One of the puzzles of Islamic finance is how Indonesia, the world’s most populous Muslim nation, has been so utterly left behind in its development. Nearby Malaysia has evolved the most sophisticated regulatory environment for Islamic finance anywhere in the world and, after building an admirable domestic base, has now opened its doors to foreign entrants. Several Gulf states, notably Bahrain, have built centres of excellence around Shariah-compliant finance; and even less-developed nations such as Pakistan are making up for a slow start and witnessing a boom in this growing area.
So where is Indonesia? According to Bank Indonesia, the country’s Islamic banks have assets of Rp42 trillion ($4.5 billion), which is barely 2% of the industry. Its Islamic fund management industry is small, few companies bother launching Shariah-compliant debt, and its legal code for Shariah-compliant securities is patchy.
One reason commonly cited for the lack of progress is being redressed with some fanfare. Indonesia, unlike many other Muslim countries, had never issued a sovereign sukuk (the Islamic equivalent of a bond). Where others, notably Malaysia, have done so, these sukuks have served not only as benchmarks for the development of a corporate sector but have also presented the world with a clear signal of intent.
