By Nuha Qonita
Islamic finance has grown rapidly worldwide which estimates USD 2.52 Trillion assets to USD2.88 trillion by 2019. However, due to the impact of Covid-19 crisis, the value of Islamic finance is expected to show slow growth by 2020 but its predicted to grow by 5% from 2019 onwards to reach up to USD3.69 trillion by 2024 (Global State Islamic Finance Report, 2019). The number shows its valuable growth in the future, nevertheless, it will be the main question, does Islamic finance has a role to tackle the crisis?
Indonesia faced its sharp contraction in more than two decades during the second quarter of 2020 due to pandemic. Indonesia’s economy contracted because of demand declining during the pandemic period up to -5.3% yoy in Q2 2020. It is known that covid-19 shock has affected both sectors and households. Many sectors also hit by pandemic including transportation (-30 in Q2), hotel and restaurant (-20 in Q2) and also retail trade (-5 in Q2) are the biggest sector that most affected. It is obvious to see that the affected sector is due to declining socio-economy activity in all country, and even more unemployed was getting increased into 30 million people (Ministry of Employment, 2020).
However, Indonesia has committed to mainstream Islamic economy and finance to the national contribution. It is evidenced through the executed act as well to the national agenda in accelerating Islamic Economy and Finance through each ministry and stakeholders program. First of all, it is known that Islamic finance has a huge potential, the financing product through Islamic banking may be still questionable among people since it is noticeable as no competitive price in the market, however, the development of Bank Syariah Indonesia is another prove the government commitment to optimize the role of Islamic banking for Indonesia. The common issue that has been crucial is an effective product of financing including banking and non-banking sector. To tackle the economic recovery should involve different parties, including government and non-government, whereabouts supposed to be a target to be achieved gradually to bring socio-economy back. It can be seen during the pandemic and post-pandemic period that should be a more inclusive and socially financial product, whether crowdfunding, peer to peer lending, public-private partnership or any supporting tools for sustaining the SMEs to bring them back and turn on the supply demand system. Therefore, the role of Islamic finance also should address the above aspects and answer ‘what does Islamic finance do’.
Islamic social fund, in this case, play a vital role to stimulate the consumption and production aspect for mustahik to run a supply and demand system towards continuous recovery. Beyond that, some private sectors have allocated a number of rupiah to provide medical tools, while others give direct charity to the impacted people including SMEs, and unemployed people. Islamic financing is also supposed to provide an extraordinary product to give an effective scheme for the consumer, it is complicated however since some regulatory issues should be first addressed, such as the unoptimized product that implemented to its uniqueness of Islamic finance, secondly related rules of investment product in Islamic banking makes unequal consequences between return and the risks.
Digitalization, however, may take a further and faster action to provide a reliable definition of Islamic contract which has a socio-economy impact in the long period. The opportunity is seen through financial technology and practicing Islamic contract basis, for instance musharakah/cooperative contract through a particular platform that connects between the capital owner to the business practitioners, its transparency and multiplier effect should give a significant impact for national economy recovery. The other platform also runs a unique business to support the SMEs by connecting between parties, as well many platforms that provide different models to help sustainable financing for household sectors. The financial technology may come as a first-mover to start effective financing in Indonesia, not only give a transparency system but also beyond socio-economic advantage.
The COVID-19 pandemic has also affected to food security aspect and put it high quality. Global and national food markets and supplies were irrepressible during the pandemic, and food prices were stable however many households run into food shortages due to income losses. It can be seen that the government responsibly expanded social protection programs to help households cope on an ambitious food estates development agenda. The halal industry should come into this opportunity to look at its core value of ‘halal and thayyib’ as a way of food hygiene and secure food. The above aspects are highly interrelated to realize the ecosystem of integrated Islamic economy and finance that aspire in Indonesia. It has a huge potential to championing the halal product through sustainable business in both the banking system and financing digital platform. There were 3 parties that can be categorized for digitalization aspect, first, people in the urban area that may be well literated about financial technology, second, rural area with well-educated about the digitalization including fintech, third, rural area with low education and literation about fintech, therefore, it is those target cannot be excluded in developing Islamic financial inclusion and should be well socialized.
The dynamic circumstances may create unprecedented change, but the Islamic economy and finance should go faster to realize its uniqueness and establish a multiplier effect for rapid economic recovery. This is not only to realize its potential of Islamic Economy in Muslim majority country such Indonesia, but beyond that is to contribute the national development. Thus, Islamic economy and finance will be valued as substance over the form in the socio-economy aspect. In line with that, the Indonesian economy is expected to start rebounding in 2021 and to gradually strengthen in 2022 (Indonesia Economic Prospects, 2020), the supporting factors should take a place, the real action should be executed including the Islamic economy and financial industry.
About the Author
Nuha Qonita, is a senior analyst in National Committee of Islamic Economy and Finance Indonesia. She earned Master Degree in Islamic Finance at Durham University Business School, UK. Her research interests are Islamic Finance, Socio-economic Development, Financial Inclusion, Islamic Digital Finance and Community Based Financing Development.
