DECENTRALISING GROWTH, EMPOWERING FUTURE BUSINESS by The Worldfolio

A SPECIAL PUBLICATION PRODUCED IN CONJUNCTION WITH THE 12TH ISLAMIC ECONOMIC FORUM, JAKARTA, INDONESIA

AUGUST 2-4, 2016

DECENTRALISING GROWTH,

EMPOWERING FUTURE BUSINESS

INDONESIA, THE WORLD’S MOST POPULOUS MAJORITY MUSLIM COUNTRY HOSTS THE PREMIER INTERNATIONAL BUSINESS DIALOGUE ON KEY ECONOMIC ISSUES AFFECTING THE GLOBAL MUSLIM COMMUNITY IN 2016 AN INSIGHT INTO THE ISLAMIC WORLD’S CONTRIBUTIONS TO THE GLOBAL ECONOMY:

FINANCE I TRADE I INVESTMENT I INTERNATIONAL COOPERATION

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Bandung

home of Indonesia’s creative minds www.bandung.go.id

With over 160 awards in the past three years Bandung is now Indonesia’s most internationally recognised city. Bandung’s commitment to creating a worldclass smart city by incorporating technology and innovation into governance has led to the unprecedented ease of doing business. The new dedicated area for ICT companies, Bandung Technopolis, has already seen large foreign investors taking advantage of Bandung’s young, well educated talent pool. As the capital of creative economy, Bandung is the new hub for international business in Indonesia.

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With the collapse of commodity prices, the slowdown in China and Russia, a post-Brexit Europe in crisis and diminishing investment in emerging economies, the 12th WIEF offers a crucial platform for leaders and delegates from the world’s Muslim nations to come together and form a collective response to the grave challenges the global economy faces as a result of the uncertain political and economic backdrop. Discussions at the 12th WIEF, themed “Decentralizing Growth, Empowering Future Business”, will focus on ways to end the inequality caused by the global domination of multinational corporations, and to strengthen the role of SMEs to elevate inclusive economic growth around the globe. Particular attention will be put on improving SMEs’ access to credit, such as through Islamic (sharia-compliant) financial instruments and crowdfunding, and exploring new opportunities for global and digitized trade. The concept of the Islamic economy has increasingly gained global traction in the past few years. It continues to grow while adhering to the underlying principles of fairness and equality. The 12th WIEF will continue to promote the ethical and equitable Islamic economic model, as it convenes world leaders, government representatives, economists, academia, and the business community to address pressing global economic and social issues.

Hosted by:

Organized by:

Government of Indonesia

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STAFF

ÁLVARO LLARYORA Chairman, The Worldfolio

JONATHAN MEANEY Chief Editor, The Worldfolio

KRISTIN KJELLGARD Head of Journalism Dept., The Worldfolio Art Direction & Graphic Design:

EDUARDO BERTONE, IGNACIO PLASENCIA Contributing writers:

BENJAMIN JONES, AYLIN PARLA, MARKO RANKOVIC, RETNO MARUTI (SENIOR ECONOMIST , INDONESIAN MINISTRY OF FINANCE), TUN MUSA HITAM, (CHAIRMAN, WORLD ISLAMIC ECONOMIC FORUM FOUNDATION) Indonesia Country Directors:

GEOFFREY FLUGGE, MIRIAM LLORCA CASTRO Regional Directors:

LEANDRO CABANILLAS, FATIMA RUIZ MORENO Special Thanks To:

THE INDONESIAN MINISTRY OF FINANCE AND INDONESIA

INVESTMENTS

TABLE OF CONTENTS

05 Value of the global Islamic economy to surge to $5.8 trillion over next four years

20 Islamic banking in indonesia: ample room for growth

32 Crowdfunding: the lifeline of small businesses

11 Indonesian government enacts progressive pro-business reforms

14 An interview with Dr. Bambang Permadi Soemantri Brodjonegoro Indonesian Minister of Finance

47 Indonesia’s “Family friendly” Halal tourism boom

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VALUE OF GLOBAL ISLAMIC ECONOMY TO SURGE TO

$5.8 TRILLION

OVER NEXT FOUR YEARS urgeoning uslim o ulation, ne finance methods o eying the rece ts of Islamic elief, a ra idly gro ing uslim middle class ith increasing s ending o er and ne avenues of trade among uslim ma ority nations are fueling the glo al Islamic economy, and governments and the rivate sector are taking notice Consider the numbers: By the year 2050, the number of Muslims is expected to reach 2.8 billion, or double the average global population growth, and will account for nearly a third of the world’s total inhabitants. Logically, this population boom will fuel the already expanding Islamic economy which experts predict will surge in value to a staggering $5.8 trillion over the next four years. Indeed, the almost 60 Muslimmajority nations from Indonesia in the east to Morocco in the west, account for more than trillion in GDP, a figure that will certainly increase as the region includes some of the world’s fastest-growing economies, many governments of which are using their vast oil revenues to overhaul their own econo-

mies and establish investment-hungry sovereign wealth funds. And at the same time, prospering Muslim minorities in Western nations and Asian non-Muslim majority countries are fast becoming major economic players in the domestic markets of the United States, the European Union, China, India, Russia and many others. Islamic finance, a concept largely unknown in the West just a few decades ago, is the root of the Islamic economy and fast becoming one of the leading global financial sectors. Defined by the International Monetary und as the provision of financial services in accordance with Sharia Islamic law, principles and rules,” Islamic finance rejects common practices in estern finance such as interest,

risky investments or activities considered harmful to the public good. “Instead,” the lending agency says, “the parties must share the risks and rewards of a business transaction and the transaction should have a real economic purpose without undue speculation, and not involve exploitation of either party.” Lofty standards perhaps, but proving to be practical and profitable as the sector is going from strength to strength and growing around 10 percent annually. Two years ago the Islamic finance market was worth 1.8 billion and should almost double that to $3.2 billion by 2020. Currently, these assets are concentrated mainly in the Gulf Cooperation Council economies, along with Malay-

Halal Food: a or , a anese, iss, anish, rench and e ican food multinationals are targeting this orld ide market ith halal food and everage offerings ranging from reakfast cereal and chocolate ars to fast food urgers and gourmet coffee

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THE GLOBAL ISLAMIC ECONOMY

1.6 BILLION Global Muslim population (2010)

2.8 BILLION

Projected global Muslim population (2050)

$3.6 TRILLION

Value of global Islamic economic sector (2014)

$5.8 TRILLION

Projected value of global Islamic economic sector (2020)

GLOBAL ISLAMIC FINANCE

$1.35 TRILLION

Value of global Islamic banking assets (2014)

$2.6 TRILLION BY 2020 Projected value of global Islamic banking assets (2020)

12%

Average annual growth of Islamic banking assets

Average annual growth of Sukuk bonds

GROWTH OF GLOBAL ISLAMIC FOOD AND LIFESTYLE SEGMENTS BY 2020

45% Halal food

65% Islamic travel

42% Islamic fashion

34%

Islamic culture and recreation

Source: World Islamic Economic Forum

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sia and Iran, and as they account for less than 1 percent of global finance assets, economists note that growth over the coming years is practically unlimited. Also by 2020, Islamic banking assets are forecast to reach $2.6 trillion as haria-compliant financing will continue to increase market share in emerging markets like Turkey, Indonesia, Malaysia, the United Arab Emirates, Saudi Arabia and Qatar. In a recent report, the IMF noted that Islamic banking had outperformed conventional banking over the previous decade, boosting its penetration rate to an unprecedented 15 percent in ten countries in Africa and the Middle East. But challenges remain and sector analysts say one of the biggest is for Islamic banks to join the digital banking revolution as more and more clients, both corporate and private citizens, prefer to do their banking online whether making deposits, purchasing insurance and other products or transferring funds. Along with banking, Islamic finance encompasses investment funds, insurance, securities (or sukuk), leasing and micro finance, with banking and se-

curities representing an estimated 95 percent of total Islamic finance assets. But the Islamic economy extends well beyond finance and the financial services sector and other industries involving Muslim-majority economies or adhering to Muslim principles are also contributing to the big picture.

An Ancient Tradition Since the days of the Silk Road which had its origins thousands of years ago with merchants crisscrossing Eurasia from the Mediterranean to China and beyond in the first stage of globali ation, trade has helped fuel Muslim economies. These days commercial ties between the 57 member states of the Organization of Islamic Cooperation (OIC) are estimated to represent 20 percent of the total trade of these countries. And as their economies continue to register regular growth, trade by these nations with all countries, Muslim and non-Muslim alike, will naturally increase as performance figures indicate. In one recent year, total merchandise exports rose to the record amount

of $2.2 trillion, well above the pre-crisis high of $1.9 trillion in 2008 and higher than the world average. eflecting the same trend, intra-OIC trade is consistently increasing while exported goods from these countries are becoming more diverse as oil-producing members diversify their economies. According to the Islamic Center for Development of Trade, an OIC subsidiary based in Casablanca, Morocco in charge of promoting commercial ties and fostering investment, this trade should increase over the coming years by around 7 percent. But the Center points out that trade could really take off if certain obstacles such as transportation problems, logistic constraints and tariff barriers could be removed and financing issues are resolved. One organization working to solve those issues is the Islamic Trade Finance Corporation (ITFC) that facilitates both private and public resources to encourage economic development through trade. â&#x20AC;&#x153;The corporation helps entities in member countries gain better access to trade finance and provides them

Fashion: on uslim international layers in the retail fashion industry such as ango, ommy ilfiger and are roducing hat is called modest fashion ith the uslim oman in mind

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with the necessary trade-related capacity building tools in order to help them compete successfully in the global market,â&#x20AC;? the ITFCâ&#x20AC;&#x2122;s mission statement says. As an example of its activities, the organization recently engineered an agreement to finance imports of crude oil, refined petroleum products and agricultural products to Mali, from which the ITFC will also fund exports from of farm commodities.

Growing Demand On a much more personal level, the Islamic economy also incorporates such consumer sectors as lifestyle, food, leisure, fashion and travel with Muslim and non-Muslim companies working hard to satisfy the growing demand. While there has always been a market for Sharia-compliant products in Muslim-majority markets, the rise in Muslim populations in countries outside of Asia, the Middle East and Africa is having a major effect. Globally, the Islamic food and lifestyle sector is expected to reach $2.6 trillion by 2020, up from $1.6 trillion in 2014. Halal food products do not

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contain pork, alcohol or other prohibited ingredients and must be produced, processed and stored using equipment, utensils and facilities cleaned according to Islamic laws. These products were worth $1.1 trillion two years ago (or almost 17 percent of global expenditure) and should grow to $1.6 trillion in the next four years â&#x20AC;&#x201C; a 45 percent increase. With this expansion in mind, many companies in non-Muslim majority countries are getting into the game. Australia, for example, is the thirdbiggest producer in the world of halal food mainly due to its huge volume of meat exports to Muslim countries and its sterling reputation for strict adherence to halal practices in processing, handling and shipping. Major U.S., Japanese, Swiss, Spanish, French and Mexican food multinationals are targeting this worldwide market with halal food and beverage offerings ranging from breakfast cereal and chocolate bars to fast-food burgers and gourmet coffee. But with so many producers, a major problem confronting the interna-

tional halal food sector is global standardization as government-designated production and process methods can vary from country to country whether Muslim-majority or not. Sector analysts explain that issues include whether certifiers continually monitor production practices or only carry out spot checks. And there is increasing concern over fraud, with experts citing cases in which food products were falsely labeled as Sharia-compliant when they actually contained pork or were processed in unsanitary conditions. Availability of halal food and beverages away from home is an issue facing Muslim travelers who are increasing as incomes rise and international travel becomes much easier, sector experts say. In 2014, the Islamic travel industry was worth $142 billion, or 11 percent of global expenditure, and is predicted to rise to by 65% to $233 billion. One study pointed out that if Muslim travel source market was considered a country, it would be the third-largest tourism source market after China and the United States. In recent years, the

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leading Muslim-majority source markets were Saudi Arabia, Iran, the United Arab Emirates, Indonesia and Kuwait. Sector analysts say that international travel by wealthy Muslims is nothing new and that rich Arabs with their entourages have been a common sight in luxury hotels on the Cote d’Azur, in London and other Western cities for many years. But a new generation of Muslim travelers, many second or third generation immigrants to the West, are eschewing their parents’ annual visits back to their homelands like Pakistan or Turkey and choosing instead to see the rest of the world. According to Dinar Standard, a research, advisory and business media consultancy based in New York which studies Muslim consumers, top nonMuslim source markets in recent years were Germany, Russia, France and the United Kingdom. And although they may live in the West, they still want a Muslim-friendly travel environment and so are looking for hotels, restaurants and travel services which respect their wishes.

As evidence that these tourists are being heard, more and more hotels are offering halal selections in their restaurants, providing information on local mosques and prayer times and scheduling gender-segregated sessions for swimming pools and other onsite sports facilities. But this raises a dilemma for some destination operators who wish to attract Muslim clients without alienating non-Muslim guests. One solution, practiced by the Indonesian resort island of Lombok which is known as the “island of 1,000 mosques” and so attracts many Muslim travelers, is to have designated Muslim areas where revealing swimsuits are prohibited and family activities are promoted. As the island is also famed for its breathtaking beaches and other tropical attractions it also lures many Western visitors so separate “Western” areas have been set up where rules about clothing and alcohol are more lax.

A Move to Modesty Modesty is the driving consideration in the growing Islamic fashion sector as the number of Muslim women who

can afford chic and practical clothing adhering to their religious tenets increases. Worth $230 billion in 2014, or 11 percent of global expenditure, the Islamic clothing industry is forecast to rise to $327 billion by 2020 – a 42 percent increase. And, as with the food and travel sectors, non-Muslim international players in the retail fashion industry such as Mango, Tommy Hilfiger and D are producing what is called “modest fashion” with the Muslim woman in mind. At the same time, the business of Muslim fashion designers is growing by leaps and bounds and online retailers specialized in the sector like Hijup and Aab are not only making it easier for women to shop for the clothes they want which combine traditional and trendy elements, the companies are also contributing to the Islamic digital economy. Among Muslim-majority nations, Turkey ranks highest in expenditure on clothing at $25 billion, followed by the United Arab Emirates, Nigeria, Saudi Arabia and Indonesia. The U.A.E.’s high ranking is especially noteworthy as it has a very small population compared to those of the other markets. Muslims in Western European countries – Germany, France, the United Kingdom and Italy – plus the United States lead the non-Islamic world in clothing and footwear purchases to the tune of $22 billion, with the United States alone accounting for almost $7 billion of the total. It is evident that the Islamic economy is in robust health and as the number of Muslims around the world increases and as Muslims themselves continue to prosper, join their countries’ middle classes and enjoy rising disposable incomes, the sector will continue to flourish creating clear opportunities for both Muslim and nonMuslim businesses and investors.

Tourism: In , the Islamic travel industry as orth illion, or ercent of glo al e enditure, and is redicted to rise y to illion y

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‘BUILDING INFRASTRUCTURE WILL HAVE A HUGE POSITIVE IMPACT ON OUR ECONOMIC GROWTH’ The position of Chief of Presidential Staff was recently created by President Joko Widodo (Jokowi) and Mr. Teten Masduki is the second to take on the role. He sits down with The Worldfolio to talk about his new role, infrastructure investment and Indonesia’s improving business climate We need to make sure that the President’s priority programs are implemented. We have monitoring and evaluation programs for all of the ministries. We report to the President if we have found any problems in the implementation. o, this office is also taking part in the revision of certain programs, which means the job is not easy. Sometimes we have to take over certain functions of subordinate entities to ensure that implementation runs smoothly. I think the main problem of our government has previously been lack of coordination between different organizations, which is part of the reason the anti-corruption agenda and bureaucratic reform is so important. We want to make sure that our bureaucracy is efficient, transparent and we want Indonesia to be attractive for investors.

How is Indonesia progressing in terms of its ease of doing business ranking? Teten Masduki with President Joko Widodo

After more than six months as Chief of Staff what would you say are the Jokowi administration’s top priorities at the moment? President Jokowi is now focusing on economic development. The three major priorities are infrastructure, deregulation and human resources development, we hope investment will increase, SMEs will be developed and our economy will grow.

ndonesia aces significant challenges in in rastructure de elo ent ut the enefits eyond connecti ity are well nown with heightened s ending on in rastructure li ely to ha e a ositi e a ect in terms of economic growth. Our target economic growth when President Jokowi came to power was 7 percent, but now, after the global slow down, we have revised that figure to between 5 and percent. Infrastructure spending will be focused on a number of key areas, including power generation through the 35,000-megawatt program, but also toll roads, railways, harbors and ports. Connectivity created by infrastructure we build is very important to minimize the cost of logistics. Currently we have some issues regarding the cost of logistics, for example the distribution of the logistics from west to east leaves a large gap. This has led to uneven economic growth between the western and eastern islands of Indonesia. The high cost of logistics also makes us less competitive. So, building infrastructure will have a huge positive impact on our economic growth.

The position of Chief of Staff is a recent one in Indonesia. What is your main role? e are not an implementation agency we are the back office of the President. We have to make sure that the ministries will implement all of the President’s agenda and promises. We interact with planning and budgeting on the ministerial level. Our core function is to influence the policy of the government based on the President’s priority and vision.

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Indonesia’s ease of doing business is now ranked 10 and the President has instructed all of the ministries to work together to achieve a ranking of 40. e are working together with the Coordinating Ministry of Economic Affairs to achieve this target and I am also the chairman of the working group for deregulation, which will accelerate this process. e have announced 12 economic policy packages thus far and we are still evaluating whether or not all the 12 packages will have a large impact on our economic growth target. If it is only a small impact, we will need to change it. We have to look at what the investors need in terms of incentives.

ow is the go ern ent consulting and wor ing with the ri ate sector? We have communicated with the private sector and consulted with them about what steps the government should take, and which policy should be reformed to improve the ease of doing business. They are very interested in the development of our infrastructure, especially in power generation I think we have the biggest project in the world in power generation now 35,000 megawatts.

ndonesia has re iously had uite a low rofile on the international scene. What is your current focus in communicating internationally? Our focus now is to communicate our priorities to the target groups such as investors and the private sector. That’s why we are focused on deregulation, to make the investment climate better. What we do know is that the President has made a number of high profile international trips and he is always very clear that Indonesia is open for business and investment friendly. e are inviting investors to actually come and join us, to work with us. Indonesia’s growth is actually one of the highest in the region, even though for us it is still low. urthermore, Indonesia has a reputation as a leader in democratization and pluralism. We are a moderate Muslim country and we are tolerant because we are aware that Indonesia is very diverse.

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INDONESIAN GOVERNMENT ENACTS

PROGRESSIVE PRO-BUSINESS REFORMS President Joko Widodo’s administration has taken concrete steps towards increasing the ease of doing business, attracting foreign investment and encouraging trade. These measures, implemented by the Jokowi administration over the last 12 months have come in response to global shifts working to the detriment of Indonesia’s economy These have been especially pronounced in 2016, with commodity prices remaining low, and reduced demand from China maintaining the trend for the foreseeable future. Indonesia’s economy has been long reliant on natural resource exports, such as coal palm oil and rubber. As a result, growth for the first half of the year has hovered just under 5 percent. Although Q1 growth for this year is higher than that of 2015, buoyed by increased government investment, it is not enough to meet the job creation needs of the country’s growing population. To face these issues, President Joko Widodo (Jokowi) has applied the same hands-on approach that made him successful as a self-made businessman and then mayor of Surakarta and Governor of Jakarta. During this time he became famous for pro-actively engaging the population and addressing issues such as flooding, education, infrastructure and corruption. ot someone to shy away from difficult problems, okowi has tackled the country’s economic woes most notably through a hardware and software approach: building infrastructure and applying deregulation. A dozen economic stimulus packages have been implemented over the last year to this end. These have mainly been focused on reducing and removing bureaucratic red tape, increasing tax incentives for commerce and a number of other initiatives improving the overall ease of doing business (A full table detailing these measures can be found on page 13).

However, public spending on infrastructure has been the shot in the arm that is boosting growth. Altogether, approximately $22 billion has been allocated to infrastructure development. This amount represents the largest infrastructure budget allocation in history of the country. A small portion of the $22 billion has been allocated to irrigation development but the lion’s share is focused on transport linkages including roads, railways, airports and maritime ports. As an archipelago nation of over 17,000 islands, the latter is particularly important for overall connectivity.

President Joko Widodo (Jokowi) has applied the same hands on approach that made him successful as a self-made businessman and then mayor of Surakarta and Governor of Jakarta. During this time he became famous for proactively engaging the population and addressing issues such as flooding, education, infrastructure and corruption

Photo Credit: Pemerintah Provinsi DKI Jakarta (Provincial Government of Jakarta)

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“The deregulation program, the second of our priorities, is very important. It is to make sure that our ureaucracy is efficient and more transparent. We want Indonesia to e attractive for investors o e fight corruption and take out more procedural bureaucracies” Teten Masduki, President’s Chief of Staff

“As one example (of the economic stimulus packages) we were able to cut the dwelling time in Tanjung Priok (Indonesia’s largest port in Jakarta) from seven days to three days. This is important, because it reduces the cost of logistics. Of course the effect is more medium term rather than immediate, as it is impossible to change these things over night. We need to be patient and persistent, but I would say that investors are already seeing significant benefits, explains Dr. i al amli, Indonesia’s Coordinating Minister of Maritime Affairs who is also a trained economist. The 13th economic stimulus measure, pending final approval, is The One Million Houses Program. This five-year initiative is aimed at providing housing to the country’s low-income segment. Government agencies, as well as the state budget will provide the necessary funds for this ambitious project. Over the long term, Indonesia’s moves towards deregulation are perhaps of greater interest to the domestic and foreign business community. Suharto’s 30-year reign saw a culture of corruption, collusion and nepotism (KKN) become ingrained in government agencies. Subsequent presidents have worked to reduce this corporate culture, but none with as much vigor as Jokowi. In fact the Presidents’ chief of staff, Teten Masduki spent his career as an activist heading various human rights and anti-corruption organizations. His knowledge of the debilitating effect of graft and state mismanagement, which saw billions plundered from the republic as well as grave injustice perpetrated, has clearly influenced presidential priorities. Beyond being a moral and rule of law issue, the economic implications of this reform are far-reaching, as Mr. Masduki explains, “The deregulation program, the second of our priorities, is very important. It is to make sure that our bureaucracy is efficient and more transparent. We want Indonesia to be attractive for investors. o we fight corruption and take out more procedural bureaucracies. The effect this plethora of reforms will have on small and medium enterprise ( M ) growth, as well as big business is significant. ess red tape and opportunity for corruption as well as reduced taxation on a range of sectors has seen the potential for bribe elicitation from government agencies diminish. urthermore, the implementation of soft loans for M s, and reduced energy tariffs for labor-intensive industries (a typical characteristic of Indonesian M s) has boosted the competitiveness of the sector. Protection measures for M s have also been implemented.

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treet vendors, the ubiquitous Indonesian M have also benefited from reforms. ree leasehold certificates have been issued in 34 zones in an effort to boost economic activity. Considering President Jokowi himself was a self-starter businessman before entering politics, such an M focus is hardly surprising. Of course, despite being the world’s fourth most populous nation, Indonesia cannot function without extensive foreign investment and trade. Traditionally nationalist elements in politics have limited foreign ownership and excluded areas of the economy from foreign investment. This has also been amended by the Jokowi Administration, which has revised the negative investments list – expanding the sectors available to foreign business interests. Facilitating foreign trade has also been a focus for the government, which plans to complete negotiations on the Indonesia- uropean nion Comprehensive conomic Partnership Agreement (I -C PA) by 201 , and announced its intention to join the Trans-Pacific Partnership. ith the cabinet reshuffle in 2015, there was again some cautious optimism and we got the news that there were going to be reforms and economic policy packages, which were well received by the business community. The message from the Jokowi team was very positive and from a trade perspective, perhaps the most important announcement was that Indonesia would consider joining TPP. We think both that announcement and the reform packages have really set the right tone from the top and it seems Indonesia really recognizes that foreign investment can be good for the country, says rian Arnold, President of the American Chamber of Commerce in Indonesia. The economic stimulus packages have also opened the world’s most populous Muslim country to Islamic finance opportunities. The importance of sukuk loans as a means of financing M s cannot be understated. Islamic microfinance has played a huge role in boosting fledgling businesses in economies analogous to Indonesia. It is hoped that this will soon become a widely adopted and effective boost to grass roots commerce across the archipelago.

“The most important announcement was that Indonesia would consider joining TPP. We think both that announcement and the reform packages have really set the right tone from the top and it seems Indonesia really recognizes that foreign investment can be good for the country” Brian Arnold, President, American Chamber of Commerce in Indonesia.

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ECONOMIC STIMULUS PACKAGES OF THE INDONESIAN GOVERNMENT: PACKAGE

UNVEILED

MAIN POINTS

1st

9 SEPTEMBER 2015

oost industrial co etiti eness through deregulation urtail red ta e nhance law en orce ent usiness certainty

2nd

30 SEPTEMBER 2015

nterest rate ta cuts or e orters eed u in est ent licensing or in est ent in industrial estates ela ation i ort ta es on ca ital goods in industrial estates a iation

7 OCTOBER 2015

ut energy tari s or la or intensi e industries

15 OCTOBER 2015

i ed or ula to deter ine increases in la or wages o t icro loans or s all ediu e ort oriented la or intensi e usinesses

22 OCTOBER 2015

a incenti e or asset re aluation cra dou le ta ation on real estate in est ent trusts eregulation in sla ic an ing

5 NOVEMBER 2015

a incenti es or in est ent in s ecial econo ic ones

4 DECEMBER 2015

21 DECEMBER 2015

27 JANUARY 2016

ingle illing syste or ort ser ices conducted y s ntegrate ational ingle indow syste with ina ortnet syste andatory use o ndonesian ru iah or ay ents related to trans ortation acti ities e o e rice di erence etween ri ate co ercial and state ostal ser ices

11 FEBRUARY 2016

e o ing oreign ownershi ca on usinesses rotecting s all ediu enter rises as well as coo erati es

29 MARCH 2016

ower ta rate on ro erty ac uired y local real estate in est ent trusts ar oni ation o custo s chec s at orts to curtail dwell ti e o ern ent su sidi es loans or e ort oriented s all ediu enter rises oad a or the har aceutical industry

28 APRIL 2016

nhancing the ease o doing usiness in ndonesia y cutting rocedures er its and costs

ai e inco e ta or wor ers in the nation s la or intensi e industries ree leasehold certificates or street endors o erating in state owned designated areas cra inco e ta or categories o air lane s are arts ncenti es or the de elo ent o oil refineries y the ri ate sector ne a olicy to har oni e the utili ation o land

Source: Indonesia Investments

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‘ENDLESS INVESTMENT OPPORTUNITY:

THAT IS WHAT WE OFFER’ The Worldfolio sits down with Indonesia’s Minister of Finance Dr. Bambang Permadi Soemantri Brodjonegoro to discuss the recent tax amnesty legislation, current economic prospects for Indonesia after the announcement of 12 economic policy packages, as well as Indonesia’s role in hosting the 12th World Islamic Economic Forum in Jakarta

Recently there have been a number of key victories for the government with the approval of a new budget, as well as the tax amnesty law. What impact do you anticipate this will have on Indonesia’s economic outlook for 2016? Basically we are still pushing through this global economic slowdown, as well as a domestic economic slowdown. It is challenging to find new sources of growth, especially after the collapse of the commodity price, as well as weakening global demand. On top of this, we have had increased market volatility as a result of rexit. ithin this weak and uncertain position globally, Indonesia needs to find alternative growth and of course, there are sectors like manufacturing that we can capitalize on to create higher growth. e also have huge potential in the tourism and maritime industry; however these industries will need some time to properly develop. In the meantime, we need capital inflow yesterday, not even today. To get capital inflow is far from easy because the traditional investors to Indonesia in mining and oil and gas have their own problems to deal with after the end to the commodities boom. This means that capital inflow will be limited in the economy, for example in the financial sector, with the end of the . . (quantative easing) program, it is clear that there is no longer a global stimulus. This has resulted in a trend of liquidity leaving emerging markets and returning to advanced markets. However, there are many individuals and companies in Indonesia that have vast fortunes in assets and banks abroad, even though the income or revenue was from Indonesia. This has resulted in limited liquidity domestically, and if we want higher growth we need that capital back in the economy. From our point of view, to bring back the In-

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donesian money from overseas, we cannot force them to bring the money back, because of legal limitations in Indonesia. e need to persuade them, which means giving an incentive, which in our case is the tax amnesty. ith the tax amnesty, companies and individuals will repatriate or bring capital back to Indonesia, or declare the unrecorded asset to the Indonesian tax authority. I think the tax amnesty will have impact on the budget both in the short and the long term, because the amnesty is limited to the end of this year, so in the short term the tax amnesty fee will help any budget revenue short fall that we might have seen this year.

The Government has gone beyond the tax amnesty in terms of new legislation, with the announcement of 12 economic policy packages that will be improving the ease of doing business. However, after the ratings upgrade disappointment from S&P, Indonesia still seems to be lacking recognition of this positive change on the international stage. How will the 12 economic policy packages impact the business environment in Indonesia? egarding the decision by P, it is clear they are way behind the curve. hen they made the decision to announce that our position had not changed, we were just getting ready to issue our uro ond. However, it is clear that investors no longer really care about P when it comes to Indonesia, because our uro ond was still investment grade and the yield is also investment grade. As a result it was oversubscribed by four times and in the end we were able to upsi e it from 2 billion euros last year to 3 billion euros this year. It is clear that the latest rating decision does not affect our economy at all. ith regards to the packages, we are trying to show the external world that

Indonesia is serious about taking care of investors and the business environment. e are serious about any complaints from the private sector and we want to ensure that our reforms improve the ease of doing business both internally and externally. Of course we cannot expect the investment to be coming in the same day that we make the reform announcement, these things take time. It takes time to convince people that Indonesia has changed. e need to do more than just talk about it there needs to be proof. This government is trying to finish unfinished business because there are many projects that have been stopped for quite some time, and now we have reactivated these projects and we are completing these projects.

What would you like to see Indonesia take away from the WIEF? The I has been hosted all over the world, including once in London. I think I is really about how we can take the opportunities the Muslim world offers from both the financial and non-financial sector. e need to broaden our relationship with other Muslim countries. If you look at the export destinations of Indonesia, apart from Malaysia, there are no Muslim countries in the top 10. This is despite Indonesia having the largest Muslim population in the world.

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Bank Indonesia’s twin towers in central Jakarta

e have not taken advantage of that position and we do not have close ties to other Muslim countries and especially the Middle ast. e are also not very aggressive in the Islamic related market. ith I it is time for Indonesia to show our identity in the community of Muslim countries, and secondly we need to capitalize on the potential of the Islamic economy. This was my thinking in hosting the I in Indonesia, and originally we wanted to host it back to back with the Islamic Development Bank annual meeting in May. The idea behind both events is trying to promote Indonesia to the Muslim community, sending a message that Indonesia is a reliable economy with a lot of potential. eyond this, Indonesia is even now in a position to invest in other countries, so it is not just about DI (foreign direct investment). e are honored to be hosting the I this year it is expanding every year and it will eventually be competing for a position not so different from the orld conomic orum in Davos.

Part of this year’s theme for the WIEF is about e owering s ow can sla ic finance improve inclusiveness in the economy?

14-15 Min of Finance.indd 15

In trying to develop our Islamic economy our preference is to speciali e in Islamic finance that is more inclusive. e want to focus on things like Islamic microfinance. This is where we really could excel internationally; we could become an example for the rest of the world.

sla ic finance also resents o ortunities in things li e in rastructure financing through sukuk. Is that something that Indonesia is taking advantage of? Our sukuk now has already been upgraded into a sukuk project, meaning that there is a special sukuk which has been issued by the government specifically for project financing, toll roads, airports, transmission, etc. The idea is to have Islamic finance really push itself and meet the market and we will try and support that from the government side in terms of development.

Where do you see the greatest opportunities for development of halal or “Muslimfriendly” industries? I think in Indonesia, there are great opportunities in halal tourism, or as we prefer to call it, Muslim-friendly tourism. I think fostering this Muslimfriendly tourism should be a number

one priority. As I mentioned before, our relationship has not been strong enough with other Muslim countries and this needs to change. e are making these changes, and if we take ombok as an example, they are going to make a resort area like the one in ali the only difference will be that the area will be designated as a Muslimfriendly tourism one. o the hotels will not sell liquor and the cuisine will be halal. e are way below our potential, and we will really be looking to boost this side of things. Beyond tourism, I think Muslim fashion is a sector that will be increasingly important. There is already a really huge market for it and it will be the focus of one of our sessions here at the I . e hope that business people will see what Indonesia has to offer for them and take these opportunities.

How would you describe Indonesia’s brand to investors? Any company or investor will do well here and to describe our brand in a few words, I would say, ‘endless investment opportunity’. That is what we offer.

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The Worldfolio WIEF

Indonesia and ASEAN:

A growing region

The ASEAN Economy: Asiaâ&#x20AC;&#x2122;s emerging global engine of growth

Indonesia: Room to grow

625 million

255 million

Total population of ASEAN

Estimated population (2015)

7th

Largest combined global economy

Median age of the population

$2.6 trillion

$888.5 billion

Combined GDP of ASEAN (2015)

GDP (2014)

4th

16th

Largest economy in the world by 2050

Largest economy in the world

$136 billion

4.9%

Foreign direct investment in the region (2014)

$110 billion

ASEAN infrastructure investment required annually

Projected GDP growth 2016 (IMF)

Increase in foreign direct investment (2009-2013)

Source: World Islamic Economic Forum

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SMEs, Funding and Digitization SMEs make up

96%

of all registered firms in ASEAN

In Indonesia, SMEs make up

60%

50%

of GDP and

90%

SMEs in the ASEAN receive only

86%

of SMEs in Indonesia acquire bank funding

62%

of the ASEAN workforce

of the workforce

Funding

of ASEAN SMEs are underserved by financial institutions.

Only

They Employ

18.7%

of total bank loans

of SMEs in Indonesia using internal funds

Digitizing Indonesiaâ&#x20AC;&#x2122;s SMEs 9% advanced engagement with e-commerce capabilities

18%

36%

Are offline

37% have intermediate engagement

only basic digital capacity

Digital Growth in Indonesian SMEs

80%

higher growth in revenue for SMEs adopting digital technology

150%

likelihood of increased employment

17X

more likely to be innovative

total potential increase in GDP from digitizing Indonesiaâ&#x20AC;&#x2122;s SMEs

Source: World Islamic Economic Forum

16-17 WIEFInfograph.indd 17

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The Worldfolio WIEF

Mayor Kamil oversees BANDUNG’S REMARKABLE TRANSFORMATION The city of Bandung is the capital and economic heart of West Java. In this interview with The Worldfolio, Mayor Ridwan Kamil, a former architect and lecturer, discusses how Bandung has become Indonesia’s ‘smart city’ and a hub for ICT and the creative economy. e also discusses

ro ect financ-

ing and invites investors to be a part of the city’s remarkable transformation Before you were Mayor of Bandung, you were a professional architect and academic. How did you come to be mayor? Within the context of the World Islamic Economic Forum, what role can Bandung play in creating better relations and understanding around Islam? I have never considered myself a smart person, but I have always been a quick learner, I love to learn. Before I was Mayor of Bandung, I was an architect and a university professor, so bureaucracy is something new for me. After three years in the job, I am amazed to see how power can change civilization when it is practiced in the right way. I am the product of direct elections. In Indonesia we are adopting this Western form of democracy, which means people like me, who are outside the political norm, have a chance to be elected. I am not a political party member, I am not a movie star, I’m just a regular guy, but I was the only one in the campaign using Youtube, Facebook, Instagram and Twitter. This is an important message to the West, that in a Muslim country, we have direct elections that are peaceful and democratic. I was educated in the U.S. at UC Berkley and I am part of a generation that was educated overseas and then returned to the country with a global perspective. In that sense I see Bandung as the perfect diplomatic vehicle to the world in a time of global uncertainty around Islam. I really want to send a message to the West: come to Indonesia, come to Bandung to talk about Islam.

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“I am inviting investors all over the world to come to Indonesia to take this opportunity and get involved in city and regional infrastructure projects. Bandung is growing at nearly 8 percent and economically it is a great city to be a part of”

In the future Indonesia needs to be included as a larger part of the dialogue, and Bandung should be used as a setting for this. andung is well qualified for the position; in 1955 Bandung hosted the Asia-Africa conference that liberated many countries in Asia and Africa. For this reason we are called the solidarity capital of Asia and Africa. We need to talk about Indonesia beyond just the economic perspective; lets send a message to the world that we have an open invitation to discuss these complex issues.

Bandung has undergone a remarkable transformation during your time as mayor, how have you initiated and funded your projects? Well one example is that I built the city square not using public money but using CSR (corporate social responsibility) money. This year I also built four junior high schools, a record number for schools in one year, also with CSR money. This

shows that building the country does not necessarily need to be dependent on government resources. I was part of an international business before this, I had projects in the Middle East, in China and I have used this network to help Bandung, which is why in the last three years I have received more than 50 international institutions that want to engage Bandung. Now as a city of 2.4 million, and with six million people visiting the city every year, we require better infrastructure. I am focusing on transportation projects including the monorail, LRT, cable car, electric buses, highways and hospitals. Bandung is the capital of West Java, so with healthcare and education, we also need to cater to the surrounding areas. These projects will require a significant budget, but in the last few years I have found a problem in the way Indonesian cities spend their money. Our cities are not progressive enough we finance 100 percent through the central government, which is not nearly enough. ast year I flew to ondon and I learned about public-private partnerships (PPPs) in Nottingham. I went to Spain and many other places to find a way to build a city without relying too much on government funds. There are really two options, municipal bonds or PPPs. Indonesia is not really ready for municipal bonds, but with PPPs you bring the products and you already deliver the highway and the monorail and then we pay for the long-term lease. andung is the first city to really push this agenda. I lobbied the President and I said that Bandung needs at least $4 billion, and if you multiply that by the 500 cities in Indonesia, that is $2 trillion for city infrastructure. That number needs to be communicated to the world, we need to invite investors to Indonesia and tell them that besides federal projects there are city projects. So in Bandung we have set up a PPP center so investors will have an independent unit set up to accommodate the process. I am inviting investors all over the world to come to Indonesia to take this opportunity and get involved in city and regional infrastructure projects. Bandung is growing at nearly 8 percent and economically it is a great city to be a part of.

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The Worldfolio WIEF

A central part of any smart city, Bandung has its own technologically advanced command center

What is the main strength of Bandung in terms of its people? What makes it such an attractive investment destination? In terms of the economy, Bandung does not have natural resources or energy resources, so human capital resources are our focus, which means I am focused on having a more creative economy in Bandung. Part of this is our aim to become the Mecca for Muslim fashion. This is only logical as the biggest Muslim population is Indonesia and the most fashionable city here is Bandung. We have the talent and we have the fashion industry nearby. So we can become the Paris of Indonesia, a real Muslim fashion hub in the next five to 10 years.

Another part of this creative economy is attracting international businesses to Bandung to use it as a base. What success have you had with this so far? Anything related to creative economy should be based in Bandung. The creative economy has thirteen different sectors and one of the thirteen is ICT. I am creating these ICT hubs everywhere, much of it hidden, where we have fitted out old buildings with the best technology. They are our so-called ‘guerilla workshops’. eyond this, one of our flagship projects is the new ICT park, which is six hectares dedicated solely to technology and called Bandung Technopolis. This year I secured $100 million in investment from UTC, an aerospace produc-

18-19 Bandung.indd 19

tion company in the U.S. They are going to be based in Bandung Technopolis. They chose our city because we have worldclass engineers that live in Bandung and beyond that our population is young; 60 percent are under 40, and highly educated, as we have 50 universities and research institutes here. Investors can use Bandung to tap into the 50 million middleclass Indonesian consumers, or they can use it like UTC, which does not actually sell into the Indonesian market. Currently, I am in talks with Apple, which is thinking about opening a startup workshop in Bandung, similar to the ones they have in Brazil. I am coordinating with MENKOMINFO (the Ministry of Communication and Informatics) to use Bandung as the base. Additionally, I have already secured an animation business for Bandung with 600 employees. It is clear that investors are already seeing the value.

Bandung is Indonesia’s smartest city, with innovation at the center. How will you take Bandung to the next level of smart city? I define smart cities into three types, 1.0, 2.0, 3.0. or 1.0, which is already finished, we digitized data and made that data open to the public so people in Bandung can now see how much I spend in my budget. For 2.0, which is what we are doing now, it is about interaction with the public. Initiatives include the scorecard for feedback and checking the progress of projects online. Another thing is trans-

portation apps for people to check bus schedules and capacity. These are simple things that help people in their daily lives and create less stress. The next level is the smart city 3.0, which is building machine-to-machine communication. For example, I am building apps that can check things like a leaking pipe, which would be sent to the relevant maintenance crew and fixed. This is very exciting for us in terms of the amount of things we will be able to handle.

Bandung is certainly a model city, how are you sharing this success with the rest of Indonesia? Of course, I do not want the success of Bandung to be ours alone, I have reached out to and spoke with all the Mayors of Indonesia and told them that we have 300 apps, and they don’t have to budget them for themselves. Twenty cities have already signed MOUs (memorandums of understanding) with me to use my software. Two months ago the Ministry of Internal Affairs, and MENKOMINFO voted us the smartest city in Indonesia. Now, my mission this year is to spread the smart city to all underprivileged cities that do not understand the smart city concept. Bandung is also the President of the Smart City Alliance for Asia and Africa and that is where my practice of smart cities is being spread globally. This really supports our position as the solidarity capital of Asia and Africa; in 1955 it was about decolonization, now it will be about smart cities.

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The Worldfolio WIEF

ISLAMIC BANKING INDUSTRY INDONESIA Ninety percent of Indonesia’s population is Muslim, yet Islamic financial institutions account for only five ercent of total banking assets. This means there is ample room for growth of the sharia-compliant banking industry

Despite having the world’s largest Muslim population and forming a dynamic emerging economy, Indonesia plays a minor role in the global Islamic banking industry, also known as sharia banking (referring to banking that is in line with Islamic principles). Not only does Indonesia’s Islamic finance industry lag far behind Islamic finance industries in other countries that contain a big Islamic community (such as Malaysia and Saudi Arabia), but it also lags far behind the country’s domestic conventional banking industry. In this section we explain the principles of Islamic finance and present an overview and analysis of this industry in Indonesia.

What is Islamic Finance/Banking? Islamic finance is banking that is consistent with the principles of sharia (Islamic law). For example, the prohibition of interest (riba) payments and excessive uncertainty (gharar) or gambling (maysir). Instead, risks and rewards should be shared by the stakeholders and the transaction should have real economic purpose without undue specification. Islamic banking involves banking, leasing, sukuk (Islamic bonds) and equity markets, investment funds, insurance and micro finance. However, the banking and sukuk assets account for about 95 percent of total Islamic finance assets. In recent years, the global market for sharia-compliant financial instruments has risen sharply.

20-23 Islamic Banking.indd 20

BETWEEN THE YEARS 2010 AND 2014, ISLAMIC BANKING ASSETS IN SOUTHEAST ASIA’S LARGEST ECONOMY GREW FROM IDR 100 TRILLION (APPROXIMATELY $8 BILLION) TO IDR 279 TRILLION (APPROXIMATELY $22 BILLION), OR AT A COMPOUND ANNUAL GROWTH RATE OF 29.2 PERCENT

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The Worldfolio WIEF

DIFFERENCES BETWEEN CONVENTIONAL AND ISLAMIC BANKING CONVENTIONAL BANKING

ISLAMIC BANKING

Money is a commodity besides medium of exchange and store of value. Thus, it can be sold at a price higher than its face value and it can also be rented out

Money is not a commodity though it is used as a medium of exchange and store of value. Thus, it cannot be sold at a price higher than its face value or rented out

Time value is the basis for charging interest on capital

rofit on trade o goods or charging on ro iding ser ice is the asis or earning rofit

Interest is charged even in case the organization suffers losses by using banks’ funds. Thus, it is not based on rofit or loss sharing

sla ic an s o erate on the asis o rofit loss sharing In case the businessman has suffered losses, the bank will share these losses ased on the ode o finance used (Mudarabah, Musharakah)

hile dis ursing cash finance running finance or wor ing ca ital finance no agree ent or e change o goods & services is made

The execution of agreements for the exchange of goods & services is a must, while disbursing funds under Murabaha, Salam & Istisna contracts

Conventional banks use money as a commodity which leads to in ation

Islamic banking tends to create a link with the real sectors of the economic system by using trade-related activities. Since the money is linked with the real assets it therefore contributes directly to economic development

Source: Indonesia Investments

Based on data from the International Monetary und (IM ), the world’s Islamic finance assets have climbed by annual double digit growth rates from $200 billion in 2003 to $1.8 trillion in 2013. The Organization of Islamic Cooperation (OIC) expects total assets to grow to $3.5 trillion by 2018. However, the Islamic banking industry is still mainly concentrated in the Middle East (particularly Iran and Saudi Arabia) and Malaysia. Other countries that have a relatively high share of global Islamic banking assets are UAE, Kuwait, Qatar, Turkey, Bahrain, Indonesia, Bangladesh and Egypt.

Islamic Banking in Indonesia Untapped Potential Remarkably, the market share of sharia banking in Indonesia remains low while nearly 90 percent of the population adheres to Islam. In absolute terms, it means that the country, Southeast Asia’s largest economy, contains more than 210 million Muslims. However, as of 2015, assets controlled by Islamic financial institutions in Indonesia only account for five percent of the nation’s total banking assets. For comparison, in Malaysia - where only 61 percent of a population that numbers just

20-23 Islamic Banking.indd 21

over 30 million people is Muslim - Islamic financial institutions control 20 percent of the country’s total banking assets. This is a remarkable contrast and shows both the underdevelopedness of the Islamic finance industry and Indonesians’ low awareness of Islamic banking. Meanwhile, in Saudi Arabia (which contains the world’s largest Islamic finance industry) Islamic banks account for over half of the country’s total banking assets. On the other hand, these facts show that there is still ample room for growth of Indonesia’s sharia-compliant financial services industry. Coming from a low base, Indonesia’s Islamic finance industry has shown rapid growth in recent years on the back of growing awareness of Islamic banking as well as government support programs. Between the years 2010 and 2014, Islamic banking assets in Southeast Asia’s largest economy grew from IDR 100 trillion (approximately $8 billion) to IDR 279 trillion (approximately $22 billion), or at a compound annual growth rate (CAGR) of 29.2 percent. This growth pace is considerably higher than growth posted in other Islamic banking markets. It is also interesting to note that Indonesia’s conventional bank-

ing assets expanded at a much slower pace (with a CAGR of 16.9 percent over the same period).

Indonesian Government Increases Support of the Domestic Islamic Banking Industry The Indonesian government is eager to turn Indonesia into a major global hub for Islamic banking as this would deepen the country’s financial markets, hence making the nation less vulnerable to the negative effects of global economic turmoil. In this context, Indonesian authorities stepped up efforts to boost the Islamic banking industry. Indonesia’s Financial Services Authority (OJK) developed and launched a five-year roadmap in early 2015. This roadmap targets tripling the market share of Islamic banks to 15 percent by 2023 through various strategies, such as the reduction of fees on sharia-compliant banking products and the development of educational and training programs (as the institutional framework and human resources within this industry need to be improved). It also involves intensifying coordination between the central government and the private sector as well as strengthening monitoring in the Islamic banking industry and enhanc-

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The Worldfolio WIEF

ing legal certainty. This roadmap also supports the consolidation of state-owned and commercial Islamic banks, which will in turn increase the size of the banks’ capital bases, enhance cost efficiency, and allow increased underwriting in the corporate and infrastructure sectors. A huge $8 billion sharia bank, created by merging existing Islamic units of statecontrolled banks Bank Rakyat Indonesia (BRI), Bank Mandiri, and Bank Negara Indonesia (BNI), would reduce operating costs and make it possible to offer more competitive rates, while making integration between Indonesia’s Islamic banks and the global financial system easier (for example by revising capital requirements in order to bring risk management at Indonesian Islamic banks in line with international standards). This mega Islamic bank would also quadru-

20-23 Islamic Banking.indd 22

ple Islamic banks’ market share in Indonesia to 20 percent by 2018 according to the OJK. The three aforementioned banks together currently account for about 40 percent of Indonesia’s Islamic banking assets. In 2015 the Islamic banking industry of Indonesia comprised 12 general sharia banks, 22 sharia business units of conventional banks and 163 sharia people’s credit banks (rural Islamic banks). Apart from launching the roadmap and the ‘I Love Sharia Finance Program’ in 2015, Indonesian financial authorities are also considering easing foreign ownership limits on local Islamic banks (currently foreign investors cannot own more than 40 percent of local Islamic banks) and promoting new sharia-compliant financial tools in a bid to make the country’s Islamic finance industry more attractive to foreign investors

and Indonesian companies (in April 2015 Indonesia’s national sharia board approved sharia-compliant currency hedging tools and a standard contract template for shariacompliant repurchase agreements, which allows the use of government-issued sukuk as collateral, was launched by Islamic banks in Indonesia). The target of Indonesian authorities to raise the market share of Islamic finance to (at least) 15 percent of the country’s total banking assets by 2023 is considered a too ambitious target by analysts who say it will require substantial reform in the country’s Islamic banking industry for the target to be achieved. The Indonesian government plans to issue about IDR 13.7 trillion (approximately $1.4 billion) worth of Islamic bonds (known as sukuk) in 2016, nearly double the amount of sharia-compliant sovereign debt paper in

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The Worldfolio WIEF

IN 2015 THE ISLAMIC BANKING INDUSTRY OF INDONESIA COMPRISED 12 GENERAL SHARIA BANKS, 22 SHARIA BUSINESS UNITS OF CONVENTIONAL BANKS AND 163 SHARIA PEOPLE’S CREDIT BANKS (RURAL ISLAMIC BANKS)

2015. Proceeds will be used to finance infrastructure development (such as roads, ports, power plants, rail lines, bridges and Islamic universities). Demand for Islamic bonds may be stronger than demand for their conventional counterparts as sukuk usually offers a yield advantage (with a relatively identical risk). Indonesian sukuk is also less volatile compared to conventional bonds as investors tend to hold sukuk until the maturity date. Indonesia also announced to be cofounder (together with Turkey and Saudibased Islamic Development Bank) of the Islamic Investment Infrastructure Bank (IIIB), a new cross-border Islamic infrastructure bank that is to start operations in the second half of 2015. Indonesia contributes over $300 million for start-up capital of the new bank which aims to boost infrastructure development in various countries.

20-23 Islamic Banking.indd 23

What Blocks More Rapid Development of Indonesia’s Islamic Finance Industry? One key problem in Indonesia’s banking sector (not only confined to the Islamic banking sector) is the low financial literacy of the Indonesian population, hence (general) banking penetration remains at a relatively low level. Based on data from the World Bank, only 36.1 percent of Indonesia’s adult population owned a bank account in 2014. Another obstacle is that Islamic banks or banking units are unevenly distributed across Indonesia. Most of these banks are located on Java, the most populous island of Indonesia. In the less populous eastern parts of Indonesia most people lack access to Islamic banking services. However, it also needs to be emphasized that conventional banking services are also scarce in

the eastern part (“under-banked”) and it also has to be noted that there are much fewer Muslims in the eastern region (both in absolute and relative terms) although adhering to a different religion does not mean that a person cannot use Islamic banking services. Islamic banking in Indonesia has also had difficulty expanding due to weak government management (a lack of ministerial-level coordination), an uncertain legal environment and the lack of highly qualified human capital, innovation and creativity in the country. The Worldfolio would like to thank Indonesia Investments for its kind ermission to reproduce this article that originally appeared on its website, www.indonesiainvestments com

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The Worldfolio WIEF

PANIN BANK GROUP WELCOMES EXPERTS TO BECOME TRAILBLAZER IN INDONESIAN ISLAMIC BANKING Panin Bank is Indonesia’s eighth largest bank in terms of assets, and has been publicly traded on the Indonesian Stock Exchange since 1982. In this interview with The Worldfolio, President Director Mr. Herwidayatmo praises the policies of President Jokowi’s administration and explains how the bank is dealing with non-performing loans in the face of slower business activity. He also speaks about working with Dubai Islamic Bank to extend Panin’s Islamic banking unit, Panin Syariah, which became the first full-fledged Islamic lender on the stock exchange in 2014, with an initial public offering (IPO) of shares valued at 475 billion rupiah ($39.3 million) o efully the The current Jokowi administration is focused on economic liberalization and boosting infrastructure. How do you see the Government’s progress towards reform and liberalization? We are very happy with the current administration. I don’t know what others are feeling, but from my point of view, the current administration, especially the President, is a very honest person. He is the kind of man that wants to work hard for his people. He never lectures people to be perceived as smart; he speaks with simple and honest language. He is very proactive with infrastructure projects, which we hoped could be done by the previous administration. It shows that now Indonesia is very different. The President never criticizes the previous administration; he looks ahead at the challenges and finds a way to solve them. Unfortunately the world is currently facing economic crisis and instability, not only Indonesia. The tax amnesty program, although some politicians criticize it, is a breakthrough from President Jokowi. He always said that he supports this initiative and business people in the private sector could

24-25 Panin Bank.indd 24

ill re ect ositively on the Islamic anking

community in Indonesia and change their perspective on the potential of the industry. Something needs to happen in the industry that should change and improve and I know that (Finance) Minister Bambang Brodjonegoro is open-minded on how to develop this opportunity”

see that this is very important. There has always been a large amount of Indonesian money abroad that could actually be used to develop our nation. Of course, if people see it from the legal perspective, it is not proper, but if we see it from an economic point of view, we need reconciliation.

o you thin the finance sector is ready to recei e that large ca ital in ow ro the ta amnesty? Is Panin Bank ready? Yes, hopefully we will be one of the banks that are appointed by the government as a gateway for the repatriation of money. Currently we are working with some companies in our group, especially the securities company and asset management company, to find out how we will approach this. e see

the law of the tax amnesty in its final form as very positive; there are no restrictions other than keeping it in Indonesia for three years. This is also a good opportunity for Indonesians to be in peace with the tax authority.

2015 was a fairly good year for Panin Bank, with trillion illion rofits which were used to strengthen operations and capital. What are your priorities for 2016? One thing you should know about Panin Bank is that although we are not the biggest bank in Indonesia, Panin Bank is one of 10 major national banks, number 8 in terms of assets, we are the only bank that has never had any help from the government. We are very proud of that, we never had a bailout and we are quite conserva-

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The Worldfolio WIEF

“We are very proud of our tive and that is why we gain trust from our customers. This is why our valued customers choose Panin Bank. In terms of challenges we are facing now, to be honest, we are currently carefully watching the NPL (non-performing loan) position, because for the first semester in 2016, we experienced growth of NPLs although it is still very low. Our NPL ratio by the end of 2015 was 2.4 percent and the regulation stipulates that the maximum should be 5 percent. We put our own threshold at a maximum of 3 percent. In the first semester of 2016, the NPLs moved up to 2.7 percent, so for us this was an indicator that we should watch very carefully. Business activity is slowing down in Indonesia and consequently we have lower demand for loans. We are still showing positive growth in assets, although not as much as before. We do hope that our performance this year will be slightly better compared to last year.

Obviously a big part of attracting customers and retaining customers is good product offerings. What impact will technology and innovation have here? We are very proud of our banking technology. We have a strong Internet and mobile banking system we just launched. Beyond this, we have over 560 branches all over Indonesia. So, we want to optimize our presence, not only in Jakarta, but also all over Indonesia. We are preparing not only for the tax amnesty, but also working with some companies in the securities market and insurance industry to have greater collaboration. Panin Group has an insurance company, Panin Dai-ichi Life, which is in cooperation with a Japanese company that

“We are the only bank that has never had any help from the government. We are very proud of that, we never had a bailout and we are quite conservative and that is why we gain trust from our customers”

24-25 Panin Bank.indd 25

is performing well. We will also sign an agreement with airfax and the official announcement for that is to be made soon. Panin is very open to working with international institutions. Hopefully this openness will mean we can give better value to the country.

banking technology. We have

In the case of Panin Syariah, what role will Islamic banking and that subsidiary play in the group moving forward?

to optimize our presence, not

Panin Syariah (Panin’s Islamic banking unit) is the first sharia bank in Indonesia to IPO. Further to this, we are very optimistic about our cooperation with Dubai Islamic Bank. Together we will contribute much to the growth of Islamic banking in Indonesia. There is currently a 5 percent trap for Islamic banking in Indonesia and if I may tell you honestly, there are some issues on Islamic banking in Indonesia. The regulation and the law focus more on sharia banking systems, instead of growing the business itself. The issue is how to grow the business of Islamic banking. We are not experts in Islamic banking, which is why we need Dubai Islamic Bank to bring their expertise in Islamic banking operations and products. Although Dubai Islamic Bank only controls 40 percent of the Panin Dubai Islamic Bank, we have given them a more active role in developing the bank together with us. The Chairman of the bank is the CEO of Dubai Islamic Bank. He will bring the technical and business expertise to Indonesia and we can combine that with our local knowledge of the business environment. With this, we hope that we can show the advantages of the industry to the Indonesian people.

The World Islamic Economic Forum hosted here in a arta will e an e citing e ent or the finance sector hat do you thin the brings to the industry? Hopefully it will reflect positively on the Islamic banking community in Indonesia and change their perspective on the potential of the industry. Something needs to happen in the industry that should change and improve and I know that (Finance) Minister Bambang Brodjonegoro is open-minded on how to develop this opportunity. Indo-

a strong Internet and mobile banking system we just launched. Beyond this, we have over 560 branches all over Indonesia. So, we want only in Jakarta, but also all over Indonesia”

nesia has the largest Muslim population in the world, but the Islamic banking industry never really grew here significantly. I do hope this conference will change the perspective of the professionals who are working in the industry.

There is a lot of interest in investment into Indonesia. Is that something that you are looking to take advantage of in a gateway capacity? The changes made by the government in liberalization should have been done a long time ago. The President himself wants to abolish all the regulations that block foreign investment. The current President listens to the problems of the business community and he has committed to change the regulations that give a hard time to the business community. We support this initiative and we will certainly be ready to facilitate this foreign investment into Indonesia.

During the Bambang Yudhoyono era, Indonesia was branded ‘Remarkable Indonesia’. Things have changed much since then, so if it were up to you to brand Indonesia and speak directly to investors, what would you say is Indonesia’s defining o ortunity or trait? We are the biggest country in the ASEAN and we have a population of 250 million. We have a demographic bonus, in which the majority of our population is still of a productive age. That is a good market opportunity for any production. We also have a lot of spots that are attractive for tourism and the country has become more open to this investment. The government is very honest; they want to listen to the business community.

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PEACE AND UNDERSTANDING

THROUGH DEVELOPMENT The Kuwait Fund for Arab Economic Development (KFAED) has shared the nation’s wealth for over 54 years with a focus on South-South cooperation, regardless of religion, ethnicity or political belief

Abdulwahab A. Al-Bader, Director General of KFAED

The Fund has pioneered development projects across the world, from constructing infrastructure, to health and education, and continues to expand its support network to help people in need. Although Kuwait had been providing development assistance prior to declaring independence in 1961, it was in that year that The Kuwait Fund was formally established. The country itself had just entered the oil era and was slowly improving its own dire economic situation at the time. Despite this, it immediately began to devote vast sums of money to assisting neighboring countries in the region. As Robert McNamara, former U.S. Secretary of Defense and President of the orld ank recalled, hen first established in 1961, the Kuwait Fund was without precedent. Here was Kuwait, a tiny country, until recently among the poorest places on earth, establishing a development fund in the year of its political independence. While welcoming its new-found prosperity it was declaring a willingness to share its future wealth with its Arab neighbors.” However, KFAED has gone far beyond its original mandate of assisting the transition of post-colonial countries in the Middle East by constructing vital infrastructure, providing health services and improving access to, and the quality

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of education. KFAED rapidly expanded beyond the Arab World during more than half a century of operations. Today, the fund has supported the financing of more than 00 projects in 105 developing countries, providing about $19 billion for their implementation across the Middle East, Africa, Asia, Europe and Latin America, as the country’s appetite to help people in need grew with its economy. “We are blessed here in Kuwait, we found a place where we were good traders and very open minded. We created a very close community and I believe that is how it started, we were helping each other, sharing our wealth,” says Abdulwahab A. Al-Bader, Director General of KFAED. Throughout its history, the Kuwait Fund has been held up as a premier example of South-South cooperation – that is, collaboration directly between developing countries. Unlike most assistance of this kind, the issuing of grants are not contingent on religion, ethnicity or political belief, but instead is based strictly on the depth of need. The list of recipients continues to grow with the rise and fall of economies and the emergence of new nations. According to Mr. Al-Bader, “We signed an agreement with our 105th country last year - with outh udan. ometimes things grow on you. I think that helping others and giving is something that has become a part of us, of our DNA. If we went without it, it would be like we were missing something”. Given the decline in oil price and diminishing state budgets for oil exporting economies such as Kuwait’s, some experts have predicted that contributions will be curtailed. To this, Sheikh Salman Sabah Al-Salem Al-Homoud Al Sabah, Kuwait’s Minister of Information and Minister of State for Youth Affairs begs to differ, “Of course with low oil prices we are contemplating our future, but on humanitarian matters Kuwait will not hesitate to support any needs from the international community.” The historical generosity of The Kuwait Fund was instrumental in turning worldwide opinion in favor of Kuwait when it was occupied by Iraq in 1 0. Ama ingly A D continued to operate even during this period, and its activities were expanded following the U.S.-led liberation in 1991 and ramped up significantly over the last 25 years. Global recognition for Kuwait’s role in humanitarian aid and development is a point of pride for the nation and personally for Mr. Al-Bader, who points out that, “The world has recogni ed the efforts of H.H. the Amir and indeed the whole country, and I am sure that we will continue our good work and participate fully and actively in development activities, because we understand how fortunate we are.”

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The Worldfolio WIEF

USING ISLAMIC BONDS TO BOOST

INFRASTRUCTURE DEVELOPMENT

IN INDONESIA

Port of Tanjung Priok, Jakarta

The issuance of sukuk bonds is seen as a good strategy to fund vital infrastructure development in Indonesia, which is key to overcome slowing economic growth In 2016 investors will be able to purchase about IDR 13.7 trillion (approximately $1.4 billion) worth of Islamic bonds (known as sukuk) to be issued by the Indonesian government. This amount is nearly double the amount of planned sharia-compliant sovereign debt paper this year (IDR 7.14 trillion). Indonesia will use proceeds from next year’s bond sales to boost the nation’s infrastructure development (such as roads, ports, power plants, rail lines, bridges and Islamic universities). Suminto Sastrosuwito, Islamic Financing Director at the Debt Management Office of the Indonesian inance Ministry, said the issuance of sukuk is a good strategy to finance much -needed infrastructure development in Southeast Asia’s largest economy. Moreover, with nearly 90 percent of the total population adhering to Islam, Indonesia contains the world’s largest Muslim population. Government-led infrastructure development is regarded as key to overcome the current process of slowing economic growth that has been plaguing Indonesia since 2011. Direct private sector involvement in infrastructure projects remains sluggish as Indonesia’s investment climate contains bottlenecks (for example land acquisition remains a big obstacle to infrastructure projects). Moreover, large-scale infrastructure projects are usually not favored by investors as it usually requires huge capital while it can take many years before projects are completed and revenue is generated.

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The issuance of debt paper is one of the strategies to collect funds for these projects. Demand for Islamic bonds may in fact be stronger than demand for conventional bonds as sukuk usually offers a yield advantage (with a relatively identical risk). Indonesian sukuk is also less volatile compared to conventional bonds as investors tend to hold sukuk until maturity. It is remarkable that the market share of sharia banking in Indonesia remains low while roughly 210 million Indonesians are followers of Islam. Assets controlled by Islamic financial institutions account for only about 5 percent of the nation’s total banking assets (in Malaysia this figures stands at 20 percent while ‘only’ 61 percent of the Malaysian population is Muslim). As such, there is still ample room for growth in Indonesia’s sharia-compliant financial services. ecently, the Indonesian government has started to raise efforts to promote Islamic banking (for example the ‘I Love Sharia Finance Program’ launched in une 2015), thus deepening the country’s financial markets and make Indonesia less vulnerable to the effects of global economic turmoil.

The Worldfolio would like to thank Indonesia Investments for its kind permission to reproduce this article that originally appeared on its website, www.indonesia-investments.com

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The Worldfolio WIEF

ISLAMIC FINANCE IN INDONESIA

Prospects for 2016 The Masyarakat Ekonomi Syariah (Islamic Economic Society), a Jakarta-based non -profit organi ation focused on the sociali ation, advocacy, advisory, consultation and education to enhance the Islamic banking industry in Indonesia, predicts that Islamic finance (banking that is consistent with the principles of sharia) in Indonesia will grow around 15 percent year-on-year (y y) in 201 . This projection is made with the assumption that Indonesia’s economic growth will reach 5.0-5.3 percent (y y), inflation at 4. percent (y y), and a rupiah exchange rate at ID 13, 00 per . . dollar. The Masyarakat konomi yariah (M ) designed three scenarios (a positive, pessimistic and normal one) regarding the development of Islamic banking in Indonesia this year. In the normal scenario, Islamic banking is projected to grow up to 15 percent (y y) in 201 , while Islamic banking assets are expected to grow about 13.5 percent. Assets controlled by Islamic financial institutions in Indonesia are expected to remain just below the 5 percentage point mark (of the nation’s total banking assets), showing that despite having the world’s largest Muslim population Indonesia’s Islamic banking industry lags far behind its conventional counterpart.

Coming from a low base, the market share of Islamic banking in Indonesia is expected to rise as foreign investors are eager to tap this industry, while Bank Aceh will become a fulledged sharia ank in

GROWTH OUTLOOK: INDONESIA’S ISLAMIC BANKING INDUSTRY IN 2016

INDICATOR

NORMAL

OPTIMISTIC

PESSIMISTIC

ASSETS

12.8 - 14.6%

14.6 - 17.1%

10.9 - 12.8%

FINANCING

13.1 - 15.0%

15.1 - 17.0%

11.1 - 13.1%

THIRD-PARTY FUNDS

12.8 - 14.7%

14.7 - 16.6%

10.9 - 12.8%

FINANCE-DEPOSIT RATIO

90.9 - 99.7%

99.7 - 105.6%

82.0 - 90.9%

MARKET SHARE

4.4 - 4.6%

4.6 - 5.5%

4.2 - 4.4%

SOURCE: MASYARAKAT EKONOMI SYARIAH (MES)

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ISLAMIC BANKING ASSETS IN INDONESIA (IN TRILLION IDR) 2010

2011

2012

2013

2014

ISLAMIC COMMERCIAL BANKS & ISLAMIC BUSINESS UNITS

975

145.5

195.0

242.3

272.3

ISLAMIC RURAL BANKS

2.7

3.5

4.7

5.8

6.6

100.3

149.0

199.7

248.1

278.9

TOTAL ASSETS

SOURCE: FINANCIAL SERVICES AUTHORITY (OJK)

Coming from a low base, the market share of Islamic banking in Indonesia is expected to rise as foreign investors are eager to tap this industry, while ank Aceh will become a full flung sharia bank in 201 . This bank, majority owned by the local Aceh province, controls more than ID 20 trillion ( 1.5 billion) in assets. Islam is the dominant religion in the province of Aceh (on the northern tip of umatra) where about 8 percent of the local population adhere to Islam. This region has been given a special status (autonomy) by the central government in 2001 (which made it possible for Aceh to implement sharia-law). Due to the low penetration rate, Islamic finance in Indonesia is an attractive investment prospect. Currently, foreign investors cannot own more than 40 percent of Islamic banks in Indonesia. However, the country’s financial authorities are considering raising the ceiling in order to boost the Islamic banking industry in outheast Asia’s largest economy. The Dubai

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Islamic ank increased its operational activities in Indonesia in October 2015, while Al araka from ahrain is expected to do the same. The Abu Dhabi Islamic ank is considering entering the Indonesian market in 201 . Dinno Indiano, Head of usiness Development at the Indonesian haria anks Association (Asbisindo), said Islamic micro finance was rather stagnant over the past two years, growing by an annual single-digit only. This is in stark contrast to the target set by Indonesia’s inancial ervices Authority (O ) which initially projected a 25.8 percentage point (y y) growth in Islamic finance. Indiano said the Islamic gross non-performing financing ratio is too high at 4. 3 percent in August 2015. The Worldfolio would like to thank Indonesia Investments for its kind permission to reproduce this article that originally appeared on its website, www.indonesia-investments.com

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AN AWAKENING FORCE IN FINANCING

CROWDFUNDING, THE LIFELINE OF SMALL BUSINESSES

by Tun Musa Hitam, Chairman, World Islamic Economic Forum Foundation

Crowdfunding is an awakening force in fund raising for micro-businesses, startups, social causes and social developments. Designed for the collection of many small contributions via a website, crowdfunding has proven to be the lifeline of many, presenting bite-sized investment opportunities for the small investor who is willing to invest a modest sum in return for a reward

Crowdfunding is nothing new. It has been around for years but was called by a term in vogue at that time and done on different platforms. ome examples interest schemes in Arowana fish farming in Malaysia and investment schemes in overseas properties through companies like Jardin Smith International and Walton International. The first crowdfunding project, a true example of crowdfunding in the 21st Century, is that of American ja musician, Maria chneider, who raised about 130,000 from her fans to finance the production of her album Concert in a Garden via Artist hare, a website for musicians to source donations from fans to produce digital recordings or to organise a concert. Her successful campaign led to the birth of many reward-based crowdfunding platforms such as Kickstarter and Indiegogo, the two best-known in the world. This alternative and revolutionary channel of raising capital has indeed helped defeat the conventional banking system for those, who have been turned away by financial institutions because of their inability to meet lending criteria. Now with the growing phenomenon of crowdfunding, small enterprises, M s and startups will not have to pin their hopes on government grants or angel investors or venture capitalists when the banking route fails. Studies done by the Asian Development Bank revealed that only 18. per cent of all bank loans in outheast Asia were granted to M s, a dwindling trend since the financial crisis in 200 . AD also reported that a whopping nine million small businesses have limited access to financing. In the event that these nine million M s jump on to the crowdfunding bandwagon, imagine the waves they will make in the crowdfunding industry and their countries’ economic growth. Crowdfunding is certainly a realistic solution to the financial woes of M s and entrepreneurs, helping this group of underserved people start a venture or expand their business; and who ultimately will be contributors to the country’s GDP growth. Crowdfunding is a game changer in the financial world, as it democrati es finance. Money lending is no longer the sole purview of financial institutions. The progress of financial technology (fintech), the increasing penetration of mobile devices and big data, the grow-

32-33 WIEF.indd 32

ing popularity of social networks and the ease and speed of alternative fundraising have changed the way business is being done today. It has disrupted the conventional banking system and banks that are feeling the threat have started to explore how they can get a share of this rapidly growing pie by collaborating with P2P lending platforms. The crowd on social network, in the form of retail investors are willing to invest in a small way in projects that are of interest to them. These investors can take their pick from the myriad of crowdfunding portals and select campaigns that promise a reward or pre-sale of products or one that offers equity purchase or peer-to-peer (P2P) lending. This form of financing works very well for the small entrepreneur as he does not have to worry about the collaterals he will have to mortgage to the bank, high interest rates, or his ability to repay the loan.

Current Trends Massolution’s 2015 Crowdfunding Industry eport revealed that the global crowdfunding industry raised .1 billion in 2013, and in 2014, the growth accelerated by 1 percent, to record a figure of 1 .2 billion. The report projected another year of unprecedented growth in 2015 for the industry that will be more than double that of the previous year with more than 34.3 billion being raised globally. This goes to show that more and more micro-businesses and M s are turning to this new alternative finance that has taken the world by storm and in the process, giving the banks a run for their money. This growing force will soon see developing economies catching up with the developed world. Allied Crowd’s anuary 2015 report stated that the developing nations’ share of the huge crowdfunding pie is only just 430 million and is slated to grow by 53 percent. Once the underserved or unbanked group pick up on crowdfunding, the growth will be explosive. Today, the real estate industry has turned to crowdfunding as an alternative means and is proving to be one of the most lucrative. The global real estate sector is now one of the fastest-growing segments of the booming crowdfunding industry. According to the 2015 Massolution eport, the sector raised over 1 billion globally in 2014 and the outlook for 2015 was expected to triple, up 2.5 billion. Crowdfunding has reshaped the way individuals find and invest in properties. Islamic crowdfunding is another growing trend. It focuses on important Islamic values such as profit and loss sharing as well as building online Islamic communities and promoting ethical and social responsibility. or the industry to mature and grow, both Muslims and non-Muslims must participate to create an ecosystem that is haria-compliant or ethics-based, one that will benefit self, humanity and society as a whole.

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The Worldfolio WIEF

Islamic crowdfunding took time to get off the ground but in the last two years, many Islamic crowdfunding platforms have emerged. Amongst them are Ata Plus in Malaysia, Club this and apital oost in ingapore and several others in Indonesia, the Middle ast, urope and the U.S. The World Bank predicted that the Muslim world may be one of the first markets in which crowdfunding investment could be truly game-changing. Could this be the force to drive Muslims to create an ecosystem that is Sharia-compliant?

Success of Crowdfunding Harnessing the powers of fintech and social networking has unleashed a potent new force in the funding ecosystem that will benefit micro-businesses and M s. Crowdfunding has worked well for the music industry, film, video and photography projects, startups, disaster relief, and social causes. It has proved highly successful for real estate, too. In the wake of the Nepal 7.8-magnitude earthquake in April 2015, relief funds amounting to 23 million were raised in quick time, within 0 days. There were hundreds of individual campaigns on crowdfunding sites like Crowdrise, Indiegogo, Go undMe and GlobalLiving. Campaigns are still running to raise funds online for restoration and rebuilding of the affected areas in Nepal. Possibly one of the biggest success story, is that of Pebble Technology that ran two campaigns raising a total of 30 million. Its campaign for Pebble Time hit its goal of 500,000 in just 1 minutes, breaking the record for the fastest campaign to be funded.

Future of Crowdfunding The crowdfunding industry has made giant strides in the last three years and is set to grow exponentially worldwide. On the Asian front, the 2015 Massolution Crowdfunding Industry eport showed that Asia contributed much of the tremendous growth in the global industry, accounting for 3.4 billion, an astounding increase of 320 percent. This surpasses that of urope thus placing Asia as the second region behind the U.S. Crowdfunding is slowly gaining traction in outheast Asia, and though still in its infancy, the government of ingapore, Indonesia and Thailand have initiated regulatory framework for the industry which only bodes well as retail investors will now have more confidence. In Malaysia, six equity crowdfunding platforms ( CPs) were licensed by the ecurities Commission last une, making Malaysia the first country in outheast Asia to do so. The six CPs are Alix Global, Ata Plus, Crowdonomic, ureeca, pitchI and Propellar Crowd+. The Malaysian landscape for crowdfunding is set to grow and will be fuelled by the mushrooming of startups and M s the acceleration of social and mobile-savvy Malaysians; the increased use of e-commerce and e-finance and the high investor optimism. Malaysia provides a ripe platform for growth, having the largest number of tech IPOs in outheast Asia, and is home to the fastest growing startups in the region. The World Bank also estimated that crowdfunding would reach 0 billion by 2020. It looks like crowdfunding, truly an awakening force, is not going away anytime soon.

EQUITY CROWD FUNDING

$880 MILLION

RAISED GLOBALLY IN 2010

$16 BILLION RAISED IN 2014

$90 BILLION RAISED BY 2020

MALAYSIA, INDONESIA, SINGAPORE, THAILAND LEAD THE WAY IN ECF PLATFORMS IN ASEAN

find the right platform, develop a strategic marketing campaign, share the story behind the concept to garner â&#x20AC;&#x2DC;buy-inâ&#x20AC;&#x2122; and decide on the kind of rewards to be given. Crowdfunding has proven to be successful with the many who did due diligence, had a product or concept that is wanted and put in the hours to promote the campaign. But what about those who failed? They probably did not fully understand how crowdfunding works. Did the campaign lack the detailed information because the entrepreneur is worried about his idea being stolen? Is the product not of interest to retail investors? Was the chosen platform suitable? Did they actively market and promote their product on social network? Did they set a high enough reward level to draw the investors? Here in Malaysia, the nascent crowdfunding industry is fraught with challenges though opportunities abound. At the moment, funds can only be raised through the six licensed CPs, where people invest in an opportunity in exchange for a small stake in the business, project or venture. The Malaysian public is not yet educated enough and is sceptical about such mode of investment. So the industry is still looking at venture capitalists and angel investors as the main players, thus it will be quite difficult for the crowdfunding industry to really take off in the immediate future. More needs to be done to educate and to cultivate a new mindset among retail investors. The orld Islamic conomic orum ( I ) oundation recogni es the value of crowdfunding and its inherent benefits to micro and small businesses, and also the challenges faced by the industry. As such we have incorporated the issue of crowdfunding into its discussion groups, programs and initiatives in an effort to bridge the gap.

The growing phenomenon of crowdfunding is certainly something to be explored at the 12th WiEF in Jakarta this year as the Forum has a focus on SMES. Themed Decentralizing Growth, Empowering Future Business, the 12th WIEF will have a session on Equity Crowdfunding and Startups on Day 2 at the 12th WIEF IdeaPad. The session will be an in-depth look into equity crowdfunding in Malaysia, the progress since six Equity Crowdfunding Platforms were licensed by Securities Commission Malaysia last June, the challenges faced and the opportunities offered. It will also be a platform for startups to learn about equity crowdfunding and how it can help them raise funds.

Conclusion The picture that I have painted may seem rosy. However, it is not as easy as it looks if we were to examine the crowdfunding process further. There is a lot of hard work involved. One has to

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The Worldfolio WIEF

INDONESIA AIMS TO BECOME A

‘GLOBAL MARITIME AXIS’ The Worldfolio met with Dr. Rizal Ramli, Coordinating Minister of Maritime Affairs, to discuss the Government of Indonesia’s focus on improving infrastructure and connectivity in the archipelago nation and consequently doubling the number of tourist’s by 2019

You were appointed recently to this Ministry, which is new itself. What was your initial reaction to being appointed? Well when I was offered the job, in fact my first reaction was to refuse it, because it’s not my forte. I’m a trained economist. I’ve been in government before as the Coordinating Minister of Economy and then Minister of Finance. I was on the advisory board of the UN for the last 7 years. The President was able to persuade me to join him because he said he needed people who understand, people who have the guts to change things.

The President has a goal of creating a global maritime axis. How are you undertaking this as Coordinating Minister of Maritime Affairs? Looking at the portfolio, we are one of the largest maritime countries in the world and the President has this dream of making Indonesia a global maritime axis. For this to happen we need a transformation of culture, because for the past few hundred years we have been focused inland. We have to start loving the sea again. In the past, in the 13th century or earlier, Indonesia’s Kingdom of Sriwijaya was a strong maritime power, our influence reached as far as Thailand and during the Majapahit in the 13th century, we had influence over Malaka. o we have to revive again the history of the past in order to explore our strength in marine resources and marine economy. e need to have maximum use of marine resources for the welfare of Indonesia. nfortunately, in the past there has been significant amounts of illegal fishing and as a result the country loses about 20 billion annually. Combating this has meant that in just a few months traditional fisherman have doubled their catch from 200 tons a day to more than 400 tons

34-35 Min of Maritime Affairs.indd 34

a day. This will give us the opportunity to invest in and develop our own industry, including processing, and canning. The government has also opened the fishing industry to 100 percent foreign ownership to support this goal. Of course a major priority for me is connectivity and maritime access, which is not an easy job because the country is so wide. In the last one and a half years, we built more than 150 small and medium ports, mostly in ast Indonesia. e are also starting to initiate regular shipping lines to visit small islands all over Indonesia. This is the first time in history that we have regular shipping and it has helped a lot. Basic food prices in East Indonesia are much more expensive than those in Java, and after the sea toll access the price of rice has been lowered by 22 percent, sugar by 28 percent, and cooking oil by 15 percent. o the fact that there is a regular shipping line helps lower the price for the basic needs in east Indonesia. o this Tol aut, or ‘ ea Toll’ helps them a lot. e have also built 26 small airports in the last one and a half years. In the medium term, because there are regular lines to some of these islands, people in these islands are going to be able to sell their commodities and products. This will be key to reducing the gap between west and east Indonesia. In the past all of our infrastructure development was ava-centered, because 0 percent of the population is in ava and 85 percent of the money is in Java, so everything is always Java-centric. The Jokowi government wants a change of paradigm from this Java-centric development to Indonesia-centric.

and enforcing maritime sovereignty. How are these efforts being supported in cooperation with the U.S. and other regional stakeholders? irstly, we want peace and we are neutral. So we will do whatever is necessary to facilitate the dialogue and agreed OP within key regional waters such as the outh China ea. If there are incidents, we want maritime diplomacy. e encourage several aval exercises in this area and a few months ago we organi ed 32 countries to have naval exercises in Mentawai, est umatra. Japan, China, Korea and U.S. sent their people and this means that among the commanders, they know each other, therefore a small problem will not escalate into conflict because they know each other personally.

“OF COURSE A MAJOR PRIORITY FOR ME IS CONNECTIVITY AND MARITIME ACCESS, WHICH IS NOT AN EASY JOB BECAUSE THE COUNTRY IS SO WIDE. IN THE LAST ONE AND A HALF YEARS, WE BUILT MORE THAN 150 SMALL AND MEDIUM PORTS, MOSTLY IN EAST INDONESIA”

Part of the global maritime axis concept is better protection of maritime resources

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“70 PERCENT OF THE POPULATION IS IN JAVA AND 85 PERCENT OF THE MONEY IS IN JAVA, SO EVERYTHING IS ALWAYS JAVA-CENTRIC. THE JOKOWI GOVERNMENT WANTS A CHANGE OF PARADIGM FROM THIS JAVA-CENTRIC DEVELOPMENT TO INDONESIA-CENTRIC”

Another important part of regional development will be tourism. What is the new strategy of the ‘10 new Balis’? When I started in this Ministry I wondered why we have this so-called Ministry of Tourism with an annual budget that is adequate, but there is no tourism development except in Bali. We reviewed the existing strategies and we found that in the past there was no real focus. That money was spread over 80 primary locations and about 200 secondary locations, so it was small money here and small money there. So, I came in and said we should focus only on 10 new locations beyond Bali. That way we have enough money and resources to build basic infrastructure, to build airports, to build marinas, and telecommunication systems, which are all essential for tourism development. The second step I took was to give 1 countries free visas, meaning you can easily travel to Indonesia without paying anything. Initially there was a lot of controversy between the government a lot of people resisted us, but the positive impact is already significant. e have seen delegations from Japan and urope bring up to 10 times the si e of their normal delegation because of these better visa regulations. urther to this, there are a lot of cruises all over the world, around 10,000 but nobody comes to Indonesia. They go to Malaysia, Penang, Singapore, Thailand and then they go back. Nobody goes to Indonesia, even though Indonesia’s maritime beauty is the best in the region. This was because it took four months to get a license for a cruise to come in. ow, we

34-35 Min of Maritime Affairs.indd 35

have an online system for yachts and in 24 hours you can get the required license.

For tourism and particularly the ten new Balis, how will the government enhance infrastructure, facilities and development? One example of what we will be doing with these 10 destinations is at Danau Toba, an exceptionally unique and beautiful lake. In terms of infrastructure improvement, we will be building a new airport nearby, that way there will be no need for transfers through other cities. e are also building a toll road from Medan to increase the flow of domestic tourism. eyond this we are really looking after the environment and in parts of the lake that are polluted due to large scale fishing we will be improving the quality of water and designating a 500 hectare ecotourism one. Another one of the 10 new Balis is orobudur, which already sees .5 million tourists yearly. However, we want to change the concept of orobudur into religious tourism. If you are a Muslim you are required to visit Mekkah before you die, if you are Christian you are required to visit erusalem at least once. e want to make sure that the 00- 00 million uddhists visit orobudur at least once. If that concept is implemented, it is easy to get 10 million tourists a year.

hat are the ain enefits o increased investment in tourism? The main benefit is that it is the cheapest way to create jobs, because Indonesia has a naturally competitive edge. To create jobs in tourism, investment is 1,000

U.S. dollars per job, whereas in other sectors, such as manufacturing, it is closer to 50,000-100,000 . . dollars per job. Over the next five years our target is to increase direct jobs to seven million, and indirect jobs will increase around double that. This is achievable if we can promote ourselves in the right way and double the amount of tourists visiting Indonesia, from 10 million to 20 million in five years. Of course beyond employment there will be other benefits, including boosting foreign exchange revenues from 10 billion . . dollars to more than 20 billion U.S. dollars.

The tourism sector has been a benefactor of the 12 economic policy packages that the government has announced to improve the investment climate of Indonesia. What is your perspective on the 12 economic policy packages? The 12 economic policy packages are essentially designed to make business easier. President Jokowi came from small business, so he knows the challenges that businesses face in things like licensing. We really wants to make things simpler, cut regulations and improve our standing on the orld ank’s ase of Doing usiness Index. e are now at 105th and the President would like to see us on at 0th. o, it is a big and ambitious job, but it is possible to make it happen.

From your perspective, what makes Indonesia so unique when you look at the rest of the region? Indonesia has a richness, diversity and culture like no other country in the region, or even the world.

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INDONESIA UPGRADES ITS MILITARY The Worldfolio sits down with General Ryamizard Ryacudu, Minister of Defense, to discuss current strategies in defense, including equipment modernization, and enhanced protection against “factual and non-factual threats” After your appointment in 2014 what have been your key priorities as the Minister of Defense? As the Minister for Defense I should focus on the state’s defense, and to do that I need to identify any threat that our country is exposed to. I don’t see any threat of war for Indonesia and in the region. Threat of war will become reality if the nation’s sovereignty, safety and integrity are disturbed. However, I perceived those threats as a non-factual threat, because to the north side of Indonesia we have ASEAN countries as our neighbors. We already have the consensus within ASEAN that we are not going to be provoked into any kind of conflicts and together we have proven after 48 years that we can solve problems through diplomacy. To the south of Indonesia, we have Australia and New Zealand, neither is perceived as a threat and after a year as Minister, I keep in close communication with them. Of course, these non-factual threats can evolve to become factual threats whenever the nation’s sovereignty, integrity and safety have been disturbed, and we must have the capabilities to handle these non-factual threats. Indonesia does face factual threats, including terrorism, natural disaster, natural resources poaching, insurgencies or rebellions, pandemic diseases, espionage and cyber war, and drugs or narcotics abuse. Of these factual threats, terrorism has been the most visible in recent times. The threat of terrorism is very real and it continues perpetuating. Indonesia is also very susceptible to natural disasters because of our location on the ring of fire. In terms of natural resources poaching, the major issue has been maintaining our maritime sovereignty in the face of illegal fishing. Pandemic disease is also a factual threat because we are located in a tropical area, so we are susceptible to any kind of outbreak affecting tropical countries. In terms of

The INDO DEFENCE EXPO & FORUM 2016 takes place 2 - 5 November at the Jakarta International Expo (PRJ) Kemayoran, Jakarta, Indonesia. Hosted by the Ministry of Defense, Indonesia’s No.1 International Defense Industry event will welcome over 20,000 delegates

36-37 Min of Defense.indd 36

drug abuse, everyday 50 people die as a result of drugs, which is 18,000 people in a year. This has led us to consider the drug threat on the same level as the terrorist threat. For both the non-factual and factual threat, we are preparing ourselves to face these threats by renewing our major equipment, revamping and upgrading our technological capacity so we can meet the demands of modern military and security services.

What sort of equipment and procurement are you undertaking to make sure that you are ready to tackle these threats? As one of the largest and most expansive nations in the world, we must build our defense capabilities to reflect our si e and objectives, meaning major equipment needs to be modern and advanced. Our number one priority is therefore to replace the major obsolete equipment, including our 30-year-old fighter jets, as well as our older vessels and ships. It is also important to ensure that the armament these new acquisitions carry are up to modern standards and capabilities. Indonesia is a country that doesn’t like war; we love peace. However, we need to be aware of any incursion into our territory, so we need to deploy a radar system that will fully cover our territory. We would also like to develop our airlift capability. This will be very important when faced with natural disasters, for example a landslide in any part of Indonesia; we need to be ready to send Rapid Deployment Forces. We cannot afford to let any people die because we are late in helping them. We have to come as soon as possible to reduce any casualties in these areas. This airlift capability serves a dual purpose in that if there is any military threat or incursion we can send rapid deployment troops to the affected area.

In 2014 we were very fortunate that we could meet the private companies that were working with the Ministry of Defense to fulfill ndonesia s de ense needs ow is ndonesia rogressing in reaching its goal o de ense sel su ficiency? The more private companies involved the better, so that they can compete to provide the best equipment, and especially maintain the major equipment. There are 200 shipyards in Indonesia, but only 20 are appointed to build ships and vessels for us. e can ask them to build Armed Personnel Carriers, vital aircraft, vessels and drones. With new regulations meaning 49 percent of an Indonesian defense company can be foreign owned, there are also opportunities for greater partnerships and technology transfer. We are currently in partnership with some Italian companies to build an armament factory. We would of course welcome fur-

21/07/16 17:11

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ther partnerships like this where there is also a high degree of technology transfer. eyond these defense specific companies, we also have the capability to redirect strategic industries to be converted to defense industry if the need were to arise.

Indo Defense Expo & Forum 2016 is approaching soon, what would the Ministry of Defense like to see as an outcome of this event? Primarily the event is to showcase our defense industry capability both in private and public sectors. Beyond that it is an opportunity to share knowledge and expertise from both sides. We try to seek for potential partners with whom we can collaborate together in the future to build our major equipment. The most important thing is what we can learn from other companies and deepen cooperation with them.

hen resident o owi isited the in there was an announcement of a strategic partnership between the Indonesia and the articularly in ariti e de ense coo eration ow will this artnershi enhance ndonesia s coo eration and ca a ilities?

I I group has not more than 200,000 people all over the world and only 30,000 are the hardcore jihadists. ith these numbers, they can already shake and threaten the world. Can you imagine if only 1 percent of Indonesian’s Muslims became radical? It would be the end of the world. So, it is my role as the Minister of Defense to remind them the true Islamic teachings and to come back to our identity, Pancasila.

“We are unique in how we are tackling terrorism. In every country I visit, they said that terrorists should be put down with anti-terrorist troops. For me, I believe e need to first tackle the elief system that sees people radicalized”

To follow the strategic partnership formed between President Obama and President okowi, we signed a partnership with the . . in the defense field. This Mo (memorandum of understanding) stipulates the depths of the cooperation and we agreed on areas where we should tackle these common factual threats together, the primary factual threat being terrorism. To tackle terrorism we have to have a collective effort and response between countries. We cannot do it alone, we have to have cooperation between countries. Beyond terrorism, we also have agreements to tackle drug trafficking and cybercrime, through sharing information and expertise. Another major area of cooperation is in the maritime sphere. We agreed that we should exchange our coast guard, A AM A (Maritime ecurity Agency), and work closely with the coastguard of the U.S. We would like for sure to step up our cooperation in these areas that I mentioned.

You have a very unique approach to defense theory, particularly when it co es to terroris ell us a out the ela egara rogra Yes, we are unique in how we are tackling terrorism. In every country I visit, they said that terrorists should be put down with anti-terrorist troops. or me, I believe we need to first tackle the belief system that sees people radicali ed. e have to come back to our identity and our nation. Our identity is Pancasila, which celebrates our great diversity. It is not true when ISIS said that killing could take us to heaven, it is not written anywhere in any religion. That is why I said we need the A GA A program (literally defending the country”). This is a program created by the Ministry of Defense to ensure growth in Indonesian’s nationalism based on Pancasila and the 1 45 Constitution of the epublic of Indonesia. A NEGARA becomes our signature in tackling terrorism. It turns out that there are several countries that want to learn about this with us, for example imbabwe, the Philippines, and the . ach country is unique, and what makes us unique is Pancasila. That is why I keep on touring around Indonesia to sociali e and communicate the A GA A concept through the true teachings of Islam. Imagine, Indonesia’s population is 250 million and from 250 million, we have a Muslim population of 200 million. The

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“As one of the largest and most expansive nations in the world we must build our defense ca a ilities to re ect our si e and objectives, meaning major equipment needs to be modern and advanced”

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QCB ASSURES CONFIDENCE IN QATAR with a solid financial framework

An interview with Governor of Qatar Central Bank Sheikh Abdulla Bin Saoud Al-Thani Governor of Qatar Central Bank Sheikh Abdulla Bin Saoud Al-Thani explains the dynamic changes, both internally and externally, affecting the country s economic and financial landscape and why it still holds great appeal to investors and ratings agencies alike

What have been the achievements of the National Development Strategy (2011-16) and what challenges still remain? The implementation of the Strategic Plan is being led by Qatar Central Bank (QCB), supported jointly by the Qatar Financial Markets Authority (QFMA) and Qatar Financial Centre Regulatory Authority (QFCRA). Together the three regulators, with close coordination through the Financial Stability and Risk Control Committee (FSRCC), are committed to maintaining a stable financial environment for business and investment, while also improving protection for investors and consumers. ithin this favorable climate, the financial services industries continue to support the various needs of a growing private sector and to benefit from a growing population as diversification progresses. A number of important regulations, based on asel III, have been issued to strengthen the banking sector in recent years. In addition to capital standards, maintenance of the liquidity coverage ratio, net stable funding ratio and loan-todeposit ratios, as well as capital charges for domestic systemically important banks (DSIBs), etc., are prescribed. Further, the QCB conducts regular stress tests of banks under various scenar-

38-40 QCB Q&A.indd 38

ios, while internal stress tests conducted by banks are reviewed at our end. At the same time, macroprudential oversight is being strengthened, while work is simultaneously ongoing to develop an early warning system for the financial sector. ating agencies and investors have continued to have confidence in atar’s financial sector, as, for example, is evident from the maintenance of atar’s high credit rating and the upgrade to emerging market status by leading rating agencies. More recently, the establishment of Qatar as the first regional enminbi clearing center will play an important role in developing the financial industry domestically and internationally. Work is to continue on our macroprudential framework, supervision of

insurance, deposit insurance, and domestic credit rating, among others, to enhance the business and investment environment.

What has been the economic impact of the lifting of sanctions on Iran and the Fed’s raising of interest rates on the Qatari Economy? Developments in atar’s economy are influenced by the changes in oil prices, as in any other GCC economy. Major factors that contributed to the persistently low oil prices were weaker demand from advanced and emerging economies, increased supply from Iran after the lifting of sanctions, and increased production by other oil producers to retain their market share. ven though the influence of these factors continue to impact the price of oil

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in the first half of 201 , once the market rebalances, we expect the price of oil will reach a comfortable level. On the positive side, the lifting of sanctions will open up trade and investment opportunities in both directions. evertheless, recogni ing the continuance of low oil prices, the government is in the processes of making structural adjustments in expenditure without affecting the planned infrastructure developments. Regarding domestic growth, the ongoing economic diversification strategy planned under the 2030 is providing an impetus to increased growth in the non-hydrocarbon sector, which grew by around 7.8% in the third quarter of 2015. The Ministry of Development Planning and tatistics’ atar conomic Outlook estimates the economy (real GDP) to grow by 3. in 2015 and increase to 4.3 in 201 . The ed eserve’s shift from the ero interest rate regime in December 2015 by increasing their policy rate by 25 basis points has not impacted much on the domestic interest rate structure. Given the volatile global financial market conditions and not so encouraging growth prospects of the global economy, the probability of further increases in the interest rate in the near term is limited. Nonetheless, the QCB has space to act flexibly given the gap between C ’s policy rate and that of the Fed. Furthermore, the large stock of T-bonds/bills from earlier issuances provides C with the flexibility in liquidity management, and thereby help ensure comfortable liquidity in the banking system and help banks meet private sector credit demand in line with strong non-hydrocarbon sector growth.

Moody’s forecasts that average real GDP growth will remain robust at around 5% until 2017. What is the strategy to ensure Qatar’s position as the most competitive economy in the region? As noted earlier, the proactive diversification strategy initiated in 2011 is yielding positive results. The major contributor to economic growth shifted from the hydrocarbon sector to

38-40 QCB Q&A.indd 39

the non-hydrocarbon sector. Needless to say, infrastructure developments are providing the required growth momentum. Education, health and other services are also growing at significant pace. A business friendly environment is being developed to attract more investments as well as to increase the scope for private sector participation in the growth process. MSCI has upgraded Qatar to Emerging Market (EM) status, which facilitates a higher access to funds from various spectra of foreign investors. The ownership of foreign investors in listed companies increased to 49% from the earlier limits of 25 . Memorandums of understanding (Mo s) with various countries are also being signed so as to improve trade and investments relations with them. The Renminbi clearing house launched in Doha, the first of its kind in the region, will attract higher cross-border investments and trade through atar. To support the competitiveness of the economy, our monetary policy is kept accommodative, and financial stability is ensured through improved regulations and macro prudential policies. avorable tax regimes and ease of doing business coupled with a fundamentally strong financial environment are expected to continue to make Qatar a preferred investment destination.

How do you manage liquidity in the market? In order to safeguard the financial market conditions, C has an effective liquidity management framework. The framework includes a host of instruments. irst, we have three policy rates QCB Deposit Rate (QCBDR), QCB Lending Rate (QCBLR), and QCB Repo. econd, since May 2011 we have introduced Treasury Bills (T-Bills), and medium-term government bonds issued in March 2013. Third, the QCB also prescribes a eserve equirement that has remained at 4. 5 since 2008. The issuances of T-bills and medium-term government bonds ensure a better transmission of monetary policy, and strengthen the mechanism of coordination between monetary and fiscal

policies. They also support the banking and financial system by enhancing the balance sheet liquidity position of domestic banks in line with the requirements of Basel III.

Could you tell us more about the role of financial institutions in atar s di ersification strategy? The persistence of low oil prices poses challenges to all the oil and gas exporting countries across the globe. A reversal of this trend will happen when the recessionary headwinds subside and oil exporters unanimously decide to moderate the supply overhang. However in atar, thanks to the wellplanned diversification strategy initiated in 2011, domestic growth, though moderate, remains at a strong position among its regional peers. Involvement of small and medium enterprises ( M s) in the overall growth of the economy is envisaged in the ational ision 2030 and the role of the financial sector to support this strategy is paramount. Identifying a uniform definition for M s across the financial institutions will ease the hurdles for SMEs to get access to credit from banks and mobili e resources from private placements and the venture capital market. atar Development ank and other government agencies are actively participating in the process of promoting the SME sector.

Could you provide some information about the new law enacted in 2015 to optimize the use of public funds and Qatar’s implementation of Basel III measures? The new law, aw o. 2 of 2015 on public finance, aims to moderni e the tate financial management system as well as align it with the developments in the global economic and financial system. The law constitutes a comprehensive audit policy and intends to improve the coordination between various stakeholders in the processes of preparing and implementing the budget. The law is also expected to enhance the efficiency of public spending by tracking income and expenses accurately and continuously. A macro-economic unit is also being set

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â&#x20AC;&#x153;The demand for Sharia-compliant funds is an increasing trend of late. Global financial crises have changed the investment hori on of conventional investors who look for low-risk and low-cost funds. Sharia-compliant exchange-traded funds (ETF) provided investors an opportunity to explore the conventional equity markets while strictly following Sharia investment principlesâ&#x20AC;?

up to monitor the overall economic planning and investment program. In line with international best practices, the fiscal calendar has also been changed from April-March to JanuaryDecember, starting anuary 201 . This will provide compatibility with the requirements of the private sector and international financial institutions. In anuary 2014, C issued the final Basel III circular, which introduced a minimum capital adequacy ratio of 12.5 . ational banks have also been evaluated on the extent to which they are domestic systemically important banks (D-SIBs). These D-SIBs are required to maintain capital charges of 0.5 to 2.5 in different D-SIB buckets. These instructions will be implemented in 201 in a phased manner. Further, Basel III framework on liquidity is also being implemented. Banks were advised to maintain the liquidity coverage ratio ( C ) with a minimum of 0 by the end of 2014. ith an increment of 10 points every year the C will reach the required 100 level by the end 2018. On similar lines we have advised the banks to maintain a net stable funding ratio as envisaged by asel III liquidity framework with a minimum of 0 by the end of 2015 and to achieve 100 limit by 2018.

How do you view the launch of the Sharia-compliant exchange-traded funds in the world? The demand for Sharia-compliant funds is an increasing trend of late. Global financial crises have changed the investment hori on of conventional investors who look for low-risk and low-cost funds. haria-compliant exchange-traded funds ( T ) provided investors an opportunity to explore the conventional equity markets while strictly following haria investment principles. Over the past few years, these T s, have shown

38-40 QCB Q&A.indd 40

low volatility and outperformed their conventional counterparts.

What are the future prospects of Islamic finance as ran enters the ar et? Over the past decade, Islamic finance has recorded exponential growth, thanks to the economic growth in GCC countries prior to the oil price downturn. It even attracted traditional conventional banks also to come out with Islamic financial products to tap a large number of the population who otherwise was underserved. Islamic finance products to support small and medium-si ed enterprises were also designed by putting emphasis on asset-backed finance. Despite the increased interest in Islamic finance, most of these assets are concentrated in GCC countries, Malaysia and Iran. Based on the latest information it represents only 1 of global financial products. Accordingly, ample scope remains for Islamic finance to grow, and definitely lifting sanctions on Iran with a population of around 5 million will provide opportunities for investors as well as Islamic financial institutions.

What is the level of participation of foreign banks in the local market and that of Qatari banks in international operations? The structure of the banking sector in Qatar remained more or less stable during the last couple of years. The share of the assets of foreign bank branches is below 4% of the total banking sector assets. They contribute to the economy through financial innovation and provide liquidity to the interbank market. Competition in the domestic banking sector remained healthy as indicated by a stable net interest margin (NIM) of 2.5 during the last few years. In view of the healthy growth and resilience of the domestic banking system, banks

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are looking for global outreach strategically through cross-border transactions. Around one-fifth of the domestic banking sector assets relates to banking businesses outside Qatar. In addition, banks operate through their branches, subsidiaries and associates. As a regulator, QCB processes the banking sectorâ&#x20AC;&#x2122;s intentions for foreign interest on a case-by-case basis and provides necessary guidance consistent with its regulation and prevailing market conditions.

What investment opportunities are there or financing a or in rastructure rograms to boost the economy as the FIFA World Cup 2022 approaches? Infrastructure development is in its full swing as we progress towards the 2022 World Cup. Along with the public sector, involvement of the private sector is also very critical for the development. The major focus of the infrastructure development includes the construction of roads, rail, and development of sea airports, etc. This entails increased financing requirements for the real estate and construction sectors. Banks are able to support this increased credit demand, where the credit to this sector (real estate and contractors) grew by around 2 .5 in 2015. In addition, investments are also focused on industrial ones, ICT, education, health, etc. These developments are expected to stimulate the domestic economy and provide substantial investment opportunities for private sector including foreign investment. The upgrade of Qatar from frontier market status to emerging market status by MSCI also came in the right time. The upgraded status will improve the depth and liquidity in the equity market and is expected to attract further investment flows.

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DISCOVER THE WORLDâ&#x20AC;&#x2122;S MOST DYNAMIC ECONOMIES

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CAN INDONESIA BECOME THE MECCA OF ISLAMIC FASHION? Ahead of the Islamic Ramadan and Idul Fitri celebrations, consumption tends to increase in Indonesia. One of the products that is searched for by Indonesian consumers (those who adhere to Islam) is Muslim fashion such as clothes and the veil. In fact, the Indonesian government wants the nation to become Asia’s center for Muslim fashion by the year 2018 and the world’s Muslim fashion leader by 2020. Muslim clothes are also envisaged to become a key export product. Currently, Indonesia’s Muslim fashion exports are still rather insignificant. Based on the ‘State of the Global Islamic Economy Report 2015-2016’, the world’s Muslim fashion market was valued at $230 billion in 2014 and is estimated to be worth $327 billion before 2020, implying that Muslim fashion is among the fastest growing industries worldwide. Obviously those nations that harbor a large Muslim population have the potential to become an important force with regard to Muslim fashion. Indonesia is one of these countries. This nation – Southeast Asia’s largest economy – has the largest Muslim population in the world with more than 210 million Muslims (nearly 90 percent of the total population), implying the market is huge (although there are also millions and millions of nominal Muslims in Indonesia who do not follow the Islamic teachings strictly – or not at all – and prefer to follow Western fashion trends). However, data shows that demand for Islamic fashion is on the rise in Indonesia. Currently, the nation ranks fifth in terms of the world’s largest Muslim fashion markets with a value of $12.7 billion. The leading nations are Turkey, United Arab Emirates, Nigeria and Saudi Arabia (see table below).

WORLD’S LARGEST ISLAMIC FASHION MARKETS: COUNTRY TURKEY UNITED ARAB EMIRATES NIGERIA SAUDI ARABIA INDONESIA RUSSIA EGYPT PAKISTAN INDIA IRAN

VALUE (USD BILLION) 24.84 18.24 14.99 14.73 12.69 10.92 10.73 10.52 9.78 8.99

However, as an exporter of Muslim clothes Indonesia’s role on the world market is still rather insignificant. According to data from Indonesia’s Trade Ministry, Indonesia’s Muslim clothes exports were worth $4.63 billion in 2014 (up 2.3 percent from the value in the preceding year). However, exports declined slightly to 4.5 billion in 2015. In the first month of 2016 exports of Islamic fashion was back on track, rising 2.13 percent, year on year. Key export markets of Indonesia for Islamic clothing are the U.S.A., Japan, Germany, South Korea, Britain, Australia, and Canada. However, Indonesia still lags far behind the leading Islamic fashion exporting nations i.e. China, India, and Turkey.

INDONESIA INDONESIA’S EXPORTS OF ISLAMIC FASHION:

EXPORT MUSLIM FASHION

2013

2014

2015

JANUARY 2016

4.53

4.63

4.57

0.37

(IN USD BILLION) SOURCE: TRADE MINISTRY OF INDONESIA

Key export markets of Indonesia for Islamic clothing are the U.S.A., Japan, Germany, South Korea, Britain, Australia, and Canada. However, Indonesia still lags far behind the leading Islamic fashion exporting nations i.e. China, India, and Turkey

SOURCE: STATE OF THE GLOBAL ISLAMIC ECONOMY REPORT 2015-2016

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Indonesia does have strong points as well. Not just because of the huge amount of Islamic consumers who live in the country – constituting a great market – but also because there exists a major pool of creativity within Indonesia considering that Islam has blended with the various local pre-Islamic cultures

The Indonesian government wants to have turned Indonesia into the ‘Mecca of Islamic fashion’ by 2020, one of the many (perhaps overly) ambitious targets of the government. However, becoming the center of the global Islamic fashion industry implies becoming the trendsetter in this industry, becoming the (quality) standard, the production hub, the center of consumption, and one of the leading exporters. To overtake established powers such as China and Turkey seems a very difficult undertaking. or example, production costs in China and Turkey where there already exists major production centers are much lower compared to Indonesia (Indonesia still needs to import 60 percent of raw materials required to produce Muslim fashion). Indonesia does have strong points as well. Not just because of the huge amount of Islamic consumers who live in the country – constituting a great market – but also because

there exists a major pool of creativity within Indonesia considering that Islam has blended with the various local pre-Islamic cultures. At the Muslim Fashion Festival Indonesia (MUFFEST) 2016, held in Jakarta between 25-29 May, there were 50 designers – originating from countries including Turkey, Italy, Russia, United Arab Emirates and Bangladesh – showcasing more than 200 brands. This event was organized by Indonesia’s Trade Ministry in cooperation with the Indonesian Fashion Chamber (IFC) and supported by Hijabers Mom Community (HMC). This event also included workshops, seminars, a design competition and much more. The Worldfolio would like to thank Indonesia Investments for its kind permission to reproduce this article that originally appeared on its website, www.indonesia-investments.com

The Indonesian government wants the nation to become Asia’s center for Muslim fashion by the year 2018 and the world’s Muslim fashion leader by 2020

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THE FUTURE OF ECONOMIC COOPERATION BETWEEN INDONESIA AND MUSLIM COUNTRIES With the economy in China slowing down, Indonesia â&#x20AC;&#x2DC;must look beyond its traditional trade strategyâ&#x20AC;&#x2122;, while economic integration amongst Muslim countries must be strengthened, writes Retno Maruti, a senior economic analyst at the Indonesian Ministry of Finance

Recently, Indonesia has shown a greater openness to trade: it has expressed an interest in joining the Trans Pacific Partnership (TPP) and has also started the negotiation process on Comprehensive Economic Partnership Agreements with both the European Union and Australia. This strategy shows that Indonesia is paving its way towards a more open trade regime, less protectionist policies and deeper integration into the international value chains. Indonesia has the worldâ&#x20AC;&#x2122;s largest Muslim population and is ranked the 25th largest exporter globally. Exports have been a substantial part of economic activities in the country and many Indonesian products are already well imported by many Muslim countries. Still, there are huge opportunities for Indonesia to tap these markets as Indonesia does not yet have free trade agreements nor any significant trade deals with Muslim countries. For the last couple of years, China has been the main trading partner for Indonesia. But as the Chinese economy weakens, Indonesia must look beyond its traditional trade strategy. The growing middle classes, particularly in Muslim nations in South East Asia and the Middle East, hold

45 Trade.indd 45

much potential for Indonesia. Indeed, through shared religious values Indonesia has a significant advantage in negotiating preferential trade relations and generally deepening economic cooperation. Many Muslim countries, including Indonesia, have abundant human resources and their primary products are natural resources and agricultural goods. Consequently, they export relatively cheap raw materials, while they import expensive capital-intensive and manufactured goods. This means the trading partners of Muslim countries are mostly developed countries with significant manufacturing sectors. According to the IMF, Muslim countries, most of which are located in the Middle East and North Africa, receive only one-third of the foreign direct investment (FDI) compared to developing countries of similar size. This means they are comparatively marginalized in terms of being integrated into the global economy. Historically, several factors have contributed to weak economic integration among Muslim countries, such as a lack of technological development, low innovation, political tension, weak industrialization strategies, weak infrastructure,

and a lack of trade information. There is much diversity among Muslim countries with some oil exporters with substantial growth potential, while others are among the poor and under-developed economies. Although these countries have built strong relations amongst themselves through organizations such as the Organization of Islamic Cooperation, the volume of trade is still relatively low. Of course, in the Middle East region, countries that have accumulated significant wealth, namely .A. ., atar, and Saudi Arabia, are investing in assets abroad. As a result, the demand for Sharia-compliant assets in other countries has seen a period of unprecedented growth. Sharia-compliant assets in Asia, including Indonesia, will represent a key investment opportunity in emerging markets offering significantly higher investment returns than developed markets. According to BMI research, global growth will be driven over the next 10 years by emerging markets, in particular Pakistan, Indonesia, Ethiopia, Egypt and Bangladesh. These markets will form new manufacturing and construction hubs, as mining, oil, and gas resources will be less significant in driving growth. Those countries previously reliant on commodities will need to adopt a new economic strategy geared towards industrialization, and innovation. Free trade agreements and bilateral/ multilateral tariff preferential agreements are a good start for Indonesia in ensuring the economy can reach its aspirational diversification goals. Moreover, faith-based economic cooperation should be an effective method of integration among Muslim countries, and it is through events such as the World Islamic Economic orum that the first steps will be taken towards closer cooperation. (The views expressed by Ms. Maruti in this article are solely her own)

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WEST NUSA TENGGARA PROVINCE RIPE WITH POTENTIAL The Worldfolio met with the Governor of West Nusa Tenggara, Muhammad Zainul Majdi, to discuss the province’s growing economy, Halal tourism, adding value to agribusiness, and the regional government’s focus on fostering entrepreneurship What opportunities do you see for West Nusa Tenggara in Indonesia’s hosting the World Islamic Economic Forum?

As for entrepreneurship, over the last seven years the regional government has turned out over 100,000 new entrepreneurs. We believe that entrepreneurship is a concept that ensures the stability of the economic development of the region. In addition, many young people have already plunged into the entrepreneurial world, especially in the field of trade and services. The regional government of West Nusa Tenggara also established educational cooperation abroad to generate stronger entrepreneurs.

The World Islamic Economic Forum is a very important event for Indonesia and West Nusa Tenggara province. Through this event West Nusa Tenggara will be able to show its growing economy and the democratic decentralized system of government where local governments can implement regional development in various fields. e fully intend to promote est Nusa Tenggara and Indonesia through this event so that foreign investors can see the benefits of doing business in Indonesia.

How is the regional government working with the central government to ensure even economic development across the archipelago?

In terms of your own region, how do you see progress in cooperation amongst the majority Muslim countries of the world? In my opinion, cooperation among the Islamic countries is now increasing. This is proven by the increasing number of investors from Islamic countries who have already started development projects in the West Nusa Tenggara province. If Islamic countries are able to build a better image and make closer ties with one another, it will certainly have a positive impact in Indonesia’s development and the province of West Nusa Tenggara.

There is currently a major focus on Halal, or “Muslim-friendly”, tourism. How are you ensuring development within this fast-growing sector? Where can investors get involved with this? Since last year, the province of West Nusa Tenggara has set a new direction for tourism development, which is more commonly known as “Muslim-Friendly” tourism. This tourism development will open new opportunities for the province of West Nusa Tenggara and the increasing number of Muslim travelers we have seen recently proves it. West Nusa Tenggara has a lot of potential to reach the existing markets today. Therefore, the regional government continues to build facilities to help investors for the development of the province. One of these measures is the preparation of the Mandalika Special Economic Zone, which is conceptu-

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“Over the last seven years the regional government of West Nusa Tenggara has turned out over 100,000 new entrepreneurs. We believe that entrepreneurship is a concept that ensures the stability of the economic development of the region”

alized as an integrated tourism development, and the first Muslim-friendly tourism concept in Indonesia.

Beyond tourism, what are your priorities in terms of agribusiness and entrepreneurship? In the agribusiness sector, our focus over the next five years is to process est Nusa Tenggara agricultural products (rice, corn, soybeans, seaweed, and sugar cane) into finished products to increase their values. This means we need to establish a downstream policy concept, i.e. to develop agricultural product processing factory in West Nusa Tenggara. Currently, most of the agricultural products of West Nusa Tenggara are exported as raw commodities.

The regional government of West Nusa Tenggara province always coordinates with the central government especially in terms of the fulfillment of the basic infrastructure required by the community, such as transportation to ensure inter-regional connections. We also cooperate on food and water infrastructure to ensure the economic sustainability of the province.

You were recently awarded by BAPPENAS with a governance award. What are your top priorities for 2016 and have these changed since you were first elected? In addition to the development of key sectors such as education and health, West Nusa Tenggara province also gives priority to the environment. We are aware that West Nusa Tenggara province as an archipelagic province must continue to initiate programs which increase the carrying capacity of the environment and are also eco-friendly. Therefore, we have created a program called ‘WNT Green’.

What makes the culture of West Nusa Tenggara region so unique? Our province is a miniature of Indonesia’s diversity in ethnicity, culture, and religion. Although the vast majority of the province of West Nusa Tenggara is Muslim, all religions here can coexist and contribute to the development of the region. Sasak, Sumbawa and Mbojo cultures create a unique interaction that is reflected both in cultural attractions and sites.

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“FAMILY FRIENDLY”

HALAL TOURISM BOOM With demand for halal tourism rising significantly, Indonesia is set to take full advantage of the niche tourism offering Indonesia, a vast country of more than 17,000 islands that encompasses most of South-East Asia’s largest archipelago, has traditionally been an attractive tourism destination. Friendly people, warm weather, tropical beaches, incredible nature, world heritage historical sites and a harmonious mix of cultures, religions and languages has drawn tourists to visit the country by the droves. In fact since the 1970s, the country transformed from an unknown tourist destination to one popular around the world. This was particularly due to the rise of visitors to Bali, which has since become a byword for tropical paradise. Australians, Singaporeans, Dutch and Malaysians led these early waves of visitation. Since then travelers from Europe and especially the U.S. began arriving in large numbers. Overall Americans remain the top spenders on travel in the Asia-Pacific region, spending approximately $231.6 billion last year. However since the turn of the century Chinese and other East Asian tourists began arriving in increasingly larger numbers. According to Indonesia’s Ministry of Tourism, approximately 10.5 million people travelled to Indonesia in 2015. This generated approximately $12.4 billion for the sector. The average visitor stayed for 8.5 days and spent $1,190.

Mount Bromo volcano, East Java, Surabuya, Indonesia

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Arief Yahya, Minister of Tourism of Indonesia

Statistics support this approach, with Muslims from around the globe spending an estimated $142 billion on travel in 2014. This amount excludes pilgrimages to holy sites (Hajj and Umrah). Over the same period, tourists from China spent $160 billion, and Americans spent $143 billion. This ranks the Muslim travel sector third highest in global travel spending. Overall this accounts for around 11% of total global travel expenditure and experts predict that Halal tourism will continue to grow, and will generate in excess of $238 billion by 2019. Turkey, with its close proximity to the Middle East and North Africa (MENA) and historical importance to Islamic culture has been a traditionally strong contender for this market. However increasing instability has reduced visitor numbers. Indonesia, as both a rising tourism destination and the world’s most populous Muslim country is well-placed to fill this lucrative niche market.

Halal tourism in Indonesia

However, given the vast territory of the country, the tourism sector still remains vastly under-utilized. In order to develop the industry, the government is seeking to double these figures over the coming years by attracting 20 million tourists by 2019. The goal is to create approximately 13 million new jobs while also significantly increasing GDP. To this end, the government has allocated $200 million to overall tourism promotion. The “Wonderful Indonesia” brand, as well as a plethora of initiatives to develop the sector has seen it increase its ranking in Travel and Tourism Competitiveness Index of the World Economic Forum (WEF). Indonesia is now ranked the 47th best in the world out of 144 countries, according to the 2015 report. At the core of the national policy is promoting Indonesian tourism as offering more than just Bali. Ten specially prioritized tourism destinations have been designated for promotion to absorb increasing tourist numbers. These destinations are Borobudur Temple, Mount Bromo, Lake Toba, Belitung, Tanjung Lesung, The Thousand Islands, Komodo Island, Wakatobi National Park, Morotai and Lombok.

With a national motto of “Unity in Diversity”, Indonesia is known as a secular and tolerant democracy. Despite having five official religions and hundreds of ethnic groups, it boasts the world’s largest Muslim population. According to a recent census approximately 222 million people, or 87 percent of its population follow Islam. Of this number the majority follow Sunni teachings. Since the 12th century the religion has left a deep cultural footprint that can still be felt today. As kingdoms scattered across the archipelago converted to Islam, many Arabic words were adopted into local lexicons. Also, before the formation of the Republic of Indonesia, Malay, Acehnese and other na-

Mosque, Mataram - Lombok

Halal Tourism In addition to increasing tourist numbers from traditional markets, Indonesia has also initiated a strategy particularly targeting Muslim visitors. This move comes on the back of the global Halal tourism boom. Also called family-friendly tourism, Halal tourism is aimed at creating conditions conducive to attracting a pool of visitors from the world’s 1.6 billion Muslims. This includes ensuring the availability of halal food, places of worship and accommodation catered to the needs of the faithful. The primary source of these visitors include residents of predominantly Muslim OIC member countries, such as the Gulf Cooperation Council (GCC) states. Demand also exists from non-Muslim majority countries with fast growing Muslim populations. The European Union, U.S., Canada, China and India constitute such source countries. Studies show that Halal tourists usually travel with more family members, stay for longer periods and ultimately spend more money than other tourist groups. As a result, tourism branding campaigns are adapting their approach and services to better meet the needs of Muslim visitors.

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tive languages were often written in Arabic script. Numerous inscriptions on historical buildings remain from this period for visitors to see. Aceh is perhaps best known for maintaining its traditional Islamic culture. The sultanate, which controlled the strategic territory until the 1800s, resisted outside influences until the final decades of Dutch colonial rule. Many see Indonesia as an obvious location for Halal tourism. The country offers year round warm weather, affordable travel costs, and halal food is widely available. Places of worship are readily accessible with more than 600,000 mosques in place across the country. Despite these advantageous conditions and strong religious, cultural and historical ties, the Middle East is not a major source of visitors for the country. As Minister for Tourism, Arief Yahya, admits, “Indonesia is the country with world’s largest Muslim population but we have not fully explored halal tourism”. According to official statistics, in 2015, only 182,143 tourists from the MENA region visited Indonesia. Of the 12 million visitors expected by the end of 2016, government planners estimate only 300,000 will be of MENA origin. However the government of Indonesia has enacted a strategy to change this. A soft launch of Halal Tourism took place in 2012, which was followed by nominating 12 Muslim-friendly provinces in 2013. These areas – Aceh, West Sumatra, Riau, Lampung, Banten, Jakarta, West Java, Central Java, Yogyakarta, East Java, West Nusa Tenggara and South Sulawesi – serve as a geographic focus for Halal tourism development. Halal Tourism was also included in the national Islamic Economic Movements framework by the President Yudhoyono in that year. Ministerial regulations on Sharia hotels were cre-

ated in 2014. This includes providing guests with halal food, Korans, marking the direction of Mecca in every room, offering access to a Halal kitchen and restricting alcohol consumption. Other services on offer include the concept of ‘friendly halal tourism’. In addition to halal-friendly hotels and halal restaurants, tours, trip planning, and spas are also provided by tourism operators. The idea is to ensure a completely seamless experience for Muslim visitors. Of the $200 million allocated to promote all forms of tourism, $29 million has been dedicated to attract guests interested in halal tourism. The MENA region has been the major focus of these efforts. The GCC in particular has seen a plethora of promotional activities launched by the Indonesian government. This is hardly surprising given the high number of travelers from the Gulf as well as high income levels. The Government of Indonesia has ambitious goals in increasing the number of Muslim tourists by 2019. As Minister Yahya explains, “I would like to increase visits for halal tourism to 5 million by 2019”. Already, quite early into the implementation of Indonesia’s Halal tourism strategy results are becoming apparent. Of the last two years, a 14.7 percent annual increase in Muslim visitors has been recorded. International recognition for Indonesia’s development of this sector is also growing. The Sofyan Hotel Betawi (located in Jakarta) won the Best Halal Hotel award during the 2015 World Halal Travel Summit in Abu Dhabi. With only 14 award categories in total, Indonesia collected 3 awards in total. Lombok (one of the 12 nominated Muslim-friendly provinces) was rated Best Halal Tourism Destination and Best Halal Honeymoon Destination. Concerted efforts by the community and local operators here has made it Indonesia’s prominent Halal tourism hotspot.

Fatahillah square in Jakarta

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Destination Lombok Lombok, green and devout, is sometimes referred to as “The Unspoiled Bali” or “The Island of a Thousand Mosques”. It is directly to the west of Indonesia’s most famous tourism destination, Bali, and is the biggest island of West Nusa Tenggara province. Unlike Bali, a predominantly Hindu area, the majority of locals (around 93 percent) are Muslim. Despite the fact that approximately 65 percent of West Nusa Tenggara province’s population lives on Lombok, it is known for its green mountains, tranquil, untouched nature and pristine sea and beaches. The highlands of Lombok are covered in verdant, lush forest. The Gunung Rinjani National Park offers vast tracks of hiking for tourists interested in fresh mountain air and mountain views. A vast crater lake, with a surface area of 11 square kilometres is one of the most popular sites for visitors. This lake, Segara Anak Toba, as it is known locally, offers breath-taking views and warm fresh water due to volcanic heating. As far as sea shore tourism is concerned, Lombok is probably best-known for Senggigi Beach. This relaxing white sand shore offers crystal clear seas, fresh-water waterfalls and a spectacular view of Mount Rinjani. The Gili Islands are also becoming a more frequently visited tourist site. The three ‘Gilis’ (Gili Trawangan, Gili Meno

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and Gili Air) are small, tranquil destinations that offer nature-based, remote island travel experiences. Vehicles are not allowed on these islands, with bicycles and horses serving as the main forms of transport. The diving sites and beaches there are renowned throughout Indonesia and are becoming increasingly popular with foreign and domestic tourists. Like many other parts of Indonesia, Lombok has an Islamic tradition linked to Arab seafarers. Centuries ago, Yemeni traders established a community in the port of Ampenan, a coastal district of Mataram (Lombok’s capital). This quaint district boasts still architecture as well as historical and cultural heritage from this Arabic period. Given these conditions, it is hardly surprising that Lombok has emerged as Indonesia’s premier Halal tourism destination. The local business community and provincial authorities have proactively sought to increase Lombok’s attractiveness to the Middle Eastern market. This includes Halal certification by the Indonesia Ulema Council, increasing the availability of Halal food, and training Arabic speaking guides. Locations of cultural and religious interest, such as Ampenan Old Town and historic mosques have been included in specially tailored city tours. These are easily accessible from hotels such as the Oberoi, located in Medana

Bay. This luxury residence offers 24 acres of manicured gardens and a sunset view of Mount Agung. Indeed, infrastructure and logistics have increasingly made Lombok an easy to reach and well served travel destination. Lombok International Airport was opened in 2011. Its management is seeking to establish more international connections, but in the meantime, domestic flights are frequent. The majority connect Mataram to Jakarta and Denpasar, with flights times of two hours and 40 minutes respectively. Ferries connect provide connections to the major neighboring island and fast boats connect the mainland to the small outlying Gilis. All things considered, Lombok has succeeded as a pilot project for Indonesia’s Muslim-friendly provinces strategy. According to government officials, of the expected three million visitors to Lombok this year, as many as 30 percent are projected to be from the MENA region. If true this marks a turning point in Indonesian success in this lucrative tourism sub-sector. The recognition received at last year’s World Halal Travel Summit have put Lombok on the map as a premier destination. As word spreads, and the market grows, experts believe that this is just the beginning of Lombok’s, and Indonesia’s, Halal tourism boom.

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