Integration of Islamic Boarding Schools and Fintech to Support Economy

KOMPAS/PRIYOMBODO

Visitors seek information on the Syariah Fund’s halal investment program at the 2019 Indonesia Fintech Summit & Expo, held at the Jakarta Convention Center in Central Jakarta.

JAKARTA, KOMPAS - Islamic economics can be a new engine for sustainable economic growth. The government and related authorities plan to integrate the Islamic economy with the digital ecosystem, especially financial technology (fintech), and to form a holding company of the country’s Islamic boarding schools (pesantren).

The deputy governor of Bank Indonesia (BI), Dody Budi Waluyo, said amid global uncertainty, the development of Islamic economic and finance would strengthen national resilience. The sharia system is strong because it is based on risk-sharing rather than on the debt approach.

In Islamic economic principles, financial transactions must be based on real activities. Islamic financial transactions are based on underlying assets, unlike conventional banks that tend to be speculative. With that, the risk of economic bubbles can be reduced or even neutralized.

"The experience of a number of countries shows that sharia economy and finance have the potential to become a new source of economic growth and improve the current account balance," Dody said at the opening of the 2019 Sharia Economic Festival (ISEF) in Jakarta, on Tuesday.

The experience of a number of countries shows that sharia economy and finance have the potential to become a new source of economic growth.

According to Dody, around 80 percent of the value of Indonesia\'s gross domestic product (GDP) has met sharia principles. To that end, the government and BI’s focus is on developing the Islamic financial services industry, including by encouraging Islamic banking and optimizing religious social funds.

According to the Financial Services Authority, as of July 2019 Islamic financial assets (not including Islamic shares) amounted to Rp 1,359 trillion (US$97.07 billion), a 5 percent increase since the beginning of this year. Its market share is 8.7 percent of total national financial assets.

Holding company

Dody said the development of Islamic finance was not just financing, but also sustainable empowerment.

The central bank, together with 110 pesantren, will form a national pesantren holding company by integrating several pesantren business units to strengthen capital, market development and access to information.

KOMPAS/KARINA ISNA IRAWAN

Bank Indonesia (BI) Deputy Governor Dody Budi Waluyo speaks at the opening of the Indonesian Sharia Economic Festival 2019 on Tuesday (12/11/2019) in Jakarta.

This pesantren-based Islamic economic development has four main activities, which include the establishment of financial statements standardization, empowerment of pesantren business units, digital market development and the merging of pesantren on a national scale.

The deputy for macroeconomics and finance at the Office of the Coordinating Economic Minister, Iskandar Simorangkir, said that the sharia economy and finance had the potential to become a new motor for economic growth if integrated with the digital ecosystem, for example with capital distribution through fintech companies.

"The development of the digital economy is an opportunity to develop the sharia system in Indonesia. If it is not integrated with digital technology, the development of sharia systems will be only discourse," he said.

According to Iskandar, Islamic financial transactions based on basic assets will minimize the risk of an economic bubble amid global uncertainty. The advantages of the sharia system may also minimize the potential for crisis in Indonesia. Islamic economic development must target micro, small and medium enterprises.

The development of the digital economy is an opportunity to develop the sharia system in Indonesia.

However, the development of Islamic economics and finance in Indonesia still faces challenges, especially from the educational aspect. The public still sees banking and Islamic institutions with one eye because the profits are not as big as conventional banking. That is because the sharia system is based on risk-sharing.

Industrial Revolution

Malaysia’s Deputy Finance Minister Dato H. Amiruddin bin Haji Hamzah, said that Industrial Revolution 4.0 helped push the transformation of the Islamic financial services. Islamic financial services must also be accessible to urban and rural communities.

The presence of fintech companies has encouraged financial inclusion in a number of countries. For this reason, the number of sharia-based fintech companies need to be increased. "The development of the financial services industry in Malaysia adopts a value-based intermediation scheme that focuses on financing to achieve sustainable development targets," Amiruddin said.

The head of BI Institute, Solikin M. Juhro, said the sources of economic growth that could be boosted were in the tourism, maritime and manufacturing sectors. The potential of the three sectors can be explored through sharia economic policies, for example with the certification of halal products.