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Indonesia Planning Halal Economic Zone

As demand for halal products grows across the Islamic world, Indonesia has plans to establish a halal economic zone in Jakarta.

The economic zone would likely include Islamic banks and financial institutions, as well as halal restaurants, hotels, malls, fashion boutiques and entertainment venues.

Such a zone could include Islamic banks and financial institutions, as well as halal restaurants, hotels, malls, halal fashion boutiques and halal entertainment, the board’s Shariah economy expert Adiwarman Karim said at a panel discussion themed “Jakarta as the Center of Islamic Finance” in Jakarta last week. The zone would also be aimed at international Islamic investors wanting to tap into the huge potential of Islamic finance, products and services in the world’s fourth-most populous nation.
Adiwarman pointed out that Islamic finance and the Islamic economy as a whole had huge potential in Indonesia owing to its large population of around 250mn people of which more than 200mn are of Muslim faith.
He said that the number of Islamic banking customers, those who invest in Shariah-compliant mutual funds and equities and those who use Islamic financing to fund property purchases and other assets, as well as people buying Islamic-based insurances, already amounted to 40mn people in Indonesia.
“That is almost the combined population of Malaysia, Singapore, Brunei and the UAE,” he said, adding that the time was right to expand the Islamic economy in Indonesia, starting with a special halal economic zone in Jakarta.
Indonesia has indeed come in the focus of Islamic investors since it hosted the 12th World Islamic Economic Forum in August last year, only the second time that the country held such a forum since 2009. At the forum, the government promoted investment opportunities in the country and marketed the growing range of halal-certified products deemed competitive in the international market. Apart from Islamic finance and investment, this included Islamic fashion and design, technology and innovation, small and medium-sized enterprises and startup in the Islamic economy, as well as Muslim-friendly tourism.
However, in terms of Islamic finance, Indonesia has not only high potential, but also a lot of catching up to do. Despite being such a populous Muslim country, Islamic banking has been underrepresented in the past.
The reasons for that are manifold. Being a developing country, more than half of the population is still unbanked, and the geographical structure of the archipelago with its thousands of islands makes it not easy for banks to reach out to new clients outside the urban and industrial centres. The outreach of Islamic banks in Indonesia is also limited as their online banking and IT infrastructure is not very well developed, at least in comparison to large conventional banks.
Another reason is the low financial literacy among the population. Being a Muslim does not automatically mean that one has a good understanding of Islamic finance. Thus, to catch up, a financial literacy campaign on Shariah finance needs to be made a priority in Indonesia.
There is also still a lack of Islamic finance regulations and clear tax rules, and Islamic banking still requires comparably complicated processes which adds extra costs to Islamic finance transactions and has led to a perception that Islamic banking is more expensive than conventional banking and generally needs more paperwork.
Thus, sector experts are convinced that halal economic zones with Islamic banks can be the first step to make Islamic banking in Indonesia cheaper and more accessible to potential customers as banks could share product development, back offices and Shariah-related approval processes.
Currently, Islamic banking in Indonesia has a market share of 5.12%, which is still low but the highest share since Shariah banking was introduced in Indonesia almost a decade ago. In 2016, the sector grew by an impressive 20% in asset volume. Ali Sakti, executive director of the Islamic Economic Forum for Indonesian Development, expects that Islamic banking in Indonesia will grow by around a further 40% this year and expand from traditional banking towards Shariah-based microfinance and reach out to small and medium enterprises, one of the major backbones of Indonesia’s economy.


About Ali Teymoori

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