the European Union and Australia. This strategy shows that Indonesia is paving its way towards a more open trade regime, less protectionist policies and deeper inte-gration into the international value chains.

Indonesia has the world’s largest Mus-lim population and is ranked the 25th larg-est exporter globally. Exports have been a substantial part of economic activities in the country and many Indonesian prod-ucts are already well imported by many Muslim countries. Still, there are huge op-portunities for Indonesia to tap these mar-kets as Indonesia does not yet have free trade agreements nor any significant trade deals with Muslim countries.

For the last couple of years, China has been the main trading partner for Indo-nesia. But as the Chinese economy weak-ens, Indonesia must look beyond its tradi-tional trade strategy. The growing middle classes, particularly in Muslim nations in South East Asia and the Middle East, hold

much potential for Indonesia. Indeed, through shared religious values Indonesia has a significant advantage in negotiating preferential trade relations and generally deepening economic cooperation.

Many Muslim countries, including In-donesia, have abundant human resources and their primary products are natural resources and agricultural goods. Conse-quently, they export relatively cheap raw materials, while they import expensive capital-intensive and manufactured goods. This means the trading partners of Muslim countries are mostly developed countries with significant manufacturing sectors.

According to the IMF, Muslim coun-tries, most of which are located in the Middle East and North Africa, receive only one-third of the foreign direct investment (FDI) compared to developing countries of similar size. This means they are com-paratively marginalized in terms of being integrated into the global economy.

Historically, several factors have con-tributed to weak economic integration among Muslim countries, such as a lack of technological development, low inno-vation, political tension, weak industri-alization strategies, weak infrastructure,

and a lack of trade information. There is much diversity among Muslim countries with some oil exporters with substantial growth potential, while others are among the poor and under-developed economies. Although these countries have built strong relations amongst themselves through or-ganizations such as the Organization of Is-lamic Cooperation, the volume of trade is still relatively low.

Of course, in the Middle East re-gion, countries that have accumulated significant wealth, namely .A. ., atar, and Saudi Arabia, are investing in as-sets abroad. As a result, the demand for Sharia-compliant assets in other coun-tries has seen a period of unprecedented growth. Sharia-compliant assets in Asia, including Indonesia, will represent a key investment opportunity in emerging mar-kets offering significantly higher invest-ment returns than developed markets.

According to BMI research, global growth will be driven over the next 10 years by emerging markets, in particular Pakistan, Indonesia, Ethiopia, Egypt and Bangladesh. These markets will form new manufacturing and construction hubs, as mining, oil, and gas resources will be less significant in driving growth. Those countries previously reliant on commodities will need to adopt a new economic strategy geared towards in-dustrialization, and innovation.

Free trade agreements and bilateral/multilateral tariff preferential agreements are a good start for Indonesia in ensuring the economy can reach its aspirational di-versification goals. Moreover, faith-based economic cooperation should be an effec-tive method of integration among Mus-lim countries, and it is through events such as the World Islamic Economic

orum that the first steps will be taken towards closer cooperation.(The views expressed by Ms. Maruti in this article are solely her own)

THE FUTURE OF ECONOMIC COOPERATION BETWEEN INDONESIA AND MUSLIM COUNTRIES

With the economy in China slowing down, Indonesia ‘must look beyond its traditional trade strategy’, while economic integration

amongst Muslim countries must be strengthened, writes Retno Maruti, a senior economic analyst at the Indonesian Ministry of Finance

45 Trade.indd 45 21/07/16 15:39


What opportunities do you see for West Nusa Tenggara in Indonesia’s hosting the World Islamic Economic Forum? The World Islamic Economic Forum is a very important event for Indonesia and West Nusa Tenggara province. Through this event West Nusa Tenggara will be able to show its growing economy and the democratic decentralized system of gov-ernment where local governments can implement regional development in vari-ous fields. e fully intend to promote est Nusa Tenggara and Indonesia through this event so that foreign investors can see the benefits of doing business in Indonesia.

In terms of your own region, how do you see progress in cooperation amongst the majority Muslim countries of the world? In my opinion, cooperation among the Is-lamic countries is now increasing. This is proven by the increasing number of inves-tors from Islamic countries who have al-ready started development projects in the West Nusa Tenggara province. If Islamic countries are able to build a better image and make closer ties with one another, it will certainly have a positive impact in In-donesia’s development and the province of West Nusa Tenggara.

There is currently a major focus on Ha-lal, or “Muslim-friendly”, tourism. How are you ensuring development within this fast-growing sector? Where can investors get involved with this? Since last year, the province of West Nusa Tenggara has set a new direction for tourism development, which is more commonly known as “Muslim-Friendly” tourism. This tourism development will open new opportunities for the province of West Nusa Tenggara and the increasing number of Muslim travelers we have seen recently proves it.

West Nusa Tenggara has a lot of po-tential to reach the existing markets today. Therefore, the regional government contin-ues to build facilities to help investors for the development of the province. One of these measures is the preparation of the Mandalika Special Economic Zone, which is conceptu-

alized as an integrated tourism development, and the first Muslim-friendly tourism con-cept in Indonesia.

Beyond tourism, what are your priorities in terms of agribusiness and entrepreneurship? In the agribusiness sector, our focus over the next five years is to process est Nusa Tenggara agricultural products (rice, corn, soybeans, seaweed, and sugar cane) into finished products to increase their values. This means we need to es-tablish a downstream policy concept, i.e. to develop agricultural product process-ing factory in West Nusa Tenggara. Cur-rently, most of the agricultural products of West Nusa Tenggara are exported as raw commodities.

As for entrepreneurship, over the last seven years the regional government has turned out over 100,000 new entrepreneurs. We believe that entrepreneurship is a con-cept that ensures the stability of the economic development of the region. In addition, many young people have already plunged into the entrepreneurial world, especially in the field of trade and services. The regional govern-ment of West Nusa Tenggara also established educational cooperation abroad to generate stronger entrepreneurs.

How is the regional government working with the central government to ensure even eco-nomic development across the archipelago? The regional government of West Nusa Tenggara province always coordinates with the central government especially in terms of the fulfillment of the basic infra-structure required by the community, such as transportation to ensure inter-regional connections. We also cooperate on food and water infrastructure to ensure the eco-nomic sustainability of the province.

You were recently awarded by BAPPENAS with a governance award. What are your top priorities for 2016 and have these changed since you were first elected? In addition to the development of key sec-tors such as education and health, West Nusa Tenggara province also gives prior-ity to the environment. We are aware that West Nusa Tenggara province as an archi-pelagic province must continue to initiate programs which increase the carrying capacity of the environment and are also eco-friendly. Therefore, we have created a program called ‘WNT Green’.

What makes the culture of West Nusa Teng-gara region so unique? Our province is a miniature of Indonesia’s diversity in ethnicity, culture, and religion. Although the vast majority of the province of West Nusa Tenggara is Muslim, all re-ligions here can coexist and contribute to the development of the region. Sasak, Sumbawa and Mbojo cultures create a unique interaction that is reflected both in cultural attractions and sites.

WEST NUSA TENGGARA PROVINCERIPE WITH POTENTIAL

The Worldfolio met with the Governor of West Nusa Tenggara, Muhammad Zainul Majdi, to discuss the province’s growing economy, Halal tourism, adding value to agribusiness,

and the regional government’s focus on fostering entrepreneurship

“Over the last seven years

the regional government of

West Nusa Tenggara has

turned out over 100,000 new

entrepreneurs. We believe

that entrepreneurship is a

concept that ensures the sta-

bility of the economic devel-

opment of the region”

46 West NT Province.indd 46 21/07/16 17:13

“FAMILY FRIENDLY”HALAL TOURISM BOOM


With demand for halal tourism rising significantly, Indonesia is set to take full advantage of the niche tourism offering

Mount Bromo volcano, East Java, Surabuya, Indonesia

Indonesia, a vast country of more than 17,000 islands that en-compasses most of South-East Asia’s largest archipelago, has traditionally been an attractive tourism destination. Friendly people, warm weather, tropical beaches, incredible nature, world heritage historical sites and a harmonious mix of cultures, religions and languages has drawn tourists to visit the country by the droves. In fact since the 1970s, the country transformed from an unknown tourist destination to one popular around the world. This was particularly due to the rise of visitors to Bali, which has since become a byword for tropical paradise.

Australians, Singaporeans, Dutch and Malaysians led these early waves of visitation. Since then travelers from Europe and especially the U.S. began arriving in large numbers. Overall Americans remain the top spenders on travel in the Asia-Pacific region, spending approximately $231.6 billion last year. However since the turn of the century Chinese and other East Asian tour-ists began arriving in increasingly larger numbers.

According to Indonesia’s Ministry of Tourism, approximately 10.5 million people travelled to Indonesia in 2015. This gener-ated approximately $12.4 billion for the sector. The average visi-tor stayed for 8.5 days and spent $1,190.

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However, given the vast territory of the country, the tourism sector still remains vastly under-utilized. In order to develop the industry, the government is seeking to double these figures over the coming years by attracting 20 million tourists by 2019. The goal is to create approximately 13 million new jobs while also significantly increasing GDP.

To this end, the government has allocated $200 million to over-all tourism promotion. The “Wonderful Indonesia” brand, as well as a plethora of initiatives to develop the sector has seen it increase its ranking in Travel and Tourism Competitiveness Index of the World Economic Forum (WEF). Indonesia is now ranked the 47th best in the world out of 144 countries, according to the 2015 report.

At the core of the national policy is promoting Indonesian tourism as offering more than just Bali. Ten specially prioritized tourism destinations have been designated for promotion to ab-sorb increasing tourist numbers. These destinations are Boro-budur Temple, Mount Bromo, Lake Toba, Belitung, Tanjung Lesung, The Thousand Islands, Komodo Island, Wakatobi Na-tional Park, Morotai and Lombok.

Halal Tourism In addition to increasing tourist numbers from traditional mar-kets, Indonesia has also initiated a strategy particularly targeting Muslim visitors.

This move comes on the back of the global Halal tourism boom. Also called family-friendly tourism, Halal tourism is aimed at creating conditions conducive to attracting a pool of visitors from the world’s 1.6 billion Muslims. This includes en-suring the availability of halal food, places of worship and ac-commodation catered to the needs of the faithful.

The primary source of these visitors include residents of predominantly Muslim OIC member countries, such as the Gulf Cooperation Council (GCC) states. Demand also exists from non-Muslim majority countries with fast growing Muslim pop-ulations. The European Union, U.S., Canada, China and India constitute such source countries.

Studies show that Halal tourists usually travel with more family members, stay for longer periods and ultimately spend more money than other tourist groups. As a result, tourism branding campaigns are adapting their approach and services to better meet the needs of Muslim visitors.

Statistics support this approach, with Muslims from around the globe spending an estimated $142 billion on travel in 2014. This amount excludes pilgrimages to holy sites (Hajj and Um-rah). Over the same period, tourists from China spent $160 bil-lion, and Americans spent $143 billion.

This ranks the Muslim travel sector third highest in global travel spending. Overall this accounts for around 11% of total global travel expenditure and experts predict that Halal tourism will continue to grow, and will generate in excess of $238 billion by 2019.

Turkey, with its close proximity to the Middle East and North Africa (MENA) and historical importance to Islamic culture has been a traditionally strong contender for this market. However increasing instability has reduced visitor numbers.

Indonesia, as both a rising tourism destination and the world’s most populous Muslim country is well-placed to fill this lucrative niche market.

Halal tourism in IndonesiaWith a national motto of “Unity in Diversity”, Indonesia is known as a secular and tolerant democracy.

Despite having five official religions and hundreds of eth-nic groups, it boasts the world’s largest Muslim population. Ac-cording to a recent census approximately 222 million people, or 87 percent of its population follow Islam. Of this number the majority follow Sunni teachings.

Since the 12th century the religion has left a deep cultural footprint that can still be felt today. As kingdoms scattered across the archipelago converted to Islam, many Arabic words were adopted into local lexicons. Also, before the formation of the Republic of Indonesia, Malay, Acehnese and other na-


Mosque, Mataram - Lombok

Arief Yahya, Minister of Tourism

of Indonesia

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tive languages were often written in Arabic script. Numerous inscriptions on historical buildings remain from this period for visitors to see.

Aceh is perhaps best known for maintaining its traditional Islamic culture. The sultanate, which controlled the strategic territory until the 1800s, resisted outside influences until the final decades of Dutch colonial rule.

Many see Indonesia as an obvious location for Halal tour-ism. The country offers year round warm weather, affordable travel costs, and halal food is widely available. Places of wor-ship are readily accessible with more than 600,000 mosques in place across the country.

Despite these advantageous conditions and strong religious, cultural and historical ties, the Middle East is not a major source of visitors for the country. As Minister for Tourism, Arief Yahya, admits, “Indonesia is the country with world’s largest Muslim population but we have not fully explored halal tourism”. Ac-cording to official statistics, in 2015, only 182,143 tourists from the MENA region visited Indonesia. Of the 12 million visitors ex-pected by the end of 2016, government planners estimate only 300,000 will be of MENA origin.

However the government of Indonesia has enacted a strat-egy to change this. A soft launch of Halal Tourism took place in 2012, which was followed by nominating 12 Muslim-friendly provinces in 2013. These areas – Aceh, West Sumatra, Riau, Lampung, Banten, Jakarta, West Java, Central Java, Yogyakar-ta, East Java, West Nusa Tenggara and South Sulawesi – serve as a geographic focus for Halal tourism development.

Halal Tourism was also included in the national Islamic Economic Movements framework by the President Yudhoyono in that year. Ministerial regulations on Sharia hotels were cre-

ated in 2014. This includes providing guests with halal food, Korans, marking the direction of Mecca in every room, offering access to a Halal kitchen and restricting alcohol consumption.

Other services on offer include the concept of ‘friendly halal tourism’. In addition to halal-friendly hotels and halal restaurants, tours, trip planning, and spas are also provided by tourism operators. The idea is to ensure a completely seamless experience for Muslim visitors.

Of the $200 million allocated to promote all forms of tour-ism, $29 million has been dedicated to attract guests interested in halal tourism. The MENA region has been the major focus of these efforts. The GCC in particular has seen a plethora of promotional activities launched by the Indonesian government. This is hardly surprising given the high number of travelers from the Gulf as well as high income levels.

The Government of Indonesia has ambitious goals in in-creasing the number of Muslim tourists by 2019. As Minister Yahya explains, “I would like to increase visits for halal tourism to 5 million by 2019”. Already, quite early into the implementa-tion of Indonesia’s Halal tourism strategy results are becoming apparent. Of the last two years, a 14.7 percent annual increase in Muslim visitors has been recorded.

International recognition for Indonesia’s development of this sector is also growing. The Sofyan Hotel Betawi (located in Jakarta) won the Best Halal Hotel award during the 2015 World Halal Travel Summit in Abu Dhabi. With only 14 award catego-ries in total, Indonesia collected 3 awards in total. Lombok (one of the 12 nominated Muslim-friendly provinces) was rated Best Halal Tourism Destination and Best Halal Honeymoon Destina-tion. Concerted efforts by the community and local operators here has made it Indonesia’s prominent Halal tourism hotspot.


Fatahillah square in Jakarta

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Destination Lombok Lombok, green and devout, is sometimes referred to as “The Unspoiled Bali” or “The Island of a Thousand Mosques”. It is directly to the west of Indonesia’s most famous tourism destination, Bali, and is the biggest island of West Nusa Teng-gara province. Unlike Bali, a predomi-nantly Hindu area, the majority of locals (around 93 percent) are Muslim. Despite the fact that approximately 65 percent of West Nusa Tenggara province’s popula-tion lives on Lombok, it is known for its green mountains, tranquil, untouched nature and pristine sea and beaches.

The highlands of Lombok are cov-ered in verdant, lush forest. The Gunung Rinjani National Park offers vast tracks of hiking for tourists interested in fresh mountain air and mountain views. A vast crater lake, with a surface area of 11 square kilometres is one of the most popular sites for visitors. This lake, Seg-ara Anak Toba, as it is known locally, of-fers breath-taking views and warm fresh water due to volcanic heating.

As far as sea shore tourism is con-cerned, Lombok is probably best-known for Senggigi Beach. This relaxing white sand shore offers crystal clear seas, fresh-water waterfalls and a spectacular view of Mount Rinjani.

The Gili Islands are also becoming a more frequently visited tourist site. The three ‘Gilis’ (Gili Trawangan, Gili Meno

and Gili Air) are small, tranquil destina-tions that offer nature-based, remote is-land travel experiences. Vehicles are not allowed on these islands, with bicycles and horses serving as the main forms of transport. The diving sites and beaches there are renowned throughout Indone-sia and are becoming increasingly popu-lar with foreign and domestic tourists.

Like many other parts of Indonesia, Lombok has an Islamic tradition linked to Arab seafarers. Centuries ago, Yeme-ni traders established a community in the port of Ampenan, a coastal district of Mataram (Lombok’s capital). This quaint district boasts still architecture as well as historical and cultural heri-tage from this Arabic period.

Given these conditions, it is hardly surprising that Lombok has emerged as Indonesia’s premier Halal tourism des-tination. The local business community and provincial authorities have proac-tively sought to increase Lombok’s at-tractiveness to the Middle Eastern mar-ket. This includes Halal certification by the Indonesia Ulema Council, increasing the availability of Halal food, and train-ing Arabic speaking guides.

Locations of cultural and religious interest, such as Ampenan Old Town and historic mosques have been in-cluded in specially tailored city tours. These are easily accessible from hotels such as the Oberoi, located in Medana

Bay. This luxury residence offers 24 acres of manicured gardens and a sun-set view of Mount Agung.

Indeed, infrastructure and logistics have increasingly made Lombok an easy to reach and well served travel destina-tion. Lombok International Airport was opened in 2011. Its management is seek-ing to establish more international con-nections, but in the meantime, domestic flights are frequent. The majority con-nect Mataram to Jakarta and Denpasar, with flights times of two hours and 40 minutes respectively.

Ferries connect provide connections to the major neighboring island and fast boats connect the mainland to the small outlying Gilis.

All things considered, Lombok has succeeded as a pilot project for Indone-sia’s Muslim-friendly provinces strat-egy. According to government officials, of the expected three million visitors to Lombok this year, as many as 30 percent are projected to be from the MENA re-gion. If true this marks a turning point in Indonesian success in this lucrative tourism sub-sector.

The recognition received at last year’s World Halal Travel Summit have put Lombok on the map as a premier destination. As word spreads, and the market grows, experts believe that this is just the beginning of Lombok’s, and Indonesia’s, Halal tourism boom.


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decentralising growth,

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