The two largest Muslim countries in the world, Kazakhstan (largest in area) and Indonesia (largest as per Muslim population) agreed, among other things, on a close cooperation in Islamic finance and the halal industry, media representatives were told after the First Bilateral Consultation Meeting between the two countries held in Jakarta on June 16. According to Kazakhstan’s Deputy Foreign Affairs Minister Akylbek Kamaldinov, his country would be eager to learn from Indonesia about regulations and financial frameworks for Islamic finance, as well as about halal products, particularly in the pharmaceutical sector.
“Kazakhstan has a vision to become the centre of Islamic finance and halal industry in Central Asia,” he told Indonesia’s state news agency Antara News, adding that the Kazakh government had also invited Indonesian business players to cooperate in developing the halal pharmaceutical industry in the country.
The move comes just shortly after the Indonesian government through its financial services authority Otoritas Jasa Keuangan (OJK) on June 13 launched a road map for the development of Islamic finance in the country for the 2017-2019 period. It is another step towards the development of Islamic finance in the Muslim nation which so far has been a laggard in developing a solid Shariah banking industry which just reached a five-per cent market share despite having been introduced more than two decades ago and despite various regulatory efforts and grassroots initiatives, mostly in form of Islamic financing cooperatives.
The new road map is designed to tackle various challenges related to Indonesia’s underdeveloped Shariah financial industry, which include limited variation of products, low literacy on Shariah finance products or simply the lack of outreach in an archipelago that consists of more than 7,000 islands.
“We will also address the shortage in human resources, optimise coordination with stakeholders and harmonise financial services policies,” OJK chairman Muliaman Hadad told journalists in Jakarta last week.
Plans are to synchronise the development of the Islamic finance industry in Indonesia to develop a master plan for all sectors, including Shariah banking, Shariah capital markets and the Shariah non-banking industry, including investment services and takaful, Hadad said. This should make Indonesia’s Shariah finance industry more inclusive and able to meet the needs of both small and medium-scale to large-scale financing, as well as to compete with conventional financial services, he added.
In turn, Kazakhstan could benefit from getting inputs from such a master plan towards a more inclusive Islamic finance industry. The former Soviet republic as early as in 2009 passed its first laws for Islamic banking, becoming the first country in the Commonwealth of Independent States to do so. However, the development of the Shariah finance industry remained in its infancy, which has mainly to do with obstacles such as the 2009 regulation not permitting the conversion of conventional banks into Islamic ones, nor allowing conventional banks to offer Islamic banking products through Islamic windows.
This has been amended only in 2015 as a result of the Kazakh government’s commitment to creating a supportive ecosystem for Islamic finance in the country, driven by its aim to establish the new Astana International Financial Center as a regional Islamic finance hub along the New Silk Road.
Analysts say a cooperation between Kazakhstan and Indonesia could be highly beneficial for both countries in their quests to utilise Islamic finance to diversify their natural resources-centred economies by attracting more foreign investments into non-oil sectors. Islamic finance is also seen as a key enabler to finance much-needed and important transport, energy, technology and communication infrastructure in either nation.
Structurally, both countries have similar problems in reaching out to potential customers, thus it would require similar techniques that could be jointly developed. Challenges include a large percentage of “unbanked” people among the population, as well as a lack of understanding and awareness of how Islamic finance works, what products or investment options are available and what ethical implications Islamic finance has. These problems could be met with regular Islamic finance education and promotion programmes in order to tap the large number of potential Islamic finance retail consumers for both banking and insurance services.
Another boost could be the development of new banking channels for those living in rural areas, for example mobile banking applications and smart money services including microfinance applications for which there is a huge potential and which could be an inspiration for financial technology start-ups in both Indonesia and Kazakhstan.
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