Indonesia’s Financial Services Authority, or Otoritas Jasa Keuangan (OJK), is seeking to boost inflow of funds into the domestic Shariah compliant asset management industry – with proposals for potentially higher returns to attract both retail and institutional investors.
These proposals are encapsulated in three separate guidelines released on the 25th October 2024 to cover Mudarabah financing products, the Shariah Restricted Investment Account (SRIA) based on Mudarabah Muqayyadah contracts and Cash Waqf Linked Deposit (CWLD) implementations.
Aligned with the 2023-2027 Indonesian Islamic Banking Development and Strengthening Roadmap, the guidelines champion Shariah-based products with having the unique value proposition that cannot be done by conventional banks, said Dian Ediana Rae, chief executive of banking supervision at OJK.
Taking advantage of Mudarabah financing – an alternative that will allow the Islamic banking industry to diversify financing products based on profit and revenue sharing – could unleash its potential to provide more funds toward working capital for more productive economic sectors.
Dian said this prospect is critical as the Mudarabah financing portfolio was only at 2.12% of the total amount of financing available in the Shariah banking sector, based on contract statistics as at December 2023.
The OJK sees SRIA potentially spurring a shift to Shariah with its underlying Mudarabah Muqayyadah agreement, to function as an investment scheme with the risk borne by the depositor – in contrast to banks bearing the risk for current, savings and deposit accounts plus deposit certificate products.
“We hope that the SRIA Implementation Guidelines with the Mudarabah Muqayyadah contract can be a catalyst for Islamic banking to develop more diverse, innovative and highly competitive investment products,” said Dian.
With the SRIA run as a distinct account, the guidelines state that investor’s funds and assets can even come from credit obtained from conventional financial institutions.
As the SRIA will be operated by Shariah banks, customer checks are needed to assess risk appetites as part of the suitability criteria and some restrictions may be applied to mitigate risk-taking investment behaviors.
A highlight is the CWLD – described as an innovation by the OJK with characteristics that cannot be implemented by conventional banking, integrating the commercial and social functions of Islamic banks simultaneously – creating shared value for the Waqf.
“This is expected to be a new breakthrough in Islamic bank operations, so that it can have an impact on the wider community and improve the performance of Islamic banks,” explained Dian.
According to the Indonesian Waqf Agency estimates, such charity-focused sector contributions – especially the cash Waqf – is valued at about IDR180 trillion (US$11.44 billion) per year.
In 2023, the returns for the cash Waqf amounted to IDR2.2 trillion (US$139.81 million) or 1.22%, noted Dian. “This shows that there is a very large gap between the potential and realization of cash Waqf collection, so support for and innovation of cash Waqf products are needed.”
Participation in the CWLD scheme involves a minimum deposit of IDR1 million (US$63.55) and clients are issued a prospectus before confirming their investments via deposits with a designated Shariah bank.
The funds are handled by the bank to generate profit – which is then given to Cash Waqf Nazhir, a special legal entity that then channels the funds to the specified Waqf or charitable cause. The client gets the deposit amount returned at the end of the agreed program.
With this temporary cash Waqf approach, the CWLD program is flexible enough to be also used as a means of developing waqf land by the Nazhir in an optimal manner to be beneficial for the community – and in return, also become a source of sustainable income for the Nazhir.
