The 3rd  December 2013 marked the last day that the supervision of banks (including Islamic banks) in Indonesia remained under the central bank, Bank Indonesia (BI). Effective from the 2nd January 2014, banks and other financial institutions are now supervized and regulated under a new institution, the Financial Service Authority (FSA). DR SUTAN EMIR HIDAYAT and DR RADITYA SUKMANA discuss the implications of this move for the Islamic finance industry in the country.  

The discussion to establish the FSA has been underway for almost a decade, as the need for the new institution was debated. Among the issues was whether the FSA would be truly effective given that all its intended functions were already conducted by various institutions.

Another issue at that time was the financing or funding to establish FSA as an establishment requiring new human resources as well as office buildings in the capital, Jakarta, as well as in various other locations all over Indonesia. Certainly, a significant government budget had to be allocated at the initial stage. Later, when the FSA had already started its operations, it had to find its own financial sources through various means such as membership fees charged to its members (which are financial institutions such as banks and insurance companies). 

Another reason for the postponement was due to the unreadiness of the banks. At the beginning of the 21st century, banks in Indonesia had not fully recovered from the financial crisis. Hence, the regulator preferred to focus on creating a conducive banking climate. To cut the story short, eventually the FSA only officially started its operations at the beginning of 2014. 2014 is a new year with a new mega regulator for the financial industry in Indonesia. Many Indonesians have big expectations for this, particularly on the impact of effective coordination between the related institutions. Previously, BI only catered to the supervision of banks. The supervision of other financial institutions and the capital market was done by the Ministry of Finance through a board called BAPEPAM. In addition, ministry of cooperatives only handled the cooperative institutions. The existence of various regulators raised questions on the issued policies from regulators, which may not always have been in line with the policy made by others.

For example, an Islamic bank attempted to create more facilities to its customers by accomodating Islamic insurance (Takaful) services by joining with an Islamic insurance operator in forming bancaTakaful service. The aim of bancaTakaful is to make the customers comfortable. Instead of visiting separately Islamic bank and Islamic insurance operator to get the two services, through bancaTakaful, both services are available in one place. The issue was then raised — when there is a dispute, to which party can the customer send his complaint. If he complained to BI as he assumed that the Islamic insurance product was offered by an Islamic bank, the central bank would not accept the complaint as the product is insurance and not originally a banking product. Meanwhile, if he wanted to complain to the Ministry of Finance as he thought that Islamic insurance was under this ministry, they would also not serve him as the product was offered by a bank which is by law under the central bank’s supervision. Under such condition, it is clear that the customer was at a disadvantage as no institution was clearly responsible for his complaint. This has led to the clear need for the FSA, as an institution that could compehensively manage all financial institutions.

Another hopeful facet of the FSA could be the development of the micro, small and medium industries (MSMEs). 

Data shows that MSMEs contribute significantly to the Indonesian GDP.

Table 1 looks into three important things with regard to the MSME sector. First is the number of the institutions within the sector. Second is the number of workers, while the last is the contributions of MSME to the GDP. In terms of the number of the institutions, it is revealed that MSMEs contribute about 99.99% of the total enterprises in the country. The remaining percentage is the number of big enterprises. Within the MSME sector itself, it shows that the number of units for micro firms is dominant, comprising up to 98.85% of total MSMEs, while the remaining small and medium businesses represent only about 1.07% and 0.08% of the total MSMEs in the country respectively.

With regard to the amount of labor absorbed by MSMEs, the data implies that MSMEs absorb a much bigger chunk compared to the big enterprises. Labor in the MSME sector contributes about 97.22% of the total labor market in Indonesia. Again, labor in micro enterprises is the biggest contributor. Labor in small and medium enterprises stood only at around 3% or 2% respectively. The last part of Table 1 is about the contribution of MSMEs to GDP. MSMEs contribute more than 57.12% of Indonesian GDP, with the contributions of micro, small and medium standing at 33.81%, 9.85% and 13.46% respectively.

This shows the importance of the MSME sector to the Indonesian market. The sector has also been relatively unaffected by the recent global turmoil — largely due to the nature of the business. One characteristic of MSMEs in Indonesia is that majority of MSMEs are domestic players. This means they get their raw materials from local suppliers and manufacture their products locally and sell their products to local buyers. As a result, they are not much affected by the international environment or the fluctuations in the exchange rate.

For example, the recent European crisis has resulted in a significant decline in export volume of many countries in Asia to the European market. As a consequence, the exporters in those countries (mainly big corporations) are at a disadvantage as their sales are falling. Fortunately, this is not the case for majority of Indonesian MSMEs.

However, although the MSME sector proved to be a buffer during the economic crisis, it does not mean that this sector is free from any risk. In fact, the risk in the MSME may be even higher than the risk in the big enterprise sector. This is because MSMEs, in many cases, cannot provide collateral for loans, which is very important for the financiers. Secondly, the owners of MSMEs are normally also at the same time the sole runners of the business. That is why his absence from the company at any day normally results in the closing of the business on that day. As a result the family cannot earn money for that day.

From the MSME profile above, it is expected that microTakaful could offer an opportunity to assist them. Not falling into the same hole as in its past experience, the regulatory body on the Islamic banks which provide financing to MSMEs must be under one roof with that for the microTakaful operator. Therefore, the newly established FSA is mandated for that purpose. If the FSA is able to conduct better supervision as compared to the two separate regulatory bodies in the past, then it is expected that the future of Indonesian MSME industry and also the Islamic finance industry as a whole will be very bright.

Dr Sutan Emir Hidayat is the assistant professor and academic advisor for Islamic finance at University College of Bahrain and Dr Raditya Sukmana is the head of Magister Science in Islamic Economics at Airlangga University Indonesia. They can be contacted at sutan@ucb.edu.bh and momyadit@gmail. com, respectively. 

Source : Islamic Finance News Volume 11 Issue 10